HACKETT GROUP, INC. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 28, 2012 (52 weeks); comparisons are with fiscal 2011 ended December 30, 2011. Amounts below are U.S. dollars; financial figures are in millions unless noted.
Business context and reporting period
Hackett is a global strategic advisory and technology consulting firm providing benchmarking, executive advisory, business transformation, working-capital improvement and ERP services. Its proprietary benchmarking and best-practice intellectual property is central to its business model. The company reported one operating segment, with service-group revenue from The Hackett Group and ERP Solutions.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue, including reimbursements | $234.1 | $225.1 |
| Revenue before reimbursements | $209.3 | $200.4 |
| Operating income | $16.8 | $17.2 |
| Operating margin on revenue before reimbursements | 8.0% | 8.6% |
| Net income | $16.7 | $21.8 |
| Diluted EPS | $0.50 | $0.52 |
| Operating cash flow | $20.4 | $20.3 |
| Cash and cash equivalents at year-end | $16.9 | $32.9 |
| Working capital at year-end | $23.8 | $42.0 |
- Revenue before reimbursements rose 4%; total revenue rose 4%. The Hackett Group service-group revenue increased 3% to $187.8 million, while ERP Solutions revenue increased 7% to $46.3 million, primarily on greater SAP demand.
- Personnel cost of service before reimbursements increased 6% to $134.0 million, or 64% of revenue before reimbursements versus 63% in 2011. SG&A increased 3% to $58.7 million and remained 28% of revenue before reimbursements.
- Management cited resource/client-demand misalignment for lower Hackett Group service-group net margins: 37% versus 39%. ERP Solutions net margins improved to 37% from 35%.
- Net income declined despite higher revenue. Both years included a tax benefit from valuation-allowance releases: $0.5 million in 2012 versus $4.5 million in 2011. The 2012 reported tax benefit was $4.0 million lower year over year.
- Operating cash flow was essentially flat. Investing used $3.1 million, mainly for capitalized development of Hackett Performance Exchange. Financing used $33.4 million, reflecting the share tender offer, debt repayments and dividend payment.
- At year-end, debt was $25.0 million principal outstanding: $2.9 million current and $22.1 million long-term; the revolving facility had no balance drawn. The company subsequently repaid another $4.5 million, reducing term-loan principal to $20.5 million.
- Current assets were $60.9 million and current liabilities $37.1 million. The company reported $20.0 million of available revolving credit and expected cash, borrowing availability and operating cash flows to fund working capital and capital expenditures for at least twelve months.
Material changes versus prior period
- Revenue growth slowed from 12% in 2011 to 4% in 2012; operating income decreased 2% and net income decreased 23%.
- Cash declined by $16.0 million, primarily reflecting $55.0 million spent to repurchase 11.0 million shares in a tender offer, partly financed with $40.0 million of credit-facility proceeds. The tender represented approximately 27% of shares outstanding at the time.
- Weighted-average shares fell substantially following the tender offer; year-end shareholders’ equity decreased to $94.7 million from $130.2 million.
- The company initiated an annual dividend program and paid $3.1 million, or $0.10 per share, in December 2012. The credit agreement restricts dividends and repurchases, and the lender waived the restrictions for this payment.
- Quarterly revenue ranged from $57.0 million to $61.3 million in 2012. Fourth-quarter net income of $6.7 million included the $4.0 million valuation-allowance release; quarterly 2011 net income likewise included a $5.3 million release.
Outlook, commentary, risks and unusual items
- Management described U.S. and Western European demand as gradually improving but volatile. It expected U.S. GDP growth of 1.5%–2.0% in 2013 and was more cautious about improved Western European demand. No specific company revenue or earnings guidance was provided.
- Management sees demand for productivity, process standardization, automation and measurable returns on business and technology investments as supportive of its offerings. It identified talent recruitment, retention and development as an important constraint on growth.
- Hackett Performance Exchange was being tested with launch clients after a free-trial period. The company had invested more than $7 million in its development and stated that it could not yet assess its eventual contribution or whether it would recover the investment.
- Principal risks include weak or volatile economic conditions, client project delays or cancellations, short-term contracts generally cancellable on 30 days’ notice, client concentration, competitive pricing pressure, utilization and staffing challenges, and fixed-price project-estimation risk. The ten largest clients generated 18% of revenue; no single client exceeded 5%.
- Other risks include foreign-currency exposure (no currency hedges were in place), variable-rate debt, and credit-agreement leverage, coverage and liquidity covenants. A 100-basis-point interest-rate increase was not expected to have materially affected 2012 results.
- After year-end, the company exited Oracle ERP implementation, a transaction described as not material. In March 2013, the CEO and COO surrendered performance-based options and received stock appreciation rights with the same performance targets, settleable in cash, stock or both at the company’s discretion.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether underlying revenue growth and operating margins improve, particularly given the 2012 rise in service personnel costs and resource-demand misalignment.
- Cash conversion and collection trends: accounts receivable and unbilled revenue totaled $36.9 million, and the doubtful-account allowance rose to $1.25 million from $0.80 million.
- Debt repayment pace, covenant headroom and the impact of variable interest rates; review the credit agreement’s restrictions on dividends and repurchases.
- Whether the $7 million-plus Performance Exchange investment produces paying customers and recurring returns.
- The sustainability of reported earnings after the tax valuation-allowance releases, and the realizability of remaining tax-loss carryforwards.
- The effect of the Oracle ERP implementation exit on future revenue, staffing and service-group performance, and the potential dilution or cash cost of equity awards.