Business context and reporting period
The Hackett Group, Inc. filed this Form 10-K for the fiscal year ended December 27, 2013. The company provides strategic advisory, benchmarking, business transformation, working-capital and technology consulting services. Its fiscal 2013 included 52 weeks.
Hackett reported two service groups in its revenue discussion: The Hackett Group, including advisory and transformation offerings, and ERP Solutions, primarily SAP ERP. The company exited its Oracle ERP implementation practice in the first quarter; management said the exit was not material to consolidated results.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue before reimbursements | $200.4 million | $199.7 million |
| Total revenue, including reimbursements | $223.8 million | $222.7 million |
| Operating income | $15.7 million | $17.1 million |
| Net income | $8.7 million | $16.7 million |
| Diluted EPS | $0.27 | $0.50 |
| Operating cash flow | $24.3 million | $20.4 million |
- Operating margin was 7.8% of revenue before reimbursements, versus 8.5% in 2012. Personnel cost of service before reimbursable expenses rose 4% to $130.5 million; SG&A fell 5% to $54.2 million, reflecting cost-containment initiatives.
- Cash and cash equivalents were $18.2 million at year-end, up from $16.9 million. Working capital was $25.9 million, compared with $23.8 million.
- Long-term debt was $19.0 million, down from $25.0 million of principal outstanding in 2012; the revolving facility had no borrowings, with up to $20 million available. The credit facility matures in August 2018 and is subject to financial covenants.
- Operating cash flow increased mainly because accounts receivable and unbilled revenue decreased. Investing activities used $1.7 million, primarily for development of the Hackett Performance Exchange; financing activities used $21.2 million.
Material changes versus comparable periods
- Total revenue increased 0.5% year over year, but the service mix shifted: The Hackett Group revenue declined 2% to $184.1 million, while ERP Solutions revenue increased 14% to $39.7 million.
- International revenue was weaker: The Hackett Group’s international revenue fell 10%, amid longer sales cycles and project deferrals in Western Europe. Its domestic revenue increased 1%.
- Net income declined by nearly half, principally reflecting 2013 income tax expense of $6.4 million versus a $0.5 million tax benefit in 2012. The 2012 benefit included releases of deferred-tax valuation allowances totaling $6.7 million.
- Fourth-quarter 2013 revenue was $52.6 million, operating income $2.4 million and net income $1.2 million. For fourth-quarter 2012, the corresponding figures were $55.0 million, $4.1 million and $6.7 million; 2012 fourth-quarter net income included a substantial deferred-tax valuation-allowance release.
- Shareholder returns included $3.1 million of dividends and approximately $13.1 million of common-stock repurchases in 2013. A tender offer repurchased approximately 1.0 million shares for about $6.9 million.
Outlook, risks and notable items
- Management expected U.S. GDP growth of 2.0%–2.5% in 2014, but remained cautious about improved demand in Western Europe. The filing does not provide specific company revenue or earnings guidance.
- Management described demand for productivity, process standardization and automation as supportive of its offerings. It planned to begin selling its Hackett Performance Exchange dashboard in early 2014 after completing planned enhancements; commercial success was not assured.
- Key risks include economic weakness, project delays or cancellations, long sales cycles, price and margin pressure, competition, dependence on skilled personnel, and client concentration. Client contracts are generally terminable for convenience on 30 days’ notice; the ten largest clients represented 20% of 2013 revenue.
- Fixed- or capped-fee work can produce losses if project costs or hours exceed estimates. The company also faces foreign-currency exposure and variable-rate debt exposure; it reported no foreign-currency hedging contracts. Management said a 100-basis-point interest-rate increase would not have materially affected 2013 results.
- Management believed cash, operating cash flow and available revolver capacity would fund working-capital and capital-expenditure needs for at least 12 months. Cash held abroad was $4.0 million; repatriation would result in tax expense and a cash payment.
- Subsequent to year-end, the company acquired certain Technolab International operations for $3.0 million cash and $1.0 million in shares, with up to $8.0 million of additional contingent consideration tied to results.
- Management reported no material adverse effect expected from ordinary-course legal proceedings. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether weaker European demand and deferred projects continued into 2014, and whether domestic growth offset that weakness.
- Whether ERP Solutions growth can be sustained without further subcontractor-driven margin pressure, and whether the Performance Exchange generates meaningful sales.
- The drivers and sustainability of the higher 2013 tax expense, including use of tax-loss carryforwards and any tax cost associated with foreign cash.
- Debt-amortization requirements, covenant headroom, and the balance between borrowing, dividends and share repurchases.
- Technolab’s subsequent results and the likelihood and potential dilution or cash impact of its contingent consideration.