Business context and reporting period
The Hackett Group, Inc. (NASDAQ: HCKT) filed this Form 10-K for fiscal year ended December 29, 2017. The company provides benchmarking, advisory, business transformation, working-capital management and enterprise software consulting, supported by proprietary best-practice intellectual property. Fiscal 2017 was a 52-week year.
During 2017, Hackett acquired Oracle consultancy Jibe Consulting and RPA/outsourcing advisory firm Aecus, launched its Quantum Leap benchmarking platform and Digital Transformation Platform, and acquired its partner’s interest in the Certified GBS Professionals program.
Financial and operating performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue before reimbursements | $263.3 million | $259.9 million |
| Total revenue, including reimbursements | $285.9 million | $288.6 million |
| Operating income | $30.8 million | $34.6 million |
| Operating margin on revenue before reimbursements | 11.7% | 13.3% |
| Net income | $27.4 million | $21.5 million |
| Diluted EPS | $0.85 | $0.66 |
| Cash from operations | $26.5 million | $32.9 million |
| Cash and cash equivalents at year-end | $17.5 million | $19.7 million |
| Long-term debt at year-end | $19.0 million | $7.0 million |
| Working capital at year-end | $23.8 million | $13.0 million |
Revenue before reimbursements grew 1.3%, while total revenue declined because reimbursable project expenses fell. Operating income declined despite higher net income; the latter benefited materially from a lower tax expense. Cash used in investing was $17.5 million, including $11.3 million for acquisitions and the CGBS program interest and $6.5 million of capital expenditures. Cash used in financing was $11.2 million, reflecting dividends, repurchases and employee share-tax withholding, partly offset by net borrowing.
In the fourth quarter, total revenue was $64.5 million versus $62.9 million a year earlier; operating income was $8.5 million versus $9.7 million, and net income was $9.4 million versus $6.2 million. The fourth-quarter 2017 net income included a tax benefit from remeasuring deferred tax liabilities under the 2017 Tax Act.
Material changes versus the prior period
- Domestic revenue declined 4%, while international revenue grew 36%; international revenue rose to 19% of total revenue from 14% in 2016. Management attributed weakness in domestic Hackett revenue in part to the transition from on-premise to cloud application work.
- SAP Solutions revenue before reimbursements rose 5% to $39.9 million. Jibe and Aecus contributed $16.2 million of revenue in 2017, including $12.3 million from Jibe and $3.9 million from Aecus after acquisition.
- Operating margin on revenue before reimbursements decreased to 11.7% from 13.3%. The company recorded $1.3 million of restructuring costs related primarily to cloud transition, acquisitions and resource realignment.
- Operating cash flow fell by $6.4 million, with higher receivables and unbilled revenue and lower accrued liabilities, including payout of prior-year incentive compensation, weighing on cash generation.
- Debt increased to $19.0 million from $7.0 million. The revolving facility has $45.0 million of capacity and matures in May 2021; the company reported covenant compliance at year-end.
Outlook, commentary, risks and unusual items
Management said it expected cash on hand, operating cash flow and borrowing availability to fund working capital and capital expenditures for at least the next 12 months. It planned to continue investing in its Digital Transformation Platform and related intellectual property during 2018. The filing provides no specific 2018 revenue or earnings guidance.
Management identified IP-based advisory and “IP as a service,” cloud applications, RPA, training and strategic alliances as growth opportunities. The annual dividend was increased after year-end from $0.30 to $0.34 per share, subject to board discretion and credit-agreement restrictions.
Fiscal 2017 income tax expense was $2.9 million, or a 9.5% effective rate, versus $12.6 million and approximately 37% in 2016. The 2017 result included the tax benefit from the new share-based award accounting and a provisional $4.0 million benefit from the Tax Act’s corporate-rate reduction; management estimated the effective rate would have been 35.5% excluding those effects. The Tax Act accounting remained provisional, with final calculations expected during 2018.
Key risks include short-term, generally cancellable client contracts; project timing and cancellation; client concentration (the ten largest clients generated 21% of 2017 revenue); competition and pricing pressure; recruiting and retaining skilled staff; acquisition integration and earn-outs; contract-estimation and collection risks; and foreign-exchange exposure. The company reported no material off-balance-sheet arrangements and stated ordinary-course legal matters were not expected to have a material adverse effect. The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much of 2017 EPS growth reflects sustainable operations versus the unusually low tax rate and related one-time tax benefits.
- Whether domestic demand and margins recover as the business shifts toward cloud implementations, and whether international growth persists.
- Jibe and Aecus integration, performance against acquisition targets, contingent consideration and the returns on acquisition spending.
- Collection and conversion of the higher accounts receivable and unbilled revenue balance into cash.
- Debt covenant headroom and the sustainability of dividends and repurchases alongside investment needs.