The Hackett Group, Inc. — FY2011 Form 10-K
Business context and reporting period. Hackett is a global strategic advisory and technology consulting firm focused on benchmarking, business transformation, working-capital improvement, executive advisory programs, and ERP services. Fiscal 2011 ended December 30, 2011; comparative fiscal 2010 ended December 31, 2010. The filing also reports unaudited fourth-quarter results.
Key financial results
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $225.1 million | $201.3 million |
| Revenue before reimbursements | $200.4 million | $180.9 million |
| Operating income | $17.2 million; 8.6% margin | $12.5 million; 6.9% margin |
| Net income | $21.8 million; $0.52 diluted EPS | $14.2 million; $0.34 diluted EPS |
| Cash from operations | $20.3 million | $19.5 million |
| Cash and cash equivalents, year-end | $32.9 million | $25.3 million |
| Working capital, year-end | $42.0 million | $27.2 million |
| Total liabilities / shareholders’ equity, year-end | $37.2 million / $130.2 million | $37.6 million / $113.2 million |
All financial amounts are in U.S. dollars. Reimbursements were $24.7 million in 2011 and are included in total revenue and cost of service. The filing presents no year-end borrowings on the balance sheet; a new credit facility was arranged after year-end.
Fourth quarter
For the quarter ended December 30, 2011, revenue was $55.5 million, operating income was $4.7 million, and net income was $9.7 million ($0.23 diluted EPS). In the prior-year quarter, revenue was $48.6 million, operating income was $2.9 million, and net income was $3.0 million. Fourth-quarter 2011 net income included a $5.3 million deferred-tax valuation-allowance release.
Changes versus prior year
- Total revenue rose 12%; revenue before reimbursements increased about 11%. Hackett Group service-line revenue grew 9% to $181.8 million, while ERP Solutions revenue rose 26% to $43.3 million.
- Management attributed growth chiefly to improving U.S. and international demand, including activity from the company’s newer Australian market.
- Operating income increased 38% and operating margin rose to 8.6% from 6.9%. SG&A increased 2% in dollars but declined to 28% of revenue before reimbursements from 31%, reflecting improved overhead leverage.
- Cost of service before reimbursements rose 12%, broadly in line with revenue; the company cited higher headcount. ERP Solutions gross margin on revenue before reimbursements declined to 35% from 40%, primarily due to increased headcount.
- Net income growth was amplified by the $5.3 million non-cash tax benefit. The company also reported a $1.7 million non-cash acquisition earn-out remeasurement gain in 2010, not 2011.
Cash flow, liquidity, and capital allocation
Operating cash flow was $20.3 million. Investing activities used $4.2 million, including $4.9 million of property and equipment purchases, primarily for Hackett Performance Exchange development and a laptop rollout. Financing activities used $8.6 million, principally reflecting $9.0 million of share repurchases. Year-end restricted cash was $0.9 million. Management said available funds and operating cash flows should cover working-capital and capital-expenditure needs for at least 12 months.
On February 21, 2012, Hackett entered into a five-year facility providing for a revolving line of up to $20 million and a term loan of up to $30 million. On February 22, it commenced a modified Dutch-auction tender offer for up to $55 million of shares at $4.25–$5.00 per share, scheduled to expire March 21, 2012. The term-loan proceeds, together with cash, were intended to fund the offer and related costs; borrowing was contingent on completing the offer and satisfying customary conditions. The facility is secured by substantially all company and specified subsidiary assets. The filing does not report whether the tender offer was completed or the amount ultimately borrowed.
Outlook, risks, and unusual items
- Management expected gradual improvement in U.S. economic conditions in 2012 but was more cautious about demand in Western Europe. No numerical revenue or earnings guidance was provided.
- Hackett Performance Exchange, a new performance-management dashboard launched late in 2011 with a six-month free trial, had not yet established its commercial contribution. The company disclosed more than $5 million invested in its development and noted there was no assurance of recovering that investment.
- Customer contracts are generally cancellable for convenience on 30 days’ notice. The ten largest clients accounted for 22% of revenue in 2011, although no individual customer exceeded 5% of revenue.
- Key risks include weak or volatile client demand, project delays or cancellations, pricing and competition, utilization and talent retention, fixed-price project overruns, customer collections, and foreign-exchange movements. The company held no currency hedges.
- Federal net operating loss carryforwards were $40.5 million, most expiring by 2022; foreign net operating loss carryforwards were $12.4 million. The 2011 tax benefit largely reflected a partial release of the U.S. deferred-tax valuation allowance, making reported net income less indicative of recurring operating performance.
- 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 disclosure controls were effective.
Important facts for investors to verify
- Whether the 2012 tender offer was completed, the shares purchased and price paid, and the resulting cash balance, debt, interest expense, and covenant position.
- How much of 2011 net income and diluted EPS reflects the one-time $5.3 million tax benefit, and whether future taxable income supports realization of deferred tax assets.
- Whether revenue growth and improved operating margins continued, particularly given the weaker ERP Solutions margin and the company’s cautious view of Western Europe.
- Hackett Performance Exchange’s paid-customer adoption, recurring revenue contribution, and ability to earn back development and support costs.
- Trends in receivables and unbilled revenue, customer retention and concentration, consultant utilization, and the effect of ongoing share repurchases on liquidity and per-share results.