HURN

Huron Consulting Group Inc. - Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Huron Consulting Group Inc. is a leading provider of operational and financial consulting services operating through four segments: Health and Education Consulting, Accounting and Financial Consulting, Legal Consulting, and Corporate Consulting. The reporting period includes the full impact of the July 2008 acquisition of Stockamp & Associates, Inc., which significantly expanded the Health and Education Consulting segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 16.9% ($23.6 million) year-over-year, driven primarily by the inclusion of Stockamp revenues in the Health and Education segment ($42.5 million increase in that segment alone).
• Margin Compression: Operating margin declined to 13.4% from 14.8%. This was attributed to higher total compensation costs as a percentage of revenue and increased amortization expense related to the Stockamp acquisition.
• Segment Performance:
  • Health and Education: Revenues surged 83.1% due to the Stockamp acquisition.
  • Accounting and Financial: Revenues dropped 37.0% due to lower demand for variable, on-demand consultants.
  • Legal: Revenues declined 9.3% due to lower utilization rates.
  • Corporate: Revenues decreased 8.8% due to a reduction in the number of consultants.
• Debt Levels: Borrowings increased to $321.5 million from $280.0 million to fund additional purchase consideration payments ($46.2 million paid in Q1 2009) and daily operations.
• Cash Flow: Operating cash flow turned positive ($2.1 million) compared to a significant outflow in Q1 2008, largely due to improved collections from the Stockamp integration and lower bonus payments.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects future annual growth rates in revenues and working capital to moderate. Liquidity is expected to be adequate to fund growth and debt service, though dependent on credit market conditions.
• Unusual Items:
  • Acquisition Costs: Significant cash outflows ($46.2 million) were used to pay earn-out provisions to sellers of previously acquired businesses.
  • Severance: Operating expenses included approximately $1.1 million in severance costs.
• Risks and Contingencies:
  • Legal Proceedings: The company is defending a lawsuit filed by the SVCMC Litigation Trust seeking at least $200 million in damages related to services provided to St. Vincents Catholic Medical Centers. Management believes the claims are without merit.
  • Market Risk: The company has exposure to interest rate fluctuations on variable-rate debt. A $100 million interest rate swap was entered into in March 2009 to hedge this risk.
  • Stock Price Contingency: Due to price protection provisions in the Stockamp acquisition, the company may be obligated to make additional payments if the stock price remains below $47.81 when escrow restrictions lapse in July 2009. Based on March 31 pricing, a potential payment of approximately $1.8 million was estimated.

Investor Verification Checklist

• Stockamp Integration: Verify the sustainability of the revenue growth in the Health and Education segment post-acquisition and the impact of amortization on future margins.
• Debt Covenants: Confirm continued compliance with the credit agreement's fixed charge coverage (3.60:1.00) and leverage ratios (1.98:1.00) given the increased debt load.
• Legal Exposure: Monitor the status of the St. Vincents litigation and any potential accruals for the $200 million claim.
• Utilization Rates: Review trends in consultant utilization rates, which declined in Accounting, Financial, and Legal segments, potentially indicating softening demand in those areas.
• Contingent Consideration: Assess the potential cash impact of the Stockamp price protection payment due in July 2009 based on prevailing stock prices.