Business Context and Reporting Period
Huron Consulting Group Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. The company provides operational and financial consulting services through Health and Education Consulting, Legal Consulting, and Financial Consulting. Revenue mix was 66.9%, 29.6%, and 3.5%, respectively. In the first quarter of 2013, Huron reorganized reporting into five operating segments, without affecting consolidated results.
Huron served more than 800 clients in 2012 and had 2,283 full-time employees. Its ten largest clients generated approximately 34.0% of revenue, although no individual client exceeded 10%.
Financial and Operating Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $626.0 million | $606.3 million | 3.2% increase |
| Total revenue and reimbursable expenses | $681.7 million | $657.9 million | 3.6% increase |
| Operating income | $73.4 million | $55.4 million | 32.5% increase |
| Operating margin | 11.7% | 9.1% | 260 basis-point increase |
| Net income from continuing operations | $36.0 million | $21.5 million | 67.4% increase |
| Net income | $36.4 million | $20.5 million | 77.5% increase |
| Diluted EPS from continuing operations | $1.61 | $0.99 | Increase |
| Adjusted EBITDA | $115.8 million | $110.8 million | 4.5% increase |
| Adjusted EBITDA margin | 18.5% | 18.3% | 20 basis-point increase |
| Cash flow from operations | $105.6 million | $108.6 million | 2.8% decrease |
| Cash and cash equivalents | $25.2 million | $5.1 million | Increase |
| Borrowings | $192.5 million | $193.5 million | Decrease |
Fourth-quarter 2012 revenue was $180.8 million, operating income was $34.5 million, and net income was $18.6 million. Fourth-quarter diluted EPS was $0.83.
Segment revenue and operating results were:
- Health and Education Consulting: Revenue increased 5.0% to $419.0 million; operating income increased 10.6% to $146.9 million; operating margin improved to 35.0% from 33.3%.
- Legal Consulting: Revenue increased 7.3% to $184.9 million, including $9.9 million from the AdamsGrayson acquisition; operating income increased 2.6% to $44.3 million; operating margin declined to 24.0% from 25.1%.
- Financial Consulting: Revenue declined 36.9% to $22.0 million; operating income declined 81.0% to $1.9 million; operating margin declined to 8.6% from 28.4%.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher demand in Health and Education Consulting and Legal Consulting, including increased discovery and records-management activity.
- Revenue increased despite a $17.3 million decline in performance-based revenue. Performance-based fees represented 14.2% of 2012 revenue versus 17.6% in 2011.
- Utilization increased to 75.6% from 75.3%, while the average billing rate declined to $229 per hour from $252.
- Financial Consulting weakened materially because of reduced demand for restructuring, turnaround, and valuation services.
- Operating margin benefited from lower goodwill impairment, contractor, and restatement-related expenses. The company recorded $13.1 million of goodwill impairment in 2012, compared with $22.0 million in 2011, both related to Financial Consulting.
- Cash flow from operations remained strong but declined modestly because of higher bonus payments, partly offset by improved collections and higher operating income.
- Huron completed acquisitions in Legal Consulting and Health and Education Consulting, using approximately $55.2 million of cash for business purchases, including $32.2 million of additional consideration related to prior acquisitions.
- Discontinued operations generated $0.5 million of net income in 2012 versus a $1.0 million net loss in 2011. The discontinued practices included Accounting Advisory, Disputes and Investigations, Utilities, and Japan operations.
Liquidity, Debt, Outlook, and Unusual Items
- Huron had $25.2 million of cash, $83.6 million of working capital, and $192.5 million of long-term bank borrowings at December 31, 2012.
- The senior secured credit facility has aggregate commitments of $450.0 million, including a $247.5 million revolver and a $202.5 million term loan. Unused borrowing capacity was $242.4 million, after considering letters of credit and term-loan payments.
- Borrowings carried a weighted-average interest rate of 2.5%, including interest-rate swaps. A hypothetical 100-basis-point rate change would affect pretax income by approximately $1.1 million.
- Huron was in compliance with its debt covenants, reporting a fixed-charge coverage ratio of 3.54 to 1.00 and leverage ratio of 1.64 to 1.00, compared with covenant limits of at least 2.25 to 1.00 and no more than 3.00 to 1.00, respectively.
- The credit facility matures on August 31, 2017. It is secured by substantially all of the company’s personal property and equity interests in subsidiaries and restricts certain debt, acquisition, disposition, investment, and dividend activity.
- Management estimated 2013 capital expenditures of approximately $25.0 million and stated that internally generated liquidity and available borrowing capacity should fund expected growth, capital needs, and debt service.
- 2012 unusual items included $13.1 million of non-cash goodwill impairment, $4.0 million of restructuring charges, $1.8 million of restatement-related expenses, and $1.2 million of litigation settlement expense.
- The litigation charge relates to a pending False Claims Act qui tam action alleging more than $30 million of inflated Medicare and Medicaid outlier payments. Huron’s summary judgment motion was pending, and management stated that it believes the claims lack merit.
- Management provided no clear consolidated 2013 revenue or earnings guidance in the filing. It cited initiatives to improve Financial Consulting performance, continued growth in healthcare and legal services, and an expected discrete tax benefit from the extension of the federal research and development tax credit.
Key Investor Verification Items
- Verify whether the Financial Consulting turnaround initiatives improve revenue, utilization, margins, and goodwill impairment exposure.
- Assess the sustainability of 2012 margin expansion after excluding goodwill impairment, restructuring, litigation, and restatement-related charges.
- Monitor performance-based revenue, fixed-fee engagement profitability, billing rates, utilization, and client concentration.
- Review debt amortization, covenant headroom, variable-rate exposure, and the 2017 credit-facility maturity.
- Evaluate acquisition integration and the financial contribution of AdamsGrayson, Ascertus, and Slover-Linett.
- Track the pending qui tam litigation and any potential settlement or additional liability beyond the $1.2 million charge recorded.
- Confirm the effect of the 2013 segment reorganization on historical comparisons and operating performance disclosures.
- Consider the company’s dependence on senior professionals, client referrals, short-term engagements, healthcare regulation, technology systems, data security, and competitive labor markets.