Huron Consulting Group Inc. — Q3 2011 Form 10-Q Summary
Business context and reporting period
Huron provides operational and financial consulting services through Health and Education Consulting, Legal Consulting, and Financial Consulting. This unaudited filing covers the three and nine months ended September 30, 2011, with comparisons to the respective 2010 periods. Amounts are in thousands unless otherwise noted.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $158.9 million | $145.4 million | $460.9 million | $408.8 million |
| Operating income | $2.2 million | $24.6 million | $36.7 million | $41.6 million |
| Operating margin | 1.4% | 16.9% | 8.0% | 10.2% |
| Net income from continuing operations | $0.2 million | $11.1 million | $13.6 million | $17.2 million |
| Net income | $0.5 million | $7.5 million | $14.0 million | $12.3 million |
| Diluted EPS from continuing operations | $0.00 | $0.53 | $0.63 | $0.83 |
| Adjusted EBITDA | $33.8 million | $31.5 million | $84.8 million | $68.8 million |
| Adjusted EBITDA margin | 21.2% | 21.6% | 18.4% | 16.8% |
For the first nine months, operating cash flow was $54.9 million versus $10.9 million in 2010. Investing cash flow was $(34.5) million, including $23.9 million for business purchases and $10.5 million for property and equipment. Financing cash flow was $(25.5) million. Cash and cash equivalents declined to $1.5 million from $6.3 million at December 31, 2010.
At September 30, 2011, bank borrowings were $233.8 million, down from $257.0 million at year-end 2010, with a weighted-average interest rate of 3.6%. Revolving-credit availability was $104.3 million after considering term-loan payments and $4.5 million of letters of credit. Stockholders’ equity was $387.1 million and goodwill was $482.6 million.
Material changes versus the prior comparable period
- Revenue increased 9.2% in Q3 and 12.7% for the nine-month period. Health and Education revenue rose 15.7% in Q3 and 20.1% year to date; Legal Consulting revenue rose 14.8% and 15.1%, respectively.
- Financial Consulting revenue declined 33.1% in Q3 and 25.7% year to date. Its segment margin fell to 22.4% from 31.2% in Q3 and to 21.4% from 28.2% year to date.
- A $23.9 million non-cash goodwill impairment charge reduced Q3 operating income and operating margin. The charge related to Financial Consulting and followed weaker forecasts for the Accounting Advisory practice, including the loss of a significant client without replacement sales. The related tax benefit was $9.5 million.
- Adjusted EBITDA increased despite the impairment charge, while reported continuing-operations earnings declined substantially.
- Performance-based fees represented 18.2% of Q3 revenue versus 11.1% in the prior-year quarter and 16.7% versus 11.3% for the nine-month periods, increasing revenue variability.
- Net income benefited from discontinued operations of $0.3 million in Q3 and $0.4 million year to date, compared with losses of $3.6 million and $4.9 million in the comparable 2010 periods.
- A $1.0 million prior-period revenue correction was recorded in Q3 for a percentage-of-completion accounting error. Management concluded that prior-quarter financial statements were not materially misstated and that the correction had no year-to-date effect.
Guidance, outlook, risks, contingencies, and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management expects internally generated liquidity and available revolver capacity to fund growth, capital expenditures, earn-outs, debt service, and other commitments.
- Management estimated 2011 capital expenditures of approximately $17.0 million and anticipated approximately $30 million of additional acquisition consideration for 2011, subject to performance targets.
- On November 1, 2011, Huron agreed to sell its Accounting Advisory practice, expected to close by year-end subject to customary conditions. The practice represented approximately 44% of Financial Consulting revenue and 23% of segment operating income for the first nine months of 2011. Management did not expect a material impact on consolidated results.
- Huron recorded $1.4 million of restructuring charges during the first nine months and expected an additional $0.5 million charge in Q4 2011 related primarily to subleasing its Boston office space.
- The SEC investigations concerning the 2009 restatement and revenue-timing matters remained ongoing. The company had cooperated with the SEC and voluntarily provided documents to the U.S. Attorney’s Office. Huron stated that the potential outcome, including possible fines, penalties, damages, or administrative remedies, could be material but could not be reasonably estimated.
- The shareholder class-action settlement was completed in May 2011 for approximately $39.6 million, consisting of $27.0 million in cash funded by insurers and 474,547 shares. A state derivative-lawsuit appeal remained pending; federal derivative lawsuits had been dismissed with prejudice.
- A separate False Claims Act qui tam action involving alleged inflated Medicare and Medicaid outlier payments remained in the pre-trial stage. The government declined to intervene, and Huron’s motion to dismiss was pending.
- Debt covenants were satisfied at September 30, 2011: fixed-charge coverage was 3.34x versus a 2.25x minimum, leverage was 1.90x versus a 3.00x maximum, and required net worth exceeded $150 million. The company stated that the goodwill impairment was excluded from covenant EBITDA.
- The company’s $100 million interest-rate swap expired February 23, 2012. Management estimated that a one-percentage-point change in borrowing rates would affect pretax income by approximately $2.3 million.
Investor verification checklist
- Verify the closing, proceeds, and accounting treatment of the Accounting Advisory practice sale.
- Monitor Financial Consulting demand, client concentration, and the possibility of additional goodwill or intangible-asset impairment.
- Reconcile reported earnings with adjusted EBITDA and adjusted EPS, particularly the treatment of the $23.9 million impairment and other excluded items.
- Review cash conversion, receivables and unbilled services, low cash balances, revolver availability, and scheduled term-loan amortization.
- Track remaining earn-out obligations, expected 2011 acquisition consideration, and restructuring costs.
- Follow the SEC and U.S. Attorney investigations, derivative-appeal status, and the False Claims Act litigation, including potential unrecorded liabilities.