Huron Consulting Group Inc. — 2011 Q2 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. The filing covers the three and six months ended June 30, 2011, with comparable periods in 2010. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $159.0 million | $135.7 million | $302.0 million | $263.4 million |
| Operating income | $22.8 million | $9.6 million | $34.5 million | $17.0 million |
| Operating margin | 14.4% | 7.0% | 11.4% | 6.5% |
| Income from continuing operations | $9.5 million | $3.5 million | $13.4 million | $6.2 million |
| Net income | $9.5 million | $2.4 million | $13.5 million | $4.9 million |
| Diluted EPS from continuing operations | $0.44 | $0.17 | $0.63 | $0.30 |
| Adjusted EBITDA | $31.3 million | $23.6 million | $51.1 million | $37.4 million |
| Adjusted EBITDA margin | 19.7% | 17.4% | 16.9% | 14.2% |
Six-month operating cash flow was $32.1 million, compared with cash used in operations of $14.0 million in the prior-year period. Investing cash flow was negative $30.7 million, including $23.9 million for business acquisitions and $6.2 million for property and equipment. Financing cash flow was negative $5.2 million.
Cash and cash equivalents were $3.3 million at June 30, 2011, down from $6.3 million at December 31, 2010. Borrowings were $254.0 million, compared with $257.0 million at year-end, and carried a weighted-average interest rate of 3.6%. Available borrowing capacity was $86.3 million after considering outstanding letters of credit and term-loan payments.
The company entered into a new $350.0 million senior secured credit facility in April 2011, consisting of a $150.0 million revolver and a $200.0 million term loan, both maturing in 2016. At June 30, 2011, Huron was in compliance with its covenants, including a fixed-charge coverage ratio of 3.01x, leverage ratio of 2.04x, and minimum net worth requirement.
Material changes versus the prior comparable period
- Revenue increased 17.2% in Q2 and 14.7% for the first six months, driven primarily by Health and Education Consulting and increased Legal Consulting demand.
- Health and Education revenue increased 26.4% in Q2 and 22.5% year to date. Performance-based healthcare revenue contributed $16.9 million of the quarterly increase and $17.6 million of the six-month increase.
- Legal Consulting revenue increased 17.7% in Q2 and 15.3% year to date, principally from document review and electronic discovery services. Its quarterly margin declined to 24.1% from 27.4%.
- Financial Consulting revenue declined 26.3% in Q2 and 21.9% year to date. Its quarterly operating margin fell to 18.6% from 27.7%, reflecting higher severance, contractor, and technology costs.
- Total consultant utilization declined to 71.9% in Q2 from 73.0%, but increased to 74.9% for the first six months from 69.7%. Average billing rates increased to $269 per hour in Q2 from $243.
- The effective tax rate increased to 50.8% in Q2 and 51.0% year to date, versus 36.6% and 39.7%, respectively, primarily because certain foreign losses generated no tax benefit and the company recorded a $0.4 million valuation allowance.
- Discontinued operations were approximately breakeven in 2011, compared with losses of $1.1 million in Q2 2010 and $1.3 million for the first six months of 2010.
Guidance, outlook, commentary, and unusual items
The filing does not provide a formal numerical revenue or earnings forecast. Management expects internally generated liquidity, available revolver capacity, and external capital resources to be adequate for growth, acquisitions, capital expenditures, earn-out payments, and debt service, subject to profitability, receivable quality, leverage, and credit-market conditions. Management also believes the company will meet future debt-covenant requirements.
- Management estimates 2011 capital expenditures of approximately $15.0 million, primarily for information technology, software, and leasehold improvements.
- Additional acquisition consideration paid during the first half totaled $22.1 million for 2010 performance. Management anticipates approximately $30 million of additional consideration may be earned for 2011 performance, although the acquisition agreements have no maximum aggregate payment limitation.
- Q2 included $1.8 million of restatement-related legal expenses, $0.5 million of restructuring charges, and $0.5 million of non-cash litigation settlement expense. The first half included $3.0 million, $1.0 million, and $1.1 million, respectively.
- The shareholder class action related to the restatement was settled and terminated in May 2011 for approximately $39.6 million, consisting of $27.0 million in insurance-funded cash and 474,547 Huron shares. The company recorded a cumulative $13.7 million non-cash charge for the shares.
- SEC investigations concerning the restatement and allocation of time within a practice group remain ongoing. The U.S. Attorney’s Office requested documents previously provided to the SEC. Huron states that any additional liability could be material but cannot reasonably estimate the amount.
- A False Claims Act qui tam lawsuit remains pending; the government declined to intervene. Huron’s motion to dismiss was pending as of the filing date.
- Goodwill totaled $506.8 million at June 30, 2011. The annual impairment test found excess estimated fair value over carrying value of 53% for Health and Education, 48% for Legal, and 11% for Financial Consulting; future deterioration could result in impairment.
Most important facts for investors to verify
- Whether the ongoing SEC and related legal matters result in fines, penalties, damages, administrative remedies, or other material liabilities not covered by insurance.
- Whether the company can sustain performance-based healthcare revenue, utilization, billing rates, and demand for Legal Consulting services.
- Whether Financial Consulting weakness and declining utilization in certain practices persist.
- Whether cash generation and the $86.3 million of reported borrowing capacity are sufficient for debt service, capital expenditures, acquisitions, and expected 2011 earn-out payments.
- Compliance with the credit facility’s leverage, fixed-charge coverage, net-worth, dividend, and acquisition restrictions.
- The sensitivity of goodwill, particularly in Financial Consulting, to lower revenue growth, profitability, or valuation assumptions.
- The effect of the elevated effective tax rate and foreign deferred-tax valuation allowance on future earnings and cash taxes.