Huron Consulting Group Inc. annual report, FY2011

Huron Consulting Group Inc. — 2011 Form 10-K 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 fiscal year ended December 31, 2011, with comparative information for 2010 and 2009. Huron had 1,992 full-time employees and served 813 clients, including 196 new clients.

Revenue mix: Health and Education Consulting 66.9%, Legal Consulting 28.4%, and Financial Consulting 4.7%.
Top ten clients represented approximately 33.9% of 2011 revenue; no individual client exceeded 10%.
Accounting Advisory, Disputes and Investigations, Utilities, Japan, and Galt were reported as discontinued operations following dispositions or exits.

Financial performance and key metrics

Metric	2011	2010	Change
Revenue	$606.3 million	$515.7 million	17.6% increase
Total revenue and reimbursable expenses	$657.9 million	$559.0 million	17.7% increase
Operating income	$55.4 million	$34.7 million	59.8% increase
Operating margin	9.1%	6.7%	Up 2.4 percentage points
Income from continuing operations	$21.5 million	$7.4 million	Increase of $14.1 million
Diluted EPS from continuing operations	$0.99	$0.36	Increase of $0.63
Net income	$20.5 million	$8.5 million	Increase of $12.0 million
Adjusted EBITDA	$110.8 million	$87.2 million	27.0% increase
Adjusted EBITDA margin	18.3%	16.9%	Up 1.4 percentage points
Cash flow from operations	$108.6 million	$50.1 million	Increase of $58.6 million

Revenue growth was led by higher demand in Health and Education Consulting and increased Legal Consulting discovery and records-management work. Full-time billable consultant utilization rose to 75.3% from 73.7%, while average billing rate increased to $252 from $244. Performance-based fees increased to 17.6% of revenue from 11.6%, increasing potential quarterly volatility.

Health and Education Consulting revenue increased 19.8% to $405.4 million; segment margin rose slightly to 33.5% from 33.2%.
Legal Consulting revenue increased 19.1% to $172.4 million; segment margin declined to 25.1% from 27.1%.
Financial Consulting revenue declined 12.8% to $28.5 million; segment margin declined to 25.0% from 36.2%.
Net loss from discontinued operations was $1.0 million, compared with $1.1 million of income in 2010.

Liquidity, debt, and capital resources

Cash and cash equivalents were $5.1 million at December 31, 2011, compared with $6.3 million at December 31, 2010.
Working capital was $41.8 million, compared with $34.5 million in 2010.
Outstanding borrowings declined to $193.5 million from $257.0 million. The weighted-average interest rate was 3.3%, compared with 4.5% in 2010.
Borrowings were under a $350 million senior secured facility consisting of a $200 million term loan and a $150 million revolving facility, maturing April 14, 2016. Available borrowing capacity was $141.3 million after letters of credit and required reductions.
At year-end, Huron satisfied its debt covenants: fixed-charge coverage ratio of 3.59x, leverage ratio of 1.57x, and net worth above the required $150 million.
Cash used in investing activities was $38.5 million, including $22.1 million of additional acquisition consideration and $13.9 million of capital expenditures. Management estimated 2012 capital expenditures of approximately $20 million.
Cash used in financing activities was $71.5 million, primarily reflecting net debt repayments.
Total contractual obligations were $290.1 million, including $193.5 million of bank borrowings, $53.6 million of operating leases, and $32.1 million of additional purchase consideration.

Material changes versus the prior comparable period

Revenue, operating income, continuing-operations earnings, and operating cash flow improved materially in 2011.
Operating performance benefited from revenue growth, higher utilization and billing rates, and lower litigation and restatement-related costs.
A $23.9 million non-cash goodwill impairment charge was recorded in 2011, including $22.0 million in continuing operations and $1.9 million in discontinued operations. The charge did not reduce liquidity or affect debt covenant calculations.
Restatement-related expenses declined to $4.6 million from $8.7 million; litigation settlement expense declined to $1.1 million from $17.3 million.
Huron sold its Accounting Advisory practice on December 30, 2011 and recognized a $1.9 million loss within discontinued operations.
Financial Consulting weakened because of lower restructuring and turnaround demand and the inability of the Accounting Advisory practice to replace revenue from a significant client.
Debt declined by $63.5 million, although the business remained dependent on variable-rate secured borrowings and revolving-credit availability.

Guidance, outlook, commentary, risks, and unusual items

The filing does not provide a formal consolidated revenue or earnings forecast. Management stated that internally generated liquidity, available revolver capacity, and access to external capital resources should be adequate for expected growth, capital needs, and debt service. Management also planned new Financial Consulting initiatives in 2012, including cross-practice synergies and additional managing-director hiring.

Management expected approximately $2.5 million of additional accelerated depreciation and approximately $2.1 million of estimated exit costs related to the New York office in 2012; actual costs could vary materially.
The SEC continues to investigate the 2009 financial restatement, and Huron recorded a $1.0 million fourth-quarter 2011 charge toward a potential SEC settlement. The ultimate penalties, relief, indemnification costs, and other liabilities could materially exceed the accrual.
Former employees received SEC Wells notices. Huron expects its indemnification obligations for their defense costs to be material in the first half of 2012 and potentially until the restatement matters are resolved.
A state derivative lawsuit related to the restatement remained on appeal. The federal derivative lawsuits were dismissed with prejudice, and the shareholder class action settlement was finalized in May 2011 for approximately $39.6 million, consisting of $27.0 million of insurer-funded cash and 474,547 shares.
A separate SEC investigation concerning time allocation within a practice group remained ongoing; management stated that its internal inquiry found no need to adjust historical financial statements.
A False Claims Act qui tam action remained in the pretrial stage after a February 2012 ruling denied Huron’s motion to dismiss. The company considers the claims meritless and intends to defend them.
Key operating risks include client concentration and termination rights, utilization and billing-rate volatility, performance-based fee timing, competition for professionals, professional liability, technology and data-security risks, goodwill impairment, and variable-rate debt exposure.
A hypothetical one-percentage-point increase in borrowing rates would reduce annual pre-tax income by approximately $1.9 million. Interest-rate swaps hedged portions of the variable-rate debt.

Most important facts for investors to verify

Reconcile reported GAAP results with adjusted EBITDA and adjusted EPS, particularly the goodwill impairment, litigation, restructuring, and restatement adjustments.
Monitor the SEC investigation, Wells notices, related indemnification obligations, state derivative appeal, and False Claims Act litigation for liabilities exceeding recorded accruals.
Assess whether the Financial Consulting revenue decline and the Accounting Advisory disposal indicate broader weakness in restructuring and turnaround demand.
Evaluate cash conversion, working-capital growth, acquisition-related payments, 2012 capital expenditures, and the company’s reliance on revolver capacity to fund term-loan amortization.
Track performance-based revenue, utilization, billing rates, client concentration, and Legal Consulting margin trends.
Confirm compliance with secured-credit covenants and the effect of variable interest rates as hedges expire or amortize.
Review the significant goodwill balance of $512.2 million and assumptions supporting future impairment tests.