Huron Consulting Group Inc. - Q1 2008 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2008. Huron Consulting Group Inc. is an independent provider of financial and operational consulting services operating through four segments: Health and Education Consulting, Financial Consulting, Legal Consulting, and Corporate Consulting. The company serves Fortune 500 companies, healthcare organizations, academic institutions, and law firms.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Revenues | $139.4 million | $116.0 million |
| Operating Income | $20.6 million | $18.9 million |
| Net Income | $10.2 million | $9.8 million |
| Diluted EPS | $0.56 | $0.55 |
| Operating Margin | 14.8% | 16.3% |
| Cash and Equivalents | $14.3 million | $6.3 million |
| Bank Borrowings (Outstanding) | $177.0 million | $123.5 million |
| Net Cash Used in Operating Activities | ($28.5 million) | ($14.0 million) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 20.2% ($23.4 million) driven by the acquisition of Callaway Partners (July 2007) and an increase in the number of full-time billable consultants (from 924 to 1,234).
- Margin Compression: Operating margin declined to 14.8% from 16.3%. This was primarily due to lower utilization rates in the Financial and Legal Consulting segments as the company added significant headcount, and increased share-based compensation expenses.
- Segment Performance:
- Health & Education: Revenues up 31.5%; Operating income up 81.4% to $22.1 million. Margin improved to 43.3% due to lower compensation costs relative to revenue and absence of amortization.
- Financial Consulting: Revenues up 6.0%; Operating income down 40.7% to $9.6 million. Margin dropped to 24.7% due to lower utilization of full-time consultants.
- Corporate Consulting: Revenues up 40.5%; Operating income up 123.5% to $9.4 million. Margin improved to 38.6%.
- Liquidity: Cash used in operating activities increased significantly ($28.5 million vs $14.0 million) primarily due to the payment of accrued 2007 bonuses and additional purchase consideration for acquisitions.
Guidance, Outlook, Risks, and Unusual Items
- Subsequent Events (April 2008):
- Amended credit agreement to increase borrowing capacity from $200 million to $240 million.
- Settled the earn-out provision for the Callaway acquisition for $23.0 million via a promissory note.
- Borrowed an additional $19.0 million to fund Wellspring earn-out payments.
- Legal Proceedings: The company is defending against a lawsuit filed by the SVCMC Litigation Trust (formerly St. Vincents Catholic Medical Centers) alleging breach of fiduciary duties and fraud. The plaintiff seeks at least $200 million in damages. Management believes the claims are without merit.
- Market Risk: The company has variable rate debt ($177 million outstanding). A 1% change in interest rates would impact pre-tax income by approximately $1.8 million.
- Outlook: Management expects future growth to be funded by operations and credit facilities. They anticipate that working capital needs will moderate as growth rates stabilize.
Investor Verification Checklist
- Utilization Rates: Verify the trend in consultant utilization rates, particularly in Financial and Legal segments, as low utilization is currently pressuring margins despite revenue growth.
- Acquisition Integration: Assess the financial contribution of the Callaway acquisition and the impact of its variable workforce model on future cost structures.
- Debt Covenants: Monitor compliance with financial covenants (interest coverage, debt-to-EBITDA) given the increased debt load ($177 million) and recent amendments to the credit facility.
- Legal Exposure: Track the status of the St. Vincents litigation, as a $200 million claim could be material if the company's defense is unsuccessful.
- Working Capital: Review the timing of bonus payments and acquisition earn-outs, as these create significant seasonal cash outflows that impact operating cash flow.