Huron Consulting Group Inc. — 2012 Q3 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 report covers the three and nine months ended September 30, 2012, with comparisons to the corresponding 2011 periods. Discontinued operations primarily include divested or exited Financial Consulting practices.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $161.9 million | $153.6 million | $445.2 million | $443.3 million |
| Operating income | $20.6 million | $3.7 million | $38.9 million | $36.8 million |
| Operating margin | 12.7% | 2.4% | 8.7% | 8.3% |
| Net income | $10.5 million | $0.5 million | $17.8 million | $14.0 million |
| Diluted EPS from continuing operations | $0.47 | $0.05 | $0.78 | $0.64 |
| Adjusted EBITDA | $41.6 million | $33.2 million | $74.8 million | $82.8 million |
| Adjusted EBITDA margin | 25.7% | 21.6% | 16.8% | 18.7% |
Net cash provided by operating activities was $40.4 million for the first nine months, compared with $54.9 million in 2011. Capital expenditures were $14.3 million and cash used for acquisitions was $53.8 million. Cash declined to $3.2 million at September 30, 2012, from $5.1 million at December 31, 2011.
Bank borrowings were $222.5 million at September 30, 2012, compared with $193.5 million at year-end 2011. The weighted average interest rate was 2.7%. Unused borrowing capacity was $218.6 million, after consideration of letters of credit and other reductions. The company reported compliance with its debt covenants, including a 3.36x fixed-charge coverage ratio, 2.07x leverage ratio, and minimum net worth requirement.
Material changes versus the prior comparable period
- Q3 revenue increased 5.4%, driven by Health and Education and Legal Consulting; Financial Consulting revenue declined 22.1%.
- Q3 operating income rose $16.9 million, primarily because the goodwill impairment charge decreased to $13.1 million from $22.0 million, direct costs declined, and operating expenses were better absorbed.
- Q3 net income from continuing operations increased to $10.4 million from $1.1 million. The 2011 quarter benefited from a tax benefit, while Q3 2012 recorded $8.0 million of tax expense and a 43.4% effective tax rate.
- For the first nine months, revenue was essentially flat. Legal Consulting revenue increased 10.5%, while Financial Consulting revenue decreased 38.2% and Health and Education revenue decreased 0.1%.
- Financial Consulting operating margin fell to 9.9% for the first nine months from 31.4%, reflecting lower demand, staffing levels, utilization, and billing rates.
- Performance-based revenue declined materially in Health and Education, to $56.3 million for the first nine months from $76.2 million.
- Two Legal Consulting acquisitions were completed during the first nine months for aggregate consideration of $32.0 million, generating $19.3 million of goodwill and $8.6 million of intangible assets.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that Financial Consulting improvement initiatives were progressing more slowly than expected and that the expected recovery timeline had lengthened.
- The company recorded a $13.1 million non-cash pretax goodwill impairment charge for Financial Consulting. Goodwill totaled $518.5 million at September 30, 2012. Management noted that additional impairment could result if future earnings or cash flows decline; a 1% increase in the discount rate would reduce estimated segment fair value by approximately $1.0 million.
- Q3 included $2.2 million of restructuring charges, principally related to Washington, D.C. office consolidation and New York office relocation. Management expected approximately $0.5 million of additional 2012 New York-related charges.
- A $1.2 million litigation charge was recorded in Q2 related to a pending qui tam False Claims Act action. The federal government declined to intervene; Huron’s summary judgment motion was pending, no trial date had been set, and management considered the claims without merit.
- The company estimated 2012 capital expenditures of approximately $20 million and stated that internal cash generation and available debt capacity should fund growth, commitments, and debt service.
- Revenue remains sensitive to consultant utilization, billing rates, staffing, client demand, performance-based fee timing, and the absence of long-term recurring contracts. The company also identified acquisition integration, market conditions, debt covenant compliance, interest rates, litigation, and goodwill valuation as material risks.
- Interest-rate exposure is significant: a hypothetical 1% change in borrowing rates would affect pretax income by approximately $2.2 million. Interest-rate swaps hedged approximately $87.5 million of debt at September 30, 2012.
Most important facts for an investor to verify
- Whether Financial Consulting revenue, utilization, margins, and cash generation recover as management initiatives mature.
- Whether further goodwill impairment charges are required, given the sensitivity of the Financial Consulting valuation to forecasts and discount rates.
- The sustainability of operating cash flow after acquisition payments, capital expenditures, bonus payments, and increased debt balances.
- Compliance with the credit agreement’s leverage, fixed-charge coverage, net worth, acquisition, and dividend restrictions.
- The ultimate resolution and potential exposure from the pending qui tam litigation.
- The effect of volatile performance-based fees and changing consultant utilization on quarterly revenue and margins.
- The comparability of adjusted EBITDA and adjusted EPS, which exclude goodwill impairment, restructuring, restatement-related expenses, litigation settlements, and other specified items.