Huron Consulting Group Inc. — Q1 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 Form 10-Q covers the three months ended March 31, 2011, compared with the same period in 2010. Discontinued operations include the D&I, Utilities, Japan, and Galt practices.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $143.0 million | $127.7 million | Up 11.9% |
| Total revenues and reimbursable expenses | $156.1 million | $139.2 million | Up 12.1% |
| Operating income | $11.6 million | $7.4 million | Up 56.5% |
| Operating margin | 8.1% | 5.8% | Up 2.3 percentage points |
| Net income from continuing operations | $4.0 million | $2.7 million | Up 47.8% |
| Net income | $4.1 million | $2.5 million | Up 61.3% |
| Diluted EPS | $0.19 | $0.12 | Up $0.07 |
| Adjusted EBITDA | $19.7 million | $13.7 million | Up 43.9% |
| Adjusted EBITDA margin | 13.8% | 10.7% | Up 3.1 percentage points |
| Cash flow from operating activities | $(3.4) million | $(24.6) million | Improved by $21.2 million |
Net income margin was approximately 2.8% in Q1 2011 versus approximately 2.0% in Q1 2010. Income tax expense increased to $4.2 million from $2.0 million, and the effective tax rate increased to 51.5% from 43.3%.
At March 31, 2011, cash and cash equivalents were $4.4 million, compared with $6.3 million at December 31, 2010. Borrowings were $286.5 million, compared with $257.0 million at year-end. Reported borrowing capacity was $46.6 million, after considering letters of credit and term-loan payments. The company was in compliance with its debt covenants.
Total assets were $789.0 million and stockholders’ equity was $355.2 million at March 31, 2011. Goodwill was $506.8 million, including $106.0 million of accumulated impairment losses in Financial Consulting.
Material Changes Versus the Prior Comparable Period
- Health and Education Consulting revenue increased 18.4% to $91.0 million, with segment margin improving to 29.0% from 27.4%.
- Legal Consulting revenue increased 12.7% to $37.3 million, with segment margin improving to 25.7% from 22.4%.
- Financial Consulting revenue declined 17.4% to $14.6 million, and segment margin fell to 23.1% from 25.5%, primarily because of lower demand for variable, on-demand consultants.
- Total full-time billable consultants increased to 1,178 from 1,056, while utilization increased to 78.0% from 66.4%. Average billing rate declined to $224 per hour from $238.
- Fixed-fee engagements represented 41.9% of revenue versus 35.6% in the prior-year quarter; time-and-expense engagements declined to 45.9% from 51.9%.
- Direct costs increased 9.6% to $93.1 million, below the rate of revenue growth. Selling, general and administrative expense increased 3.4% to $30.1 million.
- Operating cash use improved substantially, partly because of lower bonus payments and receipt of a federal income-tax refund, but working capital remained a cash use, including a $26.4 million increase in unbilled services.
- Investing cash use declined to $26.4 million from $60.3 million, although the company paid $22.9 million for acquired businesses, primarily additional purchase consideration.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide formal revenue or earnings guidance. Management expects internally generated liquidity, available revolving capacity, and external capital resources to fund growth, earn-out obligations, capital expenditures, and debt service.
- Management estimated approximately $15.0 million of 2011 capital expenditures, primarily for information technology, software, and leasehold improvements.
- On April 14, 2011, after quarter-end, Huron refinanced its debt with a five-year senior secured facility totaling $350.0 million: a $200.0 million term loan and a $150.0 million revolver, with an option to increase the revolver by up to $50.0 million. The facility matures in 2016 and carries leverage, fixed-charge-coverage, and minimum-net-worth covenants.
- The company recorded $1.2 million of restatement-related expenses, a $0.5 million Chicago office restructuring charge, and a $0.6 million non-cash litigation-settlement charge in Q1 2011.
- The proposed shareholder class-action settlement provides approximately $39.6 million of consideration: $27.0 million in cash funded by insurers and 474,547 shares valued at $13.2 million at March 31, 2011. Final court approval and share issuance remained pending; changes in the share price could produce additional non-cash charges or gains.
- SEC investigations related to the historical restatement and allocation of time within a practice group remained ongoing. The U.S. Attorney’s Office for the Northern District of Illinois also requested documents. Management stated that potential liability could be material but could not reasonably estimate the amount or outcome.
- A False Claims Act qui tam action remained in the pre-trial stage. The United States declined to intervene, and the company stated that it believed the claims were without merit.
- The company is exposed to variable interest rates. The filing states that a 1% change in borrowing rates would affect pre-tax income by approximately $2.8 million. A $100.0 million interest-rate swap provides partial protection through February 2012.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2011, and reported no material change in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Verify final court approval, issuance, and ultimate value of the 474,547 settlement shares.
- Monitor the SEC and U.S. Attorney investigations and any related fines, penalties, damages, or additional legal costs, which the filing states could be material.
- Assess leverage, covenant compliance, refinancing terms, scheduled amortization, and the relatively limited cash balance compared with $286.5 million of borrowings.
- Determine whether operating cash flow turns positive as unbilled services, receivables, bonuses, and acquisition-related payments affect working capital.
- Evaluate whether the decline in Financial Consulting revenue persists and whether growth remains concentrated in Health and Education and Legal Consulting.
- Reconcile the filing’s stated weighted-average borrowing rate, which is reported as 3.9% in the debt note and elsewhere as 3.4% in the market-risk discussion.