Huron Consulting Group Inc. - 10-Q Summary (Period Ended Sept 30, 2009)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Huron Consulting Group Inc. for the period ended September 30, 2009. Huron is a leading provider of operational and financial consulting services operating in four segments: Health and Education, Accounting and Financial, Legal, and Corporate Consulting. The filing is heavily impacted by a significant restatement of previously issued financial statements due to accounting errors regarding acquisition-related payments, resulting in senior management changes and ongoing regulatory investigations.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2009 |
|---|---|---|
| Revenues | $172.2 million | $501.1 million |
| Operating Income (Loss) | ($94.1 million) | ($54.3 million) |
| Net Income (Loss) | ($64.0 million) | ($47.3 million) |
| Diluted EPS | ($3.16) | ($2.36) |
| Cash and Cash Equivalents | $26.7 million | $26.7 million (Balance Sheet) |
| Operating Cash Flow | N/A | $52.0 million |
| Total Debt (Bank Borrowings) | $301.5 million | $301.5 million |
| Goodwill | $401.7 million | $401.7 million |
Material Changes vs. Prior Period
- Restatement Impact: The company restated financial results for 2006-2008 and Q1 2009. The restatement recognized non-cash compensation expenses related to "Shareholder Payments" and "Employee Payments" from prior acquisitions that were improperly accounted for as goodwill. This reduced historical net income significantly.
- Goodwill Impairment: A $106.0 million non-cash pretax charge was recorded in Q3 2009 due to a significant decline in stock price following the restatement announcement. This charge was allocated to the Accounting and Financial Consulting ($59.0 million) and Corporate Consulting ($47.0 million) reporting units.
- Restatement Expenses: The company incurred $13.0 million in expenses related to the restatement in Q3 2009 (legal, accounting, and settlement costs).
- Revenue Growth: Revenues increased 2.1% in Q3 2009 compared to Q3 2008, driven by the Health and Education segment (up 30.3%) and performance-based fees, partially offset by declines in Accounting and Financial and Legal segments.
- Management Changes: The Board appointed a new Chairman, CEO, CFO, and Chief Accounting Officer following the discovery of accounting errors.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management lowered revenue projections and earnings for the remainder of 2009 and the longer-term outlook due to the restatement, reputational damage, and uncertain market conditions.
- Debt Covenants: The company entered into an Eighth Amendment to its Credit Agreement on September 30, 2009, to avoid default. The amendment reduced borrowing capacity, increased interest spreads, and modified EBITDA definitions to allow add-backs for the goodwill impairment and restatement-related non-cash charges for the period ending Sept 30, 2009. The company is currently in compliance.
- Regulatory Investigations: The SEC has commenced investigations into the circumstances leading to the restatement and the allocation of time in certain practice groups. The U.S. Attorney's Office (USAO) has also requested documents.
- Litigation: Multiple shareholder class action complaints and derivative lawsuits have been filed alleging false and misleading statements regarding financial results. The company also faces a separate lawsuit from the St. Vincents Litigation Trust seeking at least $200 million.
- Unusual Items: The $106 million goodwill impairment and $13.4 million in restatement-related expenses are non-recurring items that significantly distorted operating results for the period.
Key Facts for Investor Verification
- Restatement Validity: Verify the final determination of the SEC and USAO investigations regarding the accounting treatment of acquisition-related payments and the allocation of time.
- Debt Compliance: Monitor the company's ability to meet the amended financial covenants (leverage ratio, fixed charge coverage) in future quarters, particularly given the reduced EBITDA add-backs allowed after September 30, 2009.
- Goodwill Stability: Assess the risk of further goodwill impairment charges if stock price remains depressed or if operating performance in the Accounting and Financial and Corporate Consulting segments does not improve.
- Litigation Exposure: Track the status of the shareholder class actions and the St. Vincents lawsuit, as potential liabilities could be material.
- Management Retention: Evaluate the stability of the new senior management team and their ability to retain key talent amidst reputational challenges.