Huron Consulting Group Inc. - 10-Q Summary (Period Ended Sep 30, 2007)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Huron Consulting Group Inc., an independent provider of financial and operational consulting services. The reporting period covers the three and nine months ended September 30, 2007. The Company operates through four segments: Financial Consulting, Legal Consulting, Health and Education Consulting, and Corporate Consulting. The period was characterized by significant growth driven by three major acquisitions: Wellspring Partners LTD, Glass & Associates, Inc., and Callaway Partners, LLC.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2007 |
|---|---|---|
| Revenues | $134,051 | $368,326 |
| Operating Income | $21,826 | $60,508 |
| Net Income | $10,487 | $30,399 |
| Diluted EPS | $0.58 | $1.69 |
| Operating Margin | 16.3% | 16.4% |
| Cash from Operations (9mo) | $10,567 | $10,567 |
| Bank Borrowings Outstanding | $154,500 | $154,500 |
| Cash and Equivalents | $3,742 | $3,742 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 78.3% ($58.9 million) for the quarter and 79.5% ($163.1 million) for the nine months compared to the prior year periods. This growth is primarily attributable to the acquisitions of Wellspring, Glass, and Callaway, as well as organic growth in full-time billable consultants.
- Profitability: Net income increased 54.6% for the quarter and 62.9% for the nine months. Operating income rose 80.0% and 82.8% respectively.
- Balance Sheet: Total assets more than doubled from $199.4 million to $420.8 million, driven by a $137.5 million increase in goodwill and a significant rise in receivables and unbilled services due to acquisition activity and revenue growth.
- Debt: Bank borrowings increased from $8.0 million at year-end 2006 to $154.5 million at September 30, 2007, to fund acquisitions. The credit facility limit was increased to $200.0 million.
- Utilization: Full-time billable consultant utilization rates declined slightly (from 78.9% to 73.9% for the quarter) as the Company added significant headcount to position for future demand.
Outlook, Risks, and Contingencies
- Acquisition Integration: Management expects to continue integrating acquired businesses and hiring additional professionals. Future growth is expected to be funded by operating cash flows and borrowings.
- Earn-outs: The Company anticipates aggregate additional purchase consideration (earn-outs) of approximately $30.0 million for the year ending December 31, 2007, based on current performance projections.
- Legal Proceedings: A lawsuit was filed on July 3, 2007, by the Official Committee of Unsecured Creditors of Saint Vincents Catholic Medical Centers. The suit alleges breach of fiduciary duties and other claims related to services provided to the hospital system prior to its bankruptcy. The Company believes the claims are without merit and intends to defend vigorously. No trial date is set.
- Market Risk: The Company has variable rate debt of $154.5 million. A 1% change in interest rates would impact pre-tax income by approximately $1.5 million.
- Accounting Changes: The Company is evaluating the impact of SFAS No. 157 and No. 159 regarding fair value measurements, effective January 1, 2008.
Investor Verification Checklist
- Verify the integration progress and revenue contribution of the three major 2007 acquisitions (Wellspring, Glass, Callaway).
- Monitor the utilization rates of full-time billable consultants to ensure they recover as new hires become productive.
- Track the status of the Saint Vincents litigation and potential financial exposure.
- Review the Company's ability to meet debt covenants given the increased leverage ($154.5M outstanding) and the upcoming $30M earn-out payments.
- Assess the sustainability of operating margins as amortization of acquired intangible assets increases.