Huron Consulting Group Inc. - Q1 2007 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2007. Huron Consulting Group Inc. is an independent provider of financial and operational consulting services to Fortune 500 companies, healthcare organizations, and law firms. Effective January 1, 2007, the company reorganized its operations into four segments: Legal Financial Consulting, Legal Operational Consulting, Health and Education Consulting, and Corporate Consulting.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Revenues | $116.0 million | $62.2 million |
| Operating Income | $18.9 million | $9.7 million |
| Net Income | $9.8 million | $5.6 million |
| Diluted EPS | $0.55 | $0.33 |
| Operating Margin | 16.3% | 15.6% |
| Cash and Equivalents | $6.3 million | $16.2 million |
| Bank Borrowings (Outstanding) | $112.0 million | $8.0 million |
| Goodwill | $135.0 million | $53.3 million |
Cash Flow: Net cash used in operating activities was $15.2 million, primarily due to payments for accrued bonuses and payroll. Net cash used in investing activities was $99.3 million, driven by acquisitions. Net cash provided by financing activities was $104.3 million, largely from borrowings under the credit facility.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 86.5% year-over-year. This growth was driven by the inclusion of acquired firms (Wellspring, Glass, Galt, DRCS, Aaxis) and an increase in the number of billable consultants (from 639 to 919 average).
- Acquisitions: The company completed two major acquisitions in January 2007: Wellspring Partners LTD ($68.0 million purchase price) and Glass & Associates, Inc. ($31.8 million purchase price). These deals significantly increased goodwill and intangible assets.
- Debt Levels: Bank borrowings increased from $8.0 million to $112.0 million to fund the acquisitions and operations. The credit facility limit was increased from $130.0 million to $175.0 million in February 2007.
- Cost Structure: Direct costs rose 85.9% due to increased headcount and higher utilization of independent contractors. Operating expenses increased 60.5%, partly due to higher marketing and share-based compensation.
Outlook, Risks, and Management Commentary
- Strategy: Management continues to pursue growth through hiring and acquisitions to expand service offerings. The company expects direct costs to continue increasing in the near term as it hires additional managing directors and support staff.
- Liquidity: The company believes cash generated from operations, supplemented by borrowings under its credit facility, will be adequate to fund future growth. It remains in compliance with all debt covenants.
- Risks: Key risks include the ability to successfully integrate acquired businesses, fluctuations in utilization rates and billing rates, and the potential for impairment charges on goodwill or intangible assets if customer attrition is higher than expected.
- Contingencies: There are potential additional purchase consideration payments for recent acquisitions if specific performance targets are met over the next 4-5 years. The aggregate amount is not determinable but could be significant.
Investor Verification Checklist
- Verify the integration progress and revenue contribution of the Wellspring and Glass acquisitions.
- Monitor the company's ability to maintain high utilization rates (currently 78.1%) as headcount expands.
- Review the status of deferred revenue and unbilled services, which increased significantly ($21.9 million combined increase in receivables/unbilled).
- Assess the impact of increased amortization expenses ($3.8 million in Q1 2007 vs $0.2 million in Q1 2006) on future operating margins.
- Confirm compliance with the new debt covenants under the amended $175 million credit facility.