Huron Consulting Group Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. Huron provides operational and financial consulting through Health and Education Consulting, Legal Consulting, and Financial Consulting. Discontinued operations primarily comprise divested or exited Financial Consulting practices.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Revenue | $144.7 million | $153.1 million | $283.3 million | $289.7 million |
| Operating income | $14.7 million | $22.3 million | $18.3 million | $33.1 million |
| Operating margin | 10.2% | 14.6% | 6.5% | 11.4% |
| Net income from continuing operations | $6.3 million | $9.2 million | $6.9 million | $12.6 million |
| Net income | $6.5 million | $9.5 million | $7.4 million | $13.5 million |
| Diluted EPS from continuing operations | $0.28 | $0.43 | $0.31 | $0.59 |
| Adjusted EBITDA | $21.5 million | $30.8 million | $33.3 million | $49.6 million |
| Adjusted EBITDA margin | 14.9% | 20.1% | 11.7% | 17.1% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $28.5 million | $32.1 million |
At June 30, 2012, cash and cash equivalents were $5.8 million, total assets were $748.3 million, stockholders’ equity was $410.5 million, and bank borrowings were $213.5 million. Borrowings carried a weighted-average interest rate of 3.3%. Available borrowing capacity was $112.6 million after considering term-loan payments and $3.9 million of letters of credit.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 5.5%; first-half revenue declined 2.2%.
- Operating income fell 34% in the quarter and 44.7% for the first half. Management attributed the margin pressure primarily to higher compensation costs relative to revenue, including costs associated with increased staffing.
- Health and Education Consulting revenue declined 9.2% in the quarter and 4.1% year to date. Performance-based revenue declined materially because of the timing of achievement of performance criteria.
- Legal Consulting revenue increased 14.8% in the quarter and 12.9% year to date, driven by higher advisory, document review, and electronic discovery demand. Its segment margin improved to 27.2% in the quarter from 24.1%.
- Financial Consulting revenue declined 52.2% in the quarter and 45.7% year to date because of lower demand for restructuring and turnaround services. The segment reported an operating loss of $0.3 million in the quarter and $0.1 million year to date, versus operating income in 2011.
- Interest expense decreased as a result of lower borrowing levels, lower effective rates, and the absence of a 2011 debt-issuance-cost write-off.
- Cash from operations decreased $3.5 million year over year, while investing cash use increased to $45.2 million, including acquisition-related payments and $11.8 million of capital expenditures.
Guidance, Outlook, Risks, and Unusual Items
- Management expected Health and Education Consulting’s average billing rate to improve in the second half of 2012 as performance-based criteria were achieved.
- Management expected Financial Consulting performance to improve significantly in the second half of 2012 and into 2013. Failure to improve could require an interim goodwill impairment test and potentially an impairment charge.
- Management estimated approximately $20 million of 2012 capital expenditures, primarily for information technology, software, and leasehold improvements.
- The company expected approximately $0.8 million of additional accelerated depreciation related to its New York office and estimated approximately $3 million of additional 2012 restructuring costs associated with the New York relocation and Washington, D.C. office consolidation. Actual costs could vary significantly.
- A $1.2 million litigation charge was recorded in the second quarter for preliminary settlement discussions regarding a qui tam False Claims Act action. Huron believes the claims are without merit and is seeking dismissal; no trial date had been set.
- On July 19, 2012, Huron announced a final SEC settlement related to its historical restatement. The SEC imposed a $1 million penalty, for which Huron had established a reserve in 2011. Huron agreed without admitting or denying the SEC’s factual findings.
- On July 2, 2012, Huron completed the acquisition of AdamsGrayson, a managed review and legal staffing firm, for $21.5 million in cash plus $10 million of deferred payments.
- Debt covenants were satisfied at June 30, 2012: fixed-charge coverage was 3.27 to 1.00 versus a 2.25 minimum, leverage was 2.32 to 1.00 versus a 3.00 maximum, and net worth exceeded $150 million. Management believed future covenant compliance was probable.
- Interest-rate exposure remained material: a hypothetical one-percentage-point change in borrowing rates would have affected pretax income by approximately $2.1 million. Interest-rate swaps effectively fixed rates on approximately 50% of the term loan.
- One Legal Consulting client represented 11.8% of second-quarter revenue, 10.6% of first-half revenue, and 14.3% of combined receivables and unbilled services at June 30, 2012.
Investor Verification Checklist
- Verify whether Financial Consulting improved as projected and whether any interim goodwill impairment charge became necessary.
- Reconcile reported GAAP results with management’s adjusted EBITDA and adjusted EPS, including all excluded restructuring, litigation, restatement, and amortization items.
- Assess post-quarter-end AdamsGrayson revenue contribution, integration costs, and the $31.5 million total purchase obligation.
- Monitor debt balances, available revolver capacity, interest rates, covenant headroom, and scheduled term-loan amortization through the April 2016 maturity.
- Track developments and ultimate resolution of the qui tam litigation and any remaining restatement-related indemnity or legal costs.
- Evaluate concentration risk from the large Legal Consulting client and the effect of performance-based fee timing on quarterly revenue and margins.