Huron Consulting Group Inc. — Q1 2012 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. The filing reports unaudited results for the three months ended March 31, 2012, compared with March 31, 2011. Discontinued operations include the former Accounting Advisory, Disputes and Investigations, Utilities, and Japan practices.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $138.6 million | $136.6 million | 1.5% increase |
| Total revenue and reimbursable expenses | $152.4 million | $148.5 million | 2.6% increase |
| Operating income | $3.6 million | $10.8 million | 67% decrease |
| Operating margin | 2.6% | 7.9% | Down 5.3 percentage points |
| Net income from continuing operations | $0.6 million | $3.5 million | 83% decrease |
| Net income | $0.9 million | $4.1 million | 79% decrease |
| Diluted EPS from continuing operations | $0.03 | $0.16 | Decrease |
| Adjusted EBITDA | $11.8 million | $18.8 million | 37.6% decrease |
| Adjusted EBITDA margin | 8.5% | 13.8% | Down 5.3 percentage points |
| Cash flow from operating activities | $(12.6) million | $(3.4) million | Greater use of cash |
| Cash and cash equivalents at period-end | $4.0 million | $4.4 million | Decrease from $5.1 million at Dec. 31, 2011 |
Operating performance weakened despite modest revenue growth. Direct costs increased 9.4%, driven primarily by higher salaries, bonuses, related expenses, and technology costs. The effective tax rate increased to 72.1% from 52.7%, largely because foreign losses generated no tax benefit and certain expenses were nondeductible.
Segment Performance
- Health and Education Consulting: Revenue increased 1.9% to $91.4 million, while operating income decreased 17.0% to $21.5 million. Segment margin declined to 23.5% from 28.9%.
- Legal Consulting: Revenue increased 11.0% to $41.4 million, primarily reflecting higher advisory, document review, and electronic discovery demand. Operating income was $9.5 million, broadly unchanged, and margin declined to 23.0% from 25.7%.
- Financial Consulting: Revenue decreased 39.6% to $5.8 million due to lower demand, utilization, and billing rates for restructuring and turnaround services. Operating income declined to $0.2 million from $3.0 million, and margin fell to 4.0% from 30.8%.
Liquidity, Debt, and Cash Flow
- Operating activities used $12.6 million of cash, primarily reflecting annual performance bonus payments, partially offset by collection of an income tax receivable.
- Investing activities used $36.9 million, including $31.3 million of payments for acquisition-related consideration and $5.3 million of capital expenditures.
- Financing activities provided $47.9 million, including $93.0 million of borrowings and $42.5 million of repayments.
- Bank borrowings increased to $244.0 million from $193.5 million at December 31, 2011. The weighted average interest rate was 2.9%.
- Available borrowing capacity was $86.9 million after considering term-loan payments and $4.1 million of outstanding letters of credit.
- The company complied with its debt covenants at March 31, 2012: fixed-charge coverage ratio of 3.66 to 1.00, leverage ratio of 2.09 to 1.00, and net worth above $150 million. The credit facility matures in April 2016.
- Management estimated 2012 capital expenditures of approximately $18.1 million and stated that available liquidity, operating cash flow, and borrowing capacity should fund expected needs and debt service.
Material Changes, Outlook, and Unusual Items
- Revenue-generating professionals increased, but total utilization declined to 77.6% from 78.2% and average billing rates declined to $205 from $224 per hour.
- Performance-based fees represented 11.2% of revenue versus 10.2% in the prior-year quarter, creating potential quarterly volatility.
- The company recorded a $0.8 million restructuring charge related primarily to accelerated depreciation associated with a planned New York office relocation. Additional 2012 costs are expected, including approximately $1.7 million of remaining accelerated depreciation and an estimated $2.0 million office-exit expense, although the actual amount could vary significantly.
- Restatement-related expenses were $1.5 million versus $1.2 million in the prior-year quarter. The company continues discussions with the SEC regarding a potential settlement and cannot estimate any liability in excess of the existing $1.0 million accrual. Additional penalties, remedies, legal fees, or indemnification obligations could be material.
- A qui tam action alleging inflated Medicare and Medicaid outlier payments remains in the pretrial stage. The company believes the claims are without merit and intends to defend them.
- The company sold its Accounting Advisory practice in December 2011. Discontinued operations generated $0.3 million of net income in Q1 2012 versus $0.6 million in Q1 2011, while discontinued-operation revenue declined to $0.4 million from $6.4 million.
- A new forward-amortizing interest-rate swap effectively fixed the interest rate on approximately 30% of the term loan. A hypothetical one-percentage-point change in borrowing rates would affect pretax income by approximately $2.4 million.
- Management stated that disclosure controls and procedures were effective as of March 31, 2012, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether revenue growth can continue while utilization, billing rates, and operating margins remain under pressure.
- The sustainability of the materially higher debt balance and the company’s ability to comply with progressively tighter debt covenants.
- Actual cash generation after bonus payments, acquisition-related consideration, and planned capital expenditures.
- The ultimate cost and timing of the SEC restatement investigation, including potential penalties and indemnification obligations.
- The financial impact of the planned New York office relocation and other restructuring actions.
- Whether weakness in Financial Consulting reflects a temporary demand decline or a more persistent deterioration in restructuring and turnaround activity.
- Exposure to performance-based revenue volatility, client concentration, and changes in demand for Legal Consulting document review and electronic discovery services.