Huron Consulting Group Inc. — FY2010 Form 10-K 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 covers the fiscal year ended December 31, 2010, with comparative information for 2009 and 2008. Continuing operations exclude the divested or wound-down Galt, Japan, Disputes and Investigations, and Utilities businesses.
- Revenue mix: Health and Education Consulting 61.2%, Legal Consulting 26.2%, and Financial Consulting 12.6%.
- The company had 1,757 full-time employees and 1,115 full-time billable consultants at year-end.
- The ten largest clients represented 32.1% of 2010 revenue; no individual client exceeded 10%.
Financial performance and key metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $553.0 million | $559.5 million | Down 1.2% |
| Total revenue and reimbursable expenses | $604.6 million | $607.1 million | Down 0.4% |
| Operating income (loss) | $43.0 million | $(13.0) million | Improved $56.0 million |
| Operating margin | 7.8% | (2.3)% | Improved 10.1 points |
| Net income (loss) | $8.5 million | $(32.9) million | Returned to profitability |
| Net income from continuing operations | $12.4 million | $(20.5) million | Improved $32.9 million |
| Diluted EPS from continuing operations | $0.60 | $(1.02) | Improved |
| Adjusted EBITDA | $95.7 million | $105.7 million | Down 9.4% |
| Adjusted EBITDA margin | 17.3% | 18.9% | Down 1.6 points |
| Cash flow from operations | $50.1 million | $113.9 million | Down $63.9 million |
2010 continuing-operations revenue was pressured by lower demand for traditional full-time consultants and a $27.0 million reduction in performance-based fee revenue. This was partly offset by stronger demand for variable, on-demand professionals, document review, and electronic discovery services. Utilization increased to 73.9% from 72.3%, while the average billing rate declined to $242 per hour from $270.
- Health and Education revenue declined 9.5% to $338.3 million; operating margin declined to 33.2% from 37.8%.
- Legal Consulting revenue increased 26.0% to $144.7 million; operating margin increased to 27.1% from 19.2%, primarily due to document review demand.
- Financial Consulting revenue declined 1.1% to $70.0 million; operating margin increased to 29.0% from 24.3%.
- Performance-based fees represented 10.8% of revenue, versus 15.5% in 2009. Fixed-fee engagements represented 38.9% of revenue.
Fourth-quarter 2010 results
| Metric | Q4 2010 | Q4 2009 |
|---|---|---|
| Revenue | $144.2 million | $141.9 million |
| Operating income (loss) | $1.3 million | $16.2 million |
| Net income (loss) from continuing operations | $(4.9) million | $9.5 million |
| Net income (loss) | $(3.8) million | $14.4 million |
Despite modest fourth-quarter revenue growth, profitability declined because of the $12.6 million non-cash charge for the proposed restatement-related class-action settlement, restructuring costs, and other unusual items.
Cash flow, debt, and liquidity
- Operating cash flow was $50.1 million, compared with $113.9 million in 2009. The decline primarily reflected performance-bonus payments and timing of accounts-payable payments.
- Cash and cash equivalents were approximately $6.3 million at December 31, 2010; the filing presents slightly different amounts depending on whether discontinued-operations cash is included.
- Cash used in investing was $87.8 million, including $87.9 million for acquired businesses and $8.5 million of capital expenditures.
- Debt increased to $257.0 million from $219.0 million, with a weighted-average interest rate of 4.5% versus 4.0%.
- Credit facilities consisted of a $180.0 million revolving facility and a $220.0 million term loan. Remaining borrowing capacity was $81.7 million after letters of credit.
- At year-end, the company reported compliance with its amended covenants: fixed-charge coverage ratio of 2.48 to 1.00 and leverage ratio of 2.36 to 1.00.
- A $100.0 million interest-rate swap fixed the LIBOR component of that debt at 1.715% through February 23, 2012. A one-percentage-point change in borrowing rates would affect pretax income by approximately $2.6 million.
- Management expected approximately $15.0 million of 2011 capital expenditures, primarily for information technology, software, leasehold improvements, and document-review infrastructure.
Material changes versus the prior comparable period
- Revenue decreased slightly, but operating income recovered from a 2009 loss primarily because 2009 included a $67.0 million continuing-operations goodwill impairment charge.
- Adjusted EBITDA declined despite the reported return to GAAP profitability, reflecting lower revenue, weaker performance-based fees, and margin pressure.
- Legal Consulting became the strongest growth segment, while Health and Education Consulting experienced the principal revenue and margin decline.
- Restatement-related expenses declined to $8.7 million from $17.5 million, but litigation settlement expense increased to $17.3 million from zero.
- Share-based compensation increased to approximately $19.5 million from $14.5 million.
- Days sales outstanding increased to 62 days from 60 days, indicating slower collections.
- The company completed or initiated several dispositions and wind-downs, reducing discontinued-operations revenue to $26.9 million from $104.5 million.
Guidance, outlook, risks, and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management stated that internally generated liquidity, available revolver capacity, and external capital resources were expected to support operations, debt service, contractual commitments, and growth.
- The existing credit agreement was scheduled to mature in February 2012. Management was pursuing refinancing and stated that initial indications were favorable, but acknowledged no assurance that refinancing would be obtained.
- The proposed restatement-related class-action settlement totaled approximately $39.6 million: $27.0 million in cash funded by insurers and 474,547 shares valued at approximately $12.6 million. Final court approval and issuance of the shares remained pending.
- The settlement-share liability could change with the company’s stock price until issuance, producing additional non-cash charges or gains. The proposed settlement could also be terminated if specified levels of class-member opt-outs occurred.
- The SEC investigation, a related USAO document request, federal derivative litigation, an appeal in state derivative litigation, and a False Claims Act action remained unresolved. Management stated that potential additional liabilities could be material but could not be reasonably estimated.
- The company had previously restated financial statements because certain acquisition-related payments redistributed by sellers were not accounted for as required non-cash compensation. The restatement had no effect on historical net cash flows but created significant litigation, reputational, and financing risks.
- Other unusual items included $4.1 million of restructuring charges, a $4.8 million St. Vincent litigation settlement, discontinued-operations losses of $3.9 million, and the absence of the $67.0 million goodwill impairment charge recorded in 2009.
- Goodwill totaled $506.2 million, or approximately 64% of total assets. The 2010 impairment test found no impairment, but the Financial Consulting reporting unit had only an 8.1% fair-value cushion over carrying value.
- Management and PricewaterhouseCoopers concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2010.
Most important facts for investors to verify
- Whether the proposed $39.6 million class-action settlement received final court approval and whether the 474,547 settlement shares were issued.
- The status and potential financial exposure from the SEC, USAO, derivative, and False Claims Act matters.
- Whether the company successfully refinanced the $257.0 million credit facility before its February 2012 maturity and on what terms.
- Whether operating cash flow recovered from the 2010 decline and whether debt balances and interest expense are sustainable.
- Whether Health and Education Consulting revenue and margins stabilized and whether Legal Consulting’s document-review growth persisted.
- The sensitivity of the $506.2 million goodwill balance to lower forecasts, higher discount rates, or additional client and market deterioration.
- The effect of potential settlement-share fair-value changes, acquisition earn-outs, and other contingent obligations on future earnings, liquidity, and dilution.