UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended March 31, 2005
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
file number: 000-50976
Huron
Consulting Group Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware |
|
01-0666114 |
|
(State
or other jurisdiction |
|
(IRS
Employer |
|
of
incorporation or organization) |
|
Identification
Number) |
550
West Van Buren Street
Chicago,
Illinois
60607
(Address
of principal executive offices)
(Zip
Code)
(312)
583-8700
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
x No
o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
As of
April 22, 2005, 16,876,462 shares of the registrant’s common stock,
par value $0.01 per share, were outstanding.
HURON
CONSULTING GROUP INC.
INDEX
| |
|
|
|
|
Page |
|
Part
I - Financial Information |
|
| |
|
|
|
| |
Item
1. |
|
|
| |
|
|
1 |
| |
|
|
2 |
| |
|
|
3 |
| |
|
|
4 |
| |
|
|
5 -
8 |
| |
|
|
|
| |
Item
2. |
|
9 -
17 |
| |
|
|
|
| |
Item
3. |
|
17 |
| |
|
|
|
| |
Item
4. |
|
17 |
| |
|
|
|
|
Part
II - Other Information |
|
| |
|
|
|
| |
Item
1. |
|
18 |
| |
|
|
|
| |
Item
2. |
|
18 |
| |
|
|
|
| |
Item
3. |
|
18 |
| |
|
|
|
| |
Item
4. |
|
18 |
| |
|
|
|
| |
Item
5. |
|
18 |
| |
|
|
|
| |
Item
6. |
|
18 |
| |
|
|
|
|
|
19 |
HURON CONSULTING GROUP INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share amounts)
| |
|
March
31,
2005
(Unaudited) |
|
December 31,
2004
(Audited) |
|
|
Assets |
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
20,599 |
|
$ |
28,092 |
|
|
Receivables
from clients, net |
|
|
22,914 |
|
|
21,750 |
|
|
Unbilled
services, net |
|
|
15,083 |
|
|
10,830 |
|
|
Income
tax receivable |
|
|
¾ |
|
|
494 |
|
|
Deferred
income taxes |
|
|
9,234 |
|
|
7,919 |
|
|
Other
current assets |
|
|
3,388 |
|
|
3,053 |
|
|
Total
current assets |
|
|
71,218 |
|
|
72,138 |
|
|
Property
and equipment, net |
|
|
9,121 |
|
|
8,975 |
|
|
Other
assets: |
|
|
|
|
|
|
|
|
Deferred
income taxes |
|
|
1,805 |
|
|
1,450 |
|
|
Deposits |
|
|
641 |
|
|
656 |
|
|
Total
other assets |
|
|
2,446 |
|
|
2,106 |
|
|
Total
assets |
|
$ |
82,785 |
|
$ |
83,219 |
|
| |
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
2,637 |
|
$ |
2,809 |
|
|
Accrued
expenses |
|
|
2,475 |
|
|
2,384 |
|
|
Accrued
payroll and related benefits |
|
|
10,684 |
|
|
20,494 |
|
|
Income
tax payable |
|
|
4,406 |
|
|
950 |
|
|
Deferred
revenue |
|
|
2,195 |
|
|
2,603 |
|
|
Total
current liabilities |
|
|
22,397 |
|
|
29,240 |
|
|
Non-current
liabilities: |
|
|
|
|
|
|
|
|
Accrued
expenses |
|
|
514 |
|
|
598 |
|
|
Deferred
lease incentives |
|
|
4,279 |
|
|
4,148 |
|
|
Total
non-current liabilities |
|
|
4,793 |
|
|
4,746 |
|
|
Commitments
and contingencies |
|
|
|
|
|
|
|
|
Stockholders’
equity |
|
|
|
|
|
|
|
|
Common
stock; $0.01 par value; 500,000,000 shares authorized; 16,886,053 shares
issued at March 31, 2005 (unaudited) and 16,364,574 shares issued and
outstanding at December 31, 2004 |
|
|
169 |
|
|
164 |
|
|
Treasury
stock, 15,200 shares at March 31, 2005, at cost |
|
|
(236 |
) |
|
¾ |
|
|
Additional
paid-in capital |
|
|
70,532 |
|
|
59,608 |
|
|
Deferred
stock-based compensation |
|
|
(21,439 |
) |
|
(12,281 |
) |
|
Retained
earnings |
|
|
6,569 |
|
|
1,742 |
|
|
Total
stockholders’ equity |
|
|
55,595 |
|
|
49,233 |
|
|
Total
liabilities and stockholders equity |
|
$ |
82,785 |
|
$ |
83,219 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share amounts)
(Unaudited)
| |
|
Three
months ended
March 31, |
|
| |
|
2005 |
|
2004 |
|
|
Revenues
and reimbursable expenses: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
46,760 |
|
$ |
40,101 |
|
|
Reimbursable
expenses |
|
|
4,370 |
|
|
3,443 |
|
|
Total
revenues and reimbursable expenses |
|
|
51,130 |
|
|
43,544 |
|
|
Direct
costs and reimbursable expenses: |
|
|
|
|
|
|
|
|
Direct
costs |
|
|
24,945 |
|
|
24,856 |
|
|
Stock-based
compensation |
|
|
999 |
|
|
12 |
|
|
Reimbursable
expenses |
|
|
4,387 |
|
|
3,523 |
|
|
Total
direct costs and reimbursable expenses |
|
|
30,331 |
|
|
28,391 |
|
|
Gross
profit |
|
|
20,799 |
|
|
15,153 |
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
Selling,
general and administrative |
|
|
11,312 |
|
|
8,156 |
|
|
Stock-based
compensation |
|
|
411 |
|
|
2 |
|
|
Depreciation |
|
|
847 |
|
|
603 |
|
|
Restructuring
charges |
|
|
¾ |
|
|
2,139 |
|
|
Total
operating expenses |
|
|
12,570 |
|
|
10,900 |
|
|
Operating
income |
|
|
8,229 |
|
|
4,253 |
|
|
Other
(income) expense: |
|
|
|
|
|
|
|
|
Interest
(income) expense, net |
|
|
(165 |
) |
|
245 |
|
|
Other
income |
|
|
(1 |
) |
|
¾ |
|
|
Total
other (income) expense |
|
|
(166 |
) |
|
245 |
|
|
Income
before provision for income taxes |
|
|
8,395 |
|
|
4,008 |
|
|
Provision
for income taxes |
|
|
3,568 |
|
|
1,661 |
|
|
Net
income |
|
|
4,827 |
|
|
2,347 |
|
|
Accrued
dividends on 8% preferred stock |
|
|
¾ |
|
|
273 |
|
|
Net
income attributable to common stockholders |
|
$ |
4,827 |
|
$ |
2,074 |
|
| |
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.31 |
|
$ |
0.16 |
|
|
Diluted |
|
$ |
0.29 |
|
$ |
0.15 |
|
| |
|
|
|
|
|
|
|
|
Weighted
average shares used in calculating net income attributable to common
stockholders per share: |
|
|
|
|
|
|
|
|
Basic |
|
|
15,547 |
|
|
11,974 |
|
|
Diluted |
|
|
16,677 |
|
|
12,747 |
|
| |
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
(In
thousands, except share amounts)
(Unaudited)
| |
|
Common
Stock |
|
Treasury
Stock |
|
Additional
Paid-In
Capital |
|
Deferred
Stock-based Compensation |
|
Retained
Earnings |
|
Stockholders’
Equity |
|
| |
|
Shares |
|
Amount |
|
|
Balance
at December 31, 2004 |
|
|
16,364,574 |
|
$ |
164 |
|
$ |
¾ |
|
$ |
59,608 |
|
$ |
(12,281 |
) |
$ |
1,742 |
|
$ |
49,233 |
|
|
Net
income |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
4,827 |
|
|
4,827 |
|
|
Issuance
of common stock in connection with: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards, net
of cancellations |
|
|
505,817 |
|
|
5 |
|
|
(236 |
) |
|
10,597 |
|
|
(10,366 |
) |
|
¾ |
|
|
¾ |
|
|
Exercise
of stock options |
|
|
20,759 |
|
|
¾ |
|
|
¾ |
|
|
12 |
|
|
¾ |
|
|
¾ |
|
|
12 |
|
|
Stock-based
compensation |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
202 |
|
|
1,208 |
|
|
¾ |
|
|
1,410 |
|
|
Income
tax benefit on stock-based
compensation |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
113 |
|
|
¾ |
|
|
¾ |
|
|
113 |
|
|
Balance
at March 31, 2005 |
|
|
16,891,150 |
|
$ |
169 |
|
$ |
(236 |
) |
$ |
70,532 |
|
$ |
(21,439 |
) |
$ |
6,569 |
|
$ |
55,595 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
HURON
CONSULTING GROUP INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
| |
|
Three
months ended
March 31, |
|
| |
|
2005 |
|
2004 |
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
4,827 |
|
$ |
2,347 |
|
|
Adjustments
to reconcile net income to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
847 |
|
|
603 |
|
|
Deferred
income taxes |
|
|
(1,670 |
) |
|
(184 |
) |
|
Stock-based
compensation expense |
|
|
1,410 |
|
|
14 |
|
|
Tax
benefit from stock-based compensation |
|
|
113 |
|
|
¾ |
|
|
Allowances
for doubtful accounts and unbilled services |
|
|
547 |
|
|
779 |
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Increase
in receivables from clients |
|
|
(1,244 |
) |
|
(349 |
) |
|
Increase
in unbilled services |
|
|
(4,720 |
) |
|
(8,871 |
) |
|
Decrease
in income tax receivable |
|
|
494 |
|
|
1,801 |
|
|
Increase
in other current assets |
|
|
(335 |
) |
|
(389 |
) |
|
Decrease
in deposits |
|
|
15 |
|
|
308 |
|
|
Decrease
in accounts payable and accrued expenses |
|
|
(34 |
) |
|
(772 |
) |
|
Decrease
in accrued payroll and related benefits |
|
|
(9,810 |
) |
|
(1,526 |
) |
|
Increase
in income tax payable |
|
|
3,456 |
|
|
¾ |
|
|
Decrease
in interest payable to HCG Holdings LLC |
|
|
¾ |
|
|
(620 |
) |
|
(Decrease)
increase in deferred revenue |
|
|
(408 |
) |
|
1,710 |
|
|
Net
cash used in operating activities |
|
|
(6,512 |
) |
|
(5,149 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase
of property and equipment, net |
|
|
(993 |
) |
|
(532 |
) |
|
Net
cash used in investing activities |
|
|
(993 |
) |
|
(532 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options |
|
|
12 |
|
|
¾ |
|
|
Proceeds
from borrowings under line of credit |
|
|
¾ |
|
|
14,000 |
|
|
Repayments
on line of credit |
|
|
¾ |
|
|
(12,500 |
) |
|
Net
cash provided by financing activities |
|
|
12 |
|
|
1,500 |
|
|
Net
decrease in cash and cash equivalents |
|
|
(7,493 |
) |
|
(4,181 |
) |
|
Cash
and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning
of the period |
|
|
28,092 |
|
|
4,251 |
|
|
End
of the period |
|
$ |
20,599 |
|
$ |
70 |
|
| |
|
|
|
|
|
|
|
|
Noncash
transaction: |
|
|
|
|
|
|
|
|
Accrued
dividends on 8% preferred stock |
|
$ |
¾ |
|
$ |
273 |
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash
paid for interest |
|
$ |
63 |
|
$ |
911 |
|
|
Cash
paid for taxes |
|
$ |
1,174 |
|
$ |
44 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
HURON CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Huron
Consulting Group Inc. was formed on March 19, 2002. Huron Consulting Group
Inc., together with its wholly owned subsidiary, Huron Consulting Services LLC,
(collectively the “Company”), is an independent provider of financial and
operational consulting services, whose clients include Fortune 500 companies,
medium-sized and large businesses, leading academic institutions, healthcare
organizations and the law firms that represent these various organizations. The
Company is a majority owned subsidiary of HCG Holdings LLC.
The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (“SEC”). In the opinion of management, these financial
statements reflect all adjustments of a normal, recurring nature necessary for
the fair presentation of the Company’s financial position, results of operations
and cash flows for the interim periods presented in conformity with accounting
principles generally accepted in the United States of America. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 2004 included
in the Company’s annual report on Form 10-K. The Company’s results for any
interim period are not necessarily indicative of results for a full year or any
other interim period.
|
3. |
New
Accounting
Pronouncement |
In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment,” (“SFAS No. 123R”). In April 2005, the SEC adopted a
new rule that amends the effective date of SFAS No. 123R. Under the new
rule, the Company must adopt SFAS No. 123R effective January 1,
2006. This statement requires that the costs of employee share-based payments be
measured at fair value on the awards’ grant date using an option-pricing model
and recognized in the financial statements over the requisite service period.
This statement does not change the accounting for stock ownership plans, which
are subject to American Institute of Certified Public Accountants Statement of
Position 93-6, “Employer’s Accounting for Employee Stock Ownership Plans.” SFAS
No. 123R supersedes Accounting Principles Board Opinion No. 25 (“APB
25”), “Accounting for Stock Issued to Employees,” and its related
interpretations, and eliminates the alternative to use APB 25’s intrinsic value
method of accounting, which the Company is currently using. Additionally, SFAS
No. 123R amends SFAS No. 95, “Statement of Cash Flows,” to require
that excess tax benefits be reported as a financing cash inflow rather than as a
reduction of taxes paid.
SFAS
No. 123R allows for two alternative transition methods. The first method is
the modified prospective application whereby compensation cost for the portion
of awards for which the requisite service has not yet been rendered that are
outstanding as of the adoption date will be recognized over the remaining
service period. The compensation cost for that portion of awards will be based
on the grant-date fair value of those awards as calculated for pro forma
disclosures under SFAS No. 123, as originally issued. All new awards and
awards that are modified, repurchased, or cancelled after the adoption date will
be accounted for under the provisions of SFAS No. 123R. The second method
is the modified retrospective application, which requires that the Company
restate prior period financial statements. The
Company is currently determining which transition method it will adopt and does
not expect the adoption of SFAS No. 123R to have a material impact on its
financial position, results of operations, EPS or cash flows.
The
Company accounts for stock-based compensation using the intrinsic value method
prescribed in APB 25 and related interpretations and elects the disclosure
option of SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure.” SFAS No. 123 requires that companies
either recognize compensation expense for grants of stock, stock options and
other equity instruments based on fair value, or provide pro forma disclosure of
net income and earnings per share in the notes to the financial statements.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Accordingly,
the Company has measured compensation expense for stock options as the excess,
if any, of the estimated fair market value of the Company’s stock at the date of
grant over the exercise price.
The
following table details the effect on net income attributable to common
stockholders and net income attributable to common stockholders per share if
compensation expense for the stock plans had been recorded based on the fair
value method under SFAS No. 123.
| |
|
Three
Months Ended
March 31, |
|
| |
|
2005 |
|
2004 |
|
|
Net
income attributable to common stockholders |
|
$ |
4,827 |
|
$ |
2,074 |
|
|
Add:
Total stock-based employee compensation expense included in
reported
net income, net of related tax effects |
|
|
843 |
|
|
8 |
|
|
Deduct:
Total stock-based employee compensation expense determined
under
the fair value method for all awards, net of related tax
effects |
|
|
(892 |
) |
|
(22 |
) |
|
Pro
forma net income attributable to common stockholders |
|
$ |
4,778 |
|
$ |
2,060 |
|
|
Earnings per
share: |
|
|
|
|
|
|
|
|
Basic
- as reported |
|
$ |
0.31 |
|
$ |
0.16 |
|
|
Basic
- pro forma |
|
$ |
0.31 |
|
$ |
0.16 |
|
|
Diluted
- as reported |
|
$ |
0.29 |
|
$ |
0.15 |
|
|
Diluted
- pro forma |
|
$ |
0.29 |
|
$ |
0.15 |
|
During
the first quarter of 2005, the Company granted a total of 490,617 shares of
restricted common stock to certain employees and officers with a
weighted-average fair market value of $21.13. Total compensation expense
relating to these restricted common stock awards of $10.4 million, which is
based on the market value of the shares awarded at the date of grant, will be
amortized on a straight-line basis over the vesting period.
Basic
earnings per share (EPS) excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential reduction in EPS that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. EPS under the basic and diluted computation are as
follows:
| |
|
Three
Months Ended
March 31, |
|
| |
|
2005 |
|
2004 |
|
|
Net
income |
|
$ |
4,827 |
|
$ |
2,347 |
|
|
Dividends
accrued on 8% preferred stock |
|
|
¾ |
|
|
(273 |
) |
|
Amount
allocated to preferred stockholders |
|
|
¾ |
|
|
(194 |
) |
|
Net
income attributable to common stockholders |
|
$ |
4,827 |
|
$ |
1,880 |
|
| |
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic |
|
|
15,547 |
|
|
11,974 |
|
|
Weighted
average common stock equivalents |
|
|
1,130 |
|
|
773 |
|
|
Weighted
average common shares outstanding - diluted |
|
|
16,677 |
|
|
12,747 |
|
| |
|
|
|
|
|
|
|
|
Basic
net income attributable to common stockholders per share |
|
$ |
0.31 |
|
$ |
0.16 |
|
|
Diluted
net income attributable to common stockholders per share |
|
$ |
0.29 |
|
$ |
0.15 |
|
Prior to
the redemption of the 8% preferred stock in October 2004, the 8% preferred
stockholders participated in any dividends paid to common stockholders on an as
converted basis using the current period estimated fair market value of
a share of common stock. There were no anti-dilutive securities for the three
months ended March 31, 2005 and 2004.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
In March
2004, the Company incurred a $2.1 million pre-tax restructuring charge
associated with the closing of two offices. The charge included approximately
$2.0 million for severance payments, which were paid by April 30, 2004, and
$0.1 million for office lease payments, which were paid by August 31,
2004.
|
7. |
Line
of Credit and
Guarantee |
The
Company has a bank credit agreement, expiring on February 10, 2006, that
allows it to borrow up to the lesser of $25.0 million or the sum of (a) 85%
of eligible accounts receivable and (b) the lesser of 40% of unbilled services
and $5.0 million. Borrowings under the agreement are limited by any outstanding
letters of credit, bear interest at LIBOR plus 1.75%, and are secured by
substantially all of the Company’s assets. The bank credit agreement includes
covenants for minimum equity and maximum annual capital expenditures, as well as
covenants restricting the Company’s ability to incur additional indebtedness or
engage in certain types of transactions outside of the ordinary course of
business. The Company had no borrowings outstanding as of March 31, 2005 and
December 31, 2004. At both March 31, 2005 and December 31, 2004, the
Company was in compliance with its debt covenants.
Guarantees
in the form of letters of credit of $1.7 million were outstanding at both
March 31, 2005 and December 31, 2004 to support certain office lease
obligations.
|
8. |
Commitments
and
Contingencies |
From time
to time, the Company is involved in various legal matters arising out of the
ordinary course of business. Although the outcome of these matters cannot
presently be determined, in the opinion of management, disposition of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
Segments
are defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information,” as components of a company in which separate financial
information is available and is evaluated regularly by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources
and in assessing performance.
The
Company provides services through two segments: Financial Consulting and
Operational Consulting. The Financial Consulting segment provides services that
help clients effectively address complex challenges that arise from litigation,
disputes, investigations, regulation, financial distress and other sources of
significant conflict or change. The Operational Consulting segment provides
services that help clients improve the overall efficiency and effectiveness of
their operations by enhancing revenue, reducing costs, managing regulatory
compliance and maximizing procurement efficiency.
Segment
operating income consists of the revenues generated by a segment, less the
direct costs of revenue and selling, general and administrative costs that are
incurred directly by the segment. Unallocated corporate costs include costs
related to administrative functions that are performed in a centralized manner
that are not attributable to a particular segment. These administrative function
costs include costs for corporate office support, all office facility costs,
costs relating to accounting and finance, human resources, legal, marketing,
information technology and company-wide business development functions, as well
as costs related to overall corporate management.
The
Company may reclassify certain revenues and expenses among the segments to align
them with the changes in the Company’s internal organizational structure.
Beginning January 1, 2005, the Forensic Technology and Discovery Services
group within the Financial Consulting segment was moved into the Operational
Consulting segment to improve marketing synergies with the Legal Business
Consulting practice. Previously reported
segment information has been reclassified to reflect this change. This
reclassification had no effect on previously reported net
income.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The
following table presents information about reported segments along with the
items necessary to reconcile the segment information to the totals reported in
the accompanying consolidated financial statements:
| |
|
Three
Months Ended
March 31, |
|
| |
|
2005 |
|
2004 |
|
|
Financial
Consulting: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
24,553 |
|
$ |
23,557 |
|
|
Segment
operating income |
|
$ |
9,987 |
|
$ |
7,761 |
|
|
Segment
operating income as a percent of segment revenues |
|
|
40.7 |
% |
|
32.9 |
% |
|
Operational
Consulting: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
22,207 |
|
$ |
16,544 |
|
|
Segment
operating income |
|
$ |
8,751 |
|
$ |
5,823 |
|
|
Segment
operating income as a percent of segment revenues |
|
|
39.4 |
% |
|
35.2 |
% |
|
Total
Company: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
46,760 |
|
$ |
40,101 |
|
|
Reimbursable
expenses |
|
|
4,370 |
|
|
3,443 |
|
|
Total
revenues and reimbursable expenses |
|
$ |
51,130 |
|
$ |
43,544 |
|
| |
|
|
|
|
|
|
|
|
Statement
of operations reconciliation: |
|
|
|
|
|
|
|
|
Segment
operating income |
|
$ |
18,738 |
|
$ |
13,584 |
|
|
Charges
not allocated at the segment level: |
|
|
|
|
|
|
|
|
Other
selling, general and administrative expenses |
|
|
9,251 |
|
|
6,587 |
|
|
Stock-based
compensation expense |
|
|
411 |
|
|
2 |
|
|
Depreciation
expense |
|
|
847 |
|
|
603 |
|
|
Restructuring
charges |
|
|
¾ |
|
|
2,139 |
|
|
Other
(income) expense |
|
|
(166 |
) |
|
245 |
|
|
Income
before provision for income taxes |
|
$ |
8,395 |
|
$ |
4,008 |
|
During
the first quarter of 2005, revenues from one client represented $6.5 million, or
13.8%, of the Company's consolidated revenues. Of this amount, $5.5 million
was generated by the Financial Consulting segment and $1.0 million was
generated by the Operational Consulting segment.
In this
Quarterly Report on Form 10-Q, unless the context otherwise requires, the
terms “Huron,” “company,” “we,” “us” and “our” refer to Huron Consulting Group
Inc. and its subsidiary, Huron Consulting Services LLC.
This
Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are identified by
words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” or “continue.” These forward-looking statements reflect our current
expectation about our future results, levels of activity, performance or
achievements, including without limitation, that our business continues to grow
at the current expectations; that we are able to expand our service offerings
through our existing consultants and new hires; and that existing market
conditions do not change from current expectations. These statements involve
known and unknown risks, uncertainties and other factors that may cause actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. Please
see “Risk Factors” in our 2004 annual report on Form 10-K for a complete
description of the material risks we face.
OVERVIEW
Our
History
Huron was
formed in March 2002 and commenced operations in May 2002. We were founded by a
core group of experienced financial and operational consultants that consisted
primarily of former Arthur Andersen LLP partners and professionals, with equity
sponsorship from a group of investors led by Lake Capital Management LLC. On
October 13, 2004, we completed our initial public offering (“IPO”) and became a
publicly traded company.
Our
Business
Huron is
an independent provider of financial and operational consulting services, with
clients that include Fortune 500 companies, medium-sized and large businesses,
leading academic institutions, healthcare organizations and the law firms that
represent these various organizations.
We
provide our services through two segments: Financial Consulting and Operational
Consulting. Our Financial Consulting segment provides services that help clients
effectively address complex challenges that arise from litigation, disputes,
investigations, regulation, financial distress and other sources of significant
conflict or change. Our Operational Consulting segment provides services that
help clients improve the overall efficiency and effectiveness of their
operations, reduce costs, manage regulatory compliance and maximize procurement
efficiency.
We derive
all of our revenues through three principal types of billing arrangements
consisting of time-and-expense, fixed-fee and performance-based. We manage our
business on the basis of revenues before reimbursable expenses. We believe this
is the most accurate reflection of our consulting services because it eliminates
the effect of reimbursable expenses that we bill to our clients at
cost.
Most of
our revenues have been generated from time-and-expense engagements. In
time-and-expense engagements, fees are based on the hours incurred at agreed
upon billing rates. Time-and-expense engagements represented approximately 81.6%
of our revenues in the three months ended March 31, 2005.
In
fixed-fee engagements, we agree to a pre-established fee in exchange for a
pre-determined set of consulting services. We set the fees based on our
estimates of the costs and timing for completing the fixed-fee engagements. It
is the client’s expectation in these engagements that the pre-established fee
will not be exceeded except in mutually agreed upon circumstances. For the three
months ended March 31, 2005, fixed-fee engagements represented approximately
16.4% of our revenues.
Performance-based
fee engagements generally tie fees to the attainment of contractually defined
objectives. We enter into performance-based engagements in essentially two
forms. First, we generally earn fees that are directly related to the savings
formally acknowledged by the client as a result of adopting our recommendations
for improving cost effectiveness in the procurement area. Second, we have
performance-based engagements in which
we earn a
success fee when and if certain pre-defined outcomes occur. Often this type of
success fee supplements time-and-expense or fixed-fee engagements. While
performance-based fee revenues represented approximately 2.0% of our revenues in
the three months ended March 31, 2005, such revenues in the future may cause
significant variations in quarterly revenues and operating results due to the
timing of achieving the performance-based criteria.
Business
Strategy, Opportunities and Challenges
Our
primary strategy is to meet the needs of our financial consulting and
operational consulting clients by providing a balanced portfolio of service
offerings and capabilities, so that we can adapt quickly and effectively to
emerging opportunities in the marketplace. To achieve this, we continue to hire
highly qualified consultants. Since we commenced operations, we more than
doubled the number of our consultants from 213 on May 31, 2002 to 499 as of
March 31, 2005. To expand our business, we remain focused on growing our
existing relationships and developing new relationships by continuing to promote
and deliver an integrated approach to service delivery and by broadening the
scope of our existing services. Additionally, we intend to enhance our
visibility in the marketplace by continuing to build our brand.
INITIAL
PUBLIC OFFERING
On
October 13, 2004, we completed our initial public offering (“IPO”). In the IPO,
we sold 3,333,333 shares of common stock and a selling stockholder, HCG Holdings
LLC, sold 1,666,667 shares of common stock at an offering price of $15.50 per
share. On October 22, 2004, the underwriters exercised in full their
over-allotment option to purchase an additional 750,000 shares of common stock
from the selling stockholder. The IPO generated gross proceeds to us of
$51.7 million, or $48.0 million net of underwriting discounts. We did
not receive any proceeds from the shares sold by the selling stockholder. On
October 18, 2004, we used $15.1 million of the net proceeds to redeem
the outstanding 8% preferred stock, including cumulative dividends and a
liquidation participation amount totaling $2.6 million. Also on
October 18, 2004, the Company used $10.7 million of the net proceeds
to repay the notes payable to HCG Holdings LLC, including accrued and unpaid
interest of $0.6 million. We are using the remaining proceeds for general
corporate purposes, including working capital. Additionally, immediately prior
to the consummation of this offering, each outstanding share of Class B common
stock automatically converted into a share of Class A common stock and our Class
A common stock was renamed to “common stock.”
CRITICAL
ACCOUNTING POLICIES
Management’s
discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America, or GAAP. The preparation of financial statements in conformity with
GAAP requires management to make assessments, estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Critical accounting policies are those policies that we believe present
the most complex or subjective measurements and have the most potential to
impact our financial position and operating results. While all decisions
regarding accounting policies are important, we believe that there are four
accounting policies that could be considered critical. These critical accounting
policies include revenue recognition, the allowances for doubtful accounts and
unbilled services, valuation of net deferred tax assets and stock-based
compensation.
Revenue
Recognition
We
recognize revenues in accordance with Staff Accounting Bulletin, or SAB, No.
101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104,
“Revenue Recognition.” Revenue is recognized when persuasive evidence of an
arrangement exists, the related services are provided, the price is fixed and
determinable and collectibility is reasonably assured. Our services are
primarily rendered under engagements that require the client to pay on a
time-and-expense basis. Fees are based on the hours incurred at agreed-upon
rates and recognized as services are provided. Revenues related to fixed-fee
engagements are recognized based on estimates of work completed versus the total
services to be provided under the engagement. Losses, if any, on fixed-fee
engagements are recognized in the period in which the loss first becomes
probable and reasonably estimable. To date, such losses have not been
significant. Revenues related to performance-based engagements are recognized
when all performance-based criteria are met. We also have contracts with clients
to deliver multiple services that are covered under both individual and separate
engagement letters. These arrangements allow for our services to be valued and
accounted
for on a separate basis. Reimbursable expenses related to time-and-expense and
fixed-fee engagements are recognized as revenue in the period in which the
expense is incurred. Reimbursable expenses subject to performance-based criteria
are recognized as revenue when all performance criteria are met. Direct costs
incurred on all types of engagements, including performance-based engagements,
are recognized in the period in which incurred.
Differences
between the timing of billings and the recognition of revenue are recognized as
either unbilled services or deferred revenue. Revenues recognized for services
performed but not yet billed to clients are recorded as unbilled services.
Amounts billed to clients but not yet recognized as revenues are recorded as
deferred revenue. Client prepayments and retainers that are unearned are also
classified as deferred revenue and recognized over future periods as earned in
accordance with the applicable engagement agreement.
Allowances
for Doubtful Accounts and Unbilled Services
We
maintain allowances for doubtful accounts and for services performed but not yet
billed for estimated losses based on several factors, including the historical
percentages of fee adjustments and write-offs by practice group, an assessment
of a client’s ability to make required payments and the estimated cash
realization from amounts due from clients. The allowances are assessed by
management on a regular basis. If the financial condition of a client
deteriorates in the future, impacting the client’s ability to make payments, an
increase to our allowance might be required or our allowance may not be
sufficient to cover actual write-offs.
The
provision for doubtful accounts and unbilled services is recorded as a reduction
in revenue to the extent the provision relates to fee adjustments and other
discretionary pricing adjustments. To the extent the provision relates to a
client’s inability to make required payments, the provision is recorded in
operating expenses.
Valuation
of Net Deferred Tax Assets
We have
recorded net deferred tax assets as we expect to realize future tax benefits
related to the utilization of these assets. Although we experienced net losses
early in our history, no valuation allowance has been recorded relating to these
deferred tax assets because we believe that it is more likely than not that
future taxable income will be sufficient to allow us to utilize these assets.
Should we determine in the future that we will not be able to fully utilize all
or part of these deferred tax assets, we would need to establish a valuation
allowance, which would be recorded as a charge to income in the period the
determination was made. While utilization of these deferred tax assets will
provide future cash flow benefits, they will not have an effect on future income
tax provisions.
Stock-based
Compensation
The
accounting for stock-based compensation is complex, and under certain
circumstances, GAAP allows for alternative methods. As permitted, we account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees,” and related interpretations and have elected the disclosure
option of Statement of Financial Accounting Standards (“SFAS”) No. 123,
“Accounting for Stock-Based Compensation.” SFAS No. 123 requires that companies
either recognize compensation expense for grants of stock, stock options and
other equity instruments based on fair value, or provide pro forma disclosure of
net income and earnings per share in the notes to the financial statements.
Accordingly, we have measured compensation expense for stock options that we
have granted to employees as the excess, if any, of the estimated fair value of
our common stock at the date of grant over the exercise price. The calculated
stock-based compensation is included as a component of stockholders’ equity and
is amortized on a straight-line basis by charges to earnings over the vesting
period of the applicable options.
Given the
lack of a public market for our common stock prior to our IPO, we established an
estimated fair value of the common stock as well as the exercise price for the
options to purchase this stock. We estimated the fair value of our common stock
by evaluating our results of business activities and projections of our future
results of operations.
RESULTS
OF OPERATIONS
The
following table sets forth selected segment and consolidated operating results
and other operating data for the periods indicated. Segment operating income
consists of the revenues generated by a segment, less the direct costs of
revenue and selling, general and administrative costs that are incurred directly
by the segment. Unallocated corporate costs include costs related to
administrative functions that are performed in a centralized manner that are not
attributable to a particular segment. The Company periodically reclassifies
certain revenues and expenses among
the
segments to align them with the changes in the Company’s internal organizational
structure. Beginning January 1, 2005, the Forensic Technology and Discovery
Services group within the Financial Consulting segment was moved into the
Operational Consulting segment to improve marketing synergies with the Legal
Business Consulting practice. Previously reported segment information has been
revised to reflect this change.
| |
|
Three
Months Ended
March 31, |
|
|
Segment
and Consolidated Operating Results (in
thousands): |
|
2005 |
|
2004 |
|
|
Revenues
and reimbursable expenses: |
|
|
|
|
|
|
|
|
Financial
Consulting revenues |
|
$ |
24,553 |
|
$ |
23,557 |
|
|
Operational
Consulting revenues |
|
|
22,207 |
|
|
16,544 |
|
|
Total
revenues |
|
|
46,760 |
|
|
40,101 |
|
|
Total
reimbursable expenses |
|
|
4,370 |
|
|
3,443 |
|
|
Total
revenues and reimbursable expenses |
|
$ |
51,130 |
|
$ |
43,544 |
|
| |
|
|
|
|
|
|
|
|
Operating
income: |
|
|
|
|
|
|
|
|
Financial
Consulting |
|
$ |
9,987 |
|
$ |
7,761 |
|
|
Operational
Consulting |
|
|
8,751 |
|
|
5,823 |
|
|
Total
segment operating income |
|
|
18,738 |
|
|
13,584 |
|
| |
|
|
|
|
|
|
|
|
Unallocated
corporate costs |
|
|
9,251 |
|
|
6,587 |
|
|
Depreciation
expense |
|
|
847 |
|
|
603 |
|
|
Other
operating expenses |
|
|
411 |
|
|
2,141 |
|
|
Total
operating expenses |
|
|
10,509 |
|
|
9,331 |
|
| |
|
|
|
|
|
|
|
|
Operating
income |
|
$ |
8,229 |
|
$ |
4,253 |
|
| |
|
|
|
|
|
|
|
|
Other
Operating Data: |
|
|
|
|
|
|
|
|
Number
of consultants (at period end) (1): |
|
|
|
|
|
|
|
|
Financial
Consulting |
|
|
258 |
|
|
282 |
|
|
Operational
Consulting |
|
|
241 |
|
|
201 |
|
|
Total |
|
|
499 |
|
|
483 |
|
|
Average
number of consultants (for the period): |
|
|
|
|
|
|
|
|
Financial
Consulting |
|
|
267 |
|
|
287 |
|
|
Operational
Consulting |
|
|
231 |
|
|
196 |
|
|
Total |
|
|
498 |
|
|
483 |
|
|
Utilization
rate (2): |
|
|
|
|
|
|
|
|
Financial
Consulting |
|
|
74.3 |
% |
|
72.1 |
% |
|
Operational
Consulting |
|
|
78.6 |
% |
|
75.3 |
% |
|
Total |
|
|
76.3 |
% |
|
73.4 |
% |
|
Average
billing rate per hour (3): |
|
|
|
|
|
|
|
|
Financial
Consulting |
|
$ |
274 |
|
$ |
244 |
|
|
Operational
Consulting |
|
$ |
228 |
|
$ |
210 |
|
|
Total |
|
$ |
250 |
|
$ |
229 |
|
| (1) |
Consultants
consist of our billable
professionals. |
| (2) |
We
calculate the utilization rate for our consultants by dividing the number
of hours all our consultants worked on client assignments during a period
by the total available working hours for all of our consultants during the
same period, assuming a forty-hour work week, less paid holidays and
vacation days. |
| (3) |
Average
billing rate per hour is calculated by dividing revenues for a period by
the number of hours worked on client assignments during the same
period. |
Three
Months Ended March 31, 2005 Compared to Three Months Ended March 31,
2004
Revenues
Revenues
increased $6.7 million, or 16.6%, to $46.8 million for the three months ended
March 31, 2005 from $40.1 million for the three months ended March 31,
2004. Revenues from time-and-expense engagements increased $6.6 million, or
20.9%, to $38.2 million for the three months ended March 31, 2005 from
$31.6 million for the three months ended March 31, 2004. Revenues from
fixed-fee engagements increased $1.4 million, or 22.2%, to $7.7 million for
the three months ended March 31, 2005 from $6.3 million for the three
months ended March 31, 2004. Revenues from performance-based engagements
decreased $1.3 million, or 59.1%, to $0.9 million for the three months
ended March 31, 2005 from $2.2 million for the three months ended
March 31, 2004.
The
overall $6.7 million increase in revenues resulted from a $4.5 million
increase in revenues attributable to an increase in the average billing rate per
hour, a $1.4 million increase in revenues attributable to an increase in
our utilization rate, and a $0.8 million increase in revenues attributable to an
increase in billable hours associated with new and existing client engagements
and the hiring of additional consultants. The average billing rate per hour
increased 9.2% to $250 for the three months ended March 31, 2005 from $229
for the three months ended March 31, 2004. Average billing rate per hour
for any given period is calculated by dividing revenues for the period by the
number of hours worked on client assignments during the same period. In
addition, our utilization rate increased to 76.3% for the three months ended
March 31, 2005 from 73.4% for the three months ended March 31, 2004.
The utilization rate for any given period is calculated by dividing the number
of hours all our consultants worked on client assignments during the period by
the total available working hours for all of our consultants during the same
period, assuming a forty-hour work week, less paid holidays and vacation days.
The average number of consultants increased to 498 for the three months ended
March 31, 2005 from 483 for the three months ended March 31, 2004, as
we added a number of consultants in our Operational Consulting segment to meet
growing demand for our services and position us for future growth.
Direct
Costs
Our
direct costs remained flat at $24.9 million for the three months ended
March 31, 2005 compared to the three months ended March 31, 2004.
Although our average number of consultants increased by 15 for the three months
ended March 31, 2005, as compared to the three months ended March 31, 2004, our
direct payroll costs remained unchanged as incremental salaries and wages
associated with new managers, associates and analysts were substantially offset
by a decrease in the number of our managing directors. The decrease in the
number of managing directors resulted from the closing of two small,
underperforming offices in the first quarter of 2004 and the elimination of a
service offering in the operational consulting segment in the third quarter of
2004. As a result of these actions, a total of six managing director positions
were eliminated. We expect direct costs will increase in the near term as we
focus primarily on hiring additional managers, associates and analysts to expand
support for our existing practices and better leverage our managing directors
and directors.
Stock-based
compensation expense increased to $1.0 million for the three months ended
March 31, 2005 due to the granting of restricted stock awards. On
October 12, 2004, immediately prior to our IPO, we granted a total of
767,700 shares of restricted common stock with an aggregate fair market value of
$11.9 million. During the first quarter of 2005, we granted an additional
490,617 shares of restricted common stock with an aggregate fair market value of
$10.4 million. Compensation expense for restricted common stock is
amortized on a straight-line basis over the vesting period, which is generally
four years.
Operating
Expenses
Selling,
general and administrative expenses increased $3.1 million, or 37.8%, to $11.3
million in the three months ended March 31, 2005 from $8.2 million in the three
months ended March 31, 2004. The increase was due in part to an increase in
the average number of non-billable professionals to 131 for the three months
ended March 31, 2005 from 101 for the three months ended March 31, 2004 and
their related compensation and benefit costs of $5.1 million in the three months
ended March 31, 2005 compared to $4.0 million in the three months ended
March 31, 2004. We added a number of non-billable professionals during the
past year to establish a public company infrastructure. The remaining increase
in selling, general and administrative costs in the three months ended
March 31, 2005 compared to the same period in the prior year was due to
increases in training and recruiting costs, new costs associated with being a
public company, rent and other facility costs, promotion and marketing costs and
other administrative costs associated with the general growth in our business
activity. We expect operating expenses
will
increase in the future in response to ongoing growth in our business
activity.
Stock-based
compensation expense totaled $0.4 million for the three months ended
March 31, 2005 due to the granting of restricted stock awards as discussed
above.
Depreciation
expense increased $0.2 million, or 33.3%, to $0.8 million in the three
months ended March 31, 2005
from $0.6 million in the three months ended March 31, 2004 as computers, network
equipment, furniture and fixtures, and leasehold improvements were added to
support our increase in employees.
Other
operating expenses in the first quarter of 2004 consisted of a $2.1 million
pre-tax restructuring charge associated with the closing of two small,
underperforming offices in Miami, Florida and Palo Alto, California.
Operating
Income
Operating
income increased $3.9 million, or 90.7%, to $8.2 million for the three
months ended March 31, 2005 from $4.3 million for the three months
ended March 31, 2004. The increase in operating income was primarily due to
the increases in revenues and billing rates, partially offset by the increases
in operating expenses as discussed above. Additionally, operating income for the
three months ended March 31, 2004 was reduced by the $2.1 million
restructuring charge discussed above. Operating margin, which is defined as
operating income expressed as a percentage of revenues, increased to 17.6% in
the three months ended March 31, 2005 from 10.6% in the three months ended
March 31, 2004, or 16.4% excluding restructuring and severance
charges.
Segment
Results
Financial
Consulting
Revenues
During
the first quarter of 2005, we experienced a cyclical slowdown in corporate
advisory services while the demand for our valuation practice declined. However,
strong results in our disputes and investigations practice more than offset
these decreases, resulting in a solid quarter for our Financial Consulting
segment.
Financial
Consulting segment revenues increased $1.0 million, or 4.2%, to $24.6 million
for the three months ended March 31, 2005 from $23.6 million for the three
months ended March 31, 2004. Revenues from time-and-expense engagements
increased $1.4 million, or 6.4%, to $23.2 million for the three months ended
March 31, 2005 from $21.8 million for the three months ended March 31,
2004. Revenues from fixed-fee engagements decreased $0.4 million, or 22.2%, to
$1.4 million for the three months ended March 31, 2005 from $1.8
million for the three months ended March 31, 2004. There were no revenues from
performance-based engagements for the three
months ended March 31, 2005 and 2004.
The
overall $1.0 million increase in revenues resulted from a $2.7 million
increase in revenues attributable to an increase in the average billing rate per
hour and a $0.7 million increase in revenues attributable to an increase in
our utilization rate, partially offset by a $2.4 million decrease in
revenues attributable to a decrease in billable hours associated with a decrease
in the number of consultants. The average billing rate per hour increased 12.3%
to $274 for the three months ended March 31, 2005 from $244 for the three months
ended March 31, 2004. In addition, our utilization
rate increased to 74.3% for the three months ended March 31, 2005 from
72.1% for the three months ended March 31, 2004. The average number of
consultants decreased to 267 for the three months ended March 31, 2005 from
287 for the three months ended March 31, 2004.
Operating
Income
Financial
Consulting segment operating income increased $2.2 million, or 28.2%, to $10.0
million in the three months ended March 31, 2005 from $7.8 million in the
three months ended March 31, 2004. Segment operating margin, defined as
segment operating income expressed as a percentage of segment revenues,
increased to 40.7% in the three months ended March 31, 2005 from 32.9% in
the three months ended March 31, 2004, primarily as a result of a decrease
in direct costs combined with the 4.2% increase in
revenues.
Operational
Consulting
Revenues
Operational
Consulting segment revenues increased $5.7 million, or 34.5%, to $22.2 million
for the three months ended March 31, 2005 from $16.5 million for the three
months ended March 31, 2004. Revenues from time-and-expense engagements
increased $5.2 million, or 53.1%, to $15.0 million for the three months ended
March 31, 2005 from $9.8 million for the three months ended
March 31, 2004. Revenues from fixed-fee engagements increased
$1.8 million, or 40.0%, to $6.3 million for the three months ended
March 31, 2005 from $4.5 million for the three months ended
March 31, 2004. Revenues from performance-based engagements decreased $1.3
million, or 59.1%, to $0.9 million for the three months ended March 31, 2005
from $2.2 million for the three months ended March 31, 2004.
Of the
overall $5.7 million increase in revenues, $3.2 million was attributable to an
increase in billable hours associated with new and existing client engagements
and the hiring of additional consultants, $1.8 million was attributable to an
increase in the average billing rate per hour and $0.7 million was attributable
to an increase in our utilization rate. The average number of consultants
increased to 231 for the three months ended March 31, 2005 from 196 for the
three months ended March 31, 2004, as we added a number of consultants over
the past year to meet growing demand for our services. The average billing rate
per hour increased 8.6% to $228 for the three months ended March 31, 2005
from $210 for the three months ended March 31, 2004. In addition, our
utilization rate increased to 78.6% for the three months ended March 31,
2005 from 75.3% for the three months ended March 31, 2004.
Operating
Income
Operational
Consulting segment operating income increased $3.0 million, or 51.7%, to
$8.8 million for the three months ended March 31, 2005 from
$5.8 million for the three months ended March 31, 2004. Segment
operating margin increased to 39.4% in the three months ended March 31,
2005 from 35.2% in the same period last year, primarily due to the increases in
revenues as discussed above, partially offset by increases in direct costs and
selling, general and administrative expenses.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary sources of liquidity are cash flows from operations, proceeds generated
by our IPO, debt capacity available under our credit facility and available cash
reserves. Cash and cash equivalents, consisting of demand deposits and
short-term commercial paper, decreased $7.5 million from $28.1 million
at December 31, 2004 to $20.6 million at March 31,
2005.
Cash used
in operating activities totaled $6.5 million for the three months ended
March 31, 2005 and $5.1 million for the same period last year. Our
operating assets and liabilities consist primarily of receivables from billed
and unbilled services, accounts payable and accrued expenses, and accrued
payroll and related benefits. The volume of billings, and timing of collections
and payments affect these account balances. Cash used for operations during the
three months ended March 31, 2005 primarily consisted of cash payments for
bonuses, payroll and related benefits that were accrued at December 31, 2004.
Receivables from clients and unbilled services increased $6.0 million
during the three months ended March 31, 2005, primarily due to increased
revenues generated and billed. This increase in client balances was partially
offset by a $3.5 million increase in income taxes payable.
Cash used
in investing activities was $1.0 million for the three months ended
March 31, 2005 and $0.5 million for the same period last year. Use of cash
in both periods pertained to the purchase of computer hardware and software,
furniture and fixtures and leasehold improvements needed to meet the ongoing
needs relating to the hiring of additional employees and the expansion of office
space. We estimate that our capital expenditures in 2005 will be approximately
$8.0 million for the purchase of additional computers, network equipment,
furniture and fixtures and leasehold improvements as our business continues to
expand.
We have a
bank credit agreement expiring on February 10, 2006 that allows us to borrow up
to the lesser of $25.0 million or the sum of (a) 85% of eligible accounts
receivable and (b) the lesser of 40% of unbilled services and $5.0 million.
Borrowings under the agreement are limited by any outstanding letters of credit,
bear interest at LIBOR plus 1.75%, and are secured by substantially all of the
Company’s assets. The bank credit agreement
includes
covenants for minimum equity and maximum annual capital expenditures, as well as
covenants restricting our ability to incur additional indebtedness or engage in
certain types of transactions outside of the ordinary course of business. As of
March 31, 2005, we were in compliance with the bank credit agreement debt
covenants and had no borrowings outstanding. The balance available under the
agreement was $20.1 million after the calculation of eligible accounts
receivable and unbilled services balances and a reduction of approximately $1.7
million for letters of credit outstanding.
Future
Needs
Our
primary financing need has been to fund our growth. Our growth strategy includes
hiring additional consultants and expanding our service offerings through
existing consultants, new hires or acquisitions. We intend to fund such growth
with cash generated from operations, proceeds from our IPO and borrowing
availability under our credit agreement. Because we expect that our future
annual growth rate in revenues and related percentage increases in working
capital balances will moderate, we believe cash generated from operations and
the IPO, supplemented as necessary by borrowings under our credit facility, will
be adequate to fund this growth.
CONTRACTUAL
OBLIGATIONS
The
following table represents our obligations and commitments to make future
payments under contracts, such as lease agreements, and under contingent
commitments as of December 31, 2004 (in thousands).
| |
|
Less
than 1 Year |
|
1
to 3 Years |
|
4
to 5 Years |
|
After
5 Years |
|
Total |
|
|
Operating
leases |
|
$ |
4,461 |
|
$ |
9,149 |
|
$ |
8,668 |
|
$ |
14,601 |
|
$ |
36,879 |
|
|
Purchase
obligations |
|
|
1,303 |
|
|
49 |
|
|
20 |
|
|
¾ |
|
|
1,372 |
|
|
Total
contractual obligations |
|
$ |
5,764 |
|
$ |
9,198 |
|
$ |
8,688 |
|
$ |
14,601 |
|
$ |
38,251 |
|
We lease
our facilities and certain equipment under operating lease arrangements expiring
on various dates through 2014, with various renewal options. We lease office
facilities under noncancelable operating leases that include fixed or minimum
payments plus, in some cases, scheduled base rent increases over the term of the
lease. Certain leases provide for monthly payments of real estate taxes,
insurance and other operating expense applicable to the property. Some of the
leases contain provisions whereby the future rental payments may be adjusted for
increases in operating expense above the specified amount.
Purchase
obligations include information technology and telecommunication obligations, as
well as other commitments to purchase services where we cannot cancel or would
be required to pay a termination fee in the event of cancellation.
OFF
BALANCE SHEET ARRANGEMENTS
We have
not entered into any off-balance sheet arrangements.
RECENT
ACCOUNTING PRONOUNCEMENT
In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment,” (“SFAS No. 123R”). In April 2005, the SEC adopted a
new rule that amends the effective date of SFAS No. 123R. Under the new
rule, the Company must adopt SFAS No. 123R effective January 1,
2006. This statement requires that the costs of employee share-based payments be
measured at fair value on the awards’ grant date using an option-pricing model
and recognized in the financial statements over the requisite service period.
This statement does not change the accounting for stock ownership plans, which
are subject to American Institute of Certified Public Accountants Statement of
Position 93-6, “Employer’s Accounting for Employee Stock Ownership Plans.” SFAS
No. 123R supersedes Accounting Principles Board Opinion No. 25 (“APB
25”), “Accounting for Stock Issued to Employees,” and its related
interpretations, and eliminates the alternative to use APB 25’s intrinsic value
method of accounting, which the Company is currently using. Additionally, SFAS
No. 123R amends SFAS No. 95, “Statement of Cash Flows,” to require
that excess tax benefits be reported as a financing cash inflow rather than as a
reduction of taxes paid.
SFAS
No. 123R allows for two alternative transition methods. The first method is
the modified prospective application whereby compensation cost for the portion
of awards for which the requisite service has not yet been rendered that are
outstanding as of the adoption date will be recognized over the remaining
service period. The compensation cost for that portion of awards will be based
on the grant-date fair value of those awards as calculated for pro forma
disclosures under SFAS No. 123, as originally issued. All new awards and
awards that are modified, repurchased, or cancelled after the adoption date will
be accounted for under the provisions of SFAS No. 123R. The second method
is the modified retrospective application, which requires that we restate prior
period financial statements. We are currently determining
which transition method we will adopt and do not expect the adoption of
SFAS No. 123R to have a material impact on our
financial position, results of operations, EPS, or cash flows.
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
We are
exposed to market risks related to interest rates and changes in the market
value of our investments. We do not enter into interest rate swaps, caps or
collars or other hedging instruments. Our exposure to changes in interest rates
is limited to borrowings under the bank credit agreement, which has a variable
interest rate tied to the LIBOR. We had no borrowings outstanding as of
March 31, 2005; therefore, any change in interest rates would not have a
material effect on our financial position or operating results. From time to
time, we invest excess cash in marketable securities. These investments
principally consist of overnight sweep accounts and short-term commercial paper.
Due to the short maturity of our investments and debt obligations, we have
concluded that we do not have material market risk exposure.
Our
management, with the participation of the Company’s Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of March 31, 2005. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of March 31, 2005,
our disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports we file or submit under the Exchange
Act.
There has
been no change in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the “Exchange Act”) that occurred
during the quarter ended March 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II ¾
OTHER INFORMATION
From time
to time, the Company is involved in various legal matters arising out of the
ordinary course of business. Although the outcome of these matters cannot
presently be determined, in the opinion of management, disposition of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
|
|
CHANGES
IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES |
None.
|
|
DEFAULTS
UPON SENIOR SECURITIES |
None.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS |
None.
None.
(a) The
following exhibits are filed as part of this Quarterly Report on
Form 10-Q.
|
Exhibit
Number |
|
Exhibit |
| |
|
|
|
31.1 |
|
Certification
of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
| |
|
|
|
31.2 |
|
Certification
of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
| |
|
|
|
32.1 |
|
Certification
of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
| |
|
|
|
32.2 |
|
Certification
of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| |
HURON
CONSULTING GROUP INC. |
| |
|
|
Date: April
28, 2005 |
By: /s/
Gary L. Burge |
| |
Gary
L. Burge |
| |
Chief
Financial Officer |