Concurrent
with the Stockamp acquisition described above, on July 8, 2008 the Company
entered into an amendment to the Wellspring Stock Purchase Agreement
(“Wellspring Amendment”). Effective January 1, 2009, in connection with the
Stockamp acquisition, the Company will combine Wellspring’s revenue cycle
business with Stockamp’s revenue cycle business. As such,
Wellspring will no longer be eligible for earn-out payments
pertaining to that portion of the Wellspring business. In consideration for
this, the Company paid the sellers $20.0 million through the issuance of
440,296 shares of its common stock. In addition, on the date that is six months
and one day after the date of the Wellspring Amendment (the “Wellspring
Contingent Payment Date”), the Company will pay the sellers (in cash, shares of
common stock, or any combination of cash and common stock, at the election of
the Company) the amount, if any, equal to $20.0 million less the value of
the common stock issued on the date of the Wellspring Amendment, based on 95% of
the average daily closing price per share of common stock for the ten
consecutive trading days prior to the Wellspring Contingent Payment Date. No
payment will be made if the common stock so valued equals or exceeds
$20.0 million on the Wellspring Contingent Payment Date. Any additional
payment resulting from this price protection will not change the purchase
consideration. Based on the average daily closing price of the Company’s common
stock for the ten consecutive trading days prior to and including
September 30, 2008, the Company would not be obligated to make any price
protection payments to the sellers of Wellspring. The earn-out provision, as
amended, pertaining to the non-revenue cycle portion of Wellspring’s business
will remain in effect through December 31, 2011.
The
identifiable intangible assets that were acquired totaled $13.1 million and
have an estimated weighted average useful life of 26 months, which consists
of customer contracts totaling $4.7 million (9 months useful life),
customer relationships totaling $3.9 million (20 months useful life),
non-competition agreements totaling $2.4 million (72 months useful life),
and a tradename valued at $2.1 million (24 months useful life).
Additionally, the Company recorded approximately $100.6 million of
goodwill, which the Company is not deducting for income tax
purposes.
Acquisition
of Glass & Associates, Inc.
Also in
January 2007, the Company acquired Glass & Associates, Inc. (“Glass”), a
turnaround and restructuring consulting firm that provides advice and leadership
to troubled businesses in the United States and Europe. With the acquisition of
Glass, the Company expanded its position in the consulting and restructuring
marketplace, as well as expanded its interim management capabilities to
distressed companies in industries beyond healthcare. The stock purchase
agreement for this acquisition was executed on January 2, 2007 and the
transaction was consummated on January 9, 2007 upon the satisfaction of
certain closing conditions. The results of operations of Glass have been
included within the Company’s Corporate Consulting segment since January 2,
2007.
The
aggregate purchase price of this acquisition was approximately
$35.0 million, consisting of $30.0 million in cash paid at closing,
$0.8 million of transaction costs, a $1.0 million working capital
adjustment, $1.6 million in cash paid to sellers for a tax election
reimbursement, and $1.6 million of additional purchase price earned by
selling shareholders subsequent to the acquisition. The Company financed this
acquisition with a combination of cash on hand and borrowings of
$20.0 million under the Company’s bank credit agreement. Additional
purchase consideration may be payable if specific performance targets are met
over a four-year period. Such amounts will be recorded as additional purchase
price and an adjustment to goodwill. Also, additional payments may be made based
on the amount of revenues the Company receives from referrals made by certain
employees of Glass over a four-year period. Such amounts will be recorded as an
expense.
The
identifiable intangible assets that were acquired totaled $4.3 million and
have an estimated weighted average useful life of 37 months, which consists
of customer contracts totaling $1.0 million (6 months useful life),
customer relationships totaling $1.1 million (19 months useful life), and
non-competition agreements totaling $2.2 million (60 months useful life).
Additionally, the Company recorded approximately $29.5 million of goodwill,
which the Company is deducting for income tax purposes.
HURON CONSULTING GROUP
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - (Continued)
(Tabular amounts in thousands, except
per share amounts)
Purchase
Price Allocations
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed for the Company’s significant business
acquisitions.
|
|
(Preliminary)
Stockamp
July
8,
2008
|
|
|
Callaway
July
29,
2007
|
|
|
Wellspring
January 2,
2007
|
|
|
Glass
January 2,
2007
|
|
Assets
Acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$ |
17,769 |
|
|
$ |
12,418 |
|
|
$ |
9,868 |
|
|
$ |
2,705 |
|
Property and
equipment
|
|
|
2,158 |
|
|
|
698 |
|
|
|
1,073 |
|
|
|
215 |
|
Non-current assets
|
|
|
546 |
|
|
|
23 |
|
|
|
- |
|
|
|
23 |
|
Intangible assets
|
|
|
32,900 |
|
|
|
5,700 |
|
|
|
13,100 |
|
|
|
4,300 |
|
Goodwill
|
|
|
184,865 |
|
|
|
72,007 |
|
|
|
100,566 |
|
|
|
29,517 |
|
|
|
|
238,238 |
|
|
|
90,846 |
|
|
|
124,607 |
|
|
|
36,760 |
|
Liabilities
Assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
11,892 |
|
|
|
2,354 |
|
|
|
9,128 |
|
|
|
1,727 |
|
Non-current
liabilities
|
|
|
232 |
|
|
|
94 |
|
|
|
5,278 |
|
|
|
- |
|
|
|
|
12,124 |
|
|
|
2,448 |
|
|
|
14,406 |
|
|
|
1,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets Acquired
|
|
$ |
226,114 |
|
|
$ |
88,398 |
|
|
$ |
110,201 |
|
|
$ |
35,033 |
|
Pro
Forma Financial Data
The
following unaudited pro forma financial data for the nine months ended
September 30, 2008 and the three and nine months ended September 30,
2007 give effect to the acquisition of Stockamp as if it had been completed at
the beginning of the periods presented. The actual results from the acquisition
of Stockamp have been included within the Company’s consolidated financial
results since July 8, 2008.
|
|
Nine
Months
Ended
September 30,
2008
|
|
|
Three
Months
Ended
September 30,
2007
|
|
|
Nine
Months
Ended
September 30,
2007
|
|
Revenues,
net of reimbursable expenses
|
|
$ |
509,661 |
|
|
$ |
149,584 |
|
|
$ |
421,347 |
|
Operating
income
|
|
$ |
79,560 |
|
|
$ |
21,421 |
|
|
$ |
60,135 |
|
Income
before provision for income taxes
|
|
$ |
65,499 |
|
|
$ |
16,735 |
|
|
$ |
48,164 |
|
Net
income
|
|
$ |
36,089 |
|
|
$ |
9,024 |
|
|
$ |
26,500 |
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.01 |
|
|
$ |
0.51 |
|
|
$ |
1.57 |
|
Diluted
|
|
$ |
1.92 |
|
|
$ |
0.47 |
|
|
$ |
1.47 |
|
The
following unaudited pro forma financial data for the three and nine months ended
September 30, 2007 give effect to the acquisition of Callaway as if it had
been completed at the beginning of the periods presented. The actual results
from the acquisition of Callaway have been included within the Company’s
consolidated financial results since July 29, 2007.
HURON CONSULTING GROUP
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - (Continued)
(Tabular amounts in thousands, except
per share amounts)
|
|
Three
Months
Ended
September 30,
2007
|
|
|
Nine
Months
Ended
September 30,
2007
|
|
Revenues,
net of reimbursable expenses
|
|
$ |
139,064 |
|
|
$ |
403,669 |
|
Operating
income
|
|
$ |
22,832 |
|
|
$ |
63,331 |
|
Income
before provision for income taxes
|
|
$ |
19,644 |
|
|
$ |
55,284 |
|
Net
income
|
|
$ |
10,740 |
|
|
$ |
30,701 |
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.63 |
|
|
$ |
1.82 |
|
Diluted
|
|
$ |
0.59 |
|
|
$ |
1.71 |
|
The
actual results from the acquisitions of Wellspring and Glass have been included
within the Company’s consolidated financial results since January 2, 2007;
therefore, pro forma financial information is not applicable.
The above
unaudited pro forma financial data are not necessarily indicative of the results
that would have been achieved if the acquisitions had occurred on the dates
indicated, nor are they necessarily indicative of future results.
5. Goodwill
and Intangible Assets
The table
below sets forth the changes in the carrying amount of goodwill by segment for
the nine months ended September 30, 2008.
|
|
Health
and
Education
Consulting
|
|
|
Financial
Consulting
|
|
|
Legal
Consulting
|
|
|
Corporate
Consulting
|
|
|
Total
|
|
Balance
as of December 31,
2007
|
|
$ |
93,561 |
|
|
$ |
50,314 |
|
|
$ |
15,312 |
|
|
$ |
63,866 |
|
|
$ |
223,053 |
|
Goodwill
recorded in connection
with business
combination
|
|
|
184,865 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
184,865 |
|
Additional
purchase price subsequently
recorded for
business
combinations(1)
|
|
|
20,086 |
|
|
|
23,027 |
|
|
|
44 |
|
|
|
196 |
|
|
|
43,353 |
|
Balance
as of September 30,
2008
|
|
$ |
298,512 |
|
|
$ |
73,341 |
|
|
$ |
15,356 |
|
|
$ |
64,062 |
|
|
$ |
451,271 |
|
(1)
|
Primarily
consists of additional purchase price paid to the selling shareholders of
Callaway and Wellspring in consideration for the settlement of certain
earn-out provisions.
|
Identifiable
intangible assets with finite lives are amortized over their estimated useful
lives. Intangible assets amortization expense was $5.2 million and
$8.6 million for the three and nine months ended September 30, 2008,
respectively. Intangible assets amortization expense was $3.8 million and
$11.4 million for the three and nine months ended September 30, 2007,
respectively. Estimated intangible assets amortization expense is
$15.0 million for 2008, $10.1 million for 2009, $7.6 million for
2010, $5.2 million for 2011, $3.4 million for 2012, and
$1.6 million for 2013. Actual amortization expense could differ
from these estimated amounts as a result of the finalization of the Stockamp
valuation, future acquisitions and other factors.
HURON CONSULTING GROUP
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - (Continued)
(Tabular amounts in thousands, except
per share amounts)
Intangible
assets are as follows:
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
Customer
contracts
|
|
$ |
5,800 |
|
|
$ |
2,000 |
|
|
$ |
- |
|
|
$ |
- |
|
Customer
relationships
|
|
|
20,826 |
|
|
|
7,297 |
|
|
|
9,826 |
|
|
|
3,814 |
|
Non-competition
agreements
|
|
|
12,273 |
|
|
|
3,036 |
|
|
|
8,273 |
|
|
|
1,690 |
|
Tradenames
|
|
|
5,700 |
|
|
|
2,198 |
|
|
|
2,100 |
|
|
|
1,050 |
|
Technology
and
software
|
|
|
9,085 |
|
|
|
958 |
|
|
|
585 |
|
|
|
294 |
|
Total
|
|
$ |
53,684 |
|
|
$ |
15,489 |
|
|
$ |
20,784 |
|
|
$ |
6,848 |
|
6. Earnings
Per Share
Basic
earnings per share excludes dilution and is computed by dividing net income by
the weighted average number of common shares outstanding for the period,
excluding unvested restricted common stock. Diluted earnings per share reflects
the potential reduction in earnings per share that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock under the treasury stock method. Earnings per share under the basic and
diluted computations are as follows:
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
8,830 |
|
|
$ |
10,487 |
|
|
$ |
28,852 |
|
|
$ |
30,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic
|
|
|
18,901 |
|
|
|
17,033 |
|
|
|
17,947 |
|
|
|
16,868 |
|
Weighted
average common stock equivalents
|
|
|
944 |
|
|
|
1,104 |
|
|
|
803 |
|
|
|
1,099 |
|
Weighted
average common shares outstanding – diluted
|
|
|
19,845 |
|
|
|
18,137 |
|
|
|
18,750 |
|
|
|
17,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per
share
|
|
$ |
0.46 |
|
|
$ |
0.61 |
|
|
$ |
1.61 |
|
|
$ |
1.80 |
|
Diluted
earnings per
share
|
|
$ |
0.44 |
|
|
$ |
0.58 |
|
|
$ |
1.54 |
|
|
$ |
1.69 |
|
There
were approximately 74,100 anti-dilutive securities for the three months ended
September 30, 2008 and none for the three months ended September 30,
2007. For the nine months ended September 30, 2008 and 2007, there
were approximately 462,500 and 1,600 anti-dilutive securities,
respectively.
7. Borrowings
At
September 30, 2008, the Company had a credit agreement with various
financial institutions under which it may borrow up to $460.0 million, with
an accordion feature allowing for an additional amount of up to
$60.0 million to be borrowed upon approval from the lenders. The credit
agreement consists of a $240.0 million revolving credit facility
(“Revolver”) and a $220.0 million term loan facility (“Term Loan”), which
was drawn in a single advance of $220.0 million on July 8, 2008.
Borrowings under the credit agreement are limited by any outstanding letters of
credit, which totaled $5.9 million at September 30, 2008. The Revolver
and Term Loan are secured by a pledge of 100% of the voting stock or other
equity interests in the Company’s domestic subsidiaries and 65% of the voting
stock or other equity interests in the Company’s foreign subsidiaries. Fees and
interest on borrowings vary based on the Company’s total debt to earnings before
interest, taxes, depreciation and amortization (“EBITDA”) ratio as set forth in
the credit agreement. Interest is based on a spread, ranging from
1.50% to 2.50%, over the London Interbank Offered Rate (“LIBOR”) or a spread,
ranging from 0.50% to 1.50%, over the base rate (which is the greater of the
Federal Funds Rate plus 0.50% or the Prime Rate), as selected by the Company.
The Term Loan is subject to amortization of principal in fifteen consecutive
quarterly installments beginning on September 30, 2008, with the first
fourteen installments being $5.5 million each. The fifteenth and final
installment will be the amount of the remaining outstanding principal balance of
the Term Loan and will be payable on February 23, 2012, but can
be
HURON CONSULTING GROUP
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - (Continued)
(Tabular amounts in thousands, except
per share amounts)
repaid
earlier. All outstanding borrowings under the Revolver will be due upon
expiration of the credit agreement on February 23, 2012. The credit
agreement includes quarterly financial covenants that require the Company to
maintain certain fixed coverage and total debt to EBITDA ratios. In addition,
certain acquisitions and similar transactions will need to be approved by the
lenders. Borrowings outstanding under this credit facility at September 30,
2008 totaled $335.0 million and carried a weighted-average interest rate of
5.0%, all of which the Company has classified as long-term as the principal
under the Revolver is not due until 2012 and the Company intends to fund
scheduled quarterly payments under the Term Loan with availability under the
Revolver. Borrowings outstanding at December 31, 2007 were
$123.5 million and carried a weighted-average interest rate of 6.1%. At
both September 30, 2008 and December 31, 2007, the Company was in
compliance with its financial debt covenants.
8. Restructuring
Charges
During
the third quarter of 2008, the Company incurred a $2.3 million pre-tax
restructuring charge, consisting primarily of severance payments, related to
workforce reductions to balance its employee base with current revenue
expectations, market demand, and areas of focus. These reductions in workforce
included the elimination of the operational consulting group within the
Corporate Consulting segment and a reduction in the number of consultants in
various other practice groups. At September 30, 2008, the
restructuring reserve balance was $1.2 million, most of which will be paid
by December 31, 2008.
9. Commitments
and Contingencies
Litigation
On
July 3, 2007, The Official Committee (the “Committee”) of Unsecured
Creditors of Saint Vincents Catholic Medical Centers of New York d/b/a Saint
Vincent Catholic Medical Centers (“St. Vincents”), et al. filed suit against
Huron Consulting Group Inc., certain of its subsidiaries, including Speltz &
Weis LLC, and two of the Company’s former managing directors, David E. Speltz
(“Speltz”) and Timothy C. Weis (“Weis”), in the Supreme Court of the State of
New York, County of New York. On November 26, 2007, Gray & Associates,
LLC (“Gray”), in its capacity as trustee on behalf of the SVCMC Litigation
Trust, was substituted as plaintiff in the place of the Committee and on
February 19, 2008, Gray filed an amended complaint in the action. Beginning
in 2004, St. Vincents retained Speltz & Weis LLC to provide management
services to St. Vincents, and its two principals, Speltz and Weis, were made the
interim chief executive officer and chief financial officer, respectively, of
St. Vincents. In May of 2005, Speltz & Weis LLC was acquired by the
Company. On July 5, 2005, St. Vincents filed for bankruptcy in
the United States Bankruptcy Court for the Southern District of New York
(“Bankruptcy Court”). On December 14, 2005, the Bankruptcy Court approved
the retention of Speltz & Weis LLC and the Company in various capacities,
including interim management, revenue cycle management and strategic sourcing
services. The amended complaint filed by Gray alleges, among other things,
breach of fiduciary duties, breach of the New York Not-For-Profit Corporation
Law, malpractice, breach of contract, tortious interference with contract,
aiding and abetting breaches of fiduciary duties, certain fraudulent transfers
and fraudulent conveyances, breach of the implied duty of good faith and fair
dealing, fraud, aiding and abetting fraud, negligent misrepresentation, and
civil conspiracy, and seeks at least $200 million in damages, disgorgement
of fees, return of funds or other property transferred to Speltz & Weis LLC,
attorneys’ fees, and unspecified punitive and other damages. The Company
believes that the claims are without merit and intends to vigorously defend
itself in this matter. The suit is in the pre-trial stage and no trial date has
been set.
From time
to time, the Company is involved in legal proceedings and litigation arising in
the ordinary course of business, including employment matters. As of
the date of this Quarterly Report on Form 10-Q, the Company is not a party to or
threatened with any other litigation or legal proceeding that, in the opinion of
management, could have a material adverse effect on the financial position or
results of operations of the Company.
Guarantees
Guarantees
in the form of letters of credit totaling $5.9 million and
$6.1 million were outstanding at September 30, 2008 and
December 31, 2007, respectively, to support certain office lease
obligations.
In
connection with certain business acquisitions, the Company is required to pay
additional purchase consideration to the sellers if specific performance targets
and conditions are met over a number of years as specified in the
related
HURON CONSULTING GROUP
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - (Continued)
(Tabular amounts in thousands, except
per share amounts)
purchase
agreements. These amounts are calculated and payable at the end of each year
based on full year financial results. There is no limitation to the maximum
amount of additional purchase consideration and the aggregate amount that
potentially may be paid could be significant. Based on current and projected
financial performance, the Company anticipates aggregate additional
purchase consideration that will be earned by certain sellers to be
approximately $40.0 million for the year ending December 31, 2008.
Additional purchase consideration earned by certain sellers totaled
$32.4 million for the year ended December 31, 2007.
To the
extent permitted by law, the Company’s by-laws and articles of incorporation
require that the Company indemnify its officers and directors against judgments,
fines, and amounts paid in settlement, including attorney’s fees, incurred in
connection with civil or criminal action or proceedings, as it relates to their
services to the Company if such person acted in good faith. Although there is no
limit on the amount of indemnification, the Company may have recourse against
its insurance carrier for certain payments made.
10. Segment
Information
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’s chief operating decision maker manages the business under four
operating segments: Health and Education Consulting, Financial Consulting, Legal
Consulting, and Corporate Consulting.
·
|
Health and Education
Consulting. This segment provides consulting services to
hospitals, health systems, physicians, managed care organizations,
academic medical centers, colleges, universities, and pharmaceutical and
medical device manufacturers. This segment’s professionals develop and
implement solutions to help clients address financial management,
strategy, operational and organizational effectiveness, research
administration, and regulatory compliance. This segment also provides
consulting services related to hospital or healthcare organization
performance improvement, turnarounds, merger or affiliation strategies,
labor productivity, non-labor cost management, information technology,
revenue cycle improvement, patient flow and surgical flow improvement,
physician practice management, interim management, clinical quality and
medical management, and governance and board
development.
|
·
|
Financial
Consulting. This segment assists corporations
with complex accounting and financial reporting matters, financial
analysis in business disputes and litigation, as well as valuation
analysis related to business acquisitions. This segment also consults
with management in the areas of corporate governance, Sarbanes-Oxley
compliance, internal audit, and corporate tax. Additionally, the Financial
Consulting segment provides experienced, project leadership and
consultants with a variety of financial and accounting credentials and
prior corporate experience as needed to assist clients with finance and
accounting projects. This segment is comprised of certified public
accountants, economists, certified fraud examiners, chartered financial
analysts and valuation experts who serve attorneys and
corporations as expert witnesses and consultants in connection with
business disputes, as well as in regulatory or internal
investigations.
|
·
|
Legal
Consulting. This segment provides guidance and business
services to corporate law departments, law firms and government agencies
by helping to reduce legal spending, enhance client service delivery and
increase operational effectiveness. These services include digital
evidence and discovery services, document review, law firm management
services, records management, and strategic and operational
improvements.
|
·
|
Corporate
Consulting. This segment leads clients through various
stages of transformation that result in measurable and sustainable
performance improvement. This segment works with clients to solve
complex business problems and implements strategies and
solutions to effectively address and manage stagnant or declining
stock price, acquisitions and divestitures, process inefficiency, third
party contracting difficulties, lack of or misaligned performance
measurements, margin and cost pressures, performance issues, bank
defaults, covenant violations and liquidity
issues.
|
HURON CONSULTING GROUP
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - (Continued)
(Tabular amounts in thousands, except
per share amounts)
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, certain 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 table
below sets forth information about the Company’s operating segments for the
three and nine months ended September 30, 2008 and 2007, along with the
items necessary to reconcile the segment information to the totals reported in
the accompanying consolidated financial statements.
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Health
and Education Consulting:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
77,653 |
|
|
$ |
49,767 |
|
|
$ |
185,437 |
|
|
$ |
131,429 |
|
Operating
income
|
|
$ |
22,368 |
|
|
$ |
18,783 |
|
|
$ |
67,179 |
|
|
$ |
45,004 |
|
Segment
operating income as a percent of segment
revenues
|
|
|
28.8 |
% |
|
|
37.7 |
% |
|
|
36.2 |
% |
|
|
34.2 |
% |
Financial
Consulting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
33,929 |
|
|
$ |
39,983 |
|
|
$ |
107,529 |
|
|
$ |
109,264 |
|
Operating
income
|
|
$ |
10,005 |
|
|
$ |
11,656 |
|
|
$ |
27,574 |
|
|
$ |
43,112 |
|
Segment
operating income as a percent of segment
revenues
|
|
|
29.5 |
% |
|
|
29.2 |
% |
|
|
25.6 |
% |
|
|
39.5 |
% |
Legal
Consulting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
38,137 |
|
|
$ |
23,346 |
|
|
$ |
93,858 |
|
|
$ |
69,412 |
|
Operating
income
|
|
$ |
15,724 |
|
|
$ |
7,243 |
|
|
$ |
32,387 |
|
|
$ |
22,417 |
|
Segment
operating income as a percent of segment
revenues
|
|
|
41.2 |
% |
|
|
31.0 |
% |
|
|
34.5 |
% |
|
|
32.3 |
% |
Corporate
Consulting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
18,940 |
|
|
$ |
20,955 |
|
|
$ |
64,637 |
|
|
$ |
58,221 |
|
Operating
income
|
|
$ |
3,319 |
|
|
$ |
7,036 |
|
|
$ |
19,313 |
|
|
$ |
17,152 |
|
Segment
operating income as a percent of segment
revenues
|
|
|
17.5 |
% |
|
|
33.6 |
% |
|
|
29.9 |
% |
|
|
29.5 |
% |
Total
Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
168,659 |
|
|
$ |
134,051 |
|
|
$ |
451,461 |
|
|
$ |
368,326 |
|
Reimbursable
expenses
|
|
|
16,696 |
|
|
|
11,286 |
|
|
|
40,874 |
|
|
|
32,231 |
|
Total
revenues and reimbursable expenses
|
|
$ |
185,355 |
|
|
$ |
145,337 |
|
|
$ |
492,335 |
|
|
$ |
400,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of operations reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating
income
|
|
$ |
51,416 |
|
|
$ |
44,718 |
|
|
$ |
146,453 |
|
|
$ |
127,685 |
|
Charges
not allocated at the segment level:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
selling, general and administrative expenses
|
|
|
22,872 |
|
|
|
18,609 |
|
|
|
66,542 |
|
|
|
54,675 |
|
Depreciation
and
amortization
|
|
|
6,260 |
|
|
|
4,283 |
|
|
|
16,768 |
|
|
|
12,502 |
|
Other
expense
|
|
|
5,456 |
|
|
|
2,610 |
|
|
|
9,912 |
|
|
|
5,735 |
|
Income
before provision for income taxes
|
|
$ |
16,828 |
|
|
$ |
19,216 |
|
|
$ |
53,231 |
|
|
$ |
54,773 |
|
At
September 30, 2008, one client’s total receivables and unbilled services
balance represented approximately 10.0% of the Company’s total receivables and
unbilled services balance. As of October 30, 2008, 30.9% of this client’s
total receivables and unbilled services balance was subsequently collected. At
December 31, 2007, no single client’s total receivables and unbilled services
balance represented greater than 10% of the Company’s total receivables and
unbilled services balance.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 subsidiaries.
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 “continues” or the negative of such terms or other comparable
terminology. 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 with respect to, among other factors, utilization and billing
rates, number of revenue-generating professionals; that we are able to expand
our service offerings; that we successfully integrate the businesses we acquire;
and that existing market conditions, including those in the credit markets, 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 2007 Annual
Report on Form 10-K and in Item 1A of this Quarterly Report on Form 10-Q for a
complete description of the material risks we face.
OVERVIEW
Our
Business
Huron is
an independent provider of financial and operational consulting services, with
clients that include Fortune 500 companies, medium-sized businesses, leading
academic institutions, healthcare organizations, and the law firms that
represent these various organizations. We help clients effectively address
complex challenges that arise in litigation, disputes, investigations,
regulatory compliance, procurement, financial distress, and other sources of
significant conflict or change. We also help our clients deliver superior
customer and capital market performance through integrated strategic,
operational, and organizational change.
We
provide our services and manage our business under four operating segments:
Health and Education Consulting, Financial Consulting, Legal Consulting, and
Corporate Consulting.
·
|
Health and Education
Consulting. Our Health and Education Consulting segment
provides consulting services to hospitals, health systems, physicians,
managed care organizations, academic medical centers, colleges,
universities, and pharmaceutical and medical device manufacturers. This
segment’s professionals develop and implement solutions to help clients
address financial management, strategy, operational and organizational
effectiveness, research administration, and regulatory compliance. This
segment also provides consulting services related to hospital or
healthcare organization performance improvement, turnarounds, merger of
affiliation strategies, labor productivity, non-labor cost management,
information technology, revenue cycle improvement, patient flow and
surgical flow improvement, physician practice management, interim
management, clinical quality and medical management, and governance and
board development.
|
·
|
Financial
Consulting. Our Financial Consulting segment assists
corporations with complex accounting and financial reporting matters,
financial analysis in business disputes and litigation, as well as
valuation analysis related to business acquisitions. This segment
also consults with management in the areas of corporate governance,
Sarbanes-Oxley compliance, internal audit, and corporate tax.
Additionally, the Financial Consulting segment provides experienced,
project leadership and consultants with a variety of financial and
accounting credentials and prior corporate experience as needed to assist
clients with finance and accounting projects. This segment is comprised of
certified public accountants, economists, certified fraud examiners,
chartered financial analysts and valuation experts that serve
attorneys and corporations as expert witnesses and consultants
in connection with business disputes, as well as in regulatory or internal
investigations.
|
·
|
Legal
Consulting. Our Legal Consulting segment provides
guidance and business services to address the challenges that confront
today’s legal organizations. These services add value to corporate law
departments, law firms and government agencies by helping to reduce legal
spending, enhance client service delivery, and increase operational
effectiveness. These services include digital evidence and discovery
services, document review, law firm management services, records
management, and strategic and operational
improvements.
|
·
|
Corporate
Consulting. Our Corporate Consulting segment leads
clients through various stages of transformation that result in measurable
and sustainable performance improvement. This segment works with
clients to solve complex business problems and implements
strategies and solutions to effectively address and manage stagnant
or declining stock price, acquisitions and divestitures, process
inefficiency, third party contracting difficulties, lack of or misaligned
performance measurements, margin and cost pressures, performance issues,
bank defaults, covenant violations, and liquidity
issues.
|
Recent
Acquisition
During
the third quarter of 2008, we acquired Stockamp & Associates, Inc.
(“Stockamp”), a management consulting firm specializing in helping
high-performing hospitals and health systems optimize their financial and
operational performance. With the acquisition of Stockamp, we will expand our
presence in the hospital consulting market and will be better positioned to
serve multiple segments of the healthcare industry, including major health
systems, academic medical centers and community hospitals. This acquisition was
consummated on July 8, 2008 and the results of operations of Stockamp have
been included within our Health and Education Consulting operating segment since
that date.
The
aggregate purchase price of this acquisition was approximately
$226.1 million, consisting of $168.5 million in cash paid at closing,
$1.4 million of transaction costs, a $6.2 million preliminary working
capital adjustment, and $50.0 million paid through the issuance of
1,100,740 shares of our common stock. Of the 1,100,740 shares of common stock
issued, 330,222 shares with an aggregate value of $15.0 million were
deposited into escrow for a period of one year, beginning on July 8, 2008, to
secure certain indemnification obligations of Stockamp and its shareholders. The
purchase price is subject to change based on the finalization of the net working
capital adjustment. For the period beginning on the closing date and ending on
December 31, 2011, additional purchase consideration may be payable if
specific performance targets are met. Such amounts will be recorded as
additional purchase price and an adjustment to goodwill. Additionally, we have
provided Stockamp with a protection against a decline in the value of the shares
issued. See “Quantitative and Qualitative Disclosure About Market Risk” for
further details relating to the protection.
Concurrent
with the Stockamp acquisition, we entered into an amendment to the Wellspring
Stock Purchase Agreement. Effective January 1, 2009, in connection with the
Stockamp acquisition, we will combine Wellspring’s revenue cycle business with
Stockamp’s revenue cycle business. As such, Wellspring will no longer be
eligible for earn-out payments pertaining to that portion of the Wellspring
business. In consideration for this, we paid Wellspring $20.0 million
through the issuance of 440,296 shares of our common stock. Additionally, we
have provided Wellspring with a protection against a decline in the value of the
shares issued. See “Quantitative and Qualitative Disclosure About Market Risk”
for further details relating to the protection. The earn-out provision, as
amended, pertaining to the non-revenue cycle portion of Wellspring’s business
will remain in effect through December 31, 2011.
How
We Generate Revenues
A large
portion of our revenues is generated by our full-time billable consultants who
provide consulting services to our clients and are billable to our clients based
on the number of hours worked. A smaller portion of our revenues is generated by
our other professionals, consisting of finance and accounting consultants and
specialized operational consultants who work variable schedules as needed by our
clients. Other professionals also include full-time employees who provide
software support and maintenance services to our clients. Our other
professionals also include our document review and electronic data discovery
groups who utilize contract reviewers and information technology professionals.
Our document review and electronic data discovery groups generate revenues
primarily based on number of hours worked and units produced, such as pages
reviewed or data processed. We translate the hours that these other
professionals work on client engagements into a full-time equivalent measure
that we use to manage our business. We refer to our full-time billable
consultants and other professionals collectively as revenue-generating
professionals.
Revenues
generated by our full-time billable consultants are primarily driven by the
number of consultants we employ and their utilization rates, as well as the
billing rates we charge our clients. Revenues generated by our
full-
time
equivalents are largely dependent on the number of consultants we employ, their
hours worked and billing rates charged, as well as the number of pages reviewed
and amount of data processed in the case of our document review and electronic
data discovery groups.
Most of
our revenues are generated under billing arrangements that are based on either
the number of hours worked or units produced by our revenue-generating
professionals at agreed upon rates. We refer to these types of arrangements as
time-and-expense engagements. Time-and-expense engagements represented 61.7% and
69.3% of our revenues in the three months ended September 30, 2008 and
2007, respectively, and 67.5% and 72.4% in the nine months ended September 30,
2008 and 2007, respectively.
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 September 30, 2008 and 2007, fixed-fee engagements represented
33.5% and 27.0% of our revenues, respectively; while they represented 29.9% and
25.5% of our revenues in the nine months ended September 30, 2008 and 2007,
respectively.
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. Performance-based fee revenues
represented 3.8% and 3.7% of our revenues for the three months ended
September 30, 2008 and 2007, respectively, and 2.2% and 2.1% for the nine
months ended September 30, 2008 and 2007, respectively. We expect
performance-based fee revenues to increase in the future due to our acquisition
of Stockamp, which has a larger percentage of performance-based fee engagements.
Performance-based fee engagements may cause significant variations in quarterly
revenues and operating results due to the timing of achieving the
performance-based criteria.
Stockamp
has developed proprietary software that it utilizes in its performance of
services to its clients. It licenses this software to clients and provides
related training and support. After implementation of the software, clients pay
an annual fee for support and maintenance. Annual support and maintenance fee
revenue is recognized ratably over the support period which is generally one
year. For the three and nine months ended September 30, 2008, support and
maintenance revenues represented 1.0% and 0.4% of our revenues.
We also
bill our clients for reimbursable expenses such as travel and out-of-pocket
costs incurred in connection with engagements. We manage our business on the
basis of revenues before reimbursable expenses. We believe this is the most
accurate reflection of our services because it eliminates the effect of these
reimbursable expenses that we bill to our clients at cost.
Business
Strategy, Opportunities and Challenges
Our
primary strategy is to meet the needs of our 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 have entered into select acquisitions of complementary
businesses and continue to hire highly qualified professionals. As of
September 30, 2008, we had 1,480 full-time billable consultants.
Additionally, we have a roster of consultants with a variety of financial and
accounting credentials and prior corporate experience who work variable
schedules as needed by our clients, as well as contract reviewers who are
readily available to meet our clients’ needs.
Time-and-expense
engagements do not provide us with a high degree of predictability as to
performance in future periods. Unexpected changes in the demand for our services
can result in significant variations in utilization and revenues and present a
challenge to optimal hiring and staffing. Moreover, our clients typically retain
us on an engagement-by-engagement basis, rather than under long-term recurring
contracts. The volume of work performed for any particular client can vary
widely from period to period.
To expand
our business, we will remain focused on growing our existing relationships and
developing new
relationships,
continue to promote and provide an integrated approach to service delivery,
broaden the scope of our existing services, and continue to acquire
complementary businesses. Additionally, we intend to enhance our visibility in
the marketplace by continuing to build our brand.
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 five accounting policies that could be
considered critical. These critical accounting policies relate to
revenue recognition, allowances for doubtful accounts and unbilled services,
carrying values of goodwill and other intangible assets, valuation of net
deferred tax assets, and share-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 or
determinable and collectibility is reasonably assured. Most of our services are
rendered under arrangements that require the client to pay based on either the
number of hours incurred or units produced by our revenue-generating
professionals at agreed-upon rates and recognized as services are provided.
Revenues related to fixed-fee engagements are recognized based on estimates of
services provided 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. We recognize reimbursable expenses
related to time and expense and fixed-fee engagements as revenue in the period
in which the expense is incurred. We recognize reimbursable expenses subject to
performance-based criteria as revenue when all performance criteria are met. We
recognize direct costs incurred on all types of engagements, including
performance-based engagements, in the period in which incurred.
We record
differences between the timing of billings and the recognition of revenue as
either unbilled services or deferred revenue. We record revenues recognized for
services performed but not yet billed to clients as unbilled services. We record
amounts billed to clients but not yet recognized as revenues as deferred
revenue. We also classify client prepayments and retainers that are unearned as
deferred revenue and recognize 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.
We record
the provision for doubtful accounts and unbilled services 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 on accounts receivables, we record
the provision in operating expenses.
Carrying
Values of Goodwill and Other Intangible Assets
Goodwill
represents the excess of the cost of an acquired entity over the net of the
amounts assigned to assets acquired and liabilities assumed. Our goodwill
balance as of September 30, 2008 was $451.3 million. Pursuant to the
provisions of Statement of Financial Accounting Standards, or SFAS,
No. 142, “Goodwill and Other Intangible Assets,” we test goodwill for
impairment annually or whenever indications of impairment arise, such as loss of
key personnel, unanticipated competition, or other unforeseen developments.
Impairment exists when the carrying amount of goodwill exceeds its implied fair
value, resulting in an impairment charge for this excess. An impairment test
involves considerable management judgment and estimates regarding future
operating results and cash flows. Pursuant to our policy, we performed the
annual goodwill assessment as of April 30, 2008 and determined that no
impairment of goodwill existed as of that date. Further, no indications of
impairment have arisen since that date.
Intangible
assets represent purchased assets that lack physical substance but can be
distinguished from goodwill. Our intangible assets, net of accumulated
amortization, totaled $38.2 million at September 30, 2008, and consist
of customer contracts, customer relationships, non-competition agreements,
tradenames, as well as technology and software. We use valuation techniques in
estimating the initial fair value of acquired intangible assets. These
valuations are primarily based on the present value of the estimated net cash
flows expected to be derived from the client relationships, discounted for
assumptions about future customer attrition. We evaluate our intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. Therefore, higher or
earlier-than-expected customer attrition may result in higher future
amortization charges or an impairment charge for customer-related intangible
assets.
Valuation
of Net Deferred Tax Assets
We
account for income taxes in accordance with SFAS No. 109, “Accounting for
Income Taxes.” Deferred tax assets and liabilities are recorded for future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. These deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. To
the extent that deferred tax assets will not likely be recovered from future
taxable income, a valuation allowance is established against such deferred tax
assets.
In
preparing financial statements, we exercise significant judgment in determining
our provision for income taxes, deferred tax assets and liabilities, and the
valuation allowance. In determining our provision for income taxes on an interim
basis, we estimate our annual effective tax rate based on information available
at each interim period. In determining whether a valuation allowance is
warranted, we consider the historical and estimated future taxable income and
other relevant factors of the operation recording the respective deferred tax
asset. If actual results differ from our estimates, or if these estimates are
adjusted in future periods, an adjustment to the valuation allowance may be
required. To the extent that we increase the valuation allowance, our provision
for income taxes will increase and our net income will decrease in the period
that the adjustment is made. As of September 30, 2008, we have recorded net
deferred tax assets totaling $18.2 million and have established a valuation
allowance of $1.9 million due to uncertainties relating to our ability to
utilize deferred tax assets recorded for foreign operating losses.
Share-based
Compensation
Effective
January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based
Payment,” which requires that companies recognize compensation expense for
grants of stock, stock options and other equity instruments based on fair value.
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 table
below 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.
Segment
and Consolidated Operating Results
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
(in
thousands):
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
and reimbursable expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
and Education
Consulting
|
|
$ |
77,653 |
|
|
$ |
49,767 |
|
|
$ |
185,437 |
|
|
$ |
131,429 |
|
Financial
Consulting
|
|
|
33,929 |
|
|
|
39,983 |
|
|
|
107,529 |
|
|
|
109,264 |
|
Legal
Consulting
|
|
|
38,137 |
|
|
|
23,346 |
|
|
|
93,858 |
|
|
|
69,412 |
|
Corporate
Consulting
|
|
|
18,940 |
|
|
|
20,955 |
|
|
|
64,637 |
|
|
|
58,221 |
|
Total
revenues
|
|
|
168,659 |
|
|
|
134,051 |
|
|
|
451,461 |
|
|
|
368,326 |
|
Total
reimbursable
expenses
|
|
|
16,696 |
|
|
|
11,286 |
|
|
|
40,874 |
|
|
|
32,231 |
|
Total
revenues and reimbursable expenses
|
|
$ |
185,355 |
|
|
$ |
145,337 |
|
|
$ |
492,335 |
|
|
$ |
400,557 |
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
and Education
Consulting
|
|
$ |
22,368 |
|
|
$ |
18,783 |
|
|
$ |
67,179 |
|
|
$ |
45,004 |
|
Financial
Consulting
|
|
|
10,005 |
|
|
|
11,656 |
|
|
|
27,574 |
|
|
|
43,112 |
|
Legal
Consulting
|
|
|
15,724 |
|
|
|
7,243 |
|
|
|
32,387 |
|
|
|
22,417 |
|
Corporate
Consulting
|
|
|
3,319 |
|
|
|
7,036 |
|
|
|
19,313 |
|
|
|
17,152 |
|
Total segment operating
income
|
|
|
51,416 |
|
|
|
44,718 |
|
|
|
146,453 |
|
|
|
127,685 |
|
Operating
expenses not allocated to segments
|
|
|
29,132 |
|
|
|
22,892 |
|
|
|
83,310 |
|
|
|
67,177 |
|
Total
Operating
income
|
|
$ |
22,284 |
|
|
$ |
21,826 |
|
|
$ |
63,143 |
|
|
$ |
60,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of full-time billable consultants (at
period end)
(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
and Education
Consulting
|
|
|
830 |
|
|
|
417 |
|
|
|
|
|
|
|
|
|
Financial
Consulting
|
|
|
316 |
|
|
|
358 |
|
|
|
|
|
|
|
|
|
Legal
Consulting
|
|
|
149 |
|
|
|
165 |
|
|
|
|
|
|
|
|
|
Corporate
Consulting
|
|
|
185 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,480 |
|
|
|
1,158 |
|
|
|
|
|
|
|
|
|
Average
number of full-time billable consultants (for
the period) (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
and Education
Consulting
|
|
|
800 |
|
|
|
390 |
|
|
|
575 |
|
|
|
367 |
|
Financial
Consulting
|
|
|
322 |
|
|
|
321 |
|
|
|
347 |
|
|
|
298 |
|
Legal
Consulting
|
|
|
155 |
|
|
|
143 |
|
|
|
166 |
|
|
|
129 |
|
Corporate
Consulting
|
|
|
211 |
|
|
|
194 |
|
|
|
220 |
|
|
|
182 |
|
Total
|
|
|
1,488 |
|
|
|
1,048 |
|
|
|
1,308 |
|
|
|
976 |
|
Full-time
billable consultant utilization rate (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
and Education
Consulting
|
|
|
81.2 |
% |
|
|
80.2 |
% |
|
|
80.2 |
% |
|
|
79.7 |
% |
Financial
Consulting
|
|
|
57.0 |
% |
|
|
68.7 |
% |
|
|
53.4 |
% |
|
|
75.8 |
% |
Legal
Consulting
|
|
|
66.3 |
% |
|
|
74.6 |
% |
|
|
62.0 |
% |
|
|
76.3 |
% |
Corporate
Consulting
|
|
|
59.8 |
% |
|
|
69.6 |
% |
|
|
62.5 |
% |
|
|
71.6 |
% |
Total
|
|
|
71.3 |
% |
|
|
73.9 |
% |
|
|
67.9 |
% |
|
|
76.5 |
% |
Full-time
billable consultant average billing rate
per hour (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
and Education
Consulting
|
|
$ |
231 |
|
|
$ |
292 |
|
|
$ |
252 |
|
|
$ |
266 |
|
Financial
Consulting
|
|
$ |
281 |
|
|
$ |
276 |
|
|
$ |
278 |
|
|
$ |
295 |
|
Legal
Consulting
|
|
$ |
243 |
|
|
$ |
243 |
|
|
$ |
238 |
|
|
$ |
243 |
|
Corporate
Consulting
|
|
$ |
309 |
|
|
$ |
315 |
|
|
$ |
314 |
|
|
$ |
307 |
|
Total
|
|
$ |
250 |
|
|
$ |
286 |
|
|
$ |
265 |
|
|
$ |
279 |
|
Revenue
per full-time billable consultant (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
and Education
Consulting
|
|
$ |
87 |
|
|
$ |
110 |
|
|
$ |
291 |
|
|
$ |
301 |
|
Financial
Consulting
|
|
$ |
74 |
|
|
$ |
86 |
|
|
$ |
205 |
|
|
$ |
318 |
|
Legal
Consulting
|
|
$ |
73 |
|
|
$ |
79 |
|
|
$ |
204 |
|
|
$ |
242 |
|
Corporate
Consulting
|
|
$ |
86 |
|
|
$ |
106 |
|
|
$ |
283 |
|
|
$ |
312 |
|
Total
|
|
$ |
82 |
|
|
$ |
98 |
|
|
$ |
256 |
|
|
$ |
301 |
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
Other
Operating Data:
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Average
number of full-time equivalents (for
the period) (4):
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
and Education
Consulting
|
|
|
103 |
|
|
|
65 |
|
|
|
63 |
|
|
|
62 |
|
Financial
Consulting
|
|
|
160 |
|
|
|
210 |
|
|
|
194 |
|
|
|
75 |
|
Legal
Consulting
|
|
|
676 |
|
|
|
342 |
|
|
|
587 |
|
|
|
358 |
|
Corporate
Consulting
|
|
|
8 |
|
|
|
5 |
|
|
|
7 |
|
|
|
5 |
|
Total
|
|
|
947 |
|
|
|
622 |
|
|
|
851 |
|
|
|
500 |
|
Revenue
per full-time equivalents (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
and Education
Consulting
|
|
$ |
81 |
|
|
$ |
104 |
|
|
$ |
285 |
|
|
$ |
335 |
|
Financial
Consulting
|
|
$ |
64 |
|
|
$ |
59 |
|
|
$ |
188 |
|
|
$ |
193 |
|
Legal
Consulting
|
|
$ |
40 |
|
|
$ |
35 |
|
|
$ |
102 |
|
|
$ |
107 |
|
Corporate
Consulting
|
|
$ |
103 |
|
|
$ |
76 |
|
|
$ |
324 |
|
|
$ |
299 |
|
Total
|
|
$ |
49 |
|
|
$ |
51 |
|
|
$ |
137 |
|
|
$ |
150 |
|
(1)
|
Consists
of our full-time professionals who provide consulting services and
generate revenues based on the number of hours
worked.
|
(2)
|
Utilization
rate for our full-time billable consultants is calculated by dividing the
number of hours all our full-time billable consultants worked on client
assignments during a period by the total available working hours for all
of these consultants during the same period, assuming a forty-hour work
week, less paid holidays and vacation
days.
|
(3)
|
Average
billing rate per hour for our full-time billable consultants is calculated
by dividing revenues for a period by the number of hours worked on client
assignments during the same period.
|
(4)
|
Consists
of consultants who work variable schedules as needed by our clients, as
well as contract reviewers and other professionals who generate revenues
primarily based on number of hours worked and units produced, such as
pages reviewed and data processed. Also includes full-time employees who
provide software support and maintenance services to our
clients.
|
Three
Months Ended September 30, 2008 Compared to Three Months Ended
September 30, 2007
Revenues
Revenues
increased $34.6 million, or 25.8%, to $168.7 million for the third quarter of
2008 from $134.1 million for the third quarter of 2007. We acquired Stockamp on
July 8, 2008 and therefore, revenues for the third quarter of 2008 included
revenues generated by Stockamp while revenues for the third quarter of 2007 did
not include any revenues from Stockamp. We acquired Callaway on July 29,
2007 and therefore, revenues for the third quarter of 2008 included three months
of revenues generated by Callaway while revenues for the third quarter of 2007
included two months of revenues generated by Callaway.
Of the
overall $34.6 million increase in revenues, $19.9 million was attributable
to our full-time billable consultants and $14.7 million was attributable to
our full-time equivalents. Full-time equivalents consist of our variable,
on-demand consultants, contract reviewers and our document review and processing
groups, as well as full-time employees who provide software support and
maintenance services to our clients. The $19.9 million increase in
full-time billable consultant revenues was attributable to an increase in the
number of consultants, partially offset by a decline in both our average billing
rate and utilization rate of our consultants. The $14.7 million increase in
full-time equivalent revenues resulted from greater demand and usage of contract
reviewers in our document review group.
Total
Direct Costs
Our
direct costs increased $20.1 million, or 25.0%, to $100.3 million in the
third quarter of 2008 from $80.2 million in the third quarter of 2007.
Approximately $13.6 million of the increase was attributable to the
increase in full-time billable consultants and the promotion of our employees
during the year, including ten to the managing director level effective
January 1, 2008, and their related compensation and benefit costs.
Additionally, $4.9 million of the increase in direct costs was attributable
to an increased usage of independent contractors. Share-based compensation
expense associated with our revenue-generating professionals increased
$1.0 million, or 32.3%, to $4.1 million in the third quarter of 2008
from $3.1 million in the third quarter of 2007.
Total
direct costs for the three months ended September 30, 2008 included
$3.0 million of intangible assets amortization expense, representing
customer-related assets and software acquired in connection with the Stockamp
acquisition. Total direct costs for the three months ended
September 30, 2007 included $2.2 million of intangible assets
amortization expense, primarily attributable to customer contracts acquired in
connection with the acquisitions of Wellspring and Callaway and that were fully
amortized during 2007.
Operating
Expenses
Selling,
general and administrative expenses increased $8.7 million, or 34.1%, to $34.4
million in the third quarter of 2008 from $25.7 million in the third quarter of
2007. Of the $8.7 million increase, $2.7 million was due to higher
marketing spending, $1.3 million was attributable to higher salaries and
related benefit costs, and $1.2 million was attributable to increased
facilities costs. Additionally, during the third quarter of 2008, we reduced our
workforce to balance our employee base with current revenue expectations, market
demand and areas of focus. This reduction included the elimination of the
operational consulting group within the Corporate Consulting segment and a
reduction in the number of consultants in various other practice groups.
Restructuring charges associated with these actions were $2.3 million for
the third quarter of 2008. Share-based compensation expense associated with our
non-revenue-generating professionals increased $0.7 million, or 33.3%, to
$2.8 million in the third quarter of 2008 from $2.1 million in the
third quarter of 2007.
Depreciation
expense increased $1.4 million, or 51.9%, to $4.1 million in the three
months ended September 30, 2008 from $2.7 million in the three months ended
September 30, 2007 as computers, network equipment, furniture and fixtures,
and leasehold improvements were added to support our increase in employees.
Non-direct intangible assets amortization expense increased to $2.2 million
for the three months ended September 30, 2008 from $1.6 million for
the comparable period last year due to our acquisition of Stockamp. Non-direct
intangible assets amortization relates to customer relationships,
non-competition agreements and tradenames acquired in connection with our
acquisitions.
Operating
Income
Operating
income increased $0.5 million, or 2.1%, to $22.3 million in the third
quarter of 2008 from $21.8 million in the third quarter of 2007. Operating
margin, defined as operating income expressed as a percentage of revenues,
decreased to 13.2% in the three months ended September 30, 2008 from 16.3%
in the three months ended September 30, 2007. The decline in operating
margin was attributable to higher selling, general and administrative expenses
as a percentage of revenues, coupled with the restructuring charges described
above.
Net
Income
Net
income decreased to $8.8 million for the three months ended
September 30, 2008 from $10.5 million for the comparable period last
year. Interest expense, net of interest income, increased $2.3 million to
$4.9 million in the third quarter of 2008 from $2.6 million in the
comparable period last year due to an increase in borrowings. Diluted earnings
per share for the third quarter of 2008 was $0.44 compared to $0.58 for the
third quarter of 2007. The decrease in earnings per share was attributable to a
decrease in net income, coupled with the dilutive impact of the shares issued in
connection with the acquisition of Stockamp and the amendment to the Wellspring
Stock Purchase Agreement.
Segment
Results
Health
and Education Consulting
Revenues
Health
and Education Consulting segment revenues increased $27.9 million, or 56.0%, to
$77.7 million for the third quarter of 2008 from $49.8 million for the
third quarter of 2007. Revenues for the third quarter of 2008 included revenues
from our acquisition of Stockamp while revenues for the third quarter of 2007
did not include any revenues from Stockamp. Revenues from time-and-expense
engagements, fixed-fee engagements, performance-based engagements and software
support and maintenance arrangements represented 34.0%, 55.8%, 8.0% and 2.2% of
this segment’s revenues during the three months ended September 30, 2008,
respectively, compared to 50.2%, 42.7%, 7.1% and 0%, respectively,
for the comparable period in 2007.
Of the
overall $27.9 million increase in revenues, $26.3 million was
attributable to our full-time billable consultants
and
$1.6 million was attributable to our full-time equivalents. The
$26.3 million increase in full-time billable consultant revenues reflected
an increase in the number of consultants and an increase in the utilization rate
of our consultants, partially offset by a decrease in the average billing rate
per hour for this segment. As described below under “Operating Income,” the
acquisition of Stockamp had an unfavorable impact on the average billing rate
per hour for the three months ended September 30, 2008 due to the timing of
revenue recognition. Excluding the impact of Stockamp, the average billing rate
per hour for this segment would have been $301 for the third quarter of 2008
compared to $292 for the comparable period in 2007.
Operating
Income
Health
and Education Consulting segment operating income increased $3.6 million,
or 19.1%, to $22.4 million in the three months ended September 30,
2008 from $18.8 million in the three months ended September 30, 2007.
Segment operating margin, defined as segment operating income expressed as a
percentage of segment revenues, decreased to 28.8% for the third quarter of 2008
from 37.7% in the same period last year. The acquisition of Stockamp had an
unfavorable impact on this segment’s operating margin for the three months ended
September 30, 2008 due to a portion of performance-based revenue that
cannot be recognized post-acquisition under generally accepted accounting
principles and a significant amount of performance-based revenue that was
deferred at September 30, 2008 that will be recognized in the future when
all the performance-based criteria in the engagement contracts are met, as well
as amortization of intangible assets acquired.
Financial
Consulting
Revenues
Financial
Consulting segment revenues decreased $6.1 million, or 15.1%, to $33.9 million
for the third quarter of 2008 from $40.0 million for the third quarter of 2007.
We acquired Callaway on July 29, 2007 and therefore, revenues for the third
quarter of 2008 included three months of revenues generated by Callaway while
revenues for the third quarter of 2007 included two months of revenues generated
by Callaway. For the third quarter of 2008 and 2007, most of this segment’s
revenues were from time-and-expense engagements.
Of the
overall $6.1 million decrease in revenues, $3.9 million was
attributable to our full-time billable consultants and $2.2 million was
attributable to our full-time equivalents. The $3.9 million decrease in
full-time billable consultant revenues was primarily due to a decline in this
segment’s utilization rate. The $2.2 million decrease in full-time
equivalent revenues resulted from a decline in demand for our variable,
on-demand consultants.
Operating
Income
Financial
Consulting segment operating income decreased $1.7 million, or 14.2%, to
$10.0 million in the three months ended September 30, 2008 from $11.7
million in the three months ended September 30, 2007. Segment operating
margin remained steady at 29.5% for the third quarter of 2008 compared to 29.2%
in the same period last year.
Legal
Consulting
Revenues
Legal
Consulting segment revenues increased $14.8 million, or 63.4%, to $38.1 million
for the third quarter of 2008 from $23.3 million for the third quarter of 2007.
Revenues from time-and-expense engagements, fixed-fee engagements and
performance-based engagements represented 94.0%, 5.7% and 0.3% of this segment’s
revenues during the three months ended September 30, 2008, respectively,
compared to 87.1%, 10.8% and 2.1%, respectively, for the comparable period in
2007.
The $14.8
million increase in revenues was primarily attributable to our full-time
equivalents, reflecting a greater demand for our document review
services.
Operating
Income
Legal
Consulting segment operating income increased $8.5 million, or 117.1%, to
$15.7 million in the three months ended September 30, 2008 from
$7.2 million in the three months ended September 30, 2007. Segment
operating margin increased to 41.2% for the third quarter of 2008 from 31.0% in
the same period last year. The increase in this segment’s operating margin was
attributable to lower total compensation cost as a percentage of
revenues.
Corporate
Consulting
Revenues
Corporate
Consulting segment revenues decreased $2.1 million, or 9.6%, to $18.9 million
for the third quarter of 2008 from $21.0 million for the third quarter of 2007.
Revenues from time-and-expense engagements, fixed-fee engagements and
performance-based engagements represented 50.0%, 49.9% and 0.1% of this
segment’s revenues during the three months ended September 30, 2008,
respectively, compared to 39.8%, 56.0% and 4.2%, respectively, for the
comparable period in 2007.
The
$2.1 million decrease in revenues was primarily attributable to a decline
in the utilization rate of our full-time billable consultants.
Operating
Income
Corporate
Consulting segment operating income decreased $3.7 million, or 52.8%, to
$3.3 million in the three months ended September 30, 2008 from
$7.0 million in the three months ended September 30, 2007. Segment
operating margin decreased to 17.5% for the third quarter of 2008 from 33.6% in
the same period last year. The decrease in this segment’s operating margin
reflects higher total compensation cost as a percentage of revenues and
restructuring charges relating to the elimination of our operational consulting
group.
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended
September 30, 2007
Revenues
Revenues
increased $83.2 million, or 22.6%, to $451.5 million for the first nine months
of 2008 from $368.3 million for the first nine months of 2007. We acquired
Stockamp on July 8, 2008 and therefore, revenues for the first nine months
of 2008 included three months of revenues generated by Stockamp while revenues
for the comparable period in 2007 did not include any revenues from Stockamp. We
acquired Callaway on July 29, 2007 and therefore, revenues for the first
nine months of 2008 included revenues generated by Callaway while revenues for
the comparable period in 2007 included only two months of revenues generated by
Callaway.
Of the
overall $83.2 million increase in revenues, $41.5 million was attributable
to our full-time billable consultants and $41.7 million was attributable to
our full-time equivalents. The $41.5 million increase in full-time billable
consultant revenues was attributable to an increase in the number of
consultants, partially offset by a decline in both the utilization rate and the
average billing rate of our consultants. The $41.7 million increase in
full-time equivalent revenues resulted from our acquisition of Callaway, which
heavily utilizes variable, on-demand consultants, as well as increased demand
for our document review services.
Total
Direct Costs
Our
direct costs increased $56.1 million, or 26.2%, to $269.7 million in the
first nine months of 2008 from $213.6 million in the first nine months of
2007. Approximately $44.9 million of the increase was attributable to the
increase in full-time billable consultants and the promotion of our employees
during the year, including ten to the managing director level effective
January 1, 2008, and their related compensation and benefit costs.
Additionally, $6.4 million of the increase in direct costs was attributable
to an increased usage of independent contractors. Share-based compensation
expense associated with our revenue-generating professionals increased
$3.7 million, or 43.0%, to $12.3 million in the first nine months of
2008 from $8.6 million in the comparable period last year.
Total
direct costs for the nine months ended September 30, 2008 included
$3.1 million of intangible assets amortization expense, representing
customer-related assets and software acquired in connection with the Stockamp
acquisition. Total direct costs for the three months ended September 30,
2007 included $6.8 million of intangible assets amortization expense,
primarily attributable to customer contracts acquired in connection with the
acquisitions of Wellspring, Glass and Callaway, all of which were fully
amortized during 2007.
Operating
Expenses
Selling,
general and administrative expenses increased $21.3 million, or 28.3%, to $96.4
million in the first nine months of 2008 from $75.1 million in the first nine
months of 2007. Of the $21.3 million increase, $6.1 million was due to
higher marketing spending, $3.8 million was attributable to higher salaries
and related benefit costs, $3.7 million was attributable to increased
facilities costs, and $2.7 million was due to an increase in company
and
team
meetings. Additionally, during the third quarter of 2008, we reduced our
workforce to balance our employee base with current revenue expectations, market
demand and areas of focus. This reduction included the elimination of the
operational consulting group within the Corporate Consulting segment and a
reduction in the number of consultants in various other practice groups.
Restructuring charges associated with these actions were $2.3 million for
the nine months ended September 30, 2008. Share-based compensation expense
associated with our non-revenue-generating professionals increased
$2.4 million, or 42.1%, to $8.1 million in the first nine months of
2008 from $5.7 million in the comparable period last year.
Depreciation
expense increased $3.4 million, or 43.6%, to $11.2 million in the nine
months ended September 30, 2008 from $7.8 million in the nine months ended
September 30, 2007 as computers, network equipment, furniture and fixtures,
and leasehold improvements were added to support our increase in employees.
Non-direct intangible assets amortization expense increased to $5.6 million
for the nine months ended September 30, 2008 from $4.7 million for the
comparable period last year. Non-direct intangible assets amortization relates
to customer relationships, non-competition agreements and tradenames acquired in
connection with our acquisitions.
Operating
Income
Operating
income increased $2.6 million, or 4.4%, to $63.1 million in the first
nine months of 2008 from $60.5 million in the first nine months of 2007.
Operating margin decreased to 14.0% in the nine months ended September 30,
2008 from 16.4% in the nine months ended September 30, 2007. The decline in
operating margin was attributable to higher total compensation cost as a
percentage of revenues, coupled with the restructuring charges described
above.
Net
Income
Net
income decreased to $28.9 million for the nine months ended
September 30, 2008 from $30.4 million for the comparable period last
year. Diluted earnings per share for the first nine months of 2008 was $1.54
compared to $1.69 for the first nine months of 2007. The decrease in earnings
per share was attributable to a decrease in net income, coupled with the
dilutive impact of the shares issued in connection with the acquisition of
Stockamp and the amendment to the Wellspring Stock Purchase
Agreement.
Segment
Results
Health
and Education Consulting
Revenues
Health
and Education Consulting segment revenues increased $54.0 million, or 41.1%, to
$185.4 million for the first nine months of 2008 from $131.4 million for
the first nine months of 2007. Revenues for the first nine months of 2008
included three months of revenues from our acquisition of Stockamp while
revenues for the comparable period in 2007 did not include any revenues from
Stockamp. Revenues from time-and-expense engagements, fixed-fee engagements,
performance-based engagements and software support and maintenance arrangements
represented 45.6%, 49.3%, 4.1% and 1.0% of this segment’s revenues during the
nine months ended September 30, 2008, respectively, compared to
52.0%, 44.5%, 3.5% and 0%, respectively, for the comparable period in
2007.
Of the
overall $54.0 million increase in revenues, $56.9 million was
attributable to our full-time billable consultants, partially offset by a
decrease of $2.9 million attributable to our full-time equivalents. The
$56.9 million increase in full-time billable consultant revenues reflected
an increase in the number of consultants, partially offset by a decrease in the
average billing rate per hour for this segment. As described in the three months
comparison, the acquisition of Stockamp impacted this segment’s average billing
rate per hour. Excluding the impact of Stockamp, the average billing rate per
hour for this segment would have been $279 for the nine months ended
September 30, 2008 compared to $266 for the comparable period in
2007.
Operating
Income
Health
and Education Consulting segment operating income increased $22.2 million,
or 49.3%, to $67.2 million in the nine months ended September 30, 2008
from $45.0 million in the nine months ended September 30, 2007.
Segment operating margin increased to 36.2% for the first nine months of 2008
from 34.2% in the same period last year. As described in the three months
comparison, this segment’s operating margin was impacted by the acquisition of
Stockamp.
Financial
Consulting
Revenues
Financial
Consulting segment revenues decreased $1.8 million, or 1.6%, to $107.5 million
for the first nine months of 2008 from $109.3 million for the first nine months
of 2007. We acquired Callaway on July 29, 2007 and therefore, revenues for
the first nine months of 2008 included revenues generated by Callaway while
revenues for the first nine months of 2007 included two months of revenues
generated by Callaway. For the nine months ended September 30, 2008 and
2007, most of this segment’s revenues were from time-and-expense
engagements.
Of the
overall $1.8 million decrease in revenues, $22.0 million was
attributable to our full-time equivalents, which was largely offset by a
decrease of $23.8 million attributable to our full-time billable
consultants. The $23.8 million decrease in full-time billable consultant
revenues was primarily due to a decline in this segment’s utilization rate. The
$22.0 million increase in full-time equivalent revenues resulted from our
acquisition of Callaway, which heavily utilizes variable, on-demand
consultants.
Operating
Income
Financial
Consulting segment operating income decreased $15.5 million, or 36.0%, to
$27.6 million in the nine months ended September 30, 2008 from $43.1
million in the nine months ended September 30, 2007. Segment operating
margin declined to 25.6% for the first nine months of 2008 from 39.5% in the
same period last year. The decline was attributable to lower utilization of this
segment’s full-time billable consultants as described above.
Legal
Consulting
Revenues
Legal
Consulting segment revenues increased $24.5 million, or 35.2%, to $93.9 million
for the first nine months of 2008 from $69.4 million for the first nine months
of 2007. Revenues from time-and-expense engagements, fixed-fee engagements and
performance-based engagements represented 91.7%, 7.3% and 1.0% of this segment’s
revenues during the nine months ended September 30, 2008, respectively,
compared to 91.5%, 7.2% and 1.3%, respectively, for the comparable period in
2007.
Of the
overall $24.5 million increase in revenues, $2.8 million was attributable
to our full-time billable consultants and $21.7 million was attributable to
our full-time equivalents. The $2.8 million increase in full-time billable
consultant revenues reflected an increase in the number of consultants,
partially offset by a decline in both the utilization rate of our consultants
and the average billing rate per hour for this segment. The $21.7 million
increase in full-time equivalent revenues reflected a greater demand for our
document review services.
Operating
Income
Legal
Consulting segment operating income increased $10.0 million, or 44.5%, to
$32.4 million in the nine months ended September 30, 2008 from
$22.4 million in the nine months ended September 30, 2007. Segment
operating margin increased to 34.5% for the first nine months of 2008 from 32.3%
in the same period last year due to lower total compensation cost as a
percentage of revenues.
Corporate
Consulting
Revenues
Corporate
Consulting segment revenues increased $6.4 million, or 11.0%, to $64.6 million
for the first nine months of 2008 from $58.2 million for the first nine months
of 2007. Revenues from time-and-expense engagements, fixed-fee engagements and
performance-based engagements represented 47.9%, 49.8% and 2.3% of this
segment’s revenues during the nine months ended September 30, 2008,
respectively, compared to 47.3%, 49.0% and 3.7%, respectively, for the
comparable period in 2007.
The
$6.4 million increase in revenues was primarily attributable to our
full-time billable consultants. This increase in full-time billable consultant
revenues reflected an increase in the number of consultants and an increase in
the average billing rate per hour for this segment, partially offset by a
decline in the utilization rate of our consultants.
Operating
Income
Corporate
Consulting segment operating income increased $2.1 million, or 12.6%, to
$19.3 million in the nine months ended September 30, 2008 from
$17.2 million in the nine months ended September 30, 2007. Segment
operating margin remained steady at 29.9% for the first nine months of 2008
compared to 29.5% for the same period last year. The unfavorable impact of
restructuring charges on this segment’s operating margin was largely offset by
lower general and administrative expenses.
LIQUIDITY
AND CAPITAL RESOURCES
Cash and
cash equivalents increased $11.5 million, from $3.0 million at
December 31, 2007 to $14.5 million at September 30, 2008. Our
primary sources of liquidity are cash flows from operations and debt capacity
available under our credit facility.
Cash
flows provided by operating activities totaled $44.4 million for the nine
months ended September 30, 2008, compared to $12.6 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. The increase
in cash provided by operations during the nine months ended September 30,
2008 was attributable to a decrease in income tax receivable and growth in our
client receivables moderating. Receivables from clients and unbilled services
increased $36.2 million during the nine months ended September 30,
2008 as compared to $49.0 million during the same period last year.
Additionally, deferred revenues increased during the first nine months of 2008
due to a higher level of advanced billings and collections. These increases in
cash were partially offset by cash paid for bonuses, payroll and related
benefits that were accrued for at December 31, 2007.
Cash used
in investing activities was $246.3 million for the nine months ended
September 30, 2008 and $174.4 million for the same period last year.
The use of cash in the nine months ended September 30, 2008 primarily
related to the acquisition of Stockamp, settlement of Callaway’s earn-out
provisions, payments of additional purchase consideration earned by the selling
shareholders of Galt, Wellspring and Glass, and purchases of property and
equipment. The use of cash in the nine months ended September 30, 2007
primarily related to the acquisitions of Wellspring, Glass and
Callaway.
At
September 30, 2008, we had a credit agreement with various financial
institutions under which we may borrow up to $460.0 million, with an
accordion feature allowing for an additional amount of up to $60.0 million
to be borrowed upon approval from the lenders. The credit agreement consists of
a $240.0 million revolving credit facility (“Revolver”) and a
$220.0 million term loan facility (“Term Loan”), which was drawn in a
single advance of $220.0 million on July 8, 2008. Borrowings under the
credit agreement are limited by any outstanding letters of credit, which totaled
$5.9 million at September 30, 2008. Fees and interest on borrowings
vary based on our total debt to earnings before interest, taxes, depreciation
and amortization (“EBITDA”) ratio as set forth in the credit
agreement. Interest is based on a spread, ranging from 1.50% to
2.50%, over the London Interbank Offered Rate (“LIBOR”) or a spread, ranging
from 0.50% to 1.50%, over the base rate (which is the greater of the Federal
Funds Rate plus 0.50% or the Prime Rate), as selected by us. The Term Loan is
subject to amortization of principal in fifteen consecutive quarterly
installments beginning on September 30, 2008, with the first fourteen
installments being $5.5 million each. The fifteenth and final installment
will be the amount of the remaining outstanding principal balance of the Term
Loan and will be payable on February 23, 2012, but can be repaid earlier.
All outstanding borrowings under the Revolver will be due upon expiration of the
credit agreement on February 23, 2012. The credit agreement includes
quarterly financial covenants that require us to maintain certain fixed coverage
and total debt to EBITDA ratios.
During
the first nine months of 2008, we made borrowings to fund the acquisition of
Stockamp and to pay bonuses and additional purchase consideration earned by
selling shareholders of businesses that we acquired that were accrued for at
December 31, 2007. We also made borrowings to fund our daily operations.
During the nine months ended September 30, 2008, the average daily
outstanding balance under our credit facility was $222.6 million.
Borrowings outstanding under this credit facility at September 30, 2008
totaled $335.0 million and carried a weighted-average interest rate of
5.0%. Borrowings outstanding at December 31, 2007 totaled
$123.5 million and carried a weighted-average interest rate of 6.1%. At
both September 30, 2008 and December 31, 2007, the Company was in
compliance with its financial debt covenants.
On
April 4, 2008, we entered into an amendment to the Callaway Asset Purchase
Agreement dated as of July 28, 2007, whereby we settled the earn-out
provision under Section 3.3 of the agreement in consideration for
$23.0 million, payable in the form of a promissory note (the “Note”), and
the waiver of certain indemnity obligations. The Note, along with accrued
interest of $0.5 million, was paid in full on August 15,
2008.
Future
Needs
Our
primary financing need has been to fund our growth. Our growth
strategy is to expand our service offerings, which will require investment in
new hires, acquisitions of complementary businesses, expansion into other
geographic areas, and capital expenditures for information technology, office
space, furniture and fixtures, as well as leasehold improvements. In connection
with our past business acquisitions, we are required under earn-out provisions
to pay additional purchase consideration to the sellers if specific performance
targets are met. We also have cash needs to service our credit facility and
repay our term loan. Further, we have other cash commitments as presented below
in contractual obligations. Because we expect that our future annual growth rate
in revenues and related percentage increases in working capital balances will
moderate, we believe our internally generated liquidity, together with the
borrowing capacity available under our revolving credit facility and access to
external capital resources, will be adequate to fund our long-term growth and
capital needs arising from earn-out provisions, cash commitments and debt
service obligations. Our ability to secure short-term and long-term financing in
the future will depend on several factors, including our future profitability,
the quality of our accounts receivable and unbilled services, our relative
levels of debt and equity, and the overall condition of the credit markets,
which have been unstable recently.
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, 2007 (in thousands).
|
|
Less
than
1
Year
(2008)
|
|
|
1
to 3
Years
(2009
to 2010)
|
|
|
4
to 5
Years
(2011
to 2013)
|
|
|
More
than
5
Years
(2013
and
thereafter)
|
|
|
Total
|
|
Additional
purchase consideration
|
|
$ |
32,422 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
32,422 |
|
Note
payable
|
|
|
1,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,000 |
|
Interest
on note
payable
|
|
|
40 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
Capital
lease
obligations
|
|
|
309 |
|
|
|
234 |
|
|
|
- |
|
|
|
- |
|
|
|
543 |
|
Long-term
bank
borrowings
|
|
|
- |
|
|
|
- |
|
|
|
123,500 |
|
|
|
- |
|
|
|
123,500 |
|
Purchase
obligations
|
|
|
4,336 |
|
|
|
1,002 |
|
|
|
3 |
|
|
|
- |
|
|
|
5,341 |
|
Operating
lease
obligations
|
|
|
16,015 |
|
|
|
29,383 |
|
|
|
29,283 |
|
|
|
13,590 |
|
|
|
88,271 |
|
Total contractual
obligations
|
|
$ |
54,122 |
|
|
$ |
30,619 |
|
|
$ |
152,786 |
|
|
$ |
13,590 |
|
|
$ |
251,117 |
|
In
connection with certain business acquisitions, we are required to pay additional
purchase consideration to the sellers if specific performance targets and
conditions are met over a number of years as specified in the related purchase
agreements. These amounts are calculated and payable at the end of each year
based on full year financial results. There is no limitation to the maximum
amount of additional purchase consideration and the aggregate amount that
potentially may be paid could be significant. Based on current and projected
financial performance, we anticipate aggregate additional purchase consideration
that will be earned by certain sellers to be approximately $40.0 million
for the year ending December 31, 2008.
During
the nine months ended September 30, 2008, we had net borrowings totaling
$211.5 million, primarily to fund our acquisition of Stockamp, additional
purchase consideration for business acquisitions, and 2007 bonuses that were
paid in the first quarter of 2008. As of September 30, 2008, outstanding
borrowings totaled $335.0 million.
Purchase
obligations include sponsorships, subscriptions to research tools and other
commitments to purchase services where we cannot cancel or would be required to
pay a termination fee in the event of cancellation.
We lease
our facilities and certain equipment under operating lease arrangements expiring
on various dates through 2016, 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.
OFF
BALANCE SHEET ARRANGEMENTS
We have
not entered into any off-balance sheet arrangements.
NEW
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles (“GAAP”), and expands
disclosures about fair value measurements. SFAS No. 157 does not require
any new fair value measurements in financial statements, but standardizes its
definition and guidance in GAAP. Thus, for some entities, the application of
this statement may change prior practice. We adopted SFAS No. 157 effective
beginning on January 1, 2008 for financial assets and financial
liabilities, which did not have any impact on our financial statements. In
February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of
FASB Statement No. 157,” which delayed by one year the effective date of SFAS
No. 157 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). We will adopt SFAS No. 157 for our
nonfinancial assets and nonfinancial liabilities, such as goodwill and
intangible assets, effective January 1, 2009, which is not expected to have
a material impact on our future financial position, results of operations,
earnings per share, or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115.” SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. The objective
of this statement is to improve financial reporting by providing entities with
the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. We adopted SFAS No. 159 effective beginning on
January 1, 2008. The adoption of this statement did not have any impact on
our financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations,” (“SFAS No. 141R”). SFAS No. 141R was issued to improve the
relevance, representational faithfulness, and comparability of information in
financial statements about a business combination and its effects. SFAS
No. 141R will be effective for us beginning on January 1, 2009 and
will apply prospectively to business combinations that we complete on or after
that date. This statement retains the acquisition method of accounting for
business combinations, but requires a number of changes. The changes that may
have the most significant impact on us include: contingent consideration, such
as earn-outs, will be recognized at its fair value on the acquisition date and,
for certain arrangements, changes in fair value will be recognized in earnings
until settled; acquisition-related transaction and restructuring costs will be
expensed as incurred; previously-issued financial information will be revised
for subsequent adjustments made to finalize the purchase price accounting;
reversals of valuation allowances related to acquired deferred tax assets and
changes to acquired income tax uncertainties will be recognized in earnings,
except in certain situations.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS
No. 160 was issued to improve the relevance, comparability, and
transparency of financial information provided in financial statements by
establishing accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160
will be effective for us beginning on January 1, 2009 and will apply
prospectively, except for the presentation and disclosure requirements, which
will apply retrospectively. We do not expect the adoption of this statement to
have a material impact on our future financial position, results of operations,
earnings per share, and cash flows.
ITEM
3.
|
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 generally 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 our bank
credit agreement, which has variable interest rates tied to the LIBOR, Federal
Funds rate or prime rate. At September 30, 2008, we had borrowings
outstanding totaling $335.0 million that carried a weighted-average
interest rate of 5.0%. A one percent change in this interest rate would have a
$3.4 million effect on our pre-tax income.
As
described above under “Overview – Our Business,” in connection with our
acquisition of Stockamp and the amendment to the Wellspring Stock Purchase
Agreement, we issued a total of 1,541,036 shares of our common stock to the
sellers of Stockamp and Wellspring. Additionally, we provided them with a
protection against a decline in the value of the shares issued until the
restrictions on the shares have lapsed. Of the 1,541,036 shares issued,
the restrictions on 1,210,814 shares will lapse on January 9, 2009 and the
restrictions on 330,222 shares in escrow will lapse on July 9, 2009. As
such, we are subject to market risk relating to our common stock. Upon the
lapse of the restrictions, if the average daily closing price of our common
stock for the ten consecutive trading days prior to the date that the
restrictions lapse is $47.81 or below, then for every $1.00 that our stock price
is below $47.81, we would be required to pay the sellers approximately
$1.5 million, in the form of cash, stock, or any combination of cash and
stock. Based on the average daily closing price of our common stock for the ten
consecutive trading days prior to and including September 30, 2008, or
$57.81, we would not be obligated to make any protection payments to the
sellers. If the average price decreased by 10% to $52.03, we would still
not be obligated to make any protection payments to the sellers.
From time
to time, we invest excess cash in marketable securities. These investments
principally consist of overnight sweep accounts. Due to the short maturity of
our investments, we have concluded that we do not have material market risk
exposure.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
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 September 30, 2008. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of
September 30, 2008, our disclosure controls and procedures were 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 and such information is accumulated and communicated to
management as appropriate to allow timely decisions regarding required
disclosure.
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 September 30, 2008 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART
II ¾ OTHER
INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
On
July 3, 2007, The Official Committee (the “Committee”) of Unsecured
Creditors of Saint Vincents Catholic Medical Centers of New York d/b/a Saint
Vincent Catholic Medical Centers (“St. Vincents”), et al. filed suit against
Huron Consulting Group Inc., certain of our subsidiaries, including Speltz &
Weis LLC, and two of our former managing directors, David E. Speltz (“Speltz”)
and Timothy C. Weis (“Weis”), in the Supreme Court of the State of New York,
County of New York. On November 26, 2007, Gray & Associates, LLC
(“Gray”), in its capacity as trustee on behalf of the SVCMC Litigation Trust,
was substituted as plaintiff in the place of the Committee and on
February 19, 2008, Gray filed an amended complaint in the action. Beginning
in 2004, St. Vincents retained Speltz & Weis LLC to provide management
services to St. Vincents, and its two principals, Speltz and Weis, were made the
interim chief executive officer and chief financial officer, respectively, of
St. Vincents. In May of 2005, we
acquired
Speltz & Weis LLC. On July 5, 2005, St. Vincents filed for bankruptcy
in the United States Bankruptcy Court for the Southern District of New York
(“Bankruptcy Court”). On December 14, 2005, the Bankruptcy Court approved
the retention of Speltz & Weis LLC and us in various capacities, including
interim management, revenue cycle management and strategic sourcing services.
The amended complaint filed by Gray alleges, among other things, breach of
fiduciary duties, breach of the New York Not-For-Profit Corporation Law,
malpractice, breach of contract, tortious interference with contract, aiding and
abetting breaches of fiduciary duties, certain fraudulent transfers and
fraudulent conveyances, breach of the implied duty of good faith and fair
dealing, fraud, aiding and abetting fraud, negligent misrepresentation, and
civil conspiracy, and seeks at least $200 million in damages, disgorgement
of fees, return of funds or other property transferred to Speltz & Weis LLC,
attorneys’ fees, and unspecified punitive and other damages. We believe that the
claims are without merit and intend to vigorously defend ourselves in this
matter. The suit is in the pre-trial stage and no trial date has been
set.
From time
to time, the Company is involved in legal proceedings and litigation arising in
the ordinary course of business, including employment matters. As of
the date of this Quarterly Report on Form 10-Q, the Company is not a party to or
threatened with any other litigation or legal proceeding that, in the opinion of
management, could have a material adverse effect on the Company’s business,
operating results or financial condition.
See “Risk
Factors” in the Company’s 2007 Annual Report on Form 10-K for a complete
description of the material risks it faces. There have been no material changes
to the Company’s business risk factors since December 31, 2007 except as
follows:
Revenues
from our performance-based engagements are difficult to predict, and the timing
and extent of recovery of our costs is uncertain.
From time
to time, we enter into engagement agreements under which our fees include a
significant performance-based component. Performance-based fees are contingent
on the achievement of specific measures, such as our clients meeting cost-saving
or other contractually defined goals. The achievement of these
contractually-defined goals is often impacted by factors outside of our control,
such as the actions of our client or third parties. Because performance-based
fees are contingent, revenues on such engagements, which are recognized when all
revenue recognition criteria are met, are not certain and the timing of
recognition is difficult to predict and may not occur evenly throughout the
year. While performance-based fees comprised only 3.8% and 2.2% of our revenues
for the three and nine months ended September 30, 2008, respectively, we
expect that the percentage of performance-based fee engagements will increase
due to Stockamp & Associates, Inc., a consulting firm that we acquired in
the third quarter of 2008 and which has a large number of performance-based fee
engagements. A greater number of performance-based fee arrangements may result
in increased volatility in our working capital requirements and greater
variations in our quarter-to-quarter results, which could affect the price of
our common stock. In addition, an increase in the proportion of
performance-based fee arrangements may temporarily offset the positive effect on
our operating results from increases in our utilization rate or average billing
rate per hour.
Our
substantial indebtedness could adversely affect our ability to raise additional
capital to fund our operations and obligations, expose us to interest rate risk
to the extent of our variable rate debt, and could adversely affect our
financial results.
At
September 30, 2008, we had outstanding borrowings totaling
$335.0 million compared to $123.5 million at December 31, 2007,
representing a 171.3% increase. Our substantial increase in indebtedness could
have meaningful consequences for us, including:
·
|
exposing
us to the risk of increased interest rates because our borrowings are at
variable interest rates;
|
·
|
requiring
us to dedicate a larger portion of our cash from operations to service our
indebtedness and thus reducing the level of cash for other purposes such
as funding working capital, strategic acquisitions, capital expenditures,
and other general corporate
purposes;
|
·
|
limiting
our ability to obtain additional financing;
and
|
·
|
increasing
our vulnerability to general adverse economic, industry, and competitive
developments.
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
The
Company’s stock plans permit the netting of common stock upon vesting of
restricted stock awards and the exercise of stock options to satisfy individual
tax withholding requirements. During the quarter ended September 30, 2008,
the Company redeemed 544 shares of its common stock with a weighted-average fair
market value of $52.16 as a result of such tax withholdings as presented in the
table below.
Period
|
Total
Number of
Shares
Redeemed
to Satisfy
Employee
Tax
Withholding
Requirements
|
Weighted-
Average
Fair
Market
Value
Per
Share
Redeemed
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans
or
Programs
|
Maximum
Number
of Shares
that
May Yet Be
Purchased
Under
the
Plans or
Programs
|
July
2008
|
-
|
$ -
|
N/A
|
N/A
|
August
2008
|
544
|
$ 52.16
|
N/A
|
N/A
|
September
2008
|
-
|
$ -
|
N/A
|
N/A
|
Total
|
544
|
$ 52.16
|
N/A
|
N/A
|