HURON
CONSULTING GROUP INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
| |
|
Three
months ended March 31, |
|
| |
|
2007 |
|
2006 |
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
Net
income |
|
$ |
9,811 |
|
$ |
5,596 |
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
6,282 |
|
|
1,584 |
|
|
Deferred
income taxes |
|
|
(3,866 |
) |
|
(2,380 |
) |
|
Share-based
compensation |
|
|
4,206 |
|
|
2,263 |
|
|
Allowances
for doubtful accounts and unbilled services |
|
|
3,035 |
|
|
404 |
|
|
Other |
|
|
¾ |
|
|
135 |
|
|
Changes
in operating assets and liabilities, net of businesses
acquired: |
|
|
|
|
|
|
|
|
Increase
in receivables from clients |
|
|
(10,937 |
) |
|
(5,319 |
) |
|
Increase
in unbilled services |
|
|
(10,972 |
) |
|
(3,750 |
) |
|
Decrease
in income tax receivable / payable, net |
|
|
8,884 |
|
|
2,407 |
|
|
Increase
in other assets |
|
|
(3,430 |
) |
|
(1,975 |
) |
|
Increase
(decrease) in accounts payable and accrued liabilities |
|
|
(521 |
) |
|
5,695 |
|
|
Decrease
in accrued payroll and related benefits |
|
|
(16,115 |
) |
|
(14,201 |
) |
|
Decrease
in deferred revenues |
|
|
(1,567 |
) |
|
(482 |
) |
|
Net
cash used in operating activities |
|
|
(15,190 |
) |
|
(10,023 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases
of property and equipment, net |
|
|
(3,022 |
) |
|
(7,600 |
) |
|
Purchases
of a businesses, net of cash acquired |
|
|
(96,312 |
) |
|
¾ |
|
|
Net
cash used in investing activities |
|
|
(99,334 |
) |
|
(7,600 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options |
|
|
164 |
|
|
127 |
|
|
Shares
redeemed for employee tax withholdings |
|
|
(1,564 |
) |
|
(864 |
) |
|
Tax
benefit from share-based compensation |
|
|
1,832 |
|
|
2,861 |
|
|
Proceeds
from borrowings under line of credit |
|
|
146,500 |
|
|
¾ |
|
|
Repayments
on line of credit |
|
|
(42,500 |
) |
|
¾ |
|
|
Principal
payment of capital lease obligations |
|
|
(144 |
) |
|
(144 |
) |
|
Net
cash provided by financing activities |
|
|
104,288 |
|
|
1,980 |
|
| |
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents |
|
|
(10,236 |
) |
|
(15,643 |
) |
|
Cash
and cash equivalents at beginning of the period |
|
|
16,572 |
|
|
31,820 |
|
|
Cash
and cash equivalents at end of the period |
|
$ |
6,336 |
|
$ |
16,177 |
|
| |
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in thousands, except per share amounts)
1. Description
of Business
Huron
Consulting Group Inc. was formed on March 19, 2002. Huron Consulting Group
Inc., together with its wholly-owned operating subsidiaries (collectively, the
“Company”), is an independent provider of financial and operational consulting
services, whose clients include Fortune 500 companies, medium-sized businesses,
leading academic institutions, healthcare organizations, and the law firms that
represent these various organizations.
2. Basis
of Presentation
The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, these financial statements
reflect all adjustments of a normal, recurring nature necessary for the fair
presentation of the Company’s financial position, results of operations and cash
flows for the interim periods presented in conformity with accounting principles
generally accepted in the United States of America. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 2006 included in the
Company’s annual report on Form 10-K. The Company’s results for any interim
period are not necessarily indicative of results for a full year or any other
interim period.
3.
Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.” SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in 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 current practice. SFAS No. 157
will be effective for the Company beginning on January 1, 2008. The Company
is currently evaluating the impact that the adoption of this statement may have
on its financial position, results of operations, earnings per share, and 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. SFAS No. 159 will be effective for the Company
beginning on January 1, 2008. The Company is currently evaluating the
impact that the adoption of this statement may have on its financial position,
results of operations, earnings per share, and cash flows.
4. Business
Combinations
Acquisition
of Wellspring Partners LTD
In
January 2007, the Company acquired Wellspring Partners LTD (“Wellspring”),
a management consulting firm specializing in integrated performance improvement
services for hospitals and health systems. With the acquisition of Wellspring,
the Company expanded its national presence in the healthcare provider sector.
This acquisition was consummated on January 2, 2007 and the results of
operations of Wellspring have been included within the Company’s Health and
Education Consulting operating segment since that date.
The
aggregate purchase price of this acquisition was approximately
$68.0 million, consisting of $64.7 million in cash paid at closing,
$0.2 million of transaction costs, and a $3.1 million working capital
adjustment. The Company financed this acquisition with a combination of cash on
hand and borrowings of $55.0 million under the Company’s bank credit
agreement. Additional purchase consideration may be payable if specific
performance targets are met over a five-year period. Such amounts will be
recorded as additional purchase price and an adjustment to goodwill.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
amounts in thousands, except per share amounts)
Based on
a preliminary valuation that is subject to refinement, the identifiable
intangible assets that were acquired totaled approximately $13.0 million
and have an estimated weighted average useful life of 27.1 months, which
consists of customer contracts totaling $4.7 million (9.0 months useful
life), customer relationships totaling $3.9 million (24.0 months useful
life), non-competition agreements totaling $2.3 million (72.0 months useful
life), and a tradename valued at $2.1 million (24.0 months useful life).
Additionally, the Company recorded approximately $56.1 million of goodwill,
which the Company does not intend to deduct 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 operating segment since
January 2, 2007.
The
aggregate purchase price of this acquisition was approximately
$31.8 million, consisting of $30.0 million in cash paid at closing,
$0.7 million of transaction costs, a $0.7 million working capital
adjustment, and $0.4 million of additional purchase consideration earned by
Glass during the first quarter of 2007 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.
Based on
a preliminary valuation that is subject to refinement, the identifiable
intangible assets that were acquired totaled approximately $5.0 million and
have an estimated weighted average useful life of 35.2 months, which
consists of customer contracts totaling $1.3 million (6.0 months useful
life), customer relationships totaling $1.5 million (24.0 months useful
life), and non-competition agreements totaling $2.2 million (60.0 months
useful life). Additionally, the Company recorded approximately
$25.9 million of goodwill, which the Company intends to deduct for income
tax purposes.
Acquisition
of MSGalt & Company, LLC
On
April 3, 2006, the Company acquired substantially all of the assets of
MSGalt & Company, LLC (“Galt”), a specialized advisory firm that designs and
implements corporate-wide programs to improve shareholder returns. With the
acquisition of Galt, the Company expanded its value and service offerings to the
office of the chief executive officer and boards of Fortune 500 companies. This
acquisition was consummated on April 3, 2006 and the results of operations
of Galt have been included within the Company’s Corporate Consulting operating
segment since that date.
The
aggregate purchase price of this acquisition was $28.4 million, consisting
of $20.4 million in cash paid at closing, $0.3 million of transaction
costs, and $7.7 million of additional purchase consideration earned by Galt
during 2006 subsequent to the acquisition, as certain performance targets were
met. The Company financed this acquisition with cash on hand and borrowings of
$6.5 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 Galt employees
over a four-year period. Such amounts will be recorded as an
expense.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
amounts in thousands, except per share amounts)
The
identifiable intangible assets that were acquired totaled $4.3 million and
have an estimated weighted average useful life of 20.0 months, which
consists of customer contracts totaling $1.7 million (3.2 months weighted
average useful life), customer relationships totaling $1.4 million (6.1
months weighted average useful life), and non-competition agreements totaling
$1.2 million (60.0 months weighted average useful life). The Company
assigned relatively short lives to the customer contracts and customer
relationships due to the short-term nature of the services and relationships
provided under these contracts. Additionally, the Company recorded
$24.1 million of goodwill, which the Company intends to deduct for income
tax purposes.
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.
| |
|
Wellspring
January 2,
2007 |
|
Glass
January 2,
2007 |
|
Galt
April 3,
2006 |
|
|
Assets
Acquired: |
|
|
|
|
|
|
|
|
|
|
|
Current
assets |
|
$ |
10,642 |
|
$ |
2,018 |
|
$ |
¾ |
|
|
Property
and equipment |
|
|
1,073 |
|
|
215 |
|
|
11 |
|
|
Long-term
assets |
|
|
¾ |
|
|
23 |
|
|
¾ |
|
|
Intangible
assets |
|
|
13,000 |
|
|
5,000 |
|
|
4,300 |
|
|
Goodwill |
|
|
56,063 |
|
|
25,898 |
|
|
24,069 |
|
| |
|
|
80,778 |
|
|
33,154 |
|
|
28,380 |
|
|
Liabilities
Assumed: |
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities |
|
|
7,479 |
|
|
1,368 |
|
|
¾ |
|
|
Non-current
deferred tax liability |
|
|
5,278 |
|
|
¾ |
|
|
¾ |
|
| |
|
|
12,757 |
|
|
1,368 |
|
|
¾ |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Assets Acquired |
|
$ |
68,021 |
|
$ |
31,786 |
|
$ |
28,380 |
|
Pro
Forma Financial Data
The
following unaudited pro forma financial data for the three months ended
March 31, 2006 give effect to the acquisitions of Wellspring, Glass and
Galt as if they had been completed at the beginning of the period. The financial
data for the three months ended March 31, 2007 reflect actual results from
these acquisitions and are already included in the Company’s consolidated
financial results. The unaudited pro forma financial data are not necessarily
indicative of the operating results that would have been achieved if the
acquisition had occurred on the dates indicated, nor are they necessarily
indicative of future results.
| |
|
Three
Months Ended March 31, |
|
|
Historical
Huron and Historical Wellspring |
|
2007
Actual |
|
2006
Pro
forma |
|
|
Revenues,
net of reimbursable expenses |
|
$ |
116,009 |
|
$ |
75,778 |
|
|
Operating
income |
|
$ |
18,915 |
|
$ |
10,982 |
|
|
Income
before provision for income taxes |
|
$ |
17,520 |
|
$ |
10,445 |
|
|
Net
income |
|
$ |
9,811 |
|
$ |
5,915 |
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.59 |
|
$ |
0.37 |
|
|
Diluted |
|
$ |
0.55 |
|
$ |
0.35 |
|
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
amounts in thousands, except per share amounts)
| |
|
Three
Months Ended March 31, |
|
|
Historical
Huron and Historical Glass |
|
2007
Actual |
|
2006
Pro
forma |
|
|
Revenues,
net of reimbursable expenses |
|
$ |
116,009 |
|
$ |
68,272 |
|
|
Operating
income |
|
$ |
18,915 |
|
$ |
10,597 |
|
|
Income
before provision for income taxes |
|
$ |
17,520 |
|
$ |
10,495 |
|
|
Net
income |
|
$ |
9,811 |
|
$ |
5,945 |
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.59 |
|
$ |
0.37 |
|
|
Diluted |
|
$ |
0.55 |
|
$ |
0.35 |
|
| |
|
Three
Months Ended March 31, |
|
|
Historical
Huron and Historical Galt |
|
2007
Actual |
|
2006
Pro
forma |
|
|
Revenues,
net of reimbursable expenses |
|
$ |
116,009 |
|
$ |
66,256 |
|
|
Operating
income |
|
$ |
18,915 |
|
$ |
9,679 |
|
|
Income
before provision for income taxes |
|
$ |
17,520 |
|
$ |
9,721 |
|
|
Net
income |
|
$ |
9,811 |
|
$ |
5,487 |
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.59 |
|
$ |
0.34 |
|
|
Diluted |
|
$ |
0.55 |
|
$ |
0.32 |
|
5. Goodwill
and Intangible Assets
The
changes in the carrying amount of goodwill by segment for the three months ended
March 31, 2007 were as follows:
| |
|
Legal
Financial
Consulting |
|
Legal
Operational Consulting |
|
Health
and Education Consulting |
|
Corporate
Consulting |
|
Total |
|
|
Balance
as of December 31,
2006 |
|
$ |
1,334 |
|
$ |
13,771 |
|
$ |
11,256 |
|
$ |
26,967 |
|
$ |
53,328 |
|
|
Goodwill
acquired in connection
with business combinations |
|
|
¾ |
|
|
¾ |
|
|
56,063 |
|
|
25,898 |
|
|
81,961 |
|
|
Tax
adjustment |
|
|
¾ |
|
|
(263 |
) |
|
¾ |
|
|
¾ |
|
|
(263 |
) |
|
Balance
as of March 31,
2007 |
|
$ |
1,334 |
|
$ |
13,508 |
|
$ |
67,319 |
|
$ |
52,865 |
|
$ |
135,026 |
|
Identifiable
intangible assets with finite lives are amortized over their estimated useful
lives. Intangible assets amortization expense was $3.8 million and
$0.2 million for the three months ended March 31, 2007 and 2006,
respectively. Estimated intangible assets amortization expense is
$12.2 million for 2007, $5.6 million for 2008, $1.6 million for
2009, $1.5 million for 2010, $0.9 million for 2011, and
$0.4 million for 2012. These amounts are based on intangible assets
recorded as of March 31, 2007 and actual amortization expense could differ
from these estimated amounts as a result of the finalization of the Wellspring
and Glass valuations, future acquisitions and other factors. Intangible assets
are as follows:
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
amounts in thousands, except per share amounts)
| |
|
March 31,
2007 |
|
December 31,
2006 |
|
| |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
|
Customer
contracts |
|
$ |
9,960 |
|
$ |
6,177 |
|
$ |
3,960 |
|
$ |
3,960 |
|
|
Customer
relationships |
|
|
9,766 |
|
|
3,368 |
|
|
4,366 |
|
|
2,411 |
|
|
Non-competition
agreements |
|
|
6,605 |
|
|
592 |
|
|
2,105 |
|
|
273 |
|
|
Tradename |
|
|
2,100 |
|
|
263 |
|
|
¾ |
|
|
¾ |
|
|
Technology
and software |
|
|
585 |
|
|
167 |
|
|
585 |
|
|
134 |
|
|
Total |
|
$ |
29,016 |
|
$ |
10,567 |
|
$ |
11,016 |
|
$ |
6,778 |
|
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
March 31, |
|
| |
|
2007 |
|
2006 |
|
|
Net
income |
|
$ |
9,811 |
|
$ |
5,596 |
|
| |
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic |
|
|
16,725 |
|
|
16,077 |
|
|
Weighted
average common stock equivalents |
|
|
1,043 |
|
|
918 |
|
|
Weighted
average common shares outstanding - diluted |
|
|
17,768 |
|
|
16,995 |
|
| |
|
|
|
|
|
|
|
|
Basic
earnings per share |
|
$ |
0.59 |
|
$ |
0.35 |
|
|
Diluted
earnings per share |
|
$ |
0.55 |
|
$ |
0.33 |
|
There
were approximately 1,600 anti-dilutive securities for the three months ended
March 31, 2007 and none for the three months ended March 31, 2006.
7. Line
of Credit
At
December 31, 2006, the Company had a credit agreement with various
financial institutions under which it could borrow up to $130.0 million. On
February 23, 2007, the Company amended the credit agreement so that the
maximum amount of principal that may be borrowed is increased to
$175.0 million, with an
accordion feature allowing for an additional amount of up to $50.0 million
to be borrowed upon approval from the lenders. 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 and will be based on a spread over LIBOR or a
spread over the base rate, which is the greater of the Federal Funds Rate plus
0.5% or the Prime Rate, as selected by the Company. All outstanding principal is
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 interest coverage ratio, total debt to EBITDA ratio, and net
worth levels. In addition, certain acquisitions and similar transactions will
need to be approved by the lenders. Borrowings outstanding under this credit
facility at March 31, 2007 totaled $112.0 million and bear a
weighted-average interest rate of 6.2%. Borrowings outstanding at
December 31, 2006 were $8.0 million and bear interest at 5.9%. At both
March 31, 2007 and December 31, 2006, the Company was in compliance
with its debt covenants.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
amounts in thousands, except per share amounts)
8. Income
Taxes
In July
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), which became effective for the Company on
January 1, 2007. FIN 48 addresses the determination of how tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company must recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the
financial statements from such a position are measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon
ultimate resolution.
The
Company’s unrecognized tax benefits at both January 1, 2007 and
March 31, 2007 totaled $0.1 million, all of which would have a
favorable impact on the Company’s effective tax rate if recognized.
The
Company does not expect that changes in the liability for unrecognized tax
benefits during the next 12 months will have a significant impact on the
Company’s financial position or results of operations.
Upon
adoption on January 1, 2007 and as of March 31, 2007, an accrual for
the potential payment of interest and penalties was deemed not necessary. If
deemed necessary, the Company will record accrued interest and penalties as a
component of provision for income taxes on the consolidated statement of
income.
The
Company files income tax returns with federal, state, local and foreign
jurisdictions. The 2004 federal and main office state of Illinois tax
returns were examined and closed in 2006 and no material adjustments were
identified toward any of the Company’s tax positions. The Company’s
Federal and Illinois tax returns for 2005 and 2006 are subject to future
examinations by relevant tax authorities. For all other states, 2003 through
2006 are subject to future examinations. The
Company does not currently have any material foreign income tax
filings.
9. Commitments
and Contingencies
Litigation
From time
to time, the Company is involved in various legal matters arising out of the
ordinary course of business. Although the outcome of these matters cannot
presently be determined, in the opinion of management, disposition of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
Guarantees
Guarantees
in the form of letters of credit totaling $6.4 million and
$6.3 million were outstanding at March 31, 2007 and December 31,
2006, respectively, to support certain office lease obligations.
In
connection with certain business acquisitions, the Company may be required to
pay additional purchase consideration to the sellers if specific performance
targets are met over a number of years as specified in the related purchase
agreements. There is no limitation to the maximum amount of additional purchase
consideration and such amount is not determinable at this time, but the
aggregate amount that potentially may be paid could be significant. Such amounts
are generally measured and determined at the end of the Company’s fiscal year.
Additional purchase consideration earned by certain sellers totaled
$0.4 million for the three months ended March 31, 2007 and
$8.0 million for the year ended December 31, 2006.
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 attorneys’ 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 obtain payments from its
insurance carrier for certain indemnification payments made.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
amounts in thousands, except per share amounts)
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.
Historically,
the Company provided financial results under two operating segments: Financial
Consulting and Operational Consulting. In
response to the Company’s continued growth and acquisitions of complementary
businesses, effective January 1, 2007, the Company reorganized its practice
areas and service lines to better meet market demands and serve its clients.
Under the new organizational structure, the Company’s chief operating decision
maker manages the business under four operating segments as follows.
| · |
Legal
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 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
Operational 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 strategy and operational
improvements. |
| · |
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. |
| · |
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. |
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, 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 along with
the items necessary to reconcile the segment information to the totals reported
in the accompanying consolidated financial statements. Segment information for
the three months ended March 31, 2006 has been restated to reflect the new
operating segment structure.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
amounts in thousands, except per share amounts)
| |
|
Three
Months Ended
March 31, |
|
| |
|
2007 |
|
2006 |
|
|
Legal
Financial Consulting: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
36,612 |
|
$ |
26,049 |
|
|
Operating
income |
|
$ |
16,175 |
|
$ |
11,703 |
|
|
Segment
operating income as a percent of segment revenues |
|
|
44.2 |
% |
|
44.9 |
% |
|
Legal
Operational Consulting: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
23,271 |
|
$ |
7,550 |
|
|
Operating
income |
|
$ |
7,902 |
|
$ |
2,157 |
|
|
Segment
operating income as a percent of segment revenues |
|
|
34.0 |
% |
|
28.6 |
% |
|
Health
and Education Consulting: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
38,852 |
|
$ |
18,424 |
|
|
Operating
income |
|
$ |
12,200 |
|
$ |
5,288 |
|
|
Segment
operating income as a percent of segment revenues |
|
|
31.4 |
% |
|
28.7 |
% |
|
Corporate
Consulting: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
17,274 |
|
$ |
10,164 |
|
|
Operating
income |
|
$ |
4,196 |
|
$ |
3,607 |
|
|
Segment
operating income as a percent of segment revenues |
|
|
24.3 |
% |
|
35.5 |
% |
|
Total
Company: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
116,009 |
|
$ |
62,187 |
|
|
Reimbursable
expenses |
|
|
10,035 |
|
|
5,439 |
|
|
Total
revenues and reimbursable expenses |
|
$ |
126,044 |
|
$ |
67,626 |
|
| |
|
|
|
|
|
|
|
|
Statement
of operations reconciliation: |
|
|
|
|
|
|
|
|
Segment
operating income |
|
$ |
40,473 |
|
$ |
22,755 |
|
|
Charges
not allocated at the segment level: |
|
|
|
|
|
|
|
|
Other
selling, general and administrative expenses |
|
|
17,516 |
|
|
11,574 |
|
|
Depreciation
and amortization |
|
|
4,042 |
|
|
1,508 |
|
|
Other
expense (income) |
|
|
1,395 |
|
|
(232 |
) |
|
Income
before provision for income taxes |
|
$ |
17,520 |
|
$ |
9,905 |
|
| |
|
|
|
|
|
|
|
|
Segment
assets: |
|
|
|
|
|
|
|
|
Legal
Financial Consulting |
|
$ |
22,688 |
|
$ |
17,659 |
|
|
Legal
Operational Consulting |
|
|
24,172 |
|
|
16,273 |
|
|
Health
and Education Consulting |
|
|
24,247 |
|
|
17,940 |
|
|
Corporate
Consulting |
|
|
19,611 |
|
|
12,603 |
|
|
Unallocated
assets (1) |
|
|
223,775 |
|
|
134,969 |
|
|
Total
assets |
|
$ |
314,493 |
|
$ |
199,444 |
|
| (1) |
Goodwill
and intangible assets are included in unallocated assets, as the Company
does not allocate these items in assessing segment performance or in
allocating resources. |
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 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 2006 annual report on Form 10-K for a complete
description of the material risks we face.
OVERVIEW
Our
History
Huron was
formed in March 2002 and commenced operations in May 2002. We were founded by a
core group of experienced financial and operational consultants that consisted
primarily of former Arthur Andersen LLP partners and professionals. In October
2004, we completed our initial public offering (“IPO”) and became a publicly
traded company.
Since the
date of our IPO through December 31, 2006, we completed the following
acquisitions:
| · |
In
May 2005, we acquired Speltz & Weis LLC (“Speltz & Weis,” renamed
in 2007 to Wellspring Management Services LLC), a specialized consulting
firm that provides interim management and crisis management services to
healthcare facilities. |
| · |
In
April 2006, we acquired MSGalt & Company, LLC (“Galt”), a specialized
advisory firm that designs and implements corporate-wide programs to
improve shareholder returns. |
| · |
In
July 2006, we acquired Document Review Consulting Services LLC (“DRCS”), a
consulting firm that provides comprehensive document review using
experienced contract reviewers. |
| · |
Also
in July 2006, we acquired Aaxis Technologies Inc. (“Aaxis”). Aaxis
provides full-service electronic data discovery support to litigation
teams and corporate counsel with a focus on forensics and data gathering,
end-to-end data processing, and information
consulting. |
During
the first quarter of 2007, we completed two additional
acquisitions:
| · |
In
January 2007, we acquired Wellspring Partners LTD (“Wellspring”), a
management consulting firm specializing in integrated performance
improvement services for hospitals and health systems. With the
acquisition of Wellspring, we expanded our national presence in the
healthcare provider sector. This acquisition was consummated on
January 2, 2007 and the results of operations of Wellspring have been
included within our Health and Education Consulting operating segment
since that date. |
The
aggregate purchase price of this acquisition was approximately
$68.0 million, consisting of $64.7 million in cash paid at closing,
$0.2 million of transaction costs, and a $3.1 million working capital
adjustment. We financed this acquisition with a combination of cash on hand and
borrowings of $55.0 million under our bank credit agreement. Additional
purchase consideration may be payable if specific performance targets are met
over a five-year period. Such amounts will be recorded as additional purchase
price and an adjustment to goodwill.
| · |
Also
in January 2007, we 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, we expanded our position in the consulting and
restructuring marketplace, as well as expanded our 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 our Corporate
Consulting operating segment since January 2,
2007. |
The
aggregate purchase price of this acquisition was approximately
$31.8 million, consisting of $30.0 million in cash paid at closing,
$0.7 million of transaction costs, a $0.7 million working capital
adjustment, and $0.4 million of additional purchase consideration earned by
Glass during the first quarter of 2007 subsequent to the acquisition. We
financed this acquisition with a combination of cash on hand and borrowings of
$20.0 million under our 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.
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.
Historically,
we provided our services through two operating segments: Financial Consulting
and Operational Consulting. In response to our continued growth and acquisitions
of complementary businesses, effective January 1, 2007, we reorganized our
practice areas and service lines to better meet market demands and serve our
clients. Under the new organizational structure, we manage our business under
four operating segments as follows.
| · |
Legal
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 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
Operational 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 strategy and operational
improvements. |
| · |
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. |
| · |
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. |
The
majority of our revenues are generated by our billable consultants who provide
consulting services to our clients. A smaller portion of our revenues is
generated by our other professionals, consisting of our document review and
electronic data discovery groups, who generate revenues primarily based on
number of hours worked and units produced such as pages reviewed or data
processed. We refer to our billable consultants and other professionals
collectively as revenue-generating professionals. Additionally, we utilize
independent contractors to supplement our full-time professionals.
Consulting
services revenues are primarily driven by the number of billable consultants we
employ and their utilization rates, as well as the billing rates we charge our
clients. Revenues generated by our document review and electronic data discovery
groups are largely dependent on the number of professionals and independent
contractors we employ, their utilization and billing rates charged, as well as
the number of pages reviewed and amount of data processed.
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.
Most of
our revenues are generated based on either the number of hours incurred
by our
billable consultants and independent contractors, or the number of hours
incurred or units produced by our other professionals at
agreed upon rates. We refer to these types of arrangements collectively as time
and expense engagements. Time and expense engagements represented 77.3% and
87.3% of our revenues in the three months ended March 31, 2007 and 2006,
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 March 31, 2007 and 2006, fixed fee engagements represented
21.9% and 10.5% of our revenues, respectively. The increase primarily reflects
the billing practices of Wellspring, which we acquired in 2007 and which has a
larger percentage of fixed fee engagements.
Performance-based
fee engagements generally tie fees to the attainment of contractually defined
objectives. We enter into performance-based engagements in essentially two
forms. First, we generally earn fees that are directly related to the savings
formally acknowledged by the client as a result of adopting our recommendations
for improving cost effectiveness in the procurement area. Second, we have
performance-based engagements in which we earn a success fee when and if certain
pre-defined outcomes occur. Often this type of success fee supplements time and
expense or fixed fee engagements. While performance-based fee revenues
represented only 0.8% and 2.2% of our revenues for the three months ended
March 31, 2007 and 2006, respectively, such revenues in the future may
cause significant variations in quarterly revenues and operating results due to
the timing of achieving the performance-based criteria.
Business
Strategy, Opportunities and Challenges
Our
primary strategy is to meet the needs of our 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 revenue-generating professionals. Since we
commenced operations, we have more than quadrupled the number of our
revenue-generating professionals from 213 on May 31, 2002 to 979 as of
March 31, 2007. 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. Our services are
primarily rendered under arrangements that require the client to pay based on
the hours incurred by our revenue-generating professionals, the number of pages
reviewed by our document review group, or the amount of data processed by our
electronic data discovery group at agreed-upon rates, which are 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 earned from
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
Value 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 March 31, 2007 was $135.0 million, which resulted from
our acquisitions. 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, 2006
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 $18.4 million at March 31, 2007, and consist of
customer contracts, customer relationships, non-competition agreements, a
tradename, 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 contracts and 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 have
recorded net deferred tax assets as we expect to realize future tax benefits
related to the utilization of these assets. Although we experienced net losses
early in our history, no valuation allowance has been recorded relating to these
deferred tax assets because we believe that it is more likely than not that
future taxable income will be sufficient to allow us to utilize these assets.
Should we determine in the future that we will not be able to fully utilize all
or part of these deferred tax assets, we would need to establish a valuation
allowance, which would be recorded as a charge to income in the period the
determination was made. While utilization of these deferred tax assets will
provide future cash flow benefits, they will not have an effect on future income
tax provisions.
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
As
previously described, historically we have provided our services through two
operating segments: Financial Consulting and Operational Consulting. In response
to our continued growth and acquisitions of complementary businesses, effective
January 1, 2007, we reorganized our practice areas and service lines to
better meet market demands and serve our clients. Under the new organizational
structure, we manage our business under four operating segments: Legal Financial
Consulting, Legal Operational Consulting, Health and Education Consulting, and
Corporate Consulting.
The table
below sets forth selected segment and consolidated operating results and other
operating data for the periods indicated. Segment information for the three
months ended March 31, 2006 has been restated to reflect the new operating
segment structure. 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
March 31, |
|
|
(in
thousands): |
|
2007 |
|
2006 |
|
|
Revenues and reimbursable expenses: |
|
|
|
|
|
|
|
|
Legal
Financial Consulting |
|
$ |
36,612 |
|
$ |
26,049 |
|
|
Legal
Operational Consulting (1) |
|
|
23,271 |
|
|
7,550 |
|
|
Health
and Education Consulting |
|
|
38,852 |
|
|
18,424 |
|
|
Corporate
Consulting |
|
|
17,274 |
|
|
10,164 |
|
|
Total
revenues |
|
|
116,009 |
|
|
62,187 |
|
|
Total
reimbursable expenses |
|
|
10,035 |
|
|
5,439 |
|
|
Total
revenues and reimbursable expenses |
|
$ |
126,044 |
|
$ |
67,626 |
|
| |
|
|
|
|
|
|
|
|
Operating
income: |
|
|
|
|
|
|
|
|
Legal
Financial Consulting |
|
$ |
16,175 |
|
$ |
11,703 |
|
|
Legal
Operational Consulting |
|
|
7,902 |
|
|
2,157 |
|
|
Health
and Education Consulting |
|
|
12,200 |
|
|
5,288 |
|
|
Corporate
Consulting |
|
|
4,196 |
|
|
3,607 |
|
|
Total
segment operating income |
|
|
40,473 |
|
|
22,755 |
|
| |
|
|
|
|
|
|
|
|
Unallocated
corporate costs |
|
|
17,516 |
|
|
11,574 |
|
|
Depreciation
and amortization expense |
|
|
4,042 |
|
|
1,508 |
|
|
Total
operating expenses |
|
|
21,558 |
|
|
13,082 |
|
| |
|
|
|
|
|
|
|
|
Operating
income |
|
$ |
18,915 |
|
$ |
9,673 |
|
| |
|
|
|
|
|
|
|
|
Other
Operating Data: |
|
|
|
|
|
|
|
|
Number
of revenue-generating professionals (at period end)
(2): |
|
|
|
|
|
|
|
|
Legal
Financial Consulting - Billable Consultants |
|
|
281 |
|
|
224 |
|
|
Legal
Operational Consulting - Billable Consultants |
|
|
121 |
|
|
109 |
|
|
Legal
Operational Consulting - Other Professionals (1) |
|
|
55 |
|
|
¾ |
|
|
Health
and Education Consulting - Billable Consultants |
|
|
352 |
|
|
207 |
|
|
Corporate
Consulting - Billable Consultants |
|
|
170 |
|
|
96 |
|
|
Total |
|
|
979 |
|
|
636 |
|
|
Average number of revenue-generating professionals (for the period)
(2): |
|
|
|
|
|
|
|
|
Legal
Financial Consulting - Billable Consultants |
|
|
280 |
|
|
223 |
|
|
Legal
Operational Consulting - Billable Consultants |
|
|
121 |
|
|
103 |
|
|
Legal
Operational Consulting - Other Professionals (1) |
|
|
51 |
|
|
¾ |
|
|
Health
and Education Consulting - Billable Consultants |
|
|
345 |
|
|
212 |
|
|
Corporate
Consulting - Billable Consultants |
|
|
173 |
|
|
101 |
|
|
Total |
|
|
970 |
|
|
639 |
|
|
Billable consultant utilization rate (3): |
|
|
|
|
|
|
|
|
Legal
Financial Consulting |
|
|
85.0 |
% |
|
83.9 |
% |
|
Legal
Operational Consulting (1) |
|
|
75.5 |
% |
|
67.7 |
% |
|
Health
and Education Consulting |
|
|
78.3 |
% |
|
78.1 |
% |
|
Corporate
Consulting |
|
|
68.4 |
% |
|
71.6 |
% |
|
Total |
|
|
78.1 |
% |
|
77.5 |
% |
|
Average billing rate per hour (4): |
|
|
|
|
|
|
|
|
Legal
Financial Consulting |
|
$ |
299 |
|
$ |
284 |
|
|
Legal
Operational Consulting (1) |
|
$ |
238 |
|
$ |
225 |
|
|
Health
and Education Consulting |
|
$ |
248 |
|
$ |
221 |
|
|
Corporate
Consulting |
|
$ |
293 |
|
$ |
296 |
|
|
Total |
|
$ |
272 |
|
$ |
257 |
|
| (1) |
Legal
Operational Consulting revenues include revenues generated by our document
review and processing groups (Legal Operational Consulting - Other
Professionals) for the three months ended March 31, 2007. Utilization
rate and average billing rate per hour are not presented for these
professionals as they are not meaningful measures.
|
| (2) |
Revenue-generating
professionals consist of our billable consultants and other professionals.
Billable consultants generate revenues primarily based on number of hours
worked while our other professionals generate revenues based on number of
hours worked and units produced, such as pages reviewed and data
processed. Revenue-generating professionals exclude interns and
independent contractors.
|
| (3) |
We
calculate the utilization rate for our billable consultants by dividing
the number of hours all our consultants worked on client assignments
during a period by the total available working hours for all of our
consultants during the same period, assuming a forty-hour work week, less
paid holidays and vacation days.
|
| (4) |
For
engagements where revenues are based on number of hours worked by our
billable consultants, average billing rate per hour is calculated by
dividing revenues for a period by the number of hours worked (excluding
interns and independent contractor hours) on client assignments during the
same period.
|
Three
Months Ended March 31, 2007 Compared to Three Months Ended March 31,
2006
Revenues
Revenues
increased $53.8 million, or 86.5%, to $116.0 million for the three months ended
March 31, 2007 from $62.2 million for the three months ended March 31,
2006. Revenues for the three months ended March 31, 2007 included revenues
generated by Galt, DRCS, Aaxis, Wellspring, and Glass, all of which we acquired
subsequent to March 31, 2006. Revenues from time and expense engagements
increased $35.4 million, or 65.2%, to $89.7 million for the first quarter
of 2007 from $54.3 million for the first quarter of 2006. Revenues from
fixed fee engagements increased $18.9 million, or 290.8%, to $25.4 million
for the three months ended March 31, 2007 from $6.5 million for the three
months ended March 31, 2006. Revenues from performance-based engagements
decreased $0.5 million, or 35.7%, to $0.9 million for the three months
ended March 31, 2007 from $1.4 million for the three months ended
March 31, 2006.
Of the
overall $53.8 million increase in revenues, $32.9 million was attributable
to our billable consultants and $20.9 million was attributable to our
document review and processing groups, as well as increased usage
of independent contractors. Of the $32.9 million increase in billable
consultant revenues, $27.3 million was attributable to an increase in the number
of billable consultants, $5.2 million was attributable to an increase in
the average billing rate per hour, and $0.4 million was attributable to an
increase in the utilization rate of our billable consultants. The
increases were reflective of growing demand for our services from new and
existing clients and our acquisitions. The average number of billable
consultants increased to 919 for the three months ended March 31, 2007 from
639 for the three months ended March 31, 2006, as we added a significant
number of billable consultants through our acquisitions. Our average billing
rate per hour for engagements where revenues are based on number of hours worked
by our billable consultants increased 5.8% to $272 for the three months ended
March 31, 2007 from $257 for the three months ended March 31, 2006.
Average billing rate per hour for any given period is calculated by dividing
revenues for the period by the number of hours worked by our billable
consultants on client assignments during the same period. Our billable
consultant utilization rate increased to 78.1% for the three months ended
March 31, 2007 from 77.5% for the three months ended March 31, 2006.
The utilization rate for any given period is calculated by dividing the number
of hours all our billable consultants worked on client assignments during the
period by the total available working hours for all of our billable consultants
during the same period, assuming a 40-hour work week, less paid holidays and
vacation days.
Total
Direct Costs
Our
direct costs increased $30.9 million, or 85.9%, to $66.9 million in the
three months ended March 31, 2007 from $36.0 million in the three
months ended March 31, 2006. Approximately $19.1 million of the
increase was attributable to the increase in the average number of
revenue-generating professionals, the promotion of our employees during the
year, including 20 to the managing director level effective January 1,
2007, and their related compensation and benefit costs. Additionally,
$8.4 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
$1.0 million, or 58.8%, to $2.7 million in the first quarter of 2007
from $1.7 million in the first quarter of 2006. We expect to continue to
hire additional managing directors, as well as hire additional managers,
associates and analysts to expand support for our existing practices and better
leverage our managing directors and directors. As such, we expect direct costs
will continue to increase in the near term.
Total
direct costs for the three months ended March 31, 2007 included
$2.2 million of intangible assets amortization expense, primarily
attributable to customer contracts acquired in connection with the acquisitions
of Wellspring and Glass.
Operating
Expenses
Selling,
general and administrative expenses increased $9.0 million, or 60.5%, to $23.8
million in the three months ended March 31, 2007 from $14.8 million in the
three months ended March 31, 2006. Of the $9.0 million increase,
$3.8 million was attributable to higher salaries and related benefit costs,
$1.8 million was due to higher marketing spending, $0.7 million
resulted from an increase in training and recruiting costs, and
$0.5 million was attributable to increased facilities costs. Share-based
compensation expense associated with our non-revenue-generating professionals
increased $0.9 million, or 150.0%, to $1.5 million in the first
quarter of 2007 from $0.6 million in the first quarter of 2006. These
increases were offset by the absence of secondary offering costs. During the
first quarter of 2006 in connection with a secondary offering, we incurred costs
totaling $0.6 million after tax, or $0.03 per diluted share.
Depreciation
expense increased $1.1 million, or 78.6%, to $2.5 million in the three
months ended March 31, 2007 from $1.4 million in the three months ended
March 31, 2006 as computers, network equipment, furniture and fixtures, and
leasehold improvements were added to support our increase in employees.
Non-direct intangible assets amortization expense for the three months ended
March 31, 2007 and 2006 was $1.5 million and $0.1 million,
respectively. The increase in 2007 was attributable to amortization of
intangible assets, including customer relationships, non-competition agreements
and a tradename, acquired in connection with our acquisitions subsequent to
March 31, 2006.
Operating
Income
Operating
income increased $9.2 million, or 95.5%, to $18.9 million for the
three months ended March 31, 2007 from $9.7 million for the three
months ended March 31, 2006. The increase in operating income was
attributable to the factors discussed above under Revenues, Total Direct Costs
and Operating Expenses. Operating margin, defined as operating income expressed
as a percentage of revenues, increased to 16.3% in the three months ended
March 31, 2007 from 15.6% in the three months ended March 31,
2006.
Net
Income
Net
income increased $4.2 million, or 75.3%, to $9.8 million for the three
months ended March 31, 2007 from $5.6 million for the three months
ended March 31, 2006. Diluted earnings per share increased to $0.55 for the
three months ended March 31, 2007 from $0.33 for the comparable period last
year.
Segment
Results
Legal
Financial Consulting
Revenues
Legal
Financial Consulting segment revenues increased $10.6 million, or 40.6%, to
$36.6 million for the three months ended March 31, 2007 from $26.0 million
for the three months ended March 31, 2006. Revenues from time and expense
engagements increased $10.8 million, or 42.9%, to $36.0 million for the three
months ended March 31, 2007 from $25.2 million for the three months
ended March 31, 2006. Revenues from fixed fee engagements decreased $0.2
million, or 25.0%, to $0.6 million for the three months ended
March 31, 2007 from $0.8 million for the three months ended March 31,
2006.
Of the
overall $10.6 million increase in revenues, $7.6 million was attributable
to an increase in the number of billable consultants, $1.6 million was
attributable to an increase in the average billing rate per hour,
$0.3 million was attributable to an increase in the utilization rate of our
billable consultants, and $1.1 million was attributable to an increase in
the usage of independent contractors. The average number of billable consultants
increased to 280 for the three months ended March 31, 2007 from 223 for the
three months ended March 31, 2006. The average billing rate per hour
increased to $299 for the first quarter of 2007 from $284 for the first quarter
of 2006. The utilization rate increased to 85.0% for the three months ended
March 31, 2007 from 83.9% for the comparable period last year.
Operating
Income
Legal
Financial Consulting segment operating income increased $4.5 million, or
38.2%, to $16.2 million in the three months ended March 31, 2007 from $11.7
million in the three months ended March 31, 2006. Segment operating margin,
defined as segment operating income expressed as a percentage of segment
revenues, decreased slightly to 44.2% for the first quarter of 2007 from 44.9%
in the same period last year, primarily due to an increase in share-based
compensation expense.
Legal
Operational Consulting
Revenues
Legal
Operational Consulting segment revenues increased $15.7 million, or 208.2%, to
$23.3 million for the three months ended March 31, 2007 from $7.6 million for
the three months ended March 31, 2006. Revenues for the first quarter of
2007 included revenues generated by DRCS and Aaxis while revenues for the first
quarter of 2006 did not. Revenues from time and expense engagements increased
$16.2 million, or 270.0%, to $22.2 million for the three months ended
March 31, 2007 from $6.0 million for the comparable period last year.
Revenues from fixed fee engagements decreased $0.3 million, or 23.1%, to
$1.0 million for the three months ended March 31, 2007 from
$1.3 million for the three months ended March 31, 2006. Revenues from
performance-based engagements decreased $0.2 million, or 66.7%, to $0.1 million
for the first quarter of 2007 from $0.3 million for the first quarter of
2006.
Of the
overall $15.7 million increase in revenues, $1.8 million was attributable to our
billable consultants and $13.9 million was attributable to our document
review and processing groups, as well as independent
contractors supporting our billable consultants. Of the
$1.8 million, $0.7 million was attributable to an increase in the
number of billable consultants, $0.6 million was attributable to an
increase in the utilization rate of our billable consultants, and
$0.5 million was attributable to an increase in the average billing rate
per hour. The average number of billable consultants increased to 121 for the
first quarter of 2007 from 103 for the first quarter of 2006, while the average
number of other revenue-generating professionals was 51 for the three months
ended March 31, 2007. The billable consultant utilization rate increased to
75.5% for the three months ended March 31, 2007 from 67.7% for the three
months ended March 31, 2006. The average billing rate per hour for
engagements where revenues are based on number of hours worked by our billable
consultants increased 5.8% to $238 for the first quarter of 2007 from $225 for
the comparable period last year.
Operating
Income
Legal
Operational Consulting segment operating income increased $5.7 million, or
266.3%, to $7.9 million for the three months ended March 31, 2007 from
$2.2 million for the three months ended March 31, 2006. Segment
operating margin increased to 34.0% for the first quarter of 2007 from 28.6% in
the same period last year primarily due to improved utilization of our billable
consultants, particularly at the analyst and associate levels.
Health
and Education Consulting
Revenues
Health
and Education Consulting segment revenues increased $20.5 million, or 110.9%, to
$38.9 million for the three months ended March 31, 2007 from $18.4 million
for the three months ended March 31, 2006. Revenues for the first quarter
of 2007 included revenues generated by Wellspring while revenues for the first
quarter of 2006 did not. Revenues from time and expense engagements increased
$6.7 million, or 45.0%, to $21.6 million for the three months ended
March 31, 2007 from $14.9 million for the three months ended
March 31, 2006. Revenues from fixed fee engagements increased $14.0
million, or 500.0%, to $16.8 million for the three months ended
March 31, 2007 from $2.8 million for the comparable period last year.
Revenues from performance-based engagements decreased $0.2 million, or 28.6%, to
$0.5 million for the first quarter of 2007 from $0.7 million for the first
quarter of 2006.
Of the
overall $20.5 million increase in revenues, $11.7 million was attributable
to an increase in the number of billable consultants, $3.3 million was
attributable to an increase in the average billing rate per hour, and
$5.5 million was attributable to an increase in the usage of independent
contractors. The average number of billable consultants increased to 345 for the
three months ended March 31, 2007 from 212 for the three months ended
March 31, 2006, a portion of which was due to the acquisition of 65
Wellspring professionals. The average billing rate per hour increased 12.2% to
$248 for the first quarter of 2007 from $221 for the first quarter of 2006. The
utilization rate remained steady at 78.3% for the first quarter of 2007 compared
to 78.1% for the comparable period last year.
Operating
Income
Health
and Education Consulting segment operating income increased $6.9 million,
or 130.7%, to $12.2 million in the three months ended March 31, 2007
from $5.3 million in the three months ended March 31, 2006. Segment
operating margin increased to 31.4% for the first quarter of 2007 from 28.7% in
the same period last year, primarily due to higher revenues generated per
billable consultant as the average billing rate increased, resulting in improved
yield per consultant. This increase was partially offset by amortization of
customer contracts relating to the Wellspring acquisition.
Corporate
Consulting
Revenues
Corporate
Consulting segment revenues increased $7.1 million, or 70.0%, to $17.3 million
for the three months ended March 31, 2007 from $10.2 million for the three
months ended March 31, 2006. Revenues for the first quarter of 2007
included revenues generated by Galt and Glass while revenues for the first
quarter of 2006 did not. Revenues from time and expense engagements increased
$1.8 million, or 22.0%, to $10.0 million for the three months ended
March 31, 2007 from $8.2 million for the three months ended
March 31, 2006. Revenues from fixed fee engagements increased $5.4 million,
or 337.5%, to $7.0 million for the three months ended March 31, 2007
from $1.6 million for the comparable period last year. Revenues from
performance-based engagements decreased $0.1 million, or 25.0%, to $0.3
million for the first quarter of 2007 from $0.4 million for the first
quarter of 2006.
Of the
overall $7.1 million increase in revenues, $7.3 million was attributable to
an increase in the number of billable consultants and $0.5 million was
attributable to an increase in the usage of independent contractors, partially
offset by a $0.5 million decrease in revenues attributable to a decrease in
the utilization rate, as well as a $0.2 million decrease in revenues
attributable to a decrease in the average billing rate per hour. The average
number of billable consultants increased to 173 for the three months ended
March 31, 2007 from 101 for the three months ended March 31, 2006,
primarily due to the acquisitions of Galt and Glass. The utilization rate
decreased to 68.4% for the first quarter of 2007 from 71.6% for the comparable
period last year. The average billing rate per hour decreased to $293 for the
first quarter of 2007 from $296 for the first quarter of 2006. The decrease was
reflective of higher levels of activity on performance-based fee engagements
that resulted in net deferrals of $0.8 million of fees for services
rendered, reducing the average billing rate in the first quarter of 2007 by $13
compared to the first quarter of 2006. We expect to recognize this revenue in
the future when all the performance-based criteria specified in the engagement
contracts are met.
Operating
Income
Corporate
Consulting segment operating income increased $0.6 million, or 16.3%, to
$4.2 million in the three months ended March 31, 2007 from
$3.6 million in the three months ended March 31, 2006. Segment
operating margin decreased to 24.3% for the first quarter of 2007 from 35.5% in
the same period last year, primarily due to a lower average billing rate as
discussed above, lower utilization of our billable consultants, and amortization
of customer contracts relating to the Glass acquisition.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary sources of liquidity are cash flows from operations and debt capacity
available under our credit facility. Cash and cash equivalents decreased
$10.3 million from $16.6 million at December 31, 2006 to
$6.3 million at March 31, 2007 primarily due to our
acquisitions.
Cash
flows used in operating activities totaled $15.2 million for the three
months ended March 31, 2007, compared to $10.0 million for the same
period last year. Our operating assets and liabilities consist primarily of
receivables from billed and unbilled services, accounts payable and accrued
expenses, and accrued payroll and related benefits. The volume of billings and
timing of collections and payments affect these account balances. Cash used for
operations during the first quarter of 2007 primarily consisted of cash payments
for bonuses, payroll and related benefits that were accrued for at
December 31, 2006. Receivables from clients and unbilled services increased
$21.9 million during the three months ended March 31, 2007 as a result
of increased revenues.
Cash used
in investing activities was $99.3 million for the three months ended
March 31, 2007 and $7.6 million for the same period last year. The use of
cash in the first quarter of 2007 primarily related to the acquisitions of
Wellspring and Glass. The use of cash in the first quarter of 2006 primarily
related to leasehold improvements and construction in progress at our office in
New York City.
At
December 31, 2006, we had a credit agreement with various financial
institutions under which we may borrow up to $130.0 million. On
February 23, 2007, we amended the credit agreement so that the maximum
amount of principal that may be borrowed is increased to $175.0 million,
with an
accordion feature allowing for an additional amount of up to $50.0 million
to be borrowed upon approval from the lenders. 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 and will be based on a spread over LIBOR or a spread over
the base rate, which is the greater of the Federal Funds Rate plus 0.5% or the
Prime Rate, as selected by us. All outstanding principal is due upon expiration
of the credit agreement on February 23, 2012. The credit agreement includes
quarterly financial covenants that require us to maintain certain interest
coverage ratio, total debt to EBITDA ratio, and net worth levels. In addition,
certain acquisitions and similar transactions will need to be approved by the
lenders.
During
the first quarter of 2007, we borrowed $75.0 million under the credit
facility to fund our acquisitions of Wellspring and Glass. We also made
borrowings throughout the quarter to fund our operations. During the three
months ended March 31, 2007, the average daily outstanding balance under
our credit facility was $96.0 million. Borrowings outstanding under this
credit facility at March 31, 2007 totaled $112.0 million and bear a
weighted-average interest rate of 6.2%. Borrowings outstanding at
December 31, 2006 totaled $8.0 million and bear interest at 5.9%. At
both March 31, 2007 and December 31, 2006, the Company was in
compliance with its debt covenants.
Future
Needs
Our
primary financing need has been to fund our growth. Our growth strategy includes
hiring additional revenue-generating professionals and expanding our service
offerings through existing professionals, new hires or acquisitions. We intend
to fund such growth with cash generated from operations and borrowings under our
credit agreement. Because we expect that our future annual growth rate in
revenues and related percentage increases in working capital balances will
moderate, we believe cash generated from operations, supplemented as necessary
by borrowings under our credit facility, will be adequate to fund this growth.
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 overall condition of the credit markets.
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, 2006 (in thousands).
| |
|
Less
than
1
Year |
|
1
to 3
Years |
|
4
to 5
Years |
|
After
5
Years |
|
Total |
|
|
Notes
payable |
|
$ |
1,000 |
|
$ |
1,000 |
|
$ |
¾ |
|
$ |
¾ |
|
$ |
2,000 |
|
|
Interest
on notes payable |
|
|
80 |
|
|
40 |
|
|
¾ |
|
|
¾ |
|
|
120 |
|
|
Capital
lease obligations |
|
|
282 |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
282 |
|
|
Operating
lease obligations |
|
|
11,761 |
|
|
32,035 |
|
|
16,432 |
|
|
20,216 |
|
|
80,444 |
|
|
Additional
purchase consideration |
|
|
3,400 |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
|
|
|
Purchase
obligations |
|
|
1,573 |
|
|
110 |
|
|
¾ |
|
|
¾ |
|
|
1,683 |
|
|
Total
contractual obligations |
|
$ |
18,096 |
|
$ |
33,185 |
|
$ |
16,432 |
|
$ |
20,216 |
|
$ |
87,929 |
|
During
the first quarter of 2007, we borrowed $75.0 million under our credit
facility to fund our acquisitions of Wellspring and Glass. We also made
borrowings throughout the quarter to fund our operations. As of March 31,
2007, outstanding borrowings totaled $112.0 million. Although outstanding
principal under the credit facility is not contractually due until February
2012, we may periodically make repayments to the extent we have excess cash on
hand.
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.
In
connection with certain business acquisitions, we may be required to pay
additional purchase consideration to the sellers if specific performance targets
are met over a number of years as specified in the related purchase agreements.
There is no limitation to the maximum amount of additional purchase
consideration and such amount is not determinable at this time, but the
aggregate amount that potentially may be paid could be significant. We would
expect, however, to fund such payments using cash flows generated from our
operations.
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.
OFF
BALANCE SHEET ARRANGEMENTS
We have
not entered into any off-balance sheet arrangements.
RECENT
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 in 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 current practice. SFAS No. 157 will be effective
for us beginning on January 1, 2008. We are currently evaluating the impact
that the adoption of this statement may have on our financial position and
results of operations.
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. SFAS No. 159 will be effective us beginning on
January 1, 2008. We are currently evaluating the impact that the adoption
of this statement may have on our financial position and results of
operations.
|
ITEM
3. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
We are
exposed to market risks related to changes in interest rates and changes in the
market value of our investments. We do not enter into interest rate swaps, caps
or collars or other hedging instruments.
Our
exposure to changes in interest rates is limited to borrowings under our bank
credit agreement, which has variable interest rates tied to the LIBOR, Federal
Funds rate or prime rate. At March 31, 2007, we had borrowings outstanding
totaling $112.0 million that bear interest at a weighted-average interest
rate of 6.2%. A one percent change in this interest rate would have a
$1.1 million effect on our pre-tax income.
At
March 31, 2007, we had notes payable totaling $2.0 million, of which
$1.0 million is payable on each of May 8, 2007 and May 8, 2008. We are
not exposed to material interest rate risks in respect to these notes as they
bear a fixed interest rate at 4% per annum.
From time
to time, we invest excess cash in marketable securities. These investments
principally consist of overnight sweep accounts and short-term commercial paper.
Due to the short maturity of our investments, 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 March 31, 2007. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of March 31,
2007, 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 March 31, 2007 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 |
From time
to time, the Company is involved in various legal matters arising out of the
ordinary course of business. Although the outcome of these matters cannot
presently be determined, in the opinion of management, disposition of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
See “Risk
Factors” in the Company’s 2006 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, 2006.
|
ITEM
2. |
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS |
Our 2004
Omnibus Stock Plan permits the netting of common stock upon vesting of
restricted stock awards to satisfy individual tax withholding requirements.
During the quarter ended March 31, 2007, the Company redeemed such shares
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 |
|
|
January
2007 |
|
|
571 |
|
$ |
45.34 |
|
|
N/A |
|
|
N/A |
|
|
February
2007 |
|
|
28,300 |
|
$ |
51.65 |
|
|
N/A |
|
|
N/A |
|
|
March
2007 |
|
|
1,200 |
|
$ |
63.40 |
|
|
N/A |
|
|
N/A |
|
|
Total |
|
|
30,071 |
|
$ |
52.00 |
|
|
N/A |
|
|
N/A |
|
N/A - Not
applicable.
|
ITEM
3. |
DEFAULTS
UPON SENIOR
SECURITIES |
None.
|
ITEM
4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS |
None.
|
ITEM
5. |
OTHER
INFORMATION |
None.
(a) The
following exhibits are filed as part of this Quarterly Report on
Form 10-Q.
|
Exhibit
Number |
|
Exhibit |
|
31.1 |
|
Certification
of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
| |
|
|
|
31.2 |
|
Certification
of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
| |
|
|
|
32.1 |
|
Certification
of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
| |
|
|
|
32.2 |
|
Certification
of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |