Monday, August 3, 2009

Disastrous day for Huron Consulting (HURN)

AlphaNinja - Horrible day for employees and shareholders at/of Huron Consulting (HURN). Friday afternoon the company released a statement in which it explained why they would restate earnings going back to 2006. The Chairman & CEO is stepping down and the Accounting Chief is leaving. With shares down 70% this morning, a LOT of bad news has been discounted. Opportunity in the shares?

Adding to the trouble is an SEC inquiry into the company's "allocation of chargeable hours," as well as the company reducing revenue guidance by about 10% this quarter on a lower hourly billing rate:

"The average number of full-time billable consultants increased 23.0% to 1,506 in the second quarter of 2009 compared to 1,224 in the same quarter last year. Full-time billable consultant utilization rate was approximately 69% during the second quarter of 2009 compared with 67% during the same period last year. The average number of full-time equivalent professionals totaled 854 in the second quarter of 2009 compared to 863 for the comparable period in 2008. Average billing rate per hour for full-time billable consultants was approximately $264 for the second quarter of 2009 compared to $273 for the second quarter of 2008."

The accounting issue appears to be the manner in which payment was distributed to shareholders of acquired businesses:

This inquiry resulted in the discovery that the selling shareholders of the Acquired Businesses:

1) Redistributed portions of their acquisition-related payments among themselves in amounts that were not consistent with their ownership percentages (“Shareholder Payments”) at the date of acquisition by Huron. Such payments were dependent, in part, on continuing employment with Huron or on the achievement of personal performance measures; or

2) Redistributed portions of their acquisition-related payments to certain Company employees (“Employee Payments”) who were not selling shareholders of the Acquired Businesses. Such payments were dependent on continuing employment with Huron or on the achievement of personal performance measures.

The company also provided more detail today, with a prepared Q&A:

1) How were the acquisition-related payments originally accounted for?
The acquisition-related payments made by the Company to the selling shareholders represent purchase consideration. As such, these payments were correctly recorded as goodwill, in accordance with GAAP. Payments made upon the closing of the acquisition are recorded as goodwill on the date of closing. Earn-out payments are recorded as goodwill when the financial performance targets are met by the Acquired Businesses.

2) Why is a restatement required?
The Shareholder Payments and the Employee Payments are in substance a second and separate transaction from the Company’s acquisition of the Acquired Businesses, which resulted in a separate non-cash accounting entry that was not recorded by the Company.
Under GAAP, the selling shareholders are economic interest holders of Huron due to their ability to earn additional consideration from Huron. As such, when the selling shareholders pay a portion of their closing proceeds or earn-outs to Huron employees who were not selling shareholders or redistribute those proceeds among themselves based on employment or performance-based criteria, under GAAP, these payments are viewed as resulting from service that is assumed to have benefited the Company. Therefore, these payments are deemed to be non-cash compensation expense for the Company, and the selling shareholders are deemed to have made a capital contribution to the Company.

3) Why would amounts ultimately received and retained by selling shareholders (Shareholder Payments) be included?
The amount that is deemed to be non-cash compensation expense is the entire amount of the earn-out that was subject to redistribution based on their employment or performance as Huron employees. For example, if 60% of the earn-out was distributed based on ownership percentage and 40% of the earn-out was distributed by the selling shareholders based on employment or performance, then the entire 40% is deemed to be non-cash compensation expense, even if the amounts ultimately received by the selling shareholders do not differ significantly from their original ownership percentages.


There were multiple street downgrades of the stock so far this morning, mainly related to the company's reputation being damaged by the restatement. If you believe management, then the "sharing" of acquisition cash among employees at acquired companies might not be a reason for the shares to be down so much. The SEC inquiry, and possible consultant departures could be a bigger problem, however. There could be some value here, if the 70% drop in the stock has overshot the coming reductions in earnings...

No comments:

Post a Comment