Huron Consulting Group Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
Huron is a global professional-services and consulting firm serving healthcare, business advisory, and education clients. The filing covers the fiscal year ended December 31, 2019; quarterly data identifies fourth-quarter 2019 revenue of $232.3 million and net income of $14.3 million. Revenue mix was Healthcare 46%, Business Advisory 29%, and Education 25%. Huron served more than 1,800 clients and had 3,750 full-time employees at year-end.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $876.8 million | $795.1 million | 10.3% increase |
| Operating income | $63.7 million | $52.1 million | 22.3% increase |
| Operating margin | 7.3% | 6.6% | 70 basis-point increase |
| Net income from continuing operations | $42.0 million | $13.9 million | Increase of $28.0 million |
| Diluted EPS from continuing operations | $1.87 | $0.63 | Increase of $1.24 |
| Adjusted EBITDA | $105.4 million | $91.0 million | 15.8% increase |
| Adjusted EBITDA margin | 12.0% | 11.4% | 60 basis-point increase |
| Net cash provided by operating activities | $132.2 million | $101.7 million | 30.1% increase |
Net income, including discontinued operations, was $41.7 million, or $1.85 diluted EPS, compared with $13.6 million, or $0.62 diluted EPS, in 2018. The effective tax rate declined to 20.0% from 44.7%, aided by tax credits, valuation allowance changes, and tax benefits related to investments and a prior “check-the-box” election.
Cash and cash equivalents were $11.6 million at December 31, 2019, compared with $33.1 million in 2018. Investing cash outflows were $35.0 million, including $13.2 million of property and equipment, $10.3 million of internally developed software, $5.0 million of investment securities, $4.7 million of life insurance contributions, and $2.5 million for a business acquisition. Capital expenditures and software spending were estimated at approximately $25 million to $30 million for 2020.
Total assets were $1.10 billion and stockholders’ equity was $585.5 million. Goodwill and other intangible assets totaled $678.3 million, or 61% of total assets. No goodwill or material intangible-asset impairment was recorded in 2019.
Debt and liquidity
- Outstanding debt at year-end was $208.9 million, consisting primarily of $205.0 million under a $600 million senior secured revolving credit facility and $3.9 million under a promissory note.
- The $250.0 million convertible notes matured on October 1, 2019. Huron refinanced $217.0 million through the revolving facility and paid $33.0 million using cash.
- The revolving facility matures September 27, 2024, bears variable rates generally linked to LIBOR or an alternate base rate, and had $393.3 million of unused capacity before covenant limitations.
- Maximum borrowing capacity after restrictive covenants was $271.6 million at year-end, compared with $100.1 million in 2018.
- The company was in compliance with debt covenants. The consolidated leverage ratio was 1.64x versus 2.83x in 2018, and interest coverage was 15.29x versus 11.03x.
- Huron repurchased 210,437 shares for $14.2 million in 2019. The remaining authorization under its repurchase program was $20.9 million at year-end, with the program authorized through October 31, 2020.
- Huron has not declared or paid common-stock dividends since becoming public.
Material changes versus the prior comparable period
- Revenue growth occurred across all segments: Healthcare increased 9.4% to $399.2 million, Business Advisory increased 6.9% to $252.5 million, and Education increased 15.9% to $225.0 million.
- Healthcare operating margin increased to 31.5% from 29.6%; Business Advisory margin declined to 19.7% from 21.4%; Education margin remained 24.8%.
- Average full-time billable consultants increased to 2,427 from 2,165, while total utilization declined to 76.1% from 77.5%. The average billing rate increased to $211 from $209.
- Performance-based revenue increased to 8.9% of total revenue from 6.1%, increasing earnings and working-capital variability. Healthcare performance-based revenue rose to $71.1 million from $42.7 million.
- Adjusted EBITDA improved, but direct costs increased to 66.3% of revenue from 66.1% and SG&A increased to 23.2% from 22.8%, reflecting higher compensation, bonuses, technology, legal, and transaction-related costs.
- Restructuring charges declined to $1.9 million from $3.7 million. The 2019 charges primarily reflected workforce reductions and office exits, partially offset by a lease-related gain.
- Net other expense declined to $11.2 million from $26.9 million, primarily because 2018 included a $5.8 million loss on the sale of the Middle East practice and 2019 included gains on investments supporting deferred compensation.
- Operating lease right-of-use assets and liabilities were recognized in 2019 under ASC 842, materially changing the balance sheet presentation without affecting the prior-period income statement.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear full-year 2020 revenue or earnings guidance value. Management states that internally generated liquidity, cash on hand, available revolver capacity, and access to external capital are expected to fund long-term growth and debt-service needs.
- Management committed in the fourth quarter of 2019 to implement a new enterprise resource planning system over several years. The implementation may require substantial expenditures and could disrupt operations, systems, or internal controls.
- Goodwill was $646.7 million at year-end. Strategy and Innovation passed its quantitative impairment test with fair value 41% above carrying value; a 100-basis-point increase in the discount rate would reduce fair value by approximately $5.6 million. A significant deterioration in performance could trigger future impairment charges.
- Revenue recognition involves significant estimates for fixed-fee engagements and performance-based arrangements. The independent auditor identified these areas as critical audit matters. Remaining performance obligations were $90.1 million, with approximately $58.1 million expected to be recognized in 2020.
- Key risks include consultant utilization and billing rates, talent retention, client concentration and engagement termination, healthcare-sector regulation and demand, cybersecurity and data privacy, third-party technology relationships, acquisitions and integration, litigation, variable-rate debt, and the replacement or phase-out of LIBOR.
- Contractual obligations totaled $386.4 million, including $234.0 million of bank-borrowing principal and interest, $90.9 million of operating lease obligations, and $29.6 million of purchase obligations.
- Huron reported no material off-balance-sheet arrangements and no pending legal proceeding that management believed would materially affect financial position or results of operations.
- Huron held a Shorelight convertible debt investment with a $49.5 million fair value and a $27.9 million cost basis, and a $5.0 million preferred-stock investment in Medically Home. These investments carry valuation and impairment risk.
Important facts for investors to verify
- Whether revenue growth, particularly performance-based Healthcare revenue, is sustainable and how it affects cash conversion and quarter-to-quarter volatility.
- Future utilization, average billing rates, consultant hiring, compensation inflation, and the effect of increased headcount on margins.
- Debt refinancing and interest-rate exposure, including LIBOR transition risk and the $205.0 million revolver balance due in 2024.
- Progress, cost, and control implications of the multi-year ERP implementation.
- Goodwill valuation assumptions, especially for Healthcare and Strategy and Innovation, given goodwill represents a substantial portion of total assets.
- Realization of the $90.1 million remaining performance obligations and the quality and collectability of receivables, unbilled services, and contract assets.
- Valuation and potential impairment of the Shorelight and Medically Home investments.
- Execution of the share-repurchase program and the company’s continued decision not to pay dividends.