Huron Consulting Group Inc. — 2016 Q2 Form 10-Q Summary
Business Context and Reporting Period
Huron is a global professional services firm serving healthcare, higher education, life sciences, and commercial clients through advisory, consulting, technology, and analytics solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. Huron Legal was sold on December 31, 2015, and is presented as discontinued operations for all periods.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Revenue | $184.3 million | $184.0 million | $364.7 million | $338.4 million |
| Total revenues and reimbursable expenses | $203.2 million | $204.9 million | $400.3 million | $375.6 million |
| Operating income | $28.2 million | $28.8 million | $42.6 million | $36.7 million |
| Operating margin | 15.3% | 15.6% | 11.7% | 10.9% |
| Net income from continuing operations | $16.1 million | $14.1 million | $23.0 million | $15.1 million |
| Total net income | $15.2 million | $18.8 million | $21.2 million | $20.3 million |
| Diluted EPS from continuing operations | $0.76 | $0.62 | $1.07 | $0.67 |
| Adjusted EBITDA | $41.4 million | $41.5 million | $67.9 million | $57.6 million |
| Adjusted EBITDA margin | 22.4% | 22.6% | 18.6% | 17.0% |
Cash flow from operations was $40.5 million in the first six months of 2016, versus $18.3 million in the prior-year period. Investing cash outflow was $56.7 million, including $49.1 million for acquisitions and $5.4 million for property and equipment. Financing cash outflow was $35.7 million, including $55.3 million of share repurchases and $23.0 million of net borrowings. Cash declined to $6.7 million at June 30, 2016, from $58.4 million at December 31, 2015.
Long-term debt was $334.7 million at June 30, 2016, consisting of $219.7 million carrying value of 1.25% convertible senior notes due 2019 and $115.0 million outstanding under the senior secured revolving credit facility. The facility had $380.2 million of unused borrowing capacity after outstanding borrowings and letters of credit. Huron was in compliance with its covenants, reporting a consolidated leverage ratio of 2.12x and interest coverage ratio of 19.69x.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue was essentially flat, while first-half revenue increased 7.8%, primarily from acquisitions and the full-period contribution from Studer Group.
- Second-quarter continuing-operations net income rose 14.1%, and diluted continuing-operations EPS increased to $0.76 from $0.62, helped by a lower effective tax rate and fewer diluted shares after repurchases.
- First-half operating income increased 15.9%, and operating margin improved to 11.7% from 10.9%.
- Huron Healthcare second-quarter revenue declined 10.5% and operating income declined 9.1%, reflecting lower demand in revenue cycle and cost and clinical solutions. Its segment margin nevertheless improved to 39.0% from 38.4%.
- Huron Business Advisory second-quarter revenue increased 49.0% and operating income increased 38.6%, substantially reflecting acquisitions, although segment margin declined to 28.0% from 30.1%.
- Huron Education and Life Sciences revenue increased 5.1% in the second quarter, but operating margin declined to 29.0% from 30.7%.
- Performance-based fees remain a source of quarterly variability. Healthcare performance-based fees were $14.8 million in Q2 2016 versus $16.3 million in Q2 2015; Business Advisory performance-based fees increased to $4.6 million from $3.4 million.
- Restructuring charges increased to $1.7 million in Q2 2016 from $0.6 million, and totaled $3.1 million for the first half versus $1.3 million in the prior-year period.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a clear quantitative earnings or revenue guidance range. Management expects internally generated liquidity, cash on hand, available revolver capacity, and external capital resources to fund anticipated growth and debt-service needs. Planned 2016 capital expenditures were estimated at approximately $20.0 million.
- Management’s strategy emphasizes expanding existing relationships, hiring and retaining professionals, broadening service offerings, integrating technology solutions, and acquiring complementary businesses.
- On July 25, 2016, Huron agreed to acquire HSM Consulting, a healthcare information technology and management consulting firm; closing was anticipated in the third quarter of 2016.
- Huron completed acquisitions of MyRounding and the U.S. assets of ADI Strategies in 2016. The company expected to pursue ADI Strategies’ international assets in Dubai and India.
- Huron Legal generated a $1.0 million Q2 2016 loss and a $1.8 million first-half loss within discontinued operations, primarily from employee obligations, legal fees, and vacated-office lease assumptions.
- Key risks include utilization, billing rates, staffing levels, client retention and new business, demand volatility, performance-fee timing, acquisition integration, goodwill impairment, privacy and information-security requirements, tax matters, market downturns, and dependence on professional personnel.
- Goodwill was $787.4 million and intangible assets were $93.4 million at June 30, 2016, creating exposure to impairment and amortization expense.
- The company held a $36.3 million Level 3 convertible debt investment in Shorelight, with valuation dependent on significant unobservable assumptions. It recorded a $1.4 million pretax unrealized gain in other comprehensive income during the first half.
- Management reported no material litigation expected to adversely affect financial position or results, no material off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2016.
Important Facts for Investors to Verify
- Whether the sharp second-quarter decline in Huron Healthcare demand persists and how it affects utilization, billing rates, and segment margins.
- The sustainability of Business Advisory growth after adjusting for acquisitions and performance-based fees.
- Cash generation and liquidity following the decline to $6.7 million of cash, $55.3 million of share repurchases, acquisition spending, and increased revolver borrowings.
- Compliance with credit-facility covenants and the requirement to address revolver borrowings before the convertible-debt maturity under specified conditions.
- The integration, valuation, and performance of recent acquisitions, including Studer Group, MyRounding, ADI Strategies, and the planned HSM Consulting acquisition.
- Potential goodwill or intangible-asset impairment, future amortization expense, and the carrying value of the Shorelight investment.
- The timing and magnitude of remaining discontinued-operation liabilities and Huron Legal transition-services obligations.