Huron Consulting Group Inc. — Fiscal 2016 Form 10-K Summary
Reporting period: Year ended December 31, 2016; filed February 23, 2017. The filing is an annual report, not a standalone fourth-quarter filing, although quarterly data are provided. Huron is a professional services firm serving healthcare, education and life sciences, and business advisory clients. Revenue mix was approximately 58% Healthcare, 25% Education and Life Sciences, and 17% Business Advisory. The company served more than 1,000 clients and had 2,818 full-time employees at year-end.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $726.3 million | $699.0 million | Up 3.9% |
| Operating income | $74.2 million | $103.5 million | Down 28.3% |
| Operating margin | 10.2% | 14.8% | Down 460 basis points |
| Net income from continuing operations | $39.5 million | $61.9 million | Down 36.2% |
| Diluted EPS from continuing operations | $1.84 | $2.74 | Down 32.8% |
| Net income | $37.6 million | $59.1 million | Down 36.3% |
| Adjusted EBITDA | $128.5 million | $139.3 million | Down 7.8% |
| Adjusted EBITDA margin | 17.7% | 19.9% | Down 220 basis points |
| Adjusted diluted EPS from continuing operations | $3.21 | $2.99 | Up 7.4% |
| Operating cash flow | $128.3 million | $164.3 million | Down 21.9% |
Reimbursable expenses were $71.7 million, producing total revenues and reimbursable expenses of $798.0 million. Total direct costs increased to $452.7 million, or 62.3% of revenue, from 59.9% in 2015. Full-time billable consultant utilization declined to 74.6% from 76.9%, while average billing rate declined to $212 per hour from $222.
At December 31, 2016, cash and cash equivalents were $17.0 million, compared with $58.4 million in 2015. Working capital was $44.3 million, compared with $97.0 million. Total assets were $1.153 billion and stockholders’ equity was $648.0 million.
Segment Performance and Material Changes
- Healthcare: Revenue declined 4.9% to $424.9 million and operating income declined 12.8% to $147.9 million. Segment margin fell to 34.8% from 37.9%. The segment experienced four consecutive quarters of declining revenue, driven by softness in revenue cycle and cost and clinical solutions, project wind-downs, smaller projects, and fewer large integrated projects.
- Education and Life Sciences: Revenue increased 6.6% to $179.0 million, while operating income declined 2.2% to $43.2 million. Margin decreased to 24.2% from 26.3%, primarily due to higher compensation and training costs associated with the company’s cloud-based ERP investment.
- Business Advisory: Revenue increased 47.5% to $122.4 million and operating income increased 27.0% to $24.5 million. Margin declined to 20.0% from 23.2% as lower-margin Enterprise Solutions and Analytics revenue grew faster than the legacy practice.
- Acquisitions: Huron acquired MyRounding Solutions, ADI Strategies’ U.S. assets, and HSM Consulting during 2016. These acquisitions contributed $34.5 million of 2016 revenue. The company also received full-year contributions from 2015 acquisitions, including Studer Group, Cloud62, and Rittman Mead India.
- Capital allocation: Huron repurchased 982,192 shares for $55.3 million in 2016, leaving $35.1 million authorized for repurchases at year-end. No cash dividends have been declared or paid since the company became public.
Cash Flow, Debt and Liquidity
Operating cash flow was $128.3 million. Investing cash outflow was $86.6 million, including $69.1 million for business acquisitions and $13.9 million for property and equipment. Financing cash outflow was $83.2 million, reflecting $224.0 million of credit-facility repayments, $200.0 million of borrowings, and $55.3 million of share repurchases.
Debt consisted of $250.0 million principal amount of 1.25% convertible senior notes due October 2019 and $68.0 million drawn under a $500 million senior secured revolving credit facility due March 2020. The facility had $427.2 million of unused borrowing capacity, net of borrowings and letters of credit. Huron was in compliance with its covenants, reporting a consolidated leverage ratio of 2.24x against a maximum ranging from 3.25x to 3.50x and interest coverage of 18.43x against a minimum of 3.50x. The revolver borrowings were fully hedged against interest-rate changes at year-end.
Contractual obligations totaled $483.3 million, including debt principal and interest, operating leases, purchase obligations, contingent consideration, uncertain tax positions, and deferred compensation. Management stated that available cash, operating cash flow, borrowing capacity, and external capital resources were expected to support long-term growth and debt-service needs.
Outlook, Commentary, Risks and Unusual Items
- The filing does not provide a clear numerical 2017 revenue or earnings guidance range.
- Management expected Healthcare performance-based fees to decline in 2017 because of changes in client risk-sharing preferences and service mix.
- Management initiated Healthcare solution repositioning, service expansion, and workforce reductions to align resources with demand. Healthcare goodwill had only 11% fair-value headroom at the November 30, 2016 impairment test; Enterprise Solutions and Analytics also had 11% headroom. A weaker-than-expected 2017 could trigger an interim goodwill impairment charge.
- Goodwill and other intangible assets totaled $881.2 million, or 76% of total assets. No goodwill or intangible-asset impairment was recorded in 2016.
- Restructuring charges increased to $9.6 million from $3.3 million, including $7.3 million of workforce-reduction costs and $1.5 million of office-exit costs.
- 2015 benefited from a $9.5 million litigation and other gain, including a $9.2 million litigation settlement gain. The comparable 2016 gain was $2.0 million and primarily reflected contingent-consideration remeasurement gains.
- The effective tax rate increased to 33.3% from 25.9%; 2015 benefited from a $12.3 million net tax benefit from foreign-subsidiary “check-the-box” elections.
- Huron Legal was sold on December 31, 2015 and is classified as discontinued operations. The disposed business generated a $1.9 million after-tax loss in 2016, primarily from former-employee obligations, legal fees, and lease assumptions.
- Subsequent events included the January 2017 acquisition of Pope Woodhead, described as immaterial, and a February 2017 agreement to acquire Innosight for $100 million plus contingent consideration of up to $35 million. The transaction was expected to close in March 2017 and was to be funded with cash and additional revolver borrowings.
- Key risks include client concentration and termination rights, utilization and billing-rate pressure, dependence on senior personnel, competitive labor markets, acquisition integration, healthcare-sector regulation, cybersecurity and data privacy, professional liability, goodwill impairment, and secured debt covenant and refinancing requirements.
Investor Verification Checklist
- Verify whether Healthcare revenue and utilization stabilize and whether the segment avoids a goodwill impairment charge.
- Assess the sustainability of Business Advisory growth and whether Enterprise Solutions and Analytics can improve its margin.
- Reconcile adjusted EBITDA and adjusted EPS with GAAP results, including restructuring, amortization, non-cash convertible-note interest, tax effects, and litigation gains.
- Monitor cash conversion, year-end cash of $17.0 million, acquisition spending, share repurchases, and revolver usage.
- Review the 2019 convertible-note maturity and the credit agreement’s requirement to address the notes before maturity unless specified liquidity and covenant conditions are met.
- Evaluate the funding, closing, integration, and contingent consideration of the Innosight acquisition.
- Review the effect of ASC 606 adoption in 2018, particularly the expected earlier recognition of performance-based fee revenue.