Huron Consulting Group Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
Huron provides operational and financial consulting services through Huron Healthcare, Huron Legal, Huron Education and Life Sciences, Huron Business Advisory, and All Other. This unaudited filing covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The company had 23,550,025 common shares outstanding as of April 23, 2014.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $210.7 million | $164.0 million | Up 28.5% |
| Total revenue and reimbursable expenses | $229.8 million | $179.4 million | Up 28.1% |
| Operating income | $41.8 million | $21.3 million | Up 95.9% |
| Operating margin | 19.8% | 13.0% | Up 6.8 percentage points |
| Net income from continuing operations | $34.1 million | $11.4 million | Up 199.8% |
| Diluted EPS from continuing operations | $1.48 | $0.51 | Up $0.97 |
| Adjusted EBITDA | $49.1 million | $25.6 million | Up 91.7% |
| Adjusted EBITDA margin | 23.3% | 15.6% | Up 7.7 percentage points |
| Net cash used in operating activities | $9.2 million | $23.0 million | Improved by $13.8 million |
The Q1 2014 effective tax rate was 16.0%, versus 41.7% in Q1 2013, primarily because of an $11.4 million recognized net tax benefit from a “check-the-box” election involving a wholly owned foreign subsidiary. Excluding this benefit and other specified adjustments, adjusted net income from continuing operations was $25.5 million, or $1.10 adjusted diluted EPS, compared with $11.6 million and $0.51, respectively, in Q1 2013.
Cash and cash equivalents declined to $21.6 million at March 31, 2014 from $58.1 million at December 31, 2013. Total assets were $867.8 million, including $544.9 million of net goodwill. Unbilled services increased to $89.7 million from $55.1 million at year-end, while client receivables declined to $100.2 million from $123.8 million.
Debt totaled $162.5 million at March 31, 2014, all under the term loan, compared with $168.8 million at December 31, 2013. The weighted average interest rate was 2.3%. Unused borrowing capacity was $242.0 million, after consideration of outstanding letters of credit. The company reported compliance with its debt covenants, including a 4.75-to-1.00 fixed-charge coverage ratio and a 0.91-to-1.00 leverage ratio.
Material changes versus the prior comparable period
- Huron Healthcare revenue increased 36.6% to $107.5 million, and segment margin increased to 47.6% from 39.6%, supported by higher demand and performance-based fees.
- Huron Legal revenue increased 34.3% to $55.0 million, while segment margin increased to 22.7% from 7.2%, reflecting stronger legal advisory and discovery activity.
- Huron Education and Life Sciences revenue declined 6.0% to $33.6 million, and segment margin declined to 19.2% from 26.2% because of lower billing rates and utilization and higher personnel and operating costs.
- Huron Business Advisory revenue increased 55.9% to $13.4 million, including $6.6 million from Blue Stone, acquired in Q4 2013. Segment margin fell to 19.1% from 39.4% because of higher personnel, contractor, amortization, and practice costs.
- Total direct costs declined to 59.2% of revenue from 65.1%, while selling, general and administrative expenses declined to 17.9% of revenue from 19.7%.
- Utilization of full-time billable consultants declined to 74.1% from 77.9%, but the average billing rate increased to $251 per hour from $212.
- Q1 2014 included a $17.4 million business acquisition payment and $4.8 million of capital expenditures. The company estimated 2014 capital expenditures of approximately $30.0 million.
- The company acquired The Frankel Group Associates LLC for aggregate consideration of $18.0 million, recording $5.7 million of intangible assets and $8.3 million of goodwill.
Outlook, risks, contingencies, and unusual items
- Management expects performance-based fees to be greater in the first half of 2014 than in the second half, but noted that their timing can cause significant quarterly volatility.
- No formal full-year revenue or earnings guidance is provided in the filing. Management stated that internally generated liquidity and available revolver capacity are expected to fund growth, capital needs, and debt service.
- The company authorized a share repurchase program of up to $50 million through February 28, 2015. Approximately $0.3 million of repurchases were initiated during Q1 and settled in Q2; 46,704 shares were separately reacquired for employee tax withholding.
- Goodwill was reassigned following the transfer of the Enterprise Performance Management practice to Huron Business Advisory. The related impairment tests showed fair value exceeding carrying value by 46% for Huron Education and Life Sciences and 12% for EPM; no impairment charge was recorded.
- A $0.1 million restructuring charge was recorded for workforce reductions in the London office. A $0.4 million restructuring liability remained at March 31, 2014.
- The company faces continuing litigation risks, including a False Claims Act qui tam action and an Abu Dhabi matter. Huron prevailed in the Abu Dhabi appellate court, although a further appeal remained possible through May 18, 2014. Management stated that no other known proceedings were expected to have a material adverse effect, while acknowledging litigation uncertainty.
- On April 23, 2014, Huron agreed to acquire Vonlay, LLC, a healthcare technology consulting firm, subject to customary closing conditions and expected to close in May 2014.
- Approximately 80% of term-loan borrowings were effectively hedged through interest-rate swaps. A hypothetical 100-basis-point interest-rate change was estimated to affect pretax income by approximately $0.3 million.
Important facts for investors to verify
- Separate recurring operating performance from the $11.4 million recognized tax benefit and assess adjusted results.
- Monitor cash conversion, particularly the increase in unbilled services and the company’s negative Q1 operating cash flow.
- Evaluate the sustainability and timing of performance-based fees, especially in Huron Healthcare.
- Assess goodwill and acquisition-related risks, including the limited 12% fair-value cushion reported for the EPM reporting unit.
- Track debt amortization, covenant compliance, interest-rate exposure, and the remaining $242.0 million borrowing capacity.
- Verify the closing and financial impact of the Vonlay acquisition and the company’s approximately $30.0 million 2014 capital-expenditure plan.