Business Context and Reporting Period
Huron Consulting Group Inc. is a global professional services firm serving healthcare, education, life sciences and commercial clients through its Healthcare, Education and Business Advisory segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Financial Performance and Liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $176.4 million | $183.4 million | $546.6 million | $548.1 million |
| Operating income (loss) | $6.1 million | $23.2 million | $(180.3) million | $65.8 million |
| Operating margin | 3.5% | 12.7% | (33.0)% | 12.0% |
| Net income (loss) | $4.4 million | $12.3 million | $(140.5) million | $33.5 million |
| Diluted EPS | $0.20 | $0.57 | $(6.56) | $1.56 |
| Adjusted EBITDA | $21.5 million | $37.5 million | $73.1 million | $105.8 million |
| Adjusted EBITDA margin | 12.2% | 20.4% | 13.4% | 19.3% |
Q3 operating results were pressured by lower Healthcare revenue, higher personnel and facility costs, increased bonuses and acquisition-related expenses. Net income included a $2.0 million income tax benefit; the effective tax rate was unusually favorable at negative 92.4%, primarily due to a $2.7 million benefit related to a previously unrecognized tax benefit.
- Healthcare revenue declined 23.1% year over year to $79.6 million, with segment margin declining to 32.4% from 37.5%.
- Education revenue increased 7.3% to $41.4 million, but segment margin declined to 18.7% from 28.2%.
- Business Advisory revenue increased 33.9% to $55.4 million, and segment margin increased to 23.2% from 20.8%, aided by acquisitions.
- Nine-month cash flow from operations was $52.4 million, down from $79.7 million. Investing cash outflow was $125.3 million, including $106.9 million for acquisitions and $20.1 million for capital expenditures.
- Cash and cash equivalents were $8.7 million at September 30, 2017, compared with $17.0 million at December 31, 2016.
- Total debt carrying value was $374.8 million, consisting primarily of $230.8 million of convertible notes, $139.0 million under the revolving credit facility and a $5.0 million aircraft-related promissory note.
- The company had $358.3 million of unused revolving-credit capacity, after borrowings and letters of credit, and was in compliance with its debt covenants. Reported leverage was 3.52 to 1.00 versus a maximum range of 3.25 to 3.75 to 1.00; interest coverage was 12.60 to 1.00 versus a 3.50 minimum.
Material Changes Versus the Prior Comparable Period
- Revenue declined 3.8% in Q3 and 0.3% for the first nine months, despite acquisition-related revenue growth.
- Healthcare weakness was the principal operating issue, reflecting reduced demand for performance-improvement services, winding down of large projects, smaller project sizes and lower performance-based fees. Healthcare performance-based revenue fell to $5.3 million in Q3 from $13.8 million and to $21.6 million for nine months from $42.5 million.
- Business Advisory growth reflected the acquisitions of Innosight, Pope Woodhead and the international assets of ADI Strategies. Innosight contributed $11.0 million of Q3 revenue and $27.2 million for nine months.
- In the second quarter, Huron recorded a $209.6 million non-cash goodwill impairment charge against Healthcare goodwill. Healthcare goodwill declined to $427.2 million at September 30 from $636.8 million at December 31, 2016.
- Goodwill and intangible assets totaled $770.2 million, or approximately 71% of total assets, at September 30, 2017.
- Debt increased from $292.1 million at December 31, 2016, primarily to fund acquisitions and other corporate needs. No shares were repurchased during the first nine months of 2017; $35.1 million remained available under the repurchase authorization.
- The company reorganized segment reporting by moving Life Sciences from Education and Life Sciences to Business Advisory; historical segment information was restated.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide a clear consolidated revenue or earnings guidance range. Management expects internally generated liquidity, cash on hand and available revolver capacity to fund operating, capital and debt-service needs, and estimated 2017 capital expenditures of approximately $25.0 million.
- Management remains cautious about near-term Healthcare growth because hospitals and health systems face regulatory and funding uncertainty. Further deterioration versus internal forecasts could cause another material, non-cash goodwill impairment charge.
- Healthcare goodwill was tested using an 11-year forecast, a 3.5% long-term revenue growth assumption and a 10.0% discount rate; changes in these assumptions could materially affect valuation.
- Huron expects to adopt the new revenue standard, ASC 606, on January 1, 2018 using the modified retrospective method. Performance-based fee revenue is expected to be recognized earlier because estimated amounts will be recognized over the engagement term.
- Restructuring charges were $1.3 million in Q3 and $5.3 million for nine months, primarily from office consolidations, lease obligations and Healthcare workforce reductions.
- Contingent consideration liabilities increased to $22.5 million from $8.8 million at year-end, including a maximum potential payout of $35.0 million related to the Innosight acquisition.
- The $250.0 million principal amount of convertible notes matures October 1, 2019. The credit agreement may require repayment of revolver borrowings before the convertible-note maturity unless specified liquidity, covenant or lender-waiver conditions are met.
- The company reported no material litigation, no material off-balance-sheet arrangements and effective disclosure controls as of September 30, 2017.
Facts Investors Should Verify
- Whether Healthcare demand, utilization, billing rates and performance-based fees stabilize sufficiently to avoid additional goodwill impairment.
- Actual cash generation after acquisition spending, capital expenditures, restructuring payments and contingent consideration.
- Ability to manage the 2019 convertible-note maturity and related credit-facility repayment requirements.
- The impact of ASC 606 adoption on the timing and volatility of performance-based revenue.
- Whether acquisition growth, particularly Innosight and other Business Advisory acquisitions, produces sustainable organic growth and margin improvement.
- The effect of unusual tax benefits, accounting-error corrections and non-GAAP adjustments on reported versus underlying earnings.