Huron Consulting Group Inc. — Q3 2014 Form 10-Q Summary
Business context and reporting period
Huron provides operational and financial consulting services to healthcare organizations, higher education and life sciences institutions, corporations, law departments and firms, governmental entities, and distressed organizations. Reported segments are Huron Healthcare, Huron Legal, Huron Education and Life Sciences, Huron Business Advisory, and All Other. This unaudited filing covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $198.0 million | $174.7 million | $618.2 million | $509.2 million |
| Net income | $12.2 million | $17.2 million | $66.3 million | $44.3 million |
| Diluted EPS | $0.53 | $0.75 | $2.87 | $1.95 |
| Operating income | $21.3 million | $31.1 million | $97.1 million | $83.0 million |
| Operating margin | 10.7% | 17.8% | 15.7% | 16.3% |
| Adjusted EBITDA | $28.9 million | $31.5 million | $120.2 million | $93.8 million |
| Adjusted EBITDA margin | 14.6% | 18.0% | 19.4% | 18.4% |
| Net cash from operations | Not separately provided | Not separately provided | $92.1 million | $47.8 million |
At September 30, 2014, cash and cash equivalents were $225.9 million, compared with $58.1 million at December 31, 2013. Total debt was $361.1 million, consisting of $250.0 million principal amount of 1.25% convertible senior notes due 2019 and $150.0 million outstanding under the senior secured credit facility, less the convertible debt discount reflected in carrying value. Unused credit-facility borrowing capacity was $242.4 million, and outstanding letters of credit were $5.1 million.
The company reported $463.5 million of current assets and $158.3 million of current liabilities. Stockholders’ equity was $590.6 million. Nine-month investing cash outflows included $51.7 million for acquisitions, $16.7 million for property and equipment, and $12.5 million for a convertible debt investment. Financing cash inflows included $250.0 million of convertible-note proceeds, partially offset by $45.1 million of share repurchases and $42.1 million paid for note hedges.
Material changes versus the prior comparable period
- Q3 revenue increased 13.3%; nine-month revenue increased 21.4%. Acquired businesses contributed $18.9 million of Q3 revenue and $44.9 million of nine-month revenue.
- Q3 operating income declined 31.6% and operating margin fell to 10.7%, primarily because of higher compensation, bonus and contractor costs and the absence of the $5.3 million litigation gain recognized in Q3 2013.
- Nine-month operating income increased 17.0%, but operating margin declined modestly because the prior-year period included $6.5 million of litigation settlement gains and 2014 included higher bonus and contractor costs.
- Q3 net income declined 28.8%, while nine-month net income increased 49.5%. The nine-month improvement benefited from higher operating income and a lower effective tax rate.
- The effective tax rate was 36.8% in Q3 2014 versus 42.2% in Q3 2013, and 28.4% for the first nine months versus 43.1% in the prior year. The nine-month 2014 rate benefited primarily from an $11.4 million net recognized tax benefit related to a “check-the-box” election.
- Full-time billable consultant utilization decreased to 71.8% in Q3 from 73.9% and to 74.6% for nine months from 76.2%. Period-end full-time billable consultants increased to 1,846 from 1,572.
- Huron Healthcare produced nine-month revenue of $306.3 million and segment operating income of $117.4 million. Huron Business Advisory revenue increased 87.9% for nine months, partly from the EPM acquisition, while Education and Life Sciences revenue was essentially flat.
- The company acquired The Frankel Group Associates in Q1 and Vonlay in Q2. Effective October 1, 2014, it acquired Threshold Consulting, whose results will be reported in Huron Business Advisory.
Guidance, outlook, risks and unusual items
Management stated that internally generated liquidity, cash, available revolving capacity and external capital resources should be adequate for long-term growth, capital needs and debt service. The company estimated 2014 property and equipment spending of approximately $30.0 million. Management expected 2014 convertible-note coupon interest of approximately $1.0 million and non-cash discount and issuance-cost amortization of approximately $2.5 million; Q4 expectations were $0.8 million and $2.0 million, respectively.
Management expects performance-based fees to be higher in the first half than the second half of 2014. Such fees, utilization, billing rates, staffing levels, seasonality and client demand can cause substantial quarterly variability. Most clients retain Huron on an engagement-by-engagement basis rather than under long-term recurring contracts.
- The $250.0 million convertible notes have an initial conversion price of approximately $79.89 per share. The related hedge transactions and warrants raise the effective economic dilution threshold to approximately $97.12 per share, but future dilution remains possible.
- The secured credit agreement requires a minimum fixed-charge coverage ratio of 2.25, maximum leverage ratio of 3.00, and minimum net worth of $150 million. At September 30, 2014, reported ratios were 4.77, 1.13, and net worth above $150 million, respectively.
- Goodwill was $566.3 million at September 30, 2014. The interim impairment assessment for the reorganized Education and Life Sciences and EPM reporting units indicated fair values above carrying values; however, future deterioration in operations or assumptions could result in impairment charges.
- Restructuring charges totaled $1.4 million for the first nine months, primarily for office consolidation and workforce reductions. The remaining restructuring liability was $0.6 million.
- The Abu Dhabi litigation remains pending only on reputation and defamation allegations after the Court of Cassation ruled for Huron on other claims. Huron also identified a potential Physiotherapy Associates litigation trust claim involving alleged damages exceeding $300 million, although no claim against Huron had been specified.
- The company stated that it was not party to other litigation that management believed could materially affect financial position or results, and that it had no off-balance-sheet arrangements.
Investor verification points
- Reconcile reported growth with acquisition contributions and assess organic revenue growth, utilization and billing-rate trends.
- Monitor Q4 and full-year margins given higher compensation, bonus, contractor and amortization costs and lower expected performance-based fees.
- Evaluate the sustainability of earnings excluding the one-time tax benefit and compare GAAP results with Adjusted EBITDA and adjusted earnings.
- Review the cash use, integration risks and goodwill exposure associated with the 2013–2014 acquisitions, including Threshold Consulting.
- Assess leverage, scheduled term-loan amortization, convertible-note cash settlement obligations, potential dilution and covenant compliance.
- Track the Abu Dhabi matter and any claims arising from the Physiotherapy Associates litigation trust.
- Verify future adoption effects of ASC 606 revenue recognition and other newly issued accounting standards; the filing does not provide a quantified impact.