Huron Consulting Group Inc. — 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Huron is a global consultancy serving healthcare, business advisory, and education clients. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $219.3 million | $198.4 million | $644.5 million | $589.7 million |
| Operating income | $20.6 million | $13.6 million | $45.2 million | $35.0 million |
| Operating margin | 9.4% | 6.8% | 7.0% | 5.9% |
| Net income from continuing operations | $13.7 million | $8.2 million | $27.6 million | $10.9 million |
| Diluted EPS from continuing operations | $0.61 | $0.37 | $1.23 | $0.50 |
| Adjusted EBITDA | $28.8 million | $24.7 million | $76.0 million | $63.1 million |
| Adjusted EBITDA margin | 13.1% | 12.5% | 11.8% | 10.7% |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $51.7 million | $48.9 million |
- Q3 revenue increased 10.5%; nine-month revenue increased 9.3%.
- Q3 net income was $13.7 million, or $0.61 diluted EPS, including a $0.1 million loss from discontinued operations. Nine-month net income was $27.4 million, or $1.22 diluted EPS, including a $0.2 million loss from discontinued operations.
- At September 30, cash and cash equivalents were $49.4 million, up from $33.1 million at December 31, 2018. Receivables and unbilled services totaled $216.1 million, including $99.8 million of unbilled services.
- Total debt was $304.0 million, consisting primarily of $250.0 million of convertible notes, $50.0 million under the revolving credit facility, and a $4.0 million promissory note. Operating lease liabilities totaled $70.0 million.
- The company had $548.5 million of unused revolving credit capacity at September 30, 2019, before the subsequent refinancing of the convertible notes.
Material Changes Versus the Prior Comparable Period
- Healthcare revenue increased 10.6% in Q3 and 8.8% for the nine months. Healthcare operating margin improved to 32.9% in Q3 and 31.8% for the nine months, aided by stronger demand and performance-based fees.
- Business Advisory revenue increased 9.3% in Q3 and 7.5% for the nine months, but operating margin declined to 19.1% in Q3 and 18.0% for the nine months, primarily because of higher compensation and performance bonus costs.
- Education revenue increased 11.6% in Q3 and 12.4% for the nine months. Q3 operating margin declined to 25.4%, while the nine-month margin improved slightly to 26.2%.
- Consultant headcount increased to 2,567 at September 30, 2019 from 2,222 a year earlier. Overall Q3 utilization declined to 76.3% from 77.8%, while average billing rate declined to $206 per hour from $210.
- Direct costs rose 11.3% in Q3, faster than revenue, primarily due to salaries, performance bonuses, and share-based compensation. SG&A increased 4.8%, but declined as a percentage of revenue to 21.9% from 23.1%.
- Nine-month other expense improved by $9.4 million, largely because the 2018 period included a $5.9 million loss on the sale of the Middle East practice. The 2019 period also benefited from a $2.8 million gain on investments funding the deferred compensation plan.
- The company adopted ASC 842 lease accounting on January 1, 2019, adding $56.5 million of operating lease right-of-use assets at adoption. The adoption materially affected the balance sheet but not reported operating results.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide clear formal revenue or earnings guidance. Management expects 2019 property, equipment, and software development spending of approximately $20 million to $24 million.
- Management stated that cash generation, cash on hand, revolving-credit availability, and access to external capital should be adequate for anticipated growth, capital needs, and debt service.
- The $250.0 million convertible notes matured on October 1, 2019. Huron refinanced $217.0 million with its revolving credit facility and paid the remaining $33.0 million with cash. Post-refinancing borrowings were $267.0 million, unused revolver capacity was $331.5 million, and pro forma leverage was 2.16x.
- The credit facility was amended in September 2019, increasing commitments from $500 million to $600 million, extending maturity to September 27, 2024, and permitting up to $750 million of total commitments subject to conditions. At September 30, leverage was 2.42x versus a 3.75x maximum, and interest coverage was 15.33x versus a 3.50x minimum.
- Revenue includes variable performance-based fees, which represented 8.2% of Q3 and nine-month revenue. Such fees can vary with client outcomes and contract mix. Q3 included $4.8 million of revenue from obligations satisfied in prior periods.
- The company recognized a $0.7 million discrete tax benefit in Q3 related to the expiration of limitations on a prior tax election, contributing to the favorable 15.0% Q3 effective tax rate.
- Restructuring charges were $0.1 million in Q3 and $2.2 million for the nine months, including workforce reductions, office exits, lease impairment, and accelerated depreciation.
- Huron holds a private-company convertible debt investment valued at $60.9 million, up from $50.4 million at December 31, 2018. The investment is a Level 3 fair-value measurement and generated a $7.7 million after-tax unrealized gain in other comprehensive income for the nine months.
- In October 2019, Huron amended its Chicago headquarters lease, extending the term through September 2029, providing rent abatements and a lessor incentive, and increasing contractual obligations by approximately $12.7 million.
- Key risks include utilization and billing-rate volatility, client retention and demand, dependence on qualified personnel, performance-based revenue variability, acquisition integration, goodwill impairment, cybersecurity and privacy requirements, tax matters, interest rates, and general economic conditions. Management reported no litigation expected to have a material adverse effect, but noted that outcomes remain uncertain.
Important Facts for Investors to Verify
- Confirm the October 1, 2019 refinancing and the resulting debt balance, interest expense, liquidity, and covenant headroom.
- Assess whether the higher consultant headcount can be converted into revenue without further deterioration in utilization or billing rates.
- Separate recurring operating performance from performance-based fees, discrete tax benefits, investment gains, contingent-consideration remeasurement gains, and other adjustments in non-GAAP measures.
- Monitor Business Advisory and Education margins, which showed Q3 pressure despite revenue growth.
- Evaluate collectability and timing of the growing unbilled-services balance, including the $28.6 million contract-asset balance at September 30, 2019.
- Review the valuation assumptions and liquidity implications of the $60.9 million Level 3 private-company investment.
- Track operating lease commitments, the amended Chicago lease, and the company’s ability to meet debt and lease obligations after the convertible-note refinancing.