Huron Consulting Group Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
Huron is a global consulting and technology-services company serving healthcare, business advisory, and education clients. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Results are unaudited and should be read with the 2018 Form 10-K.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $220.8 million | $197.5 million | $425.2 million | $391.2 million |
| Operating income | $17.9 million | $19.1 million | $24.6 million | $21.5 million |
| Operating margin | 8.1% | 9.7% | 5.8% | 5.5% |
| Net income | $10.5 million | $5.4 million | $13.8 million | $2.1 million |
| Diluted EPS from continuing operations | $0.47 | $0.27 | $0.62 | $0.12 |
| Adjusted EBITDA | $29.2 million | $24.7 million | $47.2 million | $38.4 million |
| Adjusted EBITDA margin | 13.2% | 12.5% | 11.1% | 9.8% |
- Q2 revenue increased 11.7%; six-month revenue increased 8.7%. Growth reflected higher consultant headcount, utilization, and billing rates, with increases across all three segments.
- Q2 operating income declined 6.6% because higher performance bonuses, selling and administrative costs, and lower litigation-related gains more than offset revenue growth. Six-month operating income increased 14.8%.
- Net income benefited from lower other expense, including the absence of the $5.8 million loss on the 2018 divestiture of the Middle East practice, and a lower effective tax rate. The six-month 2018 tax rate was unusually high at 53.0% versus 25.8% in 2019.
- Segment Q2 revenue and operating margin were: Healthcare $101.9 million and 32.7%; Business Advisory $62.3 million and 18.4%; Education $56.5 million and 28.7%.
- Healthcare and Education margins improved, while Business Advisory margin declined from 24.6% to 18.4%, primarily due to higher performance bonus, share-based compensation, and promotion expenses.
- Overall Q2 consultant utilization was 77.2%, compared with 76.2% in 2018; average billing rate was $206 per hour versus $205.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents declined to $9.2 million at June 30, 2019 from $33.1 million at December 31, 2018.
- Operating cash flow was negative $6.2 million for the first six months, compared with positive $6.9 million in 2018. The decline primarily reflected higher annual performance-bonus payments and increases in unbilled services and receivables.
- Investing cash use was $14.9 million, including $6.4 million for property and equipment, $4.4 million for internally developed software, and $4.1 million for life-insurance policies funding the deferred-compensation plan.
- Management estimates 2019 cash spending for property and equipment and software development of approximately $18 million to $22 million.
- Total debt carrying value was $307.6 million, including $247.5 million of convertible notes due October 1, 2019, $56.0 million under the senior secured revolving facility, and $4.1 million under a promissory note due 2024.
- Huron expects to refinance the $250 million principal amount of convertible notes at maturity using its revolving credit facility. The facility has $442.4 million of unused capacity at June 30, 2019, after borrowings and letters of credit.
- Huron was in compliance with its debt covenants, reporting a consolidated leverage ratio of 2.63x versus a maximum range of 3.50x to 4.00x and interest coverage of 13.82x versus a 3.50x minimum.
- The company adopted ASC 842 lease accounting on January 1, 2019, adding $55.0 million of operating lease right-of-use assets and $72.7 million of lease liabilities at June 30, 2019. The adoption materially affected the balance sheet but not reported operating results.
Material changes versus the prior comparable period
- Revenue growth accelerated in Q2, led by Healthcare performance-based revenue, which increased to $22.0 million from $9.2 million, and Education revenue growth of 17.0%.
- Business Advisory revenue increased 7.9%, but operating income fell 19.3% and margin contracted 620 basis points.
- Q2 restructuring charges decreased to $0.8 million from $2.0 million; six-month charges decreased to $2.0 million from $2.7 million. Actions included office exits and workforce reductions.
- Litigation and other gains fell to $0.5 million in Q2 from $6.7 million in 2018, when Huron recorded a $2.5 million class-action settlement gain and larger contingent-consideration remeasurement gains.
- The fair value of Huron’s Shorelight convertible debt investment increased to $59.4 million from $50.4 million at year-end, generating a $6.6 million after-tax unrealized gain in other comprehensive income for the first six months.
- Remaining performance obligations under contracts with original expected durations exceeding one year were $65.1 million at June 30, 2019; approximately $37.5 million was expected to be recognized in 2019, $16.4 million in 2020, and $11.2 million thereafter.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide a clear full-year revenue or earnings guidance range. Management expects internal liquidity, cash on hand, operating cash flows, revolving-facility capacity, and external capital access to fund growth and debt obligations.
- Management intends to continue investing in hiring, expanded service offerings, technology, complementary acquisitions, and client relationships.
- Key operating risks include utilization and billing-rate volatility, client retention and renewals, demand changes, employee retention, performance-based fee variability, acquisition integration, goodwill impairment, privacy and information-security requirements, tax matters, and general economic conditions.
- Cash conversion weakened because of bonus payments, higher unbilled services, and working-capital requirements. Unbilled services increased to $91.8 million from $69.6 million at year-end, and one Healthcare client represented 11.1% of combined receivables and unbilled services.
- The Shorelight investment is a Level 3 fair-value asset dependent on valuation models and unobservable assumptions; changes in estimated fair value flow through other comprehensive income.
- Huron reported no litigation or legal proceeding that management believes would have a material adverse effect, but acknowledges that actual outcomes could differ because of litigation-related uncertainties.
- The company had authorization to repurchase up to $125 million of stock through October 31, 2019, with $35.1 million remaining available; no program repurchases were made during the first six months.
Important facts for investors to verify
- How the $250 million convertible notes were refinanced or repaid at the October 1, 2019 maturity and the resulting leverage and interest burden.
- Whether negative operating cash flow in the first half was temporary and whether receivables and unbilled services converted to cash.
- Whether Healthcare performance-based revenue remains elevated and whether Business Advisory margins recover from the Q2 decline.
- The sustainability of adjusted EBITDA growth after excluding restructuring, amortization, litigation gains, non-cash convertible-note interest, and transaction-related expenses.
- The valuation, maturity extension, and liquidity of the $59.4 million Shorelight investment.
- Progress and costs associated with office reductions, workforce changes, software investment, and the estimated $18 million to $22 million of 2019 capital spending.