Huron Consulting Group Inc. — Fiscal 2018 Form 10-K Summary
Business context and reporting period
Huron is a global professional-services and technology consultancy serving healthcare, business advisory, and education clients. The filing covers the fiscal year ended December 31, 2018, with comparative results for 2017 and 2016. Revenue mix was approximately 46% Healthcare, 30% Business Advisory, and 24% Education. Huron served more than 1,200 clients, including more than 250 new clients, and had 3,269 full-time employees at year-end.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $795.1 million | $732.6 million | Up 8.5% |
| Operating income (loss) | $52.1 million | $(207.5) million | Improved $259.6 million |
| Operating margin | 6.6% | (28.3)% | Improved |
| Net income (loss) from continuing operations | $13.9 million | $(170.5) million | Improved $184.4 million |
| Diluted EPS from continuing operations | $0.63 | $(7.95) | Improved |
| Adjusted EBITDA | $91.0 million | $104.6 million | Down 13.0% |
| Adjusted EBITDA margin | 11.4% | 14.3% | Down 2.9 points |
| Net cash from operating activities | $101.7 million | $99.8 million | Up $1.9 million |
Total revenues and reimbursable expenses were $878.0 million, compared with $807.7 million in 2017. Total direct costs increased 12.9% to $525.8 million and represented 66.1% of revenue, primarily because of higher performance bonuses and compensation costs. SG&A increased 3.2% to $181.0 million but declined to 22.8% of revenue from 23.9%.
Full-time billable consultant utilization increased to 77.5% from 74.5%, while the average billing rate increased to $209 per hour from $207. The year-end total assets were $1.05 billion, including $645.3 million of goodwill and $47.9 million of net intangible assets. Cash was $33.1 million, compared with $16.9 million at year-end 2017. Working capital was negative $185.4 million, principally because the $250 million convertible notes due October 2019 were classified as current debt.
Segment performance and material changes
| Segment | 2018 revenue | Revenue change | 2018 operating margin | Margin change |
|---|---|---|---|---|
| Healthcare | $364.8 million | Up 2.2% | 29.6% | Down from 33.3% |
| Business Advisory | $236.2 million | Up 13.7% | 21.4% | Down from 22.4% |
| Education | $194.2 million | Up 15.6% | 24.8% | Up from 24.0% |
- Revenue growth reflected stronger demand, higher consultant headcount, improved utilization, and higher billing rates. Business Advisory also benefited from the full-year contribution of the 2017 Innosight acquisition.
- Healthcare revenue increased modestly, but operating income declined 9.0% because of higher bonuses, contractor costs, and signing and retention bonuses.
- Education was the fastest-growing segment and improved both operating income and margin.
- 2018 did not include the $253.1 million non-cash goodwill impairment charge recorded in 2017, consisting of $208.1 million for Healthcare and $45.0 million for Enterprise Solutions and Analytics. This largely explains the improvement in GAAP operating income and net income.
- Adjusted EBITDA declined despite revenue growth, primarily because of higher performance bonus expense. Adjusted net income from continuing operations decreased 1.6% to $45.8 million, and adjusted diluted EPS decreased to $2.08 from $2.15.
Cash flow, debt and liquidity
- Operating cash flow was $101.7 million. Investing cash outflow was $18.6 million, including $8.9 million of property and equipment purchases and $6.1 million of internally developed software costs.
- Financing cash outflow was $66.7 million. Huron borrowed $204.3 million under its credit facility and repaid $259.8 million.
- Debt at year-end included $250.0 million principal of 1.25% convertible senior notes due October 1, 2019, $50.0 million under a $500 million revolving credit facility, and $4.4 million under a promissory note due 2024.
- Unused revolving-credit capacity was $448.4 million, after $1.6 million of letters of credit. Management expected to refinance the convertible notes with available revolving-credit capacity.
- Huron was in compliance with its debt covenants, reporting a consolidated leverage ratio of 2.83 times versus a maximum range of 3.50 to 4.00 times and interest coverage of 11.03 times versus a 3.50-times minimum.
- The company had no material off-balance-sheet arrangements and has not paid common-stock dividends. A $125 million share-repurchase authorization remained, with $35.1 million available, although no program repurchases occurred in 2018 or 2017.
Guidance, outlook, risks and unusual items
- The filing text does not provide a clear 2019 full-year financial guidance range. Management stated that internally generated cash, cash on hand, revolving-credit capacity, and access to external capital should fund expected needs.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method. The adoption increased 2018 reported revenue by approximately $9.1 million and net income from continuing operations by approximately $6.9 million compared with the former revenue-recognition guidance, primarily from performance-based fees.
- Performance-based fees were 6.1% of revenue in 2018, up from 4.9% in 2017. These arrangements require estimates of variable consideration and may create revenue volatility or future reversals.
- Huron recorded a $2.5 million litigation settlement gain and a $5.8 million loss on the sale of its Middle East practice. Restructuring charges were $3.7 million, primarily severance and office-exit costs.
- Goodwill and other intangible assets represented 66% of total assets. No goodwill impairment was recorded in 2018, but future underperformance, unfavorable market conditions, or changes in valuation assumptions could result in substantial non-cash impairment charges.
- Key risks include dependence on retaining managing directors and skilled consultants, utilization and billing-rate volatility, client termination rights, competitive pressure, healthcare-sector regulation, cybersecurity and privacy obligations, acquisition integration, contingent acquisition payments, professional liability, and general economic conditions.
- The company expects adoption of ASC 842 leases in 2019 to create an initial lease liability of approximately $68 million to $78 million and a right-of-use asset of approximately $50 million to $60 million.
- Management reported effective disclosure controls and internal control over financial reporting; the controls were also audited and received an unqualified opinion from PricewaterhouseCoopers LLP.
Investor verification checklist
- Verify the refinancing plan and actual repayment or refinancing of the $250 million convertible notes due October 1, 2019.
- Reconcile GAAP improvement with the decline in adjusted EBITDA and adjusted EPS, including the effect of higher bonus expense.
- Assess Healthcare utilization, demand, margins, and goodwill headroom following the 2017 impairment.
- Review the sustainability and cash-conversion profile of performance-based revenue and the $9.1 million ASC 606 revenue impact.
- Monitor working-capital trends, particularly receivables, unbilled services, contract assets, and accrued compensation.
- Evaluate contingent consideration obligations, with an estimated liability of $11.4 million and a maximum potential payment of $41.9 million.
- Consider the effect of lease capitalization, tax-credit valuation allowances, convertible-note dilution, and the company’s concentration in healthcare and large clients.