Huron Consulting Group Inc. — 2013 Q3 Form 10-Q Summary
Business context and reporting period
Huron provides operational and financial consulting services to healthcare organizations, universities, life sciences companies, corporations, governmental entities, law firms, and financially distressed organizations. The filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The company reported through five segments: Huron Healthcare, Huron Legal, Huron Education and Life Sciences, Huron Financial, and All Other.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $174.7 million | $161.9 million | $509.2 million | $445.2 million |
| Operating income | $31.1 million | $20.6 million | $83.0 million | $38.9 million |
| Operating margin | 17.8% | 12.7% | 16.3% | 8.7% |
| Net income from continuing operations | $17.2 million | $10.4 million | $44.3 million | $17.3 million |
| Diluted EPS from continuing operations | $0.75 | $0.47 | $1.95 | $0.78 |
| Adjusted EBITDA | $31.5 million | $41.6 million | $93.8 million | $74.8 million |
| Adjusted EBITDA margin | 18.0% | 25.7% | 18.4% | 16.8% |
| Net cash provided by operations | Not separately provided | Not separately provided | $45.3 million | $42.9 million |
Revenues increased 7.9% in Q3 and 14.4% for the first nine months. Q3 direct costs rose to 61.1% of revenue from 55.6%, while nine-month direct costs declined to 62.3% from 63.1%. The Q3 effective tax rate was 42.2%, compared with 43.4%; the nine-month rate was 43.1%, compared with 47.6%.
Cash and cash equivalents were $30.8 million at September 30, 2013, versus $25.2 million at December 31, 2012. Total assets were $820.0 million and stockholders’ equity was $503.9 million at September 30, 2013.
Segment performance
- Huron Healthcare: Q3 revenue increased 15.9% to $87.0 million, but operating income declined 9.1% to $30.8 million and margin fell to 35.4% from 45.2%. Nine-month revenue rose 21.6% to $244.6 million and operating income rose 31.0% to $91.4 million.
- Huron Legal: Q3 revenue declined 1.9% to $45.3 million, while operating income increased 31.9% to $15.1 million. Nine-month revenue declined 1.6% to $131.3 million and operating income declined 13.8% to $28.9 million.
- Huron Education and Life Sciences: Q3 revenue rose 2.8% to $34.8 million, while operating income declined 37.3% to $7.8 million. Nine-month revenue increased 15.3% to $107.7 million and operating income increased 2.2% to $28.7 million.
- Huron Financial: Q3 revenue rose 8.0% to $7.2 million, but operating income declined 62.3% to $0.7 million. Nine-month revenue increased 49.0% to $25.1 million and operating income increased to $8.0 million from $1.7 million.
Material changes versus the prior comparable period
- Operating results benefited from the absence of the $13.1 million goodwill impairment charge recorded in Q3 2012 and from a $5.3 million litigation settlement gain in Q3 2013.
- Q3 adjusted EBITDA declined 24.3% to $31.5 million and adjusted net income from continuing operations declined to $14.8 million from $20.8 million, primarily because of lower segment operating income after excluding unusual items.
- For the first nine months, operating income more than doubled, reflecting revenue growth, lower contractor and facilities costs, reduced restructuring and restatement expenses, the litigation settlement gains, and the absence of the 2012 goodwill impairment.
- Huron identified a cumulative $1.1 million pretax stock-based compensation accounting error covering prior periods from the first quarter of 2010 through the first quarter of 2013. Management concluded prior financial statements were not materially misstated and recorded the adjustment in 2013.
- The company reorganized its internal reporting structure in Q1 2013, separating Huron Healthcare from Huron Education and Life Sciences and reallocating goodwill; prior segment information was revised for comparability.
Cash flow, debt, liquidity, and unusual items
- Nine-month operating cash flow was $45.3 million. Investing cash use was $16.3 million, including $14.4 million of capital expenditures. Financing cash use was $23.4 million, primarily reflecting net debt repayments and $5.4 million of deferred acquisition payments.
- Borrowings totaled $175.0 million at September 30, 2013, all under the term loan, compared with $192.5 million at December 31, 2012. The weighted average interest rate was 2.0%, including interest-rate swaps.
- The amended senior secured credit facility totals $450.0 million, matures September 25, 2018, and had $242.7 million of unused borrowing capacity at quarter-end. The company was in compliance with its covenants, including a 4.14-to-1 fixed-charge coverage ratio and 1.18-to-1 leverage ratio.
- The company expects approximately $20.0 million of 2013 capital expenditures. Management believes operating liquidity and available revolver capacity will be adequate for growth, capital needs, and debt service.
- On October 1, 2013, Huron acquired substantially all assets of Blue Stone International for $30 million in cash; the business will be included in Huron Education and Life Sciences.
- During Q3 2013, Huron recorded a $5.3 million gain from settling litigation brought by the company. It collected $2.6 million in Q4 2013 and expected the balance in Q1 2014.
Outlook, management commentary, and risks
Management’s strategy is to expand existing client relationships, broaden service offerings, attract and retain senior practitioners, and pursue complementary acquisitions. Demand was described as strengthened in healthcare, education and life sciences, and financial consulting, driven by rising costs, regulatory pressures, declining reimbursements or funding, and evolving client business models.
Key operating risks include fluctuating utilization, billing rates, staffing levels, performance-based fee timing, seasonal demand, project-by-project client retention, and the ability to integrate acquisitions. Performance-based revenue represented 13.2% of Q3 revenue and 11.8% of nine-month revenue, which can create quarterly volatility.
Huron remains subject to litigation risk, including an appeal in the qui tam action and an Abu Dhabi lawsuit in which claimants seek $100 million in alleged damages. Management considers the claims without merit and intends to defend them vigorously. The filing does not provide a specific quantitative loss estimate for these matters.
The company hedges interest-rate exposure and estimated that a 100-basis-point change in rates would affect pretax income by approximately $1.0 million, including swaps. Goodwill totaled $519.5 million at September 30, 2013, creating exposure to future impairment if operating performance or valuation assumptions deteriorate.
Investor verification checklist
- Verify the sustainability of Q3 performance excluding the $5.3 million litigation gain and the prior-year goodwill impairment comparison.
- Monitor Huron Healthcare’s Q3 margin compression and Huron Education and Life Sciences’ lower profitability.
- Reconcile reported net income, adjusted EBITDA, and adjusted net income to the company’s non-GAAP definitions.
- Assess collection and conversion of the elevated unbilled services balance of $82.4 million at September 30, 2013.
- Review term-loan amortization requirements, covenant headroom, variable-rate exposure, and the impact of the $30 million Blue Stone acquisition.
- Track the pending litigation, including the qui tam appeal and Abu Dhabi claims.
- Evaluate goodwill impairment sensitivity, particularly for Huron Financial and other reporting units.