Huron Consulting Group Inc. — Fiscal 2013 Form 10-K Summary
Business context and reporting period
Huron provides operational and financial consulting services to healthcare, education, life sciences, legal, corporate, governmental, and financially distressed clients. This Form 10-K covers the fiscal year ended December 31, 2013, with comparative information for 2012 and 2011. The company operated through Huron Healthcare, Huron Legal, Huron Education and Life Sciences, Huron Financial, and All Other. Effective January 1, 2014, Huron Financial was renamed Huron Business Advisory.
2013 revenue mix was 49.8% Huron Healthcare, 25.3% Huron Legal, 20.6% Huron Education and Life Sciences, 4.2% Huron Financial, and 0.1% All Other. Huron completed the acquisition of Blue Stone International in October 2013 for approximately $30.0 million, including $17.1 million of goodwill.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue, excluding reimbursable expenses | $720.5 million | $626.0 million | +15.1% |
| Total revenue and reimbursable expenses | $787.8 million | $681.7 million | +15.6% |
| Operating income | $119.9 million | $73.4 million | +63.3% |
| Operating margin | 16.6% | 11.7% | +4.9 percentage points |
| Net income from continuing operations | $66.5 million | $36.0 million | +84.9% |
| Diluted EPS from continuing operations | $2.92 | $1.61 | +81.4% |
| Adjusted EBITDA | $138.4 million | $115.8 million | +19.5% |
| Adjusted EBITDA margin | 19.2% | 18.5% | +0.7 percentage points |
| Net cash provided by operating activities | $115.3 million | $102.4 million | +12.6% |
Total direct costs were $446.6 million, or 62.0% of revenue, compared with 62.1% in 2012. Selling, general and administrative expense increased to $138.5 million but declined to 19.2% of revenue from 20.0%. The effective tax rate declined to 41.5% from 45.2%.
At December 31, 2013, cash and cash equivalents were $58.1 million, working capital was $99.1 million, and total stockholders’ equity was $530.3 million. Borrowings totaled $168.8 million, down from $192.5 million, and carried a weighted average interest rate of 2.0%. Unused borrowing capacity was $242.6 million, and the company was in compliance with its credit covenants, including a 1.10-to-1.00 leverage ratio versus a 3.00-to-1.00 maximum.
Investing cash outflows were $52.7 million, including $30.3 million for acquisitions and $20.2 million for property and equipment. Financing cash outflows were $29.6 million, primarily reflecting net debt repayments and deferred acquisition payments. Management estimated 2014 capital expenditures of approximately $30.0 million.
Material changes versus the prior comparable period
- Huron Healthcare revenue increased 24.2% to $358.8 million, with operating income up 28.0% to $141.9 million and margin improving to 39.5%.
- Huron Legal revenue declined 1.4% to $182.4 million, while operating income declined 5.3% to $42.0 million; utilization and document-review demand weakened.
- Huron Education and Life Sciences revenue increased 14.6% to $148.3 million, partly including $4.7 million from Blue Stone, but operating income declined 6.2% to $35.9 million and margin fell to 24.2% from 29.6%.
- Huron Financial revenue increased 36.1% to $30.0 million and operating income increased to $7.3 million from $1.9 million, reflecting stronger demand for restructuring, turnaround, and operational-improvement services.
- Performance-based fees increased to 14.6% of revenue from 14.2%; fixed-fee engagements increased to 37.2% from 34.7%, while time-and-expense revenue declined to 44.9% from 47.7%.
- 2013 benefited from a $5.9 million net litigation and settlement gain, including a $5.3 million gain on a lawsuit brought by Huron. The company also reversed a $1.2 million charge recorded in 2012 related to a qui tam matter.
- 2013 had no goodwill impairment charge, compared with a $13.1 million charge in 2012 related to Huron Financial. Restructuring expense declined to $0.8 million from $4.0 million, and restatement-related expense fell to zero from $1.8 million.
- Huron identified a $1.1 million cumulative share-based compensation error relating to prior-period performance awards. Management concluded that prior financial statements were not materially misstated and recorded the adjustment in 2013.
- Fourth-quarter 2013 revenue was $211.3 million and net income was $22.1 million, compared with fourth-quarter 2012 revenue of $180.8 million and net income of $18.6 million.
Outlook, commentary, risks, contingencies, and unusual items
Management indicated that demand was supported by healthcare reimbursement pressure, rising costs, regulatory change, declining funding, and demand for restructuring and operational improvement. The filing does not provide a clear numerical 2014 revenue or earnings guidance figure. Management stated that internally generated liquidity, available revolver capacity, and external capital resources should be adequate for anticipated growth and debt-service needs.
- Revenue timing is volatile because 14.6% of 2013 revenue was performance-based and is recognized only after contractual criteria are met and, in some cases, client confirmation is received.
- Fixed-fee engagements represented 37.2% of revenue and may become less profitable if costs or completion times exceed estimates.
- Client engagements are generally terminable with little or no notice, and the ten largest clients represented 35.2% of 2013 revenue. No single client exceeded 10% of revenue.
- The business depends heavily on retaining managing directors and other highly skilled professionals; competition for talent may increase compensation costs and pressure margins.
- Healthcare regulatory and reimbursement changes, economic conditions, competition, utilization, billing rates, technology dependence, cybersecurity, data privacy, and international operations could adversely affect results.
- The senior secured credit facility is collateralized by substantially all personal property and certain subsidiary equity interests. Borrowings mature in 2018, and variable-rate debt creates interest-rate exposure; a 100-basis-point rate change was estimated to affect pretax income by approximately $0.9 million.
- The Abu Dhabi court ruled in Huron’s favor on claims seeking $100 million, but the claimant appealed in January 2014. The company also disclosed a qui tam action that had been dismissed with prejudice, with an appeal pending.
- Effective January 1, 2014, Huron acquired substantially all assets of The Frankel Group, a life sciences consulting firm. The filing does not provide a clear purchase price.
Important facts an investor should verify
- Reconcile reported revenue, adjusted EBITDA, and adjusted net income to GAAP results and assess the effect of the $5.9 million litigation gain.
- Evaluate the sustainability of Huron Healthcare’s growth and performance-based revenue, particularly the $104.5 million of 2013 healthcare performance-based fees.
- Monitor Huron Legal and Huron Education and Life Sciences utilization, margins, and demand trends.
- Review debt amortization requirements, covenant headroom, interest-rate swaps, and the September 2018 credit-facility maturity.
- Assess receivable quality and collection timing, including the increase in client receivables and unbilled services associated with performance-based engagements.
- Confirm the final accounting and operating contribution of Blue Stone International and The Frankel Group.
- Track the pending litigation appeals, contractual obligations of $270.8 million, and exposure from letters of credit totaling $4.9 million.