Huron Consulting Group Inc. — 2018 Second-Quarter Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. Huron is a global consultancy operating through Healthcare, Business Advisory, and Education segments. The financial statements are unaudited.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|
| Revenue | $197.5 million | $181.4 million | $391.2 million | $370.3 million |
| Operating income (loss) | $19.1 million | $(200.6) million | $21.5 million | $(186.4) million |
| Net income (loss) from continuing operations | $5.9 million | $(150.5) million | $2.6 million | $(145.3) million |
| Net income (loss) | $5.4 million | $(150.2) million | $2.1 million | $(144.9) million |
| Diluted EPS from continuing operations | $0.27 | $(7.00) | $0.12 | $(6.80) |
| Adjusted EBITDA | $24.7 million | $24.5 million | $38.4 million | $51.6 million |
| Adjusted diluted EPS from continuing operations | $0.58 | $0.49 | $0.78 | $1.04 |
- Q2 operating margin was 9.7%, compared with negative 110.6% in the prior-year quarter. Six-month operating margin was 5.5%, compared with negative 50.3%.
- Q2 revenue increased 8.9%; six-month revenue increased 5.7%. Growth reflected higher billable-consultant revenue, increased consultant headcount, utilization, billing rates in certain segments, and higher performance-based revenue.
- Adjusted EBITDA margin was 12.5% in Q2, versus 13.5% in Q2 2017, and 9.8% for the first six months, versus 13.9% in the prior-year period.
- Cash flow from operations was $6.9 million for the first six months, down from $23.3 million in 2017. Cash declined $6.5 million to $10.5 million at June 30, 2018.
- Total debt carrying value was $352.9 million, comprising $237.8 million of convertible notes, $110.5 million under the senior secured credit facility, and $4.6 million of an aircraft-related promissory note.
- The credit facility had $387.9 million of unused borrowing capacity, net of outstanding borrowings and letters of credit. The company reported a 3.44-to-1.00 leverage ratio and 10.07-to-1.00 interest coverage ratio, within applicable covenants.
- Receivables from clients and unbilled services totaled $183.3 million at June 30, 2018, compared with $159.4 million at December 31, 2017.
Segment results
| Segment | Q2 revenue | Q2 operating margin | Six-month revenue | Six-month operating margin |
|---|
| Healthcare | $91.5 million, up 9.9% | 29.6%, up from 28.4% | $181.4 million, down 0.2% | 28.4%, down from 31.8% |
| Business Advisory | $57.7 million, up 6.4% | 24.6%, up from 22.5% | $113.6 million, up 11.0% | 20.4%, down from 21.5% |
| Education | $48.3 million, up 10.0% | 23.3%, down from 28.4% | $96.2 million, up 11.6% | 23.6%, down from 27.9% |
Material changes and unusual items
- Results benefited significantly from the absence of the $209.6 million non-cash Healthcare goodwill impairment charge recorded in Q2 2017. That charge reduced prior-year Q2 diluted EPS by approximately $7.14 and did not affect liquidity or debt covenants.
- Huron adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased retained earnings by $2.0 million and changed the timing of performance-based revenue recognition. Compared with ASC 605, ASC 606 increased reported Q2 revenue by $1.5 million and six-month revenue by $6.7 million.
- Performance-based revenue increased to $11.5 million in Q2 from $4.6 million and to $22.6 million for the first six months from $16.8 million.
- Q2 included a $2.0 million restructuring charge, a $5.8 million loss on the sale of the Middle East practice, a $2.5 million litigation settlement gain, and $4.2 million of net gains from remeasurement of contingent acquisition consideration.
- Huron identified and corrected a non-material Q1 revenue-recognition error, reducing Q2 revenue and unbilled services by $0.6 million and Q2 net income by $0.4 million. The correction had no effect on six-month results.
- The company entered into a credit facility amendment extending maturity to March 23, 2023 and modifying certain leverage, restricted-payment, and EBITDA provisions.
Outlook, risks, and contingencies
- Management stated that available cash, internally generated liquidity, and revolving-credit capacity are expected to fund long-term growth, capital needs, debt service, and other commitments. The filing does not provide specific revenue or earnings guidance.
- Management expects approximately $15.0 million of 2018 cash spending for property, equipment, and software development.
- Remaining performance obligations under contracts with original durations exceeding one year totaled $49.6 million at June 30, 2018; approximately $29.8 million was expected to be recognized in the second half of 2018.
- The $250.0 million principal amount of convertible notes matures October 1, 2019. The credit agreement may require repayment of revolving borrowings 90 days before the convertible debt maturity unless specified liquidity, covenant, or lender-waiver conditions are satisfied.
- Key operating risks include consultant utilization and billing rates, demand volatility, client retention and renewals, recruitment and retention of qualified professionals, performance-based fee estimates, acquisition integration, goodwill impairment, privacy and information-security requirements, tax matters, litigation, and general economic conditions.
- Contingent consideration liabilities were estimated at $12.0 million at June 30, 2018. Letters of credit totaled $1.6 million. Management reported no litigation expected to have a material adverse effect, while noting that legal outcomes remain uncertain.
- The company held a $47.1 million Level 3 convertible debt investment in Shorelight, with a $27.9 million cost basis. Changes in fair value are recorded in other comprehensive income and depend on unobservable valuation assumptions.
Important facts for investors to verify
- Whether performance-based revenue recognized under ASC 606 converts to cash as expected and whether unbilled services and contract assets remain collectible.
- The company’s ability to refinance or repay the $250.0 million convertible notes due in October 2019 while maintaining credit-facility covenant compliance.
- Whether the decline in six-month adjusted EBITDA and segment margins, particularly in Healthcare and Education, reverses or persists.
- The sustainability of Q2 performance excluding the $2.5 million litigation gain, contingent-consideration remeasurement gains, and the $5.8 million divestiture loss.
- Valuation sensitivity and liquidity implications of the $47.1 million Shorelight investment and other Level 3 financial instruments.
- Potential further restructuring costs, acquisition-related contingent payments, goodwill impairment, tax adjustments, and litigation or regulatory exposures.
