Huron Consulting Group Inc. 2018 Q3 SEC Filing Summary
Business Context and Reporting Period
Huron is a global consulting and technology services company serving healthcare, business advisory, and education clients. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $198.4 million | $176.4 million | $589.7 million | $546.6 million |
| Operating income (loss) | $13.6 million | $6.1 million | $35.0 million | ($180.3 million) |
| Operating margin | 6.8% | 3.5% | 5.9% | (33.0%) |
| Net income (loss) from continuing operations | $8.2 million | $4.1 million | $10.9 million | ($141.2 million) |
| Diluted EPS from continuing operations | $0.37 | $0.19 | $0.50 | ($6.59) |
| Adjusted EBITDA | $24.7 million | $21.5 million | $63.1 million | $73.1 million |
| Adjusted EBITDA margin | 12.5% | 12.2% | 10.7% | 13.4% |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $48.9 million | $52.4 million |
Q3 revenue increased 12.5% year over year, while nine-month revenue increased 7.9%. Total reimbursable expenses were $21.3 million in Q3 and $59.6 million for the nine months. Q3 total direct costs were 65.3% of revenue versus 66.0% in the prior-year quarter; nine-month direct costs increased to 66.5% of revenue from 64.3%.
At September 30, 2018, cash and cash equivalents were $9.0 million, down from $16.9 million at December 31, 2017. Receivables from clients were $108.7 million and unbilled services were $75.3 million. Total assets were $1.04 billion and stockholders’ equity was $529.9 million.
Segments and Material Changes
- Healthcare: Q3 revenue rose 13.6% to $90.4 million, but operating margin declined to 29.5% from 32.4%. Nine-month revenue increased 4.0% to $271.8 million, while operating margin declined to 28.8% from 32.0%, primarily due to higher performance bonuses and contractor costs.
- Business Advisory: Q3 revenue increased 3.3% to $57.2 million, while operating income fell 7.9% to $11.8 million and margin declined to 20.7% from 23.2%. Nine-month revenue increased 8.3% to $170.8 million, with margin declining to 20.5% from 22.1%.
- Education: Q3 revenue increased 22.8% to $50.9 million and operating income increased 93.4% to $15.0 million; margin expanded to 29.5% from 18.7%. Nine-month revenue rose 15.2% to $147.1 million and margin increased to 25.6% from 24.9%.
- Consultant utilization increased to 77.8% in Q3 from 75.1% and to 76.8% for the nine months from 74.6%. Period-end full-time billable consultants increased to 2,222 from 2,127.
- Adjusted EBITDA declined 13.7% for the first nine months despite improved Q3 results, reflecting lower segment operating income and higher corporate expenses.
Cash Flow, Debt, and Liquidity
- Operating cash flow was $48.9 million for the first nine months, compared with $52.4 million in 2017. Investing cash outflow was $13.5 million, principally for property and equipment, internally developed software, life insurance policies, and the Middle East practice divestiture.
- Financing cash outflow was $43.1 million. Huron borrowed $179.8 million under its credit facility and repaid $213.3 million of credit-facility borrowings.
- Total debt carrying value was $316.2 million, consisting primarily of $240.2 million of convertible notes due October 2019, $71.5 million under the revolving credit facility, and a $4.5 million promissory note due 2024.
- The $500 million revolving facility matures March 23, 2023. Unused borrowing capacity was $426.9 million, net of borrowings and letters of credit. The company reported a 3.02-to-1.00 consolidated leverage ratio and 10.57-to-1.00 interest coverage ratio, in compliance with its covenants.
- The credit agreement requires repayment of revolving borrowings 90 days before the convertible debt maturity unless specified liquidity, covenant, or lender-waiver conditions are satisfied. Scheduled 2019 principal payments were $250.5 million, creating a significant near-term refinancing or repayment consideration.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide clear formal revenue or earnings guidance. Management states that available cash, internally generated liquidity, revolving-credit capacity, and external capital resources are expected to fund long-term growth and debt-service needs.
- Huron adopted ASC 606 on January 1, 2018 using the modified retrospective method, increasing retained earnings by $2.0 million. The standard changed the timing of performance-based revenue recognition and affected reported 2018 revenue and earnings relative to the former ASC 605 method.
- Q3 revenue included $7.6 million from obligations satisfied or partially satisfied in prior periods. Nine-month revenue included $10.1 million from prior-period obligations, including changes in performance-based estimates and releases of unbilled-service allowances.
- The company recorded a $5.9 million loss on the sale of its Middle East practice and a $2.5 million litigation settlement gain during the first nine months. Restructuring charges were $2.7 million versus $5.3 million in the prior-year period.
- The prior-year nine-month results included a $209.6 million non-cash goodwill impairment charge related to Healthcare. No goodwill impairment charge was recorded in 2018, making year-over-year GAAP profit comparisons unusually favorable.
- Huron holds a $45.9 million Level 3 convertible debt investment, carried at fair value, with a $6.0 million pre-tax increase in value during the first nine months. Valuation depends on unobservable assumptions, including volatility, default probability, and recovery rates.
- Key operating risks include utilization and billing-rate changes, client demand and renewals, personnel retention, fixed-fee project execution, performance-based fee estimates, goodwill impairment, acquisition integration, privacy and information-security requirements, interest rates, and general economic conditions.
- The company reports no material litigation expected by management to adversely affect financial position or results, no material off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2018.
Important Facts for Investors to Verify
- How Huron will repay, refinance, or otherwise address the $250.0 million principal amount of convertible notes due October 1, 2019.
- Whether the reported $426.9 million of revolver capacity remains available after considering covenant restrictions, liquidity requirements, and the convertible-note maturity provisions.
- Whether Healthcare margin pressure and lower nine-month adjusted EBITDA represent temporary compensation and staffing effects or a continuing trend.
- The sustainability of Education’s strong growth and margin expansion and the recovery prospects for Business Advisory margins.
- The quality and collectability of the $184.0 million combined client receivables and unbilled services balance, including performance-based and contract-asset amounts.
- The sensitivity of the $45.9 million convertible debt investment and $645.5 million goodwill balance to valuation changes, business performance, and impairment testing.
- The comparability of 2018 results after ASC 606 adoption and the extent to which prior-period revenue releases or performance-based estimates contributed to reported results.