Huron Consulting Group Inc. — 2017 Form 10-K Summary
Business context and reporting period
Huron is a global professional services firm serving healthcare, higher education, life sciences, commercial, and other organizations through Healthcare, Education, and Business Advisory segments. The filing covers the fiscal year ended December 31, 2017, with quarterly data included for the fourth quarter. Huron served more than 1,300 clients and had 3,083 full-time employees at year-end.
2017 included acquisitions of Pope Woodhead, Innosight, and the international assets of ADI Strategies, as well as the divestiture of the Life Sciences Compliance and Operations practice. Life Sciences was moved from the former Education and Life Sciences segment to Business Advisory; historical segment information was reclassified accordingly.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $732.6 million | $726.3 million | Up 0.9% |
| Operating income (loss) | $(207.5) million | $74.2 million | Declined $281.7 million |
| Operating margin | (28.3)% | 10.2% | Down 38.5 percentage points |
| Net income (loss) from continuing operations | $(170.5) million | $39.5 million | Declined $210.0 million |
| Diluted EPS from continuing operations | $(7.95) | $1.84 | Declined $9.79 |
| Adjusted EBITDA | $104.6 million | $129.7 million | Down 19.3% |
| Adjusted EBITDA margin | 14.3% | 17.9% | Down 3.6 percentage points |
| Adjusted diluted EPS from continuing operations | $2.15 | $3.21 | Down 33.0% |
| Cash flow from operations | $99.8 million | $129.2 million | Down $29.4 million |
| Cash and cash equivalents | $16.9 million | $17.0 million | Essentially unchanged |
| Total assets | $1.037 billion | $1.153 billion | Down $116.3 million |
| Stockholders’ equity | $503.3 million | $648.0 million | Down $144.7 million |
Reported results were materially affected by $253.1 million of non-cash pretax goodwill impairment charges: $208.1 million for Healthcare and $45.0 million for Enterprise Solutions and Analytics within Business Advisory. Excluding the impairment and other adjustments, adjusted EBITDA remained positive but declined.
Segment performance and material changes
| Segment | 2017 revenue | Revenue change | 2017 operating margin |
|---|---|---|---|
| Healthcare | $356.9 million | Down 16.0% | 33.3% |
| Education | $167.9 million | Up 12.1% | 24.0% |
| Business Advisory | $207.8 million | Up 37.1% | 22.4% |
- Healthcare weakness reflected lower demand for performance improvement and revenue-cycle services, winding down of larger projects, fewer integrated projects, and lower performance-based fees. Healthcare revenue fell $68.0 million and operating income fell $29.1 million.
- Education benefited from higher consultant headcount and utilization; revenue increased $18.1 million and operating income increased $2.0 million, although margin declined from 25.6% to 24.0%.
- Business Advisory growth was driven substantially by Innosight, Pope Woodhead, and ADI Strategies. Revenue increased $56.2 million and operating income increased $17.2 million.
- Consolidated consultant utilization was 74.5%, broadly consistent with 74.6% in 2016, while average billing rate declined to $203 from $212.
- Fixed-fee work represented 46.7% of revenue, time-and-expense work 43.0%, performance-based fees 4.9%, and software support and subscriptions 5.4%.
Cash flow, debt, liquidity, and capital resources
- Operating cash flow was $99.8 million. Investing cash use was $128.9 million, including $106.9 million for acquisitions and $24.4 million for property and equipment. Financing cash flow was positive $28.8 million.
- At December 31, 2017, debt included $250.0 million principal of 1.25% convertible senior notes due October 2019, $105.0 million drawn on the senior secured revolving credit facility due March 2020, and $4.9 million on a promissory note due March 2024.
- The revolving facility had $393.1 million of unused borrowing capacity, after $1.9 million of letters of credit. The company was in compliance with its covenants, with a 3.02x consolidated leverage ratio versus a maximum range of 3.25x to 3.75x and a 12.43x interest coverage ratio versus a 3.50x minimum.
- The credit facility is secured by substantially all personal property assets of the company and subsidiary guarantors and restricts certain indebtedness, investments, acquisitions, dispositions, dividends, and share repurchases.
- Huron expects approximately $15 million of 2018 cash spending for property, equipment, software development, and leasehold improvements. Management stated that available cash, operating cash flow, borrowing capacity, and external capital resources should be adequate for anticipated needs.
- No shares were repurchased under the formal share repurchase program in 2017; $35.1 million remained available under the authorization at year-end. The company has not paid common-stock dividends.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide a clear numerical 2018 revenue or earnings outlook. Management expects the 2018 effective tax rate to be lower than historical levels, primarily because of the reduced federal corporate tax rate, subject to state taxes and other limitations.
- Management cited ongoing Healthcare regulatory and funding uncertainty and remained cautious about near-term growth. Healthcare initiatives include repositioning offerings, expanding Studer Group, strategy, physician, and technology services, and reducing workforce to align resources with demand.
- Enterprise Solutions and Analytics underperformed in the fourth quarter, leading to workforce reductions and a $45.0 million goodwill write-off. Life Sciences had only 14% excess fair value over carrying value in the annual impairment test, creating sensitivity to weaker performance.
- Goodwill and other intangible assets totaled $718.1 million, or 69% of total assets, at year-end. Further operating deterioration could result in additional non-cash impairment charges.
- The Tax Cuts and Jobs Act produced a provisional $8.8 million tax expense in 2017, including deferred-tax remeasurement and transition-tax effects. The company may adjust this amount as further guidance becomes available.
- Restructuring charges were $6.2 million, primarily workforce reductions and office-space exits. The company also recognized a $0.9 million gain on the Life Sciences C&O sale and $0.4 million of income from discontinued operations related primarily to former Huron Legal obligations.
- Principal risks include dependence on senior managers and specialized personnel, utilization and billing-rate volatility, client concentration and engagement termination rights, healthcare-sector uncertainty, acquisition integration, goodwill impairment, data privacy and cybersecurity, professional liability, competition, variable-rate debt, and the need to refinance or repay the convertible notes.
- The 10 largest clients represented approximately 19.5% of 2017 revenue; no individual client exceeded 10%. Legal proceedings are described as ordinary-course matters not currently expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether Healthcare revenue and demand stabilize after the 16.0% 2017 decline and whether the restructuring initiatives improve utilization and margins.
- Whether Business Advisory growth from acquisitions is sustainable and whether Enterprise Solutions and Analytics avoids further impairment or margin deterioration.
- Whether adjusted EBITDA and adjusted EPS recover from the 2017 declines, rather than relying solely on the non-GAAP exclusions.
- Huron’s ability to address the $250 million convertible-note maturity in October 2019 while maintaining credit-facility covenant compliance and liquidity.
- The final tax effects of the Tax Cuts and Jobs Act and the impact of adopting ASC 606 revenue recognition, particularly for performance-based fees.
- The sensitivity of remaining goodwill, especially Healthcare and Life Sciences, to discount rates, revenue growth, operating margins, and client demand.
- The terms and maximum potential payouts of acquisition-related contingent consideration, whose estimated fair value was $22.8 million and maximum potential payment was $56.2 million at year-end.