Huron Consulting Group Inc. — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Huron is a global professional services firm serving healthcare, higher education, life sciences, and commercial clients through Huron Healthcare, Huron Education and Life Sciences, Huron Business Advisory, and All Other. The unaudited filing covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Huron Legal was sold on December 31, 2015, and is presented as discontinued operations for all periods. 2016 results include acquisitions of My Rounding Solutions, ADI Strategies, Healthcare Services Management, and Cloud62.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $183.4 million | $175.5 million | $548.1 million | $513.9 million |
| Operating income | $23.2 million | $30.1 million | $65.8 million | $66.8 million |
| Operating margin | 12.7% | 17.1% | 12.0% | 13.0% |
| Net income from continuing operations | $12.3 million | $14.3 million | $35.3 million | $29.4 million |
| Diluted EPS from continuing operations | $0.57 | $0.63 | $1.65 | $1.30 |
| Adjusted EBITDA | $36.9 million | $41.7 million | $104.8 million | $99.3 million |
| Adjusted diluted EPS from continuing operations | $0.92 | $0.90 | $2.63 | $2.05 |
Q3 revenue increased 4.5%, while operating income declined 22.7%. Nine-month revenue increased 6.7%, while operating income declined 1.4%. The filing attributes margin pressure primarily to higher salaries and related expenses, performance bonuses, acquisition-related amortization, and continued investment in a cloud-based ERP system.
Nine-month net cash provided by operating activities was $78.8 million, compared with $83.2 million in 2015. Investing cash use was $81.2 million, including $69.1 million for acquisitions and $9.4 million for property and equipment. Financing cash use was $47.0 million, including $55.3 million of share repurchases and $12.0 million of net credit-facility borrowings.
Cash and cash equivalents declined to $9.1 million at September 30, 2016, from $58.4 million at December 31, 2015. Total long-term debt was $325.9 million, consisting of $221.9 million carrying value of 1.25% convertible senior notes due 2019 and $104.0 million outstanding under the senior secured revolving credit facility. Unused revolver capacity was $391.3 million, and outstanding letters of credit totaled $4.7 million.
Material changes versus the prior comparable period
- Huron Business Advisory revenue rose 61.3% in Q3 and 53.1% for the first nine months, largely from Cloud62 and ADI Strategies; segment margins declined to 21.5% and 21.4%, respectively.
- Huron Healthcare revenue declined 7.8% in Q3 and 1.5% year to date, reflecting lower demand in revenue cycle and cost and clinical solutions. Q3 segment margin fell to 37.5% from 42.5%.
- Huron Education and Life Sciences revenue increased 8.7% in Q3 and 7.3% year to date. Q3 margin improved to 26.5%, while the nine-month margin decreased to 26.4% from 28.4%.
- Consultant utilization declined to 73.9% in Q3 from 79.4%; average billing rate declined to $207 from $209. Period-end full-time billable consultants increased to 2,021 from 1,821.
- Share repurchases totaled $55.3 million for 982,192 shares during the first nine months. Remaining authorization at September 30 was $35.1 million; the board later extended the program through October 31, 2017.
- Discontinued operations produced a $1.8 million net loss in the first nine months of 2016 versus $10.3 million of net income in 2015, primarily from former-employee obligations, legal fees, and vacated-office lease assumptions.
- Goodwill increased to $800.0 million from $751.4 million, primarily from 2016 acquisitions. Contingent acquisition consideration increased to an estimated $11.3 million from $2.1 million.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear quantitative revenue or earnings outlook. Management expects internally generated liquidity, available cash, revolver capacity, and external capital resources to fund growth and debt-service needs. The company estimated approximately $20.0 million of 2016 capital expenditures, primarily for leasehold improvements and information technology.
Management’s strategy emphasizes expanding service offerings, retaining and hiring qualified professionals, increasing client relationships, integrating service delivery, and pursuing complementary acquisitions. Revenue and quarterly results remain sensitive to consultant utilization, billing rates, staffing, client demand, seasonality, and timing of performance-based fees.
- Q3 restructuring charges were $1.0 million; nine-month charges were $4.1 million, including office-space obligations and workforce reductions.
- The company recorded a $0.5 million Q3 remeasurement loss on contingent acquisition liabilities.
- The Shorelight convertible debt investment had a $32.9 million fair value and generated a $1.9 million pretax unrealized loss in other comprehensive income during the first nine months.
- Debt covenants were satisfied at quarter-end: consolidated leverage was 2.08x versus a maximum of 3.25x or 3.50x, and interest coverage was 20.89x versus a minimum of 3.50x.
- Key disclosed risks include utilization and billing-rate volatility, client retention and new-business requirements, recruiting and retaining personnel, acquisition integration, goodwill impairment, tax matters, privacy and information-security obligations, market downturns, and performance-based fee variability.
- Management reported no litigation expected to have a material adverse effect, no material off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2016.
Important facts for investors to verify
- Whether Healthcare segment demand and consultant utilization recover, particularly in revenue cycle and cost and clinical solutions.
- The sustainability and margins of growth from Cloud62, ADI Strategies, HSM, and My Rounding Solutions, including integration and contingent consideration obligations.
- Cash generation relative to the low $9.1 million cash balance, ongoing acquisitions, share repurchases, capital expenditures, and debt maturities.
- Compliance with revolver covenants and the company’s ability to address the $250.0 million convertible-note principal maturity in 2019.
- The valuation and recoverability of approximately $800.0 million of goodwill and $90.1 million of net intangible assets.
- Future losses or cash requirements associated with the Huron Legal divestiture, restructuring liabilities, lease obligations, and the transition services agreement expected to continue through the third quarter of 2017.