Huron Consulting Group Inc. — 2015 Q2 Form 10-Q Summary
Business context and reporting period
Huron provides operational and financial consulting, technology-enabled services, analytics, and software solutions through Huron Healthcare, Huron Education and Life Sciences, Huron Legal, Huron Business Advisory, and All Other. This unaudited filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Financial performance and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $223.6 million | $209.4 million | $411.5 million | $420.1 million |
| Operating income | $36.1 million | $34.0 million | $44.9 million | $75.8 million |
| Operating margin | 16.1% | 16.2% | 10.9% | 18.1% |
| Net income | $18.8 million | $19.9 million | $20.3 million | $54.0 million |
| Diluted EPS | $0.83 | $0.86 | $0.90 | $2.34 |
| Adjusted EBITDA | $51.4 million | $42.2 million | $71.8 million | $91.3 million |
| Adjusted EBITDA margin | 23.0% | 20.1% | 17.5% | 21.7% |
Q2 revenue increased 6.8%, while operating income increased 6.1%. Higher amortization, personnel costs, and a litigation accrual largely offset revenue and segment operating gains. Six-month revenue declined 2.1%, and operating income, net income, diluted EPS, and Adjusted EBITDA declined materially.
Cash flow from operations was $18.3 million for the first six months, compared with $12.2 million in the prior-year period. Investing cash use was $350.5 million, primarily reflecting $332.0 million of business acquisitions. Financing provided $92.1 million, including net credit-facility borrowings, partially offset by $13.5 million of share repurchases. Cash declined from $256.9 million at December 31, 2014 to $16.8 million at June 30, 2015.
At June 30, 2015, total debt was $467.6 million, consisting of $216.4 million carrying value for the 1.25% convertible senior notes due 2019 and $251.3 million under the senior secured revolving credit facility. The facility had $243.5 million of unused capacity, net of borrowings and letters of credit. The company was compliant with its covenants, reporting a 2.95-to-1.00 leverage ratio versus a maximum of 3.25-to-1.00 or 3.50-to-1.00, and a 19.94-to-1.00 interest coverage ratio versus a minimum of 3.50-to-1.00.
Material changes versus the prior comparable period
- Studer Group was acquired on February 12, 2015 for approximately $325.2 million, including $323.2 million in cash, $2.2 million in stock, and a working-capital adjustment. The acquisition added $232.9 million of goodwill and $97.5 million of identifiable intangible assets.
- Sky Analytics was acquired effective January 1, 2015 for approximately $9.7 million, including $7.2 million of goodwill.
- Huron Healthcare Q2 revenue increased 17.4% to $118.5 million; six-month revenue increased 3.8%, but six-month segment margin declined to 34.4% from 43.0%, partly because of lower performance-based fees and acquisition-related costs.
- Huron Education and Life Sciences delivered Q2 revenue growth of 13.8% and six-month growth of 16.1%, with six-month margin improving to 30.1% from 25.3%.
- Huron Legal remained weak: Q2 revenue fell 25.6% and six-month revenue fell 32.5%. Q2 revenue and operating income improved sequentially from Q1, but results remained below the prior-year period.
- Huron Business Advisory revenue increased 33.9% in Q2 and 26.6% for the first six months, although margins declined year over year.
- Interest expense increased substantially because of the convertible notes and higher credit-facility borrowings. Six-month effective tax rate increased to 42.1% from 26.2%, principally because the prior-year period benefited from a $11.4 million recognized tax benefit related to a foreign-entity “check-the-box” election.
Guidance, outlook, risks, contingencies, and unusual items
- Management estimated 2015 capital expenditures of approximately $30.0 million and expected 2015 convertible-note coupon interest of $3.1 million plus $8.3 million of non-cash amortization of debt discount and issuance costs.
- Management expected Huron Legal performance to improve during the remainder of 2015. Failure to improve could require an interim goodwill impairment test and potentially an impairment charge. At the March 31, 2015 test date, Huron Legal fair value exceeded carrying value by 25%, or $28.8 million.
- During Q2, the company recorded a $1.3 million litigation liability and a $0.5 million insurance receivable related to Physiotherapy Associates litigation. The litigation trust has stated that potential damages could exceed $300 million, although no claim against Huron had been specified in the filing.
- A separate Abu Dhabi dispute included asserted claims of $100 million; Huron prevailed on most claims, while remaining reputation and defamation claims continued.
- Q2 included $0.6 million of restructuring charges, primarily workforce reductions associated with winding down the public-sector and Middle East consulting operations. Six-month restructuring charges were $2.2 million.
- The company recorded a $6.7 million pre-tax unrealized gain on its Shorelight convertible debt investment in other comprehensive income; the investment had a June 30 fair value of $22.1 million against a $15.6 million cost basis and is subject to Level 3 valuation assumptions.
- Revenue and quarterly results remain sensitive to consultant utilization, billing rates, staffing, client demand, project timing, and performance-based fees. The company also identified acquisition integration, goodwill impairment, data security and privacy, tax matters, personnel retention, and general market conditions as material risks.
Most important facts for investors to verify
- Whether Huron Legal’s sequential recovery continues and avoids a goodwill impairment charge.
- Whether the Studer Group acquisition produces expected revenue, margin, integration, and synergy benefits after elevated amortization and acquisition-related costs.
- Liquidity after the sharp cash reduction, including operating cash generation, acquisition spending, debt service, and continued access to the revolving facility.
- Compliance with the credit agreement’s leverage and interest-coverage covenants and the requirement concerning repayment before the 2019 convertible-note maturity.
- Potential exposure from the Physiotherapy Associates litigation and the unresolved Abu Dhabi claims.
- The sustainability of performance-based revenue, particularly the decline in Huron Healthcare fees and the increase in Huron Business Advisory fees.
- The valuation and recoverability of $807.1 million of goodwill and $110.4 million of net intangible assets at June 30, 2015.