Huron Consulting Group Inc. — Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
Huron provides operational and financial consulting services through Huron Healthcare, Huron Legal, Huron Education and Life Sciences, Huron Business Advisory, and All Other. This unaudited filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014.
Financial Performance and Liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $187.9 million | $210.7 million | Down 10.9% |
| Total revenues and reimbursable expenses | $205.0 million | $229.8 million | Down 10.8% |
| Operating income | $8.8 million | $41.8 million | Down 79.0% |
| Operating margin | 4.7% | 19.8% | Down 15.1 points |
| Net income | $1.5 million | $34.1 million | Down 95.6% |
| Diluted EPS | $0.07 | $1.48 | Down $1.41 |
| Adjusted EBITDA | $20.4 million | $49.1 million | Down 58.4% |
| Adjusted EBITDA margin | 10.9% | 23.3% | Down 12.4 points |
| Net cash used in operating activities | $42.2 million | $9.2 million | Higher use of cash |
Direct costs increased to $127.5 million, or 67.9% of revenue, from $124.7 million, or 59.2%. Selling, general and administrative expense increased 12.3% to $42.3 million. Interest expense increased primarily because of the 2014 convertible notes and higher borrowings. The effective tax rate was 58.8%, compared with 16.0% in the prior-year quarter; the 2014 rate benefited from a $11.4 million net recognized tax benefit related to a foreign subsidiary tax election.
Cash and cash equivalents fell to $7.2 million at March 31, 2015 from $256.9 million at December 31, 2014. Investing cash outflow was $345.7 million, including $331.8 million for acquisitions. Financing activities provided $138.2 million, including $197.5 million of credit-facility borrowings and $57.5 million of repayments.
Total debt was $498.4 million, consisting of $214.6 million carrying value of the 1.25% convertible senior notes due 2019 and $283.8 million under the senior secured credit facility. The facility had $211.1 million of unused borrowing capacity after letters of credit. Huron reported compliance with its covenants, including a 3.22x consolidated leverage ratio versus a maximum of 3.25x or 3.50x, depending on the measurement period, and a 24.20x interest coverage ratio versus a 3.50x minimum.
Material Changes Versus the Prior Comparable Period
- Huron acquired Studer Group on February 12, 2015, for approximately $325.5 million, funded with cash, stock, and $102.0 million of acquisition-related borrowings. Studer contributed $11.4 million of Q1 revenue and $1.2 million of operating income, including acquired-intangible amortization.
- Huron acquired Sky Analytics effective January 1, 2015, for approximately $9.7 million, including $0.9 million of contingent consideration.
- Huron Healthcare revenue declined 8.9% to $98.0 million and segment margin declined to 29.6% from 47.6%, primarily because performance-based revenue fell to $13.5 million from $31.1 million and project timing weakened.
- Huron Legal revenue declined 39.2% to $33.4 million and segment margin declined to 10.7% from 22.7%, reflecting lower demand for discovery services and a downturn associated with client settlements of government investigations related to the credit crisis.
- Huron Education and Life Sciences revenue increased 18.8% to $39.9 million and segment margin increased to 29.5% from 19.2%.
- Huron Business Advisory revenue increased 17.6% to $15.7 million, but segment margin declined to 10.2% from 19.1%.
- Full-time billable consultant utilization declined to 71.8% from 74.1%, while the average billing rate declined to $218 from $249.
Guidance, Outlook, Risks and Unusual Items
Management expected the full-year 2015 effective tax rate to approximate the statutory rate, inclusive of state taxes, as pretax income increased relative to foreign losses. Management also estimated approximately $30.0 million of 2015 capital expenditures, primarily for information technology and leasehold improvements.
Management expected Huron Legal performance to improve during the remainder of 2015 compared with the first quarter and fourth quarter of 2014. However, continued underperformance could require another interim goodwill impairment test and potentially an impairment charge. At March 31, 2015, Huron Legal fair value exceeded carrying value by 25%, or $28.8 million. Goodwill and intangible assets increased substantially following the acquisitions, increasing impairment and amortization exposure.
Q1 included $1.6 million of restructuring charges, $1.3 million of transaction and acquisition-related costs, $5.1 million of intangible-asset amortization, and a $0.2 million contingent-consideration remeasurement gain. The company also recorded a $0.4 million negative revenue impact from the fair-value adjustment of Studer Group deferred revenue and expected a similar impact in Q2.
Material risks include client demand and engagement timing, utilization and billing rates, performance-fee variability, retention of clients and personnel, acquisition integration, goodwill impairment, interest-rate exposure, privacy and information-security requirements, tax matters, and general market conditions. Huron disclosed an Abu Dhabi claim alleging up to $100 million of damages, although prior rulings favored Huron on most claims. A separate Physiotherapy Associates litigation trust has identified potential claims that could exceed $300 million, but no claim against Huron had been specified as of the filing.
Investor Verification Checklist
- Verify whether Huron Legal revenue, utilization, margins, and goodwill headroom improved sufficiently to avoid a future impairment charge.
- Assess Studer Group integration, organic growth, synergies, acquisition-related costs, and the effect of acquired-intangible amortization.
- Monitor cash conversion, receivables and unbilled services, the very low cash balance, and reliance on the revolving credit facility.
- Reconcile debt maturities, covenant headroom, variable-rate exposure, and the 2019 convertible-note repayment or conversion requirements.
- Evaluate the sustainability of performance-based revenue, particularly the sharp decline in Huron Healthcare performance fees.
- Track the Abu Dhabi litigation and any claims arising from the Physiotherapy Associates bankruptcy litigation trust.
- Compare reported GAAP results with Adjusted EBITDA and adjusted net income, noting that management’s non-GAAP measures exclude recurring or acquisition-related items.