Huron Consulting Group Inc. — Form 10-Q Summary
Business context and reporting period
Huron provides operational and financial consulting services to healthcare organizations, universities, life sciences companies, corporations, law firms, governmental entities, and distressed organizations. Reported segments are Huron Healthcare, Huron Legal, Huron Education and Life Sciences, Huron Business Advisory, and All Other. The unaudited filing covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Financial performance and position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $209.4 million | $170.4 million | $420.1 million | $334.4 million |
| Operating income | $34.0 million | $30.5 million | $75.8 million | $51.9 million |
| Operating margin | 16.2% | 17.9% | 18.1% | 15.5% |
| Net income from continuing operations | $19.9 million | $15.8 million | $54.0 million | $27.2 million |
| Diluted EPS from continuing operations | $0.86 | $0.69 | $2.34 | $1.20 |
| Adjusted EBITDA | $42.2 million | $36.7 million | $91.3 million | $62.3 million |
| Adjusted EBITDA margin | 20.1% | 21.5% | 21.7% | 18.6% |
Six-month operating cash flow was $12.2 million, compared with $2.7 million in the prior-year period. Investing cash flow was negative $63.3 million, including $51.4 million for acquisitions and $11.4 million for property and equipment. Financing cash flow was positive $2.1 million, reflecting net credit-facility borrowings and $9.5 million of share repurchases. Cash declined from $58.1 million at December 31, 2013 to $9.2 million at June 30, 2014.
At June 30, 2014, total assets were $929.5 million and stockholders’ equity was $589.5 million. Credit-facility borrowings totaled $178.8 million, with a weighted average interest rate of 2.2%, and unused borrowing capacity was $219.7 million. The company had $5.3 million of outstanding letters of credit. It was in compliance with its debt covenants, reporting a fixed-charge coverage ratio of 4.91 to 1.00, leverage ratio of 0.97 to 1.00, and net worth above the $150 million minimum.
Material changes versus the prior comparable period
- Second-quarter revenue increased 22.9%; first-half revenue increased 25.6%.
- Second-quarter net income from continuing operations increased 25.9%, while first-half net income increased 98.8%, aided by stronger operating results and a favorable tax item.
- Second-quarter operating margin declined to 16.2% from 17.9%, primarily because bonus and contractor costs increased as percentages of revenue. First-half operating margin improved to 18.1% from 15.5%.
- Huron Healthcare revenue grew 27.9% in the quarter and 32.2% year to date; Huron Legal revenue grew 18.2% and 25.8%, respectively.
- Huron Education and Life Sciences revenue was essentially flat in the quarter but declined 2.1% year to date, with its first-half operating margin falling to 25.3% from 28.7%.
- Huron Business Advisory revenue rose 78.9% in the quarter and 67.9% year to date, substantially reflecting the acquired Enterprise Performance Management practice, but its segment margin declined materially.
- The company acquired The Frankel Group Associates in the first quarter and Vonlay in the second quarter. Vonlay contributed $5.1 million of second-quarter revenue; total preliminary consideration was $34.0 million.
- The company repurchased $9.5 million of common stock during the first half under a program authorizing up to $50 million; $40.5 million remained available at June 30.
Guidance, outlook, commentary, risks, and unusual items
- Management expects performance-based fees to be higher in the first half of 2014 than in the second half, creating potential quarterly revenue volatility.
- Management estimated 2014 capital expenditures of approximately $30.0 million, primarily for information technology and leasehold improvements.
- Management stated that internally generated liquidity, available revolver capacity, and external capital resources should be adequate for growth, capital needs, and debt service, subject to profitability, receivable quality, leverage, and credit-market conditions.
- The first-half effective tax rate was 26.2%, compared with 43.6% in 2013, primarily because of an $11.4 million net recognized tax benefit from a “check-the-box” election. The company excludes this benefit in certain adjusted measures.
- Second-quarter results included a $1.0 million restructuring charge related to office consolidation and a $0.4 million gain from remeasurement of contingent acquisition consideration. First-half results also included a $0.1 million restructuring charge.
- Goodwill totaled $567.0 million at June 30. Interim impairment testing performed after the EPM segment reorganization indicated that the relevant reporting units’ fair values exceeded carrying values, but management noted sensitivity to discount rates, growth assumptions, and future performance.
- Huron has variable-rate debt but uses interest-rate swaps that effectively fixed approximately 80% of term-loan borrowings. A hypothetical 100-basis-point rate change would affect pretax income by approximately $0.5 million, including swaps.
- The company faces ordinary-course litigation and an Abu Dhabi claim seeking $100 million in alleged damages; Huron prevailed in lower courts and continues to defend the pending appeal. Management does not believe other disclosed proceedings would have a material adverse effect, although litigation outcomes remain uncertain.
- On July 2, 2014, Huron made a convertible-debt investment in Shorelight Holdings LLC. The filing does not provide the investment amount.
- New revenue-recognition guidance, ASC Topic 606, becomes effective for Huron in the first quarter of 2017; the company was evaluating its impact and transition method.
Most important facts for investors to verify
- Whether the strong first-half growth, particularly in Healthcare and Legal, is sustainable after the expected reduction in performance-based fees.
- Cash conversion and working-capital trends, given only $9.2 million of cash, substantial unbilled services, and acquisition-related cash uses.
- Integration performance and contribution from Vonlay, Frankel, and the EPM practice, including the effect on segment margins and goodwill impairment risk.
- The recurring level of bonus, contractor, restructuring, amortization, and other acquisition-related costs excluded from non-GAAP measures.
- Debt repayment requirements, covenant headroom, interest-rate exposure, and the September 2018 credit-facility maturity.
- The sustainability of reported earnings excluding the $11.4 million tax benefit and other unusual items.
- Final outcomes of the Abu Dhabi litigation and any further developments in the qui tam matter.