Huron Consulting Group Inc. — FY2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015, with comparative information for 2014 and 2013. Huron is a professional services firm serving healthcare, higher education, life sciences, and commercial clients through Healthcare, Education and Life Sciences, Business Advisory, and All Other segments. Healthcare generated 64% of 2015 revenue, Education and Life Sciences 24%, and Business Advisory 12%.
Huron acquired Studer Group for approximately $325.2 million, along with Rittman Mead India and Cloud62. It sold Huron Legal to Consilio on December 31, 2015, for net proceeds of approximately $110.1 million; Huron Legal is presented as discontinued operations.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $699.0 million | $627.7 million | 11.4% increase |
| Operating income | $103.5 million | $88.3 million | 17.2% increase |
| Operating margin | 14.8% | 14.1% | Up 70 basis points |
| Net income from continuing operations | $61.9 million | $47.0 million | 31.7% increase |
| Diluted EPS from continuing operations | $2.74 | $2.05 | Increase |
| Net income, including discontinued operations | $59.1 million | $79.1 million | Decrease |
| Adjusted EBITDA | $139.3 million | $110.6 million | 25.9% increase |
| Adjusted EBITDA margin | 19.9% | 17.6% | Up 230 basis points |
| Cash flow from operating activities | $164.3 million | $146.5 million | Increase |
- Total revenues and reimbursable expenses were $769.0 million. Reimbursable expenses were $70.0 million.
- Income from continuing operations before tax was $83.6 million, and the effective tax rate was 25.9%, compared with 41.3% in 2014.
- The lower tax rate primarily reflected a $12.3 million recognized benefit from fourth-quarter “check-the-box” elections for two foreign subsidiaries.
- Cash and cash equivalents declined to $58.4 million from $256.9 million, primarily because of acquisitions, capital investments, debt repayment, and share repurchases.
- Total debt was $312.0 million, consisting of $250.0 million principal amount of 1.25% convertible senior notes due 2019 and $92.0 million outstanding under the senior secured credit facility, partially offset by the convertible debt discount.
- The credit facility had $403.2 million of unused borrowing capacity, subject to conditions, and $4.8 million of outstanding letters of credit.
- At year-end, Huron reported a 2.09-to-1.00 consolidated leverage ratio and a 15.70-to-1.00 interest coverage ratio, versus maximum leverage of 3.25-to-1.00 or 3.50-to-1.00 and minimum interest coverage of 3.50-to-1.00.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the Studer Group acquisition and increased revenue from full-time equivalents. Revenue from full-time billable consultants declined by $8.1 million, reflecting lower billing rates and weaker Healthcare performance-based fees.
- Healthcare revenue increased 7.5% to $446.9 million, but its operating margin declined slightly to 37.9% from 38.2%. Healthcare performance-based revenue fell to $52.3 million from $103.2 million.
- Education and Life Sciences revenue increased 15.1% to $167.9 million, with operating margin improving to 26.3% from 24.8%.
- Business Advisory revenue increased 32.0% to $83.0 million, with operating margin improving to 23.2% from 22.3%.
- Full-time billable consultant utilization improved to 76.9% from 75.4%, while the average billing rate declined to $222 per hour from $242.
- Fixed-fee engagements increased to 58.0% of revenue from 50.3%; performance-based fees declined to 8.7% from 17.2%.
- Amortization of intangible assets and software development costs increased materially, and total depreciation and amortization rose to $58.1 million from $31.0 million, primarily because of acquisitions.
- Interest expense increased to $18.1 million from $8.7 million, including $8.3 million of non-cash interest related to the convertible notes and debt issuance costs.
- Net income from discontinued operations changed from income of $32.0 million to a loss of $2.8 million, reflecting Huron Legal’s weaker results, restructuring charges, taxes, and a $2.3 million disposal loss.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear numerical FY2016 revenue or earnings guidance range in the supplied text. Management states that internally generated liquidity, cash on hand, available revolver capacity, and access to external capital should be adequate to fund growth, capital needs, and debt service. Planned 2016 capital expenditures were estimated at approximately $20.0 million, primarily for information technology and leasehold improvements.
- Effective February 1, 2016, Huron acquired MyRounding Solutions, a digital health solutions provider; purchase accounting had not yet been completed at the filing date.
- Huron recorded $3.3 million of continuing-operations restructuring charges, principally severance and office-exit costs. Huron Legal separately recorded $13.3 million of restructuring charges before its sale.
- Two lawsuits brought by Huron were settled in the fourth quarter, producing a $10.0 million gain collected in January 2016.
- Huron settled the Physiotherapy Associates litigation for $3.6 million; insurance receivables were $2.8 million. The Abu Dhabi litigation was concluded in Huron’s favor.
- Goodwill totaled $751.4 million, including $232.7 million recorded from the Studer Group acquisition. No goodwill impairment was recorded, but the filing emphasizes sensitivity to projected cash flows, discount rates, market conditions, and growth assumptions.
- Key risks include retention of senior professionals, utilization and billing rates, client concentration and termination rights, performance-based revenue volatility, acquisition integration, goodwill impairment, healthcare regulation, data privacy and cybersecurity, professional liability, competition, and debt covenant or refinancing requirements.
- The company has substantial fixed commitments, including $487.5 million of contractual obligations, $83.0 million of operating lease obligations, and $262.5 million of principal and interest obligations on the convertible notes.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2015. Studer Group, representing 11% of consolidated revenue and 2% of assets, was excluded from management’s and the auditor’s control assessment because of its 2015 acquisition.
Most important facts for investors to verify
- Whether Studer Group’s post-acquisition growth and profitability offset its significant amortization burden and acquisition financing requirements.
- The sustainability of the 2015 earnings improvement after excluding the $12.3 million tax benefit and approximately $9.5 million of litigation and other gains.
- The degree to which lower Healthcare performance-based revenue and lower average billing rates persist.
- Cash generation, acquisition spending, share repurchases, and the decline in cash from $256.9 million to $58.4 million.
- Liquidity and refinancing capacity for the $250.0 million convertible notes due in 2019 and the $92.0 million revolver balance due in 2020.
- Goodwill and intangible-asset exposure, particularly the $610.3 million Healthcare goodwill balance and projected amortization of $29.1 million in 2016.
- Potential dilution, cash settlement requirements, and covenant implications of the convertible notes, associated warrants, and hedge transactions.