Huron Consulting Group Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014, filed February 24, 2015. The filing presents annual results; fourth-quarter information is included in the quarterly data. Huron provides operational and financial consulting, technology, analytics, restructuring, legal-process, healthcare, education, life-sciences, and business-advisory services through five operating segments.
Business Context
- Revenue mix: Huron Healthcare 51%, Huron Legal 23%, Huron Education and Life Sciences 18%, and Huron Business Advisory 8%.
- The company had 2,870 full-time employees and 133 client-serving managing directors at December 31, 2014.
- 2014 acquisitions included The Frankel Group Associates, Vonlay, and Threshold Consulting. Enterprise Performance Management was moved from Education and Life Sciences to Business Advisory.
Financial Performance and Liquidity
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $811.3 million | $720.5 million | +12.6% |
| Operating income | $123.0 million | $119.9 million | +2.6% |
| Operating margin | 15.2% | 16.6% | Down 140 bps |
| Net income | $79.1 million | $66.4 million | +19.0% |
| Diluted EPS | $3.45 | $2.92 | +18.2% |
| Adjusted EBITDA | $155.7 million | $138.4 million | +12.5% |
| Adjusted EBITDA margin | 19.2% | 19.2% | Stable |
| Operating cash flow | $146.5 million | $115.3 million | +27.1% |
| Cash and equivalents | $256.9 million | $58.1 million | +342.0% |
| Total debt | $356.6 million carrying value | $168.8 million | Increased primarily from convertible notes |
- Revenue growth included approximately $63.0 million from 2013 and 2014 acquisitions. Performance-based fees were $110.3 million, or approximately 13.5% of revenue; fixed-fee engagements represented 39.6%.
- Total direct costs increased to 62.3% of revenue from 62.0%, while SG&A remained 19.2% of revenue. Higher personnel costs and lower litigation gains pressured operating margin.
- Net income benefited materially from a 31.0% effective tax rate versus 41.5% in 2013, including a recognized net tax benefit of approximately $11.4 million from a “check-the-box” election.
- Investing cash uses included $54.0 million for acquisitions, $25.9 million for capital expenditures, and $12.5 million for a convertible debt investment in Shorelight.
- At year-end, working capital was $309.8 million. The company reported $242.4 million of unused borrowing capacity under its credit facility and no revolver borrowings.
- The company repurchased $50.0 million of common stock during 2014 and had an additional $50.0 million authorization available at year-end. It pays no cash dividend.
Material Changes Versus 2013
- Huron Healthcare revenue increased 15.9% to $415.8 million, while segment operating margin declined to 38.2% from 39.5%.
- Huron Legal revenue was broadly flat at $183.6 million, but operating margin improved to 25.1% from 23.0%. Fourth-quarter performance was significantly below the first three quarters and management expectations following a sudden downturn related largely to settlements of government investigations connected with the credit crisis.
- Education and Life Sciences revenue increased 1.6% to $146.0 million, with operating margin declining slightly to 24.8%.
- Business Advisory revenue increased 81.3% to $62.8 million, driven principally by the EPM practice, and operating margin improved to 22.3% from 20.8%.
- Debt increased following issuance of $250 million principal amount of 1.25% convertible senior notes due 2019. The company also reduced term-loan borrowings from $168.8 million to $143.8 million.
- Restructuring charges increased to $3.4 million from $0.8 million, primarily for office consolidations, lease obligations, accelerated depreciation, and London workforce reductions.
- No goodwill impairment was recorded in 2014. However, Huron Legal’s goodwill valuation cushion declined to 28% from 60% in its prior quantitative analysis.
Outlook, Risks, Contingencies, and Unusual Items
- Management expected Huron Legal performance to improve during 2015. If improvement did not occur during the first half of 2015, an interim goodwill impairment analysis could have been required.
- The filing does not provide a clear numerical 2015 revenue or earnings guidance range.
- Management identified utilization, billing rates, hiring and retention, client renewals, performance-based fee timing, fixed-fee project profitability, acquisitions, goodwill impairment, technology availability, cybersecurity, healthcare regulation, and general economic conditions as key risks.
- Client concentration declined: the top ten clients represented 27.3% of 2014 revenue versus 35.2% in 2013; no single client exceeded 10% of revenue.
- Outstanding debt was secured by liens on substantially all assets and subsidiary equity. Credit agreement covenants included a minimum fixed-charge coverage ratio of 2.25x and maximum leverage ratio of 3.00x; reported year-end ratios were 4.50x and 0.98x, respectively.
- Material litigation included a remaining Abu Dhabi defamation claim seeking $50 million and a potential Physiotherapy Associates Litigation Trust matter in which claimed damages could exceed $300 million. Management stated the claims were without merit and that no other litigation was expected to have a material adverse effect.
- Subsequent events: Sky Analytics was acquired effective January 1, 2015, and Studer Group was acquired on February 12, 2015, for a base purchase price of $325 million, financed with cash and additional credit-facility borrowings. Purchase accounting and pro forma information were not complete at filing.
- Convertible-note accounting generated $2.1 million of non-cash interest expense in 2014; management expected substantially higher 2015 amortization of debt discount and issuance costs.
Investor Verification Priorities
- Verify the sustainability of 2014 growth excluding acquisition contributions and the effect of the tax election.
- Track Huron Legal’s quarterly recovery, goodwill headroom, and any subsequent impairment analysis.
- Assess leverage, debt-service requirements, covenant compliance, and funding for the Studer Group acquisition.
- Evaluate cash conversion, collections of unbilled healthcare implementation work, and the growth in allowances for doubtful accounts and unbilled services.
- Review the status and potential exposure from the Physiotherapy Associates and Abu Dhabi litigation matters.
- Monitor performance-based fees, fixed-fee engagement margins, utilization, billing rates, and personnel costs.