Huron Consulting Group Inc. — Q1 2013 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. The filing covers the unaudited three months ended March 31, 2013, compared with the same period in 2012. Huron reported five segments: Huron Healthcare, Huron Legal, Huron Education and Life Sciences, Huron Financial, and All Other.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $164.0 million | $138.6 million | +18.3% |
| Total revenue and reimbursable expenses | $179.4 million | $152.4 million | +17.7% |
| Operating income | $21.3 million | $3.6 million | + $17.7 million |
| Operating margin | 13.0% | 2.6% | +10.4 points |
| Net income from continuing operations | $11.4 million | $0.6 million | + $10.8 million |
| Net income | $11.3 million | $0.9 million | + $10.5 million |
| Diluted EPS from continuing operations | $0.51 | $0.03 | + $0.48 |
| Adjusted EBITDA | $25.6 million | $11.8 million | + $13.8 million |
| Adjusted EBITDA margin | 15.6% | 8.5% | +7.1 points |
| Net cash used in operating activities | $24.8 million | $12.6 million | Use increased by $12.3 million |
Total direct costs declined to 65.1% of revenue from 70.6%, while selling, general and administrative expense declined to 19.7% from 21.7%. The effective tax rate decreased to 41.7% from 72.1%.
- Cash and cash equivalents were $5.7 million at March 31, 2013, down from $25.2 million at December 31, 2012.
- Operating cash flow was negative primarily because of increases in unbilled services, receivables, tax payments, and reductions in accrued payroll.
- Capital expenditures were $3.6 million in the quarter; management estimated approximately $25 million of 2013 capital expenditures, primarily for information technology and leasehold improvements.
- Debt outstanding was $202.5 million, compared with $192.5 million at year-end 2012. The weighted average interest rate was 2.6%.
- Unused credit facility capacity was $227.4 million, and outstanding letters of credit totaled $5.1 million.
- Huron was in compliance with its debt covenants, including a 3.81-to-1 fixed-charge coverage ratio, a 1.54-to-1 leverage ratio, and required minimum net worth.
Material changes versus the prior comparable period
- Huron Healthcare revenue increased 24.1% to $78.7 million, and segment operating margin rose to 39.6% from 25.0%. Performance-based fees increased to $18.4 million from $15.5 million.
- Huron Legal revenue declined 1.1% to $40.9 million, while operating margin fell sharply to 7.2% from 23.0%, reflecting lower advisory demand, lower utilization and billing rates, and higher personnel and technology costs.
- Huron Education and Life Sciences revenue increased 29.1% to $35.7 million, with operating margin improving to 26.2% from 23.3%.
- Huron Financial revenue increased 46.7% to $8.6 million, and operating margin improved to 39.4% from 4.0%, primarily because of stronger demand for restructuring and turnaround services.
- Q1 2013 included a $1.2 million litigation settlement gain from reversal of a prior charge. Q1 2012 included $0.8 million of restructuring charges and $1.5 million of restatement-related expenses.
- The company reorganized its reporting structure, separating the former Health and Education Consulting segment into Huron Healthcare and Huron Education and Life Sciences. Historical segment information was restated for comparability.
- Discontinued operations produced a $32,000 loss in Q1 2013 versus $269,000 of income in Q1 2012.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide clear full-year revenue or earnings guidance. Management expected internally generated liquidity, available revolving capacity, and external capital resources to support growth, capital needs, and debt service.
- Management’s strategy emphasizes expanding service offerings, hiring professionals, growing client relationships, and selectively acquiring complementary businesses.
- Results can vary materially based on consultant utilization, billing rates, staffing levels, seasonality, client demand, and the timing of performance-based fees. Many clients retain Huron on an engagement-by-engagement basis rather than under long-term contracts.
- Goodwill totaled $518.9 million at March 31, 2013. The first-step impairment tests for Huron Healthcare and Huron Education and Life Sciences indicated that fair value exceeded carrying value; no impairment was recorded. The analysis relied on significant assumptions, including a six-year forecast, 3.5% terminal revenue growth, and a 13% WACC.
- A qui tam False Claims Act case was dismissed with prejudice in March 2013, resulting in the $1.2 million gain. The relator appealed, and Huron separately appealed an earlier jurisdictional ruling. Management believes the claims lack merit and intends to defend the matter.
- Interest-rate exposure remains material because borrowings are primarily variable-rate debt. Huron estimated that a hypothetical 100-basis-point rate change would affect pretax income by approximately $1.2 million after considering swaps. A new $60 million amortizing interest-rate swap was entered into on April 4, 2013.
- The company had approximately $1.0 million of restructuring liabilities, primarily for vacated office leases, and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether the significant improvement in operating margin and earnings is sustainable after excluding the $1.2 million litigation gain and comparing against unusually high prior-year restructuring and restatement costs.
- Whether negative operating cash flow and the large increase in unbilled services and receivables reverse through collections in subsequent quarters.
- Huron Legal’s ability to recover utilization, billing rates, demand, and profitability.
- Compliance with debt covenants and the company’s ability to fund scheduled term-loan amortization while maintaining only $5.7 million of cash.
- The sensitivity of goodwill valuation to changes in forecasts, discount rates, growth assumptions, and segment performance.
- The outcome and potential financial impact of the pending qui tam appeals and other ordinary-course litigation.