Huron Consulting Group Inc. — Q2 2013 Form 10-Q Summary
Business context and reporting period
Huron provides operational and financial consulting services to healthcare organizations, academic institutions, life sciences companies, corporations, governmental entities and law firms. The unaudited filing covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Reporting segments are Huron Healthcare, Huron Legal, Huron Education and Life Sciences, Huron Financial, and All Other.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $170.4 million | $144.7 million | $334.4 million | $283.3 million |
| Operating income | $30.5 million | $14.7 million | $51.9 million | $18.3 million |
| Operating margin | 17.9% | 10.2% | 15.5% | 6.5% |
| Net income from continuing operations | $15.8 million | $6.3 million | $27.2 million | $6.9 million |
| Diluted EPS from continuing operations | $0.69 | $0.28 | $1.20 | $0.31 |
| Adjusted EBITDA | $36.7 million | $21.5 million | $62.3 million | $33.3 million |
| Adjusted EBITDA margin | 21.5% | 14.9% | 18.6% | 11.7% |
Net income, including discontinued operations, was $15.8 million in Q2 and $27.1 million for the first half, versus $6.5 million and $7.4 million, respectively, in the comparable 2012 periods. Discontinued operations contributed a loss of less than $0.1 million in both 2013 periods.
- Cash and cash equivalents were $4.6 million at June 30, 2013, down from $25.2 million at December 31, 2012.
- Operating cash flow was $1.8 million for the first six months, compared with $28.5 million in 2012. The decline primarily reflected increased unbilled services, higher tax payments and lower collections relative to the prior period.
- Investing cash flow was negative $11.3 million, including $9.8 million of capital expenditures. Management estimated approximately $24.0 million of 2013 capital expenditures.
- Debt outstanding was $181.3 million at June 30, 2013, all under the term loan, compared with $192.5 million at year-end 2012. The weighted-average interest rate was 2.2%, including interest-rate swaps.
- Unused borrowing capacity was $242.6 million, after $4.9 million of outstanding letters of credit. The company was in compliance with its debt covenants, including a 4.19-to-1 fixed-charge coverage ratio and 1.23-to-1 leverage ratio.
- Receivables from clients were $90.7 million and unbilled services were $77.8 million at June 30, 2013, compared with $97.5 million and $47.2 million, respectively, at December 31, 2012.
Material changes versus the prior comparable periods
- Q2 revenue increased 17.8% and first-half revenue increased 18.0%, driven primarily by higher consultant headcount, billing rates and utilization in Healthcare, Education and Life Sciences, and Financial.
- Huron Healthcare revenue increased 25.9% in Q2 and 25.0% year to date; its operating margin improved to 37.4% and 38.5%, respectively.
- Huron Financial revenue more than doubled in Q2 and increased 76.1% year to date; the segment moved from an operating loss to operating income of $4.0 million in Q2 and $7.3 million year to date.
- Huron Education and Life Sciences revenue increased 16.6% in Q2 and 22.4% year to date, with margin expansion in both periods.
- Huron Legal revenue declined 1.8% in Q2 and 1.4% year to date, while its operating margin fell to 23.9% and 16.0%, respectively, due to lower utilization and billing rates and higher personnel and other operating costs. AdamsGrayson contributed $5.9 million of Q2 revenue and $9.6 million of first-half revenue.
- Direct costs declined as a percentage of revenue to 60.8% in Q2 from 64.3%, and to 62.9% for the first half from 67.4%. SG&A declined to 18.1% of revenue in Q2 and 18.9% year to date.
- The company reorganized its reporting structure in the first quarter, separating the former Health and Education Consulting segment into Huron Healthcare and Huron Education and Life Sciences. Historical segment information was revised accordingly.
Guidance, outlook, commentary, risks and unusual items
- Management stated that Huron Financial should continue to grow but expected its year-over-year revenue growth rate to moderate in the second half of 2013 as certain large engagements wind down.
- Management expected internally generated liquidity, available revolver capacity and external capital resources to fund growth, capital needs and debt service. No specific consolidated revenue or earnings guidance was provided in the filing text.
- Consulting results remain sensitive to utilization, billing rates, hiring transitions, seasonality, client demand, performance-based fees and engagement-by-engagement contracting. Performance-based fees represented 10.6% of Q2 revenue and 11.1% of first-half revenue.
- In Q2, the company recorded a $0.6 million restructuring charge for Washington, D.C. office consolidation. The restructuring liability was $1.2 million at June 30, 2013.
- The company identified a cumulative $1.1 million pretax stock-based compensation attribution error covering prior periods from the first quarter of 2010 through the first quarter of 2013. Management concluded that prior financial statements were not materially misstated and recorded the adjustment in Q2 2013.
- A $1.2 million litigation charge recorded in Q2 2012 was reversed in Q1 2013 after the court dismissed the qui tam complaint with prejudice. The relator appealed, and Huron also appealed an earlier procedural ruling. Management believes the claims lack merit.
- Goodwill totaled $518.9 million at June 30, 2013, including $355.9 million allocated to Huron Healthcare and $94.6 million to Huron Education and Life Sciences. The January 2013 impairment review found that the relevant reporting units’ fair values exceeded carrying values; future declines in performance could nevertheless result in impairment charges.
- The company uses interest-rate swaps to hedge variable-rate debt. A hypothetical 100-basis-point interest-rate change would have affected pretax income by approximately $1.0 million at June 30, 2013.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing states that there were no other litigation matters expected by management to have a material adverse effect, although legal outcomes remain uncertain.
Most important facts for investors to verify
- Whether the sharp earnings and margin improvement is sustainable after performance-based fees, litigation-related benefits and other unusual items.
- Whether operating cash flow improves, particularly through collection of receivables and unbilled services.
- The pace of Huron Legal stabilization and the expected moderation of Huron Financial growth as large engagements conclude.
- Compliance with debt covenants and the company’s ability to fund scheduled term-loan amortization while cash balances remain low.
- Potential effects of the pending qui tam appeals, goodwill sensitivity to operating performance, and the stock-based compensation accounting adjustment.
- Actual 2013 capital expenditures relative to the approximately $24.0 million estimate and the resulting impact on liquidity.