Huron Consulting Group Inc. — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
Huron is a global professional services firm serving healthcare, higher education, life sciences and commercial clients through Healthcare, Education and Business Advisory segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
During the quarter, Huron reorganized its reporting structure by moving Life Sciences into Business Advisory and completed acquisitions of Innosight, Pope Woodhead and the international assets of ADI Strategies. It also sold its Life Sciences Compliance and Operations practice.
Financial Results and Key Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Revenue | $181.4 million | $184.3 million | $370.3 million | $364.7 million |
| Operating income (loss) | ($200.6 million) | $28.2 million | ($186.4 million) | $42.6 million |
| Operating margin | (110.6%) | 15.3% | (50.3%) | 11.7% |
| Net income (loss) from continuing operations | ($150.5 million) | $16.1 million | ($145.3 million) | $23.0 million |
| Diluted EPS from continuing operations | ($7.00) | $0.76 | ($6.80) | $1.07 |
| Adjusted EBITDA | $24.5 million | $41.6 million | $51.6 million | $68.3 million |
| Adjusted diluted EPS from continuing operations | $0.49 | $1.09 | $1.04 | $1.71 |
Six-month net cash provided by operating activities was $23.3 million, compared with $41.4 million in the prior-year period. Investing cash flow was a use of $119.4 million, including $103.5 million for acquisitions and $15.3 million for property and equipment. Financing cash flow provided $92.5 million, primarily reflecting net credit-facility borrowings. Cash declined to $13.6 million from $17.0 million at December 31, 2016.
Total debt was $400.7 million at June 30, 2017, including $228.6 million carrying value of convertible notes, $167.0 million under the senior secured credit facility and $5.1 million under a promissory note. The credit facility had $330.4 million of unused borrowing capacity, subject to applicable restrictions. Huron reported compliance with its debt covenants, including a 3.22-to-1.00 leverage ratio and a 15.78-to-1.00 interest coverage ratio.
Material Changes Versus the Prior Comparable Period
- Revenue declined 1.5% in Q2 but increased 1.5% for the first six months. Acquisitions contributed to growth, while Healthcare weakness offset gains in Education and Business Advisory.
- Healthcare Q2 revenue fell 21.5% to $83.2 million and segment margin fell to 28.4% from 39.0%. Performance-based fees declined to $4.5 million from $14.8 million.
- Education Q2 revenue increased 17.7% to $43.9 million, while Business Advisory revenue increased 32.8% to $54.3 million, primarily reflecting acquisitions and stronger demand.
- Direct costs and selling, general and administrative expenses increased as a percentage of revenue, contributing to lower adjusted EBITDA and adjusted EPS.
- Huron recorded a $209.6 million non-cash pretax goodwill impairment charge for Healthcare. Goodwill declined to $688.8 million from $799.9 million at year-end 2016.
- Q2 restructuring charges increased to $3.7 million from $1.7 million, primarily for Healthcare workforce reductions, office obligations and related corporate reductions.
- Huron adopted the new goodwill impairment guidance in Q2 and expects to adopt ASC 606 revenue guidance on January 1, 2018 using the modified retrospective method. Management expects performance-based revenue may be recognized earlier under ASC 606.
Guidance, Outlook, Risks and Unusual Items
Management stated that Healthcare improvement is likely to take longer than originally anticipated and remains cautious about near-term growth because hospitals and health systems face regulatory and funding uncertainty. Management is pursuing solution repositioning, service expansion and workforce reductions.
The Healthcare goodwill impairment was driven by declining revenue, winding down of large projects, smaller project sizes and reduced demand for the performance improvement offering. Management warned that another significant decline could result in an additional material impairment charge. Enterprise Solutions and Analytics also had relatively limited goodwill headroom, with fair value exceeding carrying value by 11% at its latest annual test.
Other key risks include variable utilization and billing rates, client retention and demand, performance-based fee volatility, acquisition integration, leverage and refinancing requirements, interest-rate exposure, tax matters, privacy and information-security obligations, and broader market conditions. The $250.0 million principal amount of convertible notes matures in October 2019, and the credit agreement may require repayment of borrowings before the convertible debt maturity unless specified liquidity, covenant or lender-waiver conditions are satisfied.
Contingent consideration liabilities had an estimated fair value of $21.5 million at June 30, 2017, including up to $35.0 million potentially payable under the Innosight arrangement. Management reported no litigation expected to have a material adverse effect, while noting that legal outcomes remain uncertain.
Important Facts for Investors to Verify
- Whether Healthcare revenue, utilization, margins and performance-based fees stabilize and whether additional goodwill impairment becomes necessary.
- The sustainability and organic contribution of Education and Business Advisory growth after adjusting for acquisitions.
- Cash conversion, receivables and unbilled services, given lower operating cash flow and significant acquisition spending.
- Liquidity available for the 2019 convertible-note maturity and compliance with credit-facility leverage, interest-coverage and restricted-payment provisions.
- The final purchase-price accounting and integration performance for Innosight, Pope Woodhead and ADI Strategies, including contingent consideration.
- The effect of ASC 606 adoption on the timing and volatility of performance-based revenue.
- Remaining share-repurchase authority of approximately $35.1 million and whether repurchases are consistent with liquidity and debt priorities.