Huron Consulting Group Inc. 10-Q Summary
Reporting period: Three months ended March 31, 2017, compared with the three months ended March 31, 2016. Huron is a global professional services firm serving healthcare, education and life sciences, and business advisory clients. The financial statements are unaudited.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 / Dec. 31, 2016 | Change |
|---|---|---|---|
| Revenue | $188.8 million | $180.5 million | Up 4.6% |
| Total revenues and reimbursable expenses | $205.8 million | $197.1 million | Up 4.4% |
| Operating income | $14.1 million | $14.4 million | Down 1.6% |
| Operating margin | 7.5% | 8.0% | Down 50 basis points |
| Net income from continuing operations | $5.2 million | $6.9 million | Down 24.9% |
| Net income | $5.3 million | $6.0 million | Down 11.7% |
| Diluted EPS from continuing operations | $0.24 | $0.32 | Down $0.08 |
| Adjusted EBITDA | $27.1 million | $26.6 million | Up 1.8% |
| Adjusted EBITDA margin | 14.4% | 14.8% | Down 40 basis points |
| Adjusted diluted EPS from continuing operations | $0.55 | $0.62 | Down $0.07 |
| Cash flow from operating activities | $(18.4) million | $(9.0) million | Greater use of cash |
| Cash and cash equivalents | $12.7 million | $17.0 million at Dec. 31, 2016 | Down $4.4 million |
| Total debt | $422.3 million | $292.1 million at Dec. 31, 2016 | Up $130.2 million |
Q1 2017 income from discontinued operations was $0.1 million, compared with a $0.9 million loss in Q1 2016. The effective tax rate increased to 52.7% from 36.9%, primarily because adoption of ASU 2016-09 produced $1.6 million of net excess tax deficiencies recognized as tax expense.
Segment Results
- Healthcare: Revenue declined 13.7% to $98.5 million and operating income declined 12.4% to $34.2 million. Margin improved slightly to 34.7% from 34.2%. Management cited reduced demand for performance improvement and revenue-cycle services, winding down of large projects, and fewer large integrated projects.
- Education and Life Sciences: Revenue increased 21.4% to $52.5 million and operating income increased 52.6% to $15.6 million. Margin expanded to 29.7% from 23.6%, driven by revenue growth exceeding expense growth.
- Business Advisory: Revenue increased 63.2% to $37.9 million and operating income increased 115.0% to $5.8 million. Margin expanded to 15.3% from 11.6%, primarily due to acquisitions and operating leverage.
Material Changes Versus the Prior Comparable Period
- Revenue growth was primarily acquisition-driven and reflected higher consultant headcount, but total consultant utilization declined to 73.9% from 76.6%.
- Healthcare weakness more than offset growth in Education and Life Sciences and Business Advisory.
- Selling, general and administrative expense increased 11.4% to $46.9 million, while depreciation and amortization increased to $8.9 million from $7.4 million.
- Restructuring charges declined to $0.3 million from $1.3 million.
- Huron acquired Pope Woodhead and Associates and Innosight. Innosight contributed $5.2 million of Q1 revenue and $1.2 million of operating income, including $0.8 million of acquired-intangible amortization. The Innosight purchase price was $113.1 million, including $90.7 million in cash, $9.6 million in stock, and $12.1 million of preliminary contingent consideration.
- Goodwill increased to $897.8 million from $799.9 million, primarily from acquisitions.
Cash Flow, Debt, and Liquidity
- Operating cash flow was negative $18.4 million, reflecting working-capital effects including a $43.3 million decrease in accrued payroll and related benefits and a $14.3 million increase in unbilled services.
- Investing cash flow was negative $108.5 million, including $101.8 million for business acquisitions and $6.5 million for property and equipment.
- Financing cash flow was positive $122.6 million, including $179.0 million of credit-facility borrowings and $51.0 million of repayments. No shares were repurchased under the share repurchase program during the quarter.
- Debt consisted of $250.0 million principal amount of 1.25% convertible senior notes due 2019 and $196.0 million drawn under the senior secured revolving credit facility due 2020. Unused revolving capacity was $301.8 million, after considering borrowings and letters of credit.
- Huron was in compliance with its debt covenants, reporting a consolidated leverage ratio of 2.90 to 1.00 versus a maximum range of 3.25 to 1.00 to 3.75 to 1.00, and interest coverage of 19.94 to 1.00 versus a 3.50 to 1.00 minimum.
- Management stated that available cash, internally generated liquidity, credit-facility capacity, and external capital resources are expected to be adequate for long-term growth and capital needs. The company estimated 2017 capital expenditures of approximately $25.0 million.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management intends to expand service offerings, hire professionals, pursue complementary acquisitions, and integrate the acquired businesses.
- Healthcare and Enterprise Solutions and Analytics each had approximately 11% goodwill headroom at the November 30, 2016 annual impairment test. Continued underperformance could trigger an interim impairment review and a non-cash goodwill impairment charge.
- Performance-based fees can cause significant quarterly volatility. They represented 6.4% of consolidated revenue, compared with 8.4% in the prior-year quarter.
- The company expects to adopt ASC 606 revenue guidance on January 1, 2018 using the modified retrospective method. Management anticipates earlier recognition of revenue from performance-based arrangements, although the overall impact remains under evaluation.
- Acquisition accounting remains preliminary for Innosight, including goodwill, intangible assets, contingent consideration, and working-capital adjustments.
- Contingent consideration liabilities increased to $23.4 million from $8.8 million and may increase further based on acquired businesses' performance. Innosight's maximum potential contingent consideration is $35.0 million.
- Key disclosed risks include utilization and billing-rate variability, client retention and demand, competition for qualified personnel, acquisition integration, goodwill impairment, privacy and information-security requirements, tax matters, interest-rate exposure, and general economic conditions.
- The company reported no litigation or legal proceeding that management believes would have a material adverse effect, and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether Healthcare demand stabilizes and whether management's repositioning and workforce actions improve revenue and margins.
- Progress integrating Innosight, Pope Woodhead, HSM Consulting, ADI Strategies, and other recent acquisitions, including final purchase-price allocations and contingent consideration.
- Cash conversion and working-capital trends, particularly unbilled services, receivables, accrued payroll, and continued negative operating cash flow.
- Debt repayment capacity and refinancing requirements for the $250.0 million convertible notes due in 2019, including the credit agreement's repayment provisions.
- Goodwill impairment risk, especially for Healthcare and Enterprise Solutions and Analytics.
- The eventual effect of ASC 606 on the timing and amount of performance-based revenue.
- The effect of the unusually high 52.7% effective tax rate and whether ASU 2016-09-related tax effects recur.