Huron Consulting Group Inc. — Q1 2016 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 advisory, consulting, technology, and analytics solutions. This unaudited report covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Huron Legal was sold on December 31, 2015. Its results are presented as discontinued operations for all periods. The company completed the acquisition of My Rounding Solutions on February 1, 2016; the acquisition was not material to consolidated results.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $180.5 million | $154.4 million | Up 16.9% |
| Total revenues and reimbursable expenses | $197.1 million | $170.7 million | Up 15.4% |
| Operating income | $14.4 million | $7.9 million | Up 81.1% |
| Operating margin | 8.0% | 5.1% | Up 2.9 percentage points |
| Net income from continuing operations | $6.9 million | $1.0 million | Up $5.9 million |
| Net income | $6.0 million | $1.5 million | Up $4.5 million |
| Diluted EPS from continuing operations | $0.32 | $0.04 | Up $0.28 |
| Adjusted EBITDA | $26.5 million | $16.1 million | Up 64.6% |
| Adjusted EBITDA margin | 14.7% | 10.4% | Up 4.3 percentage points |
| Adjusted diluted EPS from continuing operations | $0.62 | $0.23 | Up $0.39 |
Net loss from discontinued operations was $0.9 million in Q1 2016, compared with $0.5 million of income in Q1 2015. The Q1 2016 effective tax rate was 36.9%, versus 66.2% in the prior-year quarter.
Cash flow, liquidity, and debt
- Cash used in operating activities was $9.9 million, improved from $42.2 million used in Q1 2015.
- Cash used in investing activities was $17.1 million, primarily comprising $14.0 million for business acquisitions and $2.0 million for property and equipment.
- Cash used in financing activities was $18.2 million, including $55.3 million of share repurchases and $40.5 million of net credit-facility borrowings.
- Cash and cash equivalents declined from $58.4 million at December 31, 2015 to $13.5 million at March 31, 2016.
- Long-term debt was $350.0 million, consisting of $217.5 million carrying value of 1.25% convertible senior notes due 2019 and $132.5 million drawn under the senior secured revolving credit facility.
- The company had $362.7 million of unused revolving-credit capacity and $4.8 million of outstanding letters of credit.
- Huron was in compliance with its debt covenants, reporting a consolidated leverage ratio of 2.25x against a maximum of 3.25x or 3.50x, and interest coverage of 18.07x against a minimum of 3.50x.
Material changes versus the prior comparable period
- Revenue growth reflected the full-quarter contribution from the 2015 Studer Group acquisition, subsequent acquisitions, and improved demand across the Healthcare, Education and Life Sciences, and Business Advisory segments.
- Overall consultant utilization increased to 76.6% from 73.1%, while the average billing rate declined to $214 per hour from $217.
- Huron Healthcare revenue increased 16.3% and segment margin improved to 34.2% from 29.6%, supported by Studer Group and stronger utilization.
- Huron Education and Life Sciences revenue increased 8.4%, but segment margin declined to 23.6% from 29.5%, primarily due to higher personnel and bonus costs associated with a cloud-based ERP investment.
- Huron Business Advisory revenue increased 47.6% and segment margin improved to 11.6% from 10.2%, aided by acquisitions and performance-based revenue.
- Restructuring charges increased to $1.3 million from $0.7 million, primarily for corporate workforce reductions, vacated office-space obligations, and the wind-down of Middle East operations.
- The company repurchased 982,192 shares for $55.3 million, leaving $35.1 million available under the repurchase authorization.
Outlook, management commentary, risks, and unusual items
Management stated that internally generated liquidity, cash on hand, available revolver capacity, and access to external capital should be adequate to fund anticipated growth, capital needs, and debt service. The filing does not provide a specific full-year revenue or earnings guidance figure.
Huron expects approximately $20.0 million of 2016 capital expenditures, primarily for information technology equipment and leasehold improvements. On April 26, 2016, the company agreed to acquire the U.S. assets of ADI Strategies, with closing anticipated in Q2 2016; it was also pursuing ADI’s international assets in Dubai and India.
- Operating results may fluctuate with consultant utilization, billing rates, staffing levels, client demand, seasonal factors, and the timing of performance-based fees.
- The company depends on retaining clients and qualified personnel, renewing client engagements, and integrating acquisitions successfully.
- Goodwill and intangible assets totaled approximately $860 million at March 31, 2016, creating impairment risk if business performance or valuation assumptions deteriorate.
- Liquidity is supported by the revolver, but cash declined substantially during the quarter and debt increased by approximately $42.6 million from year-end.
- Huron held a $37.3 million Level 3 convertible debt investment whose fair value depends on significant assumptions; a $2.4 million pretax unrealized gain was recorded in other comprehensive income.
- Contingent consideration liabilities increased to $8.6 million from $2.1 million, primarily due to a $6.5 million liability recorded for a Q1 acquisition.
- Management reported no litigation expected to have a material adverse effect, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2016.
Important facts for investors to verify
- Whether revenue and margin improvements are sustainable after separating organic performance from Studer Group and other acquisition contributions.
- The impact of the Education and Life Sciences ERP investment on future margins and cash requirements.
- Cash conversion, working-capital trends, and the need for additional revolver borrowings or other financing.
- Compliance with debt covenants and the company’s ability to address the $250 million convertible-note maturity in 2019.
- Progress and purchase accounting for the ADI Strategies acquisition and any additional international transactions.
- Potential dilution from the convertible notes and warrants, particularly if the share price exceeds the approximately $97.12 economic dilution threshold.
- Future restructuring costs, contingent acquisition payments, and the risk of goodwill or intangible-asset impairment.