Huron Consulting Group Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Huron is a global consulting and technology-services company serving healthcare, business advisory, and education clients. This unaudited filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $204.4 million | $193.7 million | 5.6% increase |
| Total revenues and reimbursable expenses | $223.1 million | $211.3 million | 5.6% increase |
| Operating income | $6.8 million | $2.3 million | Increase |
| Operating margin | 3.3% | 1.2% | Increase |
| Net income from continuing operations | $3.4 million | $(3.2) million | Returned to profitability |
| Diluted EPS from continuing operations | $0.15 | $(0.15) | Increase |
| Adjusted EBITDA | $18.0 million | $13.7 million | 31.5% increase |
| Adjusted EBITDA margin | 8.8% | 7.1% | Increase |
| Adjusted diluted EPS | $0.40 | $0.19 | Increase |
| Net cash used in operating activities | $(38.3) million | $(36.3) million | Higher cash use |
Segment revenue and operating income increased across all three segments. Healthcare revenue rose 4.2% to $93.7 million and segment margin increased to 29.7% from 27.2%. Business Advisory revenue increased 5.2% to $58.8 million and margin increased to 16.3% from 16.1%. Education revenue increased 8.5% to $52.0 million and margin increased to 24.3% from 23.9%.
At March 31, 2019, cash and cash equivalents were $8.5 million, compared with $33.1 million at December 31, 2018. Receivables from clients were $104.7 million and unbilled services were $86.5 million. Total assets were $1.09 billion and stockholders’ equity was $549.7 million.
Total debt was $325.3 million, including $245.1 million carrying value of the 1.25% convertible senior notes due October 1, 2019, $76.0 million drawn under the senior secured revolving credit facility, and $4.2 million under a promissory note. The company reported $422.4 million of unused revolving-credit capacity and was in compliance with its debt covenants, including a 2.99-to-1.00 leverage ratio versus a maximum ranging from 3.50-to-1.00 to 4.00-to-1.00.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher revenue from full-time billable consultants, reflecting increased consultant headcount, utilization, and overall billing rates. Full-time equivalent revenue declined.
- Total direct costs increased 3.7%, but declined to 67.9% of revenue from 69.2%, supporting margin expansion.
- Selling, general and administrative expense increased 7.8% to $50.7 million and rose to 24.8% of revenue from 24.3%.
- Depreciation and amortization decreased to $7.2 million from $8.8 million, largely due to lower amortization of acquired intangible assets.
- Other expense declined to $2.0 million from $5.1 million, benefiting from gains on investments funding deferred compensation and lower interest expense.
- Cash used in operations increased primarily because of higher annual performance-bonus payments, while cash collections from clients improved.
- The company adopted ASC 842 lease accounting on January 1, 2019. This added $53.8 million of operating lease right-of-use assets and $70.6 million of operating lease liabilities at March 31, 2019, with no impact on prior-period income statements.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear numerical full-year revenue or earnings guidance range. Management expects internally generated liquidity, cash on hand, available revolver capacity, and access to external capital to support growth and debt-service needs. Estimated 2019 capital spending for property, equipment, and software development is approximately $15 million to $20 million.
The company expects to refinance the $250 million principal amount of convertible notes at their October 2019 maturity using borrowing capacity under the revolving credit facility. The notes have an initial conversion price of approximately $79.89 per share; related hedges and warrants raise the effective economic dilution threshold to approximately $97.12 per share.
Restructuring charges were $1.3 million, including a $0.7 million lease impairment charge, $0.2 million of accelerated depreciation, and $0.2 million related to corporate workforce reductions. Huron also recorded a $3.6 million pretax unrealized gain in other comprehensive income on its private-company convertible debt investment, whose fair value increased to $54.0 million from a $27.9 million cost basis.
Key risks include variable utilization and billing rates, reliance on client renewals and new business, retention of qualified personnel, changing demand for consulting services, acquisition integration, goodwill and intangible-asset impairment, privacy and information-security requirements, tax matters, interest-rate exposure, and general economic conditions. Performance-based revenue and unbilled services require estimates that may change. Management reported no litigation expected to have a material adverse effect and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Execution of the planned refinancing or other repayment strategy for the $250 million convertible notes due October 2019.
- Whether operating cash flow improves after the first-quarter annual bonus payments and whether cash balances remain adequate.
- Sustained consultant utilization, billing rates, headcount growth, and the trend in full-time equivalent revenue.
- Realization of the $75.1 million remaining performance obligations, including approximately $56.9 million expected in 2019.
- Valuation and recoverability of the $645.5 million goodwill balance and the $54.0 million Level 3 convertible debt investment.
- Compliance with credit-facility covenants as leverage changes, particularly given the reported leverage ratio of 2.99-to-1.00.
- Potential dilution from the convertible notes and warrants, and the company’s use of its remaining $35.1 million share-repurchase authorization.