Huron Consulting Group Inc. annual report, FY2019

Huron Consulting Group Inc. — Fiscal 2019 Form 10-K Summary

Business context and reporting period

Huron is a global professional-services and consulting firm serving healthcare, business advisory, and education clients. The filing covers the fiscal year ended December 31, 2019; quarterly data identifies fourth-quarter 2019 revenue of $232.3 million and net income of $14.3 million. Revenue mix was Healthcare 46%, Business Advisory 29%, and Education 25%. Huron served more than 1,800 clients and had 3,750 full-time employees at year-end.

Financial performance and position

Metric	2019	2018	Change
Revenue	$876.8 million	$795.1 million	10.3% increase
Operating income	$63.7 million	$52.1 million	22.3% increase
Operating margin	7.3%	6.6%	70 basis-point increase
Net income from continuing operations	$42.0 million	$13.9 million	Increase of $28.0 million
Diluted EPS from continuing operations	$1.87	$0.63	Increase of $1.24
Adjusted EBITDA	$105.4 million	$91.0 million	15.8% increase
Adjusted EBITDA margin	12.0%	11.4%	60 basis-point increase
Net cash provided by operating activities	$132.2 million	$101.7 million	30.1% increase

Net income, including discontinued operations, was $41.7 million, or $1.85 diluted EPS, compared with $13.6 million, or $0.62 diluted EPS, in 2018. The effective tax rate declined to 20.0% from 44.7%, aided by tax credits, valuation allowance changes, and tax benefits related to investments and a prior “check-the-box” election.

Cash and cash equivalents were $11.6 million at December 31, 2019, compared with $33.1 million in 2018. Investing cash outflows were $35.0 million, including $13.2 million of property and equipment, $10.3 million of internally developed software, $5.0 million of investment securities, $4.7 million of life insurance contributions, and $2.5 million for a business acquisition. Capital expenditures and software spending were estimated at approximately $25 million to $30 million for 2020.

Total assets were $1.10 billion and stockholders’ equity was $585.5 million. Goodwill and other intangible assets totaled $678.3 million, or 61% of total assets. No goodwill or material intangible-asset impairment was recorded in 2019.

Debt and liquidity

Outstanding debt at year-end was $208.9 million, consisting primarily of $205.0 million under a $600 million senior secured revolving credit facility and $3.9 million under a promissory note.
The $250.0 million convertible notes matured on October 1, 2019. Huron refinanced $217.0 million through the revolving facility and paid $33.0 million using cash.
The revolving facility matures September 27, 2024, bears variable rates generally linked to LIBOR or an alternate base rate, and had $393.3 million of unused capacity before covenant limitations.
Maximum borrowing capacity after restrictive covenants was $271.6 million at year-end, compared with $100.1 million in 2018.
The company was in compliance with debt covenants. The consolidated leverage ratio was 1.64x versus 2.83x in 2018, and interest coverage was 15.29x versus 11.03x.
Huron repurchased 210,437 shares for $14.2 million in 2019. The remaining authorization under its repurchase program was $20.9 million at year-end, with the program authorized through October 31, 2020.
Huron has not declared or paid common-stock dividends since becoming public.

Material changes versus the prior comparable period

Revenue growth occurred across all segments: Healthcare increased 9.4% to $399.2 million, Business Advisory increased 6.9% to $252.5 million, and Education increased 15.9% to $225.0 million.
Healthcare operating margin increased to 31.5% from 29.6%; Business Advisory margin declined to 19.7% from 21.4%; Education margin remained 24.8%.
Average full-time billable consultants increased to 2,427 from 2,165, while total utilization declined to 76.1% from 77.5%. The average billing rate increased to $211 from $209.
Performance-based revenue increased to 8.9% of total revenue from 6.1%, increasing earnings and working-capital variability. Healthcare performance-based revenue rose to $71.1 million from $42.7 million.
Adjusted EBITDA improved, but direct costs increased to 66.3% of revenue from 66.1% and SG&A increased to 23.2% from 22.8%, reflecting higher compensation, bonuses, technology, legal, and transaction-related costs.
Restructuring charges declined to $1.9 million from $3.7 million. The 2019 charges primarily reflected workforce reductions and office exits, partially offset by a lease-related gain.
Net other expense declined to $11.2 million from $26.9 million, primarily because 2018 included a $5.8 million loss on the sale of the Middle East practice and 2019 included gains on investments supporting deferred compensation.
Operating lease right-of-use assets and liabilities were recognized in 2019 under ASC 842, materially changing the balance sheet presentation without affecting the prior-period income statement.

Guidance, outlook, commentary, risks, and unusual items

The filing does not provide a clear full-year 2020 revenue or earnings guidance value. Management states that internally generated liquidity, cash on hand, available revolver capacity, and access to external capital are expected to fund long-term growth and debt-service needs.

Management committed in the fourth quarter of 2019 to implement a new enterprise resource planning system over several years. The implementation may require substantial expenditures and could disrupt operations, systems, or internal controls.
Goodwill was $646.7 million at year-end. Strategy and Innovation passed its quantitative impairment test with fair value 41% above carrying value; a 100-basis-point increase in the discount rate would reduce fair value by approximately $5.6 million. A significant deterioration in performance could trigger future impairment charges.
Revenue recognition involves significant estimates for fixed-fee engagements and performance-based arrangements. The independent auditor identified these areas as critical audit matters. Remaining performance obligations were $90.1 million, with approximately $58.1 million expected to be recognized in 2020.
Key risks include consultant utilization and billing rates, talent retention, client concentration and engagement termination, healthcare-sector regulation and demand, cybersecurity and data privacy, third-party technology relationships, acquisitions and integration, litigation, variable-rate debt, and the replacement or phase-out of LIBOR.
Contractual obligations totaled $386.4 million, including $234.0 million of bank-borrowing principal and interest, $90.9 million of operating lease obligations, and $29.6 million of purchase obligations.
Huron reported no material off-balance-sheet arrangements and no pending legal proceeding that management believed would materially affect financial position or results of operations.
Huron held a Shorelight convertible debt investment with a $49.5 million fair value and a $27.9 million cost basis, and a $5.0 million preferred-stock investment in Medically Home. These investments carry valuation and impairment risk.

Important facts for investors to verify

Whether revenue growth, particularly performance-based Healthcare revenue, is sustainable and how it affects cash conversion and quarter-to-quarter volatility.
Future utilization, average billing rates, consultant hiring, compensation inflation, and the effect of increased headcount on margins.
Debt refinancing and interest-rate exposure, including LIBOR transition risk and the $205.0 million revolver balance due in 2024.
Progress, cost, and control implications of the multi-year ERP implementation.
Goodwill valuation assumptions, especially for Healthcare and Strategy and Innovation, given goodwill represents a substantial portion of total assets.
Realization of the $90.1 million remaining performance obligations and the quality and collectability of receivables, unbilled services, and contract assets.
Valuation and potential impairment of the Shorelight and Medically Home investments.
Execution of the share-repurchase program and the company’s continued decision not to pay dividends.