Huron Consulting Group Inc. — Q1 2018 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 its Healthcare, Business Advisory, and Education segments. The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $193.7 million | $188.8 million | Up 2.6% |
| Total revenues and reimbursable expenses | $211.3 million | $205.8 million | Up 2.7% |
| Operating income | $2.3 million | $14.1 million | Down $11.8 million |
| Operating margin | 1.2% | 7.5% | Down 6.3 points |
| Net income from continuing operations | $(3.2) million | $5.2 million | Declined to a loss |
| Net income | $(3.3) million | $5.3 million | Declined to a loss |
| Diluted EPS from continuing operations | $(0.15) | $0.24 | Down $0.39 |
| Adjusted EBITDA | $13.7 million | $27.1 million | Down 49.5% |
| Adjusted EBITDA margin | 7.1% | 14.4% | Down 7.3 points |
| Net cash used in operating activities | $(36.3) million | $(18.4) million | Higher use of cash |
Direct costs increased 12.9% to $134.0 million and rose to 69.2% of revenue from 62.9%, primarily because of higher salaries, performance bonuses, contractor costs, and other delivery expenses. Adjusted net income from continuing operations was $4.2 million, or $0.19 per adjusted diluted share, compared with $11.8 million, or $0.55, in the prior-year quarter.
Cash and cash equivalents declined to $6.4 million from $16.9 million at December 31, 2017. At March 31, 2018, total long-term debt was $378.7 million, consisting primarily of $250.0 million of convertible notes and $138.5 million drawn on the senior secured revolving credit facility. The company reported $359.6 million of unused revolver capacity and was in compliance with its debt covenants, including a 3.77x consolidated leverage ratio versus a permitted range of 3.50x to 4.00x and a 10.00x interest coverage ratio versus a 3.50x minimum.
Material changes versus the prior comparable period
- Healthcare revenue fell 8.7% to $89.9 million and segment margin declined to 27.2% from 34.7%, reflecting lower demand, fewer consultants, lower billing rates, and higher compensation and contractor costs.
- Business Advisory revenue increased 16.2% to $55.9 million, supported by the full-quarter contribution from Innosight and the acquired international assets of ADI Strategies. Segment margin decreased to 16.1% from 20.5%.
- Education revenue increased 13.3% to $47.9 million, while segment margin declined to 23.9% from 27.2%.
- Average full-time billable consultants increased to 2,126 from 1,965, but total utilization was essentially stable at 73.7% versus 73.9% and average billing rate declined to $198 per hour from $216.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $2.0 million and increased Q1 2018 reported revenue by $5.1 million versus the amount that would have been reported under ASC 605.
- Other losses of $0.8 million reflected remeasurement of contingent acquisition consideration. Restructuring charges were $0.7 million versus $0.3 million in the prior-year quarter.
- Operating cash flow weakened primarily because of lower collections, the net loss, and increases in receivables and unbilled services.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide quantitative full-year revenue or earnings guidance. Management stated that internally generated liquidity, cash on hand, available revolver capacity, and access to external capital are expected to support long-term growth, capital needs, and debt-service obligations. Planned 2018 property and equipment spending was estimated at approximately $15.0 million.
- Remaining performance obligations under contracts with original durations longer than one year were $47.9 million at March 31, 2018; approximately $36.4 million was expected to be recognized in 2018, $8.2 million in 2019, and $3.3 million thereafter.
- The $250.0 million convertible notes mature October 1, 2019. The credit agreement includes requirements that may require repayment of revolver borrowings before the convertible debt maturity unless specified liquidity, covenant, or lender-waiver conditions are met.
- Key operating risks include utilization and billing-rate volatility, client retention and renewals, recruiting and retention of qualified personnel, demand fluctuations, acquisition integration, goodwill impairment, privacy and information-security requirements, tax matters, and general economic conditions.
- Contingent consideration liabilities were $24.1 million, up from $22.8 million at December 31, 2017. Letters of credit totaled $1.9 million.
- Huron reported no litigation that management currently believes would have a material adverse effect, but acknowledged that litigation outcomes remain uncertain. It also reported no material off-balance-sheet arrangements.
- The company had a $42.8 million fair-value investment in Shorelight convertible debt, with a $2.9 million pretax unrealized gain recognized in other comprehensive income during the quarter. Valuation depends on Level 3 assumptions, including volatility, default probability, and recovery rates.
Most important facts for investors to verify
- Whether the sharp decline in operating and adjusted EBITDA margins is temporary or reflects sustained compensation, utilization, pricing, or demand pressure.
- The conversion of the Q1 operating loss into positive cash flow, given $36.3 million of operating cash use and only $6.4 million of cash on hand at quarter-end.
- The company’s ability to refinance or repay the $250.0 million convertible notes due in October 2019 while satisfying credit agreement requirements.
- The sustainability and cash-conversion quality of performance-based revenue recognized under ASC 606, including the $5.1 million quarterly revenue benefit compared with prior guidance.
- Healthcare demand trends, Business Advisory acquisition performance, Education growth, and the effect of lower average billing rates.
- The valuation and liquidity implications of the $42.8 million Shorelight investment, $24.1 million of contingent acquisition consideration, and substantial goodwill balance of $646.4 million.