Huron Consulting Group Inc. — Form 10-Q Summary
Business Context and Reporting Period
Huron provides operational and financial consulting services through Huron Healthcare, Huron Education and Life Sciences, Huron Legal, Huron Business Advisory, and All Other. This unaudited report covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $209.9 million | $198.0 million | $621.4 million | $618.2 million |
| Operating income | $36.8 million | $21.3 million | $81.7 million | $97.1 million |
| Operating margin | 17.5% | 10.7% | 13.1% | 15.7% |
| Net income | $19.4 million | $12.2 million | $39.7 million | $66.3 million |
| Diluted EPS | $0.86 | $0.53 | $1.76 | $2.87 |
| Adjusted EBITDA | $50.9 million | $28.9 million | $122.7 million | $120.2 million |
| Adjusted EBITDA margin | 24.3% | 14.6% | 19.8% | 19.4% |
For the third quarter, revenue increased 6.0%, operating income increased 73.1%, and net income increased 58.6%. For the first nine months, revenue was broadly flat, while operating income declined 15.9% and net income declined 40.1%. The nine-month effective tax rate was 39.8%, compared with 28.4% in 2014, when results benefited from a $11.4 million recognized tax benefit related to a foreign subsidiary tax election.
Operating cash flow was $83.2 million for the first nine months, compared with $92.1 million in 2014. Capital expenditures were $15.0 million, and management estimated full-year 2015 capital expenditures of approximately $20.0 million. Cash used in acquisitions was $332.8 million, principally for Studer Group.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents declined to $13.5 million at September 30, 2015, from $256.9 million at December 31, 2014.
- Total debt was $419.4 million, comprising $218.2 million carrying value of 1.25% convertible senior notes due 2019 and $201.3 million drawn under the senior secured revolving credit facility.
- The amended credit facility provides $500 million of revolving capacity, with an option to increase total capacity to $600 million. Unused capacity was $293.5 million after outstanding borrowings and letters of credit.
- The company was in compliance with its debt covenants, reporting a 2.49-to-1.00 leverage ratio against a maximum of 3.25 or 3.50-to-1.00 and an 18.30-to-1.00 interest coverage ratio against a minimum of 3.50-to-1.00.
- Net cash declined by $243.4 million during the first nine months, primarily because acquisition spending exceeded operating cash flow and financing proceeds.
Material Changes Versus the Prior Comparable Period
- Studer Group was acquired in February 2015 for approximately $325.2 million, funded with cash and $102.0 million of credit-facility borrowings. The acquisition contributed $22.3 million of third-quarter revenue and $56.0 million of nine-month revenue.
- Goodwill increased to $806.8 million from $567.1 million at year-end 2014, and net intangible assets increased to $102.5 million from $24.7 million, primarily because of acquisitions.
- Huron Healthcare revenue rose 14.6% in the third quarter and 7.3% year to date, supported by Studer Group, although performance-based fees declined materially.
- Huron Education and Life Sciences revenue rose 15.1% in the third quarter and 15.8% year to date, with improved demand and higher consultant activity.
- Huron Legal revenue declined 25.4% in the third quarter and 30.4% year to date because of lower discovery demand and weaker consultant activity. Management reported improvement in the second and third quarters compared with the fourth quarter of 2014 and first quarter of 2015.
- Huron Business Advisory revenue increased 24.0% in the third quarter and 25.6% year to date, partly offset by lower average billing rates following the Rittman Mead India acquisition.
- Performance-based revenue decreased to 5.0% of consolidated third-quarter revenue from 12.1% in the prior year and to 7.1% for the first nine months from 12.3%.
- The company repurchased $13.5 million of shares during the first nine months and had $36.5 million remaining under its repurchase authorization as of September 30, 2015.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that internally generated liquidity, available cash, borrowing capacity, and external capital resources are expected to be adequate for long-term growth and debt-service needs; no formal revenue or earnings guidance is provided in the filing text.
- Management expects Huron Legal performance to continue improving during the remainder of 2015, but stated that continued underperformance could result in a goodwill impairment charge in the annual November 30, 2015 test.
- The company recorded $2.5 million of restructuring charges in the first nine months, primarily related to workforce reductions and the wind-down of public-sector and Middle East consulting operations.
- In September 2015, Huron reached an agreement in principle to settle the Physiotherapy Associates litigation for $3.6 million, subject to bankruptcy-court approval. The accrued liability was increased to $3.6 million and the related insurance receivable to $2.8 million.
- Huron faces execution risks related to consultant utilization, billing rates, client retention, performance-based fees, hiring, acquisitions, integration, privacy and information security, taxes, goodwill impairment, and general market conditions.
- The company holds a $34.1 million fair-value convertible debt investment in Shorelight, based on Level 3 valuation inputs, with a $27.6 million cost basis and a $4.1 million year-to-date unrealized after-tax gain recorded in other comprehensive income.
- Effective October 1, 2015, Huron acquired Cloud62; financial terms were not provided in the filing text.
- New accounting standards relating to cloud-computing arrangements, debt issuance costs, consolidation, and revenue recognition were pending adoption; management was evaluating their effects, except that no impact was expected from the consolidation standard.
Investor Verification Priorities
- Verify the sustainability of third-quarter margin expansion, particularly the effect of lower bonus expense versus recurring operating improvement.
- Monitor Huron Legal revenue recovery and the outcome of the November 30, 2015 goodwill impairment test.
- Assess Studer Group integration, revenue contribution, profitability, and the substantial acquired goodwill and intangible-asset amortization.
- Reconcile the low cash balance with operating needs, acquisition strategy, debt maturities, and available revolver capacity.
- Review covenant compliance and the requirement under the credit agreement to address borrowings before the convertible debt maturity unless specified liquidity, covenant, or lender-waiver conditions are satisfied.
- Evaluate the volatility of performance-based fees and the resulting effect on quarterly revenue and earnings predictability.
- Confirm final terms and court approval of the Physiotherapy Associates settlement and the adequacy of related insurance recoveries.