Huron Consulting Group Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Huron is a global consulting company serving healthcare, business advisory, and education clients through strategy, operational, digital, technology, analytics, restructuring, and managed services offerings. This unaudited filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $224.0 million | $205.3 million | $657.3 million | $645.8 million |
| Operating income | $18.3 million | $13.7 million | $42.7 million | $(16.2) million |
| Operating margin | 8.2% | 6.7% | 6.5% | (2.5)% |
| Net income from continuing operations | $13.7 million | $11.1 million | $31.9 million | $(17.6) million |
| Diluted EPS from continuing operations | $0.64 | $0.50 | $1.46 | $(0.81) |
| Adjusted EBITDA | $26.4 million | $23.6 million | $68.5 million | $70.1 million |
| Adjusted EBITDA margin | 11.8% | 11.5% | 10.4% | 10.8% |
Q3 revenue increased 9.1%, while nine-month revenue increased 1.8%. Q3 segment revenue growth was 6.2% in Healthcare, 5.9% in Business Advisory, and 18.0% in Education. For the first nine months, Healthcare revenue increased 2.1%, Business Advisory increased 6.1%, and Education declined 3.6%.
Q3 segment operating margins were 32.6% for Healthcare, 14.1% for Business Advisory, and 24.2% for Education. Nine-month segment margins were 28.6%, 17.4%, and 21.9%, respectively.
Cash and cash equivalents were $11.2 million at September 30, 2021, compared with $67.2 million at December 31, 2020. Nine-month operating cash flow was $(28.2) million, compared with $78.0 million of cash provided in the prior-year period. The 2021 operating cash outflow was primarily associated with higher receivables and unbilled services, lower deferred revenues, annual bonus and payroll timing, and payment of $12.2 million of deferred employer Social Security taxes.
Investing cash outflow was $18.7 million, including $8.9 million of capital expenditures, $5.9 million for a business acquisition, and $3.6 million for internally developed software. Management estimated 2021 property and equipment purchases plus software development costs of approximately $13 million to $17 million.
Total debt was $262.9 million at September 30, 2021, consisting primarily of $260.0 million outstanding under the senior secured revolving facility and a $2.9 million aircraft-related promissory note. The company had $339.3 million of unused revolving capacity, excluding the facility’s potential expansion capacity, and $0.7 million of outstanding letters of credit. The facility matures September 27, 2024.
Huron remained in compliance with its debt covenants. The Consolidated Leverage Ratio was 2.73x versus a 3.75x maximum under the facility, and the Consolidated Interest Coverage Ratio was 13.99x versus a 3.50x minimum. The company reported a weighted-average credit-facility interest rate of 2.7%, including interest-rate swaps.
Material changes versus the prior comparable periods
- Revenue and operating profitability improved in Q3 as demand strengthened across all three segments following COVID-19-related project delays in 2020 and early 2021.
- Healthcare benefited from higher managed services demand and the addition of approximately 300 managed services employees beginning in Q2 2021.
- Business Advisory revenue benefited from cloud-based technology and analytics, strategy and innovation services, and $11.9 million of nine-month revenue from the ForceIQ and Unico Solutions acquisitions. Its nine-month operating income was essentially unchanged, while margin declined from 18.5% to 17.4%.
- Education rebounded strongly in Q3 but remained below the prior-year nine-month revenue and operating income levels because of earlier pandemic-related project delays and a difficult comparison.
- Q3 direct costs declined to 68.7% of revenue from 70.9%, while selling, general and administrative expense increased to 19.4% from 18.8%. Nine-month direct costs increased to 70.5% of revenue from 69.9%.
- The nine-month comparison benefited from the absence of the $59.8 million non-cash goodwill impairment charge recorded in Q1 2020. Adjusted EBITDA nevertheless declined 2.2% year over year to $68.5 million because of higher corporate expenses.
- Share repurchases totaled $60.2 million for the first nine months, including $25.0 million in Q3. The repurchase authorization was increased from $50 million to $100 million and extended through December 31, 2022; $34.7 million remained available at September 30.
- On November 1, 2021, after the reporting period, Huron completed the divestiture of its Life Sciences business to Oliver Wyman. The business generated $5.1 million of Q3 revenue and $14.8 million for the first nine months and was not classified as discontinued operations.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide specific annual revenue or earnings guidance in the filing. It expected continued revenue growth in Q4 2021 compared with Q4 2020, citing stronger sales pipelines and signing activity in Healthcare and Education and sustained demand for digital, technology, analytics, restructuring, and capital advisory services.
COVID-19 remained a source of operational and demand uncertainty. Employees primarily worked from home as of September 30, 2021, although offices were generally open and flexible work arrangements were available. Management cited risks involving client project delays, utilization and billing rates, hiring and retention, demand for services, acquisitions, goodwill impairment, privacy and information security, taxes, and general economic conditions.
Q3 restructuring charges were $1.7 million, including Life Sciences divestiture evaluation costs, vacated-office costs, and employee-related expenses. Nine-month restructuring charges were $3.2 million. The company also recognized a favorable tax rate of 12.5% in Q3 and 17.9% for the first nine months, aided by federal return-to-provision adjustments, tax credits, and the retroactive GILTI high-tax exclusion.
Huron disclosed an Oaktree bankruptcy-related lawsuit filed in September 2021 alleging fiduciary duty, negligence, fraud, conspiracy, and other claims. The trustee seeks unspecified damages. Huron believes the allegations are without merit, intends to defend the matter vigorously, and cannot estimate potential liability. Management stated that no disclosed litigation was currently expected to have a material adverse effect, but litigation outcomes remain uncertain.
The company held a $61.5 million fair-value convertible debt investment in Shorelight, a Level 3 asset, down from $64.4 million at year-end. The filing notes that alternative valuation assumptions could materially affect reported values and comprehensive income. Huron also had a $6.7 million preferred stock investment in Medically Home with no identified impairment.
Important facts for investors to verify
- Whether the anticipated Q4 revenue growth materialized and whether utilization, billing rates, and segment margins improved.
- Cash conversion, collections, unbilled services, and the sustainability of operating cash flow after the deferred payroll-tax payment and bonus-payment timing effects.
- Debt reduction plans, covenant headroom, refinancing requirements before the September 2024 maturity, and exposure to LIBOR transition and variable interest rates.
- The effect of the Life Sciences divestiture on Business Advisory revenue, earnings, goodwill, and future operating margins.
- Progress and profitability of the Healthcare Managed Services expansion, including the short-term client contract associated with the 2021 group hire.
- Developments and potential financial exposure in the Oaktree litigation.
- Valuation changes, liquidity, and realizability of the Shorelight convertible debt investment and other private-company investments.
- Whether continued share repurchases are consistent with liquidity needs and leverage objectives.