Huron Consulting Group Inc. — 2021 Q1 Form 10-Q Summary
Business context and reporting period
Huron is a global consulting and professional services company serving Healthcare, Business Advisory, and Education clients. The filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Results remained affected by COVID-19, particularly through delayed or reprioritized client projects in Healthcare and Education.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $203.2 million | $222.6 million | Down 8.7% |
| Operating income (loss) | $8.2 million | $(45.9) million | Improved $54.1 million |
| Operating margin | 4.1% | (20.6)% | Improved |
| Net income (loss) | $5.4 million | $(42.3) million | Improved $47.7 million |
| Diluted EPS | $0.24 | $(1.94) | Improved |
| Adjusted EBITDA | $16.5 million | $19.0 million | Down 13.5% |
| Adjusted EBITDA margin | 8.1% | 8.5% | Down 0.4 points |
| Adjusted diluted EPS | $0.35 | $0.44 | Down 20.5% |
| Cash flow from operations | $(82.8) million | $(56.1) million | More cash used |
Direct costs were $148.1 million, or 72.9% of revenue, compared with 70.2% in the prior-year quarter. The effective tax rate was 22.1%, benefiting primarily from a discrete tax benefit related to vested share-based compensation awards.
Segment results were mixed: Healthcare revenue declined 16.6% to $79.7 million, with a 25.7% operating margin; Business Advisory revenue increased 12.3% to $72.9 million, with a 17.9% margin; and Education revenue declined 18.5% to $50.6 million, with a 17.1% margin.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $21.6 million at March 31, 2021, down from $67.2 million at December 31, 2020.
- Operating cash flow was negative $82.8 million, principally reflecting working-capital outflows, including a $74.3 million decrease in accrued payroll and related benefits and a $23.1 million increase in unbilled services.
- Investing cash outflow was $8.0 million, including $6.0 million for a business acquisition and $1.4 million for internally developed software.
- Financing cash inflow was $45.1 million. The company borrowed $89.0 million and repaid $24.1 million under its credit facility.
- Total debt was $268.2 million at March 31, 2021, including $265.0 million under the senior secured revolving credit facility and $3.2 million under a promissory note.
- Unused revolving-credit capacity was $334.2 million, net of borrowings and $0.8 million of letters of credit. The facility matures September 27, 2024.
- The company remained in compliance with its debt covenants. Consolidated leverage was 2.64x versus a 3.75x maximum, and interest coverage was 13.00x versus a 3.50x minimum.
- The company repurchased 245,718 shares for $13.2 million under its share repurchase program; $31.8 million remained available at March 31, 2021.
Material changes versus the prior comparable period
- Revenue declined despite stronger demand in Business Advisory, as Healthcare and Education clients delayed or reprioritized work during the pandemic.
- GAAP profitability improved substantially because Q1 2020 included a $59.8 million non-cash goodwill impairment charge related to the Strategy and Innovation and Life Sciences reporting units. No goodwill impairment was recorded in Q1 2021.
- Underlying performance weakened: adjusted EBITDA decreased from $19.0 million to $16.5 million, and adjusted diluted EPS decreased from $0.44 to $0.35.
- Total billable consultant utilization declined to 68.8% from 72.9%, while the total number of billable consultants at period end increased to 2,654 from 2,599.
- Business Advisory benefited from demand for cloud, technology, analytics, strategy, restructuring, and capital advisory services. The company acquired Unico Solution on February 1, 2021; the acquisition was not significant to consolidated results.
- The company completed implementation of a new cloud-based ERP system in January 2021 and modified or added related internal controls.
- A prior-period balance-sheet classification error was corrected for December 31, 2020 involving receivables, unbilled services, and deferred revenue. Management stated that the error was not material and did not affect operations or cash flow.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific full-year revenue or earnings outlook in the filing. It remained cautious about revenue growth in the first half of 2021 because of COVID-19-related uncertainty, delayed sales cycles, and client project reprioritization. Management expects 2021 purchases of property, equipment, and software development to be approximately $12 million to $18 million.
Management believes available cash, internally generated liquidity, and borrowing capacity will support current financing needs and the long-term growth strategy. The company expects to pay deferred employer Social Security taxes from 2020 in equal installments during the fourth quarters of 2021 and 2022.
- COVID-19 remains the principal operating risk, affecting client demand, sales cycles, utilization, staffing, and the ability to work at client locations.
- Other identified risks include goodwill impairment, acquisition integration, dependence on client renewals and qualified personnel, utilization and billing rates, privacy and information security, taxes, and general economic conditions.
- The company holds a $58.0 million fair-value investment in Shorelight convertible debt, which declined $6.3 million during the quarter and generated a $4.6 million after-tax unrealized loss in other comprehensive income. The investment uses significant Level 3 assumptions.
- The company also held a $6.7 million preferred-stock investment in Medically Home, carried under the measurement alternative.
- Restructuring charges were $0.6 million, compared with $1.6 million in Q1 2020. The remaining restructuring liability was $0.9 million at March 31, 2021.
- In April 2021, Huron hired approximately 300 Healthcare full-time equivalent professionals to expand managed-services capacity; the hiring was not significant to the consolidated financial statements.
- In April 2021, counsel for the Oaktree bankruptcy trustee communicated an intent to pursue claims against Huron. Management believes the allegations lack merit and stated that no pending litigation was expected to have a material adverse effect, although outcomes remain uncertain.
Important facts for investors to verify
- Whether Healthcare and Education demand, utilization, and sales-cycle trends improve after the first half of 2021.
- Whether Business Advisory growth and the Unico Solution acquisition offset weakness in the other segments.
- Operating cash conversion, collections, unbilled-services balances, and the effect of annual bonus payments on liquidity.
- Debt repayment progress, covenant headroom, interest-rate exposure, and the September 2024 credit-facility maturity.
- The carrying value and valuation assumptions for the Shorelight investment and any future fair-value changes.
- Execution and financial effects of the approximately 300-person Healthcare hiring initiative and the new ERP system.
- Potential developments, costs, or disclosures related to the Oaktree bankruptcy claims and other contingencies.