Huron Consulting Group Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
Huron is a global consulting and technology-services company serving healthcare, business advisory, and education clients. This unaudited filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The quarter was affected by the emerging COVID-19 pandemic, although management stated that the pandemic did not materially affect first-quarter consolidated revenue.
Financial Performance and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $222.6 million | $204.4 million | Up 8.9% |
| Total revenues and reimbursable expenses | $241.9 million | $223.1 million | Up 8.5% |
| Operating income (loss) | $(45.9) million | $6.8 million | Declined $52.6 million |
| Operating margin | (20.6%) | 3.3% | Down 23.9 percentage points |
| Net income (loss) | $(42.3) million | $3.3 million | Declined $45.6 million |
| Diluted EPS | $(1.94) | $0.15 | Declined $2.09 |
| Adjusted EBITDA | $19.0 million | $18.0 million | Up 5.6% |
| Adjusted EBITDA margin | 8.5% | 8.8% | Down 0.3 percentage points |
| Adjusted net income from continuing operations | $9.8 million | $8.9 million | Up 10.2% |
| Adjusted diluted EPS | $0.44 | $0.40 | Up 10.0% |
The principal driver of the GAAP loss was a $59.8 million non-cash goodwill impairment charge, consisting of $49.9 million for Strategy and Innovation and $9.9 million for Life Sciences within Business Advisory. The impairment reduced goodwill to $586.2 million at March 31, 2020 from $646.7 million at December 31, 2019.
- Healthcare revenue increased 2.0% to $95.6 million; segment operating margin declined to 25.2% from 29.7%.
- Business Advisory revenue increased 10.4% to $64.9 million; segment operating margin declined to 15.2% from 16.3%.
- Education revenue increased 19.6% to $62.1 million; segment operating margin declined to 21.1% from 24.3%.
- Total consultant utilization declined to 72.9% from 75.9%, while the average billing rate declined to $204 per hour from $210.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $151.0 million at March 31, 2020, compared with $11.6 million at December 31, 2019.
- Operating cash flow was $(56.1) million, compared with $(38.3) million in the prior-year quarter. The use of cash reflected annual performance-bonus and employee-related payments.
- Investing cash flow was $(18.4) million, including a $13.0 million additional investment in Shorelight convertible debt, $2.9 million of internally developed software costs, $1.5 million of life-insurance contributions, and $1.0 million of property and equipment purchases.
- Financing cash flow was $214.1 million, including $281.0 million of credit-facility borrowings and $38.1 million of repayments.
- Total debt was $451.7 million at March 31, 2020, including $448.0 million under the senior secured revolving credit facility and $3.7 million under a promissory note, compared with total debt of $208.9 million at year-end 2019.
- The revolving facility had $150.4 million of unused borrowing capacity, net of outstanding borrowings and letters of credit. Letters of credit totaled $1.6 million.
- The company remained in compliance with debt covenants, reporting a 3.48x consolidated leverage ratio against a maximum of 3.75x and a 15.13x interest coverage ratio against a minimum of 3.50x.
- Management repurchased 313,998 shares for $20.9 million during the quarter. Less than $0.1 million remained under the share-repurchase authorization at March 31, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue grew across all three segments, led by Education, but higher salaries, share-based compensation, contractor costs, and lower utilization pressured operating performance.
- GAAP profitability reversed to a substantial loss because of the COVID-19-related goodwill impairment and a $5.3 million net other expense, including a $4.7 million loss on investments funding deferred compensation and $0.5 million of foreign-currency losses.
- Interest expense declined to $2.3 million from $4.3 million, primarily because the convertible notes matured on October 1, 2019, partly offset by higher credit-facility borrowings.
- Adjusted EBITDA increased modestly despite lower margins, while adjusted diluted EPS increased to $0.44 from $0.40 after excluding specified non-GAAP items.
- Debt increased materially as management borrowed $125.0 million before March 31 to preserve liquidity and fund annual bonus payments during the COVID-19 uncertainty.
Guidance, Outlook, Risks, and Unusual Items
- Management did not provide clear quantitative full-year revenue or earnings guidance in the filing. It expects COVID-19 to adversely affect sales, business development, discretionary-service demand, and full-year 2020 results.
- Management expects continued uncertainty regarding client demand, utilization, project scope, collections, remote service delivery, capital-market access, and borrowing costs.
- The company reduced discretionary operating and capital spending, estimated 2020 property and equipment and software-development spending at approximately $16 million to $20 million, and elected to defer certain employer Social Security tax deposits under the CARES Act.
- The CARES Act generated a $0.8 million tax benefit from remeasurement of an income-tax receivable. The effective tax rate was 21.0%, compared with 29.0% in Q1 2019.
- Further declines in the Strategy and Innovation reporting unit could result in additional goodwill impairment. Goodwill and other intangible assets totaled $614.4 million, or approximately 52% of total assets, at March 31, 2020.
- The company entered into additional interest-rate swaps with aggregate notional amounts of $150.0 million during the quarter. A hypothetical 100-basis-point interest-rate change would affect annualized pretax income by approximately $2.5 million.
- Management reported no material litigation expected to adversely affect financial position or results, and no material off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Whether COVID-19 caused the expected decline in discretionary consulting demand, utilization, sales activity, and full-year results after March 31, 2020.
- Whether leverage remains within covenant limits as operating performance and cash flow evolve; debt rose from $208.9 million to $451.7 million during the quarter.
- Whether additional goodwill or intangible-asset impairments are required, particularly in Strategy and Innovation and other Business Advisory reporting units.
- Whether operating cash flow improves after the first-quarter bonus and employee-payment outflows.
- The valuation and collectability of the $62.2 million Shorelight convertible-debt investment and the $5.0 million Medically Home preferred-stock investment.
- Whether adjusted EBITDA and adjusted EPS remain representative of underlying performance given the company’s significant non-GAAP adjustments.