Huron Consulting Group Inc. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed February 23, 2021. Huron is a global professional-services consultancy operating through Healthcare, Business Advisory, and Education segments, which represented approximately 42%, 32%, and 26% of 2020 revenue, respectively.
Business Context and Reporting Period
- Huron served more than 1,700 clients and had 3,807 full-time employees at year-end, including 169 client-serving managing directors.
- COVID-19 materially changed operations: substantially all services were delivered remotely, business travel was suspended, and some Healthcare and Education clients delayed, reduced, or reprioritized projects.
- Business Advisory benefited from stronger demand for cloud-based technology and analytics, restructuring, and capital advisory services.
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $844.1 million | $876.8 million | Down 3.7% |
| Total revenue including reimbursable expenses | $871.0 million | $965.5 million | Down 9.8% |
| Operating income (loss) | $(28.9) million | $63.7 million | Declined $92.6 million |
| Operating margin | (3.4%) | 7.3% | Down 10.7 percentage points |
| Net income (loss) from continuing operations | $(23.7) million | $42.0 million | Declined $65.7 million |
| Diluted EPS from continuing operations | $(1.08) | $1.87 | Declined $2.95 |
| Adjusted EBITDA | $87.1 million | $105.4 million | Down 17.3% |
| Adjusted EBITDA margin | 10.3% | 12.0% | Down 1.7 percentage points |
| Adjusted diluted EPS from continuing operations | $2.15 | $2.74 | Down 21.5% |
- Net loss was $23.8 million, or $(1.09) per diluted share, compared with net income of $41.7 million, or $1.85 per diluted share, in 2019.
- Direct costs increased 2.9% to $592.4 million and rose to 70.2% of revenue from 65.7%, primarily because of higher salaries and related expenses for revenue-generating professionals.
- Selling, general and administrative expense declined 15.9% to $170.7 million, reflecting lower marketing, travel, training, recruiting, facilities, and bonus costs.
- Full-time billable consultant utilization declined to 70.7% from 76.1%; average billing rate declined to $208 from $211.
- Performance-based fees represented 9.2% of revenue versus 8.9% in 2019; fixed-fee arrangements declined to 41.4% of revenue from 45.8%, while time-and-expense revenue increased to 43.4% from 39.9%.
Segment Results
| Segment | 2020 Revenue | Revenue Change | 2020 Operating Margin | 2019 Margin |
|---|---|---|---|---|
| Healthcare | $353.4 million | Down 11.5% | 26.9% | 31.5% |
| Business Advisory | $267.4 million | Up 5.9% | 18.0% | 19.7% |
| Education | $223.3 million | Down 0.8% | 21.3% | 24.8% |
Healthcare was the primary source of revenue pressure. Business Advisory revenue grew, but its margin declined because of mix, higher performance bonus, contractor, restructuring, and share-based compensation costs. Education revenue was broadly stable, but its margin weakened because of higher personnel, restructuring, and technology costs.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Operating cash flow increased to $136.7 million from $132.2 million, aided by lower SG&A spending and deferral of $12.2 million of employer Social Security taxes under the CARES Act.
- Investing cash outflow was $42.0 million, including $13.0 million for the additional Shorelight convertible debt investment, $8.7 million for acquisitions, $8.3 million for internally developed software, and $8.1 million for property and equipment.
- Cash increased to $67.2 million from $11.6 million at year-end 2019.
- Debt totaled $203.3 million at year-end, consisting of $200.0 million under the senior secured revolving credit facility and $3.3 million under a promissory note. The revolver matures September 27, 2024.
- Unused revolver capacity was $398.4 million, after $1.6 million of outstanding letters of credit. The weighted-average revolver interest rate was 2.5%, including interest-rate swaps.
- Debt covenants were satisfied: consolidated leverage ratio was 1.94x versus a maximum of 3.75x, and interest coverage was 12.51x versus a minimum of 3.50x.
- Huron repurchased $25.9 million of common stock in 2020. At year-end, $45.0 million remained available under the $50.0 million 2020 repurchase authorization.
- The company has never declared or paid common-stock dividends.
Material Changes and Unusual Items
- Goodwill impairment: Huron recorded $59.8 million of non-cash pretax impairment charges in the first quarter, comprising $49.9 million for Strategy and Innovation and $9.9 million for Life Sciences. No additional impairment was identified in the annual test.
- Restructuring: 2020 restructuring charges were $20.5 million, including $18.7 million from the fourth-quarter plan. The plan reduced the workforce by approximately 125 employees and consolidated leased office space.
- The restructuring plan is expected to produce approximately $22.0 million of annualized savings, including $21.0 million from personnel costs and $1.0 million from lease costs. Approximately $2.5 million of lease-related restructuring costs are expected in 2021.
- Investments: The fair value of the Shorelight convertible debt investment increased to $64.4 million from $49.5 million, including the additional $13.0 million investment. The Medically Home preferred-stock investment was carried at $6.7 million after a $1.7 million unrealized gain.
- Acquisitions: Huron acquired B3i Analytics and ForceIQ in 2020; neither was material individually or in aggregate. It agreed to acquire Unico Solution on January 7, 2021, with closing on February 1, 2021; the acquisition was described as immaterial to consolidated results.
- ERP implementation: The company went live with a new cloud-based ERP system in January 2021 and expects implementation to continue over several years.
Guidance, Outlook, and Principal Risks
- Management remained cautious about revenue growth in the first half of 2021 because of COVID-19 uncertainty, elongated sales cycles, and delayed client projects. The filing does not provide a clear quantitative 2021 revenue or earnings guidance figure.
- Management expects internally generated liquidity, cash on hand, and revolver capacity to support current operations and its long-term growth strategy.
- Key risks include prolonged or renewed COVID-19 effects, reduced client demand, lower utilization or billing rates, loss of senior personnel, competition for talent, client concentration and cancellable engagements, cybersecurity and data privacy incidents, professional liability, regulatory changes affecting Healthcare and Education clients, acquisition integration, and goodwill impairment.
- The company must repay $6.1 million of deferred payroll taxes in the fourth quarter of 2021 and another $6.1 million in the fourth quarter of 2022.
- Debt is variable-rate and linked to LIBOR or an alternate base rate, although the company states that its $200.0 million of revolver borrowings were fully hedged at year-end. LIBOR transition remains a stated risk.
- Goodwill and other intangible assets totaled $614.7 million, or 58% of total assets, making future operating performance and valuation assumptions important to reported results.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters were fixed-fee and Healthcare performance-based revenue recognition and goodwill impairment assessments.
Investor Verification Priorities
- Verify whether Healthcare and Education demand, utilization, and sales-cycle trends recovered after year-end 2020.
- Reconcile adjusted EBITDA and adjusted EPS to GAAP results, particularly the treatment of the $59.8 million goodwill impairment and $20.5 million restructuring charges.
- Monitor covenant calculations, debt repayment capacity, revolver availability, interest-rate exposure, and the 2024 debt maturity.
- Assess whether the projected $22.0 million of annualized restructuring savings are realized and whether additional lease impairment or restructuring charges arise.
- Review the valuation and credit quality of the $64.4 million Shorelight investment and the carrying value of goodwill.
- Track the financial contribution and integration of ForceIQ, B3i Analytics, and Unico Solution.
- Confirm payment of the $12.2 million deferred payroll-tax obligation and the company’s continued ability to fund capital expenditures, acquisitions, and share repurchases.