Huron Consulting Group Inc. — Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2020; filed July 30, 2020. Huron is a global consulting and technology-services company operating through Healthcare, Business Advisory, and Education segments. Results were materially affected by the COVID-19 pandemic.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $217.9 million | $220.8 million | $440.5 million | $425.2 million |
| Operating income (loss) | $16.0 million | $17.9 million | $(29.9) million | $24.6 million |
| Operating margin | 7.3% | 8.1% | (6.8)% | 5.8% |
| Net income (loss) | $13.5 million | $10.5 million | $(28.8) million | $13.8 million |
| Diluted EPS | $0.61 | $0.47 | $(1.32) | $0.62 |
| Adjusted EBITDA | $27.5 million | $29.2 million | $46.5 million | $47.2 million |
| Adjusted EBITDA margin | 12.6% | 13.2% | 10.6% | 11.1% |
- Cash flow and liquidity: Six-month operating cash flow was $1.8 million, compared with $(6.2) million in the prior-year period. Investing cash outflow was $24.1 million, including a $13.0 million Shorelight convertible-debt investment, $5.2 million of capitalized software, and $4.4 million of property and equipment. Ending cash was $83.2 million, up from $11.6 million at December 31, 2019.
- Debt: Total debt was $331.6 million at June 30, 2020, including $328.0 million under the senior secured revolving facility and $3.6 million under an aircraft-related promissory note. Unused revolving capacity was $270.3 million, excluding the effect of outstanding borrowings and $1.7 million of letters of credit. The company remained compliant with its debt covenants, with a 2.60x leverage ratio and 14.07x interest coverage ratio.
- Balance sheet: Total assets were $1.126 billion and stockholders’ equity was $536.0 million. Goodwill was $586.2 million and net intangible assets were $24.9 million.
Material changes versus the prior comparable periods
- Second-quarter revenue declined 1.3% year over year, while first-half revenue increased 3.6%. Healthcare revenue fell 16.3% in the quarter and 7.5% year to date, reflecting delayed or reprioritized client work. Business Advisory revenue rose 13.2% in the quarter and 11.8% year to date, and Education revenue rose 9.7% and 14.4%, respectively.
- Consolidated operating income improved in the quarter despite lower revenue, supported by lower selling, general and administrative expenses, reduced travel and event spending, and lower interest expense following maturity of the convertible notes. Operating margin nevertheless declined to 7.3% from 8.1% because of higher direct labor and performance-related costs.
- First-half operating results included a $59.8 million non-cash goodwill impairment charge related to the Strategy and Innovation and Life Sciences reporting units. This drove the first-half operating loss and reduced Business Advisory goodwill; Life Sciences goodwill was reduced to zero and Strategy and Innovation goodwill to $37.5 million.
- Full-time billable consultant utilization declined to 72.4% in Q2 from 77.2% in the prior-year quarter, while the average billing rate declined to $203 from $206. Year-end billable consultant headcount increased to 2,578 from 2,389.
- The company borrowed $283.0 million in the first half, primarily in the first quarter to preserve liquidity and fund annual bonuses, and repaid $160.3 million, including $120.0 million in the second quarter. It repurchased $20.9 million of stock in the first quarter; less than $0.1 million remained under the authorization at June 30.
Guidance, outlook, commentary, and risks
- The filing does not provide a specific full-year revenue or earnings guidance range. Management expects COVID-19 to continue adversely affecting sales, backlog certainty, demand, and financial results in the second half of 2020, particularly in Healthcare and Education.
- Demand improved for cloud-based technology and analytics, restructuring, and capital advisory services. Management stated that remote delivery enabled continued client service and that the enterprise resource planning implementation remained on schedule.
- Management estimated 2020 property and equipment purchases and software development spending of approximately $16 million to $20 million, below its original estimate because of discretionary spending reductions.
- The company deferred the employer portion of Social Security taxes beginning in April 2020 through year-end, with payment expected in equal installments during the fourth quarters of 2021 and 2022 under the CARES Act.
- Key risks include the duration and severity of COVID-19, client cancellations or delayed decisions, collection risk, utilization and billing-rate pressure, remote-work and cybersecurity risks, impairment of goodwill and other intangible assets, variable-rate debt, acquisition integration, dependence on qualified personnel and client renewals, and general economic weakness.
- At June 30, 2020, one Healthcare client represented 16.5% of combined receivables and unbilled services, although no client represented more than 10% of consolidated revenue. Management reported no litigation expected to have a material adverse effect and no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether COVID-19-related delays and lower Healthcare utilization persist or spread to other segments.
- Whether the Strategy and Innovation reporting unit experiences further deterioration requiring additional goodwill impairment charges.
- Debt repayment progress, covenant headroom, borrowing capacity, and the effect of variable interest rates.
- Collection performance for receivables and unbilled services, particularly the concentrated Healthcare client balance.
- The valuation and liquidity of the $54.5 million Shorelight convertible-debt investment and related accumulated other comprehensive income losses.
- Actual cash spending versus the estimated $16 million to $20 million 2020 capital and software-development range.
- The timing and cash impact of deferred payroll-tax payments in 2021 and 2022, and whether the company resumes share repurchases after the authorization was substantially exhausted.