Huron Consulting Group Inc. quarterly report, Q2 FY2021

Huron Consulting Group Inc. — Q2 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 Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.

Key financial metrics

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Revenue	$230.1 million	$217.9 million	$433.3 million	$440.5 million
Operating income	$16.1 million	$16.0 million	$24.4 million	$(29.9) million
Operating margin	7.0%	7.3%	5.6%	(6.8)%
Net income from continuing operations	$12.8 million	$13.6 million	$18.2 million	$(28.7) million
Diluted EPS from continuing operations	$0.59	$0.61	$0.82	$(1.31)
Adjusted EBITDA	$25.6 million	$27.5 million	$42.1 million	$46.5 million
Adjusted EBITDA margin	11.1%	12.6%	9.7%	10.6%

Q2 revenue increased 5.6% year over year, while first-half revenue declined 1.6%. Q2 revenue growth was led by Healthcare, including Healthcare Managed Services, and strengthened Business Advisory demand. Education revenue declined. Direct costs increased to 70.2% of Q2 revenue from 68.6%, contributing to lower operating and adjusted EBITDA margins.

Healthcare: Q2 revenue of $101.4 million, up 18.7%; segment operating margin improved to 27.3% from 24.8%. First-half revenue was essentially flat at $181.1 million, with a 26.6% margin.
Business Advisory: Q2 revenue of $70.9 million, up 0.6%; margin declined to 20.2% from 23.7%. First-half revenue increased 6.2% to $143.8 million, while margin declined to 19.1%.
Education: Q2 revenue of $57.9 million, down 6.7%; margin declined to 23.8% from 26.0%. First-half revenue declined 12.6% to $108.5 million, with a 20.7% margin.

Cash flow, liquidity, debt, and capital allocation

Cash used in operating activities was $62.0 million in the first six months of 2021, compared with $1.8 million of cash provided in the prior-year period. The use of cash primarily reflected lower collections and increases in receivables and unbilled services.
Cash used in investing activities was $13.8 million, including $5.9 million for an acquisition, $5.4 million for property and equipment, and $2.5 million for internally developed software.
Cash provided by financing activities was $21.3 million, reflecting $139.0 million of borrowings, $74.3 million of repayments, and $35.2 million of share repurchases.
Cash and cash equivalents declined to $13.0 million at June 30, 2021 from $67.2 million at December 31, 2020.
Total debt was $268.1 million, including $265.0 million outstanding under the senior secured revolving facility and $3.1 million under a promissory note. Unused revolving capacity was $334.3 million, after consideration of $0.7 million of letters of credit.
The company was in compliance with its debt covenants, reporting a 2.80-to-1.00 consolidated leverage ratio versus a 3.75-to-1.00 maximum and a 13.83-to-1.00 interest coverage ratio versus a 3.50-to-1.00 minimum.
Huron repurchased 651,081 shares for $35.2 million during the first six months. Approximately $9.7 million remained available under the repurchase authorization at June 30, 2021. In the third quarter, the board extended the program through December 31, 2022 and increased its authorization to $100 million.

Material changes versus the prior comparable period

Q2 revenue recovered from pandemic-related disruption, particularly in Healthcare. The company hired approximately 300 Healthcare Managed Services employees in early Q2, supporting a $6.8 million year-over-year increase in Q2 managed-services revenue.
Education remained under pressure from delayed or reprioritized client projects. Business Advisory benefited from cloud, technology, analytics, and strategy demand and included $4.3 million of Q2 revenue from the ForceIQ and Unico acquisitions.
Q2 operating income was broadly stable, but higher professional salaries, signing and retention bonuses, and performance bonuses offset revenue growth. Q2 adjusted EBITDA declined 6.7%.
First-half results improved substantially from the prior year because 2020 included a $59.8 million non-cash goodwill impairment charge. The improvement in GAAP earnings therefore is not representative of comparable underlying growth; first-half adjusted EBITDA and adjusted EPS declined.
The company completed its cloud-based ERP implementation in January 2021 and continued planned functionality and integrations.
A balance-sheet classification error identified in Q1 2021 was corrected in the December 31, 2020 comparative balance sheet. The filing states that it had no impact on historical operations or cash flows and was not material.

Guidance, outlook, risks, contingencies, and unusual items

Management expects continued revenue growth in the second half of 2021 compared with the second half of 2020, citing a stronger sales pipeline, increased signings, and improved demand in Healthcare and Business Advisory. The filing does not provide formal full-year revenue or earnings guidance.

COVID-19 continues to create uncertainty around client demand, project delays, sales cycles, staffing, travel, and work locations. Employees primarily worked remotely as of June 30, 2021.
Q2 revenue included $15.7 million recognized from obligations satisfied or partially satisfied in prior periods, including $13.5 million from changes in estimated variable consideration and $2.2 million primarily from released unbilled-service allowances.
Remaining performance obligations under longer-term engagements totaled $66.7 million at June 30, 2021; approximately $29.2 million was expected to be recognized in 2021, $23.1 million in 2022, and $14.4 million thereafter.
Liquidity risk increased as cash declined and debt rose to fund performance bonuses, acquisitions, and operations. Deferred employer Social Security taxes under the CARES Act are payable in equal installments in the fourth quarters of 2021 and 2022.
Huron disclosed an Oaktree bankruptcy-related dispute. A Chapter 7 trustee’s counsel asserted potential claims concerning Huron’s prior restructuring engagement. Huron considers the allegations without merit, but cannot estimate potential liability.
Long-term investments included a $60.0 million fair-value convertible debt investment in Shorelight, down from $64.4 million at year-end, and a $6.7 million preferred-stock investment in Medically Home. Changes in the Shorelight valuation are recorded in other comprehensive income.
Restructuring charges were $0.9 million in Q2 and $1.5 million year to date, primarily related to vacated office space and related costs.
Interest-rate exposure is partly hedged through swaps. Management estimates that a hypothetical 100-basis-point rate change would affect annualized pretax income by approximately $0.7 million.

Important facts for investors to verify

Whether the second-half revenue-growth expectation is supported by sustained Healthcare demand and conversion of the increased sales pipeline.
The duration and economics of the short-term contract associated with the approximately 300-person Healthcare Managed Services expansion.
Cash conversion, collections, receivables, unbilled services, and the need for additional credit-facility borrowings.
The effect of higher compensation, bonus, and staffing costs on operating and adjusted EBITDA margins.
Education segment recovery prospects and Business Advisory utilization, billing rates, and margins.
Available debt capacity, covenant headroom, 2024 maturity exposure, and the relationship between share repurchases and liquidity.
The outcome and potential financial exposure from the Oaktree-related claims.
Valuation sensitivity and liquidity of the Shorelight convertible debt investment and other private-company investments.