Huron Consulting Group Inc. annual report, FY2022

Huron Consulting Group Inc. — FY2022 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022. The filing is an annual Form 10-K rather than a standalone fourth-quarter filing; fourth-quarter information is included only where disclosed.

Business context

Huron is a global professional services firm providing consulting, managed services, digital transformation, technology, data and analytics solutions. Effective January 1, 2022, Huron reorganized its reporting structure into Healthcare, Education and Commercial segments. Historical segment information was recast, with no effect on consolidated results.

2022 revenue mix: Healthcare 47%, Education 32%, Commercial 21%.
Capability mix: Consulting and Managed Services revenue of $638.0 million and Digital revenue of $494.5 million.
Approximately 5,660 full-time employees, including 4,832 revenue-generating professionals, at December 31, 2022.
More than 2,000 clients served; the 10 largest clients represented approximately 17% of consolidated revenue.

Financial performance and key metrics

Metric	FY2022	FY2021	Change
Revenue	$1,132.5 million	$905.6 million	+25.0%
Operating income	$99.8 million	$52.8 million	+$46.9 million
Operating margin	8.8%	5.8%	+3.0 percentage points
Net income from continuing operations	$75.6 million	$63.0 million	+19.9%
Diluted EPS from continuing operations	$3.64	$2.89	+26.0%
Adjusted diluted EPS	$3.43	$2.61	+31.4%
Adjusted EBITDA	$130.8 million	$97.8 million	+33.7%
Adjusted EBITDA margin	11.6%	10.8%	+0.8 percentage points
Net cash from operating activities	$85.4 million	$18.0 million	+$67.4 million

Revenue growth reflected stronger demand for Digital services across all segments and improved Consulting and Managed Services demand in Healthcare and Education. Consulting utilization increased to 75.2% from 70.6%, while Digital utilization declined to 71.0% from 72.5%.

Healthcare revenue increased 20.3% to $535.0 million; segment margin declined to 24.5% from 26.6%.
Education revenue increased 48.5% to $359.8 million; segment margin increased to 21.9% from 21.6%.
Commercial revenue increased 8.8% to $237.6 million; segment margin increased to 21.1% from 15.7%.
Direct costs declined to 69.4% of revenue from 70.3%, while selling, general and administrative expenses declined to 18.5% from 19.7%.
The effective tax rate increased to 30.4% from 21.3%, primarily because 2021 benefited from discrete tax items and 2022 included nondeductible investment losses and other nondeductible expenses.

Liquidity, debt and capital allocation

Cash and cash equivalents were $11.8 million at December 31, 2022, compared with $20.8 million at December 31, 2021.
Net cash used in investing activities was $20.1 million, including $12.5 million of property and equipment purchases, $11.8 million of internally developed software costs and $3.4 million for business acquisitions.
Net cash used in financing activities was $74.1 million, primarily reflecting share repurchases and debt activity.
Debt outstanding was $290.0 million, compared with $230.0 million at year-end 2021. The senior secured revolving credit facility has aggregate commitments of $600 million and matures November 15, 2027.
Unused borrowing capacity was $309.3 million, after outstanding borrowings and $0.7 million of letters of credit.
The credit facility transitioned from LIBOR to Term SOFR. Borrowings had a weighted average interest rate of 3.8% at year-end 2022, including interest-rate swaps.
Huron reported a consolidated leverage ratio of 1.92x and interest coverage ratio of 14.04x, remaining in compliance with its covenants.
Huron repurchased 2.0 million shares for $121.3 million during 2022. The repurchase authorization was increased to $300 million through December 31, 2023, with $108.9 million remaining available at year-end.
Huron has not paid common-stock dividends since becoming public; dividend capacity is subject to board discretion and credit-agreement restrictions.

Material changes and unusual items

The new operating model and segment structure were implemented in 2022 to integrate industry expertise with digital, strategic and financial advisory capabilities.
Huron acquired AIMDATA in January 2022 and Customer Evolution effective December 31, 2022. Management stated that the acquisitions were not significant individually or in aggregate.
Huron recorded a $27.0 million unrealized gain on its Medically Home preferred-stock investment. The investment had a carrying value of $33.6 million at year-end, compared with $6.7 million in 2021.
Other income in 2021 included a $31.5 million pretax gain on the sale of the Life Sciences business; no comparable gain occurred in 2022.
Restructuring charges declined to $9.9 million from $12.4 million and included $5.7 million of employee-related costs, $2.5 million of office-space costs and $1.7 million of other charges.
Huron settled the Oaktree litigation in 2022 for $1.5 million. The payment was covered by an insurance receivable and had no net impact on 2022 operating results.
No goodwill impairment was recorded in 2022. Goodwill totaled $625.0 million, or approximately 52% of total assets; goodwill and other intangible assets totaled $648.4 million, or 54% of total assets.

Guidance, outlook and management commentary

The filing does not provide a clear 2023 revenue, earnings or margin guidance figure in the supplied text. Management expressed confidence that internally generated liquidity, cash on hand and available revolver capacity would support current financing needs and the long-term growth strategy.

Management expects 2023 property, equipment and software-development expenditures of approximately $30 million to $35 million.
Remaining performance obligations under engagements with original expected durations greater than one year totaled $151.2 million at year-end; approximately $78.7 million was expected to be recognized in 2023.
Management’s strategy emphasizes Digital growth, recurring software and managed-services revenue, expanded industry offerings, acquisitions and operating-model efficiencies.

Principal risks and contingencies

Demand depends on client renewals, new business, utilization, billing rates, project timing and retention of senior professionals.
Many engagements are short-term and terminable by clients with little or no notice; performance-based and fixed-fee arrangements create estimation and margin risk.
Healthcare and Education account for most revenue and are subject to regulatory, reimbursement, funding, enrollment and economic pressures.
Digital offerings depend on rapid technology evolution, proprietary software development and third-party technology partners.
Cybersecurity, data privacy, protected health information, professional liability and regulatory compliance risks could result in litigation, penalties or reputational damage.
Debt is secured by substantially all of the Company’s and subsidiary guarantors’ assets and carries variable-rate exposure. A 100-basis-point interest-rate change was estimated to affect annual pretax income by approximately $0.9 million.
Goodwill and private-company investments require valuation judgments and could generate future impairment or valuation losses. The Medically Home gain and Shorelight valuation are particularly subject to changes in market and operating assumptions.
Huron has significant operations in India, including more than 1,500 employees, exposing it to currency, political, regulatory, cybersecurity, natural-disaster and anti-corruption risks.
Management stated that no pending litigation was then expected to have a material adverse effect, but legal outcomes remain uncertain.

Investor verification checklist

Verify the absence or presence of 2023 financial guidance in subsequent earnings releases or filings, because the supplied 10-K text does not provide clear numerical guidance.
Assess whether Digital revenue growth and Consulting utilization can offset the decline in Digital utilization and rising compensation and contractor costs.
Monitor cash conversion, receivables and unbilled services, including the increase in contract assets to $50.2 million.
Review leverage, interest rates, SOFR exposure, covenant headroom and the impact of additional share repurchases on liquidity.
Evaluate the sustainability of earnings excluding the $27.0 million unrealized Medically Home gain and other non-GAAP adjustments.
Reassess goodwill and private-investment valuations if operating performance, market conditions or client demand weaken.
Confirm the timing and economics of the Customer Evolution acquisition and any contingent acquisition consideration.