Huron Consulting Group Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Huron is a global professional services firm providing consulting, managed services, digital transformation, technology, data and analytics solutions. The filing covers the three and six months ended June 30, 2022, compared with the same periods in 2021. Effective January 1, 2022, Huron reorganized its reporting model into Healthcare, Education and Commercial segments; prior-period segment data was recast for comparability.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Revenue | $273.3 million | $230.1 million | 18.8% increase |
| Operating income | $29.0 million | $16.1 million | 80.0% increase |
| Operating margin | 10.6% | 7.0% | Up 360 bps |
| Net income | $13.9 million | $12.8 million | 8.4% increase |
| Diluted EPS | $0.66 | $0.59 | 11.9% increase |
| Adjusted EBITDA | $33.2 million | $25.6 million | 29.6% increase |
| Adjusted EBITDA margin | 12.2% | 11.1% | Up 110 bps |
| Adjusted diluted EPS | $0.83 | $0.69 | 20.3% increase |
For the six months ended June 30, 2022, revenue increased 23.1% to $533.4 million, operating income increased to $45.0 million from $24.4 million, operating margin improved to 8.4% from 5.6%, and net income increased to $40.7 million from $18.2 million. Six-month diluted EPS was $1.94 versus $0.82, while adjusted diluted EPS was $1.32 versus $1.03.
- Q2 segment revenue was $128.5 million in Healthcare, $88.2 million in Education and $56.6 million in Commercial.
- Education revenue increased 45.9% in Q2, Healthcare increased 12.0%, and Commercial increased 3.1%.
- Digital revenue increased 47.4% in Q2 to $125.5 million; Consulting and Managed Services revenue increased 2.0% to $147.9 million.
- Revenue-generating professionals increased to 4,243 at June 30, 2022, from 3,459 a year earlier.
- Consulting utilization declined to 73.2% from 74.6%, while Digital utilization increased to 74.3% from 73.2%.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $12.0 million at June 30, 2022, compared with $20.8 million at December 31, 2021.
- Six-month operating cash flow was negative $50.2 million, compared with negative $62.0 million in the prior-year period. Working-capital investment included increases of $28.8 million in client receivables and $28.3 million in unbilled services.
- Six-month investing cash flow was negative $7.6 million, including $6.8 million of property and equipment purchases, $4.0 million of internally developed software costs and $1.9 million for an acquisition. Proceeds from the aircraft sale partly offset these uses.
- Six-month financing cash flow was positive $49.1 million, including $224.0 million of credit-facility borrowings, $114.8 million of debt repayments and $52.2 million of share repurchases.
- Senior secured credit-facility borrowings were $342.0 million, up from $230.0 million at December 31, 2021. The weighted average interest rate was 2.6% including interest-rate swaps.
- Unused revolving-credit capacity was $257.3 million, net of $0.7 million of letters of credit. The facility matures September 27, 2024.
- Huron reported a 2.20-to-1.00 consolidated leverage ratio and a 19.03-to-1.00 interest coverage ratio, compared with covenants of 3.75-to-1.00 and 3.50-to-1.00, respectively.
- The company estimates 2022 property and equipment purchases and software development spending of approximately $20 million to $25 million.
Material changes versus the prior comparable period
- Revenue growth was led by Digital services and stronger Education demand, with favorable comparisons partly reflecting COVID-19-related project delays in 2021.
- Operating margin expanded as revenue growth outpaced increases in direct costs and corporate expenses. Direct costs declined to 69.2% of revenue from 70.2%, and SG&A declined to 16.8% from 19.6%.
- Healthcare segment margin declined to 23.6% from 26.6%, primarily due to higher payroll and contractor costs. Education margin improved to 24.6% from 23.4%, and Commercial margin improved to 21.0% from 20.1%.
- Q2 restructuring charges increased to $2.1 million from $0.9 million, including employee costs, vacated-office costs and expenses associated with the operating-model change.
- Debt increased materially to fund operations, growth investments and shareholder returns. The share-repurchase authorization was increased to $200 million and extended through December 31, 2023; $77.9 million remained available at quarter-end.
- The company completed the sale of its aircraft, repaid the related promissory note and recognized a $1.0 million gain in the first quarter.
Outlook, unusual items, risks and contingencies
The filing does not provide a clear formal full-year revenue or earnings guidance range. Management states that it expects internally generated liquidity, cash on hand and available revolver capacity to support current financing needs and its long-term growth strategy. Strategic priorities include expanding Healthcare and Education, growing Commercial, advancing digital offerings, increasing recurring revenue and pursuing acquisitions and other growth investments.
- Six-month net income benefited from a $27.0 million unrealized gain on the Medically Home preferred-stock investment, increasing its carrying value to $33.6 million. This non-cash gain is excluded from adjusted EBITDA and adjusted EPS.
- Other income in Q2 was negative $4.9 million, primarily because deferred-compensation investments generated a $5.0 million loss, compared with a $2.1 million gain in Q2 2021.
- The effective tax rate increased to 36.0% in Q2 and 31.9% for the first six months, partly due to nondeductible investment losses and other nondeductible expenses. Prior-year rates benefited from discrete tax items.
- Huron identified no goodwill impairment at January 1, 2022, but goodwill impairment testing depends on forecast revenue growth, EBITDA margins, discount rates and other estimates. Net goodwill was $623.8 million at June 30, 2022.
- Principal risks include COVID-19 and economic conditions, client demand, utilization and billing rates, retention of clients and personnel, competition, acquisitions and integration, technology and cybersecurity, taxes, interest rates, foreign currency and potential goodwill impairment.
- The Oaktree bankruptcy litigation is subject to arbitration and a court-ordered stay of certain claims. Management believes the allegations are without merit and estimates that a comprehensive resolution will not result in a material loss, although actual outcomes may differ.
- The company has variable-rate debt indexed to LIBOR and is evaluating the transition to successor reference rates. A hypothetical 100-basis-point interest-rate change would affect annualized pretax income by approximately $1.4 million at current debt levels.
Most important facts for investors to verify
- Whether Digital growth and Education demand remain strong enough to offset lower Healthcare utilization and Commercial softness.
- The sustainability of margin expansion after excluding restructuring charges and other unusual items.
- Operating cash conversion, particularly collections of receivables and unbilled services, given six-month negative operating cash flow.
- Debt reduction plans, interest-rate exposure and compliance with the credit facility’s covenants before its September 2024 maturity.
- The valuation, liquidity and potential volatility of the Medically Home and Shorelight investments; the Medically Home gain was non-cash and not recurring operating revenue.
- Future restructuring costs, acquisition integration results and the effect of the new segment operating model.
- Developments in the Oaktree litigation, LIBOR transition and other contingencies.