Huron Consulting Group Inc. — Q3 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 nine months ended September 30, 2022, compared with the corresponding 2021 periods. Effective January 1, 2022, Huron reorganized its reporting structure into Healthcare, Education and Commercial segments and recast historical segment information.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $285.4 million | $224.0 million | $818.7 million | $657.3 million |
| Operating income | $29.3 million | $18.3 million | $74.3 million | $42.7 million |
| Operating margin | 10.3% | 8.2% | 9.1% | 6.5% |
| Net income | $17.7 million | $13.7 million | $58.5 million | $31.9 million |
| Diluted EPS | $0.86 | $0.64 | $2.80 | $1.46 |
| Adjusted EBITDA | $36.5 million | $26.4 million | $91.8 million | $68.5 million |
| Adjusted diluted EPS | $1.01 | $0.78 | $2.32 | $1.81 |
Q3 revenue increased 27.4% year over year, led by Digital revenue growth of 45.5% and Consulting and Managed Services growth of 15.5%. Nine-month revenue increased 24.6%, with Digital revenue up 43.0% and Consulting and Managed Services revenue up 12.9%.
- Healthcare: Q3 revenue increased 25.5% to $131.3 million; segment margin declined to 25.2% from 30.7%.
- Education: Q3 revenue increased 49.2% to $94.3 million; segment margin improved to 24.2% from 23.0%.
- Commercial: Q3 revenue increased 6.3% to $59.7 million; segment margin improved to 23.7% from 14.7%.
- Revenue-generating professionals increased to 4,571 from 3,724, while Q3 Consulting utilization rose to 72.5% from 71.5% and Digital utilization declined to 70.1% from 74.2%.
Cash flow, liquidity, debt and balance sheet
- Cash used in operating activities was $5.8 million in the first nine months of 2022, an improvement from $28.2 million used in the prior-year period. Working-capital investment included increases of $44.8 million in client receivables and $31.9 million in unbilled services.
- Cash used in investing activities was $10.8 million, including $9.8 million for property and equipment and $6.9 million for internally developed software, partially offset by proceeds from the aircraft sale and life-insurance policy distributions.
- Cash provided by financing activities was $4.8 million. Huron borrowed $287.0 million and repaid $178.8 million under its credit facility, while repurchasing $97.9 million of common stock.
- Cash and cash equivalents declined to $8.8 million at September 30, 2022 from $20.8 million at December 31, 2021.
- Long-term debt increased to $341.0 million from $232.2 million, consisting of borrowings under the senior secured revolving credit facility. The weighted average interest rate was 3.6%, compared with 2.7% at year-end 2021.
- The $600 million revolving facility matures September 27, 2024. Unused borrowing capacity was $258.3 million after $0.7 million of letters of credit.
- Huron was in compliance with its debt covenants, reporting a consolidated leverage ratio of 2.06x versus a 3.75x maximum and interest coverage of 18.36x versus a 3.50x minimum.
- Management expects 2022 capital expenditures and software development spending to total approximately $20 million to $25 million and believes available liquidity and borrowing capacity are adequate for current needs and long-term growth.
Material changes versus the prior comparable period
- Revenue growth substantially outpaced expense growth, increasing operating margin by 210 basis points in Q3 and 260 basis points for the first nine months.
- Net income and diluted EPS increased despite higher interest expense and a higher effective tax rate. The Q3 effective tax rate was 30.2%, versus 12.5% in 2021; the nine-month rate was 31.4%, versus 17.9%.
- Direct costs declined as a percentage of revenue, while selling, general and administrative expenses also declined as a percentage of revenue. Compensation, contractor and technology costs increased in absolute dollars due primarily to headcount growth and salary increases.
- Healthcare segment margin compressed, while Education and Commercial segment margins expanded.
- Huron recognized a $27.0 million unrealized gain in the first quarter on its Medically Home preferred stock investment. This non-operating, non-cash item materially benefited nine-month other income and GAAP EBITDA; adjusted measures exclude it.
- Huron repurchased 1,706,587 shares for $97.9 million during the first nine months, representing 7.8% of shares outstanding at December 31, 2021. Remaining authorization at September 30 was $32.3 million.
- The company completed acquisitions including AIMDATA and benefited from prior acquisitions of Whiteboard and Perception Health; it also continued to reflect the 2021 divestiture of its Life Sciences business.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear quantitative revenue, earnings or margin guidance figure. Management’s stated priorities are accelerating Healthcare and Education growth, expanding Commercial, scaling the integrated Digital platform, increasing recurring revenue, deploying capital toward acquisitions and growth, and returning capital to shareholders.
- Management attributed growth to demand for cloud-based technology and analytics solutions and stronger Healthcare and Education consulting demand. The 2021 pandemic-affected comparison particularly benefited Education results.
- Key risks include client demand and project timing, utilization and billing rates, retention of clients and qualified personnel, hiring-related utilization pressure, seasonal fourth-quarter business-day effects, acquisitions and integration, technology and cybersecurity, privacy requirements, goodwill impairment, tax developments, interest rates, foreign exchange and general economic conditions.
- The senior secured facility is variable-rate and indexed to LIBOR or an alternative base rate. Huron uses $200.0 million of interest-rate swaps and expects LIBOR transition provisions to apply when a successor rate is established.
- The Inflation Reduction Act introduced a potential 1% excise tax on stock repurchases after December 31, 2022 and a corporate alternative minimum tax; Huron was evaluating the effect on future cash flows.
- Restructuring charges were $1.3 million in Q3 and $5.0 million for the first nine months, primarily involving vacated office costs, employee costs, operating-model modification expenses, contract termination and discontinued software implementation costs.
- In October 2022, Huron reached a proposed $1.5 million settlement with the Oaktree bankruptcy trustee, subject to court approval. Huron increased both its accrued liability and insurance receivable by $1.5 million, producing no net income impact.
- Subsequent to quarter-end, the board increased the share-repurchase authorization from $200 million to $300 million in Q4 2022.
Most important facts for investors to verify
- Whether strong Digital and Education growth persists after acquisitions and favorable pandemic-related comparisons normalize.
- The sustainability of margin expansion, particularly the decline in Healthcare segment margin and lower Digital utilization.
- Cash conversion and working-capital requirements, given negative year-to-date operating cash flow and substantial receivables and unbilled services.
- Debt reduction capacity, interest-rate exposure, LIBOR transition effects and the September 2024 credit-facility maturity.
- The recurring operating performance excluding the $27.0 million Medically Home valuation gain and other non-GAAP adjustments.
- The impact of continued share repurchases on leverage, liquidity, share count and the potential 2023 excise tax.
- Final court approval and insurance recovery associated with the Oaktree settlement.
- Valuation and recoverability of the $62.2 million Shorelight convertible debt investment, $33.6 million Medically Home investment and $623.8 million of goodwill.