HURON CONSULTING GROUP INC. In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Huron," "Company," "we," "us" and "our" refer toHuron Consulting Group Inc. and its subsidiaries. Statements in this Quarterly Report on Form 10-Q that are not historical in nature, including those concerning the Company's current expectations about its future results, are "forward-looking" statements as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as "may," "should," "expects," "provides," "anticipates," "assumes," "can," "will," "meets," "could," "likely," "intends," "might," "predicts," "seeks," "would," "believes," "estimates," "plans," "continues," "goals," "guidance," or "outlook," or similar expressions. These forward-looking statements reflect our current expectations about our future requirements and needs, results, levels of activity, performance, or achievements. Some of the factors that could cause actual results to differ materially from the forward-looking statements contained herein include, without limitation: the impact of the COVID-19 pandemic on the economy; our clients and client demand for our services, and our ability to sell and provide services, including the measures taken by governmental authorities and businesses in response to the pandemic, which may cause or contribute to other risks and uncertainties that we face; failure to achieve expected utilization rates, billing rates, and the number of revenue-generating professionals; inability to expand or adjust our service offerings in response to market demands; our dependence on renewal of client-based services; dependence on new business and retention of current clients and qualified personnel; failure to maintain third-party provider relationships and strategic alliances; inability to license technology to and from third parties; the impairment of goodwill; various factors related to income and other taxes; difficulties in successfully integrating the businesses we acquire and achieving expected benefits from such acquisitions; risks relating to privacy, information security, and related laws and standards; and a general downturn in market conditions. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, among others, those described under Item 1A. "Risk Factors," in our Annual Report on Form 10-K for the year endedDecember 31, 2021 that may cause actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. We disclaim any obligation to update or revise any forward-looking statements as a result of new information or future events, or for any other reason. OVERVIEW Our Business Huron is a global professional services firm that collaborates with clients to put possible into practice by creating sound strategies, optimizing operations, accelerating digital transformation, and empowering businesses and their people to own their future. By embracing diverse perspectives, encouraging new ideas and challenging the status quo, we create sustainable results for the organizations we serve. EffectiveJanuary 1, 2022 , we modified our operating model to expand and more deeply integrate our industry expertise with our digital, strategic and financial advisory capabilities. The new operating model will strengthen Huron's go-to-market strategy, drive efficiencies that support margin expansion, and position the company to accelerate growth. To align with the new operating model, effective with reporting for periods beginningJanuary 1, 2022 , we began reporting under the following three industries, which are our reportable segments: Healthcare, Education and Commercial. The Commercial segment includes all industries outside of healthcare and education, including, but not limited to, financial services and energy and utilities. In the new reporting structure, each segment includes all revenue and costs associated with engagements delivered in the respective segments' industries. The new Healthcare and Education segments include some revenue and costs historically reported in the Business Advisory segment and the Healthcare segment includes some revenue and costs historically reported in the Education segment. We also provide revenue reporting across two principal capabilities: i) Consulting and Managed Services and ii) Digital. These changes create greater transparency for investors by improving visibility into the core drivers of our business. While our consolidated results have not been impacted, our historical segment information has been recast for consistent presentation. See below for additional information on our operating industries and principal capabilities.
Operating Industries
We provide our services and manage our business under three operating industries, which are also our operating segments: Healthcare, Education and Commercial.
•Healthcare
Our Healthcare segment serves acute care providers, including national and
regional health systems, academic health systems, community health systems, and
public, children's and critical access hospitals, and non-acute care providers,
including physician practices and medical groups, payors, and long-term care or
post-acute providers. Our Healthcare professionals have a depth of expertise in
business operations, including financial and operational improvement, care
transformation, and revenue cycle managed services; digital solutions;
organizational transformation; financial advisory and strategy and innovation.
Most healthcare organizations are focused on establishing a sustainable
long-term strategy and business model centered around optimal cost structures,
reimbursement models and financial strategies; changing the way care is
delivered, particularly in light of personnel shortages, and improving access to
care; and
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Table of Contents evolving their digital capabilities to more effectively manage their business. Our solutions help clients adapt to this rapidly changing healthcare environment to become a more agile, efficient and consumer-centric organization. We use our deep industry, functional and technical expertise to help clients solve a diverse set of business issues, including, but not limited to, optimizing financial and operational performance, improving care delivery and clinical outcomes, increasing physician, patient and employee satisfaction, and maximizing return on technology investments.
•Education
Our Education segment serves public and private colleges and universities, research institutes and other education-related organizations. Our Education professionals have a depth of expertise in strategy and innovation; business operations, including the research enterprise and student and alumni lifecycle; digital solutions; and organizational transformation. Our Education segment clients are increasingly faced with strategic, financial and/or enrollment challenges as well as increased competition. We combine our deep industry, functional and technical expertise to help clients solve their most pressing challenges, including, but not limited to, transforming business operations with technology; strengthening research strategies and support services; evolving their organizational strategy; optimizing financial and operational performance; applying innovative enrollment strategies; and enhancing the student lifecycle.
•Commercial
Our Commercial segment is focused on serving industries and organizations facing significant disruption and regulatory change by helping them adapt to rapidly changing environments and accelerate business transformation. Our Commercial professionals work primarily with six primary buyers: the chief executive officer, the chief financial officer, the chief strategy officer, the chief human resources officer, the chief operating officer, and organizational advisors, including lenders and law firms. We have a deep focus on serving organizations in the financial services, energy and utilities, industrials and manufacturing industries and the public sector while opportunistically serving the commercial industries more broadly, including professional and business services, life sciences, consumer products, and nonprofit. Our Commercial professionals have deep industry, functional and technical expertise that they put forward when delivering our digital, strategy and innovation and financial advisory (special situation advisory and corporate finance advisory) services. In today's disruptive environment, organizations must reimagine their historical strategies and financial and operating models to sustain and advance their competitive advantage. Our experts help organizations across industries with a variety of business challenges, including, but not limited to, embedding technology and analytics throughout their internal and customer-facing operations, developing insights into the needs of tomorrow's customers in order to evolve their enterprise and business unit strategies, bringing new products to market, managing through stressed and distressed situations to create a viable path forward for stakeholders and executing mergers and acquisitions, finance offerings and risk mitigation strategies.
Capabilities
Within each of our reportable segments, we provide services under two principal capabilities: i) Consulting and Managed Services and ii) Digital.
•Consulting and Managed Services
Our Consulting and Managed Services capabilities represent all of our management consulting services, managed services (excluding technology-related managed services) and outsourcing services delivered across industries. Our Consulting and Managed Services experts help our clients address a variety of strategic, operational, financial, people and organizational-related challenges.
•Digital
Our Digital capabilities represent all of our technology and analytics services, including technology-related managed services, and software products revenue delivered across industries. Our Digital experts help our clients address a variety of business challenges, including, but not limited to, designing and implementing technologies to accelerate transformation, facilitate data-driven decision making and improve customer and employee experiences. We have expanded our ecosystem to work with more than 25 technology partners, and we are an Oracle partner, a Gold-level consulting partner with Salesforce.com and a Premium Partner with Salesforce.org, a Workday Services and Software Partner, anAmazon Web Services consulting partner, a Silver-level system integrator with Informatica and an SAP Concur implementation partner.
Business Strategy, Opportunities and Challenges
Our primary strategy is to be the premier transformation partner to our clients,
meeting their needs by providing a balanced portfolio of service and product
offerings so that we can adapt quickly and effectively to emerging opportunities
in the marketplace. To achieve our strategic and financial objectives, we remain
focused on accelerating growth in healthcare and education, growing our presence
in the commercial industries, advancing our integrated digital platform,
building a more sustainable base of revenue to drive more consistent growth,
strategically deploying capital to accelerate our strategy and return capital to
shareholders, and investing in and growing our talented team, including
attracting and retaining our
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managing directors, our senior most practitioners that lead our revenue generation efforts. We regularly evaluate the performance of our businesses to ensure our investments meet these objectives.
COMPONENTS OF OPERATING RESULTS
Revenues
Our revenues are primarily generated by our employees who provide consulting and other professional services to our clients and are billable to our clients based on the number of hours worked, services provided, or achieved outcomes. We refer to these employees as our revenue-generating professionals. Revenues are primarily driven by the number of revenue-generating professionals we employ as well as the total value, scope, and terms of the consulting contracts under which they provide services. We also engage independent contractors to supplement our revenue-generating professionals on client engagements as needed.
We generate our revenues from providing professional services and software products under the following four types of billing arrangements: fixed-fee (including software license revenue); time-and-expense; performance-based; and software support, maintenance and subscriptions.
•Fixed-fee (including software license revenue): In fixed-fee billing arrangements, we agree to a pre-established fee in exchange for a predetermined set of professional services. We set the fees based on our estimates of the costs and timing for completing the engagements. Fixed-fee arrangements also include software licenses for our revenue cycle management software and research administration and compliance software. •Time-and-expense: Under time-and-expense billing arrangements, we require the client to pay based on the number of hours worked by our revenue-generating professionals at agreed upon rates. Time-and-expense arrangements also include speaking engagements, conferences and publications purchased by our clients. •Performance-based: In performance-based fee billing arrangements, fees are tied to the attainment of contractually defined objectives. We enter into performance-based engagements in essentially two forms. First, we generally earn fees that are directly related to the savings formally acknowledged by the client as a result of adopting our recommendations for improving operational and cost effectiveness in the areas we review. Second, we earn a success fee when and if certain predefined outcomes occur. Often, performance-based fees supplement our time-and-expense or fixed-fee engagements. The level of performance-based fees earned may vary based on our clients' risk sharing preferences and the mix of services we provide. •Software support, maintenance and subscriptions: Clients that have purchased one of our software licenses can pay an annual fee for software support and maintenance. We also generate subscription revenue from our cloud-based analytic tools and solutions. Software support, maintenance and subscription revenues are recognized ratably over the support or subscription period. These fees are generally billed in advance and included in deferred revenues until recognized. Time-and-expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. Moreover, our clients typically retain us on an engagement-by-engagement basis, rather than under long-term recurring contracts. The volume of work performed for any particular client can vary widely from period to period. Our quarterly results are impacted principally by the total value, scope, and terms of our client contracts, the number of our revenue-generating professionals who are available to work, our revenue-generating professionals' utilization rate, and the bill rates we charge our clients. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that results in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. For example, during the third and fourth quarters of the year, vacations taken by our clients can result in the deferral of activity on existing and new engagements, which would negatively affect our utilization rate. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period.
Reimbursable Expenses
Reimbursable expenses that are billed to clients, primarily relating to travel
and out-of-pocket expenses incurred in connection with client engagements, are
included in total revenues and reimbursable expenses. Reimbursable expenses are
recognized as expenses in the period in which the expense is incurred.
Subcontractors that are billed to clients at cost are also included in
reimbursable expenses. When billings do not specifically identify reimbursable
expenses, we allocate the portion of the billings equivalent to these expenses
to reimbursable expenses.
We manage our business on the basis of revenues before reimbursable expenses,
which we believe is the most accurate reflection of our services because it
eliminates the effect of reimbursable expenses that we bill to our clients at
cost.
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Table of Contents Operating Expenses Our most significant expenses are costs classified as direct costs. Direct costs primarily consist of payroll costs which includes salaries, performance bonuses, share-based compensation, signing and retention bonuses, payroll taxes, and benefits for our revenue-generating professionals. Direct costs also include fees paid to independent contractors that we retain to supplement our revenue-generating professionals, typically on an as-needed basis for specific client engagements, and technology costs, product and event costs, and commissions. Direct costs exclude amortization of intangible assets and software development costs and reimbursable expenses, both of which are separately presented in our consolidated statements of operations. Selling, general and administrative expenses consist primarily of salaries, performance bonuses, payroll taxes, benefits, and share-based compensation for our support personnel. Also included in selling, general and administrative expenses is third-party professional fees, software licenses and hosting expenses, rent and other office related expenses, sales and marketing related expenses, recruiting and training expenses, and practice administration and meetings expenses. Other operating expenses include restructuring charges, depreciation expense, and amortization expense related to internally developed software costs and intangible assets acquired in business combinations. In the first quarter of 2022, we began presenting depreciation and amortization expense inclusive of amortization of intangible assets and software development costs previously presented within total direct costs and reimbursable expenses. We have recast our historical presentation of our consolidated statement of operations for consistent presentation.
Segment Results
Segment operating income consists of the revenues generated by a segment, less operating expenses that are incurred directly by the segment. Unallocated costs include corporate costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include corporate office support costs, office facility costs, costs related to accounting and finance, human resources, legal, marketing, information technology, and company-wide business development functions, as well as costs related to overall corporate management.
Non-GAAP Measures
We also assess our results of operations using the following non-GAAP financial
measures: earnings before interest, taxes, depreciation and amortization
("EBITDA"), adjusted EBITDA, adjusted EBITDA as a percentage of revenues,
adjusted net income, and adjusted diluted earnings per share ("EPS"). These
non-GAAP financial measures differ from GAAP because they exclude a number of
items required by GAAP, each discussed below. These non-GAAP financial measures
should be considered in addition to, and not as a substitute for or superior to,
any measure of performance, cash flows, or liquidity prepared in accordance with
GAAP. Our non-GAAP financial measures may be defined differently from time to
time and may be defined differently than similar terms used by other companies,
and accordingly, care should be exercised in understanding how we define our
non-GAAP financial measures.
Our management uses the non-GAAP financial measures to gain an understanding of
our comparative operating performance, for example when comparing such results
with previous periods or forecasts. These non-GAAP financial measures are used
by management in their financial and operating decision making because
management believes they reflect our ongoing business in a manner that allows
for meaningful period-to-period comparisons. Management also uses these non-GAAP
financial measures when publicly providing our business outlook, for internal
management purposes, and as a basis for evaluating potential acquisitions and
dispositions. We believe that these non-GAAP financial measures provide useful
information to investors and others in understanding and evaluating Huron's
current operating performance and future prospects in the same manner as
management does and in comparing in a consistent manner Huron's current
financial results with Huron's past financial results.
These non-GAAP financial measures include adjustments for the following items:
Amortization of intangible assets: We exclude the effect of amortization of intangible assets from the calculation of adjusted net income, as it is inconsistent in its amount and frequency and is significantly affected by the timing and size of our acquisitions.
Restructuring charges: We have incurred charges due to the restructuring of various parts of our business. These restructuring charges have primarily consisted of costs associated with office space consolidations, including lease impairment charges and accelerated depreciation on lease-related property and equipment, and severance charges. We exclude the effect of the restructuring charges from our non-GAAP measures to permit comparability with periods that are not impacted by these items.
Other losses (gains): We exclude the effect of other losses (gains), which primarily relate to changes in the estimated fair value of our liabilities for contingent consideration related to business acquisitions, to permit comparability with periods that are not impacted by these items.
Transaction-related expenses: To permit comparability with prior periods, we
exclude the impact of third-party legal and accounting fees incurred related to
business acquisitions.
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Table of Contents Unrealized gain on preferred stock investment: We exclude the effect of unrealized gains related to changes in the fair value of our preferred stock investment inMedically Home Group, Inc. ("Medically Home"), which are recognized when an observable price change occurs. These unrealized gains are included as a component of other income (expense), net. We believe that these unrealized gains are not indicative of the ongoing performance of our business and their exclusion permits comparability with prior periods.
Foreign currency transaction losses (gains), net: We exclude the effect of foreign currency transaction losses and gains from the calculation of adjusted EBITDA because the amount of each loss or gain is significantly affected by changes in foreign exchange rates.
Tax effect of adjustments: The non-GAAP income tax adjustment reflects the incremental tax impact applicable to the non-GAAP adjustments.
Income tax expense, Interest expense, net of interest income, Depreciation and amortization: We exclude the effects of income tax expense, interest expense, net of interest income, and depreciation and amortization in the calculation of EBITDA, as these are customary exclusions as defined by the calculation of EBITDA to arrive at meaningful earnings from core operations excluding the effect of such items. We include, within the depreciation and amortization adjustment, the amortization of capitalized implementation costs of our ERP and other related software, which is included within selling, general and administrative expenses on our consolidated statement of operations.
Revenue-Generating Professionals
Our revenue-generating professionals consist of our full-time consultants who generate revenues based on the number of hours worked; full-time equivalents, which consists of coaches and their support staff within the Culture and Organizational excellence solution, consultants who work variable schedules as needed by clients, and full-time employees who provide software support and maintenance services to clients; and our Healthcare Managed Services employees who provide revenue cycle billing, collections insurance verification and change integrity services to clients.
Utilization Rate
The utilization rate of our revenue-generating professionals is calculated by dividing the number of hours our billable consultants worked on client assignments during a period by the total available working hours for these billable consultants during the same period. Available hours are determined by the standard hours worked by each billable consultant, adjusted for part-time hours, andU.S. standard work weeks. Available working hours exclude local country holidays and vacation days. Utilization rates are presented for our revenue-generating professionals who primarily bill on an hourly basis. We do not present utilization rates for our Managed Services professionals as most of the revenues generated by these employees are not billed on an hourly basis. RESULTS OF OPERATIONS Executive Highlights
Highlights from the first quarter of 2022 include:
•Revenues increased 28.0% to
•Revenues within our Digital capability increased 35.7% in the first quarter of 2022, compared to the first quarter of 2021
•Operating margin increased to 6.1% for the first quarter of 2022, compared to 4.1% for the first quarter of 2021
•Diluted EPS increased to
•Adjusted diluted EPS increased to
•Returned
Revenues increased$56.8 million , or 28.0%, to$260.0 million for the first quarter of 2022 from$203.2 million for the first quarter of 2021. The increase in revenues reflects strengthened demand for services in all of our segments, as well as the favorable comparison against results for the first quarter of 2021 in our Healthcare and Education segments which were more significantly impacted by the COVID-19 pandemic as some clients reprioritized and delayed certain projects as a result of the uncertainties surrounding the pandemic. Beginning in the second quarter of 2021, we saw strengthened demand for our services and an increase in our pipeline that continued through 2021 and into 2022. Revenues for the first quarter of 2022 increased 4.7% compared to the fourth quarter of 2021.
In our Consulting and Managed Services capability, revenues for the first quarter of 2022 increased 22.9% compared to the first quarter of 2021, and reflected strengthened demand in our Healthcare and Education segments. The utilization rate within our Consulting capability increased to 71.4% in the first quarter of 2022, compared to 66.4% in the first quarter of 2021.
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Table of Contents Revenues within our Digital capability increased 35.7% in the first quarter of 2022 compared to the first quarter of 2021, and reflected strengthened demand in all of our segments. The utilization rate within our Digital capability increased to 72.4% in the first quarter of 2022, compared to 71.3% in the first quarter of 2021. The total number of revenue-generating professionals increased to 4,023 as ofMarch 31, 2022 , compared to 3,116 as ofMarch 31, 2021 , as a result of the overall increase in demand for our services, particularly within our Healthcare and Education segments, as well as headcount increases in connection with business acquisitions. We proactively plan and manage the size and composition of our workforce and take actions as needed to address changes in the anticipated demand for our services as payroll costs are the most significant portion of our operating expenses. Operating margin, which is defined as operating income expressed as a percentage of revenues, increased to 6.1% for the three months endedMarch 31, 2022 compared to 4.1% for the three months endedMarch 31, 2021 , driven by strong revenue growth that outpaced increases in operating expenses. Net income increased$21.4 million to$26.9 million for the three months endedMarch 31, 2022 from$5.4 million for the same period last year. The increase in net income was primarily attributable to a$19.8 million unrealized gain, net of tax, related to the increase in the fair value of our preferred stock investment in Medically Home. As a result of the increase in net income, diluted earnings per share for the first quarter of 2022 was$1.27 compared to$0.24 for the first quarter of 2021. Adjusted diluted earnings per share was$0.49 for the first quarter of 2022, compared to$0.35 for the first quarter of 2021. During the first quarter of 2022, we repurchased 523,399 shares for$23.9 million and settled the repurchase of 3,820 shares for$0.2 million that were accrued as ofDecember 31, 2021 for a total repurchase of 527,219 shares for$24.1 million . Summary of Results EffectiveJanuary 1, 2022 , we modified our operating model to expand and more deeply integrate our industry expertise with our digital, strategic and financial advisory capabilities. The new operating model will strengthen Huron's go-to-market strategy, drive efficiencies that support margin expansion, and position the company to accelerate growth. To align with the new operating model, effective with reporting for periods beginningJanuary 1, 2022 , we began reporting under the following three industries, which are our reportable segments: Healthcare, Education and Commercial. The Commercial segment includes all industries outside of healthcare and education, including, but not limited to, financial services and energy and utilities. In the new reporting structure, each segment includes all revenue and costs associated with engagements delivered in the respective segments' industries. The new Healthcare and Education segments include some revenue and costs historically reported in the Business Advisory segment and the Healthcare segment includes some revenue and costs historically reported in the Education segment. We also provide revenue reporting across two principal capabilities: i) Consulting and Managed Services and ii) Digital. These changes create greater transparency for investors by improving visibility into the core drivers of our business. While our consolidated results have not been impacted, our historical segment information has been recast for consistent presentation.
The following table sets forth, for the periods indicated, selected segment and consolidated operating results and other operating data, including non-GAAP measures.
Three Months Ended
Segment and Consolidated Operating Results March 31,
(in thousands, except per share amounts): 2022 2021
Healthcare:
Revenues $ 121,876 $ 95,975
Operating income $ 28,032 $ 23,827
Segment operating income as a percentage of segment revenues 23.0 % 24.8 %
Education:
Revenues $ 80,662 $ 51,342
Operating income $ 14,306 $ 8,537
Segment operating income as a percentage of segment revenues 17.7 % 16.6 %
Commercial:
Revenues $ 57,511 $ 55,896
Operating income $ 12,214 $ 9,850
Segment operating income as a percentage of segment revenues 21.2 % 17.6 %
Total Huron:
Revenues $ 260,049 $ 203,213
Reimbursable expenses 4,726 1,934
Total revenues and reimbursable expenses $ 264,775 $ 205,147
Segment operating income $ 54,552 $ 42,214
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Three Months Ended
Segment and Consolidated Operating Results March 31,
(in thousands, except per share amounts): 2022 2021
Items not allocated at the segment level:
Other operating expenses 33,548 28,879
Depreciation and amortization 5,046 5,095
Operating income 15,958 8,240
Other income (expense), net 22,169 (1,299)
Income before taxes 38,127 6,941
Income tax expense 11,275 1,536
Net income $ 26,852 $ 5,405
Earnings per share:
Basic $ 1.29 $ 0.25
Diluted $ 1.27 $ 0.24
Other Operating Data:
Number of revenue-generating professionals by segment (at period
end)(5):
Healthcare 1,647 1,130
Education 1,231 871
Commercial (1) 1,145 1,115
Total 4,023 3,116
Revenue by capability:
Consulting and Managed Services (2) $ 150,584 $ 122,551
Digital 109,465 80,662
Total $ 260,049 $ 203,213 Number of revenue-generating professionals by capability (at period end): Consulting and Managed Services (3)
2,003 1,376
Digital 2,020 1,740
Total 4,023 3,116
Utilization rate by capability(4):
Consulting 71.4 % 66.4 %
Digital 72.4 % 71.3 %
(1)The majority of our revenue-generating professionals within our Commercial
segment can provide services across all of our industries, including healthcare
and education.
(2)Managed Services capability revenue within our Healthcare segment for the
three months ended
Managed Services capability revenue within our Education segment for the three
months ended
(3)The number of Managed Services revenue-generating professionals within our
Healthcare segment as of
The number of Managed Services revenue-generating professionals within our
Education segment as of
(4)Utilization rates are presented for our revenue-generating professionals who primarily bill on an hourly basis. We do not present utilization rates for our Managed Services professionals as most of the revenues generated by these employees are not billed on an hourly basis. (5)During the first quarter of 2022, we reclassified certain Digital revenue-generating professionals within our Healthcare and Education segments to our Commercial segment as these professionals can provide services across all of our industries. This reclassification did not impact the total headcount within our Digital capability for any period. The prior period headcount has been revised for consistent presentation.
The number of revenue-generating professionals within our Healthcare segment at
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The number of revenue-generating professional within our Education segment at
The number of revenue-generating professional within our Commercial segment at
Non-GAAP Measures
Three Months Ended
March 31,
2022 2021
Revenues $ 260,049 $ 203,213
Net income $ 26,852 $ 5,405
Add back:
Income tax expense 11,275 1,536
Interest expense, net of interest income 2,196 1,719
Depreciation and amortization 7,122 6,551
Earnings before interest, taxes, depreciation and amortization (EBITDA)
47,445 15,211
Add back:
Restructuring charges 1,555 628
Other losses 12 42
Transaction-related expenses 50 170
Unrealized gain on preferred stock investment (26,964) -
Foreign currency transaction losses, net 19 403
Adjusted EBITDA $ 22,117 $ 16,454
Adjusted EBITDA as a percentage of revenues 8.5 % 8.1 %
Three Months Ended
March 31,
2022 2021
Net income $ 26,852 $ 5,405
Weighted average shares - diluted 21,167 22,341
Diluted earnings per share Add back:
Amortization of intangible assets 2,860 2,399
Restructuring and other charges 1,555 628
Other losses 12 42
Transaction-related expenses 50 170
Unrealized gain on preferred stock investment (26,964) -
Tax effect of adjustments 5,959 (858)
Total adjustments, net of tax (16,528) 2,381
Adjusted net income
Adjusted weighted average shares - diluted 21,167 22,341
Adjusted diluted earnings per share $ 0.49 $ 0.35
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Three Months Ended
Revenues
Revenues by segment and capability for the three months endedMarch 31, 2022 and 2021 were as follows: Three Months Ended March 31, Revenues (in thousands) 2022 2021 Percent Increase (Decrease) Segment: Healthcare$ 121,876 $ 95,975 27.0 % Education 80,662 51,342 57.1 % Commercial 57,511 55,896 2.9 % Total revenues$ 260,049 $ 203,213 28.0 % Capability: Consulting and Managed Services$ 150,584 $ 122,551 22.9 % Digital 109,465 80,662 35.7 % Total revenues$ 260,049 $ 203,213 28.0 % Revenues increased$56.8 million , or 28.0%, to$260.0 million for the first quarter of 2022 from$203.2 million for the first quarter of 2021. The increase in revenues reflects strengthened demand for services in all of our segments, as well as the favorable comparison against results for the first quarter of 2021 in our Healthcare and Education segments which were more significantly impacted by the COVID-19 pandemic as some clients reprioritized and delayed certain projects as a result of the uncertainties surrounding the pandemic. Additional information on our revenues by segment follows. •Healthcare revenues increased$25.9 million , or 27.0%, driven by strengthened demand for our performance improvement and revenue cycle managed services solutions within our Consulting and Managed Services capability, as well as strengthened demand for our technology and analytics services within our Digital capability. Revenues in the first quarter of 2022 included$0.6 million of incremental revenues from our acquisition ofPerception Health, Inc. , which was completed inDecember 2021 . The number of revenue-generating professionals within our Healthcare segment grew 45.8% to 1,647 as ofMarch 31, 2022 , compared to 1,130 as ofMarch 31, 2021 , including an increase of 429 revenue-generating professionals within our Managed Services capability. •Education revenues increased$29.3 million , or 57.1%, driven by strengthened demand for our research, strategy and operations, and student solutions within our Consulting and Managed Services capability, as well as strengthened demand for our technology and analytics services within our Digital capability. Revenues in the first quarter of 2022 included$2.3 million of incremental revenues from our acquisition ofWhiteboard Communications Ltd. , which was completed inDecember 2021 .
The number of revenue-generating professionals within our Education segment grew
41.3% to 1,231 as of
•Commercial revenues increased$1.6 million , or 2.9%, driven by strengthened demand for our technology and analytics services within our Digital capability, partially offset by a decrease in revenues due to the divestiture of our Life Sciences business in the fourth quarter of 2021 as well as a decrease in demand for our financial advisory solutions within the Consulting and Managed Services capability. The Life Sciences business generated$4.7 million of revenues in the first quarter of 2021. Revenues in the first quarter of 2022 included$1.0 million of incremental revenues from our acquisitions ofUnico Solution, Inc. andAIMDATA, LLC , which were completed inFebruary 2021 andJanuary 2022 , respectively. The number of revenue-generating professionals within our Commercial segment grew 2.7% to 1,145 as ofMarch 31, 2022 , compared to 1,115 as ofMarch 31, 2021 . This increase includes the impact of the divestiture of our Life Sciences business, which employed 73 revenue-generating professionals as ofMarch 31, 2021 . 29
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Table of Contents Operating Expenses
Operating expenses for the first quarter of 2022 increased
Operating expenses and operating expenses as a percentage of revenues were as follows:
Operating Expenses (in thousands, Three Months Ended except amounts as a percentage of March 31, Increase / revenues) 2022 2021 (Decrease) Direct costs$ 187,247 72.0%$ 148,115 72.9%$ 39,132 Reimbursable expenses 4,756 1.8% 2,003 1.0% 2,753 Selling, general and administrative expenses 48,395 18.6% 39,808 19.6% 8,587 Restructuring charges 1,555 0.6% 628 0.3% 927 Depreciation and amortization 6,864 2.7% 6,353 3.1% 511 Total operating expenses$ 248,817 95.7%$ 196,907 96.9%$ 51,910 Direct Costs Direct costs increased$39.1 million , or 26.4%, to$187.2 million for the three months endedMarch 31, 2022 from$148.1 million for the three months endedMarch 31, 2021 . The$39.1 million increase primarily related to a$33.0 million increase in payroll costs for our revenue-generating professionals, driven by increased headcount, annual salary increases that went into effect in the first quarter of 2022, and an increase in performance bonus expense; as well as a$4.6 million increase in contractor expense and a$1.5 million increase in technology costs. As a percentage of revenues, direct costs decreased to 72.0% during the first quarter of 2022, compared to 72.9% during the first quarter of 2021, primarily due to revenue growth that outpaced the increase in payroll costs for our revenue-generating professionals, partially offset by the increase in contractor expense, as a percentage of revenues.
Reimbursable Expenses
Reimbursable expenses are billed to clients at cost and primarily relate to travel and out-of-pocket expenses incurred in connection with client engagements. These expenses are also included in total revenues and reimbursable expenses. We manage our business on the basis of revenues before reimbursable expenses, which we believe is the most accurate reflection of our services because it eliminates the effect of reimbursable expenses that are also included as a component of operating expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by$8.6 million , or 21.6%, to$48.4 million in the first quarter of 2022 from$39.8 million in the first quarter of 2021. The$8.6 million increase primarily related to a$5.1 million increase in payroll costs for our support personnel, driven by an increase in headcount, annual salary increases that went into effect in the first quarter of 2022, and increases in performance bonus expense and share-based compensation expense, partially offset by a$3.4 million decrease in deferred compensation expense attributable to the change in the market value of our deferred compensation liability. The decrease in deferred compensation expense is fully offset by a decrease in the gain recognized for the change in the market value of investments that are used to fund our deferred compensation liability and recognized in other income (expense), net. The overall increase in selling, general and administrative expenses also includes a$3.5 million increase in non-payroll costs which includes a$0.9 million increase in software and data hosting expenses, a$0.9 million increase in legal fees, and a$0.8 million increase in promotion and marketing expenses. These increases to non-payroll costs were partially offset by a$1.0 million gain recognized on the sale of our aircraft in the first quarter of 2022. As a percentage of revenues, selling, general and administrative expenses decreased to 18.6% during the first quarter of 2022, compared to 19.6% during the first quarter of 2021. This decrease was primarily attributable to the decrease in deferred compensation expense in the first quarter of 2022 compared to the first quarter of 2021.
Restructuring Charges
Restructuring charges for the first quarter of 2022 were$1.6 million , compared to$0.6 million for the first quarter of 2021. The$1.6 million of restructuring charges incurred in the first quarter of 2022 included$0.6 million for rent and related expenses, net of sublease income, for previously vacated office spaces,$0.5 million of employee-related expenses,$0.3 million of accelerated amortization of capitalized software implementation costs for a cloud-computing arrangement that is no longer in use, and$0.1 million for third-party transaction expenses related to the modification of our operating model. The$0.6 million of restructuring charges incurred in the first quarter of 2021 primarily related to rent and related expenses, net of sublease income, and accelerated depreciation on furniture and fixtures for vacated office spaces. 30
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Depreciation and Amortization
Depreciation and amortization expense, which includes amortization of intangible assets and software development costs previously presented separately, increased$0.5 million , or 8.0%, to$6.9 million for the three months endedMarch 31, 2022 , compared to$6.4 million for the three months endedMarch 31, 2021 . The$0.5 million increase in depreciation and amortization expense was primarily attributable to an increase in amortization of intangible assets acquired in business acquisitions completed subsequent to the first quarter of 2021.
Operating Income and Operating Margin
Operating income increased$7.7 million to$16.0 million in the first quarter of 2022 from$8.2 million in the first quarter of 2021. Operating margin, which is defined as operating income expressed as a percentage of revenues, increased to 6.1% for the three months endedMarch 31, 2022 , compared to 4.1% for the three months endedMarch 31, 2021 .
Operating income and operating margin for each of our segments is as follows. See the Segment and Consolidated Operating Results table above for a reconciliation of our total segment operating income to consolidated Huron operating income.
Segment Operating Income (in Three Months Ended thousands, except operating margin March 31, Increase / percentages) 2022 2021 (Decrease) Healthcare$ 28,032 23.0 %$ 23,827 24.8 %$ 4,205 Education 14,306 17.7 % 8,537 16.6 % 5,769 Commercial 12,214 21.2 % 9,850 17.6 % 2,364 Total segment operating income$ 54,552 $ 42,214 $ 12,338 •Healthcare operating income increased primarily due to the increase in revenues, partially offset by an increase in payroll costs for our revenue-generating professionals. The increase in payroll costs was driven by an increase in headcount, annual salary increases that went into effect in the first quarter of 2022, and an increase in performance bonus expense. Healthcare operating margin decreased primarily due to the increased payroll costs for our revenue-generating professionals, as a percentage of revenues. •Education operating income increased primarily due to the increase in revenues, partially offset by an increase in payroll costs for our revenue-generating professionals and an increase in contractor expense. The increase in payroll costs was driven by an increase in headcount, annual salary increases that went into effect in the first quarter of 2022, and an increase in performance bonus expense. Education operating margin increased due to revenue growth that outpaced the increase in payroll costs, partially offset by the increase in contractor expenses, as a percentage of revenues. •Commercial operating income increased primarily due to the increase in revenues and a decrease in payroll costs for our revenue-generating professionals, partially offset by an increase in contractor expense. The decrease in payroll costs for our revenue-generating professionals was primarily driven by the divestiture of our Life Sciences business in the fourth quarter of 2021, partially offset by an increase in performance bonus expense. Commercial operating margin increased due to the decrease in payroll costs for our revenue-generating professionals, partially offset by increases in contractor expense and payroll costs for our support personnel, as percentages of revenues.
Other Income (Expense), Net
Interest expense, net of interest income increased$0.5 million to$2.2 million in the first quarter of 2022 from$1.7 million in the first quarter of 2021 primarily attributable to higher levels of borrowing under our credit facility during the first quarter of 2022 compared to the first quarter of 2021. See "Liquidity and Capital Resources" below and Note 7 "Financing Arrangements" within the notes to our consolidated financial statements for additional information about our senior secured credit facility. Other income, net increased$23.9 million to$24.4 million in the first quarter of 2022 from$0.4 million in the first quarter of 2021. The increase in other income, net was primarily attributable to a$27.0 million unrealized gain related to the increase in the fair value of our preferred stock investment in Medically Home. See Note 10 "Fair Value of Financial Instruments" within the notes to our consolidated financial statements for additional information on our preferred stock investment in Medically Home. This increase was partially offset by the$3.4 million decrease in the gain recognized for the market value of our investments that are used to fund our deferred compensation liability. During the first quarter of 2022, we recognized a$2.6 million loss for the market value of our deferred compensation investments compared to a$0.8 million gain recognized in the first quarter of 2021.
Income Tax Expense
For the three months endedMarch 31, 2022 , our effective tax rate was 29.6% as we recognized income tax expense of$11.3 million on income of$38.1 million . The effective tax rate of 29.6% was less favorable than the statutory rate, inclusive of state income taxes, of 26.4%, primarily due to 31
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tax expense related to nondeductible losses on our investments used to fund our deferred compensation liability and certain nondeductible expense items.
For the three months endedMarch 31, 2021 , our effective tax rate was 22.1% as we recognized income tax expense of$1.5 million on income of$6.9 million . The effective tax rate of 22.1% was more favorable than the statutory rate, inclusive of state income taxes, of 26.6%, primarily due to a discrete tax benefit for share-based compensation awards that vested during the first quarter of 2021. This favorable item was partially offset by certain nondeductible expense items.
Net Income from Continuing Operations and Earnings per Share
Net income increased$21.4 million to$26.9 million for the three months endedMarch 31, 2022 from$5.4 million for the same period last year. The increase in net income was primarily attributable to a$19.8 million unrealized gain, net of tax, related to the increase in the fair value of our preferred stock investment in Medically Home. As a result of the increase in net income, diluted earnings per share for the first quarter of 2022 was$1.27 compared to$0.24 for the first quarter of 2021.
EBITDA and Adjusted EBITDA
EBITDA increased$32.2 million to$47.4 million for the three months endedMarch 31, 2022 from$15.2 million for the three months endedMarch 31, 2021 . The increase in EBITDA was primarily attributable to the$27.0 million unrealized gain related to the increase in the fair value of our preferred stock investment as well as the increase in segment operating income, partially offset by an increase in corporate expenses. Adjusted EBITDA increased$5.7 million to$22.1 million in the first quarter of 2022 from$16.5 million in the first quarter of 2021. The increase in adjusted EBITDA was primarily attributable to the increase in segment operating income, partially offset by an increase in corporate expenses, excluding the impact of restructuring charges on these items.
Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share
Adjusted net income increased$2.5 million to$10.3 million in the first quarter of 2022 compared to$7.8 million in the first quarter of 2021. As a result of the increase in adjusted net income, adjusted diluted earnings per share was$0.49 for the first quarter of 2022, compared to$0.35 for the first quarter of 2021.
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