Huron Consulting Group Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Huron is a global professional services firm serving Healthcare, Education, and Commercial clients through Consulting and Managed Services and Digital capabilities. This unaudited filing covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $317.9 million | $260.0 million | Up 22.2% |
| Total revenues and reimbursable expenses | $326.4 million | $264.8 million | Up 23.3% |
| Operating income | $18.4 million | $16.0 million | Up 15.5% |
| Operating margin | 5.8% | 6.1% | Down 30 basis points |
| Net income | $13.4 million | $26.9 million | Down 50.0% |
| Diluted EPS | $0.68 | $1.27 | Down $0.59 |
| Adjusted EBITDA | $29.5 million | $22.1 million | Up 33.4% |
| Adjusted EBITDA margin | 9.3% | 8.5% | Up 80 basis points |
| Adjusted diluted EPS | $0.87 | $0.49 | Up 77.6% |
Revenue growth reflected strong Digital demand across all segments and improved Consulting and Managed Services demand in Healthcare and Education. Digital revenue increased 28.5% to $140.7 million; Consulting and Managed Services revenue increased 17.7% to $177.2 million. Segment revenue growth was 22.3% in Healthcare, 29.1% in Education, and 12.5% in Commercial.
Segment operating margins were 21.6% for Healthcare, 22.2% for Education, and 21.7% for Commercial. Consulting utilization increased to 76.3% from 71.4%, while Digital utilization declined to 71.0% from 72.4%. Revenue-generating professionals increased to 5,013 from 4,023.
- Net cash used in operating activities was $92.1 million, compared with $79.1 million used in Q1 2022. The outflow was principally affected by annual performance bonus payments, higher compensation and other operating expenses, and a $31.7 million increase in unbilled services.
- Net cash used in investing activities was $10.2 million, including $6.6 million for internally developed software, $2.0 million for property and equipment, and $1.8 million for life insurance policies.
- Net cash provided by financing activities was $102.4 million, including $201.0 million of borrowings, $44.0 million of repayments, and $45.1 million of share repurchases.
- Cash and cash equivalents were $12.0 million at March 31, 2023. Unbilled services increased to $173.5 million from $141.8 million at December 31, 2022.
- Debt outstanding was $447.0 million, up from $290.0 million at December 31, 2022, with a weighted average interest rate of 4.8%. Unused revolver capacity was $152.4 million, excluding the effect of outstanding borrowings and $0.6 million of letters of credit.
- The company was in compliance with its debt covenants, reporting a Consolidated Leverage Ratio of 2.75x versus a 3.75x maximum and an Interest Coverage Ratio of 12.63x versus a 3.00x minimum.
Material changes versus the prior comparable period
- Revenue increased $57.8 million, led by Digital growth and stronger Healthcare and Education demand.
- Operating income rose $2.5 million, but operating margin contracted because selling, general and administrative expenses and reimbursable expenses grew faster than revenue.
- Net income fell $13.4 million primarily because Q1 2022 included a $27.0 million pretax unrealized gain on the Medically Home preferred stock investment. Q1 2023 included no comparable gain.
- Interest expense increased to $4.3 million from $2.2 million due to higher borrowings and interest rates.
- Adjusted EBITDA and adjusted EPS improved after excluding unusual and non-operating items.
- Share repurchases increased to $44.3 million for 632,894 shares, compared with $23.9 million for 523,399 shares in Q1 2022. Remaining repurchase authorization was $64.8 million at March 31, 2023.
- Q1 2023 restructuring charges were $2.3 million, including a $1.9 million non-cash impairment charge related to exiting office space in Hillsboro, Oregon.
Outlook, commentary, risks, and unusual items
Management expects 2023 purchases of property and equipment and software development to total approximately $30 million to $35 million. Management believes cash generated from operations, cash on hand, and available revolver capacity will support current financing needs and the long-term growth strategy. The filing does not provide a clear full-year revenue or earnings guidance range.
Remaining performance obligations under engagements with original expected durations greater than one year totaled $143.8 million at March 31, 2023; management expects to recognize $61.9 million in 2023, $33.5 million in 2024, and $48.4 million thereafter. These amounts exclude certain variable consideration and time-and-expense obligations.
- Key risks include utilization, billing rates, staffing and retention, demand volatility, client renewals, technology and cybersecurity, privacy and regulatory requirements, acquisitions and integration, goodwill impairment, taxes, interest rates, foreign currency movements, and general market conditions.
- Time-and-expense engagements and engagement-by-engagement client relationships limit revenue predictability. Seasonal effects may reduce activity during vacation periods, particularly in the third and fourth quarters.
- Unbilled services and working-capital requirements may pressure liquidity; management expects to bill and collect certain large Healthcare and Education engagement balances in the second half of 2023.
- The company holds material private-company investments, including a Shorelight convertible debt investment valued at $62.8 million and a Medically Home preferred stock investment carried at $33.6 million. Valuations depend on significant estimates and observable transactions may produce earnings volatility.
- Interest-rate exposure remains material despite hedging. Management estimates that a hypothetical 100-basis-point rate change would affect pretax income by approximately $2.0 million annually at March 31, 2023.
- In April 2023, the credit agreement was amended to incorporate ESG-linked adjustments to interest, commitment, and letter-of-credit fees. The maximum aggregate adjustment is 0.05% for borrowing and letter-of-credit fee rates and 0.01% for commitment fees.
- Management reported no material litigation, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2023.
Important facts for investors to verify
- Whether strong Digital and Education growth continues and offsets the lower Digital utilization rate and Healthcare margin pressure.
- The timing and collectability of the increased unbilled services balance and its effect on operating cash flow.
- Debt reduction plans, interest-rate sensitivity, covenant headroom, and the effect of additional share repurchases on leverage and liquidity.
- The sustainability of adjusted EBITDA and adjusted EPS growth after excluding restructuring charges, amortization, and investment-related gains or losses.
- The valuation and liquidity risks associated with the Shorelight and Medically Home investments.
- Actual 2023 capital expenditures and software development spending versus the $30 million to $35 million estimate.