Huron Consulting Group Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Huron is a global professional services firm providing consulting, managed services, digital, technology, analytics, and software solutions. It operates through Healthcare, Education, and Commercial segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Revenue | $346.8 million | $273.3 million | 26.9% increase |
| Operating income | $39.7 million | $29.0 million | 36.9% increase |
| Operating margin | 11.5% | 10.6% | Up 0.9 percentage points |
| Net income | $24.7 million | $13.9 million | Increase of $10.8 million |
| Diluted EPS | $1.27 | $0.66 | 92.4% increase |
| Adjusted diluted EPS | $1.38 | $0.83 | 66.3% increase |
| Adjusted EBITDA | $48.5 million | $33.2 million | Adjusted margin 14.0% vs. 12.2% |
| Operating cash flow | $78.2 million | $28.9 million | Increase of $49.3 million |
For the six months ended June 30, 2023, revenue was $664.7 million, up 24.6%; operating income was $58.2 million, up from $45.0 million; operating margin was 8.7% versus 8.4%; net income was $38.1 million versus $40.7 million; diluted EPS was $1.95 versus $1.94; and adjusted EBITDA was $78.0 million versus $55.3 million.
Six-month operating cash flow was negative $13.9 million compared with negative $50.2 million in 2022. Cash used in investing activities was $15.8 million, including $13.0 million for internally developed software and $3.7 million for property and equipment. Cash provided by financing activities was $34.3 million. Cash and cash equivalents were $16.6 million at June 30, 2023, compared with $11.8 million at December 31, 2022.
At June 30, 2023, long-term debt was $395.0 million, compared with $290.0 million at December 31, 2022. The weighted-average interest rate, including swaps, was 4.6%, compared with 3.8%. The company had $204.3 million of unused revolver capacity and $0.7 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Healthcare revenue increased 35.3% in Q2 to $173.8 million, with segment operating margin increasing to 28.3% from 23.6%.
- Education revenue increased 25.5% to $110.7 million, with segment operating margin increasing modestly to 24.8% from 24.6%.
- Commercial revenue increased 10.0% to $62.3 million, but segment operating margin declined to 16.8% from 21.0%, primarily because compensation costs increased faster than revenue.
- Consulting and Managed Services revenue increased 33.4% to $197.3 million; Digital revenue increased 19.2% to $149.5 million.
- Revenue-generating professionals increased to 5,174 from 4,243. Consulting utilization increased to 76.0% from 73.2%, while Digital utilization increased slightly to 74.7% from 74.3%.
- Direct costs declined to 67.8% of revenue from 69.2%, but selling, general and administrative expenses increased to 18.5% of revenue from 16.8%, partly because of higher deferred compensation expense and support personnel costs.
- Interest expense increased to $5.8 million from $2.4 million because of higher borrowing levels and interest rates.
- Six-month net income declined because the 2022 period included a $27.0 million unrealized gain on the Medically Home preferred stock investment. The 2023 six-month results included no comparable gain, although adjusted EBITDA and adjusted EPS improved substantially.
- The company repurchased 826,542 shares for $59.6 million during the first six months and had $49.6 million remaining under its repurchase authorization at June 30, 2023.
Guidance, outlook, commentary, risks, and unusual items
- Management expects 2023 purchases of property and equipment and software development to total approximately $35 million to $40 million.
- Remaining performance obligations under engagements with original expected durations exceeding one year totaled $240.0 million at June 30, 2023. Management expects to recognize $54.1 million in 2023, $66.3 million in 2024, and $119.6 million thereafter. These amounts exclude constrained variable consideration and time-and-expense obligations.
- Management attributed growth to stronger demand across all segments, particularly Healthcare and Education, increased performance-based fees, expanded digital demand, and workforce growth. Management expects to use internal liquidity, cash, and revolver capacity to support operations and long-term growth.
- Q2 restructuring charges were $1.7 million; six-month charges were $4.0 million, including a $1.9 million non-cash impairment related to exited Hillsboro, Oregon office space. A $0.3 million capitalized software project abandonment charge was also recorded in the first half.
- The company has significant exposure to variable interest rates, although it hedges part of its borrowings with interest-rate swaps. A hypothetical 100-basis-point rate change would affect annualized pretax income by approximately $1.5 million.
- Other valuation-sensitive items include the $63.6 million Shorelight convertible debt investment, measured using Level 3 assumptions, and the $33.6 million Medically Home preferred stock investment, whose value depends on observable transactions and impairment assessments.
- Key business risks include utilization and billing-rate fluctuations, demand and client-retention risk, reliance on qualified personnel, technology and cybersecurity risks, acquisition integration, goodwill impairment, tax matters, foreign exchange exposure, and general economic conditions. Management reported no litigation expected to have a material adverse effect and no material off-balance-sheet arrangements.
- The company remained in compliance with its debt covenants at June 30, 2023, with a consolidated leverage ratio of 2.17x versus a 3.75x maximum and interest coverage of 11.23x versus a 3.00x minimum.
Most important facts for investors to verify
- Whether Healthcare and Education demand and utilization trends remain strong enough to offset higher compensation, contractor, technology, and corporate costs.
- Whether Commercial segment margins recover from the Q2 decline.
- The sustainability and cash-conversion quality of performance-based revenue and the collection of elevated unbilled services, particularly on large Healthcare and Education engagements.
- The effect of higher debt balances and interest rates on future earnings, liquidity, and share repurchase capacity.
- The assumptions and potential volatility associated with the Shorelight and Medically Home investments.
- The timing and return on the planned $35 million to $40 million of 2023 capitalized software and other capital expenditures.
- The reconciliation and composition of management’s non-GAAP measures, including adjusted EBITDA and adjusted EPS.