Huron Consulting(HURN) - 2022 Q4 - Annual Report

Part I Business Huron operates under Healthcare, Education, and Commercial segments, delivering services via Consulting, Managed Services, and Digital capabilities - Effective January 1, 2022, the company modified its operating model to report under three industry segments: Healthcare, Education, and Commercial[17][18] FY2022 Revenue by Operating Segment | Segment | Revenue Percentage | | :--- | :--- | | Healthcare | 47% | | Education | 32% | | Commercial | 21% | - The company's services are delivered through two principal capabilities: Consulting and Managed Services, and Digital[21][23][24] - As of December 31, 2022, Huron had approximately 5,660 full-time professionals and reported a high employee engagement score of 80%[31][32] - The professional services industry is extremely competitive and highly fragmented, with competition from various consulting and accounting firms[49] Risk Factors The company faces significant risks related to human capital retention, business growth, industry regulations, digital offerings, and financial stability - The company heavily relies on its senior management and managing directors for revenue generation, making their retention critical to success[56] - A significant portion of revenue is derived from the healthcare and education industries, making the company susceptible to adverse conditions in these sectors[73] - The business is increasingly dependent on its digital offerings and must continually invest in and adapt to rapid technological changes[79][80] - Goodwill and other intangible assets constitute 54% of total assets ($648.4 million), and impairment could negatively impact financial results[119] - The Amended Credit Agreement imposes restrictive covenants and secures obligations with a lien on substantially all company assets[114] - The company faces risks related to its significant operations in India, including political instability and currency fluctuations[63][69] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[130] Properties Huron leases all its office facilities, including its principal executive offices in Chicago, and does not own any real estate - The company does not own any real estate and its principal executive offices are located at 550 W Van Buren Street, Chicago, Illinois 60607 under a lease[131] Legal Proceedings Management believes no current litigation is expected to have a material adverse effect on the company's financial position - As of the report date, the company is not a party to any litigation that management believes could have a material adverse effect on its financial results[133] Mine Safety Disclosures This item is not applicable to the company - Not applicable[134] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ, dividend payments are restricted, and an active share repurchase program is in place - The company's common stock is traded on the NASDAQ Global Select Market under the symbol 'HURN'[136] - No dividends have been declared or paid on common stock, and the ability to do so is restricted by its senior secured credit facility[137] - The board authorized a share repurchase program of up to $300 million through December 31, 2023, with $108.9 million remaining available at year-end 2022[139][240] 2022 Share Repurchases | Metric | Value | | :--- | :--- | | Total Shares Purchased | 2,191,598 | | Average Price Paid Per Share | $58.88 | | Shares Purchased as Part of Program | 2,037,752 | | Total Cost of Program Repurchases | ~$121.3 million | [Reserved] This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations FY2022 saw significant revenue and income growth driven by strong demand, alongside improved margins and a refinanced credit facility FY2022 vs. FY2021 Key Financial Results | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1.13 B | $905.6 M | +25.0% | | Operating Income | $99.8 M | $52.8 M | +88.9% | | Operating Margin | 8.8% | 5.8% | +3.0 p.p. | | Net Income (Continuing Ops) | $75.6 M | $63.0 M | +19.9% | | Diluted EPS (Continuing Ops) | $3.64 | $2.89 | +26.0% | | Adjusted Diluted EPS (Non-GAAP) | $3.43 | $2.61 | +31.4% | - Revenue growth was driven by strong demand for Digital capability services, which increased 41.4% to $494.5 million, and a 14.8% increase in Consulting and Managed Services[175][176] - The company refinanced its credit facility in November 2022, maintaining the $600 million revolving commitment and extending the maturity to 2027[182][242] - Net cash provided by operating activities significantly increased to $85.4 million in 2022 from $18.0 million in 2021, primarily due to higher cash collections[229][231] - Critical accounting policies involve significant management judgment, especially in revenue recognition and the valuation of goodwill and intangible assets[253] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate, foreign currency, and investment market risks, which it manages using derivative instruments - The company has interest rate risk from its variable-rate credit facility, partially hedged by $200.0 million in interest rate swaps[285][286] - Foreign currency risk from operations in India is managed through non-deliverable foreign exchange forward contracts[287] - The company holds significant investments in privately-held companies Shorelight ($57.6 million fair value) and Medically Home ($33.6 million carrying value)[291][292] Financial Statements and Supplementary Data This section references the company's Consolidated Financial Statements and supplementary data, which begin on page F-1 - The Company's Consolidated Financial Statements and supplementary data begin on page F-1 of this Annual Report on Form 10-K[294] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[295] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[296] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, an assessment audited by PricewaterhouseCoopers LLP[301][302] - There were no material changes in internal control over financial reporting during the fourth quarter of 2022[303] Other Information The company reports no other information for this item - None[304] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[305] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the company's definitive proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement[307][309] - The company has adopted a Code of Business Conduct and Ethics applicable to all employees, officers, and directors, which is available on its website[308] Executive Compensation All information regarding executive compensation is incorporated by reference from the company's definitive proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement under 'Executive Compensation'[310] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference, with details provided on shares available under equity compensation plans Equity Compensation Plan Information as of December 31, 2022 | Plan Category | Number of Shares to be Issued Upon Exercise of Outstanding Options | Weighted Average Exercise Price of Outstanding Options | Number of Shares Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by shareholders: | | | | | 2012 Omnibus Incentive Plan | 227,116 | $48.89 | 590,383 | | Stock Ownership Participation Program | — | N/A | 199,991 | | Total | 227,116 | $48.89 | 790,374 | - The company does not have any equity compensation plans that have not been approved by shareholders[311] Certain Relationships and Related Transactions, and Director Independence All information on related party transactions and director independence is incorporated by reference from the proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement[313][314] Principal Accounting Fees and Services Information regarding accounting fees and services is incorporated by reference from the company's definitive proxy statement - The information required by this item is incorporated by reference from the Proxy Statement under 'Audit and Non-Audit Fees'[316] Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including financial statements and material contract exhibits - This item lists the financial statements, schedules, and exhibits filed with the report, including material contracts and compensation agreements[317][320] Form 10-K Summary This item is not applicable to the company - Not applicable[323] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion, identifying revenue recognition as a critical audit matter - The auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control[336] - A Critical Audit Matter (CAM) was identified related to 'Revenue Recognition – Fixed-Fee and Healthcare Performance-Based Billing Arrangements' due to significant management judgments[344][345] Consolidated Financial Statements The company's assets and liabilities increased in 2022, while stockholders' equity slightly decreased, with net income rising to $75.6 million Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $328,484 | $257,682 | | Goodwill | $624,966 | $620,879 | | Total Assets | $1,199,040 | $1,119,349 | | Total Current Liabilities | $245,684 | $205,184 | | Long-term Debt, net | $290,000 | $232,221 | | Total Liabilities | $646,900 | $547,449 | | Total Stockholders' Equity | $552,040 | $571,900 | Consolidated Statement of Operations Data (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenues | $1,132,455 | $905,640 | $844,127 | | Operating Income (Loss) | $99,760 | $52,839 | $(28,852) | | Net Income (Loss) from Continuing Operations | $75,552 | $62,987 | $(23,718) | Notes to Consolidated Financial Statements The notes detail key accounting policies, segment information, financing arrangements, and the valuation of goodwill and intangible assets Note 2: Summary of Significant Accounting Policies This note details policies for revenue recognition, goodwill impairment testing, business combinations, leases, and software development costs - Revenue is recognized under four main billing arrangements, with performance-based fees estimated using a probability-weighted assessment[369][372] - Goodwill is tested for impairment annually as of November 30 at the reporting unit level, with an option for a qualitative assessment first[265][401] - For business combinations, assets acquired and liabilities assumed are recorded at fair value, with contract assets measured under Topic 606 guidance[408] Note 4: Goodwill and Intangible Assets Net goodwill was $625.0 million as of year-end 2022, with no impairment found during the annual test Goodwill by Reporting Unit (Net, as of Dec 31, 2022) | Reporting Unit | Carrying Value of Goodwill (in thousands) | | :--- | :--- | | Healthcare | $454,214 | | Education | $122,235 | | Commercial | $48,517 | | Total | $624,966 | - Due to the January 1, 2022 operating model change, goodwill was reallocated, and a subsequent impairment test confirmed no impairment[272][442] - The annual goodwill impairment test as of November 30, 2022, was performed using a qualitative assessment, which concluded no quantitative test was necessary[274][275][444] - Intangible assets had a net book value of $23.4 million at year-end 2022, with an amortization expense of $11.2 million for the year[453][454] Note 7: Financing Arrangements The company refinanced its credit facility in November 2022, securing a $600 million five-year revolving line of credit - The company entered into a Third Amended and Restated Credit Agreement on November 15, 2022, consisting of a $600 million five-year senior secured revolving credit facility[472] Debt Outstanding (in thousands) | Instrument | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Senior secured credit facility | $290,000 | $230,000 | | Promissory note due 2024 | — | $2,780 | | Total long-term debt | $290,000 | $232,780 | - As of December 31, 2022, the company had $290.0 million outstanding on its credit facility and $309.3 million of unused borrowing capacity[476][479] Note 19: Segment Information The company reports results across three segments—Healthcare, Education, and Commercial—and two primary capabilities - Effective January 1, 2022, the company realigned its reporting structure into three segments: Healthcare, Education, and Commercial[604][605] Segment Operating Results for Year Ended Dec 31, 2022 (in thousands) | Segment | Revenues | Operating Income | Operating Margin | | :--- | :--- | :--- | :--- | | Healthcare | $534,999 | $131,227 | 24.5% | | Education | $359,835 | $78,924 | 21.9% | | Commercial | $237,621 | $50,025 | 21.1% | | Total Segments | $1,132,455 | $260,176 | | Revenues by Capability for Year Ended Dec 31, 2022 (in thousands) | Capability | Revenues | | :--- | :--- | | Consulting and Managed Services | $637,994 | | Digital | $494,461 | | Total Revenues | $1,132,455 |