Huron Consulting Group Inc. [HURN] Filings

10-Q 1 hurn-20230630.htm 10-Q hurn-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-50976

HURON CONSULTING GROUP INC.

(Exact name of registrant as specified in its charter)


Delaware						01-0666114
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification Number)

550 West Van Buren Street

Chicago, Illinois

60607

(Address of principal executive offices)

(Zip Code)

(312) 583-8700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	HURN	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-accelerated Filer

☐

Smaller Reporting
Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 20, 2023, 19,024,193 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

Table of Contents


Huron Consulting Group Inc.

HURON CONSULTING GROUP INC.

INDEX


		Page
Part I – Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations and Other Comprehensive Income	2
	Consolidated Statements of Stockholders’ Equity	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	39

Part II – Other Information

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Mine Safety Disclosures	40

Item 5.	Other Information	40

Item 6.	Exhibits	41

Signature		42

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HURON CONSULTING GROUP INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	June 30, 2023		December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	16,583	$	11,834
Receivables from clients, net of allowances of $16,808 and $10,600, respectively	152,300		147,852
Unbilled services, net of allowances of $3,283 and $3,850, respectively	174,409		141,781
Income tax receivable	6,475		960
Prepaid expenses and other current assets	29,734		26,057
Total current assets	379,501		328,484
Property and equipment, net	23,440		26,107
Deferred income taxes, net	1,397		1,554
Long-term investments	97,227		91,194
Operating lease right-of-use assets	27,829		30,304
Other non-current assets	83,777		73,039
Intangible assets, net	19,188		23,392
Goodwill	624,966		624,966
Total assets	$	1,257,325	$	1,199,040
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	9,720	$	14,254
Accrued expenses and other current liabilities	27,472		27,268
Accrued payroll and related benefits	126,430		171,723


Current maturities of operating lease liabilities	11,208		10,530
Deferred revenues	24,703		21,909
Total current liabilities	199,533		245,684
Non-current liabilities:
Deferred compensation and other liabilities	34,363		33,614

Long-term debt	395,000		290,000
Operating lease liabilities, net of current portion	41,407		45,556
Deferred income taxes, net	35,404		32,146
Total non-current liabilities	506,174		401,316
Commitments and contingencies
Stockholders’ equity
Common stock; $0.01 par value; 500,000,000 shares authorized; 21,863,932 and 22,507,159 shares issued, respectively	218		223
Treasury stock, at cost, 2,840,319 and 2,711,712 shares, respectively	(141,407)		(137,556)
Additional paid-in capital	279,070		318,706
Retained earnings	390,679		352,548
Accumulated other comprehensive income	23,058		18,119
Total stockholders’ equity	551,618		552,040
Total liabilities and stockholders’ equity	$	1,257,325	$	1,199,040

The accompanying notes are an integral part of the consolidated financial statements.

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HURON CONSULTING GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenues and reimbursable expenses:
Revenues	$	346,759	$	273,325	$	664,654	$	533,374
Reimbursable expenses	8,140		7,492		16,630		12,218
Total revenues and reimbursable expenses	354,899		280,817		681,284		545,592
Operating expenses:
Direct costs (exclusive of depreciation and amortization included below)	235,198		189,233		463,581		376,480
Reimbursable expenses	8,121		7,576		16,745		12,332
Selling, general and administrative expenses	64,019		46,033		126,308		94,428
Restructuring charges	1,699		2,069		3,983		3,624
Depreciation and amortization	6,143		6,902		12,517		13,766

Total operating expenses	315,180		251,813		623,134		500,630
Operating income	39,719		29,004		58,150		44,962
Other income (expense), net:
Interest expense, net of interest income	(5,796)		(2,446)		(10,099)		(4,642)
Other income (expense), net	1,062		(4,881)		2,781		19,484
Total other income (expense), net	(4,734)		(7,327)		(7,318)		14,842
Income before taxes	34,985		21,677		50,832		59,804
Income tax expense	10,273		7,802		12,701		19,077


Net income	$	24,712	$	13,875	$	38,131	$	40,727



Earnings per share:
Net income per basic share	$	1.30	$	0.67	$	2.00	$	1.97



Net income per diluted share	$	1.27	$	0.66	$	1.95	$	1.94
Weighted average shares used in calculating earnings per share:
Basic	18,939		20,582		19,029		20,715
Diluted	19,486		20,967		19,598		21,047
Comprehensive income (loss):
Net income	$	24,712	$	13,875	$	38,131	$	40,727
Foreign currency translation adjustments, net of tax	327		(656)		379		(699)
Unrealized gain (loss) on investment, net of tax	553		773		4,426		(1,888)
Unrealized gain on cash flow hedging instruments, net of tax	2,463		971		134		5,296
Other comprehensive income	3,343		1,088		4,939		2,709
Comprehensive income	$	28,055	$	14,963	$	43,070	$	43,436

The accompanying notes are an integral part of the consolidated financial statements.

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HURON CONSULTING GROUP INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)


	Three Months Ended June 30,
	Common Stock			Treasury Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance at March 31, 2023	21,910,425	$	220	(2,970,118)	$	(141,353)	$	284,420	$	365,967	$	19,715	$	528,969
Comprehensive income									24,712		3,343		28,055
Issuance of common stock in connection with:
Restricted stock awards, net of cancellations	8,683	—		3,386	145		(145)						—
Exercise of stock options	7,464	—					360						360
Share-based compensation							9,806						9,806
Shares redeemed for employee tax withholdings				(2,464)	(199)								(199)

Share repurchases	(193,648)	(2)					(15,371)						(15,373)
Balance at June 30, 2023	21,732,924	$	218	(2,969,196)	$	(141,407)	$	279,070	$	390,679	$	23,058	$	551,618

Balance at March 31, 2022	23,639,953	$	237	(2,918,100)	$	(135,367)	$	395,103	$	303,848	$	18,461	$	582,282
Comprehensive income									13,875		1,088		14,963
Issuance of common stock in connection with:
Restricted stock awards, net of cancellations	27,309	—		(15,115)	(931)		931						—
Exercise of stock options	13,731	—					538						538
Share-based compensation							6,049						6,049
Shares redeemed for employee tax withholdings				(2,584)	(127)								(127)
Share repurchases	(497,547)	(5)					(28,341)						(28,346)
Balance at June 30, 2022	23,183,446	$	232	(2,935,799)	$	(136,425)	$	374,280	$	317,723	$	19,549	$	575,359



	Six Months Ended June 30,
	Common Stock			Treasury Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2022	22,231,593	$	223	(2,953,147)	$	(137,556)	$	318,706	$	352,548	$	18,119	$	552,040
Comprehensive income									38,131		4,939		43,070
Issuance of common stock in connection with:
Restricted stock awards, net of cancellations	306,264	3		121,835	5,877		(5,880)						—
Exercise of stock options	21,609	—					987						987
Share-based compensation							24,895						24,895
Shares redeemed for employee tax withholdings				(137,884)	(9,728)								(9,728)
Share repurchases	(826,542)	(8)					(59,638)						(59,646)
Balance at June 30, 2023	21,732,924	$	218	(2,969,196)	$	(141,407)	$	279,070	$	390,679	$	23,058	$	551,618

Balance at December 31, 2021	23,868,918	$	239	(2,908,849)	$	(135,969)	$	413,794	$	276,996	$	16,840	$	571,900
Comprehensive income									40,727		2,709		43,436
Issuance of common stock in connection with:
Restricted stock awards, net of cancellations	304,938	3		115,125	6,555		(6,558)						—
Exercise of stock options	30,536	—					1,185						1,185
Share-based compensation							18,100						18,100
Shares redeemed for employee tax withholdings				(142,075)	(7,011)								(7,011)
Share repurchases	(1,020,946)	(10)					(52,241)						(52,251)
Balance at June 30, 2022	23,183,446	$	232	(2,935,799)	$	(136,425)	$	374,280	$	317,723	$	19,549	$	575,359

The accompanying notes are an integral part of the consolidated financial statements.

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HURON CONSULTING GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities:
Net income	$	38,131	$	40,727
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation and amortization	12,549		13,766
Non-cash lease expense	3,340		3,174
Lease-related impairment charge	2,086		—

Share-based compensation	23,151		15,166
Amortization of debt discount and issuance costs	382		397

Allowances for doubtful accounts	53		47
Deferred income taxes	1,755		7,089
(Gain) loss on sale of property and equipment, excluding transaction costs	1		(1,117)

Change in fair value of contingent consideration liabilities	(233)		33
Change in fair value of preferred stock investment	—		(26,964)

Changes in operating assets and liabilities, net of acquisitions and divestiture:
(Increase) decrease in receivables from clients, net	(4,440)		(28,825)
(Increase) decrease in unbilled services, net	(32,567)		(28,329)
(Increase) decrease in current income tax receivable / payable, net	(6,141)		9,394
(Increase) decrease in other assets	(4,880)		3,984
Increase (decrease) in accounts payable and other liabilities	(5,594)		(13,524)
Increase (decrease) in accrued payroll and related benefits	(44,277)		(43,420)
Increase (decrease) in deferred revenues	2,804		(1,834)
Net cash used in operating activities	(13,880)		(50,236)
Cash flows from investing activities:
Purchases of property and equipment	(3,725)		(6,800)

Investment in life insurance policies	(2,188)		—
Distributions from life insurance policies	2,956		—
Purchases of businesses	38		(1,948)
Capitalization of internally developed software costs	(12,998)		(3,974)
Proceeds from note receivable	154		157
Proceeds from sale of property and equipment	—		4,750
Divestiture of business	—		207
Net cash used in investing activities	(15,763)		(7,608)
Cash flows from financing activities:
Proceeds from exercises of stock options	987		1,185
Shares redeemed for employee tax withholdings	(9,728)		(7,011)
Share repurchases	(60,368)		(52,443)
Proceeds from bank borrowings	230,000		224,000
Repayments of bank borrowings	(125,000)		(114,780)
Payments for debt issuance costs	(58)		—
Deferred payments on business acquisition	(1,500)		(1,875)
Net cash provided by financing activities	34,333		49,076
Effect of exchange rate changes on cash	59		(55)
Net increase (decrease) in cash and cash equivalents	4,749		(8,823)
Cash and cash equivalents at beginning of the period	11,834		20,781
Cash and cash equivalents at end of the period	$	16,583	$	11,958
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Property and equipment expenditures and capitalized software included in current liabilities	$	4,437	$	3,134
Operating lease right-of-use assets obtained in exchange for operating lease liabilities	$	1,839	$	102
Contingent consideration related to purchase of business	$	—	$	869
Excise tax on net share repurchases included in current liabilities	$	385	$	—

The accompanying notes are an integral part of the consolidated financial statements.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

1. Description of Business

Huron is a global professional services firm that partners with clients to develop growth strategies, optimize operations and accelerate digital transformation using an enterprise portfolio of technology, data and analytics solutions to empower clients to own their future. By collaborating with clients, embracing diverse perspectives, encouraging new ideas and challenging the status quo, we create sustainable results for the organizations we serve.

We provide our services and products and manage our business through three operating segments: Healthcare, Education and Commercial. See Note 13 “Segment Information” for more information.

2. Basis of Presentation and Significant Accounting Policies

The accompanying unaudited consolidated financial statements reflect the financial position, results of operations, and cash flows as of and for the three and six months ended June 30, 2023 and 2022. These financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for Quarterly Reports on Form 10-Q. Accordingly, these financial statements do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for annual financial statements. In the opinion of management, these financial statements reflect all adjustments of a normal, recurring nature necessary for the fair statement of our financial position, results of operations, and cash flows for the interim periods presented in conformity with GAAP. These financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022 and our Quarterly Report on Form 10-Q for the period ended March 31, 2023. Our results for any interim period are not necessarily indicative of results for a full year or any other interim period.

3. Goodwill and Intangible Assets

The table below sets forth the changes in the carrying amount of goodwill by reportable segment for the six months ended June 30, 2023.


	Healthcare		Education		Commercial		Total
Balance as of December 31, 2022:
Goodwill	$	644,238	$	123,652	$	312,968	$	1,080,858
Accumulated impairment losses	(190,024)		(1,417)		(264,451)		(455,892)
Goodwill, net as of December 31, 2022	$	454,214	$	122,235	$	48,517	$	624,966


Goodwill, net as of June 30, 2023	$	454,214	$	122,235	$	48,517	$	624,966

Intangible Assets

Intangible assets as of June 30, 2023 and December 31, 2022 consisted of the following:


		As of June 30, 2023				As of December 31, 2022
	Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer relationships	5 to 13	$	65,083	$	50,630	$	74,583	$	57,219
Technology and software	2 to 5	13,330		9,051		13,330		7,975
Trade names	6	6,000		6,000		6,000		5,907
Non-competition agreements	2 to 5	920		464		920		340

Total		$	85,333	$	66,145	$	94,833	$	71,441

Identifiable intangible assets with finite lives are amortized over their estimated useful lives. Customer relationships as well as certain trade names and technology and software, are amortized on an accelerated basis to correspond to the cash flows expected to be derived from the assets. All other intangible assets with finite lives are amortized on a straight-line basis.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

Intangible asset amortization expense was $2.0 million and $2.8 million for the three months ended June 30, 2023 and 2022, respectively; and $4.2 million and $5.7 million for the six months ended June 30, 2023 and 2022, respectively. The table below sets forth the estimated annual amortization expense for the intangible assets recorded as of June 30, 2023.


Year Ending December 31,	Estimated Amortization Expense
2023	$	8,122
2024	$	4,674
2025	$	3,503
2026	$	2,519
2027	$	1,773

Actual future amortization expense could differ from these estimated amounts as a result of future acquisitions, dispositions, and other factors.

4. Revenues

For the three months ended June 30, 2023 and 2022, we recognized revenues of $346.8 million and $273.3 million, respectively. Of the $346.8 million recognized in the second quarter of 2023, we recognized revenues of $14.8 million from obligations satisfied, or partially satisfied, in prior periods, of which $12.6 million was due to changes in the estimates of our variable consideration under performance-based billing arrangements and $2.2 million was due to the release of allowances on receivables from clients and unbilled services. Of the $273.3 million recognized in the second quarter of 2022, we recognized revenues of $5.1 million from obligations satisfied, or partially satisfied, in prior periods, of which $3.7 million was primarily due to changes in the estimates of our variable consideration under performance-based billing arrangements, and $1.4 million was primarily due to the release of allowances on receivables from clients and unbilled services.

For the six months ended June 30, 2023 and 2022, we recognized revenues of $664.7 million and $533.4 million, respectively. Of the $664.7 million recognized in the first six months of 2023, we recognized revenues of $6.3 million from obligations satisfied, or partially satisfied, in prior periods, of which $5.0 million was due to changes in the estimates of our variable consideration under performance-based billing arrangements, and $1.3 million was primarily due to the release of allowances on receivables from clients and unbilled services. Of the $533.4 million recognized in the first six months of 2022, we recognized revenues of $3.4 million from obligations satisfied, or partially satisfied, in prior periods, of which $2.1 million was due to changes in the estimates of our variable consideration under performance-based billing arrangements, and $1.3 million was primarily due to the release of allowances on receivables from clients and unbilled services.

As of June 30, 2023, we had $240.0 million of remaining performance obligations under engagements with original expected durations greater than one year. These remaining performance obligations exclude variable consideration which has been excluded from the total transaction price due to the constraint and performance obligations under time-and-expense engagements which are recognized in the amount invoiced. Of the $240.0 million of performance obligations, we expect to recognize $54.1 million as revenue in 2023, $66.3 million in 2024, and the remaining $119.6 million thereafter. Actual revenue recognition could differ from these amounts as a result of changes in the estimated timing of work to be performed, adjustments to estimated variable consideration in performance-based arrangements, or other factors.

Contract Assets and Liabilities

The payment terms and conditions in our customer contracts vary. Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services or deferred revenues in the consolidated balance sheets.

Unbilled services include revenues recognized for services performed but not yet billed to clients. Services performed that we are not yet entitled to bill because certain events, such as the completion of the measurement period or client approval in performance-based engagements, must occur are recorded as contract assets and included within unbilled services, net. The contract asset balance as of June 30, 2023 and December 31, 2022 was $43.7 million and $50.2 million, respectively. The $6.5 million decrease primarily reflects timing differences between the completion of our performance obligations and the amounts billed or billable to clients in accordance with their contractual billing terms.

Client prepayments and retainers are classified as deferred revenues and recognized over future periods in accordance with the applicable engagement agreement and our revenue recognition accounting policy. Our deferred revenues balance as of June 30, 2023 and

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

December 31, 2022, was $24.7 million and $21.9 million, respectively. The $2.8 million increase primarily reflects timing differences between client payments in accordance with their contract terms and the completion of our performance obligations. For the three and six months ended June 30, 2023, $3.9 million and $20.3 million of revenues recognized were included in the deferred revenue balance as of December 31, 2022, respectively.

5. Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, excluding unvested restricted common stock. Diluted earnings per share reflects the potential reduction in earnings per share that could occur if securities or other contracts to issue common stock were exercised or converted into common stock under the treasury stock method. Such securities or other contracts include unvested restricted stock awards, unvested restricted stock units, and outstanding common stock options, to the extent dilutive. In periods for which we report a net loss, diluted weighted average common shares outstanding excludes all potential common stock equivalents as their impact on diluted net loss per share would be anti-dilutive.

Earnings per share under the basic and diluted computations are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income	$	24,712	$	13,875	$	38,131	$	40,727

Weighted average common shares outstanding – basic	18,939		20,582		19,029		20,715
Weighted average common stock equivalents	547		385		569		332
Weighted average common shares outstanding – diluted	19,486		20,967		19,598		21,047

Net income per basic share	$	1.30	$	0.67	$	2.00	$	1.97
Net income per diluted share	$	1.27	$	0.66	$	1.95	$	1.94

The number of anti-dilutive securities excluded from the computation of the weighted average common stock equivalents presented above for the three and six months ended June 30, 2023 and 2022 were both less than 0.1 million shares, and related to unvested restricted stock and outstanding common stock options.

In November 2020, our board of directors authorized a share repurchase program permitting us to repurchase up to $50 million of our common stock through December 31, 2021. Subsequent to the initial authorization, our board of directors authorized extensions of the share repurchase program through December 31, 2023 and increased the authorized amount to $300 million. The amount and timing of repurchases under the share repurchase program were and will continue to be determined by management and depend on a variety of factors, including the trading price of our common stock, capacity under our credit facility, general market and business conditions, and applicable legal requirements. All shares repurchased and retired are reflected as a reduction to our basic weighted average shares outstanding based on the trade date of the share repurchase.

In the three and six months ended June 30, 2023, we repurchased and retired 193,648 and 826,542 shares for $15.4 million and $59.6 million, respectively. Additionally, in the first quarter of 2023, we settled the repurchase of 15,200 shares for $1.1 million which were accrued as of December 31, 2022. In the three and six months ended June 30, 2022, we repurchased and retired 497,547 and 1,020,946 shares for $28.3 million and $52.2 million, respectively. Additionally in the first quarter of 2022, we settled the repurchase of 3,820 shares for $0.2 million that were accrued as of December 31, 2021. As of June 30, 2023, $49.6 million remained available for share repurchases under our share repurchase program.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

6. Financing Arrangements

The Company has a $600 million five-year senior secured revolving credit facility, subject to the terms of a Third Amended and Restated Credit Agreement dated as of November 15, 2022 (as amended, the "Amended Credit Agreement") that becomes due and payable in full upon maturity on November 15, 2027. The Amended Credit Agreement provides the option to increase the revolving credit facility or establish term loan facilities in an aggregate amount up to $250 million, subject to customary conditions and the approval of any lender whose commitment would be increased, resulting in a maximum available principal amount under the Amended Credit Agreement of $850 million. The initial borrowings under the Amended Credit Agreement were used to refinance borrowings outstanding under a prior credit agreement, and future borrowings under the Amended Credit Agreement may be used for working capital, capital expenditures, share repurchases, permitted acquisitions, and other general corporate purposes.

Fees and interest on borrowings vary based on our Consolidated Leverage Ratio (as defined in the Amended Credit Agreement). At our option, borrowings under the Amended Credit Agreement will bear interest at one, three or six month Term SOFR or an alternate base rate, in each case plus the applicable margin. The applicable margin will fluctuate between 1.125% per annum and 1.875% per annum, in the case of Term SOFR borrowings, or between 0.125% per annum and 0.875% per annum, in the case of base rate loans, based upon our Consolidated Leverage Ratio at such time.

In April 2023, the Company and PNC Capital Markets, LLC, as Sustainability Structuring Agent, with the consent of the Required Lenders (as defined in the Amended Credit Agreement), entered into the first amendment to the Amended Credit Agreement (the "First Amendment") to incorporate specified key performance indicators with respect to certain environmental, social and governance targets of the Company. Based upon the performance of the Company against those key performance indicators in each Reference Year (as defined in the First Amendment), certain adjustments to the otherwise applicable rates for interest, commitment fees and letter of credit fees will be made. These annual adjustments will not exceed an increase or decrease of 0.01% in the aggregate for all key performance indicators in the case of the commitment fee rate or an increase or decrease of 0.05% in the aggregate for all key performance indicators in the case of the Term SOFR borrowings, base rate borrowings or letter of credit fee rate.

Amounts borrowed under the Amended Credit Agreement may be prepaid at any time without premium or penalty. We are required to prepay the amounts outstanding under the Amended Credit Agreement in certain circumstances, including upon an Event of Default (as defined in the Amended Credit Agreement). In addition, we have the right to permanently reduce or terminate the unused portion of the commitments provided under the Amended Credit Agreement at any time.

The loans and obligations under the Amended Credit Agreement are secured pursuant to a Third Amended and Restated Security Agreement and a Third Amended and Restated Pledge Agreement (the “Pledge Agreement”) with Bank of America, N.A. as collateral agent, pursuant to which the Company and the subsidiary guarantors grant Bank of America, N.A., for the ratable benefit of the lenders under the Amended Credit Agreement, a first-priority lien, subject to permitted liens, on substantially all of the personal property assets of the Company and the subsidiary guarantors, and a pledge of 100% of the stock or other equity interests in all domestic subsidiaries and 65% of the stock or other equity interests in each “material first-tier foreign subsidiary” (as defined in the Pledge Agreement) entitled to vote and 100% of the stock or other equity interests in each material first-tier foreign subsidiary not entitled to vote.

The Amended Credit Agreement contains usual and customary representations and warranties; affirmative and negative covenants, which include limitations on liens, investments, additional indebtedness, and restricted payments; and two quarterly financial covenants as follows: (i) a maximum Consolidated Leverage Ratio (defined as the ratio of debt to consolidated EBITDA) of 3.75 to 1.00; however the maximum permitted Consolidated Leverage Ratio will increase to 4.25 to 1.00 upon the occurrence of a Qualified Acquisition (as defined in the Amended Credit Agreement), and (ii) a minimum Consolidated Interest Coverage Ratio (defined as the ratio of consolidated EBITDA to interest) of 3.00 to 1.00. Consolidated EBITDA for purposes of the financial covenants is calculated on a continuing operations basis and includes adjustments to add back non-cash goodwill impairment charges, share-based compensation costs, certain non-cash restructuring charges, pro forma historical EBITDA for businesses acquired, and other specified items in accordance with the Amended Credit Agreement. For purposes of the Consolidated Leverage Ratio total debt is on a gross basis and is not netted against our cash balances. At June 30, 2023, we were in compliance with these financial covenants with a Consolidated Leverage Ratio of 2.17 to 1.00 and a Consolidated Interest Coverage Ratio of 11.23 to 1.00.

Borrowings outstanding under the Amended Credit Agreement at June 30, 2023 totaled $395.0 million and are classified as long-term debt in our consolidated balance sheet. These borrowings carried a weighted average interest rate of 4.6%, including the effect of the interest rate swaps described in Note 8 “Derivative Instruments and Hedging Activity.” Borrowings outstanding under the Amended Credit Agreement at December 31, 2022 were $290.0 million and carried a weighted average interest rate of 3.8%, including the effect of the interest rate swaps in effect at that time. The borrowing capacity under the revolving credit facility is reduced by any outstanding borrowings under the revolving

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

credit facility and outstanding letters of credit. At June 30, 2023, we had outstanding letters of credit totaling $0.7 million, which are used as security deposits for our office facilities. As of June 30, 2023, the unused borrowing capacity under the revolving credit facility was $204.3 million.

7. Restructuring Charges

Restructuring charges for the three and six months ended June 30, 2023 were $1.7 million and $4.0 million, respectively. The $1.7 million of restructuring charges recognized in the second quarter of 2023 included $0.9 million of employee-related expenses; $0.3 million related to the abandonment of a capitalized software development project; $0.2 million of rent and related expenses, net of sublease income, for previously vacated office spaces; and $0.2 million related to non-cash lease impairment charges driven by updated sublease assumptions for previously vacated office spaces. The $4.0 million of restructuring charges incurred in the first six months of 2023 included a $1.9 million non-cash impairment charge on the fixed assets and right-of-use operating lease asset related to our office space in Hillsboro, Oregon, which we exited in the first quarter of 2023; $0.9 million of employee-related expenses; $0.6 million for rent and related expenses, net of sublease income, for previously vacated office spaces; $0.3 million related to the abandonment of a capitalized software development project; and $0.2 million related to non-cash lease impairment charges driven by updated sublease assumptions for previously vacated office spaces.

Restructuring charges for the three and six months ended June 30, 2022 were $2.1 million and $3.6 million. The $2.1 million of restructuring charges recognized in the second quarter of 2022 included $1.1 million of employee-related expenses; $0.4 million of rent and related expenses, net of sublease income, for previously vacated office spaces; $0.5 million for third-party transaction expenses related to the modification of our operating model; and $0.1 million related to the divestiture of our Life Sciences business in the fourth quarter of 2021. The $3.6 million of restructuring charges incurred in the first six months of 2022 included $1.6 million of employee-related expenses; $1.0 million of rent and related expenses, net of sublease income, for previously vacated office spaces; $0.6 million for third-party transaction expenses related to the modification of our operating model; $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 related to the divestiture of our Life Sciences business in the fourth quarter of 2021.

The table below sets forth the changes in the carrying amount of our restructuring charge liability by restructuring type for the six months ended June 30, 2023.


	Employee Costs		Other		Total
Balance as of December 31, 2022	$	3,751	$	568	$	4,319
Additions	943		—		943
Payments	(3,489)		(74)		(3,563)
Adjustments	—		41		41
Balance as of June 30, 2023	$	1,205	$	535	$	1,740

All of the $1.2 million restructuring charge liability related to employee costs at June 30, 2023 is expected to be paid in the next 12 months and is included as a component of accrued payroll and related benefits in our consolidated balance sheet. All of the $0.5 million other restructuring charge liability at June 30, 2023, which relates to the early termination of a contract in 2022, is expected to be paid in the next 12 months and is included as a component of accrued expenses and other current liabilities in our consolidated balance sheet.

8. Derivative Instruments and Hedging Activity

In the normal course of business, we use forward interest rate swaps to manage the interest rate risk associated with our variable-rate borrowings under our senior secured credit facility and we use non-deliverable foreign exchange forward contracts to manage the foreign currency exchange rate risk related to our Indian Rupee-denominated expenses of our operations in India. From time to time, we may enter into additional forward interest rate swaps or non-deliverable foreign exchange forward contracts to further hedge against our interest rate risk and foreign currency exchange rate risk. We do not use derivative instruments for trading or other speculative purposes.

We have designated all of our derivative instruments as cash flow hedges. Therefore, changes in the fair value of the interest rate swaps and foreign exchange forward contracts are recorded to other comprehensive income (“OCI”) to the extent effective and reclassified to earnings upon settlement.

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(Tabular amounts in thousands, except per share amounts)

(Unaudited)

Interest Rate Swaps

We are party to forward interest rate swap agreements with aggregate notional amounts of $250.0 million and $200.0 million as of June 30, 2023 and December 31, 2022, respectively. Under the terms of the interest rate swap agreements, we receive from the counterparty interest on the notional amount based on one month Term SOFR and we pay to the counterparty a stated, fixed rate. The forward interest rate swap agreements have staggered maturities through February 29, 2028.

As of June 30, 2023, it was anticipated that $6.2 million of the gains, net of tax, related to interest rate swaps currently recorded in accumulated other comprehensive income will be reclassified into interest expense, net of interest income in our consolidated statement of operations within the next 12 months.

Foreign Exchange Forward Contracts

We are party to non-deliverable foreign exchange forward contracts that are scheduled to mature monthly through April 30, 2024. As of June 30, 2023 and December 31, 2022, the aggregate notional amounts of these contracts were INR 625.1 million, or $7.6 million, and INR 657.9 million, or $8.0 million, respectively, based on the exchange rates in effect as of each period end.

As of June 30, 2023, it was anticipated that all of the $0.1 million of gains, net of tax, related to foreign exchange forward contracts currently recorded in accumulated other comprehensive income will be reclassified into direct costs in our consolidated statement of operations within the next 12 months.

The table below sets forth additional information relating to our derivative instruments as of June 30, 2023 and December 31, 2022.


Derivative Instrument	Balance Sheet Location	June 30, 2023		December 31, 2022
Interest rate swaps	Prepaid expenses and other current assets	$	8,293	$	7,108
Interest rate swaps	Other non-current assets	4,057		5,131
Foreign exchange forward contracts	Prepaid expenses and other current assets	79		—
Total Assets		$	12,429	$	12,239


Interest rate swaps	Deferred compensation and other liabilities	$	126	$	—
Foreign exchange forward contracts	Accrued expenses and other current liabilities	1		120
Total Liabilities		$	127	$	120

All of our derivative instruments are transacted under the International Swaps and Derivatives Association (ISDA) master agreements. These agreements permit the net settlement of amounts owed in the event of default and certain other termination events. Although netting is permitted, it is our policy to record all derivative assets and liabilities on a gross basis in our consolidated balance sheet. Refer to Note 10 “Other Comprehensive Income (Loss)” for additional information on our derivative instruments.

9. Fair Value of Financial Instruments

Certain of our assets and liabilities are measured at fair value. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy for inputs used in measuring fair value and requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy consists of three levels based on the objectivity of the inputs as follows:


Level 1 Inputs						Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs						Quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs						Unobservable inputs for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability.

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(Tabular amounts in thousands, except per share amounts)

(Unaudited)

The table below sets forth our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022.


	Level 1		Level 2		Level 3		Total
June 30, 2023
Assets:
Interest rate swaps	$	—	$	12,224	$	—	$	12,224
Convertible debt investment	—		—		63,596		63,596
Foreign exchange forward contracts	—		79		—		79
Deferred compensation assets	—		32,239		—		32,239
Total assets	$	—	$	44,542	$	63,596	$	108,138
Liabilities:

Foreign exchange forward contracts	$	—	$	1	$	—	$	1
Contingent consideration for business acquisitions	—		—		1,957		1,957
Total liabilities	$	—	$	1	$	1,957	$	1,958
December 31, 2022
Assets:
Interest rate swaps	$	—	$	12,239	$	—	$	12,239
Convertible debt investment	—		—		57,563		57,563
Deferred compensation assets	—		29,875		—		29,875
Total assets	$	—	$	42,114	$	57,563	$	99,677
Liabilities:
Foreign exchange forward contracts	$	—	$	120	$	—	$	120
Contingent consideration for business acquisitions	—		—		3,190		3,190
Total liabilities	$	—	$	120	$	3,190	$	3,310

Interest rate swaps: The fair values of our interest rate swaps were derived using estimates to settle the interest rate swap agreements, which are based on the net present value of expected future cash flows on each leg of the swaps utilizing market-based inputs and a discount rate reflecting the risks involved. Refer to Note 8 “Derivative Instruments and Hedging Activity” for additional information on our interest rate swaps.

Foreign exchange forward contracts: The fair values of our foreign exchange forward contracts were derived using estimates to settle the foreign exchange forward contracts agreements, which are based on the net present value of expected future cash flows on each contract utilizing market-based inputs, including both forward and spot prices, and a discount rate reflecting the risks involved. Refer to Note 8 “Derivative Instruments and Hedging Activity” for additional information on our foreign exchange forward contracts.

Deferred compensation assets: We have a non-qualified deferred compensation plan (the “Plan”) for the members of our board of directors and a select group of our employees. The deferred compensation liability is funded by the Plan assets, which consist of life insurance policies maintained within a trust. The cash surrender value of the life insurance policies approximates fair value and is based on third-party broker statements which provide the fair value of the life insurance policies' underlying investments, which are Level 2 inputs. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The Plan assets are included in other non-current assets in our consolidated balance sheets. Realized and unrealized gains (losses) from the deferred compensation assets are recorded to other income (expense), net in our consolidated statements of operations.

Convertible debt investment: Since 2014, we have invested $40.9 million in the form of 1.69% convertible debt in Shorelight Holdings, LLC (“Shorelight”), the parent company of Shorelight, a U.S.-based company that partners with leading nonprofit universities to increase access to and retention of international students, boost institutional growth, and enhance an institution’s global footprint. The convertible notes will mature on January 17, 2027, unless converted earlier.

To determine the appropriate accounting treatment for our investment, we performed a variable interest entity (“VIE”) analysis and concluded that Shorelight does not meet the definition of a VIE. We also reviewed the characteristics of our investment to confirm that the convertible notes are not in-substance common stock that would warrant equity method accounting. After we reviewed all of the terms of the investment,

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(Unaudited)

we concluded the appropriate accounting treatment to be that of an available-for-sale debt security. We continue to monitor the key factors of our VIE analysis and the terms of the convertible notes to ensure our accounting treatment is appropriate. We have not identified any changes to Shorelight or our investment that would change our classification of the investment as an available-for-sale debt security.

The investment is carried at fair value with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income. We estimate the fair value of our investment using a scenario-based approach in the form of a hybrid analysis that consists of a Monte Carlo simulation model and an expected return analysis. The conclusion of value for our investment is based on the probability-weighted assessment of both scenarios. The hybrid analysis utilizes certain assumptions including the assumed holding period through the maturity date of January 17, 2027; the applicable waterfall distribution at the end of the expected holding period based on the rights and privileges of the various instruments; cash flow projections discounted at the risk-adjusted rate of 24.0% as of June 30, 2023 and December 31, 2022; and the concluded equity volatility of 40.0% as of June 30, 2023 and December 31, 2022, all of which are Level 3 inputs. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the investment, which would result in different impacts to our consolidated balance sheet and comprehensive income. Actual results may differ from our estimates. The fair value of the convertible debt investment is recorded in long-term investments in our consolidated balance sheets.

The table below sets forth the changes in the balance of the convertible debt investment for the six months ended June 30, 2023.


	Convertible Debt Investment
Balance as of December 31, 2022	$	57,563

Change in fair value	6,033
Balance as of June 30, 2023	$	63,596

Contingent consideration for business acquisitions: We estimate the fair value of acquisition-related contingent consideration using either a probability-weighted assessment of the specific financial performance targets being measured or a Monte Carlo simulation model, as appropriate. These fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 inputs. The significant unobservable inputs used in the fair value measurements of our contingent consideration are our measures of the estimated payouts based on internally generated financial projections on a probability-weighted basis and a discount rate which was 6.1% as of June 30, 2023 and 5.5% as of December 31, 2022. The fair value of the contingent consideration is reassessed quarterly based on assumptions used in our latest projections and input provided by practice leaders and management. Any change in the fair value estimate is recorded in our consolidated statement of operations for that period. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of our contingent consideration liability, which would result in different impacts to our consolidated balance sheets and consolidated statements of operations. Actual results may differ from our estimates.

The table below sets forth the changes in the balance of the contingent consideration for business acquisitions for the six months ended June 30, 2023.


	Contingent Consideration for Business Acquisitions
Balance as of December 31, 2022	$	3,190

Payment	(1,000)
Change in fair value	(233)
Balance as of June 30, 2023	$	1,957

Financial assets and liabilities not recorded at fair value on a recurring basis are as follows:

Medically Home Preferred Stock Investment

In the fourth quarter of 2019, we invested $5.0 million in Medically Home Group, Inc. (“Medically Home”), a hospital-at-home company. The investment was made in the form of preferred stock. To determine the appropriate accounting treatment for our preferred stock investment, we performed a VIE analysis and concluded that Medically Home does not meet the definition of a VIE. We also reviewed the characteristics of our investment to confirm that the preferred stock is not in-substance common stock that would warrant equity method accounting. After we reviewed all of the terms of the investment, we concluded the appropriate accounting treatment for our investment in Medically Home to be that of an equity security with no readily determinable fair value. We elected to apply the measurement alternative at the time of the purchase and will continue to do so until the investment does not qualify to be so measured. Under the measurement alternative, the investment is carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions

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(Tabular amounts in thousands, except per share amounts)

(Unaudited)

for an identical or similar investment in Medically Home. On a quarterly basis, we review the information available to determine whether an orderly and observable transaction for the same or similar equity instrument occurred, and remeasure to the fair value of the preferred stock using such identified transactions, with changes in the fair value recorded in our consolidated statement of operations.

During the first quarter of 2022, we recognized a pre-tax unrealized gain of $27.0 million based on an observable price change of preferred stock issued by Medically Home with similar rights and preferences to our preferred stock investment, a Level 2 input. There were no observable price changes for the remainder of 2022 or in the first half of 2023. Since our initial investment, we have recognized cumulative pre-tax unrealized gains of $28.6 million, which were recorded to other income (expense), net in our consolidated statement of operations, and we have not identified any impairments of our investment. As of June 30, 2023 and December 31, 2022, the carrying amount of our preferred stock investment was $33.6 million.

Senior Secured Credit Facility

The carrying value of our borrowings outstanding under our senior secured credit facility is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the senior secured credit facility bears interest at variable rates based on current market rates as set forth in the Amended Credit Agreement. Refer to Note 6 “Financing Arrangements” for additional information on our senior secured credit facility.

Cash and Cash Equivalents and Other Financial Instruments

Cash and cash equivalents are stated at cost, which approximates fair market value. The carrying values of all other financial instruments not described above reasonably approximate fair market value due to the nature of the financial instruments and the short-term maturity of these items.

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(Unaudited)

10. Other Comprehensive Income (Loss)

The table below sets forth the components of other comprehensive income (loss), net of tax, for the three and six months ended June 30, 2023 and 2022.


	Three Months Ended June 30, 2023						Three Months Ended June 30, 2022
	Before Taxes		Tax (Expense) Benefit		Net of Taxes		Before Taxes		Tax (Expense) Benefit		Net of Taxes
Foreign currency translation adjustments	$	327	$	—	$	327	$	(656)	$	—	$	(656)
Unrealized gain (loss) on investment	$	754	$	(201)	$	553	$	1,051	$	(278)	$	773
Interest rate swaps:
Change in fair value	$	5,265	$	(1,400)	$	3,865	$	1,024	$	(271)	$	753
Reclassification adjustments into earnings	(1,941)		516		(1,425)		297		(79)		218
Net unrealized gain (loss) on interest rate swaps	$	3,324	$	(884)	$	2,440	$	1,321	$	(350)	$	971
Foreign exchange forward contracts:
Change in fair value	$	46	$	(12)	$	34	$	—	$	—	$	—
Reclassification adjustments into earnings	(14)		3		(11)		—		—		—
Net unrealized gain (loss) on foreign exchange forward contracts	$	32	$	(9)	$	23	$	—	$	—	$	—
Other comprehensive income (loss)	$	4,437	$	(1,094)	$	3,343	$	1,716	$	(628)	$	1,088



	Six Months Ended June 30, 2023						Six Months Ended June 30, 2022
	Before Taxes		Tax (Expense) Benefit		Net of Taxes		Before Taxes		Tax (Expense) Benefit		Net of Taxes
Foreign currency translation adjustments	$	379	$	—	$	379	$	(699)	$	—	$	(699)
Unrealized gain (loss) on investment	$	6,033	$	(1,607)	$	4,426	$	(2,566)	$	678	$	(1,888)
Interest rate swaps:
Change in fair value	$	3,458	$	(919)	$	2,539	$	6,692	$	(1,770)	$	4,922
Reclassification adjustments into earnings	(3,473)		923		(2,550)		509		(135)		374
Net unrealized gain (loss) on interest rate swaps	$	(15)	$	4	$	(11)	$	7,201	$	(1,905)	$	5,296
Foreign exchange forward contracts:
Change in fair value	$	200	$	(53)	$	147	$	—	$	—	$	—
Reclassification adjustments into earnings	(2)		—		(2)		—		—		—
Net unrealized gain (loss) on foreign exchange forward contracts	$	198	$	(53)	$	145	$	—	$	—	$	—
Other comprehensive income (loss)	$	6,595	$	(1,656)	$	4,939	$	3,936	$	(1,227)	$	2,709

The before tax amounts reclassified from accumulated other comprehensive income related to our interest rate swaps and foreign exchange forward contracts are recorded to interest expense, net of interest income, and direct costs, respectively. Refer to Note 8 “Derivative Instruments and Hedging Activity” for additional information on our derivative instruments.

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(Tabular amounts in thousands, except per share amounts)

(Unaudited)

Accumulated other comprehensive income, net of tax, includes the following components:


					Cash Flow Hedges
	Foreign Currency Translation		Available-for-Sale Investment		Interest Rate Swaps		Foreign Exchange Forward Contracts		Total
Balance as of December 31, 2022	$	(3,033)	$	12,228	$	9,012	$	(88)	$	18,119
Current period change	379		4,426		(11)		145		4,939
Balance as of June 30, 2023	$	(2,654)	$	16,654	$	9,001	$	57	$	23,058

11. Income Taxes

For the three months ended June 30, 2023, our effective tax rate was 29.4% as we recognized income tax expense of $10.3 million on income of $35.0 million. The effective tax rate of 29.4% was less favorable than the statutory rate, inclusive of state income taxes, of 26.6% primarily due to certain nondeductible expense items. These unfavorable items were partially offset by a tax benefit related to non-taxable gains on our investments used to fund our deferred compensation liability.

For the three months ended June 30, 2022, our effective tax rate was 36.0% as we recognized income tax expense of $7.8 million on income of $21.7 million. The effective tax rate of 36.0% was less favorable than the statutory rate, inclusive of state income taxes, of 26.4% primarily due to tax expense related to nondeductible losses on our investments used to fund our deferred compensation liability and certain nondeductible expense items.

For the six months ended June 30, 2023, our effective tax rate was 25.0% as we recognized income tax expense of $12.7 million on income of $50.8 million. The effective tax rate of 25.0% 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 2023 and a tax benefit related to non-taxable gains on our investments used to fund our deferred compensation liability. These favorable items were partially offset by certain nondeductible expense items.

For the six months ended June 30, 2022, our effective tax rate was 31.9% as we recognized income tax expense of $19.1 million on income of $59.8 million. The effective tax rate of 31.9% was less favorable than the statutory rate, inclusive of state income taxes, of 26.4% primarily due to tax expense related to nondeductible losses on our investments used to fund our deferred compensation liability and certain nondeductible expense items.

As of June 30, 2023, we had $0.6 million of unrecognized tax benefits which would affect the effective tax rate if recognized. It is reasonably possible that approximately $0.6 million of the liability for unrecognized tax benefits could decrease in the next twelve months due to the expiration of statutes of limitations.

12. Commitments, Contingencies and Guarantees

Litigation

From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Quarterly Report on Form 10-Q, we are not a party to any litigation or legal proceeding or subject to any claim that, in the current opinion of management, could reasonably be expected to have a material adverse effect on our financial position or results of operations. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expected results.

Guarantees

Guarantees in the form of letters of credit totaling $0.7 million were outstanding at both June 30, 2023 and December 31, 2022, to support certain office lease obligations.

In connection with certain business acquisitions, we may be required to pay post-closing consideration to the sellers if specific financial performance targets are met over a number of years as specified in the related purchase agreements. As of June 30, 2023 and December 31, 2022, the total estimated fair value of our outstanding contingent consideration liability was $2.0 million and $3.2 million, respectively.

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(Unaudited)

To the extent permitted by law, our bylaws and articles of incorporation require that we indemnify our officers and directors against judgments, fines and amounts paid in settlement, including attorneys’ fees, incurred in connection with civil or criminal action or proceedings, as it relates to their services to us if such person acted in good faith. Although there is no limit on the amount of indemnification, we may have recourse against our insurance carrier for certain payments made.

13. Segment Information

Segments are defined as components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker, who is our chief executive officer, manages the business under three operating segments, which are our reportable 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, spanning technology and analytic-related services and a portfolio of software products; organizational transformation; financial advisory and strategy and innovation. Healthcare organizations are focused on establishing a sustainable long-term strategy and business model centered around growth, optimal cost structures, reimbursement models, financial strategies, and consumer-focused digital transformation; changing the way care is delivered, particularly in light of personnel shortages, and improving access to care; and 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, identifying new opportunities for growth, 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, spanning technology and analytic-related services and Huron Research Suite, the leading software suite designed to facilitate and improve research administration service delivery and compliance; and organizational transformation. Our Education segment clients are increasingly faced with strategic, financial and/or enrollment challenges, increased competition, and a need to modernize their businesses using technology to advance their missions. 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 and analytics; strengthening research strategies and support services; evolving their organizational strategy; optimizing financial and operational performance; applying innovative enrollment strategies; and enhancing the student lifecycle.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

•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 commercial industries more broadly, including professional and business services, life sciences, consumer products, and nonprofit. Our Commercial professionals use their deep industry, functional and technical expertise to deliver our digital services and software products, 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 analytics and insights to identify the needs of tomorrow’s customers, evolving their strategies, and bringing new products to market; managing through stressed and distressed situations to create a viable path forward for stakeholders; and providing financial, risk and regulatory advisory offerings.

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. Our chief operating decision maker does not evaluate segments using asset information.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

The table below sets forth information about our operating segments for the three and six months ended June 30, 2023 and 2022, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements.


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Healthcare:
Revenues	$	173,768		$	128,474		$	322,817		$	250,350
Operating income	$	49,151		$	30,364		$	81,406		$	58,396
Segment operating income as a percentage of segment revenues	28.3		%	23.6		%	25.2		%	23.3		%
Education:
Revenues	$	110,694		$	88,225		$	214,841		$	168,887
Operating income	$	27,397		$	21,691		$	50,562		$	35,997
Segment operating income as a percentage of segment revenues	24.8		%	24.6		%	23.5		%	21.3		%
Commercial:
Revenues	$	62,297		$	56,626		$	126,996		$	114,137
Operating income	$	10,472		$	11,915		$	24,539		$	24,129
Segment operating income as a percentage of segment revenues	16.8		%	21.0		%	19.3		%	21.1		%
Total Huron:
Revenues	$	346,759		$	273,325		$	664,654		$	533,374
Reimbursable expenses	8,140			7,492			16,630			12,218
Total revenues and reimbursable expenses	$	354,899		$	280,817		$	681,284		$	545,592

Segment operating income	$	87,020		$	63,970		$	156,507		$	118,522
Items not allocated at the segment level:
Other operating expenses	42,923			29,912			89,263			63,460
Depreciation and amortization	4,378			5,054			9,094			10,100

Operating income	39,719			29,004			58,150			44,962
Total other income (expense), net	(4,734)			(7,327)			(7,318)			14,842
Income before taxes	$	34,985		$	21,677		$	50,832		$	59,804

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

The following table illustrates the disaggregation of revenues by our two principal capabilities: i) Consulting and Managed Services and ii) Digital, and includes a reconciliation of the disaggregated revenues to revenues from our three operating segments for the three and six months ended June 30, 2023 and 2022.


	Three Months Ended June 30,				Six Months Ended June 30,
Revenues by Capability	2023		2022		2023		2022
Healthcare:
Consulting and Managed Services	$	124,944	$	83,955	$	226,680	$	167,714
Digital	48,824		44,519		96,137		82,636
Total revenues	$	173,768	$	128,474	$	322,817	$	250,350
Education:
Consulting and Managed Services	$	53,426	$	49,279	$	106,653	$	93,460
Digital	57,268		38,946		108,188		75,427
Total revenues	$	110,694	$	88,225	$	214,841	$	168,887
Commercial: