HURON CONSULTING GROUP INC.
The accompanying notes are an integral part of the consolidated financial statements.
HURON CONSULTING GROUP INC.
The accompanying notes are an integral part of the consolidated financial statements.
HURON CONSULTING GROUP INC.
The accompanying notes are an integral part of the consolidated financial statements.
1. Description of Business
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 nine months ended September 30, 20172020 and 2016.2019. These financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”("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”("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 for the year ended December 31, 20162019 included in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the periods ended March 31, 20172020 and June 30, 2017.2020. Our results for any interim period are not necessarily indicative of results for a full year or any other interim period.
3. New Accounting Pronouncements
4. Discontinued Operations
Identifiable intangible assets with finite lives are amortized over their estimated useful lives. Customer relationships and customer contracts, 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. In connection with the acquisition
Actual future amortization expense could differ from these estimated amounts as a result of future acquisitions, dispositions, and other factors.
7.5. Revenues
For the three months ended September 30, 2020 and 2019, we recognized revenues of $205.3 million and $219.3 million, respectively. Of the $205.3 million recognized in the third quarter of 2020, we recognized revenues of $7.4 million from obligations satisfied, or partially satisfied, in prior periods, of which $5.7 million was primarily due to the release of allowances on unbilled services as a result of securing contract amendments and $1.7 million was due to changes in the estimates of our variable consideration under performance-based billing arrangements. Of the $219.3 million recognized in the third quarter of 2019, we recognized revenues of $4.8 million from obligations satisfied, or partially satisfied, in prior periods, of which $3.7 million was primarily due to the release of allowances on unbilled services as a result of securing contract amendments and $1.1 million was due to changes in the estimates of our variable consideration under performance-based billing arrangements.
For the nine months ended September 30, 2020 and 2019, we recognized revenues of $645.8 million and $644.5 million, respectively. Of the $645.8 million recognized in the first nine months of 2020, we recognized revenues of $11.0 million from obligations satisfied, or partially satisfied, in prior periods, of which $6.5 million was due to changes in the estimates of our variable consideration under performance-based billing arrangements and $4.5 million was primarily due to the release of allowances on unbilled services as a result of securing contract amendments. Of the $644.5 million recognized in the first nine months of 2019, we recognized revenues of $2.6 million from obligations satisfied, or partially satisfied, in prior periods, primarily due to the release of allowances on unbilled services due to securing contract amendments. During the first nine months of 2019, we recognized a $1.4 million decrease to revenues due to changes in the estimates of our variable consideration under performance-based billing arrangements.
As of September 30, 2020, we had $67.9 million of remaining performance obligations under engagements with original expected durations greater than one year. These remaining performance obligations exclude obligations under contracts with an original expected duration of one year or less, 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 $67.9 million of performance obligations, we expect to recognize approximately $14.5 million as revenue in 2020, $34.2 million in 2021, and the remaining $19.2 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 September 30, 2020 and December 31, 2019 was $13.4 million and $12.6 million, respectively. The $0.8 million increase 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.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
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 policy. Our deferred revenues balance as of September 30, 2020 and December 31, 2019, was $31.8 million and $28.4 million, respectively. The $3.4 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 nine months ended September 30, 2020, $3.0 million and $24.3 million, respectively, of revenues recognized were included in the deferred revenue balance as of December 31, 2019.
6. 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, outstanding common stock options, convertible senior notes, and outstanding warrants, to the extent dilutive. In periods for which we report a net loss from continuing operations, diluted weighted average common shares outstanding excludes all potential common stock equivalents as their impact on diluted net loss from continuing operations per share would be anti-dilutive.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Earnings (loss) per share under the basic and diluted computations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) from continuing operations | $ | 11,087 | | | $ | 13,706 | | | $ | (17,614) | | | $ | 27,625 | |
Loss from discontinued operations, net of tax | (29) | | | (52) | | | (89) | | | (195) | |
Net income (loss) | $ | 11,058 | | | $ | 13,654 | | | $ | (17,703) | | | $ | 27,430 | |
| | | | | | | |
Weighted average common shares outstanding – basic | 21,905 | | | 22,052 | | | 21,868 | | | 21,973 | |
Weighted average common stock equivalents | 270 | | | 509 | | | 0 | | | 452 | |
Weighted average common shares outstanding – diluted | 22,175 | | | 22,561 | | | 21,868 | | | 22,425 | |
| | | | | | | |
Net earnings (loss) per basic share: | | | | | | | |
Net income (loss) from continuing operations | $ | 0.50 | | | $ | 0.62 | | | $ | (0.81) | | | $ | 1.26 | |
Loss from discontinued operations, net of tax | 0 | | | 0 | | | 0 | | | (0.01) | |
Net income (loss) | $ | 0.50 | | | $ | 0.62 | | | $ | (0.81) | | | $ | 1.25 | |
| | | | | | | |
Net earnings (loss) per diluted share: | | | | | | | |
Net income (loss) from continuing operations | $ | 0.50 | | | $ | 0.61 | | | $ | (0.81) | | | $ | 1.23 | |
Loss from discontinued operations, net of tax | 0 | | | 0 | | | 0 | | | (0.01) | |
Net income (loss) | $ | 0.50 | | | $ | 0.61 | | | $ | (0.81) | | | $ | 1.22 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) from continuing operations | $ | 4,132 |
| | $ | 12,288 |
| | $ | (141,195 | ) | | $ | 35,293 |
|
Income (loss) from discontinued operations, net of tax | 238 |
| | 4 |
| | 690 |
| | (1,830 | ) |
Net income (loss) | $ | 4,370 |
| | $ | 12,292 |
| | $ | (140,505 | ) | | $ | 33,463 |
|
| | | | | | | |
Weighted average common shares outstanding – basic | 21,505 |
| | 21,076 |
| | 21,413 |
| | 21,084 |
|
Weighted average common stock equivalents | 117 |
| | 369 |
| | — |
| | 343 |
|
Weighted average common shares outstanding – diluted | 21,622 |
| | 21,445 |
| | 21,413 |
| | 21,427 |
|
| | | | | | | |
Net earnings per basic share: | | | | |
| |
|
Net income (loss) from continuing operations | $ | 0.19 |
| | $ | 0.58 |
| | $ | (6.59 | ) | | $ | 1.67 |
|
Income (loss) from discontinued operations, net of tax | 0.01 |
| | — |
| | 0.03 |
| | (0.08 | ) |
Net income (loss) | $ | 0.20 |
| | $ | 0.58 |
| | $ | (6.56 | ) | | $ | 1.59 |
|
| | | | | | | |
Net earnings per diluted share: | | | | | | | |
Net income (loss) from continuing operations | $ | 0.19 |
| | $ | 0.57 |
| | $ | (6.59 | ) | | $ | 1.65 |
|
Income (loss) from discontinued operations, net of tax | 0.01 |
| | — |
| | 0.03 |
| | (0.09 | ) |
Net income (loss) | $ | 0.20 |
| | $ | 0.57 |
| | $ | (6.56 | ) | | $ | 1.56 |
|
The number of anti-dilutive securities excluded from the computation of the weighted average common stock equivalents presented above were as follows: | | | As of September 30, | | As of September 30, |
| 2017 | | 2016 | | 2020 | | 2019 |
Unvested restricted stock awards | 627 |
| | 5 |
| Unvested restricted stock awards | 59 | | | 0 | |
Outstanding common stock options
| 194 |
| | — |
| |
| Convertible senior notes | 3,129 |
| | 3,129 |
| Convertible senior notes | 0 | | | 3,129 | |
Warrants related to the issuance of convertible senior notes | 3,129 |
| | 3,129 |
| Warrants related to the issuance of convertible senior notes | 0 | | | 3,129 | |
Total anti-dilutive securities | 7,079 |
| | 6,263 |
| Total anti-dilutive securities | 59 | | | 6,258 | |
See Note 87 “Financing Arrangements” for further information on the convertible senior notes and warrants related to the issuance of convertible notes.
As of September 30, 2017,2020, we had a share repurchase program authorized by our board of directors, pursuantpermitting us to which we may, from time to time, repurchase up to $125 million of our common stock through October 31, 20172020 (the “Share Repurchase Program”). During the fourth quarter of 2017, our board of directors authorized an extension of the Share Repurchase Program through October 31, 2018. The amount and timing of the repurchases will be determined by management and will 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. No shares were repurchased during the first nine months of 2017. In the first quarter of 2016,2020, we repurchased and retired 982,192313,998 shares for $55.3 million. No shares were repurchased in the second or third quarter of 2016. As of September 30, 2017, $35.1 million remains available for share repurchases.
$20.9
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
million. The 313,998 shares repurchased and retired in the first quarter of 2020 were reflected as a reduction to our basic weighted average shares outstanding for the quarter ended March 31, 2020 based on the trade date of the share repurchase. Additionally, in the first quarter of 2020, we settled the repurchase of 18,000 shares for $1.2 million that were accrued as of December 31, 2019. These shares were reflected as a reduction to our basic weighted average shares outstanding in the fourth quarter of 2019 based on the trade date of the share repurchase. No shares were repurchased during the second or third quarters of 2020 nor were any shares repurchased during the first nine months of 2019. As of September 30, 2020, less than $0.1 million remained available for share repurchases. The Share Repurchase Program expired on October 31, 2020.
8.
7. Financing Arrangements
A summary of the carrying amounts of our debt follows: | | | | | | | | September 30, 2020 | | December 31, 2019 |
| September 30, 2017 | | December 31, 2016 | |
1.25% convertible senior notes due 2019 | $ | 230,834 |
| | $ | 224,065 |
| |
Senior secured credit facility | 139,000 |
| | 68,000 |
| Senior secured credit facility | $ | 248,000 | | | $ | 205,000 | |
Promissory note due 2024 | 4,991 |
| | — |
| Promissory note due 2024 | 3,457 | | | 3,853 | |
Total long-term debt | $ | 374,825 |
| | $ | 292,065 |
| Total long-term debt | $ | 251,457 | | | $ | 208,853 | |
Current maturities of debt (1) | (497 | ) | | — |
| |
Current maturities of long-term debt | | Current maturities of long-term debt | (540) | | | (529) | |
Long-term debt, net of current portion | $ | 374,328 |
| | $ | 292,065 |
| Long-term debt, net of current portion | $ | 250,917 | | | $ | 208,324 | |
| |
(1) | The current maturities of debt are included as a component of accrued expenses and other current liabilities on our consolidated balance sheets. |
Below is a summary of the scheduled remaining principal payments of our debt as of September 30, 2017.2020. |
| | | |
| Principal Payments of Long-Term Debt |
2017 | $ | 123 |
|
2018 | $ | 501 |
|
2019 | $ | 250,515 |
|
2020 | $ | 139,529 |
|
2021 | $ | 544 |
|
Thereafter | $ | 2,779 |
|
| | | | | |
| Principal Payments of Long-Term Debt |
2020 | $ | 133 | |
2021 | $ | 544 | |
2022 | $ | 559 | |
2023 | $ | 575 | |
2024 | $ | 249,646 | |
Convertible Notes
In September 2014, the Company issued $250 million principal amount of 1.25% convertible senior notes due 2019 (the “Convertible Notes”) in a private offering. The Convertible Notes arewere governed by the terms of an indenture between the Company and U.S. Bank National Association, as Trustee (the “Indenture”). The Convertible Notes arewere senior unsecured obligations of the Company and will paypaid interest semi-annually on April 1 and October 1 of each year at an annual rate of 1.25%. The Convertible Notes will mature on October 1, 2019, unless earlier repurchased by the Company or converted in accordance with their terms.
UponPrior to maturity, upon conversion, the Convertible Notes will bewould have been settled, at our election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. Our current intent and policy iswas to settle conversions with a combination of cash and shares of common stock with the principal amount of the Convertible Notes paid in cash, in accordance with the settlement provisions of the Indenture.
The initial conversion rate for the Convertible Notes is 12.5170 shares of our common stock per $1,000 principal amount of the Convertible Notes, which is equal to an initial conversion price of approximately $79.89 per share of our common stock. The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest, except in certain limited circumstances described in the Indenture. Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture) the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Convertible Notes in connection with such make-whole fundamental change. Additionally, if the Company undergoes a “fundamental change” (as defined in the Indenture), a holder will have the option to require the Company to repurchase all or a portion of its Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest. As discussed below, the convertible note hedge transactions and warrants, which were entered into in connection with the Convertible Notes, effectively raise the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to July 1, 2019, only under the following circumstances:
during any calendar quarter (and only during such calendar quarter) commencing after December 31, 2014 if, for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter, the last reported sale price of the Company’s common stock for such trading day is equal to or greater than 130% of the applicable conversion price on such trading day;
during the five consecutive business day period immediately following any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which, for each trading day of the measurement period, the “trading price” (as defined in the Indenture) per $1,000 principal amount of the Convertible Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock for such trading day and the applicable conversion rate on such trading day; or
upon the occurrence of specified corporate transactions described in the Indenture.
On or after July 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or a portion of its Convertible Notes, regardless of the foregoing circumstances.
We haveissuance, we separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar liability that does not have an associated convertible feature, assuming our non-convertible debt borrowing rate. The carrying value of the equity component representing the conversion option, which iswas recognized as a debt discount, was determined by deducting the fair value of the liability component from the proceeds of the Convertible Notes. The debt discount iswas amortized to interest expense using an effective interest rate of 4.751% over the term of the Convertible Notes. As of September 30, 2017, the remaining life of the Convertible Notes is 2.0 years. The equity component willwas not be remeasured as long as it continuescontinued to meet the conditions for equity classification.
The transaction costs related to the issuance of the Convertible Notes were separated into liability and equity components based on their relative values, as determined above.values. Transaction costs attributable to the liability component arewere recorded as a deduction to the carrying amount of the liability and amortized to interest expense over the term of the Convertible Notes; and transaction costs attributable to the equity component arewere netted with the equity component of the Convertible Notes in stockholders’ equity. Total debt issuance costs were approximately $7.3 million, of which $6.2 million was allocated to liability issuance costs and $1.1 million was allocated to equity issuance costs.
As of September 30, 2017 and December 31, 2016, the Convertible Notes consisted of the following: |
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Liability component: | | | |
Proceeds | $ | 250,000 |
| | $ | 250,000 |
|
Less: debt discount, net of amortization | (16,666 | ) | | (22,520 | ) |
Less: debt issuance costs, net of amortization | (2,500 | ) | | (3,415 | ) |
Net carrying amount | $ | 230,834 |
| | $ | 224,065 |
|
Equity component (1) | $ | 39,287 |
| | $ | 39,287 |
|
| |
(1) | Included in additional paid-in capital on the consolidated balance sheet. |
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
The following table presents the amount of interest expense recognized related to the Convertible Notes for the periods presented. | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | | | | | | | | |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months Ended September 30, 2019 | | | Nine Months Ended September 30, 2019 |
Contractual interest coupon | $ | 781 |
| | $ | 781 |
| | $ | 2,344 |
| | $ | 2,344 |
| Contractual interest coupon | $ | 781 | | | | $ | 2,344 | |
Amortization of debt discount | 1,974 |
| | 1,883 |
| | 5,853 |
| | 5,582 |
| Amortization of debt discount | 2,171 | | | | 6,436 | |
Amortization of debt issuance costs | 306 |
| | 302 |
| | 915 |
| | 900 |
| Amortization of debt issuance costs | 317 | | | | 947 | |
Total interest expense | $ | 3,061 |
| | $ | 2,966 |
| | $ | 9,112 |
| | $ | 8,826 |
| Total interest expense | $ | 3,269 | | | | $ | 9,727 | |
In connection with the issuance of the Convertible Notes, we entered into convertible note hedge transactions and warrant transactions. The convertible note hedge transactions arewere intended to reduce the potential future economic dilution associated with the conversion of the Convertible Notes and, combined with the warrants, effectively raiseraised the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share. For purposes of the computation of diluted earnings per share in accordance with GAAP, dilution will occur when the average share price of our common stock for a given period exceeds the conversion price of the Convertible Notes, which initially is equal to approximately $79.89 per share. The convertible note hedge transactions and warrant transactions are discussed separately below.
Convertible Note Hedge Transactions. In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions whereby the Company has call options to purchase a total of approximately 3.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the Convertible Notes in full, at a price of approximately $79.89, which corresponds to the initial conversion price of the Convertible Notes, subject to customary anti-dilution adjustments substantially similar to thoseexpired in the Convertible Notes.third quarter of 2019. The convertible note hedge transactions are exercisable upon conversion of the Convertible Notes and will expire in 2019 if not earlier exercised. We paid an aggregate amount of $42.1 million for the convertible note hedge transactions, which was recorded as additional paid-in capital on the consolidated balance sheets. The convertible note hedge transactions are separate transactions and are not part of the terms of the Convertible Notes.
Warrants. In connection with the issuance of the Convertible Notes, the Company sold warrants whereby the holders of the warrants havehad the option to purchase aan initial total of approximately 3.1 million shares of the Company’s common stock at a strike price of approximately $97.12. The warrants will expire incrementally on 100 different dates from January 6, 2020 to May 28, 2020 and are exercisable at each such expiry date.expired in the second quarter of 2020. If the average market value per share of our common stock for the reporting period exceedsexceeded the strike price of the warrants, the warrants willwould have had a dilutive effect on our earnings per share. We received aggregate proceeds of $23.6 million from the sale of the warrants, which was recorded as additional paid-in capital on the consolidated balance sheets. The warrants arewere separate transactions and arewere not part of the terms of the Convertible Notes or the convertible note hedge transactions.
The Company recorded an initial deferred tax liability of $15.4 million in connection with the debt discount associated with the Convertible Notes and recorded an initial deferred tax asset of $16.5 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are included in deferred income taxes, net on the consolidated balance sheets.
Senior Secured Credit Facility
The Company has a $500$600 million five-year senior secured revolving credit facility, subject to the terms of a Second Amended and Restated Credit Agreement dated as of March 31, 2015, as amended to date (as amended and modified the "Amended Credit Facility"Agreement"), that becomes due and payable in full upon maturity on March 31, 2020.September 27, 2024. The Amended Credit Agreement provides the option to increase the revolving credit facility or establish term loan facilities in an aggregate amount of up to $100$150 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 $600$750 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, acquisitions of businesses, share repurchases, and general corporate purposes.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
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, two, three or six-month LIBOR or an alternate base rate, in each case plus the applicable margin. The applicable margin will fluctuate between 1.25%1.125% per annum and 2.00%1.875% per annum, in the case of LIBOR borrowings, or between 0.25%0.125% per annum and 1.00%0.875% per annum, in the case of base rate loans, based upon our Consolidated Leverage Ratio at such time.
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 a requirement to pay all amounts outstanding under the Amended Credit Agreement 90 days prior to the Convertible Indebtedness Maturity Date (as defined in the Amended Credit Agreement) unless (1) the Convertible Indebtedness Maturity Date is waived or extended to a later date, (2) the Company can demonstrate (a) Liquidity (as defined in the Amended Credit Agreement) inupon an amount at least equal to the principal amount due on the Convertible Indebtedness Maturity Date, and (b) financial covenant compliance after giving effect to such payments and any additional indebtedness incurred on a pro forma basis, or (3) this requirement is waived by the Required LendersEvent 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 Second Amended and Restated Security Agreement and a Second Amended and Restated Pledge Agreement (the(as amended, 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).
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) ranging from 3.25of 3.75 to 1.00; however the maximum permitted Consolidated Leverage Ratio will increase to 4.00 to 1.00 to 3.75 to 1.00, depending onupon the measurement period,occurrence of certain transactions, and (ii) a minimum Consolidated Interest Coverage Ratio (defined as the ratio of consolidated EBITDA to interest) of 3.50 to 1.00. Consolidated EBITDA for purposes of the financial covenants is calculated on a continuing operations basis and includes adjustments to add back share-based compensation costs, non-cash goodwill impairment charges, share-based compensation costs, certain non-cash restructuring charges, and pro forma historical EBITDA for businesses acquired.acquired, and other specified items in accordance with the Amended Credit Agreement. For purposes of the Consolidated Leverage Ratio,
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
total debt is on a gross basis and is not netted against our cash balances. At September 30, 2017,2020, we were in compliance with these financial covenants with a Consolidated Leverage Ratio of 3.522.09 to 1.00 and a Consolidated Interest Coverage Ratio of 12.6013.19 to 1.00.
Borrowings outstanding under the Amended Credit Agreement at September 30, 20172020 totaled $139.0$248.0 million. These borrowings carried a weighted average interest rate of 3.4%2.5%, including the effect of the interest rate swapswaps described in Note 109 “Derivative Instruments and Hedging Activity." Borrowings outstanding under the Amended Credit Agreement at December 31, 20162019 were $68.0$205.0 million and carried a weighted average interest rate of 2.5%.3.0%, including the effect of the interest rate swap outstanding at the time and described in Note 9 “Derivative Instruments and Hedging Activity." The borrowing capacity under the revolving credit facility is reduced by any outstanding borrowings under the revolving credit facility and outstanding letters of credit. At September 30, 2017,2020, we had outstanding letters of credit totaling $2.7$1.7 million, which are primarily used as security deposits for our office facilities. As of September 30, 2017,2020, the unused borrowing capacity under the revolving credit facility was $358.3$350.3 million.
Promissory Note due 2024
On June 30, 2017, in conjunction with our purchase of an aircraft related to the acquisition of Innosight, we assumed, from the sellers of the aircraft, a promissory note with an outstanding principal balance of $5.1 million. The principal balance of the promissory note is subject to scheduled monthly principal payments until the maturity date of March 1, 2024, at which time a final payment of $1.5 million, plus any accrued and unpaid interest, will be due. Under the terms of the promissory note, we will pay interest on the outstanding principal amount at a rate of one-monthone month LIBOR plus 1.97% per annum. The obligations under the promissory note are secured pursuant to a Loan and Aircraft Security Agreement with Banc of America Leasing & Capital, LLC, which grants the lender a first priority security interest in the aircraft. At September 30, 2017,2020, the outstanding principal amount of the promissory note was $5.0 million. As of September 30, 2017,$3.5 million, and the aircraft had a carrying amount of $6.6$4.6 million. At December 31, 2019, the outstanding principal amount of the promissory note was $3.9 million, and the aircraft had a carrying amount of $5.1 million.
8. Restructuring Charges
Restructuring charges for the three and nine months ended September 30, 2020 were $0.1 million and $1.8 million, respectively. The $0.1 million charge recognized in the third quarter of 2020 primarily related to rent and related expenses, net of sublease income, for vacated office spaces. Restructuring charges recognized in the first nine months of 2020 include a $1.2 million accrual for the termination of a third-party advisor agreement, $0.3 million related to workforce reductions to better align resources with market demand, $0.2 million related to rent and related expenses, net of sublease income, for vacated office spaces, and $0.1 million related to workforce reductions in our corporate operations.
Restructuring charges for the three and nine months ended September 30, 2019 were $0.1 million and $2.2 million, respectively. The $0.1 million charge recognized in the third quarter of 2019 primarily related to workforce reductions as we continued to better align resources with market demand. During the nine months ended September 30, 2019, we exited a portion of our Lake Oswego, Oregon corporate office resulting in a $0.7 million lease impairment charge on the operating lease right-of-use asset and leasehold improvements and $0.2 million of accelerated depreciation on furniture and fixtures in that office. Additionally, during the nine months ended September 30, 2019, we exited the remaining portion of our Middleton, Wisconsin office and an office space in Houston, Texas, resulting in restructuring charges of $0.4 million and $0.1 million, respectively, which primarily consisted of accelerated depreciation on furniture and fixtures in those offices. The restructuring charges for the nine months ended September 30, 2019 also include $0.2 million related to workforce reductions as we continue to better align resources with market demand and $0.2 million related to workforce reductions in our corporate operations.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
9. Restructuring Charges
Restructuring charges for the three and nine months ended September 30, 2017 totaled $1.3 million and $5.3 million, respectively. The $1.3 million charge incurred in the third quarter of 2017 primarily related to the accrual of remaining lease obligations, net of estimated sublease income, due to relocating our San Francisco office to a smaller space and consolidating our New York offices in the third quarter of 2017, and accelerated depreciation on leasehold improvements for our San Francisco office. The $5.3 million of restructuring charges incurred in the first nine months of 2017 primarily consisted of $2.5 million related to the accrual of remaining lease obligations, net of estimated sublease income, due to relocating our San Francisco office to a smaller space and consolidating our Chicago and New York offices in the first nine months of 2017, and accelerated depreciation on leasehold improvements for our San Francisco office, $2.0 million related to workforce reductions in our Healthcare segment to better align our resources with market demand, and $0.4 million related to workforce reductions in our corporate operations primarily to adjust our infrastructure to align with the decreased workforce in the Healthcare segment.
Restructuring charges for the three and nine months ended September 30, 2016 totaled $1.0 million and $4.1 million, respectively. The $1.0 million charge incurred in the third quarter of 2016 primarily related to updated lease assumptions of our Washington, D.C. space vacated in the fourth quarter of 2014. The $4.1 million of restructuring charges incurred in the first nine months of 2016 primarily consisted of $1.5 million related to updated assumptions for lease accruals for the Washington, D.C. space vacated in the fourth quarter of 2014, $1.2 million related to workforce reductions in our Healthcare segment to better align resources with market demand, $0.9 million related to workforce reductions in our corporate operations as we adjusted our infrastructure to align with our Huron Legal divestiture, and $0.2 million related to the wind down of our foreign consulting operations based in the Middle East.
The table below sets forth the changes in the carrying amount of our restructuring charge liability by restructuring type for the nine months ended September 30, 2017.2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| Employee Costs | | Office Space Reductions | | Other | | Total |
Balance as of December 31, 2019 | $ | 68 | | | $ | 91 | | | $ | 0 | | | $ | 159 | |
Additions | 412 | | | 0 | | | 1,188 | | | 1,600 | |
Payments | (477) | | | 0 | | | (264) | | | (741) | |
Adjustments | 4 | | | (6) | | | 0 | | | (2) | |
Balance as of September 30, 2020 | $ | 7 | | | $ | 85 | | | $ | 924 | | | $ | 1,016 | |
|
| | | | | | | | | | | | | | | |
| Employee Costs | | Office Space Reductions | | Other | | Total |
Balance as of December 31, 2016 | $ | 5,182 |
| | $ | 5,773 |
| | $ | 24 |
| | $ | 10,979 |
|
Additions (1) | 2,889 |
| | 2,445 |
| | 110 |
| | 5,444 |
|
Payments | (7,226 | ) | | (2,047 | ) | | 5 |
| | (9,268 | ) |
Adjustments (1) | (117 | ) | | (1,087 | ) | | (78 | ) | | (1,282 | ) |
Non-cash items | (46 | ) | | (119 | ) | | (61 | ) | | (226 | ) |
Balance as of September 30, 2017 | $ | 682 |
| | $ | 4,965 |
| | $ | — |
| | $ | 5,647 |
|
| |
(1) | Additions and adjustments for the nine months ended September 30, 2017 include a restructuring gain of $1.1 million related to updated lease assumptions for vacated office spaces directly related to discontinued operations. Refer to Note 4 "Discontinued Operations" for additional information on our discontinued operations. |
As ofThe restructuring charge liability related to employee costs at September 30, 2017, our2020 is expected to be paid in the next 12 months and is included as a component of accrued payroll and related benefits. The $0.1 million restructuring charge liability related to office space reductions of $5.0 million represented the present value of remaining lease payments, net of estimated sublease income, primarily for our vacated office spaces in Washington, D.C., Houston, San Francisco, and Chicago. This restructuring charge liabilityat September 30, 2020 is included as a component of accrued expenses and other current liabilities and deferred compensation and other liabilities. All of the $0.7The $0.9 million other restructuring charge liability related to employee costs at September 30, 20172020 is related to the termination of a third-party advisor agreement and is expected to be paid inover the next 12 months. The restructuring charge liability related to employee costs28 months and is included as a component of accrued payrollexpenses and related benefits.other current liabilities and deferred compensation and other liabilities.
10.9. Derivative Instruments and Hedging Activity
On April 4, 2013, we entered into a forward amortizing interest rate swap agreement effective March 31, 2014 which ended August 31, 2017. We entered into this derivative instrument to hedge against the interest rate risks of our variable-rate borrowings. The swap had an initial notional amount of $60.0 million and amortized quarterly until April 2016. In April 2016, the notional amount of this interest rate swap increased to $86.0 million and continued to amortize quarterly until it expired in August 2017. Under the terms of the interest rate swap agreement, we received from the counterparty interest on the notional amount based on one-month LIBOR and we paid to the counterparty a fixed rate of 0.985%.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
On June 22, 2017, we entered into a forward interest rate swap agreement effective August 31, 2017 and ending August 31, 2022, with a notional amount of $50.0 million. We entered into this derivative instrument to continue to hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-monthone month LIBOR and we pay to the counterparty a fixed rate of 1.900%.
On January 30, 2020, we entered into a forward interest rate swap agreement effective December 31, 2019 and ending December 31, 2024, with a notional amount of $50.0 million. We entered into this derivative instrument to further hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one month LIBOR and we pay to the counterparty a fixed rate of 1.500%.
On March 16, 2020, we entered into a forward interest rate swap agreement effective February 28, 2020 and ending February 28, 2025, with a notional amount of $100.0 million. We entered into this derivative instrument to further hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one month LIBOR and we pay to the counterparty a fixed rate of 0.885%.
We recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. We have designated these derivative instruments as cash flow hedges. Therefore, changes in the fair value of the derivative instruments are recorded to other comprehensive income (“OCI”) to the extent effective and reclassified into interest expense upon settlement. The ineffective portion of the change in fair value of the derivative instruments is recognized in interest expense. Our interest rate swap agreement was effective during the three and nine months ended September 30, 2017. As of September 30, 2017,2020, it was anticipated that $0.1$1.7 million of the losses, net of tax, currently recorded in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.
The table below sets forth additional information relating to ourthe interest rate swaps designated as a cash flow hedging instrument as of September 30, 20172020 and December 31, 2016.2019.
|
| | | | | | | | |
| | Fair Value (Derivative Asset and Liability) |
Balance Sheet Location | | September 30, 2017 | | December 31, 2016 |
Other non-current assets | | $ | 141 |
| | $ | — |
|
Accrued expenses | | $ | 200 |
| | $ | 54 |
|
| | | | | | | | | | | | | | |
| | Fair Value (Derivative Asset and Liability) |
Balance Sheet Location | | September 30, 2020 | | December 31, 2019 |
| | | | |
| | | | |
Accrued expenses and other current liabilities | | $ | 1,977 | | | $ | 159 | |
Deferred compensation and other liabilities | | $ | 3,475 | | | $ | 387 | |
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 on our consolidated balance sheet.
We do not use derivative instruments for trading or other speculative purposes. Refer to Note 12 “Other Comprehensive Income (Loss)” for additional information on our derivative instrument.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
We do not use derivative instruments for trading or other speculative purposes. Refer to Note 11 “Other Comprehensive Income (Loss)” for additional information on our derivative instruments.
11.
10. 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. |
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 September 30, 20172020 and December 31, 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
September 30, 2020 | | | | | | | | |
Assets: | | | | | | | | |
| | | | | | | | |
Convertible debt investment | | $ | — | | | $ | — | | | $ | 61,122 | | | $ | 61,122 | |
Deferred compensation assets | | — | | | 30,477 | | | — | | | 30,477 | |
Total assets | | $ | — | | | $ | 30,477 | | | $ | 61,122 | | | $ | 91,599 | |
Liabilities: | | | | | | | | |
| | | | | | | | |
Interest rate swaps | | $ | — | | | $ | 5,452 | | | $ | — | | | $ | 5,452 | |
Total liabilities | | $ | — | | | $ | 5,452 | | | $ | 0 | | | $ | 5,452 | |
December 31, 2019 | | | | | | | | |
Assets: | | | | | | | | |
| | | | | | | | |
Convertible debt investment | | $ | — | | | $ | — | | | $ | 49,542 | | | $ | 49,542 | |
Deferred compensation assets | | — | | | 27,445 | | | — | | | 27,445 | |
Total assets | | $ | — | | | $ | 27,445 | | | $ | 49,542 | | | $ | 76,987 | |
Liabilities: | | | | | | | | |
Interest rate swap | | $ | — | | | $ | 546 | | | $ | 0 | | | $ | 546 | |
Total liabilities | | $ | — | | | $ | 546 | | | $ | 0 | | | $ | 546 | |
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.
Convertible debt investment: In 2014 and 2015, we invested $27.9 million, in the form of zero coupon convertible debt (the "initial convertible
notes"), 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. In the first quarter of 2020, we invested an additional $13.0 million, in the form of 1.69% convertible debt with a senior liquidation preference to the initial convertible notes (the "additional convertible note"); and amended our initial convertible notes to include a coupon rate of 1.69% and extend the maturity date to January 17, 2024, which coincides with the maturity date of the additional convertible note.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
September 30, 2017 | | | | | | | |
Assets: | | | | | | | |
Promissory note | $ | — |
| | $ | — |
| | $ | 2,311 |
| | $ | 2,311 |
|
Convertible debt investment | — |
| | — |
| | 31,937 |
| | 31,937 |
|
Deferred compensation assets | — |
| | 17,170 |
| | — |
| | 17,170 |
|
Total assets | $ | — |
| | $ | 17,170 |
| | $ | 34,248 |
| | $ | 51,418 |
|
Liabilities: | | | | | | | |
Interest rate swap | $ | — |
| | $ | 59 |
| | $ | — |
| | $ | 59 |
|
Contingent consideration for business acquisitions | — |
| | — |
| | 22,469 |
| | 22,469 |
|
Total liabilities | $ | — |
| | $ | 59 |
| | $ | 22,469 |
| | $ | 22,528 |
|
December 31, 2016 | | | | | | | |
Assets: | | | | | | | |
Promissory note | $ | — |
| | $ | — |
| | $ | 2,325 |
| | $ | 2,325 |
|
Convertible debt investment | — |
| | — |
| | 34,675 |
| | 34,675 |
|
Deferred compensation assets | — |
| | 16,408 |
| | — |
| | 16,408 |
|
Total assets | $ | — |
| | $ | 16,408 |
| | $ | 37,000 |
| | $ | 53,408 |
|
Liabilities: | | | | | | | |
Interest rate swap | $ | — |
| | $ | 54 |
| | $ | — |
| | $ | 54 |
|
Contingent consideration for business acquisitions | — |
| | — |
| | 8,827 |
| | 8,827 |
|
Total liabilities | $ | — |
| | $ | 54 |
| | $ | 8,827 |
| | $ | 8,881 |
|
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, we concluded the appropriate accounting treatment to be that of 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, 2024, 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%, and the concluded equity volatility of 42.5%, all of which are Level 3 inputs. The valuation of our investment as of December 31, 2019 takes into consideration the equity value indication as well as the dilutive impact of the convertible debt issued by Shorelight in the first quarter of 2020, the terms of which were known or knowable as of December 31, 2019. 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 on our consolidated balance sheets.
The table below sets forth the changes in the balance of the convertible debt investment for the nine months ended September 30, 2020.
| | | | | | | | |
| | Convertible Debt Investment |
Balance as of December 31, 2019 | | $ | 49,542 | |
Purchases | | 13,000 | |
Change in fair value of convertible debt investment | | (1,420) | |
Balance as of September 30, 2020 | | $ | 61,122 | |
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 on our consolidated balance sheet.sheets. Realized and unrealized gains (losses) from the deferred compensation assets are recorded to other income (expense), net in our consolidated statements of operations.
Financial assets and liabilities not recorded at fair value are as follows:
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Interest rate swaps: The fair values of our interest rate swaps were derived using estimates to settleIn 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 discount rates reflecting the risks involved.
Promissory note: As part of the consideration received for the sale of our Accounting Advisory practice on December 30, 2011, we received a $3.5 million promissory note payable over four years. During the secondfourth quarter of 2014, we agreed to amend and restate the note such that principal payments will be paid to us annually based on the amount of excess cash flows earned each year by the maker of the note until the maturity date of December 31, 2018, at which time the remaining principal balance and any accrued interest is due. The fair value of the note is based on the net present value of the projected cash flows using a discount rate of 17%, which accounts for the risks associated with the note. This fair value measurement is based on significant inputs not observable in the market and thus represent Level 3 inputs. As of September 30, 2017, $0.2 million is recorded in prepaid expenses and other current assets and represents the present value of the payments expected to be received in the next 12 months, and the remaining $2.1 million is recorded in other non-current assets.
The table below sets forth the changes in the balance of the promissory note for the nine months ended September 30, 2017. |
| | | | |
| | Promissory Note |
Balance as of December 31, 2016 | | $ | 2,325 |
|
Interest payments received | | (140 | ) |
Principal payment received | | (177 | ) |
Change in fair value of promissory note | | 303 |
|
Balance as of September 30, 2017 | | $ | 2,311 |
|
Convertible debt investment: In 2014 and 2015,2019, we invested $27.9$5.0 million, in the form of zero coupon convertible debt,preferred stock, in Shorelight Holdings, LLC (“Shorelight”Medically Home Group, Inc. ("Medically Home"), the parent company of Shorelight Education, 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 notes will mature on July 1, 2020, unless converted earlier.
healthcare technology-enabled services company. To determine the appropriate accounting treatment for our investment, we performed a variable interest entity (“VIE”)VIE analysis and concluded that ShorelightMedically Home does not meet the definition of a VIE. We also reviewed the characteristics of our investment to confirm that the convertible notes arepreferred 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 available-for-sale debt security.
Theequity 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 fair value with unrealized holding gainscost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment in Medically Home. On a quarterly basis, we review the information available to determine whether an orderly and losses excluded from earningsobservable transaction for the same or similar equity instrument occurred, and reported in other comprehensive income. We estimatedremeasure the fair value of our investmentthe preferred stock using a Monte Carlo simulation model, cash flow projections discounted at a risk-adjusted rate, and certain assumptions related to equity volatility, default probability, and recovery rate, 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 investment.
The table below sets forth thesuch identified transactions, with changes in the balance of the convertible debt investment for the nine months ended September 30, 2017. |
| | | | |
| | Convertible Debt Investment |
Balance as of December 31, 2016 | | $ | 34,675 |
|
Change in fair value of convertible debt investment | | (2,738 | ) |
Balance as of September 30, 2017 | | $ | 31,937 |
|
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 achieved 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 measurementsrecorded in consolidated statement of operations. Following our contingent
purchase, there has been no impairment, nor any observable price changes to our investment.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
consideration are our measures of the estimated payouts based on internally generated financial projections on a probability-weighted basis and discount rates, which typically reflect a risk-free rate. 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. Refer to Note 5 “Acquisitions” for information on the acquisitions completed in 2017. The table below sets forth the changes in the balance of the contingent consideration for business acquisitions for the nine months ended September 30, 2017. |
| | | | |
| | Contingent Consideration for Business Acquisitions |
Balance as of December 31, 2016 | | $ | 8,827 |
|
Acquisitions | | 15,489 |
|
Payments | | (1,938 | ) |
Remeasurement of contingent consideration for business acquisitions | | (222 | ) |
Unrealized loss due to foreign currency translation | | 313 |
|
Balance as of September 30, 2017 | | $ | 22,469 |
|
Financial assets and liabilities not recorded at fair value are as follows:
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 87 “Financing Arrangements” for additional information on our senior secured credit facility.
Promissory Note due 2024
The carrying value of our promissory note due 2024 is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the promissory note bears interest at rates based on current market rates as set forth in the terms of the promissory note. Refer to Note 87 “Financing Arrangements” for additional information on our promissory note due 2024.
Convertible Notes
The carrying amountCash and estimated fair value of the Convertible Notes are as follows:
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
1.25% convertible senior notes due 2019 | $ | 230,834 |
| | $ | 233,595 |
| | $ | 224,065 |
| | $ | 245,018 |
|
The differences between the $250 million principal amount of the Convertible NotesCash Equivalents and the carrying amounts shown above represent the unamortized debt discount and issuance costs. As of September 30, 2017 and December 31, 2016, the carrying value of the equity component of $39.3 million was unchanged from the date of issuance. Refer to Note 8 “Financing Arrangements” for additional information on our Convertible Notes. The estimated fair value of the Convertible Notes was determined based on the quoted bid price of the Convertible Notes in an over-the-counter market, which is a Level 2 input, on the last day of trading for the quarters ended September 30, 2017 and December 31, 2016.
Based on the closing price of our common stock of $34.30 on September 30, 2017, the if-converted value of the Convertible Notes was less than the principal amount.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
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.
12.11. Other Comprehensive Income (Loss)
The tablestable below setsets forth the components of other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 20172020 and 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| Before Taxes | | Tax (Expense) Benefit | | Net of Taxes | | Before Taxes | | Tax (Expense) Benefit | | Net of Taxes |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | 381 | | | $ | 0 | | | $ | 381 | | | $ | (630) | | | $ | 0 | | | $ | (630) | |
Unrealized gain (loss) on investment | $ | 6,598 | | | $ | (1,713) | | | $ | 4,885 | | | $ | 1,586 | | | $ | (418) | | | $ | 1,168 | |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | |
Change in fair value | $ | (903) | | | $ | 234 | | | $ | (669) | | | $ | (158) | | | $ | 42 | | | $ | (116) | |
Reclassification adjustments into earnings | 576 | | | (150) | | | 426 | | | (46) | | | 13 | | | (33) | |
Net unrealized gain (loss) | $ | (327) | | | $ | 84 | | | $ | (243) | | | $ | (204) | | | $ | 55 | | | $ | (149) | |
Other comprehensive income (loss) | $ | 6,652 | | | $ | (1,629) | | | $ | 5,023 | | | $ | 752 | | | $ | (363) | | | $ | 389 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 |
| Before Taxes | | Tax (Expense) Benefit | | Net of Taxes | | Before Taxes | | Tax (Expense) Benefit | | Net of Taxes |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | 609 |
| | $ | — |
| | $ | 609 |
| | $ | 50 |
| | $ | — |
| | $ | 50 |
|
Unrealized loss on investment | $ | (3,609 | ) | | $ | 1,409 |
| | $ | (2,200 | ) | | $ | (3,329 | ) | | $ | 1,291 |
| | $ | (2,038 | ) |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | |
Change in fair value | $ | 41 |
| | $ | (16 | ) | | $ | 25 |
| | $ | 96 |
| | $ | (35 | ) | | $ | 61 |
|
Reclassification adjustments into earnings | (3 | ) | | 1 |
| | (2 | ) | | 101 |
| | (41 | ) | | 60 |
|
Net unrealized gain | $ | 38 |
| | $ | (15 | ) | | $ | 23 |
| | $ | 197 |
| | $ | (76 | ) | | $ | 121 |
|
Other comprehensive income (loss) | $ | (2,962 | ) | | $ | 1,394 |
| | $ | (1,568 | ) | | $ | (3,082 | ) | | $ | 1,215 |
| | $ | (1,867 | ) |
| | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| Before Taxes | | Tax (Expense) Benefit | | Net of Taxes | | Before Taxes | | Tax (Expense) Benefit | | Net of Taxes | | Before Taxes | | Tax (Expense) Benefit | | Net of Taxes | | Before Taxes | | Tax (Expense) Benefit | | Net of Taxes |
Other comprehensive income (loss): | | | | | | | | | | | | Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | 1,835 |
| | $ | — |
| | $ | 1,835 |
| | $ | 52 |
| | $ | — |
| | $ | 52 |
| Foreign currency translation adjustments | $ | (294) | | | $ | 0 | | | $ | (294) | | | $ | (673) | | | $ | 0 | | | $ | (673) | |
Unrealized loss on investment | $ | (2,738 | ) | | $ | 1,069 |
| | $ | (1,669 | ) | | $ | (1,899 | ) | | $ | 736 |
| | $ | (1,163 | ) | |
Unrealized gain (loss) on investment | | Unrealized gain (loss) on investment | $ | (1,420) | | | $ | 369 | | | $ | (1,051) | | | $ | 10,514 | | | $ | (2,774) | | | $ | 7,740 | |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | | Unrealized gain (loss) on cash flow hedges: | |
Change in fair value | $ | (41 | ) | | $ | 16 |
| | $ | (25 | ) | | $ | (367 | ) | | $ | 146 |
| | $ | (221 | ) | Change in fair value | $ | (5,815) | | | $ | 1,510 | | | $ | (4,305) | | | $ | (1,164) | | | $ | 308 | | | $ | (856) | |
Reclassification adjustments into earnings | 36 |
| | (15 | ) | | 21 |
| | 323 |
| | (129 | ) | | 194 |
| Reclassification adjustments into earnings | 909 | | | (237) | | | 672 | | | (192) | | | 50 | | | (142) | |
Net unrealized loss | $ | (5 | ) | | $ | 1 |
| | $ | (4 | ) | | $ | (44 | ) | | $ | 17 |
| | $ | (27 | ) | |
Net unrealized gain (loss) | | Net unrealized gain (loss) | $ | (4,906) | | | $ | 1,273 | | | $ | (3,633) | | | $ | (1,356) | | | $ | 358 | | | $ | (998) | |
Other comprehensive income (loss) | $ | (908 | ) | | $ | 1,070 |
| | $ | 162 |
| | $ | (1,891 | ) | | $ | 753 |
| | $ | (1,138 | ) | Other comprehensive income (loss) | $ | (6,620) | | | $ | 1,642 | | | $ | (4,978) | | | $ | 8,485 | | | $ | (2,416) | | | $ | 6,069 | |
The before tax amounts reclassified from accumulated other comprehensive income related to our cash flow hedges are recorded to interest expense, net of interest income.
Accumulated other comprehensive income, net of tax, includes the following components:
|
| | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Available-for-Sale Investment | | Cash Flow Hedges | | Total |
Balance, December 31, 2016 | $ | (453 | ) | | $ | 4,088 |
| | $ | (20 | ) | | $ | 3,615 |
|
Current period change | 1,835 |
| | (1,669 | ) | | (4 | ) | | 162 |
|
Balance, September 30, 2017 | $ | 1,382 |
| | $ | 2,419 |
| | $ | (24 | ) | | $ | 3,777 |
|
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Accumulated other comprehensive income, net of tax, includes the following components:
13. | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Available-for-Sale Investment | | Cash Flow Hedges | | Total |
Balance, December 31, 2019 | $ | (566) | | | $ | 15,882 | | | $ | (380) | | | $ | 14,936 | |
Current period change | (294) | | | (1,051) | | | (3,633) | | | (4,978) | |
Balance, September 30, 2020 | $ | (860) | | | $ | 14,831 | | | $ | (4,013) | | | $ | 9,958 | |
12. Income Taxes
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act is a nearly $2 trillion emergency economic stimulus package in response to the COVID-19 outbreak, which among other items, includes income tax provisions relating to net operating loss carryback periods and technical corrections to tax depreciation methods for qualified improvement property. As a result of the enactment of this legislation during the first quarter of 2020, we recorded a tax benefit of $0.8 million related to the remeasurement of a portion of our income tax receivable due to the ability to apply the federal net operating loss incurred in 2018 to prior year income for a refund at a higher tax rate in the carryback period.
We apply an estimated annual effective tax rate to our year-to-date operating results to determine the interim provision for income tax expense. In addition, we recognize taxes related to unusual or infrequent items or resulting from a change in judgment regarding a position taken in a prior year as discrete items in the interim period in which the event occurs.
For the three months ended September 30, 2017,2020, our effective tax rate was (92.4)%17.7% as we recognized income tax expense from continuing operations of $2.4 million on income from continuing operations of $13.5 million. The effective tax rate of 17.7% was more favorable than the statutory rate, inclusive of state income taxes, of 26.0%, primarily due to the current year-to-date pre-tax losses and the impact during the quarter of certain nondeductible expense items, including the nondeductible portion of the goodwill impairment charges, based on the attribution of those expenses to the quarter in accordance with the allocation of income tax expense on a current year-to-date basis. The effective tax rate also reflected the positive impact of certain federal tax credits.
For the three months ended September 30, 2019, our effective tax rate was 15.0% as we recognized income tax expense from continuing operations of $2.4 million on income from continuing operations of $16.1 million. The effective tax rate of 15.0% was more favorable than the statutory rate, inclusive of state income taxes, of 26.4%, primarily due to a discrete tax benefit for U.S. federal return to provision adjustments related to the 2018 corporate income tax return. In addition, we recognized a discrete tax benefit related to a previously unrecognized tax benefit due to the expiration of statute of limitations on our "check-the-box" election made in 2015 to treat certain wholly-owned foreign subsidiaries as disregarded entities for U.S. federal income tax purposes.
For the nine months ended September 30, 2020, our effective tax rate was 23.5% as we recognized an income tax benefit from continuing operations of $2.0$5.4 million on incomea loss from continuing operations of $2.1$23.0 million. The effective tax rate of 23.5% was less favorable than the statutory rate, inclusive of state income taxes, of 26.0%, primarily due to certain nondeductible business expenses and the nondeductible portion of the goodwill impairment charges recorded during the first quarter of 2020. These unfavorable items were partially offset by a discrete tax benefit for share-based compensation awards that vested primarily during the first quarter, the positive impact of certain federal tax credits, and the discrete tax benefit for the remeasurement of a portion of our income tax receivable as a result of the enactment of the CARES Act in the first quarter of 2020.
For the third quarter of 2016,nine months ended September 30, 2019, our effective tax rate was 37.2%20.8% as we recognized income tax expense from continuing operations of $7.3 million on income from continuing operations of $19.6$34.9 million. The effective tax rate for the three months ended September 30, 2017of 20.8% was more favorable than the statutory rate, inclusive of state income taxes, of 26.4%, primarily due to recognizing a $2.7 milliondiscrete tax benefit recognized primarily in the third quarter of 2019 related to U.S. federal and foreign return to provision adjustments. In addition, we recognized a discrete tax benefit in the third quarter of 2019 related to a previously unrecognized tax benefit fromdue to the expiration of statute of limitations on our "check-the-box" election made in 20142015 to treat one of ourcertain wholly-owned foreign subsidiaries as a disregarded entityentities for U.SU.S. federal income tax purposes. This benefit was partially offset by $0.6 million
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in the third quarter of 2017 to correct an error that occurred in the second quarter of 2017. During the third quarter of 2017, we also recorded a $3.1 million adjustment to decrease deferred income taxes, net and increase income tax receivable on our consolidated balance sheet to correct an error that occurred in the second quarter of 2017. These errors have no impact on full year 2017 results, and we concluded that the impact of both errors was not material to the second and third quarter financial statements. The effective tax rate for the three months ended September 30, 2016 was lower than the statutory rate, inclusive of state income taxes, primarily due to non-taxable income, valuation allowance reductions, and certain credits and deductions, partially offset by non-deductible business expenses.thousands, except per share amounts)
For the nine months ended September 30, 2017, our effective tax rate was 26.1% as we recognized income tax benefit from continuing operations of $49.7 million on a loss from continuing operations of $190.9 million. For the nine months ended September 30, 2016, our effective tax rate was 35.6% as we recognized income tax expense of $19.5 million on income from continuing operations of $54.8 million. The effective tax rate for the nine months ended September 30, 2017 was less favorable than the statutory rate, inclusive of state income taxes, primarily due to the $61.2 million non-deductible portion of the goodwill impairment charge recorded in the second quarter of 2017, as well as $1.8 million of discrete tax expense for share-based compensation related to the adoption of ASU 2016-09 Improvements to Employee Share-Based Payment Accounting. Refer to Note 3 "New Accounting Pronouncements" for additional information on the adoption of ASU 2016-09. These unfavorable discrete items were partially offset by a $2.7 million tax benefit recorded in the third quarter of 2017 related to a previously unrecognized tax benefit from our 2014 "check-the-box" election. The effective tax rate for the nine months ended September 30, 2016 was lower than the statutory rate, inclusive of state income taxes, primarily due to the year-to-date impact of a discrete favorable adjustment to our state tax rate in the second quarter of 2016, non-taxable income, valuation allowance reductions, certain credits and deductions, and a discrete tax benefit related to share-based compensation, partially offset by non-deductible business expenses.(Unaudited)
As of September 30, 2017, we had $0.8 million of unrecognized tax benefits which would affect the effective tax rate of continuing operations if recognized.
14.13. 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 that, in the current opinion of management, could 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 $2.7 million and $4.8$1.7 million were outstanding at both September 30, 20172020 and December 31, 2016, respectively,2019, primarily 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 September 30, 20172020 and December 31, 2016,2019, the total estimated fair value of our contingent consideration liabilitiesliability was $22.5 million and $8.8 million, respectively.zero.
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
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
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.
15.14. 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 three3 operating segments, which are our reportable segments: Healthcare, Education, and Business Advisory.
During the second quarter of 2017, we reorganized our internal financial reporting structure, which management uses to assess performance and allocate resources, by moving our Life Sciences practice from the Education and Life Sciences segment to the Business Advisory, segment. The remaining Education and Life Sciences segment is now referred to as the Education segment. While our consolidated results have not been impacted, we have restated our historical segment information for consistent presentation.Education.
•Healthcare
Our Healthcare segment provides advisory services - from strategy setting through implementation -has a depth of expertise in the areas of organizational and resource alignment, clinical transformation, financial and operational performance, patientimprovement, care transformation, culture and caregiver engagement,organizational excellence, strategy, and technology implementation and optimization.analytics. We serve national and regional hospitals, and integrated health systems, academic medical centers, community hospitals, and medical groups. Our solutions help clients evolve and adapt to the rapidly changing healthcare environment and achieve growth, optimize performance, enhance profitability, improve quality and clinical outcomes, align leaders, improve organizational culture, and drive physician, patient, and employee engagement across the enterprise.enterprise to deliver better consumer outcomes.
Education
We help organizations transform and innovate their delivery model to focus on patient wellness by improving quality outcomes, minimizing care variation and fundamentally improving patient and population health. Our Education segment provides management consulting and technology solutions to higher education institutions and academic medical centers. Weconsultants partner with clients to address challenges relatinghelp build and sustain today’s business to businessinvest in the future by reducing complexity, improving operational efficiency and growing market share. We enable the healthcare of the future by identifying, integrating and optimizing technology strategy, financial management, operationalinvestments to collect data that transforms care delivery and improves patient outcomes. We also develop future leaders capable of driving meaningful cultural and organizational effectiveness, research administration,change and regulatory compliance. Our institutional strategy, market research, budgeting and financial management, business operations and student lifecycle management solutions align missions with business priorities, improve quality and reduce costs institution-wide. Our technology strategy, enterprise applications, and analytic solutionswho transform and optimize operations, deliver time and cost savings, and enhance the studentconsumer experience. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance.
•Business Advisory
Our Business Advisory segment provides services to large and middle market and large organizations, not-for-profit organizations, lending institutions, law firms, investment banks, and private equity firms.firms, and not-for-profit organizations, including higher education and healthcare institutions. We assist clients in a broad range of industries and across the spectrum from healthy, well-capitalized companies to organizations in transition, as well as creditors, equity owners, and other key constituents. Our Enterprise Solutions and Analytics experts advise, deliver, and optimize technology and analytics solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our Business Advisory professionalsexperts resolve complex business issues and enhance client enterprise value through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. Our Enterprise Solutions and Analytics professionals deliver technology and analytic solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our expertise in full-service enterprise performance management (EPM), enterprise resource planning (ERP), business intelligence and analytics, customer relationship management (CRM), and data management services helps clients identify and execute on business and technology strategies to drive results and gain a competitive advantage. Our Strategy and Innovation professionals collaborate with clients across a range of industries to identify new growth opportunities, build new ventures and capabilities, and accelerate organizational change. Our Life Sciences professionals providestrategic
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
organizational change. Our Life Sciences professionals providestrategic solutions to help pharmaceutical, medical device, and biotechnology companies deliver more value to patients, payers, and providers, and comply with regulations.
•Education
Our Education segment provides consulting and technology solutions to higher education institutions and academic medical centers. We collaborate with clients to address challenges relating to business and technology strategy, financial and operational excellence, student success, research administration, and regulatory compliance. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance. Our technology strategy, enterprise applications, and analytics solutions transform and optimize operations, deliver time and cost savings, and enhance the student experience. Our institutional strategy, budgeting and financial management, and business operations align missions with business priorities, improve quality, and reduce costs institution-wide. Our student solutions improve attraction, retention and graduation rates, increase student satisfaction and help generate quality outcomes.
Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative expenses that are incurred directly by the segment. Unallocated corporate costs include 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 costs for corporate office support, certain office facility costs, costs relating to accounting and finance, human resources, legal, marketing, information technology, and Company-widecompany-wide business development functions, as well as costs related to overall corporate management.
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 nine months ended September 30, 20172020 and 2016,2019, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Healthcare: | | | | | | | |
Revenues | $ | 87,406 | | | $ | 100,000 | | | $ | 268,340 | | | $ | 295,621 | |
Operating income | $ | 25,610 | | | $ | 32,863 | | | $ | 70,831 | | | $ | 94,058 | |
Segment operating income as a percentage of segment revenues | 29.3 | % | | 32.9 | % | | 26.4 | % | | 31.8 | % |
Business Advisory: | | | | | | | |
Revenues | $ | 66,048 | | | $ | 62,519 | | | $ | 201,423 | | | $ | 183,602 | |
Operating income | $ | 10,780 | | | $ | 11,942 | | | $ | 37,306 | | | $ | 32,997 | |
Segment operating income as a percentage of segment revenues | 16.3 | % | | 19.1 | % | | 18.5 | % | | 18.0 | % |
Education: | | | | | | | |
Revenues | $ | 51,850 | | | $ | 56,770 | | | $ | 176,017 | | | $ | 165,265 | |
Operating income | $ | 12,548 | | | $ | 14,413 | | | $ | 41,792 | | | $ | 43,235 | |
Segment operating income as a percentage of segment revenues | 24.2 | % | | 25.4 | % | | 23.7 | % | | 26.2 | % |
Total Company: | | | | | | | |
Revenues | $ | 205,304 | | | $ | 219,289 | | | $ | 645,780 | | | $ | 644,488 | |
Reimbursable expenses | 2,860 | | | 23,636 | | | 25,133 | | | 65,787 | |
Total revenues and reimbursable expenses | $ | 208,164 | | | $ | 242,925 | | | $ | 670,913 | | | $ | 710,275 | |
| | | | | | | |
Segment operating income | $ | 48,938 | | | $ | 59,218 | | | $ | 149,929 | | | $ | 170,290 | |
Items not allocated at the segment level: | | | | | | | |
Other operating expenses | 29,042 | | | 32,310 | | | 87,826 | | | 105,369 | |
Litigation and other gains | 0 | | | (630) | | | (150) | | | (1,571) | |
Depreciation and amortization | 6,197 | | | 6,962 | | | 18,635 | | | 21,285 | |
Goodwill impairment charges1 | 0 | | | 0 | | | 59,816 | | | 0 | |
Other expense, net | 224 | | | 4,456 | | | 6,829 | | | 10,326 | |
Income (loss) from continuing operations before taxes | $ | 13,475 | | | $ | 16,120 | | | $ | (23,027) | | | $ | 34,881 | |
(1) The non-cash goodwill impairment charges are not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segments. We do not include the impact of goodwill impairment charges in our evaluation of segment performance.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Healthcare: | | | | | | | |
Revenues | $ | 79,582 |
| | $ | 103,425 |
| | $ | 261,261 |
| | $ | 323,531 |
|
Operating income | $ | 25,778 |
| | $ | 38,824 |
| | $ | 83,580 |
| | $ | 119,229 |
|
Segment operating income as a percentage of segment revenues | 32.4 | % | | 37.5 | % | | 32.0 | % | | 36.9 | % |
Education: | | | | | | | |
Revenues | $ | 41,422 |
| | $ | 38,621 |
| | $ | 127,629 |
| | $ | 111,816 |
|
Operating income | $ | 7,762 |
| | $ | 10,896 |
| | $ | 31,772 |
| | $ | 31,474 |
|
Segment operating income as a percentage of segment revenues | 18.7 | % | | 28.2 | % | | 24.9 | % | | 28.1 | % |
Business Advisory: | | | | | | | |
Revenues | $ | 55,372 |
| | $ | 41,354 |
| | $ | 157,753 |
| | $ | 112,801 |
|
Operating income | $ | 12,832 |
| | $ | 8,608 |
| | $ | 34,890 |
| | $ | 23,275 |
|
Segment operating income as a percentage of segment revenues | 23.2 | % | | 20.8 | % | | 22.1 | % | | 20.6 | % |
Total Company: | | | | | | | |
Revenues | $ | 176,376 |
| | $ | 183,400 |
| | $ | 546,643 |
| | $ | 548,148 |
|
Reimbursable expenses | 17,982 |
| | 19,093 |
| | 55,862 |
| | 54,636 |
|
Total revenues and reimbursable expenses | $ | 194,358 |
| | $ | 202,493 |
| | $ | 602,505 |
| | $ | 602,784 |
|
| | | | | | | |
Segment operating income | $ | 46,372 |
| | $ | 58,328 |
| | $ | 150,242 |
| | $ | 173,978 |
|
Items not allocated at the segment level: | | | | | | | |
Other operating expenses | 29,448 |
| | 26,502 |
| | 92,643 |
| | 84,595 |
|
Other losses (gains), net | 880 |
| | 494 |
| | (222 | ) | | 494 |
|
Depreciation and amortization | 9,946 |
| | 8,092 |
| | 28,549 |
| | 23,064 |
|
Goodwill impairment charge (1) | — |
| | — |
| | 209,600 |
| | — |
|
Other expense, net | 3,950 |
| | 3,687 |
| | 10,607 |
| | 11,034 |
|
Income (loss) from continuing operations before income tax expense | $ | 2,148 |
| | $ | 19,553 |
| | $ | (190,935 | ) | | $ | 54,791 |
|
The following table illustrates the disaggregation of revenues by billing arrangements, employee types, and timing of revenue recognition, including a reconciliation of the disaggregated revenues to revenues from our three operating segments for the three and nine months ended September 30, 2020 and 2019. | |
(1) | The goodwill impairment charge is not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segments. We do not include the impact of goodwill impairment charges in our evaluation of segment performance. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 51,491 | | | $ | 20,675 | | | $ | 10,958 | | | $ | 83,124 | |
Time and expense | 14,627 | | | 40,511 | | | 35,214 | | | 90,352 | |
Performance-based | 15,641 | | | 3,671 | | | 0 | | | 19,312 | |
Software support, maintenance and subscriptions | 5,647 | | | 1,191 | | | 5,678 | | | 12,516 | |
Total | $ | 87,406 | | | $ | 66,048 | | | $ | 51,850 | | | $ | 205,304 | |
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by full-time billable consultants | $ | 65,084 | | | $ | 62,340 | | | $ | 44,234 | | | $ | 171,658 | |
Revenue generated by full-time equivalents | 22,322 | | | 3,708 | | | 7,616 | | | 33,646 | |
Total | $ | 87,406 | | | $ | 66,048 | | | $ | 51,850 | | | $ | 205,304 | |
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 86,413 | | | $ | 66,048 | | | $ | 51,663 | | | $ | 204,124 | |
Revenue recognized at a point in time | 993 | | | 0 | | | 187 | | | 1,180 | |
Total | $ | 87,406 | | | $ | 66,048 | | | $ | 51,850 | | | $ | 205,304 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 158,079 | | | $ | 73,442 | | | $ | 35,530 | | | $ | 267,051 | |
Time and expense | 43,389 | | | 118,364 | | | 123,493 | | | 285,246 | |
Performance-based | 49,042 | | | 5,903 | | | 695 | | | 55,640 | |
Software support, maintenance and subscriptions | 17,830 | | | 3,714 | | | 16,299 | | | 37,843 | |
Total | $ | 268,340 | | | $ | 201,423 | | | $ | 176,017 | | | $ | 645,780 | |
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by full-time billable consultants | $ | 188,750 | | | $ | 191,566 | | | $ | 150,857 | | | $ | 531,173 | |
Revenue generated by full-time equivalents | 79,590 | | | 9,857 | | | 25,160 | | | 114,607 | |
Total | $ | 268,340 | | | $ | 201,423 | | | $ | 176,017 | | | $ | 645,780 | |
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 265,813 | | | $ | 201,423 | | | $ | 175,715 | | | $ | 642,951 | |
Revenue recognized at a point in time | 2,527 | | | 0 | | | 302 | | | 2,829 | |
Total | $ | 268,340 | | | $ | 201,423 | | | $ | 176,017 | | | $ | 645,780 | |
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 65,610 | | | $ | 24,333 | | | $ | 12,418 | | | $ | 102,361 | |
Time and expense | 12,307 | | | 35,212 | | | 39,688 | | | 87,207 | |
Performance-based | 16,313 | | | 1,614 | | | 0 | | | 17,927 | |
Software support, maintenance and subscriptions | 5,770 | | | 1,360 | | | 4,664 | | | 11,794 | |
Total | $ | 100,000 | | | $ | 62,519 | | | $ | 56,770 | | | $ | 219,289 | |
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by full-time billable consultants | $ | 72,142 | | | $ | 60,131 | | | $ | 48,928 | | | $ | 181,201 | |
Revenue generated by full-time equivalents | 27,858 | | | 2,388 | | | 7,842 | | | 38,088 | |
Total | $ | 100,000 | | | $ | 62,519 | | | $ | 56,770 | | | $ | 219,289 | |
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 98,204 | | | $ | 62,519 | | | $ | 56,274 | | | $ | 216,997 | |
Revenue recognized at a point in time | 1,796 | | | 0 | | | 496 | | | 2,292 | |
Total | $ | 100,000 | | | $ | 62,519 | | | $ | 56,770 | | | $ | 219,289 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 188,875 | | | $ | 72,693 | | | $ | 37,926 | | | $ | 299,494 | |
Time and expense | 39,345 | | | 104,325 | | | 114,122 | | | 257,792 | |
Performance-based | 50,144 | | | 2,810 | | | 0 | | | 52,954 | |
Software support, maintenance and subscriptions | 17,257 | | | 3,774 | | | 13,217 | | | 34,248 | |
Total | $ | 295,621 | | | $ | 183,602 | | | $ | 165,265 | | | $ | 644,488 | |
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by full-time billable consultants | $ | 206,508 | | | $ | 177,279 | | | $ | 144,338 | | | $ | 528,125 | |
Revenue generated by full-time equivalents | 89,113 | | | 6,323 | | | 20,927 | | | 116,363 | |
Total | $ | 295,621 | | | $ | 183,602 | | | $ | 165,265 | | | $ | 644,488 | |
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 289,452 | | | $ | 183,602 | | | $ | 164,164 | | | $ | 637,218 | |
Revenue recognized at a point in time | 6,169 | | | 0 | | | 1,101 | | | 7,270 | |
Total | $ | 295,621 | | | $ | 183,602 | | | $ | 165,265 | | | $ | 644,488 | |
(1) Full-time billable consultants consist of our full-time professionals who provide consulting services to our clients and are billable to our clients based on the number of hours worked. Full-time equivalent professionals consist of leadership coaches and their support staff within our Culture and Organizational Excellence solution, consultants who work variable schedules as needed by our clients, and full-time employees who provide software support and maintenance services to our clients.
At September 30, 20172020 one client in our Healthcare segment had a total receivable and unbilled services balance that accounted for 15.0% of our combined balance of receivables from clients, net and unbilled services, net. The outstanding balance for this client is the result of outstanding invoices due in the normal course of the contract payment terms and services performed in advance of the contract billing schedule. At December 31, 2016,2019, no single client accounted for greater than 10% of our combined balance of receivables from clients, net and unbilled services, balances.net. During the three and nine months ended September 30, 20172020 and 2016,2019, no single client generated greater than 10% of our consolidated revenues.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
15. Subsequent Event
Acquisition of ForceIQ, Inc.
On October 15, 2020, we entered into an agreement to acquire ForceIQ, Inc. ("ForceIQ"), a Salesforce Industries partner focused on helping clients drive digital transformation and innovation at scale powered by the cloud. The acquisition expands our cloud-based technology offerings within the Business Advisory segment. The results of operations of ForceIQ will be included within the Business Advisory segment from the effective close date, November 1, 2020. The acquisition of ForceIQ is not significant to our consolidated financial statements.
Fourth Quarter 2020 Restructuring Plan
On October 29, 2020, we announced a restructuring plan to reduce operating costs to address the impact of the COVID-19 pandemic on our business. The restructuring plan provides for a reduction in workforce and leased office space that is expected to result in initial restructuring charges in a range of approximately $15.5 million to $19.5 million. We do not anticipate a material revenue impact related to the restructuring actions.
The reduction in workforce impacts approximately 145 employees across all segments and corporate operations. We expect the reduction in workforce to be substantially complete by the end of the fourth quarter of 2020 and expect to incur an estimated restructuring charge in a range of approximately $3.5 million to $4.5 million related to cash payments for employee severance and benefits.
The reduction in leased office space is expected to result in estimated non-cash restructuring charges in a range of approximately $12.0 million to $15.0 million, consisting of operating lease right-of-use asset and leasehold improvement impairment charges and accelerated depreciation on other fixed assets. The non-cash restructuring charges related to the reduction in leased office space are expected to be recorded primarily in the fourth quarter of 2020. Future cash expenditures related to the leased office space are expected to continue through 2029. The exact amount and timing of the office space reductions, and the associated payments and expenses, depend on a number of factors, including our ability to terminate or modify existing lease contracts and/or enter into sublease agreements for the exited spaces to lower future cash expenditures.
In addition, in the fourth quarter of 2020, we announced our intent to divest our life sciences drug safety practice, a UK-based business that is part of the Life Sciences reporting unit within our Business Advisory segment. For the nine months ended September 30, 2020, this practice generated $1.9 million of revenue and is not significant to our consolidated financial statements. We expect the divestiture to be completed in the fourth quarter of 2020.
We believe these measures will better align delivery capacity with anticipated demand and strengthen our financial position amidst the ongoing disruption, creating a foundation from which our business can grow.
|
| | | | |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Huron,” “Company,” “we,” “us” and “our” refer to Huron Consulting Group Inc. and its subsidiaries.
Statements in this Quarterly Report on Form 10-Q that are not historical in nature, including those concerning the Company’s current expectations about its future requirements and needs,results, are “forward-looking” statements as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as “may,” “should,” “expects,” “provides,” “anticipates,” “assumes,” “can,” “will,” “meets,” “could,” “likely,” “intends,” “might,” “predicts,” “seeks,” “would,” “believes,” “estimates,” “plans,” “continues,” “guidance,” or “outlook,” or similar expressions. These forward-looking statements reflect our current expectations about our future requirements and needs, results, levels of activity, performance, or achievements. Some of the factors that could cause actual results to differ materially from the forward-looking statements contained herein include, without limitation: the impact of the COVID-19 pandemic on the economy, our clients and client demand for our services, and our ability to sell and provide services, including the measures taken by governmental authorities and businesses in response to the pandemic, which may cause or contribute to other risks and uncertainties that we face; failure to achieve expected utilization rates, billing rates, and the number of revenue-generating professionals; inability to expand or adjust our service offerings in response to market demands; our dependence on renewal of client-based services; dependence on new business and retention of current clients and qualified personnel; failure to maintain third-party provider relationships and strategic alliances; inability to license technology to and from third parties; the impairment of goodwill; various factors related to income and other taxes; difficulties in successfully integrating the businesses we acquire and achieving expected benefits from such acquisitions; risks relating to privacy, information security, and related laws and standards; and a general downturn in market conditions. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, among others, those described under Item 1A. "Risk“Risk Factors,"” in our Annual Report on Form 10-K for the year ended December 31, 20162019 and under Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q, that may cause actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. We disclaim any obligation to update or revise any forward-looking statements as a result of new information or future events, or for any other reason.
OVERVIEW
Our Business
Huron is a global professional services firm committedconsultancy that collaborates with clients to achievingdrive strategic growth, ignite innovation and navigate constant change. Through a combination of strategy, expertise and creativity, we help clients accelerate operational, digital and cultural transformation, enabling the change they need to own their future. By embracing diverse perspectives, encouraging new ideas and challenging the status quo, we create sustainable results in partnership with clients. We bring a depth of expertise in strategy, technology, operations, advisory services, and analytics to drive lasting and measurable results infor the healthcare, higher education, life sciences and commercial sectors. Through focus, passion and collaboration,organizations we provide guidance and solutions to support organizations as they contend with the changes transforming their industries and businesses.serve.
We provide professional services through three operating segments: Healthcare, Education,Business Advisory, and Business Advisory.Education.
•Healthcare
Our Healthcare segment provides advisory services - from strategy setting through implementation -has a depth of expertise in the areas of organizational and resource alignment, clinical transformation, financial and operational performance, patientimprovement, care transformation, culture and caregiver engagement,organizational excellence, strategy, and technology implementation and optimization.analytics. We serve national and regional hospitals, and integrated health systems, academic medical centers, community hospitals, and medical groups. Our solutions help clients evolve and adapt to the rapidly changing healthcare environment and achieve growth, optimize performance, enhance profitability, improve quality and clinical outcomes, align leaders, improve organizational culture, and drive physician, patient, and employee engagement across the enterprise.enterprise to deliver better consumer outcomes.
Education
We help organizations transform and innovate their delivery model to focus on patient wellness by improving quality outcomes, minimizing care variation and fundamentally improving patient and population health. Our Education segment provides management consulting and technology solutions to higher education institutions and academic medical centers. Weconsultants partner with clients to address challenges relatinghelp build and sustain today’s business to businessinvest in the future by reducing complexity, improving operational efficiency and growing market share. We enable the healthcare of the future by identifying, integrating and optimizing technology strategy, financial management, operationalinvestments to collect data that transforms care delivery and improves patient outcomes. We also develop future leaders capable of driving meaningful cultural and organizational effectiveness, research administration,change and regulatory compliance. Our institutional strategy, market research, budgeting and financial management, business operations and student lifecycle management solutions align missions with business priorities, improve quality and reduce costs institution-wide. Our technology strategy, enterprise applications, and analytic solutionswho transform and optimize operations, deliver time and cost savings, and enhance the studentconsumer experience. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance.
•Business Advisory
Our Business Advisory segment provides services to large and middle market and large organizations, not-for-profit organizations, lending institutions, law firms, investment banks, and private equity firms.firms, and not-for-profit organizations, including higher education and healthcare institutions. We assist clients in a broad range of industries and across the spectrum from healthy, well-capitalized companies to organizations in transition, as well as creditors, equity owners, and other key constituents. Our Business Advisory professionals resolve complex business issues and enhance client enterprise value through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. Our Enterprise Solutions and Analytics professionalsexperts advise, deliver, and optimize technology and analyticanalytics solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our expertise in full-serviceBusiness Advisory experts resolve complex business issues and enhance client enterprise performance management (EPM), enterprise resource planning (ERP), business intelligencevalue
through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and analytics, customer relationship management (CRM),turnaround, valuation, and data management services helps clients identify and execute on business and technology strategies to drive results and gain a competitive advantage.dispute advisory. Our Strategy and Innovation professionals collaborate with clients across a range of industries to identify new growth opportunities, build new ventures and capabilities, and accelerate organizational change. Our Life Sciences professionals providestrategic solutions to help pharmaceutical, medical device, and biotechnology companies deliver more value to patients, payers, and providers, and comply with regulations.
Segment Reorganization•Education
DuringOur Education segment provides consulting and technology solutions to higher education institutions and academic medical centers. We collaborate with clients to address challenges relating to business and technology strategy, financial and operational excellence, student success, research administration, and regulatory compliance. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance. Our technology strategy, enterprise applications, and analytics solutions transform and optimize operations, deliver time and cost savings, and enhance the secondstudent experience. Our institutional strategy, budgeting and financial management, and business operations align missions with business priorities, improve quality, and reduce costs institution-wide. Our student solutions improve attraction, retention and graduation rates, increase student satisfaction and help generate quality outcomes.
Huron is a Platinum level member of the Oracle PartnerNetwork, an Oracle Cloud Premier Partner within North America, a Gold level consulting partner with Salesforce.com and a Workday Services Partner.
Coronavirus (COVID-19)
The worldwide spread of the coronavirus (COVID-19) in 2020 has created significant volatility, uncertainty and disruption to the global economy. The pandemic has had an unfavorable impact on aspects of our business, operations, and financial results, and has caused us to significantly change the way we operate. Near the end of the first quarter of 2017,2020, we reorganizedsuspended almost all business travel and our internal financial reporting structure, which management usesemployees began working from their homes. While traditionally a majority of the work performed by our revenue-generating professionals occurred at client sites, the nature of the services we provide allows for our revenue-generating professionals to assess performancecontinue to serve clients in a remote work environment. As state and allocate resources,local governments ease their restrictions, we continue to develop and implement our comprehensive plan to return to our offices and client sites with our people’s safety and the needs of our clients guiding how we manage our phased transition. As of September 30, 2020, our employees continue to primarily work from their homes.
In each of our operating segments, we are working closely with our clients to support them and provide relevant services to address their needs caused by movingthe COVID-19 pandemic. However, as some clients reprioritized and delayed projects as a result of the pandemic, demand for certain offerings has been negatively impacted, particularly within our Life Sciences practice fromHealthcare and Education segments. While the Education and Life Sciences segment to the Business Advisory segment. The remaining Education and Life Sciences segment is now referred to as the Education segment. WhileCOVID-19 pandemic did not have a significant impact on our consolidated results have not been impacted, we have restated our historical segment information for consistent presentation.
Acquisitions
ADI Strategies, Inc. (International)
On April 1, 2017, we completed our acquisitionrevenues in the first quarter of the international assets of ADI Strategies, Inc. ("ADI Strategies") in Dubai and India. We acquired the U.S. assets of ADI Strategies2020, revenues in the second and third quarters of 2020 declined 2.1% and 5.8%, sequentially. Revenues in the third quarter of 2016. ADI Strategies is a leading enterprise performance management, risk management2020 decreased by 6.4% compared to the third quarter of 2019, and business intelligence firm. revenues for the first nine months of 2020 increased by just 0.2% compared to the same prior year period.
The acquisition strengthensCOVID-19 pandemic has strengthened demand for other services we provide, such as our cloud-based technology and analytics competencies and expands our global reach. The international results of operations of ADI Strategies have been included in our consolidated financial statements and results of operations ofsolutions within our Business Advisory segment and our restructuring and capital advisory solutions provided to organizations in transition within our Business Advisory segment.
In order to support our liquidity during the COVID-19 pandemic, we took proactive measures to increase available cash on hand including, but not limited to, borrowing under our senior secured credit facility in the first quarter of 2020 and reducing discretionary operating and capital spending. During the second and third quarters of 2020, we made repayments on our borrowings to reduce our total debt outstanding due to our ability to maintain adequate cash flows from operations and improved clarity around access to capital resources. To further support our liquidity during the dateCOVID-19 pandemic, we elected to defer the deposit of acquisition.our employer portion of social security taxes beginning in April 2020 and through the end of the year, which we expect to pay in equal installments in the fourth quarters of 2021 and 2022, as provided for under the Coronavirus Aid, Relief, and Economic Security Act ("CARES") Act.
Innosight Holdings, LLCFirst Quarter 2020 Goodwill Impairment Charges
On March 1, 2017, we completedThe services provided by our acquisition of Innosight Holdings, LLC ("Innosight"), a growth strategy firm focused on helping companies navigate disruptive change, enable innovation,Strategy and manage strategic transformation. Together with Innosight, we use our strategic, operational,Innovation and technology capabilities to help clients across multiple industries develop pioneering solutions to address disruption and achieve sustained growth. Innosight's results of operations have been included in our consolidated financial statements and results of operations ofLife Sciences reporting units within our Business Advisory segment fromfocus on strategic solutions for healthy, well-capitalized companies to identify new growth opportunities, which may be considered by our clients to be more discretionary in nature, and the dateduration of acquisition.
Pope Woodheadthe projects within these practices are typically short-term. Therefore, due to the uncertainty caused by the COVID-19 pandemic, we are cautious about near-term results for these two reporting units. Based on our internal projections and Associates Limited
On January 9, 2017, we completedthe preparation of our acquisition of Pope Woodhead and Associates Limited ("Pope Woodhead"), a U.K.-based consulting firm providing market access capabilities to assist clients in developing value propositions for innovative medicines and technologies. The acquisition expands our life sciences strategy expertise and strengthens our ability to lead clients through complex payer and regulatory environments. Pope Woodhead's results of operations have been included in our consolidated financial statements for the quarter ended March 31, 2020, and resultsconsidering the expected decrease in demand due to the COVID-19 pandemic, during the first quarter of operations2020 we believed that the fair value of these two reporting units no longer exceeded their carrying values and performed an interim goodwill impairment test on both reporting units. Based on the estimated fair values of the Strategy and Innovation and Life Sciences reporting units, we recorded non-cash pretax goodwill impairment charges of $49.9 million and $9.9 million, respectively. The non-cash
goodwill impairment charge related to the Strategy and Innovation reporting unit reduced the goodwill balance of the reporting unit to $37.5 million as of March 31, 2020. The non-cash goodwill impairment charge related to the Life Sciences reporting unit reduced the goodwill balance to zero as of March 31, 2020. We did not identify any indicators that would lead us to believe that the fair values of our Healthcare, Education, and Business Advisory segment fromreporting units may not exceed their carrying values. See the date of acquisition.
See"Critical Accounting Policies" section below and Note 5 "Acquisitions"4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for furtheradditional information regarding our recent acquisitions.
Divestiture
Life Sciences Complianceon the charges and Operationsevaluations performed.
During the second and third quarters of 2020, we did not identify any indicators that would lead us to believe that the fair values of our reporting units may not exceed their carrying values. We will continue to evaluate goodwill for impairment during future periods. Any future significant decline in the performance of our Strategy and Innovation reporting unit, or any other reporting unit with a goodwill balance, compared to our internal forecasts could result in additional non-cash goodwill impairment charges.
Enterprise Resource Planning System Implementation
In the fourth quarter of 2017,2019, we divested our Life Sciences Compliance and Operations practice ("Life Sciences C&O"), which was partcommitted to the implementation of a new enterprise resource planning system designed to improve the efficiency of our broader Life Sciences practice withininternal operational, financial and administrative activities. The implementation continues to progress and is on schedule and has not been significantly impacted by the Business Advisory segment. The saleCOVID-19 pandemic.
See Part II, Item 1A. "Risk Factors" of Life Sciences C&O did not meetthis Quarterly Report on Form 10-Q for additional information on the criteria for reporting separately as discontinued operations.
potential impact the COVID-19 pandemic could have on our business, operations and financial results.
How We Generate Revenues
A large portion of our revenues is generated by our full-time consultants who provide consulting services to our clients and are billable to our clients based on the number of hours worked. A smaller portion of our revenues is generated by our other professionals, also referred to as full-time equivalents, some of whom work variable schedules as needed by our clients. Full-time equivalent professionals consist of our cultural transformation consultants from our Studer Group solution, which include coaches and their support staff specialized financefrom our Culture and operationalOrganizational Excellence solution, consultants who work variable schedules as needed by our clients, employees who provide managed services in our Healthcare segment, and our employees who provide software support and maintenance services to our clients. We translate the hours that these other professionals work on client engagements into a full-time equivalent measure that we use to manage our business. We refer to our full-time consultants and other professionals collectively as revenue-generating professionals.
Revenues generated by our full-time consultants are primarily driven by the number of consultants we employ and their utilization rates, as well as the billing rates we charge our clients. Revenues generated by our other professionals, or full-time equivalents, are largely dependent on the number of consultants we employ, their hours worked, and billing rates charged. Revenues generated by our coaches are largely dependent on the number of coaches we employ and the total value, scope, and terms of the consulting contracts under which they provide services, which are primarily fixed-fee contracts. Revenues generated by our Managed Services solution are dependent on the total value, scope and terms of the related contracts.
We generate our revenues from providing professional services under four types of billing arrangements: fixed-fee (including software license revenue), time-and-expense, performance-based,; time-and-expense; performance-based; and software support, and maintenance and subscriptions.
In fixed-fee billing arrangements, we agree to a pre-established fee in exchange for a predetermined set of professional services. We set the fees based on our estimates of the costs and timing for completing the engagements. In these engagements, itIt is the client’s expectation in these engagements that the pre-established fee will not be exceeded except in mutually agreed upon circumstances. We generally recognize revenues under fixed-fee billing arrangements using a proportionate performance approach, which is based on work completed to dateto-date versus our estimates of the total services to be provided under the engagement. Contracts within our Studer GroupCulture and Organizational Excellence solution areinclude fixed-fee partner contracts with multiple deliverables,performance obligations, which primarily consist of coaching services, as well as speaking engagements, conferences, materialspublications and software products (“Partner Contracts”). Revenues for coaching services and software products are generally recognized on a straight-line basis over the length of the contract. All other revenues under Partner Contracts, including speaking engagements, conferences and publications, are recognized at the time the service isgoods or services are provided.
Fixed-fee arrangements also include software licenses for our revenue cycle management software and research administration and compliance software. Licenses for our revenue cycle management software are sold only as a component of our consulting projects, and the services we provide are essential to the functionality of the software. Therefore, revenues from these software licenses are recognized over the term of the related consulting services contract. License revenue from our research administration and compliance software is generally recognized in the month in which the software is delivered.
Fixed-fee engagements represented 46.5%40.5% and 44.5%46.7% of our revenues for the three months ended September 30, 20172020 and 2016,2019, respectively, and 45.9%41.3% and 48.5%46.5% of our revenues for the nine months ended September 30, 20172020 and 2016,2019, respectively.
Time-and-expense billing arrangements require the client to pay based on the number of hours worked by our revenue-generating professionals at agreed upon rates. Time-and-expense arrangements also include certain speaking engagements, conferences and publications purchased by our clients outside of Partner Contracts within our Studer GroupCulture and Organizational Excellence solution. We recognize revenues under time-and-expense billing arrangements as the related services or publications are provided. Time-and-expense engagements represented 43.9%44.0% and 42.2%39.7% of our
revenues for the three months ended September 30, 20172020 and 2016,2019, respectively, and 44.4%44.2% and 37.6%40.0% of our revenues for the nine months ended September 30, 20172020 and 2016,2019, respectively.
In performance-based fee billing arrangements, fees are tied to the attainment of contractually defined objectives. We enter into performance-based engagements in essentially two forms. First, we generally earn fees that are directly related to the savings formally acknowledged by the client as a result of adopting our recommendations for improving operational and cost effectiveness in the areas we review. Second, we have performance-based engagements in which we earn a success fee when and if certain predefined outcomes occur. Often, performance-based fees supplement our time-and-expense or fixed-fee engagements. We do not recognize revenues under performance-based billing arrangements until all relatedby estimating the amount of variable consideration that is probable of being earned and recognizing that estimate over the length of the contract using a proportionate performance criteria are met.approach. Performance-based fee revenues represented 4.0%9.4% and 8.2% of our revenues for the three months ended September 30, 20172020 and 2016,2019, respectively, and 4.4%8.6% and 9.1%8.2% of our revenues for the nine months ended September 30, 20172020 and 2016,2019, respectively. Performance-based fee engagementsThe level of performance-based fees earned may cause significant variations in quarterly revenuesvary based on our clients' risk sharing preferences and operating results depending on the timingmix of achieving the performance-based criteria.services we provide.
Clients that have purchased one of our software licenses can pay an annual fee for software support and maintenance. We also generate subscription revenue from our cloud-based analytic tools and solutions. Software support, and maintenance and subscription revenues are recognized ratably over the support or subscription period, which ranges from one to three years.period. These fees are generally billed in advance and included in deferred revenues until recognized. Software support, and maintenance and subscription revenues represented
5.6% 6.1% and 5.1%5.4% of our revenues for the three months ended September 30, 20172020 and 2016,2019, respectively, and 5.3%5.9% and 4.8%5.3% of our revenues for the nine months ended September 30, 20172020 and 2016,2019, respectively.
Our quarterly results are impacted principally by our full-time consultants’ utilization rate, the bill rates we charge our clients, and the number of our revenue-generating professionals who are available to work, and the amount of performance-based fees recognized, which often vary significantly between quarters.work. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that results in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. For example, during the third and fourth quarters of the year, vacations taken by our clients can result in the deferral of activity on existing and new engagements, which would negatively affect our utilization rate. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period.
Time-and-expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. Moreover, our clients typically retain us on an engagement-by-engagement basis, rather than under long-term recurring contracts. The volume of work performed for any particular client can vary widely from period to period.
Business Strategy, Opportunities and Challenges
Our primary strategy is to meet the needs of our clients by providing a balanced portfolio of service offerings and capabilities so that we can adapt quickly and effectively to emerging opportunities in the marketplace. To achieve this, we continue to hire highly qualified professionals and have entered into select acquisitions of complementary businesses.
To expand our business, we will remain focused on growing our existing relationships and developing new relationships, executing our managing director compensation plan to attract and retain senior practitioners, continuing to promote and provide an integrated approach to service delivery, broadening the scope of our existing services, and acquiring complementary businesses. We will regularly evaluate the performance of our practices to ensure our investments meet these objectives. Furthermore, we intend to enhance our visibility in the marketplace by refining our overarching messaging and value propositions for the organization as well as each practice. We will continue to focus on reaching our client base through clear, concise, and endorsed messages.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected segment and consolidated operating results and other operating data.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment and Consolidated Operating Results (in thousands, except per share amounts): | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Healthcare: | | | | | | | | |
Revenues | | $ | 87,406 | | | $ | 100,000 | | | $ | 268,340 | | | $ | 295,621 | |
Operating income | | $ | 25,610 | | | $ | 32,863 | | | $ | 70,831 | | | $ | 94,058 | |
Segment operating income as a percentage of segment revenues | | 29.3 | % | | 32.9 | % | | 26.4 | % | | 31.8 | % |
Business Advisory: | | | | | | | | |
Revenues | | $ | 66,048 | | | $ | 62,519 | | | $ | 201,423 | | | $ | 183,602 | |
Operating income | | $ | 10,780 | | | $ | 11,942 | | | $ | 37,306 | | | $ | 32,997 | |
Segment operating income as a percentage of segment revenues | | 16.3 | % | | 19.1 | % | | 18.5 | % | | 18.0 | % |
Education: | | | | | | | | |
Revenues | | $ | 51,850 | | | $ | 56,770 | | | $ | 176,017 | | | $ | 165,265 | |
Operating income | | $ | 12,548 | | | $ | 14,413 | | | $ | 41,792 | | | $ | 43,235 | |
Segment operating income as a percentage of segment revenues | | 24.2 | % | | 25.4 | % | | 23.7 | % | | 26.2 | % |
Total Company: | | | | | | | | |
Revenues | | $ | 205,304 | | | $ | 219,289 | | | $ | 645,780 | | | $ | 644,488 | |
Reimbursable expenses | | 2,860 | | | 23,636 | | | 25,133 | | | 65,787 | |
Total revenues and reimbursable expenses | | $ | 208,164 | | | $ | 242,925 | | | $ | 670,913 | | | $ | 710,275 | |
Statements of Operations reconciliation: | | | | | | | | |
Segment operating income | | $ | 48,938 | | | $ | 59,218 | | | $ | 149,929 | | | $ | 170,290 | |
Items not allocated at the segment level: | | | | | | | | |
Other operating expenses | | 29,042 | | | 32,310 | | | 87,826 | | | 105,369 | |
Litigation and other gains | | — | | | (630) | | | (150) | | | (1,571) | |
Depreciation and amortization | | 6,197 | | | 6,962 | | | 18,635 | | | 21,285 | |
Goodwill impairment charges (1) | | — | | | — | | | 59,816 | | | — | |
Operating income (loss) | | 13,699 | | | 20,576 | | | (16,198) | | | 45,207 | |
Other income (expense), net | | (224) | | | (4,456) | | | (6,829) | | | (10,326) | |
Income (loss) from continuing operations before taxes | | 13,475 | | | 16,120 | | | (23,027) | | | 34,881 | |
Income tax expense (benefit) | | 2,388 | | | 2,414 | | | (5,413) | | | 7,256 | |
Net income (loss) from continuing operations | | $ | 11,087 | | | $ | 13,706 | | | $ | (17,614) | | | $ | 27,625 | |
Earnings (loss) per share from continuing operations: | | | | | | | | |
Basic | | $ | 0.50 | | | $ | 0.62 | | | $ | (0.81) | | | $ | 1.26 | |
Diluted | | $ | 0.50 | | | $ | 0.61 | | | $ | (0.81) | | | $ | 1.23 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Other Operating Data: | | 2020 | | 2019 | | 2020 | | 2019 |
Number of full-time billable consultants (at period end) (2): | | | | | | | | |
Healthcare | | 838 | | | 886 | | | 838 | | | 886 | |
Business Advisory | | 1,001 | | | 954 | | | 1,001 | | | 954 | |
Education | | 790 | | | 727 | | | 790 | | | 727 | |
Total | | 2,629 | | | 2,567 | | | 2,629 | | | 2,567 | |
Average number of full-time billable consultants (for the period) (2): | | | | | | | | |
Healthcare | | 844 | | | 858 | | | 873 | | | 835 | |
Business Advisory | | 976 | | | 920 | | | 940 | | | 876 | |
Education | | 772 | | | 698 | | | 779 | | | 665 | |
Total | | 2,592 | | | 2,476 | | | 2,592 | | | 2,376 | |
Full-time billable consultant utilization rate (3): | | | | | | | | |
Healthcare | | 71.4 | % | | 81.8 | % | | 70.2 | % | | 80.4 | % |
Business Advisory | | 72.6 | % | | 72.0 | % | | 72.6 | % | | 72.7 | % |
Education | | 66.5 | % | | 75.5 | % | | 71.7 | % | | 76.7 | % |
Total | | 70.4 | % | | 76.3 | % | | 71.5 | % | | 76.5 | % |
Full-time billable consultant average billing rate per hour (4): | | | | | | | | |
Healthcare | | $ | 252 | | | $ | 226 | | | $ | 233 | | | $ | 225 | |
Business Advisory (5) | | $ | 186 | | | $ | 193 | | | $ | 197 | | | $ | 195 | |
Education | | $ | 184 | | | $ | 197 | | | $ | 189 | | | $ | 200 | |
Total (5) | | $ | 206 | | | $ | 206 | | | $ | 206 | | | $ | 207 | |
Revenue per full-time billable consultant (in thousands): | | | | | | | | |
Healthcare | | $ | 77 | | | $ | 84 | | | $ | 216 | | | $ | 247 | |
Business Advisory | | $ | 64 | | | $ | 65 | | | $ | 204 | | | $ | 202 | |
Education | | $ | 57 | | | $ | 70 | | | $ | 194 | | | $ | 217 | |
Total | | $ | 66 | | | $ | 73 | | | $ | 205 | | | $ | 222 | |
Average number of full-time equivalents (for the period) (6): | | | | | | | | |
Healthcare | | 279 | | | 217 | | | 279 | | | 237 | |
Business Advisory | | 35 | | | 19 | | | 27 | | | 14 | |
Education | | 46 | | | 52 | | | 56 | | | 44 | |
Total | | 360 | | | 288 | | | 362 | | | 295 | |
Revenue per full-time equivalent (in thousands): | | | | | | | | |
Healthcare | | $ | 80 | | | $ | 128 | | | $ | 285 | | | $ | 375 | |
Business Advisory | | $ | 106 | | | $ | 126 | | | $ | 370 | | | $ | 465 | |
Education | | $ | 165 | | | $ | 151 | | | $ | 453 | | | $ | 480 | |
Total | | $ | 93 | | | $ | 132 | | | $ | 317 | | | $ | 395 | |
(1)The resultsnon-cash goodwill impairment charges are not allocated at the segment level because the underlying goodwill asset is reflective of operations for acquired businesses have been includedour corporate investment in the segments. We do not include the impact of goodwill impairment charges in our resultsevaluation of segment performance.
(2)Consists of our full-time professionals who provide consulting services and generate revenues based on the number of hours worked.
(3)Utilization rate for our full-time billable consultants is calculated by dividing the number of hours our full-time billable consultants worked on client assignments during a period by the total available working hours for these consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days.
(4)Average billing rate per hour for our full-time billable consultants is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period.
(5)The Business Advisory segment includes operations sinceof Huron Eurasia India. Absent the dateimpact of their respective acquisition.
DuringHuron Eurasia India, the second quarter of 2017, we reorganized our internal financial reporting structure by moving our Life Sciences practice from the Education and Life Sciences segment toaverage billing rate per hour for the Business Advisory segment. The remaining Educationsegment would have been $201 and Life Sciences segment is now referred to as$221 for the Education segment. While ourthree months ended September 30, 2020 and 2019, respectively; and $217 and $220 for the nine months ended September 30, 2020 and 2019, respectively.
Absent the impact of Huron Eurasia India, Huron's consolidated resultsaverage billing rate per hour would have not been impacted, we have restated our historical segment information$212 and $216 for consistent presentation.the three months ended September 30, 2020 and 2019, respectively; and $213 and $216 for the nine months ended September 30, 2020 and 2019, respectively.
|
| | | | | | | | | | | | | | | | |
Segment and Consolidated Operating Results (in thousands, except per share amounts): | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Healthcare: | | | | | | | | |
Revenues | | $ | 79,582 |
| | $ | 103,425 |
| | $ | 261,261 |
| | $ | 323,531 |
|
Operating income | | $ | 25,778 |
| | $ | 38,824 |
| | $ | 83,580 |
| | $ | 119,229 |
|
Segment operating income as a percentage of segment revenues | | 32.4 | % | | 37.5 | % | | 32.0 | % | | 36.9 | % |
Education: | | | | | | | | |
Revenues | | $ | 41,422 |
| | $ | 38,621 |
| | $ | 127,629 |
| | $ | 111,816 |
|
Operating income | | $ | 7,762 |
| | $ | 10,896 |
| | $ | 31,772 |
| | $ | 31,474 |
|
Segment operating income as a percentage of segment revenues | | 18.7 | % | | 28.2 | % | | 24.9 | % | | 28.1 | % |
Business Advisory: | | | | | | | | |
Revenues | | $ | 55,372 |
| | $ | 41,354 |
| | $ | 157,753 |
| | $ | 112,801 |
|
Operating income | | $ | 12,832 |
| | $ | 8,608 |
| | $ | 34,890 |
| | $ | 23,275 |
|
Segment operating income as a percentage of segment revenues | | 23.2 | % | | 20.8 | % | | 22.1 | % | | 20.6 | % |
Total Company: | | | | | | | | |
Revenues | | $ | 176,376 |
| | $ | 183,400 |
| | $ | 546,643 |
| | $ | 548,148 |
|
Reimbursable expenses | | 17,982 |
| | 19,093 |
| | 55,862 |
| | 54,636 |
|
Total revenues and reimbursable expenses | | $ | 194,358 |
| | $ | 202,493 |
| | $ | 602,505 |
| | $ | 602,784 |
|
| | | | | | | | |
Segment operating income | | $ | 46,372 |
| | $ | 58,328 |
| | $ | 150,242 |
| | $ | 173,978 |
|
Items not allocated at the segment level: | | | | | | | | |
Other operating expenses | | 29,448 |
| | 26,502 |
| | 92,643 |
| | 84,595 |
|
Other losses (gains), net | | 880 |
| | 494 |
| | (222 | ) | | 494 |
|
Depreciation and amortization | | 9,946 |
| | 8,092 |
| | 28,549 |
| | 23,064 |
|
Goodwill impairment charge (1) | | — |
| | — |
| | 209,600 |
| | — |
|
Total operating income (loss) | | 6,098 |
| | 23,240 |
| | (180,328 | ) | | 65,825 |
|
Other expense, net | | (3,950 | ) | | (3,687 | ) | | (10,607 | ) | | (11,034 | ) |
Income (loss) from continuing operations before income tax expense | | 2,148 |
| | 19,553 |
| | (190,935 | ) | | 54,791 |
|
Income tax expense (benefit) | | (1,984 | ) | | 7,265 |
| | (49,740 | ) | | 19,498 |
|
Net income (loss) from continuing operations | | $ | 4,132 |
| | $ | 12,288 |
| | $ | (141,195 | ) | | $ | 35,293 |
|
Earnings (loss) per share from continuing operations: | | | | | | | | |
Basic | | $ | 0.19 |
| | $ | 0.58 |
| | $ | (6.59 | ) | | $ | 1.67 |
|
Diluted | | $ | 0.19 |
| | $ | 0.57 |
| | $ | (6.59 | ) | | $ | 1.65 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Other Operating Data: | | 2017 | | 2016 | | 2017 | | 2016 |
Number of full-time billable consultants (at period end) (2): | | | | | | | | |
Healthcare | | 761 |
| | 1,010 |
| | 761 |
| | 1,010 |
|
Education | | 536 |
| | 466 |
| | 536 |
| | 466 |
|
Business Advisory | | 830 |
| | 545 |
| | 830 |
| | 545 |
|
Total | | 2,127 |
| | 2,021 |
| | 2,127 |
| | 2,021 |
|
Average number of full-time billable consultants (for the period) (2): | | | | | | | | |
Healthcare | | 741 |
| | 984 |
| | 805 |
| | 1,005 |
|
Education | | 527 |
| | 447 |
| | 497 |
| | 425 |
|
Business Advisory | | 779 |
| | 530 |
| | 710 |
| | 465 |
|
Total | | 2,047 |
| | 1,961 |
| | 2,012 |
| | 1,895 |
|
Full-time billable consultant utilization rate (3): | | | | | | | | |
Healthcare | | 80.3 | % | | 77.0 | % | | 76.6 | % | | 78.6 | % |
Education | | 70.9 | % | | 68.0 | % | | 73.6 | % | | 71.2 | % |
Business Advisory | | 72.9 | % | | 73.5 | % | | 73.4 | % | | 72.4 | % |
Total | | 75.0 | % | | 73.9 | % | | 74.7 | % | | 75.3 | % |
Full-time billable consultant average billing rate per hour (4): | | | | | | | | |
Healthcare | | $ | 190 |
| | $ | 203 |
| | $ | 200 |
| | $ | 209 |
|
Education | | $ | 210 |
| | $ | 220 |
| | $ | 215 |
| | $ | 217 |
|
Business Advisory | | $ | 197 |
| | $ | 203 |
| | $ | 195 |
| | $ | 216 |
|
Total | | $ | 197 |
| | $ | 207 |
| | $ | 202 |
| | $ | 212 |
|
Revenue per full-time billable consultant (in thousands): | | | | | | | | |
Healthcare | | $ | 69 |
| | $ | 73 |
| | $ | 211 |
| | $ | 231 |
|
Education | | $ | 69 |
| | $ | 72 |
| | $ | 226 |
| | $ | 224 |
|
Business Advisory | | $ | 67 |
| | $ | 72 |
| | $ | 212 |
| | $ | 229 |
|
Total | | $ | 68 |
| | $ | 72 |
| | $ | 215 |
| | $ | 229 |
|
Average number of full-time equivalents (for the period) (5): | | | | | | | | |
Healthcare | | 214 |
| | 204 |
| | 215 |
| | 201 |
|
Education | | 35 |
| | 40 |
| | 36 |
| | 37 |
|
Business Advisory | | 26 |
| | 25 |
| | 21 |
| | 19 |
|
Total | | 275 |
| | 269 |
| | 272 |
| | 257 |
|
Revenue per full-time equivalent (in thousands): | | | | | | | | |
Healthcare | | $ | 134 |
| | $ | 156 |
| | $ | 427 |
| | $ | 456 |
|
Education | | $ | 138 |
| | $ | 158 |
| | $ | 419 |
| | $ | 436 |
|
Business Advisory | | $ | 108 |
| | $ | 126 |
| | $ | 342 |
| | $ | 335 |
|
Total | | $ | 132 |
| | $ | 154 |
| | $ | 420 |
| | $ | 444 |
|
| |
(1) | The non-cash goodwill impairment charge is not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segments. We do not include the impact of goodwill impairment charges in our evaluation of segment performance. |
| |
(2) | (6)Consists of our full-time professionals who provide consulting services and generate revenues based on the number of hours worked. |
| |
(3) | Utilization rate for our full-time billable consultants is calculated by dividing the number of hours all of our full-time billable consultants worked on client assignments during a period by the total available working hours for all of these consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days. |
| |
(4) | Average billing rate per hour for our full-time billable consultants is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period. |
| |
(5) | Consists of cultural transformation consultants within our Studer Group solution, which include coaches and their support staff, consultants who work variable schedules as needed by our clients, and full-time employees who provide software support and maintenance services to our clients. |
coaches and their support staff within our Culture and Organizational Excellence solution, consultants who work variable schedules as needed by our clients, employees who provide managed services in our Healthcare segment, and full-time employees who provide software support and maintenance services to our clients.
Non-GAAP Measures
We also assess our results of operations using certain non-GAAP financial measures. These non-GAAP financial measures differ from GAAP because the non-GAAP financial measures we calculate to measure earnings (loss) before interest, taxes, depreciation and amortization ("EBITDA"), adjusted EBITDA, adjusted EBITDA as a percentage of revenues, adjusted net income (loss) from continuing operations, and adjusted diluted earnings (loss) per share from continuing operations exclude a number of items required by GAAP, each discussed below. These non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance, cash flows, or liquidity prepared in accordance with GAAP. Our non-GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how we define our non-GAAP financial measures.
Our management uses the non-GAAP financial measures to gain an understanding of our comparative operating performance, for example when comparing such results with previous periods or forecasts. These non-GAAP financial measures are used by management in their financial and operating decision making because management believes they reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons. Management also uses these non-GAAP financial measures when publicly providing our business outlook, for internal management purposes, and as a basis for evaluating potential acquisitions and dispositions. We believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating Huron’s current operating performance and future prospects in the same manner as management does and in comparing in a consistent manner Huron’s current financial results with Huron’s past financial results.
The reconciliations of these financial measures from GAAP to non-GAAP are as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Revenues | $ | 205,304 | | | $ | 219,289 | | | $ | 645,780 | | | $ | 644,488 | |
Net income (loss) from continuing operations | $ | 11,087 | | | $ | 13,706 | | | $ | (17,614) | | | $ | 27,625 | |
Add back: | | | | | | | |
Income tax expense (benefit) | 2,388 | | | 2,414 | | | (5,413) | | | 7,256 | |
Interest expense, net of interest income | 2,259 | | | 4,374 | | | 7,516 | | | 13,156 | |
Depreciation and amortization | 7,546 | | | 8,124 | | | 22,488 | | | 24,735 | |
Earnings before interest, taxes, depreciation and amortization (EBITDA) | 23,280 | | | 28,618 | | | 6,977 | | | 72,772 | |
Add back: | | | | | | | |
Restructuring and other charges | 59 | | | 127 | | | 2,626 | | | 2,156 | |
Litigation and other gains | — | | | (630) | | | (150) | | | (1,571) | |
Goodwill impairment charges | — | | | — | | | 59,816 | | | — | |
Loss on sale of business | — | | | — | | | 102 | | | — | |
Transaction-related expenses | 437 | | | 563 | | | 437 | | | 2,613 | |
Foreign currency transaction losses (gains), net | (194) | | | 114 | | | 245 | | | 36 | |
Adjusted EBITDA | $ | 23,582 | | | $ | 28,792 | | | $ | 70,053 | | | $ | 76,006 | |
Adjusted EBITDA as a percentage of revenues | 11.5 | % | | 13.1 | % | | 10.8 | % | | 11.8 | % |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues | $ | 176,376 |
| | $ | 183,400 |
| | $ | 546,643 |
| | $ | 548,148 |
|
Net income (loss) from continuing operations | $ | 4,132 |
| | $ | 12,288 |
| | $ | (141,195 | ) | | $ | 35,293 |
|
Add back: | | | | | | | |
Income tax expense (benefit) | (1,984 | ) | | 7,265 |
| | (49,740 | ) | | 19,498 |
|
Interest expense, net of interest income | 4,880 |
| | 4,176 |
| | 13,811 |
| | 12,270 |
|
Depreciation and amortization | 12,603 |
| | 12,144 |
| | 36,937 |
| | 34,342 |
|
Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA) | 19,631 |
| | 35,873 |
|
| (140,187 | ) | | 101,403 |
|
Add back: | | | | | | | |
Restructuring charges | 1,347 |
| | 1,049 |
| | 5,295 |
| | 4,129 |
|
Other losses (gains), net | 880 |
| | 494 |
| | (222 | ) | | 494 |
|
Goodwill impairment charge | — |
| | — |
| | 209,600 |
| | — |
|
Gain on sale of business | — |
| | — |
| | (931 | ) | | — |
|
Foreign currency transaction losses (gains), net | (385 | ) | | 84 |
| | (449 | ) | | (270 | ) |
Adjusted EBITDA | $ | 21,473 |
| | $ | 37,500 |
|
| $ | 73,106 |
| | $ | 105,756 |
|
Adjusted EBITDA as a percentage of revenues | 12.2 | % | | 20.4 | % |
| 13.4 | % | | 19.3 | % |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) from continuing operations | $ | 4,132 |
| | $ | 12,288 |
| | $ | (141,195 | ) | | $ | 35,293 |
| Net income (loss) from continuing operations | $ | 11,087 | | | $ | 13,706 | | | $ | (17,614) | | | $ | 27,625 | |
Weighted average shares - diluted | 21,622 |
| | 21,445 |
| | 21,413 |
| | 21,427 |
| Weighted average shares - diluted | 22,175 | | | 22,561 | | | 21,868 | | | 22,425 | |
Diluted earnings (loss) per share from continuing operations | $ | 0.19 |
| | $ | 0.57 |
| | $ | (6.59 | ) | | $ | 1.65 |
| Diluted earnings (loss) per share from continuing operations | $ | 0.50 | | | $ | 0.61 | | | $ | (0.81) | | | $ | 1.23 | |
Add back: | | | | | | | | Add back: | | | | | | | |
Amortization of intangible assets | 8,834 |
| | 8,771 |
| | 26,432 |
| | 24,369 |
| Amortization of intangible assets | 3,155 | | | 4,205 | | | 9,558 | | | 13,036 | |
Restructuring charges | 1,347 |
| | 1,049 |
| | 5,295 |
| | 4,129 |
| |
Other losses (gains), net | 880 |
| | 494 |
| | (222 | ) | | 494 |
| |
Goodwill impairment charge | — |
| | — |
| | 209,600 |
| | — |
| |
Restructuring and other charges | | Restructuring and other charges | 59 | | | 127 | | | 2,626 | | | 2,156 | |
Litigation and other gains | | Litigation and other gains | — | | | (630) | | | (150) | | | (1,571) | |
Goodwill impairment charges | | Goodwill impairment charges | — | | | — | | | 59,816 | | | — | |
Non-cash interest on convertible notes | 1,974 |
| | 1,883 |
| | 5,853 |
| | 5,582 |
| Non-cash interest on convertible notes | — | | | 2,171 | | | — | | | 6,436 | |
Gain on sale of business | — |
| | — |
| | (931 | ) | | — |
| |
Tax effect | (5,100 | ) | | (4,794 | ) | | (70,362 | ) | | (13,588 | ) | |
Loss on sale of business | | Loss on sale of business | — | | | — | | | 102 | | | — | |
Transaction-related expenses | | Transaction-related expenses | 437 | | | 563 | | | 437 | | | 2,613 | |
Tax effect of adjustments | | Tax effect of adjustments | (1,692) | | | (1,673) | | | (17,041) | | | (5,909) | |
| Tax benefit related to "check-the-box" election | (2,748 | ) | | — |
| | (2,748 | ) | | — |
| Tax benefit related to "check-the-box" election | — | | | (736) | | | — | | | (736) | |
Total adjustments, net of tax | 5,187 |
| | 7,403 |
|
| 172,917 |
| | 20,986 |
| Total adjustments, net of tax | 1,959 | | | 4,027 | | | 55,348 | | | 16,025 | |
Adjusted net income from continuing operations | $ | 9,319 |
| | $ | 19,691 |
|
| $ | 31,722 |
| | $ | 56,279 |
| Adjusted net income from continuing operations | $ | 13,046 | | | $ | 17,733 | | | $ | 37,734 | | | $ | 43,650 | |
Adjusted weighted average shares - diluted | 21,622 |
| | 21,445 |
| | 21,585 |
| | 21,427 |
| Adjusted weighted average shares - diluted | 22,175 | | | 22,561 | | | 22,207 | | | 22,425 | |
Adjusted diluted earnings per share from continuing operations | $ | 0.43 |
| | $ | 0.92 |
|
| $ | 1.47 |
| | $ | 2.63 |
| Adjusted diluted earnings per share from continuing operations | $ | 0.59 | | | $ | 0.79 | | | $ | 1.70 | | | $ | 1.95 | |
These non-GAAP financial measures include adjustments for the following items:
Amortization of intangible assets: We have excluded the effect of amortization of intangible assets from the calculation of adjusted net income from continuing operations presented above. Amortization of intangiblesintangible assets is inconsistent in its amount and frequency and is significantly affected by the timing and size of our acquisitions.
Restructuring and other charges: We have incurred charges due to the restructuring of various parts of our business. These restructuring charges have primarily consisted of costs associated with office space consolidations, including thelease impairment charges and accelerated depreciation of certain leasehold improvements,on lease-related property and equipment, and severance charges. Additionally, we have excluded the effect of a $0.8 million one-time charge incurred during the first quarter of 2020, related to redundant administrative costs in our corporate operations which is recorded within selling, general and administrative expenses on our consolidated statement of operations. We have excluded the effect of the restructuring and other charges from our non-GAAP measures because the amount of each restructuring charge is significantly affected by the timing and size of the restructured business or component of a business.
Other losses (gains), net: We have excluded the effects of remeasurement losses and gains related to contingent acquisition liabilities to permit comparability with periods that were not impacted by these items.
Litigation and other gains: We have excluded the effects of the litigation settlement gain recognized in the first quarter of 2020 and the remeasurement gains recognized in the first nine months of 2019 to decrease the estimated fair value of our liabilities for contingent consideration payments related to business acquisitions to permit comparability with periods that were not impacted by these items.
Goodwill impairment charge:charges: We have excluded the effect of the goodwill impairment charge that occurredcharges recognized in the secondfirst quarter of 20172020 as this is anthese are infrequent eventevents and itstheir exclusion permits comparability with periods that were not impacted by such charge.charges.
Non-cash interest on convertible notes: We incurincurred non-cash interest expense relating to the implied value of the equity conversion component of our Convertible Notes. The value of the equity conversion component iswas treated as a debt discount and amortized to interest expense over the life of the Convertible Notes using the effective interest rate method. We exclude this non-cash interest expense that does not represent cash interest payments from the calculation of adjusted net income from continuing operations as management believes that this non-cash expense is not indicative of the ongoing performance of our business.
GainLoss on sale of business:We have excluded the effect of the gainloss on the sale of Life Sciences C&O, as management believes that this one-time gain related toa software-based solution within our Business Advisory segment in the divestiturefirst quarter of a business is2020. Divestitures of businesses are infrequent and are not indicative of the ongoing performance of our business.
Transaction-related expenses: To permit comparability with prior periods, we excluded the impact of third-party legal and accounting fees incurred in the third quarter of 2020 related to the acquisition of ForceIQ, Inc., which closed effective November 1, 2020. See Note 15 "Subsequent Events" for additional information. We have also excluded the impact of third-party legal and accounting fees incurred in the first nine months of 2019 related to the evaluation of a potential acquisition that ultimately did not consummate to permit comparability with periods that were not impacted by this item.
Foreign currency transaction losses (gains), net: We have excluded the effect of foreign currency transaction losses and gains from the calculation of adjusted EBITDA because the amount of each loss or gain is significantly affected by timing and changes in foreign exchange rates.
Tax effect:effect of adjustments: The non-GAAP income tax adjustment reflects the incremental tax impact applicable to the non-GAAP adjustments.
Tax benefit related to "check-the-box" election:We have excluded the effectpositive impact of a tax benefit, recorded in the third quarter of 2017,2019, from
recognizing a previously unrecognized tax benefit fromdue to the expiration of statute of limitations on our "check-the-box" election made in 20142015 to treat one of our
certain wholly-owned foreign subsidiaries as a disregarded entityentities for U.S. federal income tax purposes. The exclusion of this discrete tax benefit
permits comparability with periods that were not impacted by this item. Refer toSee Note 13 “Income Taxes”12 "Income Taxes" within the notes to the consolidated financial
statements for additional information.
Income tax expense, Interest expense, net of interest income, Depreciation and amortization: We have excluded the effects of income tax expense, interest expense, net of interest income, and depreciation and amortization in the calculation of EBITDA as these are customary exclusions as defined by the calculation of EBITDA to arrive at meaningful earnings from core operations excluding the effect of such items.
Adjusted weighted average shares - diluted:As we reported a net loss for the first nine months ended September 30, 2017,of 2020, GAAP diluted weighted average shares outstanding equals the basic weighted average shares outstanding for that period. For the nine months ended September 30, 2017, theThe non-GAAP adjustments described above resulted in an adjusted net income from continuing operations.operations for the first nine months of 2020. Therefore, we included the dilutive common stock equivalents in the calculation of adjusted diluted weighted average shares outstanding for that period.
Three Months Ended September 30, 20172020 Compared to Three Months Ended September 30, 20162019
Revenues
Revenues decreased $7.0$14.0 million, or 3.8%6.4%, to $176.4$205.3 million for the third quarter of 20172020 from $183.4$219.3 million for the third quarter of 2016. Third quarter 2017 revenues included $13.4 million from our acquisitions of Innosight and Pope Woodhead, which were completed subsequent to2019. In the third quarter of 2016,2020, as wellsome clients reprioritized and delayed projects as revenues from our acquisitiona result of the international assetsCOVID-19 pandemic, demand for certain offerings have been negatively impacted, particularly within our Healthcare and Education segments. The negative impact of ADI Strategies, which was also completed subsequent to the third quarter of 2016 andCOVID-19 pandemic has since been fully integrated into thepartially offset by strengthened demand within our Business Advisory segment. Third quarter 2017 revenues also included an incremental $1.7 million of revenue from our acquisition of Healthcare Services Management, Inc. ("HSM Consulting"), which was completed mid-third quarter 2016.segment for cloud-based technology and analytics solutions and restructuring and capital advisory solutions provided to organizations in transition.
Of the overall $7.0$14.0 million decrease in revenues, $5.3$9.5 million was attributable to our full-time equivalents and $1.7 million was attributable to our full-time billable consultants.
The decrease in full-time equivalent revenues was primarily attributable to a decrease in revenuerevenues from our Studer Group solution within our Healthcare segmentfull-time billable consultants and $4.5 million was attributable to a decrease in license revenue inrevenues from our Education segment as discussed below in Segment Results.full-time equivalents.
The decrease in full-time billable consultant revenues reflected a decrease in the average billing ratedemand for the third quarter of 2017,services in our Healthcare and Education segments, partially offset by increasesa strengthened demand for services in our Business Advisory segment, as discussed below in Segment Results. The decrease in full-time billable consultant revenues was primarily attributable to an overall decrease in the consultant utilization rate, partially offset by an overall increase in the average number of billable consultants for the third quarter of 2020 compared to the same prior year period.
The decrease in full-time equivalent revenues was attributable to decreases in full-time equivalent revenues in our Healthcare and consultant utilization rate. AsEducation segments, partially offset by an increase in full-time equivalent revenues in our Business Advisory segment, as discussed below in Segment Results, thisResults. The decrease in full-time equivalent revenues reflected a decrease in revenue attributable to ourper full-time billable consultants reflected decreased demand for our servicesequivalent, partially offset by an increase in the Healthcare segment, largely offset by revenues from our acquisitionsaverage number of Innosight and Pope Woodhead, as well as strengthened demand for our servicesfull-time equivalents in the Business Advisorythird quarter of 2020 compared to the same prior year period.
In the third quarter of 2020, the COVID-19 pandemic negatively impacted sales and elongated the sales cycle for new opportunities for certain services we provide, particularly within our Healthcare and Education segments.segments, and therefore is expected to continue to have an unfavorable impact on our financial results in the fourth quarter of 2020.
Total Direct Costs
Our total directDirect costs, includingexcluding amortization of intangible assets and software development costs, increased $4.0$2.4 million, or 3.6%1.7%, to $116.4$145.5 million infor the three months ended September 30, 2017,2020, from $112.4$143.0 million infor the three months ended September 30, 2016.2019. The $4.0$2.4 million increase primarily related to a $2.1$4.2 million increase in salaries and related expenses for our revenue-generating professionals, which was largely driven by increased headcount from acquisitionsin our Education segment that primarily occurred prior to the COVID-19 pandemic and increased headcount in our ongoing cloud-based enterprise resource planning (ERP) investment,Business Advisory segment; partially offset by a $1.0 million decrease in salariessigning, retention and related expenses in our Healthcare segment as a result of headcount reductions. Additional increases included a $1.1 million increase in contractor expense, a $0.9 million increase in signing and retention bonuses for our revenue-generating professionals, a $0.6 million increase in performanceother bonus expense for our revenue-generating professionals and a $0.5 million increase in share-based compensation expense for our revenue-generating professionals. All of these increases were partially offset by a $1.4$0.9 million decrease in amortization of intangible assets.product and event costs. As a percentage of revenues, our total direct costs increased to 66.0%70.9% during the third quarter of 20172020 compared to 61.3%65.2% during the third quarter of 2016,2019, primarily due to the items described above.decrease in revenues and the increase in salaries and related expenses for our revenue-generating professionals.
Total direct costs for the three months ended September 30, 20172020 included $2.7$1.4 million of amortization expense for intangible assets, primarily representing customer contracts and software acquired in business combinations, and internal software development costs and intangible assets, compared to $4.1$1.2 million of amortization expense for the same prior year period. The $1.4 million decrease inIntangible asset amortization expense wasincluded within direct costs for the three months ended September 30, 2020 and 2019 primarily attributablerelated to the decreasing amortization expense oftechnology and software, certain customer relationships and customer contracts acquired in connection with our Studer Group acquisition, due to the accelerated basis of amortization.business acquisitions. See Note 5 "Acquisitions" and Note 64 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information abouton our intangible assets.
Operating Expenses and Other Gains,Losses (Gains), Net
Selling, general and administrative expenses increased $3.3decreased by $9.6 million, or 8.7%19.9%, to $41.6$38.6 million in the third quarter of 20172020 from $38.3$48.1 million in the third quarter of 2016. Selling, general and administrative expenses for the third quarter of 2017 included $3.9 million from Innosight and Pope Woodhead.2019. The overall $3.3$9.6 million increasedecrease primarily related to a $1.9$3.8 million increasedecrease in promotion and marketing expenses; a $2.1 million decrease in share-based compensation expense for our support personnel; a $1.3 million decrease in practice administration and meetings expenses; a $0.9 million decrease in training expenses; a $0.9 million decrease in third-party consulting expenses, a $0.8 million decrease in facilities expense; a $0.5 million decrease in recruiting expenses; and a $0.5 million decrease in salaries and related expenses for our support personnel, a $0.9 million increase in facilities and other office-related expenses, a $0.7 million increase in third-party consulting expenses, and a $0.5 million increase in travel related expenses,personnel. These decreases were partially offset by a $1.1$1.8 million decreaseincrease in deferred compensation expense attributable to the change in the market value of our deferred compensation liability. During the third quarter of 2020, the market value of our deferred compensation liability increased by $1.8 million, compared to an immaterial increase in the third quarter of 2019. This $1.8 million increase in expense is offset by a $1.8 million increase in the gain recognized for the change in the market value of investments that are used to fund our deferred compensation liability and recognized in other income (expense), net. The decreases in promotion and marketing expenses, practice administration and meetings expenses.expenses, and training expenses primarily relate to the cancellation or delay of in-person meetings and events and business travel due to the COVID-19 pandemic. The decrease in share-based compensation expense primarily related to a decrease in the expected funding of performance-based share awards for our executive officers recorded in the third quarter of 2020. As a percentage of revenues, selling, general and administrative expenses increaseddecreased to 23.6%18.8% during the third quarter of 20172020 compared to 20.9%21.9% during the third quarter of 2016,2019. This decrease was primarily dueattributable to the items described above.decreases in selling, general and administrative expenses noted above, as percentages of revenues; partially offset by the change in the market value of our deferred compensation liability.
Restructuring charges for both the third quarter of 2017 totaled $1.3 million, compared to $1.0 million for the third quarter of 2016.2020 and 2019 were $0.1 million. The $1.3$0.1 million charge incurredrecognized in the third quarter of 20172020 primarily related to the accrual of remaining lease obligations,rent and related expenses, net of estimated sublease income, due to relocating our San Franciscofor vacated office to a smaller space and consolidating our New York officesspaces. The $0.1 million charge recognized in the third quarter of 2017, and accelerated depreciation on leasehold improvements for our San Francisco office. The $1.0 million charge incurred in the third quarter of 20162019 primarily related to updated lease assumptions of our Washington, D.C. space vacated in the fourth quarter of 2014.workforce reductions as we continued to better align resources with market demand. See Note 98 "Restructuring Charges" within the notes to our consolidated financial statements for further discussion of our restructuring expenses.
Other losses, net totaled $0.9 million for the three months ended September 30, 2017, and represents losses due to the increase in the fair value of the liability for future expected contingent consideration payments related to acquisitions. In the third quarter of 2016, we recognized $0.5 million of remeasurement losses for the increase in the fair value of the contingent consideration liability. 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. See Note 11 "Fair Value of Financial Instruments" within the notes to our consolidated financial statements for additional information on our restructuring charges.
Litigation and other gains totaled $0.6 million for the third quarter of 2019, which consisted of a remeasurement gain to decrease the estimated fair value of our liability for contingent consideration liabilities.payments related to a business acquisition. We did not recognize any litigation or other gains in the third quarter of 2020.
Depreciation and amortization expense increased by $1.9decreased $0.8 million, or 11.3%, to $9.9$6.2 million in the three months ended September 30, 2017 from $8.12020 compared to $7.0 million in the three months ended September 30, 2016.2019. The increase$0.8 million decrease in depreciation and amortization expense was primarily attributable to an increasea decrease in amortization expense for intangible assetsthe trade name acquired in our Studer Group acquisition that was fully amortized in the Innosight and Pope Woodhead acquisitions, which were completed subsequent to the thirdfourth quarter of 2016, and an increase in2019; decreasing amortization expense for a customer-related intangible assetcustomer relationships due to the accelerated basis of amortization in prior periods, including the customer relationships acquired in theour Studer Group acquisition.acquisition; and customer relationships acquired in other business acquisitions that were fully amortized in prior periods. Intangible asset amortization expense included within operating expenses primarily relatesrelated to certain customer relationships, trade names, and non-competition agreements and trade names acquired in connection with our business acquisitions. See Note 5 "Acquisitions" and Note 64 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information abouton our intangible assets.
Operating Income
Operating income decreased $17.1$6.9 million, or 33.4% to $6.1$13.7 million in the third quarter of 20172020 from $23.2$20.6 million in the third quarter of 2016.2019. Operating margin, which is defined as operating income expressed as a percentage of revenues, decreased to 3.5% inwas 6.7% for the three months ended September 30, 2017,2020, compared to 12.7% in9.4% for the three months ended September 30, 2016.2019. The decrease in operating margin was primarily attributable to increasesthe decrease in revenues and the increase in salaries and related expenses for both our revenue-generating professionals and support personnel, contractor expense, facilities and other office-related expenses, signing and retention bonuses for our revenue-generating professionals, and performance bonus expense for our revenue-generating professionals for the third quarter of 2017 comparedprofessionals. These decreases to the same prior year period.operating margin were partially offset by the decrease in selling, general and administrative expenses discussed above, as percentages of revenues.
Total Other Expense,Income (Expense), Net
Total otherInterest expense, net increased by $0.3of interest income decreased $2.1 million to $4.0$2.3 million in the third quarter of 20172020 from $3.7$4.4 million in the third quarter of 2016.2019. The increasedecrease in total otherinterest expense net was primarily attributable to a $0.7 million increase in interest expense, netthe maturity of interest income, which was due toour Convertible Notes on October 1, 2019, partially offset by higher levels of borrowings and higher interest ratesborrowing under our credit facility during the third quarter of 20172020 compared to the same prior year period. See Note 7 "Financing Arrangements" within the notes to our consolidated financial statements for additional information about our Convertible Notes and credit facility.
Other expense, net decreased $2.1 million to a net gain of $2.0 million in the third quarter of 2016. This increase2020 from a net loss of $0.1 million in the third quarter of 2019. The decrease in other expense, net was partially offset by $0.4primarily attributable to a $1.8 million gain recognized in the third quarter of 2020 for the market value of our investments that are used to fund our deferred compensation liability, compared to an immaterial gain in the third quarter of 2019. Additionally, other expense, net includes the recognition of $0.2 million of foreign currency transaction gains in the third quarter of 20172020 compared to $0.1 million of net foreign currency transaction losses recognized in the third quarter of 2016.2019.
Income Tax Expense (Benefit)
For the three months ended September 30, 2017,2020, our effective tax rate was (92.4)% as we recognized income tax benefit from continuing operations of $2.0 million on income from continuing operations of $2.1 million. For the third quarter of 2016, our effective tax rate was 37.2%17.7% as we recognized income tax expense from continuing operations of $7.3$2.4 million on income from continuing operations of $19.6$13.5 million. The effective tax rate for the three months ended September 30, 2017of 17.7% was more favorable than the statutory rate, inclusive of state income taxes, of 26.0%, primarily due to recognizingthe current year-to-date pre-tax losses and the impact during the quarter of certain nondeductible business expense items, including the nondeductible portion of the goodwill impairment charges, based on the attribution of those expenses to the quarter in accordance with the allocation of income tax expense on a $2.7current year-to-date basis. The effective tax rate also reflected the positive impact of certain federal tax credits.
For the three months ended September 30, 2019, our effective tax rate was 15.0% as we recognized income tax expense from continuing operations of $2.4 million on income from continuing operations of $16.1 million. The effective tax rate of 15.0% was more favorable than the statutory rate, inclusive of state income taxes, of 26.4% primarily due to discrete tax benefits for U.S. federal return to provision adjustments related to the 2018 corporate income tax return. In addition, we recognized a discrete tax benefit related to a previously unrecognized tax benefit fromdue to the expiration of statute of limitations on our "check-the-box" election made in 20142015 to treat one of ourcertain wholly-owned foreign subsidiaries as a
disregarded entityentities for U.SU.S. federal income tax purposes. This benefit was partially offset by $0.6 million of tax expense recorded in
See Note 12 "Income Taxes" within the third quarter of 2017notes to correct an error that occurred in the second quarter of 2017. During the third quarter of 2017, we also recorded a $3.1 million adjustment to decrease deferred income taxes, net and increaseour consolidated financial statements for additional information on our income tax receivable on our consolidated balance sheet to correct an error that occurred in the second quarter of 2017. These errors have no impact on full year 2017 results, and we concluded that the impact of both errors was not material to the second and third quarter financial statements. The effective tax rate for the three months ended September 30, 2016 was lower than the statutory rate, inclusive of state income taxes, primarily due to non-taxable income, valuation allowance reductions, and certain credits and deductions, partially offset by non-deductible business expenses.expense.
Net Income from Continuing Operations and Earnings per Share
Net income from continuing operations decreased by $8.2$2.6 million to $4.1$11.1 million for the three months ended September 30, 2017,2020 from $12.3$13.7 million for the same period last year. As a result of the decrease in net income from continuing operations, diluted earnings per share from continuing operations for the third quarter of 20172020 was $0.19$0.50 compared to $0.57$0.61 for the third quarter of 2016.2019.
Discontinued OperationsEBITDA and Adjusted EBITDA
Net income from discontinued operations was $0.2EBITDA decreased $5.3 million to $23.3 million for the three months ended September 30, 2017 and related to updated lease assumptions for vacated office space directly related to the sale of the Huron Legal segment. See Note 4 "Discontinued Operations" within the notes to our consolidated financial statements for additional information about our discontinued operations.
EBITDA and Adjusted EBITDA
EBITDA decreased $16.2 million to $19.62020 from $28.6 million for the three months ended September 30, 2017 from $35.9 million for the three months ended September 30, 2016.2019. Adjusted EBITDA decreased $16.0$5.2 million to $21.5$23.6 million in the third quarter of 20172020 from $37.5$28.8 million in the third quarter of 2016.2019. The decrease in both EBITDA and adjusted EBITDA was primarily dueattributable to the decrease in segment operating income, as discussed belowexcluding the change in Segment Results, as well as an increase in corporate expenses primarily duethe market value of our deferred compensation liability for the third quarter of 2020 compared to our acquisitionsthe third quarter of Innosight and Pope Woodhead.2019.
Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share
Adjusted net income from continuing operations decreased $10.4$4.7 million to $9.3$13.0 million in the third quarter of 20172020 compared to $19.7$17.7 million in the third quarter of 2016.2019. As a result of the decrease in adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations was $0.43$0.59 for the third quarter of 2017,2020, compared to $0.92$0.79 for the third quarter of 2016.2019.
Segment Results
Healthcare
Revenues
Healthcare segment revenues decreased $23.8$12.6 million, or 23.1%12.6%, to $79.6$87.4 million for the third quarter of 20172020 from $103.4$100.0 million for the third quarter of 2016. Revenues2019, primarily due to the negative impact of the COVID-19 pandemic on demand for our services within this segment, as some clients reprioritized and delayed certain projects as a result of the third quarter of 2017 included an incremental $1.7 million from our acquisition of HSM Consulting, which was completed mid-third quarter 2016.uncertainties surrounding the pandemic.
During the three months ended September 30, 2017,2020, revenues from fixed-fee engagements,engagements; time-and-expense engagements,engagements; performance-based arrangements,arrangements; and software support, and maintenance and subscription arrangements represented 68.5%58.9%, 16.6%16.7%, 6.7%17.9%, and 8.2%6.5% of this segment’s revenues, respectively, compared to 67.0%65.6%, 13.4%12.3%, 13.4%16.3%, and 6.2%5.8% of this segment’s revenues, respectively, for the same prior year period.
Of the overall $23.8 million decrease in revenues, $20.4 million was attributable to a decrease in revenue from our full-time billable consultants and $3.4 million was attributable to a decrease in revenue generated by our full-time equivalents.
The decrease in revenue attributable to our full-time billable consultants reflected decreases in the average number of full-time billable consultants and the average billing rate, partially offset by an increase in the consultant utilization rate. This decrease in revenue was primarily driven by a decreased demand for our performance improvement solution. Performance-based fee revenue was $5.3$15.6 million duringfor the third quarter of 20172020 compared to $13.8$16.3 million duringfor the third quarter of 2016.2019. The level of performance-based fees earned may vary based on our clients’ risk sharing preferences and the mix of services we provide. Performance-based fee arrangements may also cause significant variations
Of the overall $12.6 million decrease in revenues, operating results,$7.1 million was attributable to a decrease in revenues from our full-time billable consultants and average billing rates due$5.5 million was attributable to a decrease in revenues from our level of execution and the timing of achievement of the performance-based criteria.
full-time equivalents. The decrease in revenuerevenues attributable to our full-time equivalents was primarily drivenbillable consultants reflected decreases in the consultant utilization rate and the average number of full-time billable consultants, partially offset by a decreased demand for our Studer Group solution andan increase in the average billing rate in the third quarter of 2020 compared to the same prior year period. The decrease in full-time equivalent revenues reflected a decrease in revenue per full-time equivalent, partially offset by an increase in the average number of full-time equivalents.equivalents in the third quarter of 2020 compared to the same prior year period.
Operating Income
Healthcare segment operating income decreased $13.0$7.3 million, or 33.6%22.1%, to $25.8$25.6 million for the three months ended September 30, 20172020 from $38.8$32.9 million for the three months ended September 30, 2016.2019. The Healthcare segment operating margin, defined as segment operating income expressed as a percentage of segment revenues, decreased to 32.4%29.3% for the third quarter of 20172020 from 37.5%32.9% in the same period last year. The decrease in this segment’s operating margin was primarily attributable to increases in salaries and related expenses for our revenue-generating professionals and technology expenses; partially offset by decreases in product and event costs, practice administration and meetings expenses, promotion and marketing expenses, contractor expenses, and signing, retention and other bonus expense for our revenue-generating professionals, as percentages of revenues.
Business Advisory
Revenues
Business Advisory segment revenues increased $3.5 million, or 5.6%, to $66.0 million for the third quarter of 2020 from $62.5 million for the third quarter of 2019, primarily related to strengthened demand for our cloud-based technology and analytics solutions and our restructuring and capital advisory solutions provided to organizations in transition.
During the three months ended September 30, 2020, revenues from fixed-fee engagements; time-and-expense engagements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 31.3%, 61.3%, 5.6%, and 1.8% of this segment’s revenues, respectively, compared to 38.9%, 56.3%, 2.6%, and 2.2% of this segment's revenues, respectively, for the same prior year period. Performance-based fee revenue was $3.7 million for the third quarter of 2020 compared to $1.6 million for the third quarter of 2019. The level of performance-based fees earned may vary based on our clients’ preferences and the mix of services we provide.
Of the overall $3.5 million increase in revenues, $2.2 million was attributable to an increase in revenues from our full-time billable consultants and $1.3 million was attributable to an increase in revenues from our full-time equivalents. The increase in revenues from our full-time billable consultants reflected increases in the average number of billable consultants and the consultant utilization rate, partially offset by a decrease in the average billing rate in the third quarter of 2020 compared to the same prior year period. The increase in revenues generated by our full-time equivalents was driven by an increased use of contractors; and reflected an increase in the average number of full-time equivalents, partially offset by a decrease in revenue per full-time equivalent in the third quarter of 2020 compared to the same prior year period.
Operating Income
Business Advisory segment operating income decreased by $1.2 million, or 9.7%, to $10.8 million for the three months ended September 30, 2020 from $11.9 million for the three months ended September 30, 2019. The Business Advisory segment operating margin decreased to 16.3% for the third quarter of 2020 from 19.1% in the same period last year. The decrease in this segment’s operating margin was primarily attributable to increases in performance bonus expense for our revenue-generating professionals and contractor expenses, as percentages of revenues; partially offset by decreases in promotion and marketing expenses and signing, retention and other bonus expense for our revenue-generating professionals.
Education
Revenues
Education segment revenues decreased $4.9 million, or 8.7%, to $51.9 million for the third quarter of 2020 from $56.8 million for the third quarter of 2019, primarily due to the negative impact of the COVID-19 pandemic on demand for our services within this segment, as some clients reprioritized and delayed certain projects as a result of the uncertainties surrounding the pandemic.
During the three months ended September 30, 2020, revenues from fixed-fee engagements; time-and-expense engagements; and software support, maintenance and subscription arrangements represented 21.1%, 67.9%, and 11.0% of this segment’s revenues, respectively, compared to 21.9%, 69.9%, and 8.2% of this segment’s revenues, respectively, for the same prior year period.
Of the overall $4.9 million decrease in revenues, $4.7 million was attributable to our full-time billable consultants and $0.2 million was attributable to our full-time equivalents. The decrease in revenues attributable to our full-time billable consultants reflected decreases in the consultant utilization rate and the average billing rate, partially offset by an increase in the average number of full-time billable consultants in the third quarter of 2020 compared to the same prior year period. The increase in the average number of full-time billable consultants primarily related to hiring that occurred prior to the COVID-19 pandemic. The decrease in revenues from our full-time equivalents was primarily driven by a decreased use of contractors and project consultants, largely offset by an increase in software subscriptions and data hosting revenues. The overall decrease in full-time equivalent revenues reflected a decrease in the average number of full-time equivalents, partially offset by an increase in revenue per full-time equivalent in the third quarter of 2020 compared to the same prior year period.
Operating Income
Education segment operating income decreased $1.9 million, or 12.9% to $12.5 million for the three months ended September 30, 2020 from $14.4 million for the three months ended September 30, 2019. The Education segment operating margin decreased to 24.2% for the third quarter of 2020 from 25.4% in the same period last year. The decrease in this segment’s operating margin was primarily attributable to an increase in salaries and related expenses for our revenue-generating and support professionals as a percentage of revenues, as well as increases in contractor expenses, product and event costs, and signing and retention bonus expense for our revenue-generating professionals. These decreases to the operating margin arerevenue generating professionals; partially offset by decreases in performance bonus expense for our revenue-generating professionals practice administration and meetingspromotion and marketing expenses, and intangible asset amortization expense, all as a percentagepercentages of revenues.
Education
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Revenues
Education segment revenuesRevenues increased $2.8$1.3 million, or 7.3%0.2%, to $41.4$645.8 million for the third quarterfirst nine months of 20172020 from $38.6$644.5 million for the thirdfirst nine months of 2019. While the COVID-19 pandemic did not have a significant impact on our consolidated revenues in the first quarter of 2016.
During2020, the three months ended September 30, 2017, revenues from fixed-fee engagements, time-and-expense engagements,second and software supportthird quarters of 2020 were negatively impacted by the pandemic as some clients reprioritized or delayed certain projects, primarily in our Healthcare and maintenanceEducation segments. Conversely, the COVID-19 pandemic has strengthened demand for other services we provide, such as our cloud-based technology and subscription arrangements represented 16.2%, 78.1%,analytics solutions within our Business Advisory segment and 5.7% of this segment’s revenues, respectively. During the three months ended September 30, 2016, revenues from fixed-fee engagements, time-and-expense engagements, performance-based arrangements,our restructuring and software support and maintenance and subscription arrangements represented 12.2%, 80.4%, 1.6%, and 5.8% of this segment’s revenues, respectively.capital advisory solutions provided to organizations in transition within our Business Advisory segment.
Of the overall $2.8$1.3 million increase in revenues, $4.3$3.0 million was attributable to an increase in revenues from our full-time billable consultants, which was partially offset by a $1.5 million decrease in revenue attributable to our full-time equivalents. The increase in revenue attributable to our full-time billable consultants reflected increases in the average number of full-time billable consultants and the consultant utilization rate, partially offset by a decrease in the average billing rate. The decrease in revenue from our full-time equivalents was largely driven by a decrease in license revenues, and reflected decreases in both revenue per full-time equivalent and the average number of full-time equivalents in the third quarter of 2017 compared to the same prior year period.
Operating Income
Education segment operating income decreased $3.1 million, or 28.8%, to $7.8 million for the three months ended September 30, 2017 from $10.9 million for the three months ended September 30, 2016. Segment operating margin decreased to 18.7% for the third quarter of 2017 from 28.2% in the same period last year. The decrease in this segment’s operating margin was primarily attributable to increases in performance bonus expense and salaries and related expenses for our revenue-generating professionals, as well as an increase in performance bonus expense for our support personnel, all as a percentage of revenues. The increase in bonus expense was primarily the result of a significant performance bonus adjustment in the third quarter of 2017 to increase our year-to-date performance bonus accrual due to a revised full year forecast. These increases were partially offset by decreases in training expenses and practice administration and meetings expenses.
Business Advisory
Revenues
Business Advisory segment revenues increased $14.0 million, or 33.9%, to $55.4 million for the third quarter of 2017 from $41.4 million for the third quarter of 2016. Revenues for the third quarter of 2017 included $13.4 million from our acquisitions of Innosight and Pope Woodhead, which were completed subsequent to the third quarter of 2016. Third quarter 2017 revenues also included revenues from our acquisition of the international assets of ADI Strategies, which was completed in April 2017 and has since been fully integrated into the Business Advisory segment.
During the three months ended September 30, 2017, revenues from fixed-fee engagements, time-and-expense engagements, performance-based arrangements, and software support and maintenance and subscription arrangements represented 37.5%, 57.7%, 3.0%, and 1.8% of this segment’s revenues, respectively, compared to 18.5%, 78.2%, 1.7%, and 1.6% of this segment’s revenues, respectively, for the same prior year period. Performance-based fee revenue was $1.7 million for the third quarter of 2017, compared to $0.7 million for the same prior year period. The level of performance-based fees earned may vary based on our clients’ preferences
and the mix of services we provide. Performance-based fee arrangements may also cause significant variations in revenues, operating results, and average billing rates due to our level of execution and the timing of achievement of the performance-based criteria.
Of the overall $14.0 million increase in revenues, $14.4 million was attributable to our full-time billable consultants, which was partially offset by a $0.4 million decrease in revenues attributable to our full-time equivalents.
The increase in revenue from our full-time billable consultantsconsultant revenues was primarily drivenattributable to strengthened demand for services in our Business Advisory and Education segments, partially offset by a decrease in demand for services in our acquisitions of Innosight, Pope Woodhead, and the international assets of ADI Strategies, andHealthcare segment, as discussed below in Segment Results. The overall increase in full-time billable consultant revenues reflected an increase in the average number of full-time billable consultants, partially offset by overall decreases in the consultant utilization rate and the average billing rate and consultant utilization rate. during the first nine months of 2020 compared to the same prior year period.
The decrease in revenue fromfull-time equivalent revenues was attributable to decreases in full-time equivalent revenues in our Healthcare segment, partially offset by an increase in full-time equivalentsequivalent revenues in our Education and Business Advisory segments, as discussed below in Segment Results; and reflected aan overall decrease in revenue per full-time equivalent, partially offset by an increase in the average number of full-time equivalents in the third quarter of 2017 compared to the same prior year period.
Operating Income
Business Advisory segment operating income increased by $4.2 million, or 49.1%, to $12.8 million for the three months ended September 30, 2017 from $8.6 million for the three months ended September 30, 2016. Segment operating margin increased to 23.2% for the third quarter of 2017 from 20.8% in the same period last year. The increase in this segment’s operating margin was primarily attributable to revenue growth that outpaced increases in performance bonus expense for our revenue-generating professionals, salaries and related expenses for our revenue-generating professionals and our support personnel, and contractor expenses. These increases to segment operating margin were partially offset by increases in travel related costs, signing and retention bonuses for our revenue-generating professionals, and third-party consulting expenses, all as a percentage of revenues.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Revenues
Revenues decreased $1.5 million, or 0.3%, to $546.6 million forduring the first nine months of 2017 from $548.1 million for2020 compared to the first nine months of 2016. Revenues2019.
In the second and third quarters of 2020, the COVID-19 pandemic negatively impacted sales and elongated the sales cycle for new opportunities for certain services, particularly within our Healthcare and Education segments, and therefore is expected to continue to have an unfavorable impact on our financial results in the first nine monthsfourth quarter of 2017 included $34.1 million from our acquisitions of Innosight and Pope Woodhead, which were completed subsequent2020 compared to the thirdfourth quarter of 2016, and $13.9 million of incremental revenues due to the full period impact of our acquisition of MyRounding Solutions, LLC ("MyRounding") and HSM Consulting, which we completed mid-first quarter 2016 and mid-third quarter 2016, respectively. Revenues for the first nine months of 2017 also included a full period impact of our acquisition of the U.S. assets of ADI Strategies and revenues from our acquisition of the international assets of ADI Strategies. These acquisitions were completed in May 2016 and April 2017, respectively, and have since been fully integrated into the Business Advisory segment.
The overall $1.5 million decrease in revenues was primarily attributable to our full-time billable consultants. The decrease in full-time billable consultant revenues reflected decreases in the average billing rate and consultant utilization rate, mostly offset by an increase in the average number of billable consultants. As discussed below in Segment Results, this decrease in revenue was largely driven by decreased demand for services in our Healthcare segment, mostly offset by revenues from our acquisitions of Innosight and Pope Woodhead, as well as strengthened demand for services in our Business Advisory and Education segments.2019.
Total Direct Costs
Our total directDirect costs, includingexcluding amortization of intangible assets and software development costs, increased $17.0$28.8 million, or 5.1%6.8%, to $351.6$451.2 million for the nine months ended September 30, 2017,2020, from $334.6$422.4 million for the nine months ended September 30, 2016.2019. The overall $17.0$28.8 million increase primarily related to a $14.3$27.1 million increase in salaries and related expenses for our revenue-generating professionals, which was largely driven by increased headcount from acquisitionsin all three of our segments and our ongoing cloud-based ERP investment, partially offset by a decreaseprimarily reflected hiring that occurred in salaries and related expenses in our Healthcare segmentthe second half of 2019 prior to the COVID-19 pandemic, as well as a result of headcount reductions. Additional increases included a $2.8$2.4 million increase in contractorshare-based compensation expense for our revenue-generating professionals, a $2.1 million increase in technology expenses, a $1.1 million increase in contractor expenses, and a $0.9 million increase in performance bonus expenses for our revenue-generating professionals. These increases were partially offset by a $2.3 million decrease in signing, retention and retentionother bonus expense for our revenue-generating professionals, a $0.8$1.4 million increasedecrease in product and event costs, a $0.5 million increase in project costs, and a $0.5 million increase in technology expenses. These increases were partially offset by a $2.9$0.9 million decrease in intangible asset amortization expense and a $0.5 million decrease in performance bonus expense for our revenue-generating professionals.project costs. As a percentage of revenues, our total direct costs increased to 64.3%69.9% during the first nine months of 20172020 compared to 61.0%65.5% during the first nine months of 20162019 primarily due to the items described above.increase in salaries and related expenses for our revenue-generating professionals, as a percentage of revenues.
Total direct costs for the nine months ended September 30, 20172020 included $8.4$4.0 million of amortization expense for intangible assets, primarily representing customer contracts and software acquired in business combinations and internal software development costs and intangible assets, compared to $11.3$3.5 million of amortization expense for the same prior year period. The $2.9 million decrease inIntangible asset amortization expense was primarily attributableincluded within direct costs for the nine months ended September 30, 2020 and 2019 related to the decreasing amortization expense oftechnology and software, certain customer relationships, and customer contracts acquired in connection with our Studer Group acquisition, due to the accelerated basis of amortization, partially offset by the amortization of intangible assets acquired in the Innosight acquisition, which we completed in the first quarter of 2017.business acquisitions. See Note 5 "Acquisitions" and Note 64 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information about our intangible assets.
Operating Expenses and Other Gains,Losses (Gains), Net
Selling, general and administrative expenses increased $12.2decreased $24.5 million, or 10.2%16.2%, to $132.1$126.9 million in the nine months ended September 30, 2017,2020, from $119.9$151.4 million in the nine months ended September 30, 2016. Selling, general and administrative expenses for the first nine months of 2017 included $9.82019. The $24.5 million from Innosight and Pope Woodhead. The overall $12.2 million increase wasdecrease primarily related to an $8.5$8.0 million increase in salaries and related expenses for our support personnel, a $2.2 million increase in facilities and other office-related expenses, a $1.4 million increase in travel related costs, a $1.2 million increase in third-party consulting expenses, a $1.0 million increasedecrease in promotion and sponsorshipmarketing expenses, and a $0.7$2.6 million increasedecrease in signing and retention bonusfacilities expense, for our support personnel. These increases were partially offset by a $2.5$2.6 million decrease in performance bonus expense for our support personnel, a $2.2 million decrease in training expenses, a $2.1 million decrease in third-party consulting expenses, a $2.0 million decrease
in practice administration and meetings expenses, and a $0.8$1.8 million decrease in the change in the market value of our deferred compensation liability. During the first nine months of 2020, the market value of our deferred compensation liability increased by $1.0 million, compared to an increase of $2.8 million during the first nine months of 2019. This $1.8 million decrease in expense is offset by a $1.8 million decrease in the gain recognized for the change in the market value of our investments that are used to fund our deferred compensation liability and recognized in other income (expense), net. Additional decreases in selling, general and administrative expenses include a $1.7 million decrease in share-based compensation expense for our support personnel, a $1.3 million decrease in legal expenses, and a $1.3 million decrease in recruiting expenses. These decreases were partially offset by a $1.4 million increase in data hosting and software related expenses and a $1.2 million increase in salaries and related expenses for support personnel. The decreases in promotion and marketing expenses, training expenses, and practice administration and meetings expenses primarily relate to the cancellation or delay of in-person meetings and events and business travel due to the COVID-19 pandemic. The decrease in share-based compensation expense primarily related to a decrease in the expected funding of performance-based share awards for our executive officers recorded in the third quarter of 2020. The decrease in legal expenses was primarily due to third-party transaction-related expenses related to the evaluation of a potential acquisition in the second quarter of 2019 that ultimately did not consummate. As a percentage of revenues, selling, general and administrative expenses increaseddecreased to 24.2%19.6% during the first nine months of 20172020 compared to 21.9%23.5% during the first nine months of 20162019. This decrease was primarily dueattributable to the items describedoverall decrease in selling, general and administrative expenses noted above.
Restructuring charges for the first nine months of 20172020 totaled $5.3$1.8 million, compared to $4.1$2.2 million for the first nine months of 2016.2019. The charges for the first nine months of 2017 primarily consisted of $2.5$1.8 million related to the accrual of remaining lease obligations, net of estimated sublease income, due to relocating our San Francisco office to a smaller space and consolidating our Chicago and New York officesrestructuring charge incurred in the first nine months of 2017, and accelerated depreciation on leasehold improvements2020 primarily related to a $1.2 million accrual for our San Francisco office, $2.0the termination of a third-party advisor agreement; $0.3 million related to workforce reductions in our Healthcare segment to better align our resources with market demand,demand; $0.2 million related to rent and $0.4related expenses, net of sublease income, for office spaces previously vacated, and $0.1 million related to workforce reductions in our corporate operations primarily to adjust our infrastructure to align with the decreased workforce in the Healthcare segment. The charges foroperations. During the first nine months of 20162019, we exited a portion of our Lake Oswego, Oregon corporate office resulting in a $0.7 million lease impairment charge on the related operating lease right-of-use asset and leasehold improvements and $0.2 million of accelerated depreciation on furniture and fixtures in that office. Additionally, in the first nine months of 2019, we exited the remaining portion of our Middleton, Wisconsin office and an office space in Houston, Texas, resulting in restructuring charges of $0.4 million and $0.1 million, respectively, which primarily consisted of $1.5 million related to updated assumptions for lease accruals for our Washington, D.C. space vacated inaccelerated depreciation on furniture and fixtures. Additional restructuring charges during the fourth quarterfirst nine months of 2014, $1.22019 include a total of $0.5 million related to workforce reductions in our Healthcare segment to better align resources with market demand, $0.9 million related to workforce reductions in our corporate operations as we adjusted our infrastructure to align with our Huron Legal divestiture, and $0.2 million related to the wind down of our foreign consulting operations based in the Middle East.
Other gains, net totaled $0.2 million for the nine months ended September 30, 2017, and represents gains due to the decrease in the fair value of the liability for future expected contingent consideration payments related to acquisitions. In the first nine months of 2016, we recognized $0.5 million of remeasurement losses for the increase in the fair value of the contingent consideration liability. 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.demand. See Note 11 "Fair Value of Financial Instruments"8 "Restructuring Charges" within the notes to our consolidated financial statements for additional information on the fair value of contingent consideration liabilities.our restructuring charges.
DepreciationLitigation and amortization expense increased by $5.5other gains totaled $0.2 million to $28.5 million infor the nine months ended September 30, 2017, from $23.12020, which consisted of a litigation settlement gain for the resolution of a claim that was settled in the first quarter of 2020. Other gains totaled $1.6 million infor the nine months ended September 30, 2016.2019, which primarily consisted of $1.5 million of remeasurement gains to decrease the estimated fair value of our liabilities for contingent consideration payments related to business acquisitions.
Depreciation and amortization expense decreased by $2.8 million, or 13.2%, to $18.5 million for the nine months ended September 30, 2020, from $21.3 million for the nine months ended September 30, 2019. The increasedecrease was primarily attributable to amortization expense for intangible assets acquired in the Innosight, ADI Strategies, Pope Woodhead, and HSM Consulting acquisitions, and an increasea decrease in amortization expense for a customer-related intangible assetthe trade name acquired in theour Studer Group acquisition.acquisition that was fully amortized in the fourth quarter of 2019; decreasing amortization expense for customer relationships due to the accelerated basis of amortization in prior periods, including the customer relationships acquired in our Studer Group acquisition; and customer relationships acquired in other business acquisitions that were fully amortized in prior periods. Intangible asset amortization included within operating expenses for the nine months ended September 30, 2020 and 2019 primarily relatesrelated to certain customer relationships, trade names and non-competition agreements acquired in connection with our business acquisitions. See Note 5 "Acquisitions" and Note 64 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information about our intangible assets.
During the first quarter ended June 30, 2017,of 2020, we recorded a $209.6$59.8 million of non-cash pretax goodwill impairment chargecharges related to our HealthcareStrategy and Innovation and Life Sciences reporting unit. This charge isunits within our Business Advisory segment; primarily related to the expected decline in sales, increased uncertainty in the backlog and a decrease in the demand for the services these reporting units provide, as a result of the COVID-19 pandemic. These charges are non-cash in nature and doesdo not affect our liquidity or debt covenants. See the "Critical Accounting Policies" section below and Note 64 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for further discussionadditional information on the charges. The non-cash goodwill impairment charge related to the Strategy and Innovation reporting unit reduced the goodwill balance of thisthe reporting unit to $37.5 million as of March 31, 2020. The non-cash goodwill impairment charge related to the Life Sciences reporting unit reduced the goodwill balance to zero as of March 31, 2020. Any future significant decline in the performance of our Strategy and Innovation reporting unit compared to our internal forecasts could result in another non-cash goodwill impairment charge. During the second and third quarters of 2020, we did not identify any indicators that would lead us to believe that the fair value of any of our reporting units may not exceed their carrying values. We will continue to evaluate goodwill for impairment during future periods.
Operating Income (Loss)
Operating income decreased $246.2$61.4 million to a loss of $180.3$16.2 million in the first nine months of 20172020 from operating income of $65.8$45.2 million in the first nine months of 2016.2019. This decrease is primarily attributable to the $209.6$59.8 million of non-cash pretax goodwill impairment charge recorded in the second quarter of 2017charges related to our Healthcare segment.Business Advisory segment that were recognized in the first quarter of 2020 and the increase in direct costs, partially offset by the decrease in selling, general and administrative expenses as discussed above. See the "Critical Accounting Policies" section below and Note 64 "Goodwill and
Intangible Assets" within the notes to our consolidated financial statements for additional information on the non-cash goodwill impairment charge.charges. Operating margin, which is defined as operating income (loss) expressed as a percentage of revenues, decreased to (33.0)(2.5)% for the nine months ended September 30, 2017,2020, compared to 12.0%an operating margin of 7.0% for the nine months ended September 30, 2016.2019. The decrease in operating margin was primarily attributable to the goodwill impairment charge, as well as increasescharges and the increase in salaries and related expenses for both our revenue-generating professionals, and support personnel, contractor expenses, and signing and retention bonuses for our revenue-generating professionals during the first nine monthsas a percentage of 2017 comparedrevenues. These decreases to the same prior year period.operating margin were partially offset by the decreases in selling, general and administrative expenses.
Total Other Expense,Income (Expense), Net
Total otherInterest expense, net of interest income decreased by $0.4$5.6 million to $10.6$7.5 million in the first nine months of 20172020 from $11.0$13.2 million in the first nine months of 2016. The decrease was2019, primarily attributable to a $0.9 million gain on salethe maturity of our Life Sciences Compliance and Operations solution withinConvertible Notes on October 1, 2019, partially offset by higher levels of borrowing under our Business Advisory segment incredit facility during the second quarterfirst nine months of 2017.2020 compared to the same prior year period. See Note 6 "Goodwill and Intangible Assets"7 "Financing Arrangements" within the notes to our consolidated financial statements for additional information onabout our Convertible Notes and credit facility.
Other income, net decreased by $2.1 million to a net gain of $0.7 million in the sale.first nine months of 2020 from a net gain of $2.8 million in the first nine months of 2019. The decrease in total other expense,income, net was alsoprimarily attributable to a $1.8$1.0 million gain inrecognized during the first nine months of 2020 for the market value of our investments that are used to fund our deferred compensation liability, compared to a $1.0$2.8 million gain recognized during the first nine months of 2019. Additionally, other income, net includes the recognition of $0.2 million of foreign currency transaction losses in the first nine months of 2016. These decreases were partially offset by a $1.5 million increase in interest expense, net2020 compared to an immaterial amount of interest incomeforeign currency transaction losses recognized in the first nine months of 2017 compared to the same prior year period. The increase in interest expense was due to higher levels of borrowings and higher interest rates under our credit facility during the first nine months of 2017 compared to the first nine months of 2016.2019.
Income Tax Expense (Benefit)
On March 27, 2020, the President of the United States signed into law the CARES Act, a nearly $2 trillion emergency economic stimulus package in response to the COVID-19 outbreak, which among other items, includes income tax provisions relating to net operating loss carryback periods and technical corrections to tax depreciation methods for qualified improvement property. As a result of the enactment of this legislation during the first quarter of 2020, we recorded a tax benefit of $0.8 million related to the remeasurement of a portion of our income tax receivable due to the ability to apply the federal net operating loss incurred in 2018 to prior year income for a refund at a higher tax rate in the carryback period.
For the nine months ended September 30, 2017,2020, our effective tax rate was 26.1%23.5% as we recognized an income tax benefit from continuing operations of $49.7$5.4 million on a loss from continuing operations of $190.9 million. For the nine months ended September 30, 2016, our effective tax rate was 35.6% as we recognized income tax expense of $19.5 million on income from continuing operations of $54.8$23.0 million. The effective tax rate for the nine months ended September 30, 2017of 23.5% was less favorable than the statutory rate, inclusive of state income taxes, of 26.0%, primarily due to certain nondeductible business expenses and the $61.2 million non-deductiblenondeductible portion of the goodwill impairment chargecharges recorded induring the secondfirst quarter of 2017, as well as $1.8 million of discrete tax expense for share-based compensation related to the adoption of ASU 2016-09 Improvements to Employee Share-Based Payment Accounting. Refer to Note 3 "New Accounting Pronouncements" for additional information on the adoption of ASU 2016-09.2020. These unfavorable discrete items were partially offset by a $2.7 milliondiscrete tax benefit recordedfor share-based compensation awards that vested during the first quarter, the positive impact of certain federal tax credits, and the discrete tax benefit for the remeasurement of a portion of our income tax receivable as a result of the enactment of the CARES Act in the thirdfirst quarter of 2017 related to a previously unrecognized tax benefit from our 2014 "check-the-box" election. The effective tax rate for2020.
For the nine months ended September 30, 20162019, our effective tax rate was lower20.8% as we recognized income tax expense from continuing operations of $7.3 million on income from continuing operations of $34.9 million. The effective tax rate of 20.8% was more favorable than the statutory rate, inclusive of state income taxes, of 26.4%, primarily due to the year-to-date impact of a discrete favorable adjustment to our state tax ratebenefits recognized primarily in the secondthird quarter of 2016, non-taxable income, valuation allowance reductions, certain credits2019 related to U.S. federal and deductions, andforeign return to provision adjustments. In addition, we recognized a discrete tax benefit in the third quarter of 2019 related to share-based compensation, partially offset by non-deductible business expenses.a previously unrecognized tax benefit due to the expiration of statute of limitations on our "check-the-box" election made in 2015 to treat certain wholly-owned foreign subsidiaries as disregarded entities for U.S. federal income tax purposes.
See Note 12 "Income Taxes" within the notes to our consolidated financial statements for additional information on our income tax expense.
Net Income (Loss) from Continuing Operations and Earnings (Loss) Per Share
Net income from continuing operations decreased by $176.5$45.2 million to a net loss from continuing operations of $141.2$17.6 million for the nine months ended September 30, 2017,2020, from net income from continuing operations of $35.3$27.6 million for the same prior year period. This decrease is primarily attributable to the $209.6$59.8 million of non-cash pretax goodwill impairment chargecharges related to our Healthcare segment.Business Advisory segment recognized in the first quarter of 2020. As a result of the decrease in net income from continuing operations, diluted loss per share from continuing operations for the first nine months of 20172020 was $6.59$0.81 compared to diluted earnings per share from continuing operations of $1.65$1.23 for the first nine months of 2016.2019. The non-cash goodwill impairment chargecharges had a $7.16$2.11 unfavorable impact on diluted earnings per share from continuing operations for the first nine months of 2017.
Discontinued Operations
Net income from discontinued operations for the nine months ended September 30, 2017 was $0.7 million and primarily related to updated lease assumptions for vacated office space directly related to the sale of the Huron Legal segment. Net loss from discontinued operations for the nine months ended September 30, 2016 was $1.8 million and primarily related to obligations for former employees, legal fees, and updated lease assumptions for vacated office space directly related to the sale of the Huron Legal segment. See Note 4 "Discontinued Operations" within the notes to our consolidated financial statements for additional information about our discontinued operations.2020.
EBITDA and Adjusted EBITDA
EBITDA decreased $241.6$65.8 million to a loss of $140.2$7.0 million for the nine months ended September 30, 2017,2020, from earnings of $101.4$72.8 million for the nine months ended September 30, 2016. Adjusted EBITDA decreased $32.7 million to $73.1 million in the first nine months of 2017 from $105.8 million in the first nine months of 2016.2019. The decrease in EBITDA was primarily attributable to the non-cash goodwill impairment chargecharges of $209.6$59.8 million recordedrecognized in the secondfirst quarter of 2017.2020 and the increase in salaries and related expense for our revenue-generating professionals for the first nine months of 2020 compared to the first nine months of 2019; partially offset by the decrease in selling, general and administrative expenses, excluding the change in the market value of our deferred compensation liability for the first nine months of 2020 compared to the same prior year period.
Adjusted EBITDA decreased $6.0 million to $70.1 million in the first nine months of 2020 from $76.0 million in the first nine months of 2019. The decrease in adjusted EBITDA was primarily dueattributable to the increase in salaries and related expenses for our revenue-generating professionals for the first nine months of 2020 compared to the first nine months of 2019; largely offset by the decrease in segment operating income, as discussed belowselling, general and administrative expenses, excluding the change in Segment Results, as well as an increase in corporatethe market value of our deferred compensation liability and transaction-related expenses primarily duerelated to ourthe evaluation of potential acquisitions, for the first nine months of Innosight and Pope Woodhead.2020 compared to the same prior year period.
Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share
Adjusted net income from continuing operations decreased $24.6$5.9 million to $31.7$37.7 million in the first nine months of 20172020 compared to $56.3$43.7 million in the first nine months of 2016.2019. As a result of the decrease in adjusted net income from continuing operations, adjusted
diluted earnings per share from continuing operations for the first nine months of 20172020 was $1.47$1.70 compared to $2.63$1.95 for the first nine months of 2016.2019.
Segment Results
Healthcare
Revenues
Healthcare segment revenues decreased $62.3$27.3 million, or 19.2%9.2%, to $261.3$268.3 million for the first nine months of 20172020 from $323.5$295.6 million for the first nine months of 2016. Revenues for the first nine months of 2017 included $13.9 million of incremental revenues2019, primarily due to the full periodnegative impact of the COVID-19 pandemic on demand for our acquisitionsservices within this segment, as some clients reprioritized and delayed certain projects as a result of HSM Consulting and MyRounding, which we completed mid-first quarter 2016 and mid-third quarter 2016, respectively.the uncertainties surrounding the pandemic.
During the nine months ended September 30, 2017,2020, revenues from fixed-fee engagements,engagements; time-and-expense engagements,engagements; performance-based arrangements,arrangements; and software support, and maintenance and subscription arrangements represented 67.4%58.9%, 16.8%16.2%, 8.3%18.3%, and 7.5%6.6% of this segment’s revenues, respectively, compared to 70.4%63.9%, 10.7%13.3%, 13.1%17.0%, and 5.8% of this segment’s revenues, respectively, for the same prior year period.
The overall $62.3 million decrease in revenues was primarily attributable to a decrease in revenue from our full-time billable consultants. The decrease in revenue attributable to our full-time billable consultants was primarily driven by a decreased demand for our performance improvement solution and reflected decreases in the average number of full-time billable consultants, average billing rate, and consultant utilization rate. Performance-based fee revenue was $21.6$49.0 million during the first nine months of 20172020, compared to $42.5$50.1 million during the first nine months of 2016.2019. The level of performance-based fees earned may vary based on our clients’ risk sharing preferences and the mix of services we provide. Performance-based fee arrangements may also cause significant variations
Of the overall $27.3 million decrease in revenues, operating results,$17.8 million was attributable to a decrease in revenues from our full-time billable consultants and $9.5 million was attributable to our full-time equivalents. The decrease in revenues attributable to our full-time billable consultants reflected a decrease in the consultant utilization rate, partially offset by increases in the average number of full-time billable consultants and the average billing rates duerate in the first nine months of 2020 compared to our levelthe same prior year period. The decrease in full-time equivalent revenues reflected a decrease in revenue per full-time equivalent, partially offset by an increase in the average number of execution andfull-time equivalents during the timingfirst nine months of achievement of2020 compared to the performance-based criteria.same prior year period.
Operating Income
Healthcare segment operating income decreased $35.6$23.2 million, or 29.9%24.7%, to $83.6$70.8 million for the nine months ended September 30, 2017,2020, from $119.2$94.1 million for the nine months ended September 30, 2016.2019. The Healthcare segment operating margin decreased to 32.0%26.4% for the first nine months of 20172020 from 36.9%31.8% in the same period last year. The decrease in this segment’s operating margin was primarily attributable to an increaseincreases in salaries and related expenses for our revenue-generating professionals as a percentage of revenues, as well as increases in salaries and related expenses for our support personnel, contractor expenses, product and event costs, and restructuring charges,technology expenses; partially offset by decreases in performance bonus expense for our revenue-generating professionals, contractor expenses, and support personnelproduct and event costs, as a percentagepercentages of revenues.
Business Advisory
Revenues
Business Advisory segment revenues increased $17.8 million, or 9.7%, to $201.4 million for the first nine months of 2020 from $183.6 million for the first nine months of 2019, primarily related to strengthened demand for our cloud-based technology and analytics solutions and our restructuring and capital advisory solutions provided to organizations in transition.
During the first nine months of 2020, revenues from fixed-fee engagements; time-and-expense engagements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 36.5%, 58.8%, 2.9%, and 1.8% of this segment’s revenues, respectively, compared to 39.6%, 56.8%, 1.5%, and 2.1% of this segment’s revenues, respectively, during the same prior year period. Performance-based fee revenue was $5.9 million for the first nine months of 2020, compared to $2.8 million for the first nine months of 2019. The level of performance-based fees earned may vary based on our clients’ preferences and the mix of services we provide.
Of the overall $17.8 million increase in revenues, $14.3 million was attributable to revenues generated by our full-time billable consultants and $3.5 million was attributable to our full-time equivalents. The increase in revenues from our full-time billable consultants was primarily driven by increases in the average number of full-time billable consultants and the average billing rate in the first nine months of 2020 compared to the same prior year period. The increase in revenues from our full-time equivalents was driven by an increased use of contractors; and reflected an increase in the average number of full-time equivalents, partially offset by a decrease in revenue per full-time equivalent in the first nine months of 2020 compared to the same prior year period.
Operating Income
Business Advisory segment operating income increased by $4.3 million, or 13.1%, to $37.3 million for the nine months ended September 30, 2020, from $33.0 million for the nine months ended September 30, 2019. The Business Advisory segment operating margin increased to 18.5% for the first nine months of 2020 from 18.0% in the same period last year. The increase in this segment’s operating margin was primarily attributable to a decrease in promotion and marketing expenses, revenue growth that outpaced an increase in salaries and related expenses for our revenue-generating professionals, and decreases in signing, retention and other bonus expense for our revenue-generating professionals and practice administration and meetings expenses. These increases to the segment's operating margin were partially offset by increases in performance bonus expense for our revenue-generating professionals, contractor expenses, share-based compensation expense for our revenue-generating professionals, and restructuring charges, all as percentages of revenues. The restructuring charge recorded in the first nine months of 2020 related to the termination of a third-party advisor agreement.
The non-cash goodwill impairment chargecharges related to the Strategy and Innovation and Life Sciences reporting units within the Business Advisory segment, which are discussed above within the consolidated results, isare not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segments.segment. We do not include the impact of goodwill impairment charges in our evaluation of segment performance. See the "Critical Accounting Policies" section below and Note 64 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for further discussion of this charge. We will continue to evaluate goodwill for impairment during future periods. Any future significant decline inadditional information on the performance of the Healthcare segment compared to our internal forecasts could result in another non-cash goodwill impairment charge.charges and our goodwill balances.
Education
Revenues
Education segment revenues increased $15.8$10.8 million, or 14.1%6.5%, to $127.6$176.0 million for the first nine months of 20172020 from $111.8 million for$165.3 million. The increase in revenues was primarily related to an increase in our cloud-based technology and analytics solutions and strategy and research consulting solutions in the first nine monthshalf of 2016.2020, partially offset by the negative impact of the COVID-19 pandemic on demand for our on-premise technology consulting solutions.
For the nine months ended September 30, 2017,2020, revenues from fixed-fee engagements,engagements; time-and-expense engagements,engagements; performance-based arrangements,arrangements; and software support, and maintenance and subscription arrangements represented 15.8%20.2%, 78.5%70.1%, 0.3%,0.4% and 5.4%9.3% of this segment’s revenues, respectively, compared to 14.5%respectively. Revenues from fixed-fee engagements; time-and-expense engagements; and software support, maintenance and subscription arrangements represented 22.9%, 78.6%, 0.9%69.1%, and 6.0%8.0% of this segment's revenues, respectively, during the same prior year period.
Of the overall $15.8$10.8 million increase in revenues, $16.9$6.5 million was attributable to revenues generated by our full-time billable consultants whichand $4.3 million was partially offset by a $1.1 million decrease in revenues attributable to revenues generated by our full-time equivalents. The increase in revenuerevenues from our full-time billable consultants reflected increasesan increase in the average number of full-time billable consultants, andpartially offset by decreases in the consultant utilization rate and average billing rate in the first nine months of 2020 compared to the same prior year period. The increase in the average number of full-time billable consultants primarily related to hiring that occurred prior to the COVID-19 pandemic. The increase in revenues from our full-time equivalents was primarily driven by an increased use of contractors and project consultants as well as an increase in software subscriptions and data hosting revenues; and reflected an increase in the average number of full-time equivalents, partially offset by a decrease in the average billing rate. The decrease in revenue from our full-time equivalents was largely driven by
a decrease in license revenues, and reflected decreases in both revenue per full-time equivalent and the average number of full-time equivalents in the first nine months of 20172020 compared to the same prior year period.
Operating Income
Education segment operating income increased $0.3decreased $1.4 million, or 0.9%3.3%, to $31.8$41.8 million for the nine months ended September 30, 2017,2020, from $31.5$43.2 million for the nine months ended September 30, 2016.2019. The Education segment operating margin decreased to 24.9%23.7% for the first nine months of 20172020 from 28.1%26.2% in the same period last year. The decrease in this segment’s operating margin was primarily attributable to increases in performance bonus expense for both our revenue-generating professionals and support personnel, as well as an increase in salaries and related expenses for our revenue-generating professionals, technology expenses, and contractor expenses, all as a percentagepercentages of revenues, partially offset by decreases in training expenses and practice administration and meetings expenses.
Business Advisory
Revenues
Business Advisory segment revenues increased $45.0 million, or 39.9%, to $157.8 million for the first nine months of 2017 from $112.8 million for the first nine months of 2016. Revenues for the first nine months of 2017 included $34.1 million from our acquisitions of Innosight and Pope Woodhead, which were completed subsequent to the third quarter of 2016. Revenues for the first nine months of 2017 also included a full period impact of our acquisition of the U.S. assets of ADI Strategies and revenues from our acquisition of the international assets of ADI Strategies. These acquisitions were completed in May 2016 and April 2017, respectively, and have since been fully integrated into the Business Advisory segment.
During the first nine months of 2017, revenues from fixed-fee engagements, time-and-expense engagements, performance-based arrangements, and software support and maintenance and subscription arrangements represented 34.7%, 62.6%, 1.2%, and 1.5% of this segment’s revenues, respectively, compared to 19.5%, 74.0%, 5.4%, and 1.1% of this segment’s revenues, respectively, during the same prior year period. Performance-based fee revenue was $1.9 million for the first nine months of 2017 compared to $6.2 million for the same prior year period. The level of performance-based fees earned may vary based on our clients’ preferences and the mix of services we provide. Performance-based fee arrangements may also cause significant variations in revenues, operating results, and average billing rates due to our level of execution and the timing of achievement of the performance-based criteria.
Of the overall $45.0 million increase in revenues, $44.1 million was attributable to our full-time billable consultants and $0.9 million was attributable to our full-time equivalents. The increase in revenue from our full-time billable consultants was primarily driven by our acquisitions of Innosight, ADI Strategies, and Pope Woodhead, and reflected increases in the average number of full-time billable consultants and consultant utilization rate,revenues; partially offset by a decrease in the average billing rate. The increase in revenue from our full-time equivalents reflected increases in the average number of full-time equivalentspromotion and revenue per full-time equivalent.
Operating Income
Business Advisory segment operating income increased by $11.6 million, or 49.9%, to $34.9 million for the nine months ended September 30, 2017, from $23.3 million for the nine months ended September 30, 2016. The Business Advisory segment operating margin increased to 22.1% for the first nine months of 2017 from 20.6% in the same period last year. The increase in this segment’s operating margin was primarily attributable to a decrease inmarketing expenses and performance bonus expense for our revenue-generating professionals, as a percentage of revenues, as well as decreases in share-based compensation expense for our revenue-generating professionals and contractor expense, partially offset by increases, as a percentage of revenues, in salaries and related expenses for our revenue-generating professionals, third-party consulting expenses, signing and retention bonuses for our revenue-generating professionals, and travel related costs.
professionals.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $8.4increased $63.1 million to $74.7 million at September 30, 2020 from $17.0$11.6 million at December 31, 2016 to $8.7 million at September 30, 2017.2019. As of September 30, 2017,2020, our primary sources of liquidity are cash on hand, cash flows from our U.S. operations, and borrowing capacity available under our credit facility.
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
Cash Flows (in thousands): | | 2017 | | 2016 | Cash Flows (in thousands): | | 2020 | | 2019 |
Net cash provided by operating activities | | $ | 52,432 |
| | $ | 79,745 |
| Net cash provided by operating activities | | $ | 77,985 | | | $ | 51,745 | |
Net cash used in investing activities | | (125,253 | ) | | (81,233 | ) | Net cash used in investing activities | | (28,388) | | | (24,420) | |
Net cash provided by (used in) financing activities | | 64,262 |
| | (47,979 | ) | Net cash provided by (used in) financing activities | | 13,517 | | | (11,060) | |
Effect of exchange rate changes on cash | | 192 |
| | 133 |
| Effect of exchange rate changes on cash | | 27 | | | 38 | |
Net decrease in cash and cash equivalents | | $ | (8,367 | ) | | $ | (49,334 | ) | |
Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | | $ | 63,141 | | | $ | 16,303 | |
Operating Activities
Net cash provided by operating activities totaled $52.4$78.0 million for the nine months ended September 30, 2017 and $79.72020, compared to $51.7 million for the same period last year.nine months ended September 30, 2019. Our operating assets and liabilities consist primarily of receivables from billed and unbilled services, accounts payable and accrued expenses, accrued payroll and related benefits, and deferred revenues. The volume of services rendered and the related billings and timing of collections on those billings, as well as payments of our accounts payable and salaries, bonuses, and related benefits to employees affect these account balances.
The decreaseincrease in cash provided by operationsoperating activities for the first nine months of 20172020 compared to the same prior year period was primarily attributable to lower net income,an increase in cash collections, a decrease in selling, general and administrative expenses for the collectionfirst nine months of a settlement receivable2020 compared to the first nine months of 2019; and the deferral of the employer's portion of social security taxes as provided for under the CARES Act. These increases to cash provided by operating activities were partially offset by increases in payments to employees for salaries and related benefits in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 and the amount paid for annual performance bonuses in the first quarter of 2016 and a decrease in cash collections from clients in2020 compared to the first nine monthsquarter of 2017, partially offset by decreased vendor and tax payments.2019.
Investing Activities
Net cash used in investing activities was $125.3$28.4 million and $24.4 million for the nine months ended September 30, 20172020 and $81.2 million for the same period last year.2019, respectively.
The use of cash in the first nine months of 20172020 primarily consisted of $106.9$13.0 million for the purchasespurchase of businesses and $20.1an additional convertible debt investment in Shorelight Holdings, LLC; $6.8 million for payments related to internally developed software; $5.7 million for purchases of property and equipment, primarily related to purchases of leasehold improvements and purchases of furniture and fixtures for newcertain office spaces in certain locations.and computers and related equipment; and $2.0 million for contributions to our life insurance policies which fund our deferred compensation plan.
The use of cash in the first nine months of 20162019 primarily consisted of $69.1 million for the purchases of businesses and $9.4$10.0 million for purchases of property and equipment.equipment, primarily related to purchases of computers and related equipment and leasehold improvements for new office spaces in certain locations; $7.5 million for payments related to internally developed software; $4.4 million for contributions to our life insurance policies which fund our deferred compensation plan; and $2.5 million for the purchase of a business in the third quarter of 2019.
WeIn order to support our liquidity during the COVID-19 pandemic, we took proactive measures to increase available cash on hand, including reducing discretionary capital expenses. As a result, as of September 30, 2020, we estimate that cash utilized for purchases of software development and property and equipment in 20172020 will betotal approximately $25.0$16 million to $20 million. These purchases will primarily consistingconsist of leasehold improvements, furniture and fixtures, andsoftware development costs, information technology related equipment to support our corporate infrastructure.infrastructure, and leasehold improvements for certain office locations.
Financing Activities
Net cash provided by financing activities was $64.3$13.5 million for the nine months ended September 30, 2017.2020. During the first nine months of 2017,2020, we borrowed $241.0$283.0 million, under our credit facility, primarilyall of which was in the first quarter of 2020, including $125.0 million in March 2020 to fund our acquisitionsmaintain excess cash and support liquidity during the period of Innosight and Pope Woodhead anduncertainty created by the COVID-19 pandemic, as well as to fund our annual performance bonus payment, and made repayments on our credit facility of $170.0 million.
Net cash used in financing activities was $48.0 million for the nine months ended September 30, 2016.payment. During the first nine months of 2016,2020, we made repayments on our borrowings of $240.4 million, including $200.0 million in the second and third quarters of 2020 due to our ability to maintain adequate cash flows from operations and improved clarity around access to capital resources. Additionally, we repurchased and retired $55.3$20.9 million of our common stock under our Share Repurchase Program, as defined below, and had net borrowingssettled $1.2 million of $12.0share repurchases that were accrued as of December 31, 2019.
Net cash used in financing activities was $11.1 million for the nine months ended September 30, 2019. During the first nine months of 2019, we paid $10.0 million to the sellers of certain business acquisitions for achieving specified financial performance targets in accordance with the related
purchase agreements. Of the total $10.0 million payments made, $4.7 million is classified as a cash outflow from financing activities and represents the amount paid up to the fair value of the contingent consideration liability recorded as of the acquisition date. The remaining $5.3 million is classified as a cash outflow from operating activities. During the first nine months of 2019, we borrowed $105.5 million under our credit facility, primarily to fund the acquisitions of HSM Consulting and the U.S. assets of ADI Strategies and our annual performance bonus payment.payment, and made repayments on our borrowings of $105.9 million.
Share Repurchase Program
As of September 30, 2017,2020, we had a share repurchase program permitting us to repurchase up to $125 million of our common stock through October 31, 20172020 (the "Share Repurchase Program"). DuringIn the fourthfirst quarter of 2017, our board of directors authorized an extension of the Share Repurchase Program through October 31, 2018. The amount and timing of the repurchases will be determined by management and will 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. During the first nine months of 2016,2020, we
repurchased and retired 982,192313,998 shares for $55.3$20.9 million. Additionally, in the first quarter of 2020, we settled the repurchase of 18,000 shares for $1.2 million that were accrued as of December 31, 2019. No shares were repurchased in the first nine monthssecond and third quarters of 2017.2020. As of September 30, 2017, $35.12020, less than $0.1 million remainsremained available for share repurchases. The Share Repurchase Program expired on October 31, 2020.
Financing Arrangements
At September 30, 2017,2020, we had $250.0 million principal amount of our 1.25% convertible senior notes outstanding, $139.0$248.0 million outstanding under our senior secured credit facility and $5.0$3.5 million outstanding under a promissory note, as discussed below.
1.25% Convertible Senior Notes
In September 2014, we issued $250.0 million principal amount of the Convertible Notes in a private offering. The Convertible Notes are senior unsecured obligations of the Company and will pay interest semi-annually on April 1 and October 1 of each year at an annual rate of 1.25%. The Convertible Notes will mature on October 1, 2019, unless earlier repurchased by the Company or converted in accordance with their terms.
Upon conversion, the Convertible Notes will be settled, at our election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. Our current intent and policy is to settle conversions with a combination of cash and shares of common stock with the principal amount of the Convertible Notes paid in cash, in accordance with the settlement provisions of the Indenture.
The initial conversion rate for the Convertible Notes is 12.5170 shares of our common stock per $1,000 principal amount of the Convertible Notes, which is equal to an initial conversion price of approximately $79.89 per share of our common stock.
In connection with the issuance of the Convertible Notes, we entered into convertible note hedge transactions and warrant transactions. The convertible note hedge transactions are intended to reduce the potential future economic dilution associated with the conversion of the Convertible Notes and, combined with the warrants, effectively raise the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share.
For further information, see Note 8 “Financing Arrangements” within the notes to our consolidated financial statements.
Senior Secured Credit Facility
The Company has a $500$600 million senior secured revolving credit facility, subject to the terms of a Second Amended and Restated Credit Agreement dated as of March 31, 2015, as amended to date (as amended and modified the "Amended Credit Facility"Agreement"), that becomes due and payable in full upon maturity on March 31, 2020.September 27, 2024. The Amended Credit Agreement provides the option to increase the revolving credit facility or establish term loan facilities in an aggregate amount of up to $100$150 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 $600$750 million. The initial borrowings under the Amended Credit Agreement were used to refinance borrowings outstanding under a prior credit agreement, and future borrowingsBorrowings under the Amended Credit Agreement may be used for working capital, capital expenditures, acquisitions of businesses, share repurchases, and 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, two, three or six-month LIBOR or an alternate base rate, in each case plus the applicable margin. The applicable margin will fluctuate between 1.25%1.125% per annum and 2.00%1.875% per annum, in the case of LIBOR borrowings, or between 0.25%0.125% per annum and 1.00%0.875% per annum, in the case of base rate loans, based upon our Consolidated Leverage Ratio at such time.
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 a requirement to pay all amounts outstanding under the Amended Credit Agreement 90 days prior to the Convertible Indebtedness Maturity Date (as defined in the Amended Credit Agreement) unless (1) the Convertible Indebtedness Maturity Date is waived or extended to a later date, (2) the Company can demonstrate (a) Liquidity (as defined in the Amended Credit Agreement) in an amount at least equal to the principal amount due on the Convertible Indebtedness Maturity Date, and (b) financial covenant compliance after giving effect to such payments and any additional indebtedness incurred on a pro forma basis, or (3) this requirement is waived by the Required Lenders (as defined in the Amended Credit Agreement).circumstances. 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 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) ranging from 3.25of 3.75 to 1.00; however the maximum permitted Consolidated Leverage Ratio will increase to 4.00 to 1.00 to 3.75 to 1.00, depending onupon the measurement period,occurrence of certain transactions, and (ii) a minimum Consolidated Interest Coverage Ratio (defined as the ratio of consolidated EBITDA to interest) of 3.50 to 1.00. Consolidated EBITDA for purposes of the financial
covenants is calculated on a continuing operations basis and includes adjustments to add back share-based compensation costs, non-cash goodwill impairment charges, share-based compensation costs, certain non-cash restructuring charges, and pro forma historical EBITDA for businesses acquired.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 September 30, 2017,2020 and December 31, 2019, we were in compliance with these financial covenants with acovenants. Our Consolidated Leverage Ratio as of 3.52September 30, 2020 was 2.09 to 1.00, and acompared to 1.64 to 1.00 as of December 31, 2019. Our Consolidated Interest Coverage Ratio as of 12.60September 30, 2020 was 13.19 to 1.00.1.00, compared to 15.29 to 1.00 as of December 31, 2019. The increase in our Consolidated Leverage Ratio as of September 30, 2020 compared to December 31, 2019 was driven by increased borrowings under the Amended Credit Agreement to maintain excess cash and support liquidity during the period of uncertainty created by the COVID-19 pandemic and to fund our annual performance bonus payment in the first quarter of 2020. As a result of these borrowings, cash and cash equivalents increased $63.1 million to $74.7 million at September 30, 2020 from $11.6 million at December 31, 2019.
The Amended Credit Agreement contains restricted payment provisions, including a potential limit on the amount of dividends we may pay. Pursuant to the terms of the Amended Credit Agreement, if our Consolidated Leverage Ratio is greater than 3.00,3.25, the amount of dividends and other Restricted Payments (as defined in the Amended Credit Agreement) we may pay is limited to an amount up to $50 million plus 50% of cumulative consolidated net income (as defined in the Amended Credit Agreement) from the closing date of the Amended Credit Agreement plus 50% of the net cash proceeds from equity issuances after the closing date of the Amended Credit Agreement.$25 million.
BorrowingsPrincipal borrowings outstanding under the Amended Credit Agreement at September 30, 20172020 and December 31, 2019 totaled $139.0 million.$248.0 million and $205.0 million, respectively. These borrowings carried a weighted average interest rate of 3.4%,2.5% at September 30, 2020 and 3.0% at December 31, 2019 including the impact of the interest rate swap in effect as of September 30, 2017 andswaps described in Note 109 “Derivative Instruments and Hedging Activity” within the notes to the consolidated financial statements. Borrowings outstanding under the Amended Credit Agreement at December 31, 2016 were $68.0 million and carried a weighted average interest rate of 2.5%. The borrowing capacity under the revolving credit facility is reduced by any outstanding borrowings under the
revolving credit facility and outstanding letters of credit. At September 30, 2017,2020, we had outstanding letters of credit totaling $2.7$1.7 million, which are primarily used as security deposits for our office facilities. As of September 30, 2017,2020, the unused borrowing capacity under the revolving credit facility was $358.3$350.3 million.
Promissory Note due 2024
On June 30, 2017, in conjunction with our purchase of an aircraft related to the acquisition of Innosight, we assumed, from the sellers of the aircraft, a promissory note with an outstanding principal balance of $5.1 million. The principal balance of the promissory note is subject to scheduled monthly principal payments until the maturity date of March 1, 2024, at which time a final payment of $1.5 million, plus any accrued and unpaid interest, will be due. Under the terms of the promissory note, we will pay interest on the outstanding principal amount at a rate of one-month LIBOR plus 1.97% per annum. The obligations under the promissory note are secured pursuant to a Loan and Aircraft Security Agreement with Banc of America Leasing & Capital, LLC, which grants the lender a first priority security interest in the aircraft. At September 30, 2017,2020, the outstanding principal amount of the promissory note was $5.0 million. As of September 30, 2017,$3.5 million, and the aircraft had a carrying amount of $6.6$4.6 million. At December 31, 2019, the outstanding principal amount of the promissory note was $3.9 million, and the aircraft had a carrying amount of $5.1 million.
For further information, see Note 87 “Financing Arrangements” within the notes to the consolidated financial statements.
Future Financing Needs
Our current primary financing need is to support our operations during the COVID-19 pandemic. The pandemic has created significant volatility and uncertainty in the economy, which could limit our access to capital resources and could increase our borrowing costs. In order to support our liquidity during the pandemic, we took proactive measures to increase available cash on hand, including, but not limited to, borrowing under our senior secured credit facility in the first quarter of 2020 and reducing discretionary operating and capital expenses. To further support our liquidity, we elected to defer the deposit of our employer portion of social security taxes beginning in April 2020 and through the end of the year, which we expect to pay in equal installments in the fourth quarters of 2021 and 2022, as provided for under the CARES Act. Our long-term financing need has been to fund our growth. Our growth strategy is to expand our service offerings, which may require investments in new hires, acquisitions of complementary businesses, possible expansion into other geographic areas, and related capital expenditures. We believe our internally generated liquidity, together with our available cash, and the borrowing capacity available under our revolving credit facility and access to external capital resources will be adequate to fundsupport our current financing needs and long-term growth and capital needs arising from cash commitments and debt service obligations.strategy. Our ability to secure short-term and long-termadditional financing, if needed, in the future will depend on several factors, including our future profitability, the quality of our accounts receivable and unbilled services, our relative levels of debt and equity, and the overall condition of the credit markets.
CONTRACTUAL OBLIGATIONS
For a summary of our commitments to make future payments under contractual obligations, see “ItemItem 7. Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations”Obligations" in our Annual Report on Form 10-K for the year ended December 31, 2016.
In connection with certain business acquisitions completed during the first nine months2019. As of 2017, we entered into contingent consideration arrangements, under which 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. The aggregate fair value of these contingent consideration liabilities on the dates of acquisition was $15.5 million. Refer to Note 5 “Acquisitions” within the notes to the consolidated financial statements for additional information on the businesses acquired during the first nine months of 2017. At September 30, 2017,2020, borrowings outstanding under our senior secured credit facility totaled $248.0 million compared to $205.0 million at December 31, 2019. See the aggregate fair value of all contingent consideration liabilities outstanding was $22.5 million.
As discussed above in "Liquidity and Capital Resources," on June 30, 2017, in conjunction with our purchase of an aircraft related to the acquisition of Innosight, we assumed, from the sellers of the aircraft, a promissory note with an outstanding principal balance of $5.1 million. The principal balance of the promissory note is subject to scheduled monthly principal payments until the maturity date of March 1, 2024, at which time a final payment of $1.5 million, plus any accrued and unpaid interest will be due. Under the terms of the promissory note, we will pay interest on the outstanding principal amount at a rate of one-month LIBOR plus 1.97% per annum.
Refer to "Liquidity and Capital Resources" section above and Note 87 "Financing Arrangements" within the notes to theour consolidated financial statements for additional information on our outstanding borrowings including the schedule of monthly principal payments.
The following table provides the scheduled future payments of the contingent consideration arrangements and promissory note described above as of September 30, 2017: |
| | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
Contingent consideration | $ | 22,469 |
| | $ | 7,743 |
| | $ | 13,126 |
| | $ | 1,600 |
| | $ | — |
|
Promissory note—principal and interest | $ | 5,682 |
| | $ | 650 |
| | $ | 1,293 |
| | $ | 1,283 |
| | $ | 2,456 |
|
2020. There have been no other material changes to our contractual obligations since December 31, 2016.2019.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any material off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. We regularly review our financial reporting and disclosure practices and accounting policies to ensure that our financial reporting and disclosures provide accurate information relative to the current economic and business environment. The preparation of financial statements in conformity with GAAP requires management to make assessments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to impact our financial position and operating results. While all decisions regarding accounting policies are important, we believe there are five accounting policies that could be considered critical: revenue recognition, allowances for doubtful accounts and unbilled services, business combinations, carrying values of goodwill and other intangible assets, and accounting for income taxes. For a detailed discussion of these critical accounting policies, see “ItemItem 7. Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies”Policies" in our Annual Report on Form 10-K for the year ended December 31, 2016.2019. Below is an update to our critical accounting policy related to the carrying value of goodwill and other intangible assets. There have been no material changes to our other critical accounting policies during the first nine months of 2017.2020.
Carrying Values of Goodwill and Other Intangible Assets
AcquisitionFirst Quarter 2020 Goodwill Impairment Analysis
The worldwide spread of Innosight
On March 1, 2017, we completed our acquisitionthe coronavirus (COVID-19) in the first quarter of Innosight, a growth strategy firm focused2020 created significant volatility, uncertainty and disruption to the global economy. We are closely monitoring the impact of the COVID-19 pandemic on helping companies navigate disruptive change, enable innovation, and manage strategic transformation. Innosight's results of operations have been included in our consolidated financial statements and results of operationsall aspects of our Business Advisory segment from the date of acquisition. The goodwill recorded as part of the allocation of the purchase price of Innosight has been assigned to Innosight as a separate reporting unit, which is referred to as Strategy and Innovation.
Adoption of ASU 2017-04
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminated Step 2 of the goodwill impairment test, which required us to determine the implied fair value of goodwill by allocating the reporting unit's fair value to each of its assets and liabilities as if the reporting unit was acquired in a business, acquisition. Instead, the updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. We adopted this guidance in the second quarter of 2017 on a prospective basis and applied the new guidance to our goodwill impairment tests described below.
Second Quarter 2017 Goodwill Reallocation
Effective June 1, 2017,including how we reorganized our internal financial reporting structure, which management uses to assess performance and allocate resources, by moving our Life Sciences practice from the Education and Life Sciences reporting unit and segment to its own reporting unit within the Business Advisory segment. The remaining Education and Life Sciences segment is now referred to as the Education segment. Weexpect it will continue to operate under three reportable segments: Healthcare, Education,negatively impact our clients, employees and Business Advisory.
These three reportable segments will be comprised of2020, we expected it to have an unfavorable impact on sales, increase uncertainty in the following six reporting units for goodwill impairment testing purpose: Healthcare, Education, Business Advisory, Enterprise Solutionsbacklog and Analytics, Strategy and Innovation, and Life Sciences.negatively impact full year 2020 results. The Business Advisory, Enterprise Solutions and Analytics,services provided by our Strategy and Innovation and Life Sciences reporting units comprisewithin our Business Advisory segment.
As a resultsegment focus on strategic solutions for healthy, well-capitalized companies to identify new growth opportunities, which may be considered by our clients to be more discretionary in nature, and the duration of the reorganization, we reallocated $10.8 million of the goodwill balance associated with the previous Education and Life Sciences reporting unitprojects within these practices are typically short-term. Therefore, due to the new Life Sciences reporting unit based onuncertainty caused by the relative fair values of the Life Sciences reporting unit and the remaining Education reporting unit. The estimated fair values were determined using a combination of the income approach and the market approach, utilizing the guideline company method, with a fifty-fifty weighting.
In conjunction with the goodwill reallocation,COVID-19 pandemic, we performed a goodwill impairment test for the goodwill balances within our Education reporting unit and Life Sciences reporting unit as of June 1, 2017. Based on the results of the goodwill impairment test, we determined that the fair values of our Education reporting unit and Life Sciences reporting unit exceeded their carrying values. As such, we concluded there was no indication of goodwill impairment for either reporting unit.
Second Quarter 2017 Goodwill Impairment Analysis
Since the first quarter of 2016, the Healthcare segment, which is also a reporting unit, has experienced declining revenues, primarily driven by softness in our revenue cycle offering within our performance improvement solution. This softness is attributable to decreased demand for our services, the winding down of some of our larger projects and a growing trend toward smaller projects, as well as fewer large integrated projects. In light of these challenges, several initiatives have been undertaken to improve the segment's financial performance, including repositioning our solutions to address the most critical needs of our clients, the expansion of our existing services such as those in our Studer Group, strategy, physician and technology offerings, and workforce reductions to better align resources with market demand. While the initiatives undertaken to improve the financial performance of our Healthcare segment are yielding some positive impacts, hospitals and health systems continue to face regulatory and funding uncertainty; therefore, we remain cautious about near-term growth. As we have previously disclosed in prior quarters, if the financial performance of our Healthcare segment continued to decline and did not meet our expectations, we could be required to perform an interim impairment analysis with respect to our carrying value of goodwillresults for the Healthcarethese two reporting unit prior to our usual annual test.units. Based on forecasts prepared in connection with our quarterly forecasting cycle during the second quarter of 2017, we determined that the likely time frame to improve the financial results of this segment will take longer than originally anticipated. As such, we concluded, during the second quarter of 2017, that the fair value of the Healthcare reporting unit may no longer exceed its carrying value. In connection withinternal projections and the preparation of our financial statements for the quarter ended June 30, 2017,March 31, 2020, and considering the expected decrease in demand due to the COVID-19 pandemic, during the first quarter of 2020 we believed that the fair value of these two reporting units no longer exceeded their carrying values and performed an interim impairment test on the Healthcareboth reporting unit.units as of March 31, 2020.
Based on the estimated fair valuevalues of the HealthcareStrategy and Innovation and Life Sciences reporting unitunits described below, we recorded a $209.6non-cash pretax goodwill impairment charges of $49.9 million and $9.9 million, respectively, in the first quarter of 2020. The $49.9 million non-cash pretax charge inrelated to the second quarterStrategy and Innovation reporting unit reduced the goodwill balance of 2017the reporting unit to reduce$37.5 million. The $9.9 million non-cash pretax charge related to the carrying valueLife Sciences reporting unit reduced the goodwill balance of goodwill in our Healthcarethe reporting unit.unit to zero.
Our goodwill impairment test was performed by comparing the fair value of each of the HealthcareStrategy and Innovation and Life Sciences reporting unitunits with its respective carrying value and in accordance with ASU 2017-04, which we adopted in the second quarter of 2017, recognizing an impairment charge for the amount by which the carrying value exceeded the fair value. To estimate the fair value of the Healthcareeach reporting unit, we relied on a combination of the income approach and the market approach, with a fifty-fifty weighting.
In the income approach, we utilized a discounted cash flow analysis, which involved estimating the expected after-tax cash flows that will be generated by theeach reporting unit and then discounting those cash flows to present value, reflecting the relevant risks associated with theeach reporting unit and the time value of money. This approach requires the use of significant estimates and assumptions, including long-term projections of future cash flows, market conditions, and a discount raterates that reflectsreflect the risk inherent in the future cash flows. In estimating future cash flows, we relied on an internally generated 11-year forecast.seven-year forecasts. For periods after the 11-yearseven-year forecast, we assumed a long-term annual revenue growth rate of 3.5%.3.0% for both the Strategy and Innovation and Life Sciences reporting units and a long-term EBITDA margin of 24.8% and 6.7%, respectively. Our forecast isforecasts are based on historical experience, current backlog, expected market demand, and other industry information. Our discounted cash flow analysis assumed a 10.0% weighted average cost of capital discount rate.rates of 16.0% and 10.5% for the Strategy and Innovation and Life Sciences reporting units, respectively.
In the market approach, we utilized the guideline company method, which involved calculating valuation multiples based on operating data from guideline publicly traded companies. Multiples derived from guideline companies provide an indication of how much a knowledgeable investor in the marketplace would be willing to pay for a company. These multiples arewere evaluated and adjusted based on specific characteristics of the HealthcareStrategy and Innovation and Life Sciences reporting unitunits relative to the selected guideline companies and applied to the reporting unit'sunits' operating data to arrive at an indication of value. The range of revenue multiples used in the valuation of the Strategy and Innovation and Life Sciences reporting units was 1.20x to 1.70x and 0.30x to 0.40x, respectively.
Determining the fair value of any reporting unit requires us to make significant judgments, estimates, and assumptions. While we believe that the estimates and assumptions underlying our valuation of the Healthcare reporting unitmethodology are reasonable, these estimates and assumptions could have a significant impact on whether or not anothera non-cash impairment charge is recognized in the future and also the magnitude of any such charge. The results of an impairment analysis are as of a point in time. There is no assurance that the
actual future earnings or cash flows of our Healthcare reporting unitunits will be consistent with our projections. We will continue to monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods. Any significant decline in our operations compared to our internal forecasts could result in additional non-cash goodwill impairment charges, which could be material.
Concurrently with the goodwill impairment tests performed over the Strategy and Innovation and Life Sciences reporting units, we evaluated whether any indicators exist that would lead us to believe that the fair values of our Healthcare, Education, and Business Advisory reporting units may not exceed their carrying values. Based on our internal projections, consideration of the impact of the COVID-19 pandemic on these reporting units, and review of the amounts by which the fair values of these reporting units exceeded their carrying values in the most recent quantitative goodwill impairment analysis performed, we did not identify any indicators that would lead us to believe that the fair values of these reporting units may not exceed their carrying values as of March 31, 2020. Additionally, in the second and third quarters of 2020, we did not identify any indicators that would lead us to believe that the fair values of any of our reporting units may not exceed their carrying values. We will monitor any changes to our assumptions and will evaluate goodwill as partdeemed warranted during future periods.
As discussed above, as of September 30, 2017, we have six reporting units with goodwill balances: our Healthcare and Education segments, and our Business Advisory, Enterprise Solutions and Analytics, Strategy and Innovation, and Life Sciences practices, which together make up our Business Advisory operating segment.
The carrying values of goodwill for each of our reporting units as of September 30, 20172020 are as follows (in thousands):
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Reporting Unit | | Carrying Value of Goodwill |
Healthcare | | $ | 427,209 |
|
Education | | 102,830 |
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Business Advisory | | 16,094 |
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Enterprise Solutions and Analytics | | 45,119 |
|
Strategy and Innovation | | 87,432 |
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Life Sciences | | 10,691 |
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Total | | $ | 689,375 |
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Three of our reporting units have been established primarily or entirely through recent business acquisitions: | | | | | | | | |
Reporting Unit | | Carrying Value of Goodwill |
Healthcare | | $ | 428,729 | |
Education | | 104,384 | |
Business Advisory | | 16,094 | |
Strategy and Innovation | | 37,523 | |
Life Sciences | | — | |
Enterprise Solutions and Analytics | | — | |
Total | | $ | 586,730 | |
Intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill. Our intangible assets, net of accumulated amortization, totaled $22.3 million at September 30, 2020 and primarily consist of customer relationships, trade names, technology and software, non-competition agreements, and customer contracts, all of which were acquired through business combinations. We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In connection with the goodwill impairment tests performed for the Strategy and Innovation and Life Sciences. Our Enterprise Solutions and Analytics reporting unit was established with the acquisition of Blue Stone International, LLC in October 2013. Since that time, we have completed five additional business acquisitions within the reporting unit, most recently the acquisitions of the U.S. assets and international assets of ADI Strategies in May 2016 and April 2017, respectively. Our Strategy and Innovation reporting unit was established with the acquisition of Innosight in March 2017. Our Life Sciences reporting unit is primarily comprised of two recent acquisitions: The Frankel Group Associates LLC in January 2014 and Pope Woodhead in January 2017.
We record the assets acquired and liabilities assumed in business combinations, including identifiable intangible assets, at their estimated fair values as of the acquisition date, and goodwill is recorded as the excess of the fair value of consideration transferred, including any contingent consideration, over the fair value of the net assets acquired. Therefore, the initial accounting for an acquisition results in no headroom, as its fair value equals its carrying value.
Our most recent goodwill impairment test for the Enterprise Solutions and Analytics reporting unit was performed as of November 30, 2016, as part of our annual goodwill impairment test, pursuant to our policy, and based on the results of the first step of that analysis, the reporting unit’s fair value exceeded its carrying value by 11%.
Our most recent goodwill impairment test for the Life Sciences reporting unit was performed as of June 1, 2017, as part of the reorganization of our internal financial reporting structure, as discussed above under the section titled Second Quarter 2017 Goodwill Reallocation. Based on the results of that analysis, the reporting unit’s fair value exceeded its carrying value by 16%.
We have not yet performed a goodwill impairment test for the Strategy and Innovation reporting unit, as the reporting unit was established during the current year with the acquisition of Innosight in March 2017 and there have been no triggering events requiring an interim goodwill impairment test to date.
Since the date of the most recent goodwill impairment tests for the Enterprise Solutions and Analytics and Life Sciences reporting units and sincein the inceptionfirst quarter of 2020, which resulted in non-cash goodwill impairment charges, we performed impairment tests on the long-lived assets allocated to the asset groups of the Strategy and Innovation and Life Sciences reporting unit,units. Based on the performanceimpairment tests performed, we concluded that the long-lived assets allocated to the asset groups were not impaired as of these three reporting units has continuedMarch 31, 2020. We did not identify any indicators that would lead us to reasonably meet our expectations suchbelieve that no triggering event for an interim goodwill impairment analysis was identified. We will monitor any changesthe carrying values of the long-lived assets allocated to our assumptionsother asset groups may not be recoverable as of March 31, 2020, June 30, 2020, and will evaluate goodwill as part of our annual goodwill impairment testing in the fourth quarter of 2017, or on an interim basis, if required. Any future significant decline in our operations compared to our internal forecast could result in a non-cash goodwill impairment charge as a result of any such test.September 30, 2020.
For further discussion of our 2016 annual goodwill impairment test, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2016.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 3 “New"New Accounting Pronouncements”Pronouncements" within the notes to the consolidated financial statements for information on new accounting pronouncements.
SUBSEQUENT EVENTS
Acquisition of ForceIQ, Inc.
On October 15, 2020, we entered into an agreement to acquire ForceIQ, Inc. ("ForceIQ"), a Salesforce Industries partner focused on helping clients drive digital transformation and innovation at scale powered by the cloud. The acquisition expands our cloud-based technology offerings within the Business Advisory segment. The results of operations of ForceIQ will be included within the Business Advisory segment from the effective close date, November 1, 2020. The acquisition of ForceIQ is not significant to our consolidated financial statements.
Fourth Quarter 2020 Restructuring Plan
On October 29, 2020, we announced a restructuring plan to reduce operating costs to address the impact of the COVID-19 pandemic on our business. The restructuring plan provides for a reduction in workforce and leased office space that is expected to result in initial restructuring charges in a range of approximately $15.5 million to $19.5 million and annualized savings in a range of approximately $23.0 million to $27.0 million. We do not anticipate a material revenue impact related to the restructuring actions.
The reduction in workforce impacts approximately 145 employees across all segments and corporate operations. We expect the reduction in workforce to be substantially complete by the end of the fourth quarter of 2020 and expect to incur an estimated restructuring charge in a range of approximately $3.5 million to $4.5 million related to cash payments for employee severance and benefits.
The reduction in leased office space is expected to result in estimated non-cash restructuring charges in a range of approximately $12.0 million to $15.0 million, consisting of operating lease right-of-use asset and leasehold improvement impairment charges and accelerated depreciation on other fixed assets. The non-cash restructuring charges related to the reduction in leased office space are expected to be recorded primarily in the fourth quarter of 2020. Future cash expenditures related to the leased office space are expected to continue through 2029. The exact amount and timing of the office space reductions, and the associated payments and expenses, depend on a number of factors, including our ability to terminate or modify existing lease contracts and/or enter into sublease agreements for the exited spaces to lower future cash expenditures.
In addition, in the fourth quarter of 2020, we announced our intent to divest our life sciences drug safety practice, a UK-based business that is part of the Life Sciences reporting unit within our Business Advisory segment. For the nine months ended September 30, 2020, this practice generated $1.9 million of revenue and is not significant to our consolidated financial statements. We expect the divestiture to be completed in the fourth quarter of 2020.
We believe these measures will better align delivery capacity with anticipated demand and strengthen our financial position amidst the ongoing disruption, creating a foundation from which our business can grow.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
We are exposed to market risks primarily from changes in interest rates and changes in the market value of our investments.
Market Risk and Interest Rate Risk
The value of our Convertible Notes is exposed to interest rate risk. Generally, the fair value of our fixed interest rate Convertible Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of our Convertible Notes is affected by our stock price. The carrying value of our Convertible Notes was $230.8 million as of September 30, 2017, which represents the liability component of the $250.0 million principal balance. The estimated fair value of our Convertible Notes at September 30, 2017 was $233.6 million, and was determined based on the quoted bid price of the Convertible Notes in an over-the-counter market as of the last day of trading for the quarter ended September 30, 2017, which was $93.438 per $100 principal amount.
Concurrent with the issuance of the Convertible Notes, we entered into separate convertible note hedge and warrant transactions. The convertible note hedge transactions are intended to reduce the potential future economic dilution associated with the conversion of the Convertible Notes and, combined with the warrants, effectively raise the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share. Under the convertible note hedge transactions, we have the option to purchase a total of approximately 3.1 million shares of our common stock, which is the number of shares initially issuable upon conversion of the Convertible Notes in full, at a price of approximately $79.89, which corresponds to the initial conversion price of the Convertible Notes, subject to customary anti-dilution adjustments substantially similar to those in the Convertible Notes. Under the warrant transactions, the holders of the warrants have the option to purchase a total of approximately 3.1 million shares of our common stock at a price of approximately $97.12. If the average market value per share of our common stock for the reporting period exceeds the strike price of the warrants, the warrants will have a dilutive effect on our earnings per share.
We have exposure to changes in interest rates associated with borrowings under our bank credit facility, which has variable interest rates tied to LIBOR or an alternate base rate, at our option. At September 30, 2017,2020, we had borrowings outstanding under the credit facility totaling $139.0$248.0 million that carried a weighted average interest rate of 3.4%2.5%, including the impact of the interest rate swapswaps described below. A hypothetical 100 basis point change in thisthe interest rate would have a $0.9$0.5 million effect on our pretax income on an annualized basis, including the effect of the interest rate swap.swaps outstanding at September 30, 2020. At December 31, 2016, our2019, we had borrowings outstanding under the credit facility totaled $68.0totaling $205.0 million andthat carried a weighted average interest rate of 2.5%,3.0% including the impact of the interest rate swap outstanding at December 31, 2019. A hypothetical 100 basis point change in the interest rate would have had a $1.6 million effect on our pretax income on an annualized basis, including the effect of the interest rate swap described below. The outstanding borrowings at December 31, 2016 were fully hedged against changes in interest rates by our interest rate swap, which had a notional amount of $68.0 million at December 31, 2016.
On April 4, 2013, we entered into a forward amortizing interest rate swap agreement effective March 31, 2014 and ending August 31, 2017. We entered into this derivative instrument to hedge against the interest rate risks of our variable-rate borrowings. The swap had an initial notional amount of $60.0 million and amortized quarterly until April 2016. In April 2016, the notional amount of this interest rate swap increased to $86.0 million and continued to amortize quarterly until it expired in August 2017. Under the terms of the interest rate swap agreement, we received from the counterparty interest on the notional amount based on one-month LIBOR and we paid to the counterparty a fixed rate of 0.985%.swap.
On June 22, 2017, we entered into a forward interest rate swap agreement effective August 31, 2017 and ending August 31, 2022, with a notional amount of $50.0 million. We entered into this derivative instrument to continue to hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and we pay to the counterparty a fixed rate of 1.900%.
On January 30, 2020, we entered into a forward interest rate swap agreement effective December 31, 2019 and ending December 31, 2024, with a notional amount of $50.0 million. We entered into this derivative instrument to further hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one month LIBOR and we pay to the counterparty a fixed rate of 1.500%.
On March 16, 2020, we entered into a forward interest rate swap agreement effective February 28, 2020 and ending February 28, 2025, with a notional amount of $100.0 million. We entered into this derivative instrument to further hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one month LIBOR and we pay to the counterparty a fixed rate of 0.885%.
We also have exposure to changes in interest rates associated with the promissory note assumed on June 30, 2017 in connection with our purchase of an aircraft, which has variable interest rates tied to LIBOR. At September 30, 2017,2020, the outstanding principal amount of the promissory note was $5.0$3.5 million and carried an interest rate of 3.2%2.1%. A hypothetical 100 basis point change in this interest rate would not have a $0.1 millionmaterial effect on our pretax income,income. At December 31, 2019, the outstanding principal amount of the promissory note was $3.9 million and carried an interest rate of 3.7%. A hypothetical 100 basis point change in the interest rate as of December 31, 2019 would not have had a material effect on an annualized basis.our pretax income.
We do not use derivative instruments for trading or other speculative purposes. From time to time, we invest excess cash in short-term marketable securities. These investments principally consist of overnight sweep accounts. Due to the short maturity of these investments, we have concluded that we do not have material market risk exposure.
We have a non-interest bearingan investment in the form of 1.69% convertible debt investment in Shorelight Holdings, LLC, a privately-held company, which we account for as an available-for-sale debt security. As such, the investment is carried at fair value with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income. As of September 30, 2017,2020, the fair value of the investment was $31.9$61.1 million, with a total cost basis of $40.9 million. At December 31, 2019, the fair value of the investment was $49.5 million, with a total cost basis of $27.9 million.
We have a preferred stock investment in Medically Home Group, Inc., a privately-held company, which we account for as an equity security without a readily determinable fair value using the measurement alternative. As such, the investment is carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment. Any unrealized holding gains and losses resulting from observable price changes are recorded in our consolidated statement of operations. As of September 30, 2020, the carrying value of the investment was $5.0 million. Following our purchase, there has been no impairment, nor any observable price changes to our investment. See Note 10 “Fair Value of Financial Instruments” for further information on our long-term investments in Shorelight Holdings, LLC and Medically Home Group, Inc.
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ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act")) as of September 30, 2017.2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017,2020, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports we file or submit under the Exchange Act, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 20172020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
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ITEM 1. | LEGAL PROCEEDINGS. |
The information required by this Item is incorporated by reference from Note 1413 "Commitments, Contingencies and Guarantees" included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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 that, in the current opinion of management, could 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.
The following information updates, and should be read in conjunction with, the information disclosed in Part 1, Item 1A, “Risk
Factors” ofin our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019 (the “2019 Annual Report”), which was filed with the Securities and
Exchange Commission on February 23, 2017.26, 2020.
Our results of operations have been adversely affected and, in the future, could be materially adversely impacted by the coronavirus (COVID-19) pandemic.
The worldwide spread of coronavirus (COVID-19) has created significant volatility, uncertainty and disruption to the global economy. The pandemic is adversely impacting and, in the future, could materially adversely impact our business, operations and financial results. The extent to which the COVID-19 pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including:
•the severity of the pandemic;
•the timing of the development and distribution of an effective vaccine or treatments for COVID-19;
•governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic, including quarantines, social distancing and other risk mitigating measures taken to prevent the spread of COVID-19;
•the effect on our clients and client demand for our services and solutions, including the effect on the healthcare and higher education industries which are areas of significant focus for our business;
•the health and welfare of our employees, including our senior management team, practice leaders and managing directors, and their ongoing ability to serve clients and manage operations if they contract COVID-19;
•the impact on our key third-party vendors;
•the effect on the businesses in which we have invested;
•our ability to sell and provide our services and solutions and maintain adequate utilization levels, including as a result of travel restrictions, shelter-in-place and quarantine orders and people working from home;
•the ability of our clients to pay for our services and solutions;
•any disruption to the Internet and related systems, which may impact our ability to provide our services and solutions remotely, and increased vulnerability to hackers or third parties seeking to disrupt operations; and
•any closures of our clients’ offices and facilities.
Additionally, in some instances, clients have slowed down decision making, delayed planned work or are seeking to reduce the scope of current engagements or terminate existing agreements, which may continue. Any of these events could cause or contribute to the risks and uncertainties enumerated in our 2019 Annual Report and could materially adversely affect our business, financial condition, results of operations and/or stock price.
Our goodwill and other intangible assets represent a substantial amount of our total assets, and we may be required to recognize a non-cash impairment charge for these assets if the performance of one or more of our reporting units falls below our expectations.
Our total assets reflect a substantial amount of intangible assets, primarily goodwill. At December 31, 2016,2019, goodwill and other intangible assets totaled $881.2$678.3 million, or 76%61%, of our total assets. During the secondfirst quarter of 2017,2020, we wrote off $209.6incurred non-cash pretax goodwill impairment charges totaling $59.8 million of goodwill related to our HealthcareStrategy and Innovation and Life Sciences reporting units within our Business Advisory segment, as discussed below. At September 30, 2017,2020, goodwill and other intangible assets totaled $770.2$609.0 million, or 71%56%, of our total assets.assets as of September 30, 2020. The goodwill results from our acquisitions, representing the excess of the fair value of consideration transferred over the fair value of the net assets acquired. We test goodwill for impairment at the reporting unit level, annually and whenever events or circumstances make it more likely than not that an impairment may have occurred.
SinceThe worldwide spread of the coronavirus (COVID-19) in the first quarter of 2016,2020 created significant volatility, uncertainty and disruption to the Healthcare segment, which is alsoglobal economy. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how we expect it will continue to negatively impact our clients, employees and business partners. While the COVID-19 pandemic did not have a significant impact on our consolidated revenues in the first quarter of 2020, we expected it to have an unfavorable impact on sales, increase uncertainty in the backlog and negatively impact full year 2020 results. The services provided by our Strategy and Innovation and Life Sciences reporting unit, has experienced declining revenues, primarily driven by softness in our revenue cycle offeringunits within our performance improvement solution. This softness is attributableBusiness Advisory segment focus on strategic solutions for healthy, well-capitalized companies to decreased demand for our services, the winding down of some of our larger projects and a growing trend toward smaller projects, as well as fewer large integrated projects. In light of these challenges, several initiatives have been undertaken to improve the segment's financial performance, including repositioning our solutions to address the most critical needs ofidentify new growth opportunities, which may be considered by our clients to be more discretionary in nature, and the expansionduration of our existing services such as those in our Studer Group, strategy, physician and technology offerings, and workforce reductionsthe projects within these practices are typically short-term. Therefore, due to better align resources with market demand. While the initiatives undertaken to improveuncertainty caused by the financial performance of our Healthcare segmentCOVID-19 pandemic, we are yielding some positive impacts, hospitals and health systems continue to face regulatory and funding uncertainty; therefore, we
remain cautious about near-term growth. As we have previously disclosed in prior quarters, if the financial performance of our Healthcare segment continued to decline and did not meet our expectations, we could be required to perform an interim impairment analysis with respect to our carrying value of goodwillresults for the Healthcarethese two reporting unit prior to our usual annual test.units. Based on forecasts prepared in connection with our quarterly forecasting cycle during the second quarter of 2017, we determined that the likely time frame to improve the financial results of this segment will take longer than originally anticipated. As such, we concluded, during the second quarter of 2017, that the fair value of the Healthcare reporting unit may no longer exceed its carrying value. In connection withinternal projections and the preparation of our financial statements for the quarter ended June 30, 2017,March 31, 2020, and considering the expected decrease in demand due to the COVID-19 pandemic, during the first quarter of 2020 we believed that the fair value of these two reporting units no longer exceeded their carrying values and performed an interim impairment test on the Healthcareboth reporting unit. units as of March 31, 2020.
Based on the estimated fair valuevalues of the HealthcareStrategy and Innovation and Life Sciences reporting unit,units, we recorded a $209.6non-cash pretax goodwill impairment charges of $49.9 million and $9.9 million, respectively, in the first quarter of 2020. The $49.9 million non-cash pretax charge inrelated to the second quarterStrategy and Innovation reporting unit reduced the goodwill balance of 2017the reporting unit to reduce$37.5 million. The $9.9 million non-cash pretax charge related to the carrying valueLife Sciences reporting unit reduced the goodwill balance of goodwill in our Healthcarethe reporting unit.unit to zero.
Determining the fair value of any reporting unit requires us to make significant judgments, estimates, and assumptions. While we believe that the estimates and assumptions underlying our valuation of the Healthcare reporting unitmethodology are reasonable, these estimates and assumptions could have a significant impact on whether or not anothera non-cash impairment charge is recognized in the future and also the magnitude of any such charge. The results of an impairment analysis are as of a point in time. There is no assurance that the actual future earnings or cash flows of our Healthcare reporting unitunits will be consistent with our projections. We willcontinue to monitor any changes to our assumptions and will evaluate goodwill as part of our annual goodwill impairment testing in the fourth quarter of 2017, or on an interim basis, if required.deemed warranted during future periods. Any future significant decline in our operations compared to our internal forecast could result in anotheradditional non-cash goodwill impairment charge,charges or impairment charges with respect to our other intangible assets, which could be material.
Three of our reporting units have been established primarily or entirely through recent business acquisitions: Enterprise Solutions and Analytics, Strategy and Innovation, and Life Sciences. Our Enterprise Solutions and Analytics reporting unit was established with the acquisition of Blue Stone International, LLC in October 2013. Since that time, we have completed five additional business acquisitions within the reporting unit, most recently the acquisitions of the U.S. assets and international assets of ADI Strategies in May 2016 and April 2017, respectively. Our Strategy and Innovation reporting unit was established with the acquisition of Innosight in March 2017. Our Life Sciences reporting unit is primarily comprised of two recent acquisitions: The Frankel Group Associates LLC in January 2014 and Pope Woodhead in January 2017.
We record the assets acquired and liabilities assumed in business combinations, including identifiable intangible assets, at their estimated fair values as of the acquisition date, and goodwill is recorded as the excess of the fair value of consideration transferred, including any contingent consideration, over the fair value of the net assets acquired. Therefore, the initial accounting for an acquisition results in no headroom, as its fair value equals its carrying value.
Our most recent goodwill impairment test for the Enterprise Solutions and Analytics reporting unit was performed as of November 30, 2016, as part of our annual goodwill impairment test, pursuant to our policy, and based on the results of the first step of that analysis, the reporting unit’s fair value exceeded its carrying value by 11%.
Our most recent goodwill impairment test for the Life Sciences reporting unit was performed as of June 1, 2017, as part of the reorganization of our internal financial reporting structure, as discussed in the "Critical Accounting Policies" section within Part I - Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Based on the results of that analysis, the reporting unit’s fair value exceeded its carrying value by 16%.
We have not yet performed a goodwill impairment test for the Strategy and Innovation reporting unit, as the reporting unit was established during the current year with the acquisition of Innosight in March 2017 and there have been no triggering events requiring an interim goodwill impairment test to date.
Since the date of the most recent goodwill impairment tests for the Enterprise Solutions and Analytics and Life Sciences reporting units, and since the inception of the Strategy and Innovation reporting unit, the performance of these three reporting units has continued to reasonably meet our expectations such that no triggering event for an interim goodwill impairment analysis was identified. We will monitor any changes to our assumptions and will evaluate goodwill as part of our annual goodwill impairment testing in the fourth quarter of 2017, or on an interim basis, if required. Any future significant decline in our operations compared to our internal forecast could result in a non-cash goodwill impairment charge as a result of any such test.
Refer to “Critical Accounting Policies” within Part I - Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 64 “Goodwill and Intangible Assets” within the notes to our consolidated financial statements for further discussion of business combinations,our goodwill, intangible assets, and impairment tests performed in 2017.2020.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
Our Stock Ownership Participation Program, 2012 Omnibus Incentive Plan, and 2004 Omnibus Stock Plan, which was replaced by the 2012 Omnibus Incentive Plan, permit the netting of common stock upon vesting of restricted stock awards to satisfy individual tax withholding requirements. During the quarter ended September 30, 2017,2020, we reacquired 4,79812,468 shares of common stock with a weighted average fair market value of $39.78$46.49 as a result of such tax withholdings.
We had a share repurchase program pursuantpermitting us to which we may, from time to time, repurchase up to $125 million of our common stock through October 31, 20172020 (the "Share Repurchase Program"). During the fourth quarter, with less than $0.1 million available for share repurchases as of 2017, our board of directors authorized an extension of theSeptember 30, 2020. The Share Repurchase Program throughexpired on October 31, 2018. The amount and timing of the repurchases will be determined by management and will depend on a variety of factors, including the trading price of our common stock, capacity under our line of credit, general market and business conditions, and applicable legal requirements.2020.
The following table provides information with respect to purchases we made of our common stock during the quarter ended September 30, 2017.2020.
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Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Dollar Value of Shares that may yet be Purchased under the Plans or Programs (2) |
July 1, 2020 - July 31, 2020 | | 3,106 | | | $ | 44.25 | | | — | | | $ | 43,572 | |
August 1, 2020 - August 31, 2020 | | 8,705 | | | $ | 47.66 | | | — | | | $ | 43,572 | |
September 1, 2020 - September 30, 2020 | | 657 | | | $ | 41.57 | | | — | | | $ | 43,572 | |
Total | | 12,468 | | | $ | 46.49 | | | — | | | |
(1)The number of shares repurchased each period represent shares to satisfy employee tax withholding requirements. These shares do not reduce the repurchase authority under the Share Repurchase Program.
(2)As of the end of the period.
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Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Dollar Value of Shares that may yet be Purchased under the Plans or Programs (2) |
July 1, 2017 - July 31, 2017 | | 3,194 |
| | $ | 43.08 |
| | — |
| | $ | 35,143,546 |
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August 1, 2017 - August 31, 2017 | | 796 |
| | $ | 35.47 |
| | — |
| | $ | 35,143,546 |
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September 1, 2017 - September 30, 2017 | | 808 |
| | $ | 30.95 |
| | — |
| | $ | 35,143,546 |
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Total | | 4,798 |
| | $ | 39.78 |
| | — |
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(1) | The number of shares repurchased for each period represents shares to satisfy employee tax withholding requirements. These shares do not reduce the repurchase authority under the Share Repurchase Program. |
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(2) | As of the end of the period. |
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ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
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ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
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ITEM 5. | OTHER INFORMATION. |
None.
(a) The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
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| | | | | | | | Incorporated by Reference |
Exhibit Number
| | Exhibit Description | | Filed herewith
| | Furnished herewith
| | Form | | Period Ending
| | Exhibit | | Filing Date
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10.131.1 | | | | X | | | | | | | | | | |
31.1 | | | | X | | | | | | | | | | |
31.2 | | | | X | | | | | | | | | | |
32.1 | | | | | | X | | | | | | | | |
32.2 | | | | | | X | | | | | | | | |
101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | X | | | | | | | | | | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | X | | | | | | | | | | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X | | | | | | | | | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | | | | | | | | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | | | | | | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X | | | | | | | | | | |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | X | | | | | | | | | | |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | Huron Consulting Group Inc. |
| | | | (Registrant) |
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Date: | November 1, 20172, 2020 | | | /S/ JOHN D. KELLY |
| | | | John D. Kelly |
| | | | Executive Vice President, Chief Financial Officer and Treasurer
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