Actual future amortization expense could differ from these estimated amounts as a result of future acquisitions, dispositions, and other factors.
Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, excluding unvested restricted common stock. Diluted earnings per share reflects the potential reduction in earnings per share that could occur if securities or other contracts to issue common stock were exercised or converted into common stock under the treasury stock method. Such securities or other contracts include unvested restricted stock awards, unvested restricted stock units, 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.
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.
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 “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, total debt is on a gross basis and is not netted against our cash balances. At September 30, 2017,March 31, 2021, we were in compliance with these financial covenants with a Consolidated Leverage Ratio of 3.522.64 to 1.00 and a Consolidated Interest Coverage Ratio of 12.6013.00 to 1.00.
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,March 31, 2021, the outstanding principal amount of the promissory note was $5.0 million. As of September 30, 2017,$3.2 million, and the aircraft had a carrying amount of $6.6$4.3 million. At December 31, 2020, the outstanding principal amount of the promissory note was $3.3 million, and the aircraft had a carrying amount of $4.4 million.
The table below sets forth the changes in the carrying amount of our restructuring charge liability by restructuring type for the ninethree months ended September 30, 2017.March 31, 2021.
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%.
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,March 31, 2021, 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.
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 1211 “Other Comprehensive Income (Loss)” for additional information on our derivative instrument.instruments.
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, 2017March 31, 2021 and December 31, 2016.2020.
The table below sets forth the changes in the balance of the contingent consideration for business acquisitions for the ninethree months ended September 30, 2017.March 31, 2021.
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.
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.
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.
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.
|
| | | | | | | | | | | | | | | |
| 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)
13. Income Taxesstatutory rate, inclusive of state income taxes, of 26.6%, primarily due to a discrete tax benefit for share-based compensation awards that vested during the first quarter of 2021. This favorable item was partially offset by certain nondeductible expense items.
For the three months ended September 30, 2017,March 31, 2020, our effective tax rate was (92.4)%21.0% as we recognized an 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% as we recognized income tax expense from continuing operations of $7.3 million on income from continuing operations of $19.6 million. The effective tax rate for the three months ended September 30, 2017 was more favorable than the statutory rate, inclusive of state income taxes, primarily due to recognizing a $2.7 million tax benefit related to a previously unrecognized tax benefit from our "check-the-box" election made in 2014 to treat one of our wholly-owned foreign subsidiaries as a disregarded entity for U.S federal income tax purposes. This benefit was partially offset by $0.6 million of tax expense recorded 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.
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$11.2 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$53.5 million. The effective tax rate for the nine months ended September 30, 2017of 21.0% was less favorable than the statutory rate, inclusive of state income taxes, of 26.0% primarily due to certain nondeductible expense items, non-deductible losses on our investments used to fund our deferred compensation liability, 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 quarter and the discrete tax benefit for the remeasurement of a portion of our income tax receivable as a result of the enactment of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in the thirdfirst quarter of 2017 related to a previously unrecognized tax benefit from our 2014 "check-the-box" election. 2020.
The effective tax rate for the nine months ended September 30, 2016CARES Act, which was lower than the statutory rate, inclusive of state income taxes, primarily duesigned into law on March 27, 2020, is an approximately $2 trillion emergency economic stimulus package in response to the year-to-date impactCOVID-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. During 2020, as a result of the CARES Act, we recognized 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$1.5 million tax benefit related to share-based compensation, partially offset by non-deductible business expenses.the remeasurement of a portion of our income tax receivable for the federal net operating loss incurred in 2018 and the expected federal net operating loss in 2020 that will be carried back to prior year income, both for a refund at the higher, prior year tax rate.
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
Oaktree
On November 9, 2018, Huron was engaged by Oaktree Medical Centre LLC, a management services organization (“Oaktree”) to perform interim management and financial advisory services. As part of the services, a Huron employee was appointed by Oaktree’s board of directors to serve as Chief Restructuring Officer of Oaktree. The engagement letter through which Oaktree retained Huron’s services states that all disputes or claims are subject to binding arbitration, disclaims special, consequential, incidental or exemplary damages or loss and caps liability to the fees paid for the portion of the engagement giving rise to any liability. On September 19, 2019, Oaktree filed for Chapter 7 liquidation in the U.S. Bankruptcy Court for the Western District of North Carolina, with the case subsequently transferred to the District of South Carolina. As a result of the bankruptcy filing, a Chapter 7 trustee was appointed to oversee the bankruptcy estate, at which time Huron’s services for Oaktree wound down.
In April 2021, Trustee’s counsel communicated in writing to Huron its intent to pursue various claims against Huron, among others, on behalf of the bankruptcy estate related to the services carried out by Huron during the engagement. The allegations suggest that Huron did not develop and implement a Chapter 11 restructuring plan on a timely basis and that its failure to do so led to significant damages. We believe the Trustee’s allegations with respect to Huron are without merit and will vigorously defend ourselves should any claim arising out of these alleged facts and circumstances be asserted against us by the Trustee.
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$0.8 million and $4.8$1.6 million were outstanding at September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively, 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, 2017March 31, 2021 and December 31, 2016,2020, the total estimated fair value of our outstanding contingent consideration liabilitiesliability was $22.5 million and $8.8 million, respectively.$1.8 million.
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.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
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 - in the areas of organizational and resource alignment, clinical transformation, financial and operational performance, patient and caregiver engagement, and technology implementation and optimization. We serveserves national and regional hospitals, and integrated health systems, academic medical centers, community hospitals, and medical groups. Our Healthcare professionals have a depth of expertise in business operations, including financial and operational improvement, care transformation, and revenue cycle managed services; organizational transformation; and digital, technology and analytic solutions. Most healthcare organizations are focused on changing the way care is delivered; establishing a sustainable business model centered around optimal cost structures, reimbursement models and financial strategies; and evolving their digital, technology and analytic capabilities. Our solutions help clients evolve and adapt to thethis rapidly changing healthcare environment to become a more agile, efficient and achieve growth, optimizeconsumer-centric organization. We use our deep industry expertise to help clients solve a diverse set of business issues, including, but not limited to, optimizing financial and operational performance, enhance profitability, improve qualityimproving care delivery and clinical outcomes, and driveincreasing physician, patient and employee engagement across the enterprise.satisfaction, evolving organizational culture, and maximizing return on technology investments.
Education
Our Education segment provides management consulting and technology solutions to higher education institutions and academic medical centers. We partner with clients to address challenges relating to business and technology strategy, financial management, operational and organizational effectiveness, research administration, 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 solutions transform and optimize operations, deliver time and cost savings, and enhance the student 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 middle marketworks with C-suite executives, boards, and largebusiness unit and functional leadership across a diverse set of organizations, not-for-profit organizations, lending institutions, law firms, investment banks, and private equity firms. We assist clients in a broad range of industries and across the spectrum fromincluding healthy, well-capitalized companies to organizations in transition, as well as creditors, equity owners, and other key constituents.across a broad range of industries, including life sciences, financial services, healthcare, education, energy and utilities, industrials and manufacturing, and the public sector. Our Business Advisory professionals resolve complexhave deep industry, functional and technical expertise that they put forward when delivering our digital, technology and analytics, strategy and innovation and corporate finance and restructuring services. In today’s disruptive environment, organizations must reimagine their historical strategies and financial and operating models to sustain and advance their competitive advantage. Organizations also recognize the need to adopt technologies, automation and analytics to improve their operations and compete in a rapidly changing environment. Our experts help organizations across industries with a variety of business issueschallenges, including, but not limited to, embedding technology and enhance clientanalytics throughout their internal and customer-facing operations, developing insights into the needs of tomorrow’s customers in order to evolve their enterprise valueand business unit strategies, bringing new products to market, and managing through stressed and distressed situations to create a suiteviable path forward for stakeholders.
•Education
Our Education segment serves public and private colleges and universities, academic medical centers, research institutes and other not-for-profit organizations. Our Education professionals have a depth of servicesexpertise in strategy and innovation; business operations, including capital advisory, transaction advisory, operational improvement, restructuringthe research enterprise and turnaround, valuation, and dispute advisory. Our Enterprise Solutions and Analytics professionals deliverstudent lifecycle; digital, technology and analytic solutionssolutions; and organizational transformation. Our Education segment clients are increasingly faced with financial and/or demographic challenges as well as increased competition. To remain competitive, organizations must challenge traditional operating and financial models and reimagine strategic, operational and research-centered opportunities that enable organizations to manage and optimizeadvance their financial performance, operational efficiency, and client or stakeholder experience. Our expertise in full-service enterprise performance management (EPM), enterprise resource planning (ERP),mission while strengthening their 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 professionalsmodels. We collaborate with clients acrossto address these challenges and ensure they have a range of industries to identify new growth opportunities, build new venturessustainable future. We combine our deep industry, functional 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)
solutionstechnical expertise to help pharmaceutical, medical device,clients solve their most pressing challenges, including, but not limited to, transforming business operations with technology; strengthening research strategies and biotechnology companies deliver more value to patients, payers,support services; evolving their organizational strategy; optimizing financial and providersoperational performance; and comply with regulations.enhancing the student lifecycle.
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, 2017March 31, 2021 and 2016,2020, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2021 | | 2020 |
Healthcare: | | | | | | | |
Revenues | | | | | $ | 79,722 | | | $ | 95,578 | |
Operating income | | | | | $ | 20,484 | | | $ | 24,050 | |
Segment operating income as a percentage of segment revenues | | | | | 25.7 | % | | 25.2 | % |
Business Advisory: | | | | | | | |
Revenues | | | | | $ | 72,867 | | | $ | 64,905 | |
Operating income | | | | | $ | 13,077 | | | $ | 9,842 | |
Segment operating income as a percentage of segment revenues | | | | | 17.9 | % | | 15.2 | % |
Education: | | | | | | | |
Revenues | | | | | $ | 50,624 | | | $ | 62,136 | |
Operating income | | | | | $ | 8,653 | | | $ | 13,116 | |
Segment operating income as a percentage of segment revenues | | | | | 17.1 | % | | 21.1 | % |
Total Company: | | | | | | | |
Revenues | | | | | $ | 203,213 | | | $ | 222,619 | |
Reimbursable expenses | | | | | 1,934 | | | 19,303 | |
Total revenues and reimbursable expenses | | | | | $ | 205,147 | | | $ | 241,922 | |
| | | | | | | |
Segment operating income | | | | | $ | 42,214 | | | $ | 47,008 | |
Items not allocated at the segment level: | | | | | | | |
Other operating expenses | | | | | 28,837 | | | 27,146 | |
Litigation and other gains | | | | | 42 | | | (150) | |
Depreciation and amortization | | | | | 5,095 | | | 6,047 | |
Goodwill impairment charges1 | | | | | 0 | | | 59,816 | |
Other expense, net | | | | | 1,299 | | | 7,637 | |
Income (loss) from continuing operations before taxes | | | | | $ | 6,941 | | | $ | (53,488) | |
(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 3 operating segments for the three months ended March 31, 2021 and 2020. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 48,295 | | | $ | 29,881 | | | $ | 15,259 | | | $ | 93,435 | |
Time and expense | 11,375 | | | 37,633 | | | 28,784 | | | 77,792 | |
Performance-based | 14,669 | | | 3,409 | | | 0 | | | 18,078 | |
Software support, maintenance and subscriptions | 5,383 | | | 1,944 | | | 6,581 | | | 13,908 | |
Total | $ | 79,722 | | | $ | 72,867 | | | $ | 50,624 | | | $ | 203,213 | |
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by billable consultants | $ | 59,569 | | | $ | 69,847 | | | $ | 42,528 | | | $ | 171,944 | |
Revenue generated by full-time equivalents | 20,153 | | | 3,020 | | | 8,096 | | | 31,269 | |
Total | $ | 79,722 | | | $ | 72,867 | | | $ | 50,624 | | | $ | 203,213 | |
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 78,764 | | | $ | 72,867 | | | $ | 50,624 | | | $ | 202,255 | |
Revenue recognized at a point in time | 958 | | | 0 | | | 0 | | | 958 | |
Total | $ | 79,722 | | | $ | 72,867 | | | $ | 50,624 | | | $ | 203,213 | |
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(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. | | | | | | |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 55,785 | | | $ | 25,393 | | | $ | 13,175 | | | $ | 94,353 | |
Time and expense | 14,733 | | | 37,589 | | | 43,711 | | | 96,033 | |
Performance-based | 18,921 | | | 646 | | | 0 | | | 19,567 | |
Software support, maintenance and subscriptions | 6,139 | | | 1,277 | | | 5,250 | | | 12,666 | |
Total | $ | 95,578 | | | $ | 64,905 | | | $ | 62,136 | | | $ | 222,619 | |
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by billable consultants | $ | 65,445 | | | $ | 61,957 | | | $ | 53,436 | | | $ | 180,838 | |
Revenue generated by full-time equivalents | 30,133 | | | 2,948 | | | 8,700 | | | 41,781 | |
Total | $ | 95,578 | | | $ | 64,905 | | | $ | 62,136 | | | $ | 222,619 | |
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 94,459 | | | $ | 64,905 | | | $ | 62,022 | | | $ | 221,386 | |
Revenue recognized at a point in time | 1,119 | | | 0 | | | 114 | | | 1,233 | |
Total | $ | 95,578 | | | $ | 64,905 | | | $ | 62,136 | | | $ | 222,619 | |
(1) Billable consultants consist of our consulting 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, 2017March 31, 2021 and December 31, 2016,2020, 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, 2017March 31, 2021 and 2016,2020, 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
Healthcare Group Hiring
On April 5, 2021, we hired approximately 300 full-time equivalent professionals within our Healthcare operating segment. These additional professionals will expand our capacity to provide revenue cycle billing, collections, insurance verification and charge integrity services to our healthcare clients. These professionals will serve new and existing clients in our Healthcare managed services solution, including serving under a short-term contract with an existing client which we entered into in connection with this group hire. The hiring of these professionals is not significant to our consolidated financial statements.
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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, 2016 and under Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q,2020 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 - in the areas of organizational and resource alignment, clinical transformation, financial and operational performance, patient and caregiver engagement, and technology implementation and optimization. We serveserves national and regional hospitals, and integrated health systems, academic medical centers, community hospitals, and medical groups. Our Healthcare professionals have a depth of expertise in business operations, including financial and operational improvement, care transformation, and revenue cycle managed services; organizational transformation; and digital, technology and analytic solutions. Most healthcare organizations are focused on changing the way care is delivered; establishing a sustainable business model centered around optimal cost structures, reimbursement models and financial strategies; and evolving their digital, technology and analytic capabilities. Our solutions help clients evolve and adapt to thethis rapidly changing healthcare environment to become a more agile, efficient and achieve growth, optimizeconsumer-centric organization. We use our deep industry expertise to help clients solve a diverse set of business issues, including, but not limited to, optimizing financial and operational performance, enhance profitability, improve qualityimproving care delivery and clinical outcomes, and driveincreasing physician, patient and employee engagement across the enterprise.satisfaction, evolving organizational culture, and maximizing return on technology investments.
Education
Our Education segment provides management consulting and technology solutions to higher education institutions and academic medical centers. We partner with clients to address challenges relating to business and technology strategy, financial management, operational and organizational effectiveness, research administration, 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 solutions transform and optimize operations, deliver time and cost savings, and enhance the student 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 middle marketworks with C-suite executives, boards, and largebusiness unit and functional leadership across a diverse set of organizations, not-for-profit organizations, lending institutions, law firms, investment banks, and private equity firms. We assist clients in a broad range of industries and across the spectrum fromincluding healthy, well-capitalized companies to organizations in transition, as well as creditors, equity owners, and other key constituents.across a broad range of industries, including life sciences, financial services, healthcare, education, energy and utilities, industrials and manufacturing, and the public sector. Our Business Advisory professionals resolve complexhave deep industry, functional and technical expertise that they put forward when delivering our digital, technology and analytics, strategy and innovation and corporate finance and restructuring services. In today’s disruptive environment, organizations must reimagine their historical strategies and financial and operating models to sustain and advance their competitive advantage. Organizations also recognize the need to adopt technologies, automation and analytics to improve their operations and compete in a rapidly changing environment. Our experts help organizations across industries with a variety of business issueschallenges, including, but not limited to, embedding technology and enhance clientanalytics throughout their internal and customer-facing operations, developing insights into the needs of tomorrow’s customers in order to evolve their enterprise valueand business unit strategies, bringing new products to market, and managing through stressed and distressed situations to create a suiteviable path forward for stakeholders.
•Education
Our Education segment serves public and private colleges and universities, academic medical centers, research institutes and other not-for-profit organizations. Our Education professionals have a depth of expertise in strategy and innovation; business operations, including capital advisory, transaction advisory, operational improvement, restructuringthe research enterprise and turnaround, valuation, and dispute advisory. Our Enterprise Solutions and Analytics professionals deliverstudent lifecycle; digital, technology and analytic solutionssolutions; and organizational transformation. Our Education segment clients are increasingly faced with financial and/or demographic challenges as well as increased competition. To remain competitive, organizations must challenge traditional operating and financial models and reimagine strategic, operational and research-centered opportunities that enable organizations to manage and optimizeadvance their financial performance, operational efficiency, and client or stakeholder experience. Our expertise in full-service enterprise performance management (EPM), enterprise resource planning (ERP),mission while strengthening their 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 professionalsmodels. We collaborate with clients acrossto address these challenges and ensure they have a range of industries to identify new growth opportunities, build new venturessustainable future. We combine our deep industry, functional and capabilities, and accelerate organizational change. Our Life Sciences professionals providestrategic solutionstechnical expertise to help pharmaceutical, medical device,clients solve their most pressing challenges, including, but not limited to, transforming business operations with technology; strengthening research strategies and biotechnology companies deliver more valuesupport services; evolving their organizational strategy; optimizing financial and operational performance; and enhancing the student lifecycle.
Huron is an Oracle partner, a Gold-level consulting partner with Salesforce.com and a Premium Partner with Salesforce.org, a Workday Services and Software Partner, an Amazon Web Services consulting partner, a Silver-level system integrator with Informatica and an SAP Concur implementation partner.
Coronavirus (COVID-19)
The worldwide spread of COVID-19 beginning in 2020 has created significant volatility, uncertainty and disruption to patients, payers,the global economy. This pandemic has had an unfavorable impact on aspects of our business, operations, and providersfinancial results, and comply with regulations.
Segment Reorganization
Duringhas caused us to significantly change the secondway 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 and enhanced available technology allows our revenue-generating professionals to assess performanceeffectively serve clients in a remote work environment. As state and allocate resources,local governments ease their restrictions, we continue to refine 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 implement our phased transition. As of March 31, 2021, 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 their ongoing business needs 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. Total revenues in the Education and Life Sciences segmentfirst quarter of 2021 decreased 8.7% compared to the Business Advisory segment. The remainingfirst quarter of 2020, which was not significantly impacted by the pandemic. In addition to the impact on first quarter 2021 revenues, the COVID-19 pandemic negatively impacted sales and elongated the sales cycle for new opportunities for certain services, particularly within our Healthcare and Education and Life Sciences segment is now referred to assegments. Given the Education segment. While 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 acquisitionuncertainties around the duration of the international assetsCOVID-19 pandemic, we continue to remain cautious about revenue growth for the first half of ADI Strategies, Inc. ("ADI Strategies") in Dubai and India. We acquired2021 when compared to the U.S. assetsfirst half of ADI Strategies in the second quarter of 2016. ADI Strategies is a leading enterprise performance management, risk management and business intelligence firm. 2020.
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 from the date of acquisition.
Innosight Holdings, LLC
On March 1, 2017, we completedand our acquisition of Innosight Holdings, LLC ("Innosight"), a growth strategy firm focused on helping companies navigate disruptive change, enable innovation,restructuring and manage strategic transformation. Together with Innosight, we use our strategic, operational, and technology capabilitiescapital advisory solutions provided to help clients across multiple industries develop pioneering solutions to address disruption and achieve sustained growth. Innosight's results of operations have been includedorganizations in our consolidated financial statements and results of operations oftransition also within our Business Advisory segment fromsegment.
In order to support our liquidity during the dateCOVID-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 acquisition.
Pope Woodhead2020 and Associates Limited
On January 9, 2017,reducing discretionary operating and capital spending. In the second, third and fourth quarters of 2020, we completedmade repayments on our acquisition of Pope Woodhead and Associates Limited ("Pope Woodhead"), a U.K.-based consulting firm providing market access capabilitiesborrowings to assist clients in developing value propositions for innovative medicines and technologies. The acquisition expandsreduce our life sciences strategy expertise and strengthenstotal debt outstanding to pre-pandemic levels due to our ability to lead clients through complex payermaintain adequate cash flows from operations and regulatory environments. Pope Woodhead's resultsimproved clarity around access to capital resources. In the first quarter of operations have been included in2021, we borrowed under our consolidated financial statements and results of operationscredit facility primarily to fund our annual performance bonus payment. To further support our liquidity during the COVID-19 pandemic, we elected to defer the deposit of our Business Advisory segment fromemployer portion of social security taxes beginning in April 2020 and through December 31, 2020, which we expect to pay in equal installments in the datefourth quarters of acquisition.2021 and 2022, as provided for under CARES Act. See the “Liquidity and Capital Resources” section below for additional information on these items.
See Note 5 "Acquisitions" within our consolidated financial statements for further information regarding our recent acquisitions.Enterprise Resource Planning System Implementation
Divestiture
Life Sciences Compliance and Operations
DuringIn the secondfourth quarter of 2017,2019, we divested our Life Sciences Compliance and Operations practice ("Life Sciences C&O"began the implementation of a new cloud-based enterprise resource planning (“ERP”), which was part system designed to improve the efficiency of our broader Life Sciences practice withininternal finance, human resources, resource planning, and administrative operations. In January 2021, we successfully went live with the Business Advisory segment.new ERP system, and we continue to progress with additional functionality and integrations as scheduled. The saleimplementation progressed on schedule and has not been significantly impacted by the COVID-19 pandemic due to the ability of Life Sciences C&O did not meetour implementation team to work and collaborate remotely and the criteria forenhanced technology and cloud-based nature of our new ERP system. We believe our investment in this new system will position our teams to drive efficiencies and provide more robust management reporting separately as discontinued operations.
and data analytics to support future growth and the goals and vision of the company.
How We Generate Revenues
A large portion of our revenues is generated by our full-timebillable 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-timebillable consultants and other professionals collectively as revenue-generating professionals.
Revenues generated by our full-timebillable 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 healthcare 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 (“Partner Contracts”), which primarily consist of coaching services, as well as speaking engagements, conferences, materialspublications and software products (“Partner Contracts”).products. 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%46.0% and 44.5%42.4% of our revenues for the three months ended September 30, 2017March 31, 2021 and 2016, respectively, and 45.9% and 48.5% of our revenues for the nine months ended September 30, 2017 and 2016,2020, 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%38.3% and 42.2%43.1% of our revenues for the three months ended September 30, 2017March 31, 2021 and 2016, respectively, and 44.4% and 37.6% of our revenues for the nine months ended September 30, 2017 and 2016,2020, 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%8.9% and 8.2%8.8% of our revenues for the three months ended September 30, 2017March 31, 2021 and 2016, respectively,2020, respectively. The level of performance-based fees earned may vary based on our clients' risk sharing preferences and 4.4% and 9.1%the mix of our revenues for the nine months ended September 30, 2017 and 2016, respectively. Performance-based fee engagements may cause significant variations in quarterly revenues and operating results depending on the timing 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% 6.8% and 5.1%5.7% of our revenues for the three months ended September 30, 2017March 31, 2021 and 2016, respectively, and 5.3% and 4.8%2020, respectively.
Our quarterly results are impacted principally by our full-timebillable 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 March 31, |
| | | | | 2021 | | 2020 |
Healthcare: | | | | | | | | |
Revenues | | | | | | $ | 79,722 | | | $ | 95,578 | |
Operating income | | | | | | $ | 20,484 | | | $ | 24,050 | |
Segment operating income as a percentage of segment revenues | | | | | | 25.7 | % | | 25.2 | % |
Business Advisory: | | | | | | | | |
Revenues | | | | | | $ | 72,867 | | | $ | 64,905 | |
Operating income | | | | | | $ | 13,077 | | | $ | 9,842 | |
Segment operating income as a percentage of segment revenues | | | | | | 17.9 | % | | 15.2 | % |
Education: | | | | | | | | |
Revenues | | | | | | $ | 50,624 | | | $ | 62,136 | |
Operating income | | | | | | $ | 8,653 | | | $ | 13,116 | |
Segment operating income as a percentage of segment revenues | | | | | | 17.1 | % | | 21.1 | % |
Total Company: | | | | | | | | |
Revenues | | | | | | $ | 203,213 | | | $ | 222,619 | |
Reimbursable expenses | | | | | | 1,934 | | | 19,303 | |
Total revenues and reimbursable expenses | | | | | | $ | 205,147 | | | $ | 241,922 | |
Statements of Operations reconciliation: | | | | | | | | |
Segment operating income | | | | | | $ | 42,214 | | | $ | 47,008 | |
Items not allocated at the segment level: | | | | | | | | |
Other operating expenses | | | | | | 28,837 | | | 27,146 | |
Litigation and other losses (gains) | | | | | | 42 | | | (150) | |
Depreciation and amortization | | | | | | 5,095 | | | 6,047 | |
Goodwill impairment charges (1) | | | | | | — | | | 59,816 | |
Operating income (loss) | | | | | | 8,240 | | | (45,851) | |
Other expense, net | | | | | | (1,299) | | | (7,637) | |
Income (loss) from continuing operations before taxes | | | | | | 6,941 | | | (53,488) | |
Income tax expense (benefit) | | | | | | 1,536 | | | (11,215) | |
Net income (loss) from continuing operations | | | | | | $ | 5,405 | | | $ | (42,273) | |
Earnings (loss) per share from continuing operations: | | | | | | | | |
Basic | | | | | | $ | 0.25 | | | $ | (1.94) | |
Diluted | | | | | | $ | 0.24 | | | $ | (1.94) | |
| | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
Other Operating Data: | | | | | | 2021 | | 2020 |
Number of billable consultants (at period end) (2): | | | | | | | | |
Healthcare | | | | | | 821 | | | 892 | |
Business Advisory | | | | | | 1,107 | | | 916 | |
Education | | | | | | 726 | | | 791 | |
Total | | | | | | 2,654 | | | 2,599 | |
Average number of billable consultants (for the period) (2): | | | | | | | | |
Healthcare | | | | | | 822 | | | 897 | |
Business Advisory | | | | | | 1,080 | | | 920 | |
Education | | | | | | 731 | | | 778 | |
Total | | | | | | 2,633 | | | 2,595 | |
Billable consultant utilization rate (3): | | | | | | | | |
Healthcare | | | | | | 67.9 | % | | 71.6 | % |
Business Advisory | | | | | | 68.7 | % | | 71.5 | % |
Education | | | | | | 70.1 | % | | 76.2 | % |
Total | | | | | | 68.8 | % | | 72.9 | % |
Billable consultant average billing rate per hour (4): | | | | | | | | |
Healthcare | | | | | | $ | 236 | | | $ | 228 | |
Business Advisory (5) | | | | | | $ | 203 | | | $ | 198 | |
Education | | | | | | $ | 174 | | | $ | 188 | |
Total (5) | | | | | | $ | 205 | | | $ | 204 | |
Revenue per billable consultant (in thousands): | | | | | | | | |
Healthcare | | | | | | $ | 73 | | | $ | 73 | |
Business Advisory | | | | | | $ | 63 | | | $ | 67 | |
Education | | | | | | $ | 59 | | | $ | 69 | |
Total | | | | | | $ | 65 | | | $ | 70 | |
Average number of full-time equivalents (for the period) (6): | | | | | | | | |
Healthcare | | | | | | 258 | | | 278 | |
Business Advisory | | | | | | 34 | | | 20 | |
Education | | | | | | 36 | | | 60 | |
Total | | | | | | 328 | | | 358 | |
Revenue per full-time equivalent (in thousands): | | | | | | | | |
Healthcare | | | | | | $ | 78 | | | $ | 108 | |
Business Advisory | | | | | | $ | 89 | | | $ | 149 | |
Education | | | | | | $ | 227 | | | $ | 144 | |
Total | | | | | | $ | 95 | | | $ | 117 | |
(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 consulting professionals who provide consulting services and generate revenues based on the number of hours worked.
(3)Utilization rate for our billable consultants is calculated by dividing the number of hours our 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 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 $221 and Life Sciences$224 for the three months ended March 31, 2021 and 2020, respectively.
Absent the impact of Huron Eurasia India, Huron's consolidated average billing rate per hour would have been $212 and $213 for the three months ended March 31, 2021 and 2020, respectively.
(6)Consists of 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, is now referredand full-time employees who provide software support and maintenance services to as the Education segment. While our consolidated results have not been impacted, we have restated our historical segment information for consistent presentation.clients.
|
| | | | | | | | | | | | | | | | |
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) | 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. |
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 March 31, |
| | | | | 2021 | | 2020 |
Revenues | | | | | $ | 203,213 | | | $ | 222,619 | |
Net income (loss) from continuing operations | | | | | $ | 5,405 | | | $ | (42,273) | |
Add back: | | | | | | | |
Income tax expense (benefit) | | | | | 1,536 | | | (11,215) | |
Interest expense, net of interest income | | | | | 1,719 | | | 2,341 | |
Depreciation and amortization | | | | | 6,551 | | | 7,415 | |
Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA) | | | | | 15,211 | | | (43,732) | |
Add back: | | | | | | | |
Restructuring and other charges | | | | | 628 | | | 2,458 | |
Litigation and other losses (gains) | | | | | 42 | | | (150) | |
Goodwill impairment charges | | | | | — | | | 59,816 | |
Loss on sale of business | | | | | — | | | 102 | |
Transaction-related expenses | | | | | 170 | | | — | |
Foreign currency transaction losses (gains), net | | | | | 403 | | | 520 | |
Adjusted EBITDA | | | | | $ | 16,454 | | | $ | 19,014 | |
Adjusted EBITDA as a percentage of revenues | | | | | 8.1 | % | | 8.5 | % |
|
| | | | | | | | | | | | | | | |
| 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 March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | | 2021 | | 2020 |
Net income (loss) from continuing operations | $ | 4,132 |
| | $ | 12,288 |
| | $ | (141,195 | ) | | $ | 35,293 |
| Net income (loss) from continuing operations | | $ | 5,405 | | | $ | (42,273) | |
Weighted average shares - diluted | 21,622 |
| | 21,445 |
| | 21,413 |
| | 21,427 |
| Weighted average shares - diluted | | 22,341 | | | 21,827 | |
Diluted earnings (loss) per share from continuing operations | $ | 0.19 |
| | $ | 0.57 |
| | $ | (6.59 | ) | | $ | 1.65 |
| Diluted earnings (loss) per share from continuing operations | | $ | 0.24 | | | $ | (1.94) | |
Add back: | | | | | | | | Add back: | | | | |
Amortization of intangible assets | 8,834 |
| | 8,771 |
| | 26,432 |
| | 24,369 |
| Amortization of intangible assets | | 2,399 | | | 3,209 | |
Restructuring charges | 1,347 |
| | 1,049 |
| | 5,295 |
| | 4,129 |
| |
Other losses (gains), net | 880 |
| | 494 |
| | (222 | ) | | 494 |
| |
Goodwill impairment charge | — |
| | — |
| | 209,600 |
| | — |
| |
Non-cash interest on convertible notes | 1,974 |
| | 1,883 |
| | 5,853 |
| | 5,582 |
| |
Gain on sale of business | — |
| | — |
| | (931 | ) | | — |
| |
Tax effect | (5,100 | ) | | (4,794 | ) | | (70,362 | ) | | (13,588 | ) | |
Tax benefit related to "check-the-box" election | (2,748 | ) | | — |
| | (2,748 | ) | | — |
| |
Restructuring and other charges | | Restructuring and other charges | | 628 | | | 2,458 | |
Litigation and other losses (gains) | | Litigation and other losses (gains) | | 42 | | | (150) | |
Goodwill impairment charges | | Goodwill impairment charges | | — | | | 59,816 | |
Loss on sale of business | | Loss on sale of business | | — | | | 102 | |
Transaction-related expenses | | Transaction-related expenses | | 170 | | | — | |
Tax effect of adjustments | | Tax effect of adjustments | | (858) | | | (13,409) | |
| Total adjustments, net of tax | 5,187 |
| | 7,403 |
|
| 172,917 |
| | 20,986 |
| Total adjustments, net of tax | | 2,381 | | | 52,026 | |
Adjusted net income from continuing operations | $ | 9,319 |
| | $ | 19,691 |
|
| $ | 31,722 |
| | $ | 56,279 |
| Adjusted net income from continuing operations | | $ | 7,786 | | | $ | 9,753 | |
Adjusted weighted average shares - diluted | 21,622 |
| | 21,445 |
| | 21,585 |
| | 21,427 |
| Adjusted weighted average shares - diluted | | 22,341 | | | 22,329 | |
Adjusted diluted earnings per share from continuing operations | $ | 0.43 |
| | $ | 0.92 |
|
| $ | 1.47 |
| | $ | 2.63 |
| Adjusted diluted earnings per share from continuing operations | | $ | 0.35 | | | $ | 0.44 | |
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 losses (gains): We have excluded the effect of a loss in the first quarter of 2021 from an increase in the estimated fair value of our liability for contingent consideration payments related to a business acquisition and a litigation settlement gain recognized in the first quarter of 2020 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 interestLoss on convertible notes:sale of business: We incur non-cash interest expense relating toexcluded the implied valueeffect of the equity conversion componentloss on sale of a software-based solution within our Convertible Notes. The valueBusiness Advisory segment in the first quarter of the equity conversion component is treated as a debt discount2020. Divestitures of businesses are infrequent 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 isare not indicative of the ongoing performance of our business.
Gain on sale of business: We haveTransaction-related expenses: To permit comparability with prior periods, we excluded the effectimpact of third-party legal and accounting fees incurred in the gain on the salefirst quarter of Life Sciences C&O, as management believes that this one-time gain2021 related to the divestitureacquisition of a business is not indicative of the ongoing performance of our business.Unico Solution, Inc. and ForceIQ, Inc., which closed effective February 1, 2021 and November 1, 2020, respectively.
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 effect of a tax benefit, recorded in the third quarter of 2017, from recognizing a previously unrecognized tax benefit from our "check-the-box" election made in 2014 to treat one of our wholly-owned foreign subsidiaries as a disregarded entity 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 to Note 13 “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. Included within the depreciation and amortization adjustment is the amortization of capitalized implementation costs of our ERP and other related software, which is included within Selling, general and administrative expenses on our consolidated statement of operations.
Adjusted weighted average shares - diluted:As we reported a net loss for the ninefirst three 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 three 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, 2017March 31, 2021 Compared to Three Months Ended September 30, 2016March 31, 2020
Revenues
Revenues decreased $7.0$19.4 million, or 3.8%8.7%, to $176.4$203.2 million for the thirdfirst quarter of 20172021 from $183.4$222.6 million for the thirdfirst quarter of 2016. Third quarter 2017 revenues included $13.4 million from our acquisitions of Innosight and Pope Woodhead, which were completed subsequent to2020. Revenues in the thirdfirst quarter of 2016,2021 were negatively impacted by COVID-19 as wellsome clients have reprioritized and delayed projects as revenues from our acquisitiona result of the international assets of ADI Strategies, which was also completed subsequent topandemic, particularly within our Healthcare and Education segments, whereas revenues in the thirdfirst quarter of 20162020 were not significantly impacted by the pandemic. Conversely, the COVID-19 pandemic has strengthened demand for other services we provide, such as our cloud-based technology and has since been fully integrated into theanalytics solutions within our Business Advisory segment. Third quarter 2017 revenues also included an incremental $1.7 million of revenue fromsegment and our acquisition of Healthcare Services Management, Inc. ("HSM Consulting"), which was completed mid-third quarter 2016.restructuring and capital advisory solutions provided to organizations in transition in our Business Advisory segment.
Of the overall $7.0$19.4 million decrease in revenues, $5.3$10.5 million was attributable to a decrease in revenues from our full-time equivalents and $1.7$8.9 million was attributable to a decrease in revenues from our full-time billable consultants.
The decrease in full-time equivalent revenues was primarily attributable to a decrease in revenue from our Studer Group solution within our Healthcare segment and a decrease in license revenuefull-time equivalent revenues in our EducationHealthcare segment, as discussed below in Segment Results. The decrease in full-time equivalent revenues reflected overall decreases in revenue per full-time equivalent and the average number of full-time equivalents in the first quarter of 2021 compared to the same prior year period.
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 Education and Healthcare segments, partially offset by increasesa strengthened demand for services in our Business Advisory segment, as discussed below in Segment Results. The decrease in billable consultant revenues was primarily attributable to overall decreases in the consultant utilization rate, partially offset by an overall increase in the average number of billable consultants for the first quarter of 2021 compared to the same prior year period.
In most of 2020 and consultant utilization rate. As discussed belowthe first quarter of 2021, 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 where some clients reprioritized or delayed certain projects. Given the uncertainties around the duration of the COVID-19 pandemic, we continue to remain cautious about revenue growth for the first half of 2021 when compared to the first half of 2020.
The COVID-19 pandemic has caused the need for many companies to accelerate their digital transformation to drive operational efficiencies, better engage with their customers, and make better data-driven decisions. This has resulted in Segment Results, this decrease in revenue attributable to our full-time billable consultants reflected decreasedstrong demand for our servicesdigital, technology and analytic offerings, particularly within our Business Advisory segment. Indicative of our expectations for future growth in the Healthcarethis segment, largely offset by revenues fromwe continue to make investments in these offerings, both organically and through strategic acquisitions, such as our acquisitions of InnosightForceIQ in November 2020 and Pope Woodhead, as well as strengthened demand for our servicesUnico Solutions in February 2021, and the Business Advisoryaddition of new offerings and Education segments.capabilities within this segment where we see strategic opportunities.
Total Direct Costs
Our total directDirect costs, includingexcluding amortization of intangible assets and software development costs, increased $4.0decreased $8.1 million, or 3.6%5.2%, to $116.4$148.1 million infor the three months ended September 30, 2017,March 31, 2021, from $112.4$156.2 million infor the three months ended September 30, 2016.March 31, 2020. The $4.0$8.1 million increasedecrease primarily related to a $2.1$3.0 million increasedecrease in salaries and related expenses for our revenue-generating professionals, which was largely driven by increased headcount from acquisitions and our ongoing cloud-based enterprise resource planning (ERP) investment, partially offset by a $1.3 million decrease in salaries and related expenses in our Healthcare segment as a result of headcount reductions. Additional increases included a $1.1 million increase in contractorshare-based compensation expense a $0.9 million increase in signing and retention bonuses for our revenue-generating professionals, a $0.6$1.3 million increasedecrease in performance 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$1.3 million decrease in amortization of intangible assets.contractor expense. As a percentage of revenues, our total direct costs increased to 66.0%72.9% during the thirdfirst quarter of 20172021 compared to 61.3%70.2% during the thirdfirst quarter of 2016,2020, primarily due to the items described above.decrease in revenues.
Total direct costs for the three months ended September 30, 2017March 31, 2021 included $2.7$0.9 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$1.3 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 March 31, 2021 and 2020 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 $3.7 million, or 8.7%8.5%, to $41.6$39.8 million in the thirdfirst quarter of 20172021 from $38.3$43.4 million in the thirdfirst quarter of 2016. Selling, general and administrative expenses for the third quarter of 2017 included $3.9 million from Innosight and Pope Woodhead.2020. The overall $3.3$3.7 million increasedecrease primarily related to a $1.9$4.2 million increasedecrease in practice administration and meetings expenses; $2.5 million decrease in promotion and marketing expenses; a $1.4 million decrease in share-based compensation expense for our support personnel; a $0.7 million decrease in training expenses; and a $0.7 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$5.5 million increase in deferred compensation expense attributable to the change in the market value of our deferred compensation liability. During the first quarter of 2021, the market value of our deferred compensation liability increased by $0.8 million, compared to a $4.7 million decrease in the first quarter of 2020. This $5.5 million increase in expense is offset by a $5.5 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 practice administration and meetings expenses.expenses, promotion and marketing 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 first quarter of 2021. As a percentage of revenues, selling, general and administrative expenses increased to 23.6%19.6% during the thirdfirst quarter of 20172021 compared to 20.9%19.5% during the thirdfirst quarter of 2016,2020. This increase was primarily dueattributable to the items described above.change in the market value of our deferred compensation liability and the decrease in revenues, mostly offset by the decreases in practice administration and meetings expenses and promotion and marketing expenses.
Restructuring charges for the thirdfirst quarter of 2017 totaled $1.32021 were $0.6 million, compared to $1.0$1.6 million for the thirdfirst quarter of 2016.2020. The $1.3$0.6 million charge incurredrecognized in the thirdfirst quarter of 20172021 primarily related to the accrual of remaining lease obligations,rent and related expenses, 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 improvementsfurniture and fixtures for our San Francisco office.vacated office spaces. The $1.0$1.6 million charge incurredrecognized in the thirdfirst quarter of 20162020 primarily related to updated lease assumptionsa $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; and $0.1 million related to workforce reductions in our Washington, D.C. space vacated in the fourth quarter of 2014.corporate operations. 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 $0.2 million for the fair valuefirst quarter of contingent consideration liabilities.2020, which consisted of a litigation settlement gain for the resolution of a claim that was settled in the first quarter of 2020.
Depreciation and amortization expense increased by $1.9decreased $0.7 million, or 11.2%, to $9.9$5.4 million infor the three months ended September 30, 2017 from $8.1March 31, 2021 compared to $6.1 million infor the three months ended September 30, 2016.March 31, 2020. The increase$0.7 million decrease in depreciation and amortization expense was primarily attributable to an increase indecreasing amortization expense for intangible assetscustomer relationships acquired in the Innosight and Pope Woodheadbusiness acquisitions which were completed subsequentdue to the third quarteraccelerated basis of 2016,amortization in prior periods, including the customer relationships acquired in our Studer Group acquisition; and an increasecustomer relationships acquired in amortizationother business acquisitions that were fully amortized in prior periods; as well as a decrease in depreciation expense for a customer-related intangible asset acquired in the Studer Group acquisition.leasehold improvements and furniture and fixtures related to vacated office spaces. 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.
During the first quarter of 2020, we recorded $59.8 million of non-cash pretax goodwill impairment charges related to our Strategy and Innovation and Life Sciences reporting units 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 were non-cash in nature and did not affect our liquidity or debt covenants. See Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on the charges.
Operating Income
Operating income decreased $17.1increased $54.1 million to $6.1income of $8.2 million in the thirdfirst quarter of 20172021 from $23.2a loss of $45.9 million in the thirdfirst quarter of 2016.2020. This increase is primarily attributable to the $59.8 million of non-cash pretax goodwill impairment charges related to our Business Advisory segment that were recognized in the first quarter of 2020. Operating margin, which is defined as operating income expressed as a percentage of revenues, decreased to 3.5% inwas 4.1% for the three months ended September 30, 2017,March 31, 2021, compared to 12.7% in(20.6)% for the three months ended September 30, 2016.March 31, 2020. The decreaseincrease in operating margin in the first quarter of 2021 was primarily attributable to increasesthe goodwill impairment charges recognized 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 thirdfirst quarter of 20172020, as well as the decreases in practice administration and meetings expenses and promotion and marketing expenses in the first quarter of 2021 compared to the same prior year period. These increases to the operating margin were partially offset by the decrease in revenues and the change in the market value of our deferred compensation liability. See Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on the non-cash goodwill impairment charges.
Total Other Expense,Income (Expense), Net
Total otherInterest expense, net increased by $0.3of interest income decreased $0.6 million to $4.0$1.7 million in the thirdfirst quarter of 20172021 from $3.7$2.3 million in the thirdfirst quarter of 2016.2020. The increasedecrease in totalinterest expense was primarily attributable to lower levels of borrowing under our credit facility during the first quarter of 2021 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 senior secured credit facility.
Other expense, net decreased $5.7 million to a net gain of $0.4 million in the first quarter of 2021 from a net loss of $5.3 million in the first quarter of 2020. The decrease in other expense, net was primarily attributable to a $0.7$0.8 million increasegain recognized in interestthe first quarter of 2021 for the market value of our investments that are used to fund our deferred compensation liability, compared to a $4.7 million loss in the first quarter of 2020. Additionally, other expense, net of interest income, which was due to higher levels of borrowings and higher interest rates under our credit facility during the third quarter of 2017 compared to the third quarter of 2016. This increase was partially offset byincludes $0.4 million of net foreign currency transaction gains in the third quarter of 2017 compared to $0.1 million of net foreign currency transaction losses in the thirdfirst quarter of 2016.2021 compared to $0.5 million of foreign currency transaction losses recognized in the first quarter of 2020.
Income Tax Expense (Benefit)
For the three months ended September 30, 2017,March 31, 2021, 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%22.1% as we recognized income tax expense from continuing operations of $7.3$1.5 million on income from continuing operations of $19.6$6.9 million. The effective tax rate for the three months ended September 30, 2017of 22.1% was more favorable than the statutory rate, inclusive of state income taxes, of 26.6%, primarily due to recognizing a $2.7 milliondiscrete tax benefit related to a previously unrecognized tax benefit from our "check-the-box" election made in 2014 to treat onefor share-based compensation awards that vested during the first quarter of our wholly-owned foreign subsidiaries as a
disregarded entity for U.S federal income tax purposes.2021. This benefitfavorable item was partially offset by $0.6 millioncertain nondeductible expense items.
For the three months ended March 31, 2020, our effective tax expense recorded in the third quarter of 2017 to correctrate was 21.0% as we recognized 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 receivablebenefit from continuing operations of $11.2 million on our consolidated balance sheet to correct an error that occurred in the second quartera loss from continuing operations 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.$53.5 million. The effective tax rate for the three months ended September 30, 2016of 21.0% was lowerless favorable than the statutory rate, inclusive of state income taxes, of 26.0% primarily due to non-taxable income, valuation allowance reductions,certain nondeductible expense items, non-deductible losses on our investments used to fund our deferred compensation liability, and certain credits and deductions,the nondeductible portion of the goodwill impairment charges recorded during the first quarter of 2020. These unfavorable items were partially offset by non-deductible business expenses.a discrete tax benefit for share-based compensation awards that vested during the quarter 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.
The CARES Act, which was signed into law on March 27, 2020, is an approximately $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. During 2020, as a result of the CARES Act, we recognized a $1.5 million tax benefit related to the remeasurement of a portion of our income tax receivable for the federal net operating loss incurred in 2018 and the expected federal net operating loss in 2020 that will be carried back to prior year income, both for a refund at the higher, prior year tax rate.
See Note 12 "Income Taxes" within the notes to our consolidated financial statements for additional information on our income tax expense.
Net Income from Continuing Operations and Earnings per Share
Net income from continuing operations decreased by $8.2increased $47.7 million to $4.1$5.4 million for the three months ended September 30, 2017,March 31, 2021 from $12.3a net loss from continuing operations of $42.3 million for the same period last year. This increase is primarily attributable to the $59.8 million of non-cash pretax goodwill impairment charges related to our Business Advisory segment recognized in the first quarter of 2020 . As a result of the decreaseincrease in net income from continuing operations, diluted earnings per share from continuing operations for the thirdfirst quarter of 20172021 was $0.19$0.24 compared to $0.57a loss per share from continuing operations of $1.94 for the thirdfirst quarter of 2016.2020. The non-cash goodwill impairment charges had a $2.19 unfavorable impact on diluted earnings per share from continuing operations for the first quarter of 2020.
Discontinued OperationsEBITDA and Adjusted EBITDA
Net income from discontinued operations was $0.2EBITDA increased $58.9 million to earnings of $15.2 million for the three months ended September 30, 2017 and related to updated lease assumptions for vacated office space directly related to the saleMarch 31, 2021 from a loss 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 $19.6$43.7 million for the three months ended September 30, 2017 from $35.9 million for the three months ended September 30, 2016.March 31, 2020. Adjusted EBITDA decreased $16.0$2.6 million to $21.5$16.5 million in the thirdfirst quarter of 20172021 from $37.5$19.0 million in the thirdfirst quarter of 2016.2020. The increase in EBITDA was primarily attributable to the non-cash goodwill impairment charges of $59.8 million recognized in the first quarter of 2020. The decrease in EBITDA and adjusted EBITDA was primarily dueattributable to the decrease in segment operating income, as discussed below in Segment Results, as well as an increase in corporate expenses primarily due to our acquisitions of Innosight and Pope Woodhead.Results.
Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share
Adjusted net income from continuing operations decreased $10.4$2.0 million to $9.3$7.8 million in the thirdfirst quarter of 20172021 compared to $19.7$9.8 million in the thirdfirst quarter of 2016.2020. As a result of the decrease in adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations was $0.43$0.35 for the thirdfirst quarter of 2017,2021, compared to $0.92$0.44 for the thirdfirst quarter of 2016.2020.
Segment Results
Healthcare
Revenues
Healthcare segment revenues decreased $23.8$15.9 million, or 23.1%16.6%, to $79.6$79.7 million for the thirdfirst quarter of 20172021 from $103.4$95.6 million for the thirdfirst quarter of 2016. Revenues2020, 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,March 31, 2021, 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%60.5%, 16.6%14.3%, 6.7%18.4%, and 8.2%6.8% of this segment’s revenues, respectively, compared to 67.0%58.4%, 13.4%15.4%, 13.4%19.8%, and 6.2%6.4% 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$14.7 million duringfor the thirdfirst quarter of 20172021 compared to $13.8$18.9 million duringfor the thirdfirst quarter of 2016.2020. 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 $15.9 million decrease in revenues, operating results,$10.0 million was attributable to a decrease in revenues from our full-time equivalents and average billing rates due$5.9 million was attributable to a decrease in revenues from our level of execution and the timing of achievement of the performance-based criteria.
billable consultants. The decrease in revenue attributable to our full-time equivalents was primarily driven by a decreased demand for our Studer Group solution andequivalent revenues reflected a decreasedecreases in revenue per full-time equivalent and the average number of full-time equivalents in the first quarter of 2021 compared to the same prior year period. The decrease in revenues attributable to our billable consultants reflected decreases in the average number of billable consultants and the consultant utilization rate, partially offset by an increase in the average numberbilling rate in the first quarter of full-time equivalents.2021 compared to the same prior year period.
Operating Income
Healthcare segment operating income decreased $13.0$3.6 million, or 33.6%14.8%, to $25.8$20.5 million for the three months ended September 30, 2017March 31, 2021 from $38.8$24.1 million for the three months ended September 30, 2016.March 31, 2020. The Healthcare segment operating margin, defined as segment operating income expressed as a percentage of segment revenues, increased to 25.7% for the first quarter of 2021 from 25.2% in the same period last year. The increase in this segment’s operating margin was primarily attributable to decreases in practice administration and meetings expenses, performance bonus and share-based compensation expense for our revenue-generating professionals, product and event costs, and promotion and marketing expenses, largely offset by an increase in salaries and related expenses for our revenue-generating professionals as a percentage of revenues.
Business Advisory
Revenues
Business Advisory segment revenues increased $8.0 million, or 12.3%, to $72.9 million for the first quarter of 2021 from $64.9 million for the first quarter of 2020, primarily related to strengthened demand for our cloud-based technology and analytics solutions, our strategy and innovation solutions, and our restructuring and capital advisory solutions provided to organizations in transition.
During the three months ended March 31, 2021, revenues from fixed-fee engagements; time-and-expense engagements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 41.0%, 51.6%, 4.7%, and 2.7% of this segment’s revenues, respectively, compared to 39.1%, 57.9%, 1.0%, and 2.0% of this segment's revenues, respectively, for the same prior year period. Performance-based fee revenue was $3.4 million for the first quarter of 2021 compared to $0.6 million for the first quarter of 2020. The level of performance-based fees earned may vary based on our clients’ preferences, the mix of services we provide, and the timing of transactions or milestones.
Of the overall $8.0 million increase in revenues, $7.9 million was attributable to an increase in revenues from our billable consultants and $0.1 million was attributable to an increase in revenues from our full-time equivalents. The increase in revenues from our billable consultants reflected increases in the average number of billable consultants and the average billing rate, partially offset by a decrease in the consultant utilization rate in the first quarter of 2021 compared to the same prior year period. The slight increase in revenues generated by our full-time equivalents reflected an increase in the average number of full-time equivalents, largely offset by a decrease in revenue per full-time equivalent in the first quarter of 2021 compared to the same prior year period.
Operating Income
Business Advisory segment operating income increased by $3.2 million, or 32.9%, to $13.1 million for the three months ended March 31, 2021 from $9.8 million for the three months ended March 31, 2020. The Business Advisory segment operating margin increased to 17.9% for the first quarter of 2021 from 15.2% in the same period last year. The increase in this segment’s operating margin was primarily attributable to decreases in restructuring charges and promotion and marketing expenses, partially offset by an increase in performance bonus expense for our revenue-generating professionals.
Education
Revenues
Education segment revenues decreased $11.5 million, or 18.5%, to $50.6 million for the first quarter of 2021 from $62.1 million for the first quarter of 2020. The decrease in revenues was related to the negative impact of the COVID-19 pandemic on demand for this segment's services as some clients reprioritized and delayed certain projects as a result of the uncertainties surrounding the pandemic.
During the three months ended March 31, 2021, revenues from fixed-fee engagements; time-and-expense engagements; and software support, maintenance and subscription arrangements represented 30.1%, 56.9%, and 13.0% of this segment’s revenues, respectively, compared to 21.2%, 70.3%, and 8.5% of this segment’s revenues, respectively, for the same prior year period.
Of the overall $11.5 million decrease in revenues, $10.9 million was attributable to a decrease in revenues from our billable consultants and $0.6 million was attributable to a decrease in revenues from our full-time equivalents. The decrease in revenues attributable to our billable consultants reflected decreases in the consultant utilization rate, average billing rate, and average number of billable consultants in the first quarter of 2021 compared to the same prior year period. The decrease in revenues from our full-time equivalents was primarily driven by a decreased use of contractors and project consultants. 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 first quarter of 2021 compared to the same prior year period.
Operating Income
Education segment operating income decreased $4.5 million, or 34.0% to $8.7 million for the three months ended March 31, 2021 from $13.1 million for the three months ended March 31, 2020. The Education segment operating margin decreased to 32.4%17.1% for the thirdfirst quarter of 20172021 from 37.5%21.1% 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 supportrevenue generating 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 arerevenues; partially offset by decreases in contractor expense, promotion and marketing expenses, and performance bonus expense for our revenue-generating professionals, practice administration and meetings expenses, and intangible asset amortization expense, all as a percentage of revenues.professionals.
Education
Revenues
Education segment revenues increased $2.8 million, or 7.3%, to $41.4 million for the third quarter of 2017 from $38.6 million for the third quarter of 2016.
During the three months ended September 30, 2017, revenues from fixed-fee engagements, time-and-expense engagements, and software support and maintenance and subscription arrangements represented 16.2%, 78.1%, 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, and software support and maintenance and subscription arrangements represented 12.2%, 80.4%, 1.6%, and 5.8% of this segment’s revenues, respectively.
Of the overall $2.8 million increase in revenues, $4.3 million was attributable to 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 consultants was primarily driven by our acquisitions of Innosight, Pope Woodhead, and the international assets of ADI Strategies, and reflected an increase in the average number of full-time billable consultants, partially offset by decreases in the average billing rate and consultant utilization rate. The decrease in revenue from our full-time equivalents reflected a 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 for the first nine months of 2017 from $548.1 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, 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.
Total Direct Costs
Our total direct costs, including amortization of intangible assets and software development costs, increased $17.0 million, or 5.1%, to $351.6 million for the nine months ended September 30, 2017, from $334.6 million for the nine months ended September 30, 2016. The overall $17.0 million increase primarily related to a $14.3 million increase in salaries and related expenses for our revenue-generating professionals, which was largely driven by increased headcount from acquisitions and our ongoing cloud-based ERP investment, partially offset by a decrease in salaries and related expenses in our Healthcare segment as a result of headcount reductions. Additional increases included a $2.8 million increase in contractor expense, a $2.1 million increase in signing and retention bonus expense for our revenue-generating professionals, a $0.8 million increase 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 million decrease in intangible asset amortization expense and a $0.5 million decrease in performance bonus expense for our revenue-generating professionals. As a percentage of revenues, our total direct costs increased to 64.3% during the first nine months of 2017 compared to 61.0% during the first nine months of 2016 primarily due to the items described above.
Total direct costs for the nine months ended September 30, 2017 included $8.4 million of amortization expense for intangible assets, primarily representing customer contracts and software acquired in business combinations and internal software development costs, compared to $11.3 million of amortization expense for the same prior year period. The $2.9 million decrease in amortization expense was primarily attributable to the decreasing amortization expense of customer contracts acquired in 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. See Note 5 "Acquisitions" and Note 6 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information about our intangible assets.
Operating Expenses and Other Gains, Net
Selling, general and administrative expenses increased $12.2 million, or 10.2%, to $132.1 million in the nine months ended September 30, 2017, from $119.9 million in the nine months ended September 30, 2016. Selling, general and administrative expenses for the first nine months of 2017 included $9.8 million from Innosight and Pope Woodhead. The overall $12.2 million increase was primarily related to an $8.5 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 increase in promotion and sponsorship expenses, and a $0.7 million increase in signing and retention bonus expense for our support personnel. These increases were partially offset by a $2.5 million decrease in performance bonus expense for our support personnel and a $0.8 million decrease in share-based compensation expense for our support personnel. As a percentage of revenues, selling, general and administrative expenses increased to 24.2% during the first nine months of 2017 compared to 21.9% during the first nine months of 2016 primarily due to the items described above.
Restructuring charges for the first nine months of 2017 totaled $5.3 million, compared to $4.1 million for the first nine months of 2016. The charges for 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. The charges for the first nine months of 2016 primarily consisted of $1.5 million related to updated assumptions for lease accruals for our 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.
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. See Note 11 "Fair Value of Financial Instruments" within the notes to our consolidated financial statements for additional information on the fair value of contingent consideration liabilities.
Depreciation and amortization expense increased by $5.5 million to $28.5 million in the nine months ended September 30, 2017, from $23.1 million in the nine months ended September 30, 2016. The increase was primarily attributable to amortization expense for intangible assets acquired in the Innosight, ADI Strategies, Pope Woodhead, and HSM Consulting acquisitions, and an increase in amortization expense for a customer-related intangible asset acquired in the Studer Group acquisition. Intangible asset amortization included within operating expenses primarily relates to certain customer relationships, trade names, and non-competition agreements acquired in connection with our business acquisitions. See Note 5 "Acquisitions" and Note 6 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information about our intangible assets.
During the quarter ended June 30, 2017, we recorded a $209.6 million non-cash pretax goodwill impairment charge related to our Healthcare reporting unit. This charge is non-cash in nature and does not affect our liquidity or debt covenants. See the "Critical Accounting Policies" section below and Note 6 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for further discussion of this charge.
Operating Income (Loss)
Operating income decreased $246.2 million, to a loss of $180.3 million in the first nine months of 2017 from income of $65.8 million in the first nine months of 2016. This decrease is primarily attributable to the $209.6 million non-cash pretax goodwill impairment charge recorded in the second quarter of 2017 related to our Healthcare segment. See the "Critical Accounting Policies" section below and Note 6 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on the non-cash goodwill impairment charge. Operating margin decreased to (33.0)% for the nine months ended September 30, 2017, compared to 12.0% for the nine months ended September 30, 2016. The decrease in operating margin was primarily attributable to the goodwill impairment charge, as well as increases 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 months of 2017 compared to the same prior year period.
Other Expense, Net
Total other expense, net decreased by $0.4 million to $10.6 million in the first nine months of 2017 from $11.0 million in the first nine months of 2016. The decrease was primarily attributable to a $0.9 million gain on sale of our Life Sciences Compliance and Operations solution within our Business Advisory segment in the second quarter of 2017. See Note 6 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on the sale. The decrease in total other expense, net was also attributable to a $1.8 million gain in the market value of our investments that are used to fund our deferred compensation liability, compared to a $1.0 million gain in the first nine months of 2016. These decreases were partially offset by a $1.5 million increase in interest expense, net of interest income 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.
Income Tax Expense (Benefit)
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.
Net Income (Loss) from Continuing Operations
Net income from continuing operations decreased by $176.5 million, to a net loss from continuing operations of $141.2 million for the nine months ended September 30, 2017, from net income from continuing operations of $35.3 million for the same prior year period. This decrease is primarily attributable to the $209.6 million non-cash pretax goodwill impairment charge related to our Healthcare segment. 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 2017 was $6.59 compared to diluted earnings per share from continuing operations of $1.65 for the first nine months of 2016. The non-cash goodwill impairment charge had a $7.16 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.
EBITDA and Adjusted EBITDA
EBITDA decreased $241.6 million to a loss of $140.2 million for the nine months ended September 30, 2017, from earnings of $101.4 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. The decrease in EBITDA was primarily attributable to the non-cash goodwill impairment charge of $209.6 million recorded in the second quarter of 2017. The decrease in adjusted EBITDA was primarily due to the decrease in segment operating income, as discussed below in Segment Results, as well as an increase in corporate expenses primarily due to our acquisitions of Innosight and Pope Woodhead.
Adjusted Net Income from Continuing Operations
Adjusted net income from continuing operations decreased $24.6 million to $31.7 million in the first nine months of 2017 compared to $56.3 million in the first nine months of 2016. 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 2017 was $1.47 compared to $2.63 for the first nine months of 2016.
Segment Results
Healthcare
Revenues
Healthcare segment revenues decreased $62.3 million, or 19.2%, to $261.3 million for the first nine months of 2017 from $323.5 million for the first nine months of 2016. Revenues for the first nine months of 2017 included $13.9 million of incremental revenues due to the full period impact of our acquisitions of HSM Consulting and MyRounding, which we completed mid-first quarter 2016 and mid-third quarter 2016, respectively.
During the nine 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 67.4%, 16.8%, 8.3%, and 7.5% of this segment’s revenues, respectively, compared to 70.4%, 10.7%, 13.1%, 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 million during the first nine months of 2017 compared to $42.5 million during the first nine months of 2016. 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 in revenues, operating results, and average billing rates due to our level of execution and the timing of achievement of the performance-based criteria.
Operating Income
Healthcare segment operating income decreased $35.6 million, or 29.9%, to $83.6 million for the nine months ended September 30, 2017, from $119.2 million for the nine months ended September 30, 2016. The Healthcare segment operating margin decreased to 32.0% for the first nine months of 2017 from 36.9% 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 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, partially offset by decreases in performance bonus expense for our revenue-generating professionals and support personnel as a percentage of revenues.
The non-cash goodwill impairment charge discussed above within the consolidated results 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. See the "Critical Accounting Policies" section below and Note 6 "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 in the performance of the Healthcare segment compared to our internal forecasts could result in another non-cash goodwill impairment charge.
Education
Revenues
Education segment revenues increased $15.8 million, or 14.1%, to $127.6 million for the first nine months of 2017 from $111.8 million for the first nine months of 2016.
For the nine 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 15.8%, 78.5%, 0.3%, and 5.4% of this segment’s revenues, respectively, compared to 14.5%, 78.6%, 0.9%, and 6.0% of this segment's revenues, respectively, during the same prior year period.
Of the overall $15.8 million increase in revenues, $16.9 million was attributable to our full-time billable consultants, which was partially offset by a $1.1 million decrease in revenues attributable to our full-time equivalents. The increase in revenue from our full-time billable consultants reflected increases in the average number of full-time billable consultants and 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 first nine months of 2017 compared to the same prior year period.
Operating Income
Education segment operating income increased $0.3 million, or 0.9%, to $31.8 million for the nine months ended September 30, 2017, from $31.5 million for the nine months ended September 30, 2016. The Education segment operating margin decreased to 24.9% for the first nine months of 2017 from 28.1% in the same period last year. The decrease in this segment’s operating margin was primarily attributable to increases in performance bonus expense for both our revenue-generating professionals and support personnel, as well as an increase in salaries and related expenses for our revenue-generating professionals, all as a percentage 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, 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 equivalents 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 in 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $8.4$45.6 million to $21.6 million at March 31, 2021 from $17.0$67.2 million at December 31, 2016 to $8.7 million at September 30, 2017.2020. As of September 30, 2017,March 31, 2021, 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, | | | Three Months Ended March 31, |
Cash Flows (in thousands): | | 2017 | | 2016 | Cash Flows (in thousands): | | 2021 | | 2020 |
Net cash provided by operating activities | | $ | 52,432 |
| | $ | 79,745 |
| |
Net cash used in operating activities | | Net cash used in operating activities | | $ | (82,754) | | | $ | (56,146) | |
Net cash used in investing activities | | (125,253 | ) | | (81,233 | ) | Net cash used in investing activities | | (8,037) | | | (18,395) | |
Net cash provided by (used in) financing activities | | 64,262 |
| | (47,979 | ) | |
Net cash provided by financing activities | | Net cash provided by financing activities | | 45,082 | | | 214,089 | |
Effect of exchange rate changes on cash | | 192 |
| | 133 |
| Effect of exchange rate changes on cash | | 155 | | | (143) | |
Net decrease in cash and cash equivalents | | $ | (8,367 | ) | | $ | (49,334 | ) | |
Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | | $ | (45,554) | | | $ | 139,405 | |
Operating Activities
Net cash provided byused in operating activities totaled $52.4$82.8 million for the ninethree months ended September 30, 2017 and $79.7March 31, 2021, compared to $56.1 million for the same period last year.three months ended March 31, 2020. 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 operationsused in operating activities for the first ninethree months of 20172021 compared to the same prior year period was primarily attributable to lower net income,a decrease in cash collections, partially offset by a decrease in the collection of a settlement receivableamount paid for annual performance bonuses in the first quarter of 20162021 compared to the first quarter of 2020, a decrease in payments to employees for salaries and related benefits, and a decrease in cash collections from clients inselling, general and administrative expenses during the first ninethree months of 2017, partially offset by decreased vendor and tax payments.2021 compared to the first three months of 2020.
Investing Activities
Net cash used in investing activities was $125.3$8.0 million and $18.4 million for the ninethree months ended September 30, 2017March 31, 2021 and $81.2 million for the same period last year.2020, respectively.
The use of cash in the first ninethree months of 20172021 primarily consisted of $106.9$6.0 million for the purchasespurchase of businessesa business; $1.4 million for payments related to internally developed software; and $20.1$0.6 million for purchases of property and equipment, primarily related to purchases of leasehold improvements for certain office spaces and computers and related equipment.
The use of cash in the first three months of 2020 primarily consisted of $13.0 million for the purchase of an additional convertible debt investment in
Shorelight Holdings, LLC; $2.9 million for payments related to internally developed software; $1.5 million for contributions to our life insurance policies which fund our deferred compensation plan; and $1.0 million for purchases of property and equipment, primarily related to purchases of furniture and fixturesleasehold improvements for new office spaces in certain locations.
The use of cash in the first nine months of 2016 primarily consisted of $69.1 million for the purchases of businesses and $9.4 million for purchases of property and equipment.
We estimate that cash utilized for purchases of property and equipment and software development in 20172021 will betotal approximately $25.0$12 million to $18 million; primarily consisting of leasehold improvements furniture and fixtures,for certain office locations, software development costs, and information technology related equipment to support our corporate infrastructure.equipment.
Financing Activities
Net cash provided by financing activities was $64.3$45.1 million and $214.1 million for the ninethree months ended September 30, 2017. March 31, 2021 and March 31, 2020, respectively.
During the first ninethree months of 2017,2021, we borrowed $241.0$89.0 million, under our credit facility, primarily to fund our acquisitions of Innosight and Pope Woodhead and our annual performance bonus payment, and made repayments on our credit facilityborrowings of $170.0$24.1 million.
Net cash used in financing activities was $48.0 million for the nine months ended September 30, 2016. During Additionally, during the first ninethree months of 2016,2021, we repurchased and retired $55.3$11.5 million of our common stock under our 2020 Share Repurchase Program, as defined below.
During the first three months of 2020, we borrowed $281.0 million under our credit facility, including $125.0 million prior to March 31, 2020 to maintain excess cash and support liquidity during the period of uncertainty created by the COVID-19 pandemic, as well as to fund our annual performance bonus payment. During the first quarter of 2020, we made repayments on our borrowings of $38.1 million. Additionally, we repurchased and retired $20.9 million of our common stock under our 2015 Share Repurchase Program, as defined below, and had net borrowingssettled $1.2 million of $12.0 million under our credit facility, primarily to fund the acquisitionsshare repurchases that were accrued as of HSM Consulting and the U.S. assets of ADI Strategies and our annual performance bonus payment.December 31, 2019.
Share Repurchase Program
AsIn November 2020, our board of September 30, 2017, we haddirectors authorized a share repurchase program (the “2020 Share Repurchase Program”) permitting us to
repurchase up to $50 million of our common stock through December 31, 2021. The 2020 Share Repurchase Program was authorized
subsequent to the expiration of our prior share repurchase program (the “2015 Share Repurchase Program”) on October 31, 2020. The 2015
Share Repurchase Program permitted us to repurchase up to $125 million of our common stock through October 31, 2017 (the "Share 2020. The 2020 Share
Repurchase Program"). DuringProgram and 2015 Share Repurchase Program are collectively known as the fourth quarter“Share Repurchase Programs.” The amount and
timing of 2017, our board of directors authorized an extension ofrepurchases under the Share Repurchase Program through October 31, 2018. The amountPrograms were and timing of the repurchases will continue to 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
Under the first nine months of 2016,2020 Share Repurchase Program, we
repurchased and retired 982,192245,718 shares for $55.3 million. No shares were repurchased$13.2 million in the first nine monthsquarter of 2017.2021 of which $1.7 million settled in the second quarter of 2021. As of September 30, 2017, $35.1March 31, 2021, $31.8 million remainsremained available for share repurchases.
Financing Arrangements
At September 30, 2017,March 31, 2021, we had $250.0 million principal amount of our 1.25% convertible senior notes outstanding, $139.0$265.0 million outstanding under our senior secured credit facility and $5.0$3.2 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,March 31, 2021 and December 31, 2020, we were in compliance with these financial covenants with acovenants. Our Consolidated Leverage Ratio as of 3.52March 31, 2021 was 2.64 to 1.00, and acompared to 1.94 to 1.00 as of December 31, 2020. Our Consolidated Interest Coverage Ratio as of 12.60March 31, 2021 was 13.00 to 1.00.1.00, compared to 12.51 to 1.00 as of December 31, 2020.
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%$25 million.
Principal borrowings outstanding under the Amended Credit Agreement at September 30, 2017March 31, 2021 and December 31, 2020 totaled $139.0 million.$265.0 million and $200.0 million, respectively. These borrowings carried a weighted average interest rate of 3.4%,2.4% at March 31, 2021 and 2.5% at December 31, 2020, 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,March 31, 2021, we had outstanding letters of credit totaling $2.7$0.8 million, which are primarily used as security deposits for our office facilities. As of September 30, 2017,March 31, 2021, the unused borrowing capacity under the revolving credit facility was $358.3$334.2 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,March 31, 2021, the outstanding principal amount of the promissory note was $5.0 million. As of September 30, 2017,$3.2 million, and the aircraft had a carrying amount of $6.6$4.3 million. At December 31, 2020, the outstanding principal amount of the promissory note was $3.3 million, and the aircraft had a carrying amount of $4.4 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 December 2020, 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-term
additional 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 months 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, the aggregate fair value of all contingent consideration liabilities outstanding was $22.5 million.
2020. 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, 2024,31, 2021, borrowings outstanding under our senior secured credit facility totaled $265.0 million compared to $200.0 million at which time a final payment of $1.5 million, plus any accrued and unpaid interest will be due. UnderDecember 31, 2020. See 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 |
|
March 31, 2021. There have been no other material changes to our contractual obligations since December 31, 2016.2020.
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 areis based upon our consolidated financial statements, which have been prepared in accordance with GAAP.accounting principles generally accepted in the United States of America ("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. Below is an update to our critical accounting policy related to the carrying value of goodwill and other intangible assets.2020. There have been no material changes to our other critical accounting policies during the first ninethree months of 2017.2021.
Carrying Values of Goodwill and Other Intangible Assets
Acquisition of Innosight
On March 1, 2017, we completed our acquisition of Innosight, a growth strategy firm focused 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 operations 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, 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. We will continue to operate under three reportable segments: Healthcare, Education, and Business Advisory.
These three reportable segments will be comprised of the following six reporting units for goodwill impairment testing purpose: Healthcare, Education, Business Advisory, Enterprise Solutions and Analytics, Strategy and Innovation, and Life Sciences. The Business Advisory, Enterprise Solutions and Analytics, Strategy and Innovation, and Life Sciences reporting units comprise our Business Advisory segment.
As a result of the reorganization, we reallocated $10.8 million of the goodwill balance associated with the previous Education and Life Sciences reporting unit to the new Life Sciences reporting unit based on 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, 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 goodwill for the Healthcare reporting unit prior to our usual annual test. 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 with the preparation of our financial statements for the quarter ended June 30, 2017, we performed an interim impairment test on the Healthcare reporting unit.
Based on the estimated fair value of the Healthcare reporting unit described below, we recorded a $209.6 million non-cash pretax charge in the second quarter of 2017 to reduce the carrying value of goodwill in our Healthcare reporting unit.
Our goodwill impairment test was performed by comparing the fair value of the Healthcare reporting unit with its 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 Healthcare 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 the reporting unit and then discounting those cash flows to present value reflecting the relevant risks associated with the 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 rate that reflects the risk inherent in the future cash flows. In estimating future cash flows, we relied on an internally generated 11-year forecast. For periods after the 11-year forecast, we assumed a long-term annual revenue growth rate of 3.5%. Our forecast is 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.
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 are evaluated and adjusted based on specific characteristics of the Healthcare reporting unit relative to the selected guideline companies and applied to the reporting unit's operating data to arrive at an indication of value.
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 unit are reasonable, these estimates and assumptions could have a significant impact on whether or not another 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 unit will be consistent with our projections. 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 another non-cash goodwill impairment charge, which could be material.
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, 2017 are as follows (in thousands):
|
| | | | |
Reporting Unit | | Carrying Value of Goodwill |
Healthcare | | $ | 427,209 |
|
Education | | 102,830 |
|
Business Advisory | | 16,094 |
|
Enterprise Solutions and Analytics | | 45,119 |
|
Strategy and Innovation | | 87,432 |
|
Life Sciences | | 10,691 |
|
Total | | $ | 689,375 |
|
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 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 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.
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
Healthcare Group Hiring
On April 5, 2021, we hired approximately 300 full-time equivalent professionals within our Healthcare operating segment. These additional professionals will expand our capacity to provide revenue cycle billing, collections, insurance verification and charge integrity services to our healthcare clients. These professionals will serve new and existing clients in our Healthcare managed services solution, including serving under a short-term contract with an existing client which we entered into in connection with this group hire. The hiring of these professionals is not significant to our consolidated financial statements.
We are exposed to market risks primarily from changes in interest rates and changes in the market value of our investments.
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,March 31, 2021, we had borrowings outstanding under the credit facility totaling $139.0$265.0 million that carried a weighted average interest rate of 3.4%2.4%, 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$0.7 million effect on our pretax income on an annualized basis, including the effect of the interest rate swap.swaps outstanding at March 31, 2021. At December 31, 2016, our2020, we had borrowings outstanding under the credit facility totaled $68.0totaling $200.0 million andthat carried a weighted average interest rate of 2.5%, including the effectimpact of the interest rate swapswaps described below. The outstanding borrowings atAs of December 31, 20162020, these variable rate borrowings were fully hedged against changes in interest rates by ourthe interest rate swap,swaps, which hadhave a notional amount of $68.0 million at December 31, 2016.
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%.
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,March 31, 2021, the outstanding principal amount of the promissory note was $5.0$3.2 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, 2020, the outstanding principal amount of the promissory note was $3.3 million and carried an interest rate of 2.1%. A hypothetical 100 basis point change in the interest rate as of December 31, 2020 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.
reported in other comprehensive income. As of September 30, 2017,March 31, 2021, the fair value of the investment was $31.9$58.0 million, with a total cost basis of $27.9$40.9 million. At December 31, 2020, the fair value of the investment was $64.4 million, with a total cost basis of $40.9 million.
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
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.
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.
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,March 31, 2021, we reacquired 4,798165,203 shares of common stock with a weighted average fair market value of $39.78$51.47 as a result of such tax withholdings.
legal requirements.
The following table provides information with respect to purchases we made of our common stock during the quarter ended September 30, 2017.March 31, 2021.
None.
Not applicable.
None.
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.