HURON CONSULTING GROUP INC.
The accompanying notes are an integral part of the consolidated financial statements.
HURON CONSULTING GROUP INC.
The accompanying notes are an integral part of the consolidated financial statements.
HURON CONSULTING GROUP INC.
1. Description of Business
2. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited consolidated financial statements reflect the financial position, results of operations, and cash flows as of and for the three and nine months ended September 30, 20172023 and 2016.2022. These financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”("SEC") for Quarterly Reports on Form 10-Q. Accordingly, these financial statements do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”("GAAP") for annual financial statements. In the opinion of management, these financial statements reflect all adjustments of a normal, recurring nature necessary for the fair statement of our financial position, results of operations, and cash flows for the interim periods presented in conformity with GAAP. These financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2016 included in our Annual Report on Form 10-K for the year ended December 31, 2022 and our Quarterly Reports on Form 10-Q for the periods ended March 31, 20172023 and June 30, 2017.2023. Our results for any interim period are not necessarily indicative of results for a full year or any other interim period.
3. New Accounting PronouncementsGoodwill and Intangible Assets
Identifiable intangible assets with finite lives are amortized over their estimated useful lives. Customer relationships and customer contracts, as well as certain trade names and technology and software are amortized on an accelerated basis to correspond to the cash flows expected to be derived from the assets. All other intangible assets with finite lives are amortized on a straight-line basis. In connection with the acquisition of MyRounding Solutions, LLC, we acquired in-process technology which was accounted for as an indefinite-lived intangible asset until the development of the technology was complete, which occurred in the first quarter of 2017. Upon completion, we reclassified the technology to definite-lived technology and software, and began amortizing the asset over a five-year useful life on a straight-line basis.
Actual future amortization expense could differ from these estimated amounts as a result of future acquisitions, dispositions, and other factors.
7.4. Revenues
For the three months ended September 30, 2023 and 2022, we recognized revenues of $358.2 million and $285.4 million, respectively. Of the $358.2 million recognized in the third quarter of 2023, we recognized revenues of $9.6 million from obligations satisfied, or partially satisfied, in prior periods, of which $7.1 million was due to changes in the estimates of our variable consideration under performance-based billing arrangements and $2.5 million was due to the release of allowances on receivables from clients and unbilled services. Of the $285.4 million recognized in the third quarter of 2022, we recognized revenues of $3.5 million from obligations satisfied, or partially satisfied, in prior periods, which was primarily due to the release of allowances on receivables from clients and unbilled services.
For the nine months ended September 30, 2023 and 2022, we recognized revenues of $1.02 billion and $818.7 million, respectively. Of the $1.02 billion recognized in the first nine months of 2023, we recognized revenues of $10.4 million from obligations satisfied, or partially satisfied, in prior periods, of which $9.1 million was due to changes in the estimates of our variable consideration under performance-based billing arrangements and $1.3 million was primarily due to the release of allowances on receivables from clients and unbilled services. Of the $818.7 million recognized in the first nine months of 2022, we recognized revenues of $4.7 million from obligations satisfied, or partially satisfied, in prior periods, of which $2.5 million was due to changes in the estimates of our variable consideration under performance-based billing arrangements and $2.2 million was primarily due to the release of allowances on receivables from clients and unbilled services.
As of September 30, 2023, we had $228.4 million of remaining performance obligations under engagements with original expected durations greater than one year. These remaining performance obligations exclude variable consideration which has been excluded from the total transaction price due to the constraint and performance obligations under time-and-expense engagements which are recognized in the amount invoiced. Of the $228.4 million of performance obligations, we expect to recognize $25.8 million as revenue in 2023, $72.6 million in 2024, and the remaining $130.0 million thereafter. Actual revenue recognition could differ from these amounts as a result of changes in the
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
estimated timing of work to be performed, adjustments to estimated variable consideration in performance-based arrangements, or other factors.
Contract Assets and Liabilities
The payment terms and conditions in our customer contracts vary. Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services or deferred revenues in the consolidated balance sheets.
Unbilled services include revenues recognized for services performed but not yet billed to clients. Services performed that we are not yet entitled to bill because certain events, such as the completion of the measurement period or client approval in performance-based engagements, must occur are recorded as contract assets and included within unbilled services, net. The contract asset, net balance as of September 30, 2023 and December 31, 2022 was $58.0 million and $50.2 million, respectively. The $7.8 million increase primarily reflects timing differences between the completion of our performance obligations and the amounts billed or billable to clients in accordance with their contractual billing terms.
Client prepayments and retainers are classified as deferred revenues and recognized over future periods in accordance with the applicable engagement agreement and our revenue recognition accounting policy. Our deferred revenues balance as of September 30, 2023 and December 31, 2022 was $26.2 million and $21.9 million, respectively. The $4.3 million increase primarily reflects timing differences between client payments in accordance with their contract terms and the completion of our performance obligations. For the three and nine months ended September 30, 2023, $0.9 million and $21.2 million of revenues recognized were included in the deferred revenue balance as of December 31, 2022, respectively.
5. Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, excluding unvested restricted common stock. Diluted earnings per share reflects the potential reduction in earnings per share that could occur if securities or other contracts to issue common stock were exercised or converted into common stock under the treasury stock method. Such securities or other contracts include unvested restricted stock awards, unvested restricted stock units, and outstanding common stock options, convertible senior notes, and outstanding warrants, to the extent dilutive. In periods for which we report a net loss, from continuing operations, diluted weighted average common shares outstanding excludes all potential common stock equivalents as their impact on diluted net loss from continuing operations per share would be anti-dilutive.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Earnings (loss) per share under the basic and diluted computations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Net income | $ | 21,516 | | | $ | 17,741 | | | $ | 59,647 | | | $ | 58,468 | |
| | | | | | | |
| Weighted average common shares outstanding – basic | 18,770 | | | 20,109 | | | 18,941 | | | 20,511 | |
| Weighted average common stock equivalents | 705 | | | 506 | | | 637 | | | 388 | |
| Weighted average common shares outstanding – diluted | 19,475 | | | 20,615 | | | 19,578 | | | 20,899 | |
| | | | | | | |
| Net income per basic share | $ | 1.15 | | | $ | 0.88 | | | $ | 3.15 | | | $ | 2.85 | |
| Net income per diluted share | $ | 1.10 | | | $ | 0.86 | | | $ | 3.05 | | | $ | 2.80 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income (loss) from continuing operations | $ | 4,132 |
| | $ | 12,288 |
| | $ | (141,195 | ) | | $ | 35,293 |
|
| Income (loss) from discontinued operations, net of tax | 238 |
| | 4 |
| | 690 |
| | (1,830 | ) |
| Net income (loss) | $ | 4,370 |
| | $ | 12,292 |
| | $ | (140,505 | ) | | $ | 33,463 |
|
| | | | | | | | |
| Weighted average common shares outstanding – basic | 21,505 |
| | 21,076 |
| | 21,413 |
| | 21,084 |
|
| Weighted average common stock equivalents | 117 |
| | 369 |
| | — |
| | 343 |
|
| Weighted average common shares outstanding – diluted | 21,622 |
| | 21,445 |
| | 21,413 |
| | 21,427 |
|
| | | | | | | | |
| Net earnings per basic share: | | | | |
| |
|
| Net income (loss) from continuing operations | $ | 0.19 |
| | $ | 0.58 |
| | $ | (6.59 | ) | | $ | 1.67 |
|
| Income (loss) from discontinued operations, net of tax | 0.01 |
| | — |
| | 0.03 |
| | (0.08 | ) |
| Net income (loss) | $ | 0.20 |
| | $ | 0.58 |
| | $ | (6.56 | ) | | $ | 1.59 |
|
| | | | | | | | |
| Net earnings per diluted share: | | | | | | | |
| Net income (loss) from continuing operations | $ | 0.19 |
| | $ | 0.57 |
| | $ | (6.59 | ) | | $ | 1.65 |
|
| Income (loss) from discontinued operations, net of tax | 0.01 |
| | — |
| | 0.03 |
| | (0.09 | ) |
| Net income (loss) | $ | 0.20 |
| | $ | 0.57 |
| | $ | (6.56 | ) | | $ | 1.56 |
|
The number of anti-dilutive securities excluded from the computation of the weighted average common stock equivalents presented above for the three and nine months ended September 30, 2023 and 2022 were as follows: |
| | | | | |
| | As of September 30, |
| | 2017 | | 2016 |
| Unvested restricted stock awards | 627 |
| | 5 |
|
Outstanding common stock options
| 194 |
| | — |
|
| Convertible senior notes | 3,129 |
| | 3,129 |
|
| Warrants related to the issuance of convertible senior notes | 3,129 |
| | 3,129 |
|
| Total anti-dilutive securities | 7,079 |
| | 6,263 |
|
See Note 8 “Financing Arrangements” for further information on the convertible senior notesless than 0.1 million shares and warrants related to the issuanceunvested restricted stock and outstanding common stock options.
In November 2020, our board of convertible notes.
As of September 30, 2017, we haddirectors authorized a share repurchase program authorized by our board of directors, pursuantpermitting us to which we may, from time to time, repurchase up to $125$50 million of our common stock through OctoberDecember 31, 2017 (the “Share Repurchase Program”). During2021. Subsequent to the fourth quarter of 2017,initial authorization, our board of directors authorized anextensions of the share repurchase program through December 31, 2023 and increased the authorized amount to $300 million. In the fourth quarter of 2023, our board of directors authorized a further extension of the Share Repurchase Programshare repurchase program through OctoberDecember 31, 2018.2024 and increased the authorized amount under the share repurchase program from $300 million to $400 million. The amount and timing of repurchases under the repurchasesshare repurchase program were and 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. NoAll shares were repurchased during the first nine months of 2017. In the first quarter of 2016, we repurchased and retired 982,192 shares for $55.3 million. No shares were repurchased in the second or third quarter of 2016. As of September 30, 2017, $35.1 million remains available for share repurchases.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
8. Financing Arrangements
A summaryrepurchased and retired are reflected as a reduction to our basic weighted average shares outstanding based on the trade date of the carrying amountsshare repurchase.
In the three and nine months ended September 30, 2023, we repurchased and retired 290,288 and 1,116,830 shares for $28.8 million and $88.4 million, respectively. Additionally, in the first quarter of
our debt follows: |
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| 1.25% convertible senior notes due 2019 | $ | 230,834 |
| | $ | 224,065 |
|
| Senior secured credit facility | 139,000 |
| | 68,000 |
|
| Promissory note due 2024 | 4,991 |
| | — |
|
| Total long-term debt | $ | 374,825 |
| | $ | 292,065 |
|
Current maturities of debt (1) | (497 | ) | | — |
|
| Long-term debt, net of current portion | $ | 374,328 |
| | $ | 292,065 |
|
| |
(1) | The current maturities of debt are included as a component2023, we settled the repurchase of 15,200 shares for $1.1 million which were accrued expenses and other current liabilities on our consolidated balance sheets. |
Below is a summary of the scheduled remaining principal payments of our debt as of December 31, 2022. In the three and nine months ended September 30, 2017. |
| | | |
| | Principal Payments of Long-Term Debt |
| 2017 | $ | 123 |
|
| 2018 | $ | 501 |
|
| 2019 | $ | 250,515 |
|
| 2020 | $ | 139,529 |
|
| 2021 | $ | 544 |
|
| Thereafter | $ | 2,779 |
|
Convertible Notes
In September 2014, the Company issued $2502022, we repurchased and retired 685,641 and 1,706,587 shares for $45.6 million principal amount of 1.25% convertible senior notes due 2019 (the “Convertible Notes”) in a private offering. The Convertible Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as Trustee (the “Indenture”). 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$97.9 million, respectively, including 38,568 shares for $2.6 million which were 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. The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest, except in certain limited circumstances described in the Indenture. Upon the occurrencefourth quarter of a “make-whole fundamental change” (as defined2022. Additionally in the Indenture)first quarter of 2022, we settled the Company will, in certain circumstances, increase the conversion rate by a numberrepurchase of additional3,820 shares for a holder$0.2 million that elects to convert its Convertible Notes in connection with such make-whole fundamental change. Additionally, if the Company undergoes a “fundamental change” (as defined in the Indenture), a holder will have the option to require the Company to repurchase all or a portionwere accrued as of its Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest. As discussed below, the convertible note hedge transactions and warrants, which were entered into in connection with the Convertible Notes, effectively raise the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to July 1, 2019, only under the following circumstances:
during any calendar quarter (and only during such calendar quarter) commencing after December 31, 2014 if, for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter, the last reported sale price of the Company’s common stock for such trading day is equal to or greater than 130% of the applicable conversion price on such trading day;
during the five consecutive business day period immediately following any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which, for each trading day of the measurement period, the “trading price” (as defined in the Indenture) per $1,000 principal amount of the Convertible Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock for such trading day and the applicable conversion rate on such trading day; or
upon the occurrence of specified corporate transactions described in the Indenture.
On or after July 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or a portion of its Convertible Notes, regardless of the foregoing circumstances.
We have separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar liability that does not have an associated convertible feature, assuming our non-convertible debt borrowing rate. The carrying value of the equity component representing the conversion option, which is recognized as a debt discount, was determined by deducting the fair value of the liability component from the proceeds of the Convertible Notes. The debt discount is amortized to interest expense using an effective interest rate of 4.751% over the term of the Convertible Notes.2021. As of September 30, 2017, the remaining life of the Convertible Notes is 2.0 years. The equity component will not be remeasured as long as it continues to meet the conditions2023, $21.1 million remained available for equity classification.share repurchases under our share repurchase program.
The transaction costs related to the issuance of the Convertible Notes were separated into liability and equity components based on their relative values, as determined above. Transaction costs attributable to the liability component are recorded as a deduction to the carrying amount of the liability and amortized to interest expense over the term of the Convertible Notes; and transaction costs attributable to the equity component are netted with the equity component of the Convertible Notes in stockholders’ equity. Total debt issuance costs were approximately $7.3 million, of which $6.2 million was allocated to liability issuance costs and $1.1 million was allocated to equity issuance costs.
As of September 30, 2017 and December 31, 2016, the Convertible Notes consisted of the following: |
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Liability component: | | | |
| Proceeds | $ | 250,000 |
| | $ | 250,000 |
|
| Less: debt discount, net of amortization | (16,666 | ) | | (22,520 | ) |
| Less: debt issuance costs, net of amortization | (2,500 | ) | | (3,415 | ) |
| Net carrying amount | $ | 230,834 |
| | $ | 224,065 |
|
Equity component (1) | $ | 39,287 |
| | $ | 39,287 |
|
| |
(1) | Included in additional paid-in capital on the consolidated balance sheet. |
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
The following table presents the amount of interest expense recognized related to the Convertible Notes for the periods presented. |
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Contractual interest coupon | $ | 781 |
| | $ | 781 |
| | $ | 2,344 |
| | $ | 2,344 |
|
| Amortization of debt discount | 1,974 |
| | 1,883 |
| | 5,853 |
| | 5,582 |
|
| Amortization of debt issuance costs | 306 |
| | 302 |
| | 915 |
| | 900 |
|
| Total interest expense | $ | 3,061 |
| | $ | 2,966 |
| | $ | 9,112 |
| | $ | 8,826 |
|
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 purposes of the computation of diluted earnings per share in accordance with GAAP, dilution will occur when the average share price of our common stock for a given period exceeds the conversion price of the Convertible Notes, which initially is equal to approximately $79.89 per share. The convertible note hedge transactions and warrant transactions are discussed separately below.
Convertible Note Hedge Transactions. In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions whereby the Company has call options to purchase a total of approximately 3.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the Convertible Notes in full, at a price of approximately $79.89, which corresponds to the initial conversion price of the Convertible Notes, subject to customary anti-dilution adjustments substantially similar to those in the Convertible Notes. The convertible note hedge transactions are exercisable upon conversion of the Convertible Notes and will expire in 2019 if not earlier exercised. We paid an aggregate amount of $42.1 million for the convertible note hedge transactions, which was recorded as additional paid-in capital on the consolidated balance sheets. The convertible note hedge transactions are separate transactions and are not part of the terms of the Convertible Notes.
Warrants. In connection with the issuance of the Convertible Notes, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 3.1 million shares of the Company’s common stock at a strike price of approximately $97.12. The warrants will expire incrementally on 100 different dates from January 6, 2020 to May 28, 2020 and are exercisable at each such expiry date. If the average market value per share of our common stock for the reporting period exceeds the strike price of the warrants, the warrants will have a dilutive effect on our earnings per share. We received aggregate proceeds of $23.6 million from the sale of the warrants, which was recorded as additional paid-in capital on the consolidated balance sheets. The warrants are separate transactions and are not part of the terms of the Convertible Notes or the convertible note hedge transactions.
The Company recorded an initial deferred tax liability of $15.4 million in connection with the debt discount associated with the Convertible Notes and recorded an initial deferred tax asset of $16.5 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are included in deferred income taxes, net on the consolidated balance sheets.
Senior Secured Credit Facility6. Financing Arrangements
The Company has a $500$600 million five-year senior secured revolving credit facility, subject to the terms of a SecondThird Amended and Restated Credit Agreement dated as of March 31, 2015, as amended to dateNovember 15, 2022 (as amended, and modified the "Amended Credit Facility"Agreement"), that becomes due and payable in full upon maturity on March 31, 2020.November 15, 2027. The Amended Credit Agreement provides the option to increase the revolving credit facility or establish term loan facilities in an aggregate amount of up to $100$250 million, subject to customary conditions and the approval of any lender whose commitment would be increased, resulting in a maximum available principal amount under the Amended Credit Agreement of $600$850 million. The initial borrowings under the Amended Credit Agreement were used to refinance borrowings outstanding under a prior credit agreement, and future borrowings under the Amended Credit Agreement may be used for working capital, capital expenditures, acquisitions of businesses, share repurchases, permitted acquisitions, and other general corporate purposes.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Fees and interest on borrowings vary based on our Consolidated Leverage Ratio (as defined in the Amended Credit Agreement). At our option, borrowings under the Amended Credit Agreement will bear interest at one, two, three or six-month LIBORsix month Term SOFR 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 LIBORTerm SOFR 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.
In April 2023, the Company and PNC Capital Markets, LLC, as Sustainability Structuring Agent, with the consent of the Required Lenders (as defined in the Amended Credit Agreement), entered into the first amendment to the Amended Credit Agreement (the "First Amendment") to incorporate specified key performance indicators with respect to certain environmental, social and governance targets of the Company. Based upon the performance of the Company against those key performance indicators in each Reference Year (as defined in the First Amendment), certain adjustments to the otherwise applicable rates for interest, commitment fees and letter of credit fees will be made. These annual adjustments will not exceed an increase or decrease of 0.01% in the aggregate for all key performance indicators in the case of the commitment fee rate or an increase or decrease of 0.05% in the aggregate for all key performance indicators in the case of the Term SOFR borrowings, base rate borrowings or letter of credit fee rate.
Amounts borrowed under the Amended Credit Agreement may be prepaid at any time without premium or penalty. We are required to prepay the amounts outstanding under the Amended Credit Agreement in certain circumstances, including 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 SecondThird Amended and Restated Security Agreement and a SecondThird Amended and Restated Pledge Agreement (the “Pledge Agreement”) with Bank of America, N.A. as collateral agent, pursuant to which the Company and the subsidiary guarantors grant Bank of America, N.A., for the ratable benefit of the lenders under the Amended Credit Agreement, a first-priority lien, subject to permitted liens, on substantially all of the personal property assets of the Company and the subsidiary guarantors, and a pledge of 100% of the stock or other equity interests in all domestic subsidiaries and 65% of the stock or other equity interests in each “material first-tier foreign subsidiary” (as defined in the Pledge Agreement). entitled to vote and 100% of the stock or other equity interests in each material first-tier foreign subsidiary not entitled to vote.
The Amended Credit Agreement contains usual and customary representations and warranties; affirmative and negative covenants, which include limitations on liens, investments, additional indebtedness, and restricted payments; and two quarterly financial covenants as follows: (i) a maximum Consolidated Leverage Ratio (defined as the ratio of debt to consolidated EBITDA) ranging from 3.25of 3.75 to 1.00; however the maximum permitted Consolidated Leverage Ratio will increase to 4.25 to 1.00 to 3.75 to 1.00, depending onupon the measurement period,occurrence of a Qualified Acquisition (as defined in the Amended Credit Agreement), and (ii) a minimum Consolidated Interest Coverage Ratio (defined as the ratio of consolidated EBITDA to interest) of 3.503.00 to 1.00. Consolidated EBITDA for purposes of the financial covenants is calculated on a continuing operations basis and
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
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, 2017,2023, we were in compliance with these financial covenants with a Consolidated Leverage Ratio of 3.521.82 to 1.00 and a Consolidated Interest Coverage Ratio of 12.6010.86 to 1.00.
Borrowings outstanding under the Amended Credit Agreement at September 30, 20172023 totaled $139.0 million.$358.0 million and are classified as long-term debt in our consolidated balance sheet. These borrowings carried a weighted average interest rate of 3.4%4.4%, including the effect of the interest rate swapswaps described in Note 108 “Derivative Instruments and Hedging Activity."” Borrowings outstanding under the Amended Credit Agreement at December 31, 20162022 were $68.0$290.0 million and carried a weighted average interest rate of 2.5%.3.8%, including the effect of the interest rate swaps in effect at that time. The borrowing capacity under the revolving credit facility is reduced by any outstanding borrowings under the revolving credit facility and outstanding letters of credit. At September 30, 2017,2023, we had outstanding letters of credit totaling $2.7$0.6 million, which are primarily used as security deposits for our office facilities. As of September 30, 2017,2023, the unused borrowing capacity under the revolving credit facility was $358.3$241.4 million.
Promissory Note due 2024
On June7. Restructuring Charges
Restructuring charges for the three months ended September 30, 2017,2023 were $5.4 million. In the third quarter of 2023, we exited our office space in conjunction withLexington, Massachusetts which resulted in a $3.5 million non-cash impairment charge on the related right of use operating lease asset and fixed assets of that office space. Additionally, in the third quarter of 2023, we recognized $1.2 million of employee-related expenses and $0.7 million of rent and related expenses, net of sublease income, for previously vacated office spaces.
Restructuring charges for the nine months ended September 30, 2023 were $9.4 million. In the first nine months of 2023, we exited our purchaseoffice spaces in Hillsboro, Oregon and Lexington, Massachusetts, resulting in non-cash impairment charges of an aircraft$1.9 million and $3.5 million, respectively, related to the acquisitionright-of-use operating lease assets and fixed assets. Additionally, in the first nine months of Innosight,2023, we assumed, fromrecognized $2.2 million of employee-related expenses; $1.3 million for rent and related expenses, net of sublease income, for previously vacated office spaces; $0.3 million related to the sellersabandonment of a capitalized software development project; and $0.2 million related to non-cash lease impairment charges driven by updated sublease assumptions for previously vacated office spaces.
Restructuring charges for the three and nine months ended September 30, 2022 were $1.3 million and $5.0 million, respectively. The $1.3 million of restructuring charges recognized in the third quarter of 2022 included $0.7 million of rent and related expenses, net of sublease income, for previously vacated office spaces; $0.5 million for the early termination of a contract; and $0.1 million of employee-related expenses. The $5.0 million of restructuring charges incurred in the first nine months of 2022 included $1.7 million of employee-related expenses; $1.7 million of rent and related expenses, net of sublease income, for previously vacated office spaces; $0.6 million for third-party transaction expenses related to the modification of our operating model; $0.5 million for the early termination of a contract; $0.3 million of accelerated amortization of capitalized software implementation costs for a cloud-computing arrangement that is no longer in use; and $0.1 million related to the divestiture of our Life Sciences business in the fourth quarter of 2021.
The table below sets forth the changes in the carrying value of our restructuring charge liability by restructuring type for the nine months ended September 30, 2023.
| | | | | | | | | | | | | | | | | | | |
| Employee Costs | | | | Other | | Total |
| Balance as of December 31, 2022 | $ | 3,751 | | | | | $ | 568 | | | $ | 4,319 | |
| Additions | 2,185 | | | | | — | | | 2,185 | |
| Payments | (4,289) | | | | | (74) | | | (4,363) | |
Adjustments | — | | | | | 41 | | | 41 | |
| Balance as of September 30, 2023 | $ | 1,647 | | | | | $ | 535 | | | $ | 2,182 | |
All of the aircraft,$1.6 million restructuring charge liability related to employee costs at September 30, 2023 is expected to be paid in the next 12 months and is included as a promissory note with an outstanding principalcomponent of accrued payroll and related benefits in our consolidated balance of $5.1 million. The principal balancesheet. All of the promissory note$0.5 million other restructuring charge liability at September 30, 2023, which relates to the early termination of a contract in 2022, is subjectexpected 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 interestpaid in the aircraft. At September 30, 2017, the outstanding principal amountnext 12 months and is included as a component of the promissory note was $5.0 million. As of September 30, 2017, the aircraft had a carrying amount of $6.6 million.
accrued expenses and other current liabilities in our consolidated balance sheet.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
9. Restructuring Charges
Restructuring charges for the three and nine months ended September 30, 2017 totaled $1.3 million and $5.3 million, respectively. The $1.3 million charge incurred in the third quarter of 2017 primarily related to the accrual of remaining lease obligations, net of estimated sublease income, due to relocating our San Francisco office to a smaller space and consolidating our New York offices in the third quarter of 2017, and accelerated depreciation on leasehold improvements for our San Francisco office. The $5.3 million of restructuring charges incurred in the first nine months of 2017 primarily consisted of $2.5 million related to the accrual of remaining lease obligations, net of estimated sublease income, due to relocating our San Francisco office to a smaller space and consolidating our Chicago and New York offices in the first nine months of 2017, and accelerated depreciation on leasehold improvements for our San Francisco office, $2.0 million related to workforce reductions in our Healthcare segment to better align our resources with market demand, and $0.4 million related to workforce reductions in our corporate operations primarily to adjust our infrastructure to align with the decreased workforce in the Healthcare segment.
Restructuring charges for the three and nine months ended September 30, 2016 totaled $1.0 million and $4.1 million, respectively. The $1.0 million charge incurred in the third quarter of 2016 primarily related to updated lease assumptions of our Washington, D.C. space vacated in the fourth quarter of 2014. The $4.1 million of restructuring charges incurred in the first nine months of 2016 primarily consisted of $1.5 million related to updated assumptions for lease accruals for the Washington, D.C. space vacated in the fourth quarter of 2014, $1.2 million related to workforce reductions in our Healthcare segment to better align resources with market demand, $0.9 million related to workforce reductions in our corporate operations as we adjusted our infrastructure to align with our Huron Legal divestiture, and $0.2 million related to the wind down of our foreign consulting operations based in the Middle East.
The table below sets forth the changes in the carrying amount of our restructuring charge liability by restructuring type for the nine months ended September 30, 2017.
|
| | | | | | | | | | | | | | | |
| | Employee Costs | | Office Space Reductions | | Other | | Total |
| Balance as of December 31, 2016 | $ | 5,182 |
| | $ | 5,773 |
| | $ | 24 |
| | $ | 10,979 |
|
Additions (1) | 2,889 |
| | 2,445 |
| | 110 |
| | 5,444 |
|
| Payments | (7,226 | ) | | (2,047 | ) | | 5 |
| | (9,268 | ) |
Adjustments (1) | (117 | ) | | (1,087 | ) | | (78 | ) | | (1,282 | ) |
| Non-cash items | (46 | ) | | (119 | ) | | (61 | ) | | (226 | ) |
| Balance as of September 30, 2017 | $ | 682 |
| | $ | 4,965 |
| | $ | — |
| | $ | 5,647 |
|
| |
(1) | Additions and adjustments for the nine months ended September 30, 2017 include a restructuring gain of $1.1 million related to updated lease assumptions for vacated office spaces directly related to discontinued operations. Refer to Note 4 "Discontinued Operations" for additional information on our discontinued operations. |
As of September 30, 2017, our restructuring charge liability related to office space reductions of $5.0 million represented the present value of remaining lease payments, net of estimated sublease income, primarily for our vacated office spaces in Washington, D.C., Houston, San Francisco, and Chicago. This restructuring charge liability is included as a component of accrued expenses and other current liabilities and deferred compensation and other liabilities. All of the $0.7 million restructuring charge liability related to employee costs at September 30, 2017 is expected to be paid in the next 12 months. The restructuring charge liability related to employee costs is included as a component of accrued payroll and related benefits.
10.8. Derivative Instruments and Hedging Activity
On April 4, 2013,In the normal course of business, we entered into ause forward amortizing interest rate swap agreement effective March 31, 2014 which ended August 31, 2017. We entered into this derivative instrumentswaps to hedge againstmanage the interest rate risksrisk associated with our variable-rate borrowings under our senior secured credit facility and we use non-deliverable foreign exchange forward contracts to manage the foreign currency exchange rate risk related to our Indian Rupee-denominated expenses of our variable-rate borrowings. The swap had an initial notional amount of $60.0 million and amortized quarterly until April 2016. In April 2016, the notional amount of this interest rate swap increasedoperations in India. From time to $86.0 million and continued to amortize quarterly until it expired in August 2017. Under the terms of the interest rate swap agreement,time, we received from the counterparty interest on the notional amount based on one-month LIBOR and we paid to the counterparty a fixed rate of 0.985%.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
On June 22, 2017, we enteredmay enter into aadditional 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 instrumentswaps or non-deliverable foreign exchange forward contracts to continue tofurther hedge against theour interest rate risks of our variable-rate borrowings. Under the terms of the interestrisk and foreign currency exchange 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%.
risk. We recognize alldo not use derivative instruments as either assetsfor trading or liabilities at fair value on the balance sheet. other speculative purposes.
We have designated theseall of our derivative instruments as cash flow hedges. Therefore, changes in the fair value of the derivative instrumentsinterest rate swaps and foreign exchange forward contracts are recorded to other comprehensive income (“OCI”) to the extent effective and reclassified into interest expenseto earnings upon settlement. The ineffective portion of the change in fair value of the derivative instruments is recognized in interest expense. Our
Interest Rate Swaps
We are party to forward interest rate swap agreement was effective during the threeagreements with aggregate notional amounts of $250.0 million and nine months ended$200.0 million as of September 30, 2017. 2023 and December 31, 2022, respectively. Under the terms of the interest rate swap agreements, we receive from the counterparty interest on the notional amount based on one month Term SOFR and we pay to the counterparty a stated, fixed rate. The forward interest rate swap agreements have staggered maturities through February 29, 2028.
As of September 30, 2017,2023, it was anticipated that $0.1$6.4 million of the losses,gains, net of tax, related to interest rate swaps currently recorded in accumulated other comprehensive income will be reclassified into earningsinterest expense, net of interest income in our consolidated statement of operations within the next 12 months.
Foreign Exchange Forward Contracts
We are party to non-deliverable foreign exchange forward contracts that are scheduled to mature monthly through August 31, 2024. As of September 30, 2023 and December 31, 2022, the aggregate notional amounts of these contracts were INR 1,371.2 million, or $16.5 million, and INR 657.9 million, or $8.0 million, respectively, based on the exchange rates in effect as of each period end.
As of September 30, 2023, it was anticipated that all of the $0.1 million of losses, net of tax, related to foreign exchange forward contracts currently recorded in accumulated other comprehensive income will be reclassified into direct costs in our consolidated statement of operations within the next 12 months.
The table below sets forth additional information relating to our interest rate swaps designated as a cash flow hedging instrumentderivative instruments as of September 30, 20172023 and December 31, 2016.
|
| | | | | | | | |
| | | Fair Value (Derivative Asset and Liability) |
| Balance Sheet Location | | September 30,
2017 | | December 31,
2016 |
| Other non-current assets | | $ | 141 |
| | $ | — |
|
| Accrued expenses | | $ | 200 |
| | $ | 54 |
|
| | | | | | | | | | | | | | | | | |
| Derivative Instrument | Balance Sheet Location | | September 30,
2023 | | December 31,
2022 |
| Interest rate swaps | Prepaid expenses and other current assets | | $ | 8,218 | | | $ | 7,108 | |
| Interest rate swaps | Other non-current assets | | 3,748 | | | 5,131 | |
| Foreign exchange forward contracts | Prepaid expenses and other current assets | | 16 | | | — | |
| Total Assets | | | $ | 11,982 | | | $ | 12,239 | |
| | | | | |
| | | | | |
| | | | | |
| Foreign exchange forward contracts | Accrued expenses and other current liabilities | | 180 | | | 120 | |
| Total Liabilities | | | $ | 180 | | | $ | 120 | |
All of our derivative instruments are transacted under the International Swaps and Derivatives Association (ISDA) master agreements. These agreements permit the net settlement of amounts owed in the event of default and certain other termination events. Although netting is permitted, it is our policy to record all derivative assets and liabilities on a gross basis onin our consolidated balance sheet.
We do not use derivative instruments for trading or other speculative purposes. Refer to Note 1210 “Other Comprehensive Income (Loss)” for additional information on our derivative instrument.
instruments.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
11.9. Fair Value of Financial Instruments
Certain of our assets and liabilities are measured at fair value. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy for inputs used in measuring fair value and requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy consists of three levels based on the objectivity of the inputs as follows: |
| | | | | | | |
| Level 1 Inputs | | Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
| |
| Level 2 Inputs | | Quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| |
| Level 3 Inputs | | Unobservable inputs for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability. |
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, 20172023 and December 31, 2016.2022. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| September 30, 2023 | | | | | | | | |
| Assets: | | | | | | | | |
| Interest rate swaps | | $ | — | | | $ | 11,966 | | | $ | — | | | $ | 11,966 | |
| Convertible debt investment | | — | | | — | | | 61,756 | | | 61,756 | |
| Foreign exchange forward contracts | | — | | | 16 | | | — | | | 16 | |
| Deferred compensation assets | | — | | | 31,311 | | | — | | | 31,311 | |
| Total assets | | $ | — | | | $ | 43,293 | | | $ | 61,756 | | | $ | 105,049 | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| Foreign exchange forward contracts | | $ | — | | | $ | 180 | | | $ | — | | | $ | 180 | |
| Contingent consideration for business acquisitions | | — | | | — | | | 2,313 | | | 2,313 | |
| Total liabilities | | $ | — | | | $ | 180 | | | $ | 2,313 | | | $ | 2,493 | |
| December 31, 2022 | | | | | | | | |
| Assets: | | | | | | | | |
| Interest rate swaps | | $ | — | | | $ | 12,239 | | | $ | — | | | $ | 12,239 | |
| Convertible debt investment | | — | | | — | | | 57,563 | | | 57,563 | |
| Deferred compensation assets | | — | | | 29,875 | | | — | | | 29,875 | |
| Total assets | | $ | — | | | $ | 42,114 | | | $ | 57,563 | | | $ | 99,677 | |
| Liabilities: | | | | | | | | |
| Foreign exchange forward contracts | | $ | — | | | $ | 120 | | | $ | — | | | $ | 120 | |
| Contingent consideration for business acquisitions | | — | | | — | | | 3,190 | | | 3,190 | |
| Total liabilities | | $ | — | | | $ | 120 | | | $ | 3,190 | | | $ | 3,310 | |
Interest rate swaps: The fair values of our interest rate swaps were derived using estimates to settle the interest rate swap agreements, which are based on the net present value of expected future cash flows on each leg of the swaps utilizing market-based inputs and a discount rate reflecting the risks involved. Refer to Note 8 “Derivative Instruments and Hedging Activity” for additional information on our interest rate swaps.
Foreign exchange forward contracts: The fair values of our foreign exchange forward contracts were derived using estimates to settle the foreign exchange forward contracts agreements, which are based on the net present value of expected future cash flows on each contract
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| September 30, 2017 | | | | | | | |
| Assets: | | | | | | | |
| Promissory note | $ | — |
| | $ | — |
| | $ | 2,311 |
| | $ | 2,311 |
|
| Convertible debt investment | — |
| | — |
| | 31,937 |
| | 31,937 |
|
| Deferred compensation assets | — |
| | 17,170 |
| | — |
| | 17,170 |
|
| Total assets | $ | — |
| | $ | 17,170 |
| | $ | 34,248 |
| | $ | 51,418 |
|
| Liabilities: | | | | | | | |
| Interest rate swap | $ | — |
| | $ | 59 |
| | $ | — |
| | $ | 59 |
|
| Contingent consideration for business acquisitions | — |
| | — |
| | 22,469 |
| | 22,469 |
|
| Total liabilities | $ | — |
| | $ | 59 |
| | $ | 22,469 |
| | $ | 22,528 |
|
| December 31, 2016 | | | | | | | |
| Assets: | | | | | | | |
| Promissory note | $ | — |
| | $ | — |
| | $ | 2,325 |
| | $ | 2,325 |
|
| Convertible debt investment | — |
| | — |
| | 34,675 |
| | 34,675 |
|
| Deferred compensation assets | — |
| | 16,408 |
| | — |
| | 16,408 |
|
| Total assets | $ | — |
| | $ | 16,408 |
| | $ | 37,000 |
| | $ | 53,408 |
|
| Liabilities: | | | | | | | |
| Interest rate swap | $ | — |
| | $ | 54 |
| | $ | — |
| | $ | 54 |
|
| Contingent consideration for business acquisitions | — |
| | — |
| | 8,827 |
| | 8,827 |
|
| Total liabilities | $ | — |
| | $ | 54 |
| | $ | 8,827 |
| | $ | 8,881 |
|
Deferred compensation assets: We have a non-qualified deferred compensation plan (the "Plan"“Plan”) for the members of our board of directors and a select group of our employees. The deferred compensation liability is funded by the Plan assets, which consist of life insurance policies maintained within a trust. The cash surrender value of the life insurance policies approximates fair value and is based on third-party broker statements which provide the fair value of the life insurance policies' underlying investments, which are Level 2 inputs. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The Plan assets are included in other non-current assets onin our consolidated balance sheet.sheets. Realized and unrealized gains (losses) from the deferred compensation assets are recorded to other income (expense), net in our consolidated statements of operations.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Interest rate swaps: The fair values of our interest rate swaps were derived using estimates to settle the interest rate swap agreements, which are based on the net present value of expected future cash flows on each leg of the swaps utilizing market-based inputs and discount rates reflecting the risks involved.
Promissory note: As part of the consideration received for the sale of our Accounting Advisory practice on December 30, 2011, we received a $3.5 million promissory note payable over four years. During the second quarter ofConvertible debt investment: Since 2014, we agreed to amend and restate the note such that principal payments will be paid to us annually based on the amount of excess cash flows earned each year by the maker of the note until the maturity date of December 31, 2018, at which time the remaining principal balance and any accrued interest is due. The fair value of the note is based on the net present value of the projected cash flows using a discount rate of 17%, which accounts for the risks associated with the note. This fair value measurement is based on significant inputs not observable in the market and thus represent Level 3 inputs. As of September 30, 2017, $0.2 million is recorded in prepaid expenses and other current assets and represents the present value of the payments expected to be received in the next 12 months, and the remaining $2.1 million is recorded in other non-current assets.
The table below sets forth the changes in the balance of the promissory note for the nine months ended September 30, 2017. |
| | | | |
| | | Promissory Note |
| Balance as of December 31, 2016 | | $ | 2,325 |
|
| Interest payments received | | (140 | ) |
| Principal payment received | | (177 | ) |
| Change in fair value of promissory note | | 303 |
|
| Balance as of September 30, 2017 | | $ | 2,311 |
|
Convertible debt investment: In 2014 and 2015, wehave invested $27.9$40.9 million in the form of zero coupon1.69% convertible debt in Shorelight Holdings, LLC (“Shorelight”), the parent company of Shorelight, Education, a U.S.-based company that partners with leading nonprofit universities to increase access to and retention of international students, boost institutional growth, and enhance an institution’s global footprint. The convertible notes will mature on July 1, 2020,January 17, 2027, unless converted earlier.
To determine the appropriate accounting treatment for our investment, we performed a variable interest entity (“VIE”) analysis and concluded that Shorelight does not meet the definition of a VIE. We also reviewed the characteristics of our investment to confirm that the convertible notes are not in-substance common stock that would warrant equity method accounting. After we reviewed all of the terms of the investment, we concluded the appropriate accounting treatment to be that of an available-for-sale debt security. We continue to monitor the key factors of our VIE analysis and the terms of the convertible notes to ensure our accounting treatment is appropriate. We have not identified any changes to Shorelight or our investment that would change our classification of the investment as an available-for-sale debt security.
The investment is carried at fair value with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income. The carrying value is recorded in long-term investments in our consolidated balance sheets. We estimatedestimate the fair value of our investment using a scenario-based approach in the form of a hybrid analysis that consists of a Monte Carlo simulation model and an expected return analysis. The conclusion of value for our investment is based on the probability-weighted assessment of both scenarios. The hybrid analysis utilizes certain assumptions including the assumed holding period through the maturity date of January 17, 2027; the applicable waterfall distribution at the end of the expected holding period based on the rights and privileges of the various instruments; cash flow projections discounted at athe risk-adjusted rate of 24.5% and certain assumptions related to24.0% as of September 30, 2023 and December 31, 2022, respectively; and the concluded equity volatility default probability,of 35.0% and recovery rate,40.0% as of September 30, 2023 and December 31, 2022, respectively, all of which are Level 3 inputs. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the investment, which would result in different impacts to our consolidated balance sheet and comprehensive income. Actual results may differ from our estimates. The fair value of the convertible debt investment is recorded in long-term investment.
The table below sets forth the changes in the balance of the convertible debt investment for the nine months ended September 30, 2017.2023. | | | | | | | | |
| | Convertible Debt Investment |
| Balance as of December 31, 2022 | | $ | 57,563 | |
| | |
| Change in fair value | | 4,193 | |
| Balance as of September 30, 2023 | | $ | 61,756 | |
|
| | | | |
| | | Convertible Debt Investment |
| Balance as of December 31, 2016 | | $ | 34,675 |
|
| Change in fair value of convertible debt investment | | (2,738 | ) |
| Balance as of September 30, 2017 | | $ | 31,937 |
|
Contingent consideration for business acquisitions: We estimate the fair value of acquisition-related contingent consideration using either a probability-weighted assessment of the specific financial performance targets being achievedmeasured or a Monte Carlo simulation model, as appropriate. These fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 inputs. The significant unobservable inputs used in the fair value measurements of our contingent
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
consideration are our measures of the estimated payouts based on internally generated financial projections on a probability-weighted basis and a discount rates,rate which typically reflect a risk-free rate.was 6.2% as of September 30, 2023 and 5.5% as of December 31, 2022. The fair value of the contingent consideration is reassessed quarterly based on assumptions used in our latest projections and input provided by practice leaders and management. Any change in the fair value estimate is recorded in our consolidated statement of operations for that period. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of our contingent consideration liability, which would result in different impacts to our consolidated balance sheets and consolidated statements of operations. Actual results may differ from our estimates. Refer to Note 5 “Acquisitions” for information on the acquisitions completed
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in 2017. thousands, except per share amounts)
(Unaudited)
The table below sets forth the changes in the balance of the contingent consideration for business acquisitions for the nine months ended September 30, 2017. |
| | | | |
| | | Contingent Consideration for Business Acquisitions |
| Balance as of December 31, 2016 | | $ | 8,827 |
|
| Acquisitions | | 15,489 |
|
| Payments | | (1,938 | ) |
| Remeasurement of contingent consideration for business acquisitions | | (222 | ) |
| Unrealized loss due to foreign currency translation | | 313 |
|
| Balance as of September 30, 2017 | | $ | 22,469 |
|
| | | | | | | | |
| | Contingent Consideration for Business Acquisitions |
| Balance as of December 31, 2022 | | $ | 3,190 | |
| Acquisition | | 374 | |
| Payment | | (1,000) | |
| Change in fair value | | (251) | |
| Balance as of September 30, 2023 | | $ | 2,313 | |
| | |
| | |
| | |
| | |
Financial assets and liabilities not recorded at fair value on a recurring basis are as follows:
Medically Home Preferred Stock Investment
In the fourth quarter of 2019, we invested $5.0 million in Medically Home Group, Inc. (“Medically Home”), a hospital-at-home company. The investment was made in the form of preferred stock. To determine the appropriate accounting treatment for our preferred stock investment, we performed a VIE analysis and concluded that Medically Home does not meet the definition of a VIE. We also reviewed the characteristics of our investment to confirm that the preferred stock is not in-substance common stock that would warrant equity method accounting. After we reviewed all of the terms of the investment, we concluded the appropriate accounting treatment for our investment in Medically Home to be that of an equity security with no readily determinable fair value. We elected to apply the measurement alternative at the time of the purchase and will continue to do so until the investment does not qualify to be so measured. Under the measurement alternative, the investment is carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment in Medically Home. On a quarterly basis, we review the information available to determine whether an orderly and observable transaction for the same or similar equity instrument occurred, and remeasure to the fair value of the preferred stock using such identified transactions, with changes in the fair value recorded to other income (expense), net in our consolidated statement of operations. The carrying value of the preferred stock investment is recorded in long-term investments in our consolidated balance sheets.
During the first quarter of 2022, we recognized a pre-tax unrealized gain of $27.0 million based on an observable price change of preferred stock issued by Medically Home with similar rights and preferences to our preferred stock investment, a Level 2 input. There were no observable price changes for the remainder of 2022 or in the first nine months of 2023. Since our initial investment, we have recognized cumulative pre-tax unrealized gains of $28.6 million, which were recorded to other income (expense), net in our consolidated statement of operations, and we have not identified any impairments of our investment. As of September 30, 2023 and December 31, 2022, the carrying value of our preferred stock investment was $33.6 million.
Senior Secured Credit Facility
The carrying value of our borrowings outstanding under our senior secured credit facility is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the senior secured credit facility bears interest at variable rates based on current market rates as set forth in the Amended Credit Agreement. Refer to Note 86 “Financing Arrangements” for additional information on our senior secured credit facility.
Promissory Note due 2024
The carrying value of our promissory note due 2024 is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the promissory note bears interest at rates based on current market rates as set forth in the terms of the promissory note. Refer to Note 8 “Financing Arrangements” for additional information on our promissory note due 2024.
Convertible Notes
The carrying amountCash and estimated fair value of the Convertible Notes are as follows:
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Carrying Amount | | Estimated Fair Value | | Carrying
Amount | | Estimated
Fair Value |
| 1.25% convertible senior notes due 2019 | $ | 230,834 |
| | $ | 233,595 |
| | $ | 224,065 |
| | $ | 245,018 |
|
The differences between the $250 million principal amount of the Convertible NotesCash Equivalents and the carrying amounts shown above represent the unamortized debt discount and issuance costs. As of September 30, 2017 and December 31, 2016, the carrying value of the equity component of $39.3 million was unchanged from the date of issuance. Refer to Note 8 “Financing Arrangements” for additional information on our Convertible Notes. The estimated fair value of the Convertible Notes was determined based on the quoted bid price of the Convertible Notes in an over-the-counter market, which is a Level 2 input, on the last day of trading for the quarters ended September 30, 2017 and December 31, 2016.
Based on the closing price of our common stock of $34.30 on September 30, 2017, the if-converted value of the Convertible Notes was less than the principal amount.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Other Financial Instruments
Cash and cash equivalents are stated at cost, which approximates fair market value. The carrying values of all other financial instruments not described above reasonably approximate fair market value due to the nature of the financial instruments and the short-term maturity of these items.
12. Other Comprehensive Income (Loss)
The tables below set forth the components of other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, 2017 | | Three Months Ended
September 30, 2016 |
| | Before
Taxes | | Tax
(Expense)
Benefit | | Net of
Taxes | | Before
Taxes | | Tax
(Expense)
Benefit | | Net of
Taxes |
| Other comprehensive income (loss): | | | | | | | | | | | |
| Foreign currency translation adjustments | $ | 609 |
| | $ | — |
| | $ | 609 |
| | $ | 50 |
| | $ | — |
| | $ | 50 |
|
| Unrealized loss on investment | $ | (3,609 | ) | | $ | 1,409 |
| | $ | (2,200 | ) | | $ | (3,329 | ) | | $ | 1,291 |
| | $ | (2,038 | ) |
| Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | |
| Change in fair value | $ | 41 |
| | $ | (16 | ) | | $ | 25 |
| | $ | 96 |
| | $ | (35 | ) | | $ | 61 |
|
| Reclassification adjustments into earnings | (3 | ) | | 1 |
| | (2 | ) | | 101 |
| | (41 | ) | | 60 |
|
| Net unrealized gain | $ | 38 |
| | $ | (15 | ) | | $ | 23 |
| | $ | 197 |
| | $ | (76 | ) | | $ | 121 |
|
| Other comprehensive income (loss) | $ | (2,962 | ) | | $ | 1,394 |
| | $ | (1,568 | ) | | $ | (3,082 | ) | | $ | 1,215 |
| | $ | (1,867 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, 2017 | | Nine Months Ended
September 30, 2016 |
| | Before Taxes | | Tax (Expense) Benefit | | Net of Taxes | | Before Taxes | | Tax (Expense) Benefit | | Net of Taxes |
| Other comprehensive income (loss): | | | | | | | | | | | |
| Foreign currency translation adjustments | $ | 1,835 |
| | $ | — |
| | $ | 1,835 |
| | $ | 52 |
| | $ | — |
| | $ | 52 |
|
| Unrealized loss on investment | $ | (2,738 | ) | | $ | 1,069 |
| | $ | (1,669 | ) | | $ | (1,899 | ) | | $ | 736 |
| | $ | (1,163 | ) |
| Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | |
| Change in fair value | $ | (41 | ) | | $ | 16 |
| | $ | (25 | ) | | $ | (367 | ) | | $ | 146 |
| | $ | (221 | ) |
| Reclassification adjustments into earnings | 36 |
| | (15 | ) | | 21 |
| | 323 |
| | (129 | ) | | 194 |
|
| Net unrealized loss | $ | (5 | ) | | $ | 1 |
| | $ | (4 | ) | | $ | (44 | ) | | $ | 17 |
| | $ | (27 | ) |
| Other comprehensive income (loss) | $ | (908 | ) | | $ | 1,070 |
| | $ | 162 |
| | $ | (1,891 | ) | | $ | 753 |
| | $ | (1,138 | ) |
The before tax amounts reclassified from accumulated other comprehensive income related to our cash flow hedges are recorded to interest expense, net of interest income.
Accumulated other comprehensive income, net of tax, includes the following components:
|
| | | | | | | | | | | | | | | |
| | Foreign Currency Translation | | Available-for-Sale Investment | | Cash Flow Hedges | | Total |
| Balance, December 31, 2016 | $ | (453 | ) | | $ | 4,088 |
| | $ | (20 | ) | | $ | 3,615 |
|
| Current period change | 1,835 |
| | (1,669 | ) | | (4 | ) | | 162 |
|
| Balance, September 30, 2017 | $ | 1,382 |
| | $ | 2,419 |
| | $ | (24 | ) | | $ | 3,777 |
|
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
10. Other Comprehensive Income (Loss)
13.The table below sets forth the components of other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2023 and 2022. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, 2023 | | Three Months Ended
September 30, 2022 |
| Before
Taxes | | Tax
(Expense)
Benefit | | Net of
Taxes | | Before
Taxes | | Tax
(Expense)
Benefit | | Net of
Taxes |
| Foreign currency translation adjustments | $ | (662) | | | $ | — | | | $ | (662) | | | $ | (1,034) | | | $ | — | | | $ | (1,034) | |
| Unrealized gain (loss) on investment | $ | (1,840) | | | $ | 490 | | | $ | (1,350) | | | $ | (1,128) | | | $ | 298 | | | $ | (830) | |
| Interest rate swaps: | | | | | | | | | | | |
| Change in fair value | $ | 1,849 | | | $ | (492) | | | $ | 1,357 | | | $ | 5,302 | | | $ | (1,402) | | | $ | 3,900 | |
| Reclassification adjustments into earnings | (2,107) | | | 560 | | | (1,547) | | | (89) | | | 24 | | | (65) | |
| Net unrealized gain (loss) on interest rate swaps | $ | (258) | | | $ | 68 | | | $ | (190) | | | $ | 5,213 | | | $ | (1,378) | | | $ | 3,835 | |
| Foreign exchange forward contracts: | | | | | | | | | | | |
| Change in fair value | $ | (223) | | | $ | 59 | | | $ | (164) | | | $ | (98) | | | $ | 26 | | | $ | (72) | |
| Reclassification adjustments into earnings | (19) | | | 5 | | | (14) | | | (1) | | | — | | | (1) | |
| Net unrealized gain (loss) on foreign exchange forward contracts | $ | (242) | | | $ | 64 | | | $ | (178) | | | $ | (99) | | | $ | 26 | | | $ | (73) | |
| Other comprehensive income (loss) | $ | (3,002) | | | $ | 622 | | | $ | (2,380) | | | $ | 2,952 | | | $ | (1,054) | | | $ | 1,898 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Nine Months Ended
September 30, 2023 | | Nine Months Ended
September 30, 2022 |
| Before
Taxes | | Tax
(Expense)
Benefit | | Net of
Taxes | | Before
Taxes | | Tax
(Expense)
Benefit | | Net of
Taxes |
| Foreign currency translation adjustments | $ | (283) | | | $ | — | | | $ | (283) | | | $ | (1,733) | | | $ | — | | | $ | (1,733) | |
| Unrealized gain (loss) on investment | $ | 4,193 | | | $ | (1,117) | | | $ | 3,076 | | | $ | (3,694) | | | $ | 976 | | | $ | (2,718) | |
| Interest rate swaps: | | | | | | | | | | | |
| Change in fair value | $ | 5,307 | | | $ | (1,411) | | | $ | 3,896 | | | $ | 11,994 | | | $ | (3,172) | | | $ | 8,822 | |
| Reclassification adjustments into earnings | (5,580) | | | 1,483 | | | (4,097) | | | 420 | | | (111) | | | 309 | |
| Net unrealized gain (loss) on interest rate swaps | $ | (273) | | | $ | 72 | | | $ | (201) | | | $ | 12,414 | | | $ | (3,283) | | | $ | 9,131 | |
| Foreign exchange forward contracts: | | | | | | | | | | | |
| Change in fair value | $ | (23) | | | $ | 6 | | | $ | (17) | | | $ | (98) | | | $ | 26 | | | $ | (72) | |
| Reclassification adjustments into earnings | (21) | | | 5 | | | (16) | | | (1) | | | — | | | (1) | |
| Net unrealized gain (loss) on foreign exchange forward contracts | $ | (44) | | | $ | 11 | | | $ | (33) | | | $ | (99) | | | $ | 26 | | | $ | (73) | |
| Other comprehensive income (loss) | $ | 3,593 | | | $ | (1,034) | | | $ | 2,559 | | | $ | 6,888 | | | $ | (2,281) | | | $ | 4,607 | |
The before tax amounts reclassified from accumulated other comprehensive income related to our interest rate swaps and foreign exchange forward contracts are recorded to interest expense, net of interest income and direct costs, respectively. Refer to Note 8 “Derivative Instruments and Hedging Activity” for additional information on our derivative instruments.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Accumulated other comprehensive income, net of tax, includes the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Cash Flow Hedges | | |
| Foreign Currency Translation | | Available-for-Sale Investment | | Interest Rate Swaps | | Foreign Exchange Forward Contracts | | Total |
| Balance as of December 31, 2022 | $ | (3,033) | | | $ | 12,228 | | | $ | 9,012 | | | $ | (88) | | | $ | 18,119 | |
| Current period change | (283) | | | 3,076 | | | (201) | | | (33) | | | 2,559 | |
| Balance as of September 30, 2023 | $ | (3,316) | | | $ | 15,304 | | | $ | 8,811 | | | $ | (121) | | | $ | 20,678 | |
11. Income Taxes
For the three months ended September 30, 2017,2023, 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% 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 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%31.2% as we recognized income tax expense of $19.5$9.8 million on income from continuing operations of $54.8$31.3 million. The effective tax rate for the nine months ended September 30, 2017of 31.2% was less favorable than the statutory rate, inclusive of state income taxes, of 26.6% 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 nondeductible losses on our investments used to fund our deferred compensation liability and certain nondeductible expense items.
For the adoptionthree months ended September 30, 2022, our effective tax rate was 30.2% as we recognized income tax expense of ASU 2016-09 Improvements to Employee Share-Based Payment Accounting. Refer to Note 3 "New Accounting Pronouncements" for additional information$7.7 million on the adoptionincome 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.$25.4 million. The effective tax rate for the nine months ended September 30, 2016of 30.2% was lowerless favorable than the statutory rate, inclusive of state income taxes, of 26.4% primarily due to tax expense related to nondeductible losses on our investments used to fund our deferred compensation liability and certain nondeductible expense items.
For the year-to-date impact of a discrete favorable adjustment tonine months ended September 30, 2023, our stateeffective tax rate inwas 27.4% as we recognized income tax expense of $22.5 million on income of $82.1 million. The effective tax rate of 27.4% was less favorable than the second quarterstatutory rate, inclusive of 2016, non-taxablestate income valuation allowance reductions,taxes, of 26.6% primarily due to certain credits and deductions, andnondeductible expense items. These unfavorable items were partially offset by a discrete tax benefit for share-based compensation awards that vested during the year.
For the nine months ended September 30, 2022, our effective tax rate was 31.4% as we recognized income tax expense of $26.7 million on income of $85.2 million. The effective tax rate of 31.4% was less favorable than the statutory rate, inclusive of state income taxes, of 26.4% primarily due to tax expense related to share-basednondeductible losses on our investments used to fund our deferred compensation partially offset by non-deductible business expenses.liability and certain nondeductible expense items.
As of September 30, 2017,2023, we had $0.8$0.6 million of unrecognized tax benefits which would affect the effective tax rate of continuing operations if recognized. It is reasonably possible that approximately $0.6 million of the liability for unrecognized tax benefits could decrease in the next twelve months due to the expiration of statutes of limitations.
14.12. Commitments, Contingencies and Guarantees
Litigation
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Quarterly Report on Form 10-Q, we are not a party to any litigation or legal proceeding or subject to any claim that, in the current opinion of management, could reasonably be expected to have a material adverse effect on our financial position or results of operations. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expected results.
Guarantees
Guarantees in the form of letters of credit totaling $2.7$0.6 million and $4.8$0.7 million were outstanding at September 30, 20172023 and December 31, 2016,2022, 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, 20172023 and December 31, 2016,2022, the total estimated fair value of our outstanding contingent consideration liabilitiesliability was $22.5$2.3 million and $8.8$3.2 million, respectively.
To the extent permitted by law, our bylaws and articles of incorporation require that we indemnify our officers and directors against judgments, fines and amounts paid in settlement, including attorneys’ fees, incurred in connection with civil or criminal
action or proceedings,
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.
15.13. Segment Information
Segments are defined as components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker, who is our chief executive officer, manages the business under three operating segments, which are our reportable segments: Healthcare, Education, and Business Advisory.Commercial.
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.
•Healthcare
Our Healthcare segment providesserves acute care providers, including national and regional health systems; academic health systems; community health systems; and public, children’s and critical access hospitals, and non-acute care providers, including physician practices and medical groups; payors; and long-term care or post-acute providers. Our Healthcare professionals have a depth of expertise in business operations, including financial and operational improvement, care transformation, and revenue cycle managed services; digital solutions, spanning technology and analytic-related services and a portfolio of software products; organizational transformation; financial advisory services - fromand strategy setting through implementation -and innovation. Healthcare organizations are focused on establishing a sustainable long-term strategy and business model centered around growth, optimal cost structures, reimbursement models, financial strategies, and consumer-focused digital transformation; changing the way care is delivered, particularly in the areaslight of organizationalpersonnel shortages, and resource alignment, clinical transformation,improving access to care; and evolving their digital capabilities to more effectively manage their business. Our solutions help clients adapt to this rapidly changing healthcare environment to become a more agile, efficient and consumer-centric organization. We use our deep industry, functional and technical expertise to help clients solve a diverse set of business issues, including, but not limited to, identifying new opportunities for growth, optimizing financial and operational performance, patient and caregiver engagement, and technology implementation and optimization. We serve national and regional hospitals and integrated health systems, academic medical centers, community hospitals, and medical groups. Our solutions help clients evolve and adapt to the rapidly changing healthcare environment and achieve growth, optimize performance, enhance profitability, improve qualityimproving care delivery and clinical outcomes, and driveincreasing physician, patient and employee engagement across the enterprise.satisfaction, and maximizing return on technology investments.
•Education
Our Education segment provides management consultingserves public and private colleges and universities, research institutes and other education-related organizations. Our Education professionals have a depth of expertise in strategy and innovation; business operations, including the research enterprise and student and alumni lifecycle; digital solutions, spanning technology solutionsand analytic-related services and Huron Research Suite, the leading software suite designed to higher education institutionsfacilitate and academic medical centers. We partner with clients to address challenges relating to businessimprove research administration service delivery and technology strategy, financial management, operationalcompliance; and organizational effectiveness, research administration,transformation. Our Education segment clients are increasingly faced with strategic, financial and/or enrollment challenges, increased competition, and regulatory compliance. Our institutional strategy, market research, budgetinga need to modernize their businesses using technology to advance their missions. We combine our deep industry, functional and financial management,technical expertise to help clients solve their most pressing challenges, including, but not limited to, transforming business operations with technology and student lifecycle management solutions align missions with business priorities, improve qualityanalytics; strengthening research strategies and reduce costs institution-wide. Our technology strategy, enterprise applications,support services; evolving their organizational strategy; optimizing financial and analytic solutions transformoperational performance; applying innovative enrollment strategies; and optimize operations, deliver time and cost savings, and enhanceenhancing 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 market and large 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 from healthy, well-capitalized companies to organizations in transition as well as creditors, equity owners, and other key constituents. Our Business Advisory professionals resolve complex business issues and enhance client enterprise value through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. Our Enterprise Solutions and Analytics professionals deliver technology and analytic solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our expertise in full-service enterprise performance management (EPM), enterprise resource planning (ERP), business intelligence and analytics, customer relationship management (CRM), and data management services helps clients identify and execute on business and technology strategies to drive results and gain a competitive advantage. Our Strategy and Innovation professionals collaborate with clients across a range of industries to identify new growth opportunities, build new ventures and capabilities, and accelerate organizational change. Our Life Sciences professionals providestrategic
lifecycle.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
•Commercial
solutionsOur Commercial segment is focused on serving industries and organizations facing significant disruption and regulatory change by helping them adapt to rapidly changing environments and accelerate business transformation. Our Commercial professionals work primarily with six primary buyers: the chief executive officer, the chief financial officer, the chief strategy officer, the chief human resources officer, the chief operating officer, and organizational advisors, including lenders and law firms. We have a deep focus on serving organizations in the financial services, energy and utilities, industrials and manufacturing industries and the public sector while opportunistically serving commercial industries more broadly, including professional and business services, life sciences, consumer products, and nonprofit. Our Commercial professionals use their deep industry, functional and technical expertise to deliver our digital services and software products, strategy and innovation, and financial advisory (special situation advisory and corporate finance advisory) services. In today’s disruptive environment, organizations must reimagine their historical strategies and financial and operating models to sustain and advance their competitive advantage. Our experts help pharmaceutical, medical device,organizations across industries with a variety of business challenges, including, but not limited to, embedding technology and biotechnology companies deliver more valueanalytics throughout their internal and customer-facing operations; developing analytics and insights to patients, payers,identify the needs of tomorrow’s customers, evolving their strategies, and providersbringing new products to market; managing through stressed and comply with regulations.distressed situations to create a viable path forward for stakeholders; and providing financial, risk and regulatory advisory offerings.
Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrativeoperating expenses that are incurred directly by the segment. Unallocated corporate costs include corporate costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include costs for corporate office support certaincosts, office facility costs, costs relatingrelated 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. Our chief operating decision maker does not evaluate segments using asset information.
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, 20172023 and 2016,2022, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Healthcare: | | | | | | | |
| Revenues | $ | 179,177 | | | $ | 131,319 | | | $ | 501,994 | | | $ | 381,669 | |
| Operating income | $ | 46,888 | | | $ | 33,045 | | | $ | 128,294 | | | $ | 91,441 | |
| Segment operating income as a percentage of segment revenues | 26.2 | % | | 25.2 | % | | 25.6 | % | | 24.0 | % |
| Education: | | | | | | | |
| Revenues | $ | 111,043 | | | $ | 94,347 | | | $ | 325,884 | | | $ | 263,234 | |
| Operating income | $ | 26,550 | | | $ | 22,851 | | | $ | 77,112 | | | $ | 58,848 | |
| Segment operating income as a percentage of segment revenues | 23.9 | % | | 24.2 | % | | 23.7 | % | | 22.4 | % |
| Commercial: | | | | | | | |
| Revenues | $ | 67,958 | | | $ | 59,704 | | | $ | 194,954 | | | $ | 173,841 | |
| Operating income | $ | 15,432 | | | $ | 14,153 | | | $ | 39,971 | | | $ | 38,282 | |
| Segment operating income as a percentage of segment revenues | 22.7 | % | | 23.7 | % | | 20.5 | % | | 22.0 | % |
| Total Huron: | | | | | | | |
| Revenues | $ | 358,178 | | | $ | 285,370 | | | $ | 1,022,832 | | | $ | 818,744 | |
| Reimbursable expenses | 9,288 | | | 6,816 | | | 25,918 | | | 19,034 | |
| Total revenues and reimbursable expenses | $ | 367,466 | | | $ | 292,186 | | | $ | 1,048,750 | | | $ | 837,778 | |
| | | | | | | |
| Segment operating income | $ | 88,870 | | | $ | 70,049 | | | $ | 245,377 | | | $ | 188,571 | |
| Items not allocated at the segment level: | | | | | | | |
| Other operating expenses | 43,086 | | | 34,875 | | | 129,563 | | | 96,376 | |
| Restructuring charges | 4,095 | | | 804 | | | 6,881 | | | 2,763 | |
| Depreciation and amortization | 4,347 | | | 5,071 | | | 13,441 | | | 15,171 | |
| | | | | | | |
| Operating income | 37,342 | | | 29,299 | | | 95,492 | | | 74,261 | |
| Total other income (expense), net | (6,047) | | | (3,896) | | | (13,365) | | | 10,946 | |
| Income before taxes | $ | 31,295 | | | $ | 25,403 | | | $ | 82,127 | | | $ | 85,207 | |
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 |
|
| |
(1) | The goodwill impairment charge is not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segments. We do not include the impact of goodwill impairment charges in our evaluation of segment performance. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| Revenues by Capability | | 2023 | | 2022 | | 2023 | | 2022 |
| Healthcare: | | | | | | | | |
| Consulting and Managed Services | | $ | 130,548 | | | $ | 88,626 | | | $ | 357,228 | | | $ | 256,340 | |
| Digital | | 48,629 | | | 42,693 | | | 144,766 | | | 125,329 | |
| Total revenues | | $ | 179,177 | | | $ | 131,319 | | | $ | 501,994 | | | $ | 381,669 | |
| Education: | | | | | | | | |
| Consulting and Managed Services | | $ | 55,837 | | | $ | 49,363 | | | $ | 162,490 | | | $ | 142,823 | |
| Digital | | 55,206 | | | 44,984 | | | 163,394 | | | 120,411 | |
| Total revenues | | $ | 111,043 | | | $ | 94,347 | | | $ | 325,884 | | | $ | 263,234 | |
| Commercial: | | | | | | | | |
| Consulting and Managed Services | | $ | 28,303 | | | $ | 17,912 | | | $ | 69,419 | | | $ | 55,193 | |
| Digital | | 39,655 | | | 41,792 | | | 125,535 | | | 118,648 | |
| Total revenues | | $ | 67,958 | | | $ | 59,704 | | | $ | 194,954 | | | $ | 173,841 | |
| Total Huron: | | | | | | | | |
| Consulting and Managed Services | | $ | 214,688 | | | $ | 155,901 | | | $ | 589,137 | | | $ | 454,356 | |
| Digital | | 143,490 | | | 129,469 | | | 433,695 | | | 364,388 | |
| Total revenues | | $ | 358,178 | | | $ | 285,370 | | | $ | 1,022,832 | | | $ | 818,744 | |
For the three and nine months ended September 30, 2023 and 2022, substantially all of our revenues were recognized over time. At September 30, 20172023 and December 31, 2016,2022, 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, 20172023 and 2016,2022, no single client generated greater than 10% of our consolidated revenues.
|
| | | | |
| 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,” “goals,” “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: failure to achieve expected utilization rates, billing rates, and the necessary 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,2022 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 committedthat partners with clients to achievingdevelop growth strategies, optimize operations and accelerate digital transformation using an enterprise portfolio of technology, data and analytics solutions to empower clients to own their future. By collaborating with clients, embracing diverse perspectives, encouraging new ideas and challenging the status quo, we create sustainable results for the organizations we serve.
We provide our services and products and manage our business under three operating segments: Healthcare, Education, and Commercial. We also provide revenue reporting across two principal capabilities: i) Consulting and Managed Services and ii) Digital.
Capabilities
Within each of our reportable segments, we provide services under two principal capabilities: i) Consulting and Managed Services and ii) Digital.
•Consulting and Managed Services
Our Consulting and Managed Services capabilities represent our management consulting services, managed services (excluding technology-related managed services) and outsourcing services delivered across industries. Our Consulting and Managed Services experts help our clients address a variety of strategic, operational, financial, people and organizational-related challenges. These services are often combined with technology, analytic and data-driven solutions powered by our Digital capability to support long-term relationships with our clients and drive lasting impact. Examples include the areas of revenue cycle management and research administration at our healthcare and education clients, where our consulting and managed services projects are often coupled with our digital services and product offerings.
•Digital
Our Digital capabilities represent our technology and analytics services, including technology-related managed services, and software products delivered across industries. Our Digital experts help clients address a variety of business challenges, including, but not limited to, designing and implementing technologies to accelerate transformation, facilitate data-driven decision making and improve customer and employee experiences.
We have expanded our ecosystem to work with more than 25 technology partners. We are a Leading Modern Oracle Network Partner; a Summit-level consulting partner with Salesforce.com and a Premium Partner with Salesforce.org; a Workday Services, Preferred Channel, Extend, and Application Management Services Partner; an Amazon Web Services consulting partner; an Informatica Platinum Partner; an SAP Concur implementation partner; and a Boomi Elite Partner.
We have also grown our proprietary software product portfolio to address our clients' challenges with solutions that expand our base of recurring revenue and further differentiate our consulting, digital and managed services offerings. Our product portfolio bundles our deep industry expertise and unique intellectual property together to serve our clients outside of our traditional consulting offerings. Our product portfolio includes, among others: Huron Research Suite, the leading software suite designed to facilitate and improve research administration service delivery and compliance; Huron Intelligence™ Rounding, the #1 ranked Digital Rounding solution in partnership with clients. the 2023 Best in KLAS® report; and Huron Intelligence™ Analytic Suite in Healthcare, a predictive analytics suite to improve care delivery while lowering costs.
Operating Industries
We bringprovide our services and products and manage our business under three operating industries, which are our operating segments: Healthcare, Education, and Commercial.
•Healthcare
Our Healthcare segment serves acute care providers, including national and regional health systems; academic health systems; community health systems; and public, children’s and critical access hospitals, and non-acute care providers, including physician practices and medical groups; payors; and long-term care or post-acute providers. Our Healthcare professionals have a depth of expertise in business operations, including financial and operational improvement, care transformation, and revenue cycle managed services; digital solutions, spanning technology and analytic-related services and a portfolio of software products; organizational transformation; financial advisory and strategy and innovation. Healthcare organizations are focused on establishing a sustainable long-term strategy and business model centered around growth, optimal cost structures, reimbursement models, financial strategies, and consumer-focused digital transformation; changing the way care is delivered, particularly in light of personnel shortages, and improving access to care; and evolving their digital capabilities to more effectively manage their business. Our solutions help clients adapt to this rapidly changing healthcare environment to become a more agile, efficient and consumer-centric organization. We use our deep industry, functional and technical expertise to help clients solve a diverse set of business issues, including, but not limited to, identifying new opportunities for growth, optimizing financial and operational performance, improving care delivery and clinical outcomes, increasing physician, patient and employee satisfaction, and maximizing return on technology investments.
To best serve our clients, we continue to diversify our portfolio of offerings. For example, we have broadened our capabilities beyond our leading profit and loss-focused offerings (e.g., revenue cycle, cost transformation) into offerings dedicated to optimizing our clients' financial positions through financial advisory and transaction-related services; transforming care delivery models through virtual health, health equity and social determinants of health models; and evolving organizations by supporting change management and developing the next generation of leaders by applying our best practices (e.g., revenue cycle leadership).
•Education
Our Education segment serves public and private colleges and universities, research institutes and other education-related organizations. Our Education professionals have a depth of expertise in strategy and innovation; business operations, including the research enterprise and student and alumni lifecycle; digital solutions, spanning technology operations, advisoryand analytic-related services and analyticsHuron Research Suite, the leading software suite designed to drive lastingfacilitate and measurable results in the healthcare, higher education, life sciencesimprove research administration service delivery and commercial sectors. Through focus, passioncompliance; and collaboration, we provide guidanceorganizational transformation. Our Education segment clients are increasingly faced with strategic, financial and/or enrollment challenges, increased competition, and solutionsa need to modernize their businesses using technology to advance their missions. We combine our deep industry, functional and technical expertise to help clients solve their most pressing challenges, including, but not limited to, transforming business operations with technology and analytics; strengthening research strategies and support organizations as they contend with the changes transformingservices; evolving their industries and businesses.
We provide professional services through three operating segments: Healthcare, Education, and Business Advisory.
•Healthcare
Our Healthcare segment provides advisory services - from strategy setting through implementation - in the areas of organizational and resource alignment, clinical transformation,strategy; optimizing financial and operational performance, patientperformance; applying innovative enrollment strategies; and caregiver engagement,enhancing the student lifecycle. We continue to broaden our offerings into new areas; for example, research managed services, advancement, campus health and technology implementationwell-being, and optimization. We serve nationalathletics.
•Commercial
Our Commercial segment is focused on serving industries and regional hospitalsorganizations facing significant disruption and integrated health systems, academic medical centers, community hospitals, and medical groups. Our solutions help clients evolve andregulatory change by helping them adapt to the rapidly changing healthcare environmentenvironments and achieve growth, optimize performance, enhance profitability, improve quality and clinical outcomes, and drive physician, patient, and employee engagement acrossaccelerate business transformation. Our Commercial professionals work primarily with six primary buyers: the enterprise.
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 technologychief executive officer, the chief financial officer, the chief strategy financial management, operationalofficer, the chief human resources officer, the chief operating officer, and organizational effectiveness, research administration,advisors, including lenders and regulatory compliance.law firms. We have a deep focus on serving organizations in the financial services, energy and utilities, industrials and manufacturing industries and the public sector while opportunistically serving commercial industries more broadly, including professional and business services, life sciences, consumer products, and nonprofit. Our institutionalCommercial professionals use their deep industry, functional and technical expertise to deliver our digital services and software products, strategy market research, budgetingand innovation, and financial management,advisory (special situation advisory and corporate finance advisory) services. In today’s disruptive environment, organizations must reimagine their historical strategies and financial and operating models to sustain and advance their competitive advantage. Our experts help organizations across industries with a variety of business 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 servicechallenges, including, but not limited to, faculty, and mitigating risk compliance.
Business Advisory
Our Business Advisory segment provides services to middle market and large 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 from healthy, well-capitalized companies to organizations in transition as well as creditors, equity owners, and other key constituents. Our Business Advisory professionals resolve complex business issues and enhance client enterprise value through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. Our Enterprise Solutions and Analytics professionals deliver technology and analytic solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our expertise in full-service enterprise performance management (EPM), enterprise resource planning (ERP), business intelligence and analytics, customer relationship management (CRM), and data management services helps clients identify and execute on business and technology strategies to drive results and gain a competitive advantage. Our Strategy and Innovation professionals collaborate with clients across a range of industries to identify new growth opportunities, build new ventures and capabilities, and accelerate organizational change. Our Life Sciences professionals providestrategic solutions to help pharmaceutical, medical device, and biotechnology companies deliver more value to patients, payers, and providers and comply with regulations.
Segment Reorganization
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.
Acquisitions
ADI Strategies, Inc. (International)
On April 1, 2017, we completed our acquisition of the international assets of ADI Strategies, Inc. ("ADI Strategies") in Dubai and India. We acquired the U.S. assets of ADI Strategies in the second quarter of 2016. ADI Strategies is a leading enterprise performance management, risk management and business intelligence firm. The acquisition strengthens ourembedding technology and analytics competenciesthroughout their internal and expandscustomer-facing operations; developing analytics and insights to identify the needs of tomorrow’s customers, evolving their strategies, and bringing new products to market; managing through stressed and distressed situations to create a viable path forward for stakeholders; and providing financial, risk and regulatory advisory offerings.
Business Strategy, Opportunities and Challenges
Our strategy is to be the premier transformation partner to our clients by helping them address a variety of strategic, operational, financial, people, and organizational challenges through an array of industry-differentiated consulting, digital and managed services offerings that meet their unique needs. To achieve our strategic and financial objectives that will drive increased shareholder value, we remain focused on:
•Extending our leading market positions and accelerating growth in healthcare and education,
•Growing our presence in commercial industries,
•Advancing our integrated, global reach. The international resultsdigital platform,
•Building a more sustainable base of operations of ADI Strategies have been includedrevenue and executing on our margin levers to drive more consistent growth and improved profitability,
•Strategically deploying capital to accelerate our strategy and return capital to shareholders, and
•Investing in and growing our consolidated financial statementstalented team, including attracting and results of operationsretaining our managing directors - the senior most practitioners that lead our revenue generation efforts.
We regularly evaluate the performance of our Business Advisory segment from the date of acquisition.businesses to ensure our investments meet these objectives.
Innosight Holdings, LLC
On March 1, 2017, we completed our acquisition of Innosight Holdings, LLC ("Innosight"), a growth strategy firm focused on helping companies navigate disruptive change, enable innovation, and manage strategic transformation. Together with Innosight, we use our strategic, operational, and technology capabilities to help clients across multiple industries develop pioneering solutions to address disruption and achieve sustained growth. Innosight's results of operations have been included in our consolidated financial statements and results of operations of our Business Advisory segment from the date of acquisition.COMPONENTS OF OPERATING RESULTS
Pope Woodhead and Associates Limited
On January 9, 2017, we completed our acquisition of Pope Woodhead and Associates Limited ("Pope Woodhead"), a U.K.-based consulting firm providing market access capabilities to assist clients in developing value propositions for innovative medicines and technologies. The acquisition expands our life sciences strategy expertise and strengthens our ability to lead clients through complex payer and regulatory environments. Pope Woodhead's results of operations have been included in our consolidated financial statements and results of operations of our Business Advisory segment from the date of acquisition.
See Note 5 "Acquisitions" within our consolidated financial statements for further information regarding our recent acquisitions.
Divestiture
Life Sciences Compliance and Operations
During the second quarter of 2017, we divested our Life Sciences Compliance and Operations practice ("Life Sciences C&O"), which was part of our broader Life Sciences practice within the Business Advisory segment. The sale of Life Sciences C&O did not meet the criteria for reporting separately as discontinued operations.
How We Generate Revenues
A large portion of ourOur revenues isare primarily generated by our full-time consultantsemployees who provide consulting and other professional 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 finance and operational consultants, and our employees who provide software support and maintenanceworked, 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.provided, or achieved outcomes. We refer to these employees as our full-time consultants and other professionals collectively as revenue-generating professionals.
Revenues generated by our full-time consultants are primarily driven by the number of consultantsrevenue-generating professionals 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.services. We also engage independent contractors to supplement our revenue-generating professionals on client engagements as needed.
We generate our revenues from providing professional services and software products under the following 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.
•Fixed-fee (including software license revenue):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, it is the client’s expectation 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 date versus our estimates of the total services to be provided under the engagement. Contracts within our Studer Group solution are fixed-fee partner contracts with multiple deliverables, which primarily consist of coaching services, as well as conferences, materials and software products (“Partner Contracts”). Revenues for coaching services and software products are generally recognized on a straight-line basis over the length of the contract. All other revenues under Partner Contracts are recognized at the time the service is 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.certain digital products.
Fixed-fee engagements represented 46.5% and 44.5% of our revenues for the three months ended September 30, 2017 and 2016, respectively, and 45.9% and 48.5% of our revenues for the nine months ended September 30, 2017 and 2016, respectively.
Time-and-expense•Time-and-expense: Under time-and-expense billing arrangements, we 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 Group 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% and 42.2% of our revenues for the three months ended September 30, 2017 and 2016, respectively, and 44.4% and 37.6% of our revenues for the nine months ended September 30, 2017 and 2016, respectively.clients.
•Performance-based: 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 underThe level of performance-based billing arrangements until all related performance criteria are met. Performance-based fee revenues represented 4.0%fees earned may vary based on our clients’ risk sharing preferences and 8.2%the mix of our revenues for the three months ended September 30, 2017services we provide.
•Software support, maintenance and 2016, respectively, and 4.4% and 9.1% 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.
subscriptions: 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 ourcertain cloud-based analytic tools and solutions.digital products. 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
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 maintenancerevenues and subscription revenues represented
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.
5.6% and 5.1% of our revenues for the three months ended September 30, 2017 and 2016, respectively, and 5.3% and 4.8% of our revenues for the nine months ended September 30, 2017 and 2016, respectively.
Our quarterly results are impacted principally by the total value, scope, and terms of our full-time consultants’ utilization rate, the bill rates we charge our clients,client contracts, the number of our revenue-generating professionals who are available to work, our revenue-generating professionals' utilization rate, and the amount of performance-based fees recognized, which often vary significantly between quarters.bill rates we charge our clients. 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-expenseReimbursable Expenses
Reimbursable expenses that are billed to clients, primarily relating to travel and out-of-pocket expenses incurred in connection with client engagements, do not provide us with a high degreeare included in total revenues and reimbursable expenses. We manage our business on the basis of predictabilityrevenues before reimbursable expenses, which we believe is the most accurate reflection of our services because it eliminates the effect of reimbursable expenses that we bill to our clients at cost.
Operating Expenses
Our most significant expenses are costs classified as to performance in future periods. Unexpected changes in the demanddirect costs. Direct costs primarily consist of compensation costs for our services can result in significant variations in utilizationrevenue-generating professionals, which includes salaries, performance bonuses, share-based compensation, signing and revenuesretention bonuses, payroll taxes and present a challengebenefits. Direct costs also include fees paid to optimal hiring and staffing. Moreover,independent contractors that we retain to supplement our clientsrevenue-generating professionals, typically retain us on an engagement-by-engagementas-needed basis rather than under long-term recurring contracts. The volumefor specific client engagements, and technology costs, product and event costs, and commissions. Direct costs exclude amortization of work performedintangible assets and software development costs and reimbursable expenses, both of which are separately presented in our consolidated statements of operations.
Selling, general and administrative expenses consist primarily of compensation costs for any particular client can vary widely from period to period.
Business Strategy, Opportunitiesour support personnel. Also included in selling, general and Challenges
Our primary strategy is to meet the needs of our clients by providing a balanced portfolio of service offeringsadministrative expenses are third-party professional fees, software licenses 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 resultsdata hosting expenses, rent and other office related expenses, sales and marketing related expenses, recruiting and training expenses, and practice administration and meetings expenses.
Other operating data. The resultsexpenses include restructuring charges, depreciation expense, amortization expense related to internally developed software costs and amortization of operations forintangible assets acquired businesses have been included in our resultsbusiness combinations.
Segment operating income consists of operations since the date of their respective acquisition.
Duringrevenues generated by a segment, less operating expenses that are incurred directly by the second quarter of 2017, we reorganized our internal financial reporting structure by moving our Life Sciences practice fromsegment. Other operating expenses not allocated at the Educationsegment level include corporate costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include corporate office support costs, office facility costs, costs related to accounting and Life Sciences segmentfinance, human resources, legal, marketing, information technology, and company-wide business development functions, and costs related 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.
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| | | | | | | | | | | | | | | | |
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. |
overall corporate management.
Non-GAAP Measures
We also assess our results of operations using certainthe following non-GAAP financial measures. These non-GAAP financial measures differ from GAAP because the non-GAAP financial measures we calculate to measuremeasures: earnings (loss) before interest, taxes, depreciation and amortization ("EBITDA"(“EBITDA”), adjusted EBITDA, adjusted EBITDA as a percentage of revenues, adjusted net income, (loss) from continuing operations, and adjusted diluted earnings (loss) per share (“EPS”). These non-GAAP financial measures differ from continuing operationsGAAP because they exclude a number of items required by GAAP, each discussed below. These non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance, cash flows, or liquidity prepared in accordance with GAAP. Our non-GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how we define our non-GAAP financial measures.
Our management uses the non-GAAP financial measures to gain an understanding of our comparative operating performance, for example when comparing such results with previous periods or forecasts. These non-GAAP financial measures are used by management in their financial and operating decision making because management believes they reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons. Management also uses these non-GAAP financial measures when publicly providing our business outlook, for internal management purposes, and as a basis for evaluating potential acquisitions and dispositions. We believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating Huron’s current operating performance and future prospects in the same manner as management does and in comparing in a consistent manner Huron’s current financial results with Huron’s past financial results.
The reconciliations of these financial measures from GAAP to non-GAAP are as follows (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 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, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income (loss) from continuing operations | $ | 4,132 |
| | $ | 12,288 |
| | $ | (141,195 | ) | | $ | 35,293 |
|
| Weighted average shares - diluted | 21,622 |
| | 21,445 |
| | 21,413 |
| | 21,427 |
|
| Diluted earnings (loss) per share from continuing operations | $ | 0.19 |
| | $ | 0.57 |
| | $ | (6.59 | ) | | $ | 1.65 |
|
| Add back: | | | | | | | |
| Amortization of intangible assets | 8,834 |
| | 8,771 |
| | 26,432 |
| | 24,369 |
|
| 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 | ) | | — |
|
| Total adjustments, net of tax | 5,187 |
| | 7,403 |
|
| 172,917 |
| | 20,986 |
|
| Adjusted net income from continuing operations | $ | 9,319 |
| | $ | 19,691 |
|
| $ | 31,722 |
| | $ | 56,279 |
|
| Adjusted weighted average shares - diluted | 21,622 |
| | 21,445 |
| | 21,585 |
| | 21,427 |
|
| Adjusted diluted earnings per share from continuing operations | $ | 0.43 |
| | $ | 0.92 |
|
| $ | 1.47 |
| | $ | 2.63 |
|
These non-GAAP financial measures include adjustments for the following items:
Amortization of intangible assets: We have excludedexclude the effect of amortization of intangible assets from the calculation of adjusted net income, from continuing operations presented above. Amortization of intangiblesas it is inconsistent in its amount and frequency and is significantly affected by the timing and size of our acquisitions.
Restructuring 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 employee severance charges. We have excludedexclude the effect of the restructuring 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 wereare not impacted by these items. We do not include normal, recurring, cash operating expenses in our restructuring charges.
Goodwill impairment charge:Other losses (gains): We have excludedexclude the effecteffects of the goodwill impairment charge that occurredother losses (gains), which primarily relate to changes in the second quarterestimated fair value of 2017 as this is an infrequent eventour liabilities for contingent consideration related to business acquisitions and its exclusion permitslitigation settlement losses and gains, to permit comparability with periods that wereare not impacted by such charge.these items.
Non-cash interest on convertible notes: We incur non-cash interest expense relatingTransaction-related expenses: To permit comparability with prior periods, we exclude the impact of third-party advisory, legal, and accounting fees incurred related to the impliedevaluation and/or consummation of business acquisitions.
Unrealized gain on preferred stock investment: We exclude the effect of unrealized gains related to changes in the fair value of the equity conversionour preferred stock investment in Medically Home Group, Inc. (“Medically Home”), which are recognized when an observable price change occurs. These unrealized gains are included as a component of our Convertible Notes. The value of the equity conversion component is treated as a debt discount and amortized to interest expense over the life of the Convertible Notes using the effective interest rate method.other income (expense), net. We exclude this non-cash interest expensebelieve 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 isthese unrealized gains are not indicative of the ongoing performance of our business.business and their exclusion permits comparability with prior periods.
Gain on sale of business: We have excluded the effect of the gain on the sale of Life Sciences C&O, as management believes that this one-time gain related to the divestiture of a business is not indicative of the ongoing performance of our business.
Foreign currency transaction losses (gains), net: We have excludedexclude 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 excludedexclude 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. We include, within the depreciation and amortization adjustment, the amortization of capitalized implementation costs of our enterprise resource planning ("ERP") and other related software, which is included within selling, general and administrative expenses in our consolidated statements of operations.
Revenue-Generating Professionals
Our revenue-generating professionals consist of our full-time consultants who generate revenues based on the number of hours worked; full-time equivalents, which consists of coaches and their support staff within the culture and organizational excellence solution, consultants who work variable schedules as needed by clients, and full-time employees who provide software support and maintenance services to clients; and our Healthcare managed services employees who provide revenue cycle billing, collections insurance verification and change integrity services to clients.
Utilization Rate
The utilization rate of our revenue-generating professionals 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 billable consultants during the same period. Available hours are determined by the standard hours worked by each billable consultant, adjusted for part-time hours, and U.S. standard work weeks. Available working hours exclude local country holidays and vacation days. Utilization rates are presented for our revenue-generating professionals who primarily bill on an hourly basis. We do not present utilization rates for our Managed Services professionals as most of the revenues generated by these employees are not billed on an hourly basis.
RESULTS OF OPERATIONS
Executive Highlights
Highlights from the third quarter of 2023 include:
•Total revenues increased 25.5% to $358.2 million for the third quarter of 2023 from $285.4 million for the third quarter of 2022.
•For the first nine months of 2023, Healthcare segment revenues increased 31.5% compared to the first nine months of 2022.
•For the first nine months of 2023, adjusted EBITDA as a percentage of revenues increased 110 basis points to 12.3% from 11.2% for the first nine months of 2022.
•Diluted EPS increased 27.9% to $1.10 for the third quarter of 2023, compared to $0.86 for the third quarter of 2022.
•Adjusted weighted averagediluted EPS increased 37.6% to $1.39 for the third quarter of 2023, compared to $1.01 for the third quarter of 2022.
•Net cash provided by operating activities increased 54.7% to $68.8 million for the third quarter of 2023, compared to $44.5 million for the third quarter of 2022.
•Returned $88.4 million to shareholders in the first nine months of 2023 by repurchasing 1,116,830 shares - diluted:of our common stock.
Total revenues increased $72.8 million, or 25.5%, to $358.2 million for the third quarter of 2023 from $285.4 million for the third quarter of 2022. The increase in revenues reflects continued strength in demand for our Consulting and Managed Services capability across all segments, as well as continued strength in demand for our Digital capability services within our Education and Healthcare segments. These increases in revenue reflect our focus on accelerating growth in our healthcare and education industries and growing our presence in commercial industries. Additional information on our revenues by segment follows.
In our Consulting and Managed Services capability, revenues for the third quarter of 2023 increased 37.7%, compared to the third quarter of 2022, and reflected strengthened demand in all of our segments. The utilization rate within our Consulting capability increased to 77.3% in the third quarter of 2023, compared to 72.5% in the third quarter of 2022.
Revenues within our Digital capability increased 10.8% in the third quarter of 2023, compared to the third quarter of 2022, and reflected strengthened demand in our Education and Healthcare segments. The utilization rate within our Digital capability increased to 75.4% in the third quarter of 2023, compared to 70.1% in the third quarter of 2022.
The total number of revenue-generating professionals increased to 5,341 as of September 30, 2023, compared to 4,571 as of September 30, 2022, as a result of hiring to support the overall increase in demand for our services within all of our segments. We proactively plan and manage the size and composition of our workforce and take actions as needed to address changes in the anticipated demand for our services as employee compensation costs are the most significant portion of our operating expenses.
Net income increased $3.8 million to $21.5 million for the three months ended September 30, 2023 from $17.7 million for the same period last year. As a result of the increase in net income and a reduction in diluted shares outstanding resulting from share repurchases made under our share repurchase plan, diluted earnings per share for the third quarter of 2023 increased 27.9% to $1.10, compared to $0.86 for the third quarter of 2022. Adjusted diluted earnings per share increased 37.6% to $1.39 for the third quarter of 2023, compared to $1.01 for the third quarter of 2022.
Net cash provided by operating activities increased 54.6% to $68.8 million for the third quarter of 2023, compared to $44.5 million for the third quarter of 2022. The increase in net cash provided by operating activities was primarily related to an increase in cash collections in the third quarter of 2023, compared to the third quarter of 2022; partially offset by increases in salaries and related expenses for our revenue-generating professionals and payments for selling, general and administrative expenses in the third quarter of 2023, compared to the third quarter of 2022.
In the first nine months of 2023, we reported a net lossdeployed $88.4 million of capital to repurchase 1,116,830 shares of our common stock, representing 5.6% of our common stock outstanding as of December 31, 2022.
Summary of Results
The following table sets forth, for the periods indicated, selected segment and consolidated operating results and other operating data, including non-GAAP measures.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment and Consolidated Operating Results
(in thousands, except per share amounts): | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Healthcare: | | | | | | | | |
| Revenues | | $ | 179,177 | | | $ | 131,319 | | | $ | 501,994 | | | $ | 381,669 | |
| Operating income | | $ | 46,888 | | | $ | 33,045 | | | $ | 128,294 | | | $ | 91,441 | |
| Segment operating income as a percentage of segment revenues | | 26.2 | % | | 25.2 | % | | 25.6 | % | | 24.0 | % |
| Education: | | | | | | | | |
| Revenues | | $ | 111,043 | | | $ | 94,347 | | | $ | 325,884 | | | $ | 263,234 | |
| Operating income | | $ | 26,550 | | | $ | 22,851 | | | $ | 77,112 | | | $ | 58,848 | |
| Segment operating income as a percentage of segment revenues | | 23.9 | % | | 24.2 | % | | 23.7 | % | | 22.4 | % |
| Commercial: | | | | | | | | |
| Revenues | | $ | 67,958 | | | $ | 59,704 | | | $ | 194,954 | | | $ | 173,841 | |
| Operating income | | $ | 15,432 | | | $ | 14,153 | | | $ | 39,971 | | | $ | 38,282 | |
| Segment operating income as a percentage of segment revenues | | 22.7 | % | | 23.7 | % | | 20.5 | % | | 22.0 | % |
| Total Huron: | | | | | | | | |
| Revenues | | $ | 358,178 | | | $ | 285,370 | | | $ | 1,022,832 | | | $ | 818,744 | |
| Reimbursable expenses | | 9,288 | | | 6,816 | | | 25,918 | | | 19,034 | |
| Total revenues and reimbursable expenses | | $ | 367,466 | | | $ | 292,186 | | | $ | 1,048,750 | | | $ | 837,778 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment and Consolidated Operating Results
(in thousands, except per share amounts): | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| Segment operating income | | $ | 88,870 | | | $ | 70,049 | | | $ | 245,377 | | | $ | 188,571 | |
| Items not allocated at the segment level: | | | | | | | | |
| Other operating expenses | | 43,086 | | | 34,875 | | | 129,563 | | | 96,376 | |
| Restructuring charges | | 4,095 | | | 804 | | | 6,881 | | | 2,763 | |
| Depreciation and amortization | | 4,347 | | | 5,071 | | | 13,441 | | | 15,171 | |
| Operating income | | 37,342 | | | 29,299 | | | 95,492 | | | 74,261 | |
| Total other income (expense), net | | (6,047) | | | (3,896) | | | (13,365) | | | 10,946 | |
| Income before taxes | | 31,295 | | | 25,403 | | | 82,127 | | | 85,207 | |
| Income tax expense | | 9,779 | | | 7,662 | | | 22,480 | | | 26,739 | |
| Net income | | $ | 21,516 | | | $ | 17,741 | | | $ | 59,647 | | | $ | 58,468 | |
| Earnings per share: | | | | | | | | |
| Basic | | $ | 1.15 | | | $ | 0.88 | | | $ | 3.15 | | | $ | 2.85 | |
| Diluted | | $ | 1.10 | | | $ | 0.86 | | | $ | 3.05 | | | $ | 2.80 | |
| | | | | | | | |
| Other Operating Data: | | | | | | | | |
| Number of revenue-generating professionals by segment (at period end): | | | | | | | | |
| Healthcare | | 2,083 | | | 1,686 | | | 2,083 | | | 1,686 | |
| Education | | 1,799 | | | 1,543 | | | 1,799 | | | 1,543 | |
Commercial (1) | | 1,459 | | | 1,342 | | | 1,459 | | | 1,342 | |
| Total | | 5,341 | | | 4,571 | | | 5,341 | | | 4,571 | |
| | | | | | | | |
| Revenue by capability: | | | | | | | | |
Consulting and Managed Services (2) | | $ | 214,688 | | | $ | 155,901 | | | $ | 589,137 | | | $ | 454,356 | |
| Digital | | 143,490 | | | 129,469 | | | 433,695 | | | 364,388 | |
| Total | | $ | 358,178 | | | $ | 285,370 | | | $ | 1,022,832 | | | $ | 818,744 | |
| | | | | | | | |
| Number of revenue-generating professionals by capability (at period end): | | | | | | | | |
Consulting and Managed Services (3) | | 2,483 | | | 2,098 | | | 2,483 | | | 2,098 | |
| Digital | | 2,858 | | | 2,473 | | | 2,858 | | | 2,473 | |
| Total | | 5,341 | | | 4,571 | | | 5,341 | | | 4,571 | |
| | | | | | | | |
Utilization rate by capability (4): | | | | | | | | |
| Consulting | | 77.3 | % | | 72.5 | % | | 76.5 | % | | 73.0 | % |
| Digital | | 75.4 | % | | 70.1 | % | | 73.7 | % | | 71.6 | % |
(1)The majority of our revenue-generating professionals within our Commercial segment can provide services across all of our industries, including healthcare and education.
(2)Managed Services capability revenues within our Healthcare segment was $16.7 million and $17.6 million for the three months ended September 30, 2023 and 2022, respectively; and $53.8 million and $47.5 million for the nine months ended September 30, 2017, GAAP diluted weighted average shares outstanding equals2023 and 2022, respectively.
Managed Services capability revenues within our Education segment was $5.0 million and $4.1 million for the basic weighted average shares outstandingthree months ended September 30, 2023 and 2022, respectively; and $14.6 million and $11.3 million for that period. For the nine months ended September 30, 2017,2023 and 2022, respectively.
(3)The number of Managed Services revenue-generating professionals within our Healthcare segment as of September 30, 2023 and 2022 was 757 and 547, respectively.
The number of Managed Services revenue-generating professionals within our Education segment as of September 30, 2023 and 2022 was 105 and 97, respectively.
(4)Utilization rates are presented for our revenue-generating professionals who primarily bill on an hourly basis. We do not present utilization rates for our Managed Services professionals as most of the non-GAAP adjustments described above resulted inrevenues generated by these employees are not billed on an adjusted net income from continuing operations. Therefore, we included the dilutive common stock equivalents in the calculationhourly basis.
Non-GAAP Measures
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Revenues | $ | 358,178 | | | $ | 285,370 | | | $ | 1,022,832 | | | $ | 818,744 | |
| Net income | $ | 21,516 | | | $ | 17,741 | | | $ | 59,647 | | | $ | 58,468 | |
| Add back: | | | | | | | |
| Income tax expense | 9,779 | | | 7,662 | | | 22,480 | | | 26,739 | |
| Interest expense, net of interest income | 5,047 | | | 3,111 | | | 15,146 | | | 7,753 | |
| Depreciation and amortization | 6,300 | | | 7,019 | | | 19,183 | | | 21,238 | |
| EBITDA | 42,642 | | | 35,533 | | | 116,456 | | | 114,198 | |
| Add back: | | | | | | | |
| Restructuring charges | 5,402 | | | 1,332 | | | 9,385 | | | 4,956 | |
| Other gains, net | (14) | | | (67) | | | (202) | | | (34) | |
| | | | | | | |
| | | | | | | |
| Transaction-related expenses | 302 | | | — | | | 302 | | | 50 | |
| Unrealized gain on preferred stock investment | — | | | — | | | — | | | (26,964) | |
| Foreign currency transaction losses (gains), net | (332) | | | (328) | | | 36 | | | (409) | |
| Adjusted EBITDA | $ | 48,000 | | | $ | 36,470 | | | $ | 125,977 | | | $ | 91,797 | |
| Adjusted EBITDA as a percentage of revenues | 13.4 | % | | 12.8 | % | | 12.3 | % | | 11.2 | % |
Reconciliation of Net Income to Adjusted Net Income and Adjusted Diluted Earnings per Share
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Net income | $ | 21,516 | | | $ | 17,741 | | | $ | 59,647 | | | $ | 58,468 | |
| Weighted average shares - diluted | 19,475 | | | 20,615 | | | 19,578 | | | 20,899 | |
| Diluted earnings per share | $ | 1.10 | | | $ | 0.86 | | | $ | 3.05 | | | $ | 2.80 | |
| Add back: | | | | | | | |
| Amortization of intangible assets | 1,997 | | | 2,818 | | | 6,202 | | | 8,496 | |
| Restructuring charges | 5,402 | | | 1,332 | | | 9,385 | | | 4,956 | |
| Other gains, net | (14) | | | (67) | | | (202) | | | (34) | |
| | | | | | | |
| | | | | | | |
| Transaction-related expenses | 302 | | | — | | | 302 | | | 50 | |
| Unrealized gain on preferred stock investment | — | | | — | | | — | | | (26,964) | |
| Tax effect of adjustments | (2,037) | | | (1,082) | | | (4,157) | | | 3,576 | |
| | | | | | | |
| | | | | | | |
| Total adjustments, net of tax | 5,650 | | | 3,001 | | | 11,530 | | | (9,920) | |
| Adjusted net income | $ | 27,166 | | | $ | 20,742 | | | $ | 71,177 | | | $ | 48,548 | |
| Adjusted weighted average shares - diluted | 19,475 | | | 20,615 | | | 19,578 | | | 20,899 | |
| Adjusted diluted earnings per share | $ | 1.39 | | | $ | 1.01 | | | $ | 3.64 | | | $ | 2.32 | |
Three Months Ended September 30, 20172023 Compared to Three Months Ended September 30, 20162022
Revenues
Revenues decreased $7.0by segment and capability for the three months ended September 30, 2023 and 2022 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (in thousands) | | Three Months Ended
September 30, | | Increase / (Decrease) |
| 2023 | | 2022 | | $ | | % |
| Segment: | | | | | | | | |
| Healthcare | | $ | 179,177 | | | $ | 131,319 | | | $ | 47,858 | | | 36.4 | % |
| Education | | 111,043 | | | 94,347 | | | 16,696 | | | 17.7 | % |
| Commercial | | 67,958 | | | 59,704 | | | 8,254 | | | 13.8 | % |
| Total revenues | | $ | 358,178 | | | $ | 285,370 | | | $ | 72,808 | | | 25.5 | % |
| | | | | | | | |
| Capability: | | | | | | | | |
| Consulting and Managed Services | | $ | 214,688 | | | $ | 155,901 | | | $ | 58,787 | | | 37.7 | % |
| Digital | | 143,490 | | | 129,469 | | | 14,021 | | | 10.8 | % |
| Total revenues | | $ | 358,178 | | | $ | 285,370 | | | $ | 72,808 | | | 25.5 | % |
Revenues increased $72.8 million, or 3.8%25.5%, to $176.4$358.2 million for the third quarter of 20172023 from $183.4$285.4 million for the third quarter of 2016. Third quarter 20172022. The overall increase in revenues included $13.4 million fromreflects continued strength in demand for our acquisitions of InnosightConsulting and Pope Woodhead, which were completed subsequent to the third quarter of 2016,Managed Services capability across all segments, as well as revenues from our acquisition of the international assets of ADI Strategies, which was also completed subsequent to the third quarter of 2016 and has since been fully integrated into the Business Advisory segment. Third quarter 2017 revenues also included an incremental $1.7 million of revenue from our acquisition of Healthcare Services Management, Inc. ("HSM Consulting"), which was completed mid-third quarter 2016.
Of the overall $7.0 million decreasecontinued strength in revenues, $5.3 million was attributable to our full-time equivalents and $1.7 million was attributable to our full-time billable consultants.
The decrease in full-time equivalent revenues was primarily attributable to a decrease in revenue from our Studer Group solution within our Healthcare segment and a decrease in license revenue in our Education segment as discussed below in Segment Results.
The decrease in full-time billable consultant revenues reflected a decrease in the average billing rate for the third quarter of 2017, partially offset by increases in the average number of billable consultants and consultant utilization rate. As discussed below in Segment Results, this decrease in revenue attributable to our full-time billable consultants reflected decreased demand for our Digital capability services within our Education and Healthcare segments. These increases in the Healthcarerevenue reflect our focus on accelerating growth in our healthcare and education industries and growing our presence in commercial industries. Additional information on our revenues by segment largely offsetfollows.
•Healthcare revenues increased $47.9 million, or 36.4%, driven by revenues fromstrengthened demand for our acquisitions of Innosightperformance improvement, strategy and Pope Woodhead,innovation, and financial advisory solutions within our Consulting and Managed Services capability, as well as strengthened demand for our technology and analytics services within our Digital capability. These increases in demand were partially offset by a decrease in demand for our culture and organization excellence solution within our Consulting and Managed Services capability. Revenues in the Business Advisorythird quarter of 2023 included $0.1 million of incremental revenues from our acquisitions of Customer Evolution, LLC and Roundtable Analytics, Inc, which were completed in December 2022 and September 2023, respectively.
The number of revenue-generating professionals within our Healthcare segment grew 23.5% to 2,083 as of September 30, 2023, compared to 1,686 as of September 30, 2022.
•Education revenues increased $16.7 million, or 17.7%, driven by strengthened demand for our technology and analytics services and software products within our Digital capability, as well as strengthened demand for our strategy and operations and research solutions within our Consulting and Managed Services capability.
The number of revenue-generating professionals within our Education segments.segment grew 16.6% to 1,799 as of September 30, 2023, compared to 1,543 as of September 30, 2022.
Total •Commercial revenues increased $8.3 million, or 13.8%, driven by strengthened demand for our financial advisory solutions within our Consulting and Managed Services capability, partially offset by decreases in demand for our strategy and innovation solution within our Consulting and Managed Services capability and technology and analytics services within our Digital capability.
The number of revenue-generating professionals within our Commercial segment grew 8.7% to 1,459 as of September 30, 2023, compared to 1,342 as of September 30, 2022.
Operating Expenses
Operating expenses for the third quarter of 2023 increased $67.2 million, or 25.6%, over the third quarter of 2022.
Operating expenses and operating expenses as a percentage of revenues were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Expenses (in thousands, except amounts as a percentage of revenues) | | Three Months Ended September 30, | | Increase / (Decrease) |
| 2023 | | 2022 | |
| Direct costs | | $ | 244,774 | | | 68.3% | | $ | 193,368 | | | 67.8% | | $ | 51,406 | |
| Reimbursable expenses | | 9,497 | | | 2.7% | | 6,917 | | | 2.4% | | 2,580 | |
| Selling, general and administrative expenses | | 64,347 | | | 18.0% | | 54,458 | | | 19.1% | | 9,889 | |
| Restructuring charges | | 5,402 | | | 1.5% | | 1,332 | | | 0.5% | | 4,070 | |
| Depreciation and amortization | | 6,104 | | | 1.7% | | 6,812 | | | 2.3% | | (708) | |
| Total operating expenses | | $ | 330,124 | | | 92.2% | | $ | 262,887 | | | 92.1% | | $ | 67,237 | |
Direct Costs
Our total direct costs, including amortization of intangible assets and software developmentDirect costs increased $4.0$51.4 million, or 3.6%26.6%, to $116.4$244.8 million infor the three months ended September 30, 2017,third quarter of 2023 from $112.4$193.4 million infor the three months ended September 30, 2016.third quarter of 2022. The $4.0$51.4 million increase primarily related to a $2.1$48.1 million increase in compensation costs for our revenue-generating professionals as we continue to invest in and grow our talented team to meet increased market demand. Specifically, the increase in compensation costs is primarily attributable to a $25.1 million increase in performance bonus expense, a $21.0 million increase in salaries and related expenses driven by increased headcount and annual salary increases that went into effect in the first quarter of 2023, and a $1.3 million increase in share-based compensation expense. Additional increases in direct costs include a $1.9 million increase in technology costs and a $1.3 million increase in contractor expenses. As a percentage of revenues, direct costs increased to 68.3% during the third quarter of 2023, compared to 67.8% during the third quarter of 2022. This increase was primarily due to an increase in performance bonus expense for our revenue-generating professionals, as a percentage of revenue; partially offset by revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals,professionals.
Reimbursable Expenses
Reimbursable expenses are billed to clients at cost and primarily relate to travel and out-of-pocket expenses incurred in connection with client engagements. These expenses are also included in total revenues and reimbursable expenses. We manage our business on the basis of revenues before reimbursable expenses, which was largely driven by increased headcount from acquisitions andwe believe is the most accurate reflection of our ongoing cloud-based enterprise resource planning (ERP) investment, partially offset by a decrease in salaries and relatedservices because it eliminates the effect of reimbursable expenses in our Healthcare segmentthat are also included as a resultcomponent of headcount reductions. Additional increases included a $1.1 million increase in contractor expense, a $0.9 million increase in signingoperating expenses.
Selling, General and retention bonuses for our revenue-generating professionals, a $0.6 million increase 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 million decrease in amortization of intangible assets. As a percentage of revenues, our total direct costs increased to 66.0% during the third quarter of 2017 compared to 61.3% during the third quarter of 2016, primarily due to the items described above.
Total direct costs for the three months ended September 30, 2017 included $2.7 million of amortization expense for intangible assets, primarily representing customer contracts and software acquired in business combinations, and internal software development costs, compared to $4.1 million of amortization expense for the same prior year period. The $1.4 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. 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.
OperatingAdministrative Expenses and Other Gains, Net
Selling, general and administrative expenses increased $3.3by $9.9 million, or 8.7%18.2%, to $41.6$64.3 million in the third quarter of 20172023 from $38.3$54.5 million in the third quarter of 2016. Selling, general and administrative expenses for the third quarter of 2017 included $3.9 million from Innosight and Pope Woodhead.2022. The overall $3.3$9.9 million increase primarily related to a $1.9$8.9 million increase in compensation costs for our support personnel driven by a $4.5 million increase in salaries and related expenses, for our support personnel, a $0.9$3.0 million increase in facilities and other office-related expenses,performance bonus expense, a $0.7$1.6 million increase in third-party consulting expenses,share-based compensation expense, and a $0.5$1.4 million increase in travel related expenses,legal expenses. These increases were partially offset by a $1.1 million decrease in practice administration and meetings expenses. As a percentage of revenues, selling, general and administrative expenses increaseddecreased to 23.6%18.0% during the third quarter of 20172023, compared to 20.9%19.1% during the third quarter of 2016,2022. This decrease was primarily dueattributable to decreases in practice administration and meetings expenses and third-party professional expenses, as well as revenue growth that outpaced the items described above.increase in salaries and related expenses for our support personnel; partially offset by an increase in performance bonus expense, as a percentage of revenues.
Restructuring Charges
Restructuring charges for the third quarter of 2017 totaled $1.32023 were $5.4 million, compared to $1.0$1.3 million for the third quarter of 2016. 2022. In the third quarter of 2023, we exited our office space in Lexington, Massachusetts which resulted in a $3.5 million non-cash impairment charge on the related right-of-use operating lease asset and fixed assets of that office space. Restructuring charges for the third quarter of 2023 also included $1.2 million of employee-related expenses and $0.7 million of rent and related expenses, net of sublease income, for previously vacated office spaces.
The $1.3 million charge incurredof restructuring charges recognized in the third quarter of 2017 primarily2022 included $0.7 million of rent and related to the accrual of remaining lease obligations,expenses, net of estimated sublease income, due to relocating our San Franciscofor previously vacated office to a smaller space and consolidating our New York offices in the third quarter of 2017, and accelerated depreciation on leasehold improvements for our San Francisco office. The $1.0 million charge incurred in the third quarter of 2016 primarily related to updated lease assumptions of our Washington, D.C. space vacated in the fourth quarter of 2014. See Note 9 "Restructuring Charges" within the notes to our consolidated financial statements for further discussion of our restructuring expenses.
Other losses, net totaled $0.9spaces; $0.5 million for the three months ended September 30, 2017,early termination of a contract; 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$0.1 million of remeasurement losses for the increase in the fair valueemployee-related expenses.
Depreciation and Amortization
Depreciation and amortization expense increased by $1.9decreased $0.7 million, to $9.9 million in the three months ended September 30, 2017 from $8.1 million in the three months ended September 30, 2016. The increase was primarily attributable to an increase in amortization expense for intangible assets acquired in the Innosight and Pope Woodhead acquisitions, which were completed subsequent to the third quarter of 2016, 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, non-competition agreements, and trade names 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.
Operating Income
Operating income decreased $17.1 millionor 10.4%, to $6.1 million in the third quarter of 2017 from $23.22023, compared to $6.8 million in the third quarter of 2016.2022. The $0.7 million decrease in depreciation and amortization expense was primarily attributable to intangible assets acquired in business acquisitions that were fully amortized in prior periods and a decrease in amortization of intangible assets acquired in business acquisitions due to the accelerated basis of amortization in prior periods.
Operating Income and Operating Margin
Operating income increased $8.0 million, or 27.5%, to $37.3 million in the third quarter of 2023 from $29.3 million in the third quarter of 2022. Operating margin, which is defined as operating income expressed as a percentage of revenues, decreasedincreased to 3.5% in10.4% for the three months ended September 30, 2017,2023, compared to 12.7% in10.3% for the three months ended September 30, 2016. The2022.
Operating income and operating margin for each of our segments is as follows. See the Segment and Consolidated Operating Results table above for a reconciliation of our total segment operating income to consolidated Huron operating income. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment Operating Income (in thousands, except operating margin percentages) | | Three Months Ended September 30, | | Increase / (Decrease) |
| 2023 | | 2022 | |
| Healthcare | | $ | 46,888 | | | 26.2% | | $ | 33,045 | | | 25.2% | | $ | 13,843 | |
| Education | | 26,550 | | | 23.9% | | 22,851 | | | 24.2% | | 3,699 | |
| Commercial | | 15,432 | | | 22.7% | | 14,153 | | | 23.7% | | 1,279 | |
| Total segment operating income | | $ | 88,870 | | | | | $ | 70,049 | | | | | $ | 18,821 | |
•Healthcare operating income increased $13.8 million, or 41.9%, primarily due to the increase in revenues as well as a decrease in operating margin was primarily attributable topractice administration and meetings expenses; partially offset by increases in salariescompensation costs for our revenue-generating professionals, contractor expenses, and related expensescompensation costs for bothour support personnel. The increases in compensation costs for our revenue-generating professionals and support personnel were primarily driven by an increase in performance bonus expense, an increase in headcount, annual salary increases that went into effect in the first quarter of 2023, and an increase in share-based compensation expense. Healthcare operating margin increased to 26.2% from 25.2% primarily driven by a decrease in practice administration and meetings expenses and revenue growth that outpaced the increase in compensation costs for our revenue-generating professionals; partially offset by an increase in contractor expense, facilities and other office-related expenses, signing and retention bonusesas a percentage of revenues.
•Education operating income increased $3.7 million, or 16.2%, primarily due to the increase in revenues as well as a decrease in contractor expenses, partially offset by increases in compensation costs for our revenue-generating professionals and technology expenses. The increase in compensation costs was primarily driven by an increase in headcount, annual salary increases that went into effect in the first quarter of 2023, and an increase in performance bonus expenseexpense. Education operating margin decreased to 23.9% from 24.2% primarily driven by increases in compensation costs for our revenue-generating professionals for the third quarterand technology expenses, as percentages of 2017 comparedrevenue; partially offset by a decrease in contractor expenses.
•Commercial operating income increased $1.3 million, or 9.0%, primarily due to the same prior year period.increase in revenues as well as a decrease in contractor expenses, partially offset by increases in compensation costs for our revenue-generating professionals. Commercial operating margin decreased to 22.7% from 23.7% primarily driven by increases in compensation costs for our revenue-generating professionals and support personnel, as percentages of revenues; partially offset by a decrease in contractor expenses.
Other Expense,Income (Expense), Net
Total otherInterest expense, net of interest income increased by $0.3$1.9 million to $4.0$5.0 million in the third quarter of 20172023 from $3.7$3.1 million in the third quarter of 2016. The increase in total other expense, net2022, which was primarily attributable to a $0.7 million increase inhigher interest expense, net of interest income, which was due torates and higher levels of borrowings and higher interest ratesborrowing under our credit facility during the third quarter of 20172023 compared to the third quarter of 2016. This increase was partially offset by $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 third quarter of 2016.
Income Tax Expense (Benefit)
For the three months ended September 30, 2017, 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% 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, net2022. See “Liquidity 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,Capital Resources” below 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.
Net Income from Continuing Operations
Net income from continuing operations decreased by $8.2 million to $4.1 million for the three months ended September 30, 2017, from $12.3 million for the same period last year. As a result of the decrease in net income from continuing operations, diluted earnings per share from continuing operations for the third quarter of 2017 was $0.19 compared to $0.57 for the third quarter of 2016.
Discontinued Operations
Net income from discontinued operations was $0.2 million for the three months ended September 30, 2017 and related to updated lease assumptions for vacated office space directly related to the sale of the Huron Legal segment. See Note 4 "Discontinued Operations"6 “Financing Arrangements” within the notes to our consolidated financial statements for additional information about our discontinued operations.senior secured credit facility.
EBITDA and Adjusted EBITDA
EBITDAOther expense, net decreased $16.2$0.2 million to $19.6 million for the three months ended September 30, 2017 from $35.9 million for the three months ended September 30, 2016. Adjusted EBITDA decreased $16.0 million to $21.5$1.0 million in the third quarter of 20172023 from $37.5$0.8 million in the third quarter of 2016.2022. The decrease in EBITDA and 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
Adjustedother expense, net income from continuing operations decreased $10.4 million to $9.3 million in the third quarter of 2017 compared to $19.7 million in the third quarter of 2016. As a result of the decrease in adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations was $0.43 for the third quarter of 2017, compared to $0.92 for the third quarter of 2016.
Segment Results
Healthcare
Revenues
Healthcare segment revenues decreased $23.8 million, or 23.1%, to $79.6 million for the third quarter of 2017 from $103.4 million for the third quarter of 2016. Revenues for the third quarter of 2017 included an incremental $1.7 million from our acquisition of HSM Consulting, which was completed mid-third quarter 2016.
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 68.5%, 16.6%, 6.7%, and 8.2% of this segment’s revenues, respectively, compared to 67.0%, 13.4%, 13.4%, and 6.2% 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 million during the third quarter of 2017 compared to $13.8 million during the third quarter 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.
The decrease in revenue attributable to our full-time equivalents was primarily driven by a decreased demand for our Studer Group solution and reflected a decrease in revenue per full-time equivalent, partially offset by an increase in the average number of full-time equivalents.
Operating Income
Healthcare segment operating income decreased $13.0 million, or 33.6%, to $25.8 million for the three months ended September 30, 2017 from $38.8 million for the three months ended September 30, 2016. The Healthcare segment operating margin, defined as segment operating income expressed as a percentage of segment revenues, decreased to 32.4% for the third quarter of 2017 from 37.5% in the same period last year. The decrease in this segment’s operating margin was primarily attributable to an increase in salaries and related expenses for our revenue-generating and support professionals as a percentage of revenues, as well as increases in contractor expenses, product and event costs, and signing and retention bonus expense for our revenue-generating professionals. These decreases to the operating margin are partially offset by decreases in performance bonus expense for our revenue-generating professionals, practice administration and meetings expenses, and intangible asset amortization expense, all as a percentage of revenues.
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 toincludes the decrease in the fair value of the liabilityloss recognized 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 monthsliability.
Income Tax Expense (Benefit)
For the ninethree months ended September 30, 2017,2023, 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%31.2% as we recognized income tax expense of $19.5$9.8 million on income from continuing operations of $54.8$31.3 million. The effective tax rate for the nine months ended September 30, 2017of 31.2% was less favorable than the statutory rate, inclusive of state income taxes, of 26.6% 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 nondeductible losses on our investments used to fund our deferred compensation liability and certain nondeductible expense items.
For the adoptionthree months ended September 30, 2022, our effective tax rate was 30.2% as we recognized income tax expense of ASU 2016-09 Improvements to Employee Share-Based Payment Accounting. Refer to Note 3 "New Accounting Pronouncements" for additional information$7.7 million on the adoptionincome 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.$25.4 million. The effective tax rate for the nine months ended September 30, 2016of 30.2% was lowerless favorable than the statutory rate, inclusive of state income taxes, of 26.4% primarily due to tax expense related to nondeductible losses on our investments used to fund our deferred compensation liability and certain nondeductible expense items.
Net Income and Earnings per Share
Net income increased $3.8 million to $21.5 million for the year-to-datethree months ended September 30, 2023 from $17.7 million for the same period last year. Diluted earnings per share for the third quarter of 2023 increased to $1.10 compared to $0.86 for the third quarter of 2022, driven by the increase in net income and a reduction in diluted shares outstanding resulting from share repurchases made under our share repurchase plan.
EBITDA and Adjusted EBITDA
EBITDA increased $7.1 million to $42.6 million for the third quarter of 2023 from $35.5 million for the third quarter of 2022. The increase in EBITDA was primarily attributable to the increase in segment operating income, offset by the increase in corporate expenses, excluding the impact of a discrete favorable adjustment to our state tax ratethe change in the secondmarket value of our deferred compensation liability.
Adjusted EBITDA increased $11.5 million to $48.0 million in the third quarter of 2016, non-taxable2023 from $36.5 million in the third quarter of 2022. The increase in adjusted EBITDA was primarily attributable to the increase in segment operating income, valuation allowance reductions, certain credits and deductions, and a discrete tax benefit related to share-based compensation,excluding the impact of segment restructuring charges, partially offset by non-deductible businessthe increase in corporate expenses.
Adjusted Net Income (Loss) from Continuing Operationsand Adjusted Earnings per Share
NetAdjusted net income from continuing operations decreased by $176.5increased $6.4 million to $27.2 million in the third quarter of 2023, compared to $20.7 million in the third quarter of 2022. Adjusted diluted earnings per share increased to $1.39 for the third quarter of 2023, compared to $1.01 for the third quarter of 2022, driven by the increase in adjusted net income and a net lossreduction in diluted shares outstanding resulting from continuing operations of $141.2 millionshare repurchases made under our share repurchase plan.
Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
Revenues
Revenues by segment and capability for the nine months ended September 30, 2017, from net income from continuing operations of $35.32023 and 2022 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (in thousands) | | Nine Months Ended
September 30, | | Increase / (Decrease) |
| 2023 | | 2022 | | $ | | % |
| Segment: | | | | | | | | |
| Healthcare | | $ | 501,994 | | | $ | 381,669 | | | $ | 120,325 | | | 31.5 | % |
| Education | | 325,884 | | | 263,234 | | | 62,650 | | | 23.8 | % |
| Commercial | | 194,954 | | | 173,841 | | | 21,113 | | | 12.1 | % |
| Total revenues | | $ | 1,022,832 | | | $ | 818,744 | | | $ | 204,088 | | | 24.9 | % |
| | | | | | | | |
| Capability: | | | | | | | | |
| Consulting and Managed Services | | $ | 589,137 | | | $ | 454,356 | | | $ | 134,781 | | | 29.7 | % |
| Digital | | 433,695 | | | 364,388 | | | 69,307 | | | 19.0 | % |
| Total revenues | | $ | 1,022,832 | | | $ | 818,744 | | | $ | 204,088 | | | 24.9 | % |
Revenues increased $204.1 million, for the same prior year period. This decrease is primarily attributableor 24.9%, 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$1.02 billion for the first nine months of 2017 was $6.59 compared to diluted earnings per share2023 from continuing operations of $1.65$818.7 million for the first nine months of 2016.2022. The non-cash goodwill impairment charge hadoverall increase in revenues reflects continued strength in demand for both our Consulting and Managed Services capability and Digital capability across all segments, which reflects our focus on accelerating growth in our healthcare and education industries and growing our presence in commercial industries. Additional information on our revenues by segment follows.
•Healthcare revenues increased $120.3 million, or 31.5%, primarily driven by strong results in our performance improvement solution due to strengthened demand and exceeding performance expectations on certain performance-based arrangements. The increase in Healthcare revenue was also attributable to strengthened demand for our technology and analytics services within our Digital capability, as well as strengthened demand for our financial advisory, revenue cycle managed services, and strategy and innovation solutions within our Consulting and Managed Services capability. Revenues in the first nine months of 2023 included $0.6 million of incremental revenues from our acquisitions of Customer Evolution, LLC and Roundtable Analytics, Inc, which were completed in December 2022 and September 2023, respectively.
The number of revenue-generating professionals within our Healthcare segment grew 23.5% to 2,083 as of September 30, 2023, compared to 1,686 as of September 30, 2022.
•Education revenues increased $62.7 million, or 23.8%, driven by strengthened demand for our technology and analytics services and software products within our Digital capability, as well as strengthened demand for our strategy and operations and research solutions within our Consulting and Managed Services capability.
The number of revenue-generating professionals within our Education segment grew 16.6% to 1,799 as of September 30, 2023, compared to 1,543 as of September 30, 2022.
•Commercial revenues increased $21.1 million, or 12.1%, driven by strengthened demand for our financial advisory solutions within our Consulting and Managed Services capability and our technology and analytics services within our Digital capability, partially offset by a $7.16 unfavorable impact on diluted earnings per share from continuing operationsdecrease in demand for our strategy and innovation solution within our Consulting and Managed Services capability.
The number of revenue-generating professionals within our Commercial segment grew 8.7% to 1,459 as of September 30, 2023, compared to 1,342 as of September 30, 2022.
Operating Expenses
Operating expenses for the first nine months of 2017.2023 increased $189.7 million, or 24.9%, over the first nine months of 2022.
Discontinued OperationsOperating expenses and operating expenses as a percentage of revenues were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Expenses (in thousands, except amounts as a percentage of revenues) | | Nine Months Ended September 30, | | Increase / (Decrease) |
| 2023 | | 2022 | |
| Direct costs | | $ | 708,355 | | | 69.3% | | $ | 569,848 | | | 69.6% | | $ | 138,507 | |
| Reimbursable expenses | | 26,242 | | | 2.6% | | 19,249 | | | 2.4% | | 6,993 | |
| Selling, general and administrative expenses | | 190,655 | | | 18.6% | | 148,886 | | | 18.2% | | 41,769 | |
| Restructuring charges | | 9,385 | | | 0.9% | | 4,956 | | | 0.6% | | 4,429 | |
| Depreciation and amortization | | 18,621 | | | 1.8% | | 20,578 | | | 2.5% | | (1,957) | |
| Total operating expenses | | $ | 953,258 | | | 93.2% | | $ | 763,517 | | | 93.3% | | $ | 189,741 | |
Net income from discontinued operationsDirect Costs
Direct costs increased $138.5 million, or 24.3%, to $708.4 million for the first nine months ended September 30, 2017 was $0.7of 2023 from $569.8 million andfor the first nine months of 2022. The $138.5 million increase primarily related to updateda $124.6 million increase in compensation costs for our revenue-generating professionals as we continue to invest in and grow our talented team to meet increased market demand. Specifically, the increase in compensation costs is primarily attributable to a $71.3 million increase in salaries and related expenses driven by increased headcount and annual salary increases that went into effect in the first quarter of 2023, a $48.1 million increase in performance bonus expense, and a $4.9 million increase in share-based compensation expense. Additional increases in direct costs include a $6.0 million increase in contractor expenses, a $4.6 million increase in technology costs, and a $1.2 million increase in project costs. As a percentage of revenues, direct costs decreased to 69.3% during the first nine months of 2023, compared to 69.6% during the first nine months of 2022. The decrease was primarily due to revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals; partially offset by an increase in performance bonus expense, as a percentage of revenue.
Reimbursable Expenses
Reimbursable expenses are billed to clients at cost and primarily relate to travel and out-of-pocket expenses incurred in connection with client engagements. These expenses are also included in total revenues and reimbursable expenses. We manage our business on the basis of revenues before reimbursable expenses, which we believe is the most accurate reflection of our services because it eliminates the effect of reimbursable expenses that are also included as a component of operating expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $41.8 million, or 28.1%, to $190.7 million in the first nine months of 2023 from $148.9 million in the first nine months of 2022. The $41.8 million increase primarily related to a $32.2 million increase in compensation costs for our support personnel driven by a $10.9 million increase in deferred compensation expense attributable to the change in market value of our deferred compensation liability, a $10.2 million increase in salaries and related expenses, a $6.3 million increase in performance bonus expense, and a $4.9 million increase in share-based compensation expense. The increase in deferred compensation expense is offset by an 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, net. Additionally, selling, general and administrative expenses increased $9.5 million for non-payroll costs driven by a $3.2 million increase in promotion and marketing expenses, a $2.1 million increase in software and data hosting expenses, a $1.3 million increase in practice administration and meetings expenses, and a $1.1 million increase in legal expenses. As a percentage of revenues, selling, general and administrative expenses increased to 18.6% during the first nine months of 2023, compared to 18.2% during the first nine months of 2022. This increase was primarily attributable to an increase in deferred compensation expense, as a percentage of revenues; partially offset by revenue growth that outpaced the increase in other salaries and related expenses for our support personnel.
Restructuring Charges
Restructuring charges for the first nine months of 2023 were $9.4 million, compared to $5.0 million for the first nine months of 2022. In the first nine months of 2023, we exited our office spaces in Hillsboro, Oregon and Lexington, Massachusetts, resulting in non-cash impairment charges of $1.9 million and $3.5 million, respectively, on the related right-of-use operating lease assumptionsassets and fixed assets. Additionally, in the first nine months of 2023, we recognized, $2.2 million of employee-related expenses; $1.3 million for rent and related expenses, net of sublease income, for previously vacated office space directlyspaces; $0.3 million related to the saleabandonment of a capitalized software development project; and $0.2 million related to non-cash lease impairment charges driven by updated sublease assumptions for previously vacated office spaces.
The $5.0 million of restructuring charges incurred in the Huron Legal segment. Net loss from discontinued operations for thefirst nine months ended September 30, 2016 was $1.8of 2022 included $1.7 million of employee-related expenses; $1.7 million for rent and primarily related to obligationsexpenses, net of sublease income, for former employees, legal fees, and updated lease assumptions forpreviously vacated office space directlyspaces; $0.6 million for third-party transaction expenses related to the salemodification of our operating model; $0.5 million for the early termination of a contract; $0.3 million of accelerated amortization of capitalized software implementation costs for a cloud-computing arrangement that is no longer in use; and $0.1 million related to the divestiture of our Life Sciences business in the fourth quarter of 2021.
Depreciation and Amortization
Depreciation and amortization expense decreased $2.0 million, or 9.5%, to $18.6 million for the first nine months of 2023, compared to $20.6 million for first nine months of 2022. The $2.0 million decrease in depreciation and amortization expense was primarily attributable to intangible assets acquired in business acquisitions that were fully amortized in prior periods and a decrease in the amortization of intangible assets acquired in business acquisitions due to the accelerated basis of amortization in prior periods.
Operating Income and Operating Margin
Operating income increased $21.2 million to $95.5 million in the first nine months of 2023 from $74.3 million in the first nine months of 2022. Operating margin, which is defined as operating income expressed as a percentage of revenues, increased to 9.3% for the first nine months of 2023, compared to 9.1% for the first nine months of 2022.
Operating income and operating margin for each of our segments is as follows. See the Segment and Consolidated Operating Results table above for a reconciliation of our total segment operating income to consolidated Huron Legal segment.operating income. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment Operating Income (in thousands, except operating margin percentages) | | Nine Months Ended September 30, | | Increase / (Decrease) |
| 2023 | | 2022 | |
| Healthcare | | $ | 128,294 | | | 25.6% | | $ | 91,441 | | | 24.0% | | $ | 36,853 | |
| Education | | 77,112 | | | 23.7% | | 58,848 | | | 22.4% | | 18,264 | |
| Commercial | | 39,971 | | | 20.5% | | 38,282 | | | 22.0% | | 1,689 | |
| Total segment operating income | | $ | 245,377 | | | | | $ | 188,571 | | | | | $ | 56,806 | |
•Healthcare operating income increased $36.9 million, or 40.3%, primarily due to the increase in revenues; partially offset by increases in compensation costs for our revenue-generating professionals, contractor expenses, and compensation costs for our support personnel. The increases in compensation costs for our revenue-generating professionals and support personnel were primarily driven by an increase in headcount, annual salary increases that went into effect in the first quarter of 2023, an increase in performance bonus expense, and an increase in share-based compensation expense. Healthcare operating margin increased to 25.6% from 24.0% primarily due to the revenue growth that outpaced the increase in compensation costs for our revenue-generating professionals; partially offset by an increase in contractor expenses, as a percentage of revenues.
•Education operating income increased $18.3 million, or 31.0%, primarily due to the increase in revenues as well as a decrease in contractor expenses; partially offset by increases in compensation costs for our revenue-generating professionals, data hosting expenses, promotion and marketing expenses, practice administration and meetings expenses and compensation costs for our support personnel. The increases in compensation costs for our revenue-generating professionals and support personnel were primarily driven by an increase in headcount, annual salary increases that went into effect in the first quarter of 2023, and an increase in performance bonus expense. Education operating margin increased to 23.7% from 22.4% primarily driven by the decrease in contractor expenses; partially offset by increases in compensation costs for our revenue-generating professionals and data hosting expenses, as percentages of revenue.
•Commercial operating income increased $1.7 million, or 4.4%, primarily due to the increase in revenues, largely offset by increases in compensation costs for our revenue-generating professionals and contractor expenses. The increase in compensation costs for our revenue-generating professionals was primarily driven by an increase in performance bonus expense, an increase in headcount, and annual salary increases that went into effect in the first quarter of 2023. Commercial operating margin decreased to 20.5% from 22.0% primarily driven by an increase in compensation costs for our revenue-generating professionals, as a percentage of revenues; partially offset by decreases in contractor expenses and compensation costs for our support personnel.
Other Income (Expense), Net
Interest expense, net of interest income increased $7.4 million to $15.1 million in the first nine months of 2023 from $7.8 million in the first nine months of 2022, which was primarily attributable to higher interest rates and higher levels of borrowing under our credit facility during the first nine months of 2023 compared to the first nine months of 2022. See “Liquidity and Capital Resources” below and Note 4 "Discontinued Operations"6 “Financing Arrangements” within the notes to our consolidated financial statements for additional information about our discontinued operations.senior secured credit facility.
EBITDA and Adjusted EBITDA
EBITDAOther income, net decreased $241.6$16.9 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$1.8 million in the first nine months of 20172023 from $105.8$18.7 million in the first nine months of 2016.2022. 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 operatingother 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$27.0 million unrealized gain recognized in the average numberfirst quarter of full-time billable consultants, average billing rate, and consultant utilization rate. Performance-based fee revenue was $21.6 million during2022 related to 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%increase 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 reflectivefair value of our corporatepreferred stock investment in the segments. We do not include the impactMedically Home. See Note 9 “Fair Value of goodwill impairment charges in our evaluation of segment performance. See the "Critical Accounting Policies" section below and Note 6 "Goodwill and Intangible Assets"Financial Instruments” 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 declineadditional information on our preferred stock investment in Medically Home. This decrease in other income, net was partially offset by a $10.9 million increase in the performancegain recognized for the market value of the Healthcare segment comparedour investments that are used to fund 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 fordeferred compensation liability. During the first nine months of 2017 from $111.82023, we recognized a $1.8 million gain for the market value of our deferred compensation investments compared to a $9.1 million loss recognized in the first nine months of 2016.2022.
Income Tax Expense
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%2023, our effective tax rate was 27.4% as we recognized income tax expense of this segment’s revenues, respectively, compared$22.5 million on income of $82.1 million. The effective tax rate of 27.4% was less favorable than the statutory rate, inclusive of state income taxes, of 26.6% primarily due 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 wascertain nondeductible expense items. These unfavorable items were 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 indiscrete tax benefit for share-based compensation awards that vested during the average number of full-time billable consultants and consultant utilization rate, partially offset by a decrease inyear.
For 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 ended September 30, 2022, our effective tax rate was 31.4% as we recognized income tax expense of 2017 compared$26.7 million on income of $85.2 million. The effective tax rate of 31.4% was less favorable than the statutory rate, inclusive of state income taxes, of 26.4% primarily due to the same prior year period.tax expense related to nondeductible losses on our investments used to fund our deferred compensation liability and certain nondeductible expense items.
OperatingNet Income from Continuing Operations and Earnings per Share
Education segment operatingNet income increased $0.3$1.2 million or 0.9%, to $31.8$59.6 million for the nine months ended September 30, 2017,2023 from $31.5$58.5 million for the same period last year. Diluted earnings per share for the nine months ended September 30, 2023 increased to $3.05 compared to $2.80 for the nine months ended September 30, 2022, driven by a reduction in diluted shares outstanding resulting from share repurchases made under our share repurchase plan and the increase in net income.
EBITDA and Adjusted EBITDA
EBITDA increased $2.3 million to $116.5 million for the nine months ended September 30, 2016. The Education segment operating margin decreased to 24.9% for the first nine months of 20172023 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$114.2 million for the nine months ended September 30, 2017,2022. The increase in EBITDA was primarily attributable to the increase in segment operating income; largely offset by the $27.0 million unrealized gain recognized in the first quarter of 2022 related to the increase in the fair value of our preferred stock investment and the increase in corporate expenses, excluding the impact of the change in the market value of our deferred compensation liability.
Adjusted EBITDA increased $34.2 million to $126.0 million in the first nine months of 2023 from $23.3$91.8 million in the first nine months of 2022. The increase in adjusted EBITDA was primarily attributable to the increase in segment operating income, excluding the impact of segment restructuring charges; partially offset by the increase in corporate expenses, excluding the impacts of the change in the market value of our deferred compensation liability and corporate restructuring charges.
Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share
Adjusted net income increased $22.6 million to $71.2 million in the first nine months of 2023 compared to $48.5 million in the first nine months of 2022. Adjusted diluted earnings per share increased to $3.64 for the nine months ended September 30, 2016. The Business Advisory segment operating margin increased2023, compared to 22.1%$2.32 for the first nine months of 2017 from 20.6% inended September 30, 2022, driven by the same period last year. The increase in this segment’s operating margin was primarily attributable toadjusted net income and a decreasereduction in performance bonus expense fordiluted shares outstanding resulting from share repurchases made under 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.share repurchase plan.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $8.4were $9.4 million from $17.0 million at December 31, 2016 to $8.7and $11.8 million at September 30, 2017.2023 and December 31, 2022, respectively. As of September 30, 2017,2023, our primary sources of liquidity are cash on hand, cash flows from our U.S. operations, and borrowing capacity available under our credit facility.
| | | | | Nine Months Ended
September 30, | | | Nine Months Ended
September 30, |
| Cash Flows (in thousands): | | 2017 | | 2016 | Cash Flows (in thousands): | | 2023 | | 2022 |
| Net cash provided by operating activities | | $ | 52,432 |
| | $ | 79,745 |
| |
| Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | | $ | 54,894 | | | $ | (5,779) | |
| Net cash used in investing activities | | (125,253 | ) | | (81,233 | ) | Net cash used in investing activities | | (25,799) | | | (10,779) | |
| Net cash provided by (used in) financing activities | | 64,262 |
| | (47,979 | ) | Net cash provided by (used in) financing activities | | (31,518) | | | 4,752 | |
| Effect of exchange rate changes on cash | | 192 |
| | 133 |
| Effect of exchange rate changes on cash | | (13) | | | (144) | |
| Net decrease in cash and cash equivalents | | $ | (8,367 | ) | | $ | (49,334 | ) | Net decrease in cash and cash equivalents | | $ | (2,436) | | | $ | (11,950) | |
Operating Activities
Net cash provided by operating activities totaled $52.4 million for the nine months ended September 30, 2017 and $79.7 million for the same period last year. Our operating assets and liabilities consist primarily of receivables from billed and unbilled services, accounts payable and accrued expenses, accrued payroll and related benefits, operating lease obligations 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. Our purchase obligations primarily consist of payments for software and other information technology products to support our business and corporate infrastructure.
The decrease inNet cash provided by operationsoperating activities totaled $54.9 million for the nine months ended September 30, 2023, compared to net cash used in operating activities of $5.8 million for the nine months ended September 30, 2022. The increase in net operating cash flows was primarily related to an increase in cash collections in the first nine months of 2023 compared to the same prior year period; partially offset by an increase in salaries and related expenses for our revenue-generating professionals, an increase in payments for selling, general and administrative expenses for the first nine months of 20172023 compared to the same prior year period, was primarily attributable to lower net income,and an increase in the collection of a settlement receivableamount paid for annual performance bonuses in the first quarter of 2016 and a decrease in cash collections from clients in2023 compared to the first quarter of 2022.
Additionally, for the first nine months of 2017,2023, our unbilled receivables increased partially offsetdriven by decreased vendorcertain large Healthcare and tax payments.Education engagements where our services performed and revenue recognized exceeded the amounts billed to clients in accordance with the contractual billing terms. In the future, we may enter into additional client engagements with similar deferred billing terms.
Investing Activities
Our investing activities primarily consist of purchases of complementary businesses; purchases of property and equipment, primarily related to computers and related equipment for our employees and leasehold improvements and furniture and fixtures for office spaces; payments related to internally developed cloud-based software sold to our clients; and investments. Our investments include a convertible note investment in Shorelight Holdings, LLC, a preferred stock investment in Medically Home Group, Inc., and investments in life insurance policies that are used to fund our deferred compensation liability.
Net cash used in investing activities was $125.3$25.8 million for the nine months ended September 30, 2017 and $81.2 million for the same period last year.
The use of cash in the first nine months of 20172023 which primarily consisted of $106.9$19.6 million for the purchases of businessespayments related to internally developed software to advance our Healthcare and $20.1Education software products; $5.1 million for purchases of property and equipment, primarily related to purchases of computers and related equipment and leasehold improvements for certain office spaces; $2.6 million for contributions to our life insurance policies; and purchases$1.6 million for the purchase of furniture and fixtures for new office spaces in certain locations.
The usea business. These uses of cash for investing activities were partially offset by $3.0 million of cash received for distributions from our life insurance policies that are used to fund our deferred compensation liability.
Net cash used in investing activities was $10.8 million for the first nine months of 2016ended September 30, 2022 which primarily consisted of $69.1 million for the purchases of businesses and $9.4$9.8 million for purchases of property and equipment.equipment, primarily related to purchases of computers and related equipment and leasehold improvements and furniture for certain office spaces; $6.9 million for payments related to internally developed software; and $1.9 million for the purchase of a business. These uses of cash for investing activities were partially offset by $4.8 million of cash received for the sale of our aircraft in the first quarter of 2022 and $3.0 million of cash received for a distribution from our life insurance policies that are used to fund our deferred compensation liability.
We estimate that cash utilized for purchases of property and equipment and software development in 20172023 will betotal approximately $25.0$35 million to $40 million; primarily consisting of leasehold improvements, furniture and fixtures, andsoftware development costs, information technology related equipment to support our corporate infrastructure.infrastructure, and leasehold improvements and furniture and fixtures for certain office locations.
Financing Activities
Our financing activities primarily consist of borrowings and repayments under our senior secured credit facility, share repurchases, shares redeemed for employee tax withholdings upon vesting of share-based compensation, and payments for contingent consideration liabilities related to business acquisitions. See “Financing Arrangements” below for additional information on our senior secured credit facility.
Net cash used in financing activities was $31.5 million for the nine months ended September 30, 2023. During the nine months ended September 30, 2023, we borrowed $292.0 million primarily to fund our operations, including our annual performance bonus payment in the first quarter of 2023, and made repayments on our borrowings of $224.0 million. Additionally, during the first nine months of 2023, we paid $88.9 million for share repurchases, including $1.1 million related to the settlement of share repurchases that were accrued as of December 31, 2022, and reacquired $10.1 million of common stock as a result of tax withholdings upon vesting of share-based compensation. We also made deferred acquisition payments of $1.5 million to the sellers of certain businesses we acquired. These payments were primarily the result of achieving specified financial performance targets in accordance with the related purchase agreements.
Net cash provided by financing activities was $64.3$4.8 million for the nine months ended September 30, 2017.2022. During the first nine months of 2017,ended September 30, 2022, we borrowed $241.0$287.0 million under our credit facility primarily to fund our acquisitions of Innosight and Pope Woodhead andoperations, including our annual performance bonus payment in the first quarter of 2022, and made repayments on our credit facilityborrowings of $170.0$178.8 million.
Net cash used in financing activities was $48.0 The repayments on our borrowings included the repayment of the outstanding principal of our promissory note due 2024 of $2.7 million from the proceeds received for the nine months ended September 30, 2016. Duringsale of our aircraft. Additionally, during the first nine months of 2016,2022, we repurchased and retired $55.3$97.9 million of our common stock under our Share Repurchase Program,share repurchase program, of which $2.6 million settled in the fourth quarter of 2022, and settled $0.2 million of share repurchases that were accrued as defined below, and had net borrowings of $12.0December 31, 2021. In the first nine months of 2022, we reacquired $7.5 million under our credit facility,of common stock as a result of tax withholdings upon vesting of share-based compensation. We also made deferred acquisition payments of $1.9 million to the sellers of certain businesses we acquired. These payments were primarily to fund the acquisitionsresult of HSM Consulting andachieving specified financial performance targets in accordance with the U.S. assets of ADI Strategies and our annual performance bonus payment.related purchase agreements.
Share Repurchase Program
AsIn November 2020, our board of September 30, 2017, we haddirectors authorized a share repurchase program permitting us to repurchase up to $125$50 million of our common stock through OctoberDecember 31, 2017 (the "Share Repurchase Program"). During2021. Subsequent to the fourth quarter of 2017,initial authorization, our board of directors authorized anextensions of the share repurchase program through December 31, 2023 and increased the authorized amount to $300 million. In the fourth quarter of 2023, our board of directors authorized a further extension of the Share Repurchase Programshare repurchase program through OctoberDecember 31, 2018.2024 and increased the authorized amount under the share repurchase program from $300 million to $400 million. The amount and timing of repurchases under the repurchasesshare repurchase program were and 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 the first nine months of 2016, we
repurchased and retired 982,192 shares for $55.3 million. No shares were repurchased in the first nine months of 2017. As of September 30, 2017, $35.12023, $21.1 million remainsremained available for share repurchases.repurchases under our share repurchase program.
Financing Arrangements
At September 30, 2017,2023, we had $250.0 million principal amount of our 1.25% convertible senior notes outstanding, $139.0$358.0 million outstanding under our senior secured credit facility, and $5.0 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 five-year senior secured revolving credit facility, subject to the terms of a SecondThird Amended and Restated Credit Agreement dated as of March 31, 2015, as amended to dateNovember 15, 2022 (as amended, and modified the "Amended Credit Facility"Agreement"), that becomes due and payable in full upon maturity on March 31, 2020.November 15, 2027. The Amended Credit Agreement provides the option to increase the revolving credit facility or establish term loan facilities in an aggregate amount of up to $100$250 million, subject to customary conditions and the approval of any lender whose commitment would be increased, resulting in a maximum available principal amount under the Amended Credit Agreement of $600$850 million. The initial borrowings under the Amended Credit Agreement were used to refinance borrowings outstanding under a prior credit agreement, and future borrowings under the Amended Credit Agreement may be used for working capital, capital expenditures, acquisitions of businesses, share repurchases, permitted acquisitions, and other general corporate purposes.
Fees and interest on borrowings vary based on our Consolidated Leverage Ratio (as defined in the Amended Credit Agreement). At our option, borrowings under the Amended Credit Agreement will bear interest at one, two, three or six-month LIBORsix month Term SOFR 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 LIBORTerm SOFR 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. Fees and interest on borrowings are paid on a monthly basis.
In April 2023, the Company and PNC Capital Markets, LLC, as Sustainability Structuring Agent, with the consent of the Required Lenders (as defined in the Amended Credit Agreement), entered into the first amendment to the Amended Credit Agreement (the "First Amendment") to incorporate specified key performance indicators with respect to certain environmental, social and governance targets of the Company. Based upon the performance of the Company against those key performance indicators in each Reference Year (as defined in the First Amendment), certain adjustments to the otherwise applicable rates for interest, commitment fees and letter of credit fees will be made. These annual adjustments will not
exceed an increase or decrease of 0.01% in the aggregate for all key performance indicators in the case of the commitment fee rate or an increase or decrease of 0.05% in the aggregate for all key performance indicators in the case of the Term SOFR borrowings, base rate borrowings or letter of credit fee rate.
Amounts borrowed under the Amended Credit Agreement may be prepaid at any time without premium or penalty. We are required to prepay the amounts outstanding under the Amended Credit Agreement in certain circumstances, including 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 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 4.25 to 1.00 to 3.75 to 1.00, depending onupon the measurement period,occurrence of a Qualified Acquisition (as defined in the Amended Credit Agreement), and (ii) a minimum Consolidated Interest Coverage Ratio (defined as the ratio of consolidated EBITDA to interest) of 3.503.00 to 1.00. Consolidated EBITDA for purposes of the financial
covenants is calculated on a continuing operations basis and includes adjustments to add back 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, 2017,2023 and December 31, 2022, we were in compliance with these financial covenants with acovenants. Our Consolidated Leverage Ratio as of 3.52September 30, 2023 was 1.82 to 1.00, and acompared to 1.92 to 1.00 as of December 31, 2022. Our Consolidated Interest Coverage Ratio as of 12.60September 30, 2023 was 10.86 to 1.00.1.00, compared to 14.04 to 1.00 as of December 31, 2022.
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 3.00,3.50, the amount of dividends and other Restricted Payments (as defined in the Amended Credit Agreement) we may pay is limited to an amount up to $50 million plus 50% of cumulative consolidated net income (as defined in the Amended Credit Agreement) from the closing date of the Amended Credit Agreement plus 50% of the net cash proceeds from equity issuances after the closing date of the Amended Credit Agreement.million.
BorrowingsPrincipal borrowings outstanding under the Amended Credit Agreement at September 30, 20172023 and December 31, 2022 totaled $139.0 million.$358.0 million and $290.0 million, respectively. These borrowings carried a weighted average interest rate of 3.4%,4.4% at September 30, 2023 and 3.8% at December 31, 2022, including the impact of the interest rate swap in effect as of September 30, 2017 andswaps described in Note 108 “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, 2017,2023, we had outstanding letters of credit totaling $2.7$0.6 million, which are primarily used as security deposits for our office facilities. As of September 30, 2017,2023, the unused borrowing capacity under the revolving credit facility was $358.3$241.4 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, the outstanding principal amount of the promissory note was $5.0 million. As of September 30, 2017, the aircraft had a carrying amount of $6.6 million.
For further information, see Note 8 “Financing Arrangements” within the notes to the consolidated financial statements.
Future Financing Needs
Our primary financing need has beenis to fund our long-term growth. Our growth strategy is to expand our service offerings, which may require investments in new hires, acquisitions of complementary businesses, possible expansion into other geographic areas, and related capital expenditures.
We believe our internally generated liquidity, together with our available cash, and the borrowing capacity available under our revolving credit facility and access to external capital resources will be adequate to fundsupport our current financing needs and long-term growth and capital needs arising from cash commitments and debt service obligations.strategy. Our ability to secure short-term and long-termadditional financing in the future, if needed, 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 “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual 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.
As discussed above in "Liquidity and Capital Resources," on June 30, 2017, in conjunction with our purchase of an aircraft related to the acquisition of Innosight, we assumed, from the sellers of the aircraft, a promissory note with an outstanding principal balance of $5.1 million. The principal balance of the promissory note is subject to scheduled monthly principal payments until the maturity date of March 1, 2024, at which time a final payment of $1.5 million, plus any accrued and unpaid interest will be due. Under the terms of the promissory note, we will pay interest on the outstanding principal amount at a rate of one-month LIBOR plus 1.97% per annum.
Refer to "Liquidity and Capital Resources" and Note 8 "Financing Arrangements" within the notes to the 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 |
|
There have been no other material changes to our contractual obligations since December 31, 2016.
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” 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.2022. There have been no material changes to our other critical accounting policies during the first nine months ended September 30, 2023.
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
NEW ACCOUNTING PRONOUNCEMENTS
No new accounting pronouncements or changes in accounting pronouncements have been included inissued or adopted that are material to 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 assince 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):
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| | | | |
| 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"included in our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 3 “New Accounting Pronouncements” within the notes to the consolidated financial statements for information on new accounting pronouncements.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
We are exposed to market risks primarily from changes in interest rates and foreign currency exchange rates and changes in the market value of our investments. We use certain derivative instruments to hedge a portion of the interest rate and foreign currency exchange rate risks.
Market Risk and Interest Rate Risk
The value of our Convertible Notes is exposed to interest rate risk. Generally, the fair value of our fixed interest rate Convertible Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of our Convertible Notes is affected by our stock price. The carrying value of our Convertible Notes was $230.8 million as of September 30, 2017, which represents the liability component of the $250.0 million principal balance. The estimated fair value of our Convertible Notes at September 30, 2017 was $233.6 million, and was determined based on the quoted bid price of the Convertible Notes in an over-the-counter market as of the last day of trading for the quarter ended September 30, 2017, which was $93.438 per $100 principal amount.
Concurrent with the issuance of the Convertible Notes, we entered into separate convertible note hedge and warrant transactions. The convertible note hedge transactions are intended to reduce the potential future economic dilution associated with the conversion of the Convertible Notes and, combined with the warrants, effectively raise the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share. Under the convertible note hedge transactions, we have the option to purchase a total of approximately 3.1 million shares of our common stock, which is the number of shares initially issuable upon conversion of the Convertible Notes in full, at a price of approximately $79.89, which corresponds to the initial conversion price of the Convertible Notes, subject to customary anti-dilution adjustments substantially similar to those in the Convertible Notes. Under the warrant transactions, the holders of the warrants have the option to purchase a total of approximately 3.1 million shares of our common stock at a price of approximately $97.12. If the average market value per share of our common stock for the reporting period exceeds the strike price of the warrants, the warrants will have a dilutive effect on our earnings per share.
We have exposure to changes in interest rates associated with borrowings under our bank credit facility, which hashave variable interest rates tied to LIBORTerm SOFR or an alternate base rate, at our option. At September 30, 2017,2023, we had borrowings outstanding under the credit facility totaling $139.0$358.0 million that carried a weighted average interest rate of 3.4%4.4%, including the impact of the interest rate swapswaps described below. A hypothetical 100 basis point change in thisthe interest rate would have a $1.1 million effect on our pretax income on an annualized basis, including the effect of the interest rate swaps. At December 31, 2022, we had borrowings outstanding under the credit facility totaling $290.0 million that carried a weighted average interest rate of 3.8% including the impact of the interest rate swaps described below. A hypothetical 100 basis point change in the interest rate would have had a $0.9 million effect on our pretax income on an annualized basis, including the effect of the interest rate swap. At December 31, 2016, our borrowings outstanding under the credit facility totaled $68.0 million and carried a weighted average interest rate of 2.5%, including the effect of the interest rate swap described below. The outstanding borrowings at December 31, 2016 were fully hedged against changes in interest rates by our interest rate swap, which had a notional amount of $68.0 million at December 31, 2016.swaps.
On April 4, 2013, we enteredWe enter into a forward amortizing interest rate swap agreement effective March 31, 2014 and ending August 31, 2017. We entered into this derivative instrument to hedge against the interest rate risks of our variable-rate borrowings. The swap had an initial notional amount of $60.0 million and amortized quarterly until April 2016. In April 2016, the notional amount of this interest rate swap increased to $86.0 million and continued to amortize quarterly until it expired in August 2017. Under the terms of the interest rate swap agreement, we received from the counterparty interest on the notional amount based on one-month LIBOR and we paid to the counterparty a fixed rate of 0.985%.
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 continueagreements 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 LIBORone month Term SOFR and we pay to the counterparty a stated, fixed rate. As of September 30, 2023 and December 31, 2022, the aggregate notional amount of our forward interest rate swap agreements was $250.0 million and $200.0 million, respectively. The outstanding interest rate swap agreements as of 1.900%.September 30, 2023 are scheduled to mature on a staggered basis through February 29, 2028.
Foreign Currency Risk
We also have exposure to changes in interestforeign currency exchange rates associated withbetween the promissory note assumed on June 30, 2017U.S. Dollar (USD) and the Indian Rupee (INR) related to our operations in connection withIndia. We hedge a portion of our purchasecash flow exposure related to our INR-denominated intercompany expenses by entering into non-deliverable foreign exchange forward contracts. As of an aircraft, which has variable interest rates tied to LIBOR. At September 30, 2017,2023 and December 31, 2022, the aggregate notional amounts of these contracts were INR 1,371.2 million, or $16.5 million, and INR 657.9 million, or $8.0 million, respectively, based on the exchange rates in effect as of each period end. The outstanding principal amountforeign exchange forward contracts as of September 30, 2023 are scheduled to mature monthly through August 31, 2024.
We use a sensitivity analysis to determine the effects that market foreign currency exchange rate fluctuations may have on the fair value of our foreign currency exchange rate hedge portfolio. The sensitivity of the promissory note was $5.0 millionhedge portfolio is computed based on the market value of future cash flows as affected by changes in exchange rates. This sensitivity analysis represents the hypothetical changes in value of the hedge position and carried an interest rate of 3.2%.does not reflect the offsetting gain or loss on the underlying exposure. A hypothetical 100 basis point change in this interestthe foreign currency exchange rate between the USD and INR would have an immaterial impact on the fair value of our hedge instruments as of September 30, 2023 and December 31, 2022.
Market Risk
We have a $0.11.69% convertible debt investment in Shorelight Holdings, LLC, a privately-held company, which we account for as an available-for-sale debt security. As such, the investment is carried at fair value with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income. As of September 30, 2023, the fair value of the investment was $61.8 million, effectwith a total cost basis of $40.9 million. At December 31, 2022, the fair value of the investment was $57.6 million, with a total cost basis of $40.9 million.
We have a preferred stock investment in Medically Home Group, Inc. ("Medically Home"), a privately-held company, which we account for as an equity security without a readily determinable fair value using the measurement alternative. As such, the investment is carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment. Any unrealized holding gains and losses resulting from observable price changes are recorded in our consolidated statement of operations. As of September 30, 2023 and December 31, 2022, the carrying value of the investment was $33.6 million with a total cost basis of $5.0 million. During the first quarter of 2022, we recognized an unrealized gain of $27.0 million on our pretax income, onpreferred stock investment resulting from an annualized basis.observable price change of preferred stock with similar rights and preferences to our preferred stock investment issued by Medically Home. Following our purchase, we have not identified any impairment of our investment.
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.
Refer to Note 8 “Derivative Instruments and Hedging Activity” within the notes to our consolidated financial statements for additional information on our derivative instruments.
We have a non-interest bearing convertible debt investment in a privately-held company, which we account for as an available-for-sale debt security. As such, the investment is carried at fair value with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income. As of September 30, 2017, the fair value of the investment was $31.9 million, with a total cost basis of $27.9 million.
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| ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2017.2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017,2023, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports we file or submit under the Exchange Act, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 20172023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
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| ITEM 1. | LEGAL PROCEEDINGS. |
The information required by this Item is incorporated by reference from Note 14 "Commitments, Contingencies and Guarantees" included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Quarterly Report on Form 10-Q, we are not a party to any litigation or legal proceeding or subject to any claim that, in the current opinion of management, could reasonably be expected to have a material adverse effect on our financial position or results of operations. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expected results.
The following information updates, and should be read in conjunction with, the information disclosed inSee Part 1, Item 1A, “Risk
Factors” ofin our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2022, which was filed with the Securities and
Exchange Commission on February 23, 2017.
Our goodwill and other intangible assets represent28, 2023, for a substantial amount of our total assets, and we may be required to recognize a non-cash impairment charge for these assets if the performance of one or more of our reporting units falls below our expectations.
Our total assets reflect a substantial amount of intangible assets, primarily goodwill. At December 31, 2016, goodwill and other intangible assets totaled $881.2 million, or 76%, of our total assets. During the second quarter of 2017, we wrote off $209.6 million of goodwill related to our Healthcare segment as discussed below. At September 30, 2017, goodwill and other intangible assets totaled $770.2 million, or 71%, of our total assets. The goodwill results from our acquisitions, representing the excesscomplete description of the fair value of consideration transferred over the fair value of the net assets acquired. We test goodwill for impairment, at the reporting unit level, annually and whenever events or circumstances make it more likely than not that an impairment may have occurred.material risks we face.
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, 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.
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.
Three of our reporting units have been established primarily or entirely through recent business acquisitions: Enterprise Solutions and Analytics, Strategy and Innovation, and Life Sciences. Our Enterprise Solutions and Analytics reporting unit was established with the acquisition of Blue Stone International, LLC in October 2013. Since that time, we have completed five additional business acquisitions within the reporting unit, most recently the acquisitions of the U.S. assets and international assets of ADI Strategies in May 2016 and April 2017, respectively. Our Strategy and Innovation reporting unit was established with the acquisition of Innosight in March 2017. Our Life Sciences reporting unit is primarily comprised of two recent acquisitions: The Frankel Group Associates LLC in January 2014 and Pope Woodhead in January 2017.
We record the assets acquired and liabilities assumed in business combinations, including identifiable intangible assets, at their estimated fair values as of the acquisition date, and goodwill is recorded as the excess of the fair value of consideration transferred, including any contingent consideration, over the fair value of the net assets acquired. Therefore, the initial accounting for an acquisition results in no headroom, as its fair value equals its carrying value.
Our most recent goodwill impairment test for the Enterprise Solutions and Analytics reporting unit was performed as of November 30, 2016, as part of our annual goodwill impairment test, pursuant to our policy, and based on the results of the first step of that analysis, the reporting unit’s fair value exceeded its carrying value by 11%.
Our most recent goodwill impairment test for the Life Sciences reporting unit was performed as of June 1, 2017, as part of the reorganization of our internal financial reporting structure, as discussed in the "Critical Accounting Policies" section within Part I - Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Based on the results of that analysis, the reporting unit’s fair value exceeded its carrying value by 16%.
We have not yet performed a goodwill impairment test for the Strategy and Innovation reporting unit, as the reporting unit was established during the current year with the acquisition of Innosight in March 2017 and there have been no triggering events requiring an interim goodwill impairment test to date.
Since the date of the most recent goodwill impairment tests for the Enterprise Solutions and Analytics and Life Sciences reporting units, and since the inception of the Strategy and Innovation reporting unit, the performance of these three reporting units has continued to reasonably meet our expectations such that no triggering event for an interim goodwill impairment analysis was identified. We will monitor any changes to our assumptions and will evaluate goodwill as part of our annual goodwill impairment testing in the fourth quarter of 2017, or on an interim basis, if required. Any future significant decline in our operations compared to our internal forecast could result in a non-cash goodwill impairment charge as a result of any such test.
Refer to “Critical Accounting Policies” within Part I - Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 6 “Goodwill and Intangible Assets” within the notes to our consolidated financial statements for further discussion of business combinations, goodwill, intangible assets, and impairment tests performed in 2017.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
On September 1, 2023, as partial consideration for our acquisition of Roundtable Analytics, Inc., we issued 16,337 shares of our common stock, par value $0.01 per share, with an aggregate value of $1.6 million. The issuance was exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction by an issuer not involving a public offering.
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, 2017,2023, we reacquired 4,7983,820 shares of common stock with a weighted average fair market value of $39.78$84.43 as a result of such tax withholdings.
OurIn November 2020, our board of directors authorized a share repurchase program pursuantpermitting us to which we may, from time to time, repurchase up to $125$50 million of our common stock through OctoberDecember 31, 2017 (the "Share Repurchase Program"). During2021. Subsequent to the fourth quarter of 2017,initial authorization, our board of directors authorized anextensions of the share repurchase program through December 31, 2023 and increased the authorized amount to $300 million. In the fourth quarter of 2023, our board of directors authorized a further extension of the Share Repurchase Programshare repurchase program through OctoberDecember 31, 2018.2024 and increased the authorized amount under the share repurchase program from $300 million to $400 million. The amount and timing of repurchases under the repurchasesshare repurchase program were and 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 line of credit facility, general market and business conditions, and applicable legal requirements. As of September 30, 2023, $21.1 million remained available for share repurchases under our share repurchase program.
The following table provides information with respect to purchases we made of our common stock during the quarter ended September 30, 2017.2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price
Paid per Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Dollar Value of Shares that may yet be Purchased under the Plans or Programs (2) |
| July 1, 2023 - July 31 2023 | | 9,811 | | | $ | 80.79 | | | 6,100 | | | $ | 49,121,613 | |
| August 1, 2023 - August 31, 2023 | | 211,895 | | | $ | 98.26 | | | 211,786 | | | $ | 28,305,510 | |
| September 1, 2023 - September 30, 2023 | | 72,402 | | | $ | 99.87 | | | 72,402 | | | $ | 21,072,842 | |
| Total | | 294,108 | | | $ | 98.07 | | | 290,288 | | | |
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| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Dollar Value of Shares that may yet be Purchased under the Plans or Programs (2) |
| July 1, 2017 - July 31, 2017 | | 3,194 |
| | $ | 43.08 |
| | — |
| | $ | 35,143,546 |
|
| August 1, 2017 - August 31, 2017 | | 796 |
| | $ | 35.47 |
| | — |
| | $ | 35,143,546 |
|
| September 1, 2017 - September 30, 2017 | | 808 |
| | $ | 30.95 |
| | — |
| | $ | 35,143,546 |
|
| Total | | 4,798 |
| | $ | 39.78 |
| | — |
| | |
| |
(1) | The number of shares repurchased for each period represents shares to satisfy employee tax withholding requirements. These shares do not reduce the repurchase authority under the Share Repurchase Program. |
| |
(2) | As of the end of the period. |
(1)The number of shares repurchased included 3,711 shares in July 2023 and 109 shares in August 2023 to satisfy employee tax withholding requirements. These shares do not reduce the repurchase authority under the share repurchase program. (2)As of the end of the period.
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| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
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| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
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| ITEM 5. | OTHER INFORMATION. |
None.Securities Trading Plans of Directors and Executive Officers
The following table describes contracts, instructions or written plans for the sale or purchase of our securities adopted by our executive officers and/or directors during the third quarter of 2023, each of which is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), referred to as Rule 10b5-1 trading plans. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Title | | Action | | Date of Rule 10b5-1 Trading Plan Action | | Scheduled Expiration Date of Rule 10b5-1 Trading Plan | | Aggregate Number of Shares to be Sold |
| John McCartney - Non-Executive Chairman of the Board | | Adoption | | 8/2/2023 | | 7/31/2024 | | 5,400 |
| C. Mark Hussey - President, Chief Executive Officer and Director | | Adoption | | 8/29/2023 | | 8/28/2024 | | 51,628 |
During the third quarter of 2023, none of our executive officers or directors terminated a Rule 10b5-1 trading plan or adopted or terminated a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K).
(a) The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
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| | | | | | | | Incorporated by Reference |
Exhibit
Number
| | Exhibit Description | | Filed
herewith
| | Furnished
herewith
| | Form | | Period
Ending
| | Exhibit | | Filing
Date
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10.13.1 | | Amendment No. 2Restated Certificate of Incorporation filed with the Credit Agreement, dated asSecretary of October 24, 2017, by and among Huron Consulting Group Inc., as Borrower, certain subsidiaries, as Guarantors, and BankState of America, N.A., as Administrative Agent for andDelaware on behalf of the Lenders.July 28, 2023. | | X | | | | | | | | | | |
| 31.1 | | | | X | | | | | | | | | | |
| 31.2 | | | | X | | | | | | | | | | |
| 32.1 | | | | | | X | | | | | | | | |
| 32.2 | | | | | | X | | | | | | | | |
| 101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | X | | | | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | X | | | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation LinkbaseLink base Document | | X | | | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X | | | | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | X | | | | | | | | | | |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | Huron Consulting Group Inc. |
| | | | (Registrant) |
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| Date: | November 1, 20172, 2023 | | | /S/ JOHN s/ JOHN D. KELLY KELLY |
| | | | John D. Kelly |
| | | | Executive Vice President,
Chief Financial Officer and Treasurer
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