Actual future amortization expense could differ from these estimated amounts as a result of future acquisitions, dispositions, and other factors.
5. Leases
The payment terms and conditions in our customer contracts vary. Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services or deferred revenues in the consolidated balance sheets.
Unbilled services include revenues recognized for services performed but not yet billed to clients. Services performed that we are not yet entitled to bill because certain events, such as the completion of the measurement period or client approval in performance-based engagements, must occur are recorded as contract assets and included within unbilled services, net. The contract asset balance as of September 30, 20192020 and December 31, 20182019 was $28.6$13.4 million and $9.1$12.6 million, respectively. The $19.5$0.8 million increase primarily reflects timing differences between the completion of our performance obligations and the amounts billed or billable to clients in accordance with their contractual billing terms.
Client prepayments and retainers are classified as deferred revenues and recognized over future periods in accordance with the applicable engagement agreement and our revenue recognition policy. Our deferred revenues balance as of September 30, 20192020 and December 31, 2018,2019, was $31.2$31.8 million and $28.1$28.4 million, respectively. The $3.1$3.4 million increase primarily reflects timing differences between client payments in accordance with their contract terms and the completion of our performance obligations. For the three and nine months ended September 30, 2019, $3.42020, $3.0 million and $21.4$24.3 million, respectively, of revenues recognized were included in the deferred revenue balance as of December 31, 2018.2019.
Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, excluding unvested restricted common stock. Diluted earnings per share reflects the potential reduction in earnings per share that could occur if securities or other contracts to issue common stock were exercised or converted into common stock under the treasury stock method. Such securities or other contracts include unvested restricted stock awards, outstanding common stock options, convertible senior notes, and outstanding warrants, to the extent dilutive. In periods for which we report a net loss from continuing operations, diluted weighted average common shares outstanding excludes all potential common stock equivalents as their impact on diluted net loss from continuing operations per share would be anti-dilutive. Earnings (loss) per share under the basic and diluted computations are as follows:
Prior to maturity, upon conversion, the Convertible Notes would have been settled, at our election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. Our intent and policy was 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 transaction costs related to the issuance of the Convertible Notes were separated into liability and equity components based on their relative values, as determined above.values. Transaction costs attributable to the liability component were 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 were 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.
The following table presents the amount of interest expense recognized related to the Convertible Notes for the periods presented.
Fees and interest on borrowings vary based on our Consolidated Leverage Ratio (as defined in the Amended Credit Agreement). At our option, borrowings under the Amended Credit Agreement will bear interest at one, two, three or six-month LIBOR or an alternate base rate, in each case plus the applicable margin. The applicable margin will fluctuate between 1.125% per annum and 1.875% per annum, in the case of
LIBOR borrowings, or between 0.125% per annum and 0.875% per annum, in the case of base rate loans, based upon our Consolidated Leverage Ratio at such time.
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.circumstances, including upon an Event of Default (as defined in the Amended Credit Agreement). In addition, we have the right to permanently reduce or terminate the unused portion of the commitments provided under the Amended Credit Agreement at any time.
The loans and obligations under the Amended Credit Agreement are secured pursuant to a Second Amended and Restated Security Agreement and a Second Amended and Restated Pledge Agreement (as amended, the “Pledge Agreement”) with Bank of America, N.A. as collateral agent, pursuant to which the Company and the subsidiary guarantors grant Bank of America, N.A., for the ratable benefit of the lenders under the Amended Credit Agreement, a first-priority lien, subject to permitted liens, on substantially all of the personal property assets of the Company and the subsidiary guarantors, and a pledge of 100% of the stock or other equity interests in all domestic subsidiaries and 65% of the stock or other equity interests in each “material first-tier foreign subsidiary” (as defined in the Pledge Agreement).
The Amended Credit Agreement contains usual and customary representations and warranties; affirmative and negative covenants, which include limitations on liens, investments, additional indebtedness, and restricted payments; and two quarterly financial covenants as follows: (i) a maximum Consolidated Leverage Ratio (defined as the ratio of debt to consolidated EBITDA) of 3.75 to 1.00; however the maximum permitted Consolidated Leverage Ratio will increase to 4.00 to 1.00 upon the occurrence of certain transactions, and (ii) a minimum Consolidated Interest Coverage Ratio (defined as the ratio of consolidated EBITDA to interest) of 3.50 to 1.00. Consolidated EBITDA for purposes of the financial covenants is calculated on a continuing operations basis and includes adjustments to add back non-cash goodwill impairment charges, share-based compensation costs, certain non-cash restructuring charges, pro forma historical EBITDA for businesses acquired, and other specified items in accordance with the Amended Credit Agreement. For purposes of the Consolidated Leverage Ratio,
We recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. We have designated thisthese derivative instrumentinstruments as a cash flow hedge.hedges. Therefore, changes in the fair value of the derivative instrumentinstruments are recorded to other comprehensive income (“OCI”) to the extent effective and reclassified into interest expense upon settlement. As of September 30, 2019,2020, it was anticipated that $0.1$1.7 million of the losses, net of tax, currently recorded in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.
All of our derivative instruments are transacted under the International Swaps and Derivatives Association (ISDA) master agreements. These agreements permit the net settlement of amounts owed in the event of default and certain other termination events. Although netting is permitted, it is our policy to record all derivative assets and liabilities on a gross basis on our consolidated balance sheet.
We do not use derivative instruments for trading or other speculative purposes. Refer to Note 1211 “Other Comprehensive Income (Loss)” for additional information on our derivative instrument.instruments.
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.
income. We estimate the fair value of our investment using a scenario-based approach in the form of a hybrid analysis that consists of a Monte Carlo simulation model and an expected return analysis. The conclusion of value for our investment is based on the probability weighted assessment of both scenarios. The hybrid analysis utilizes certain assumptions including the assumed holding period through the maturity date of January 17, 2024, the applicable waterfall distribution at the end of the expected holding period based on the rights and privileges of the various instruments, cash flow projections discounted at athe risk-adjusted rate of 24.0%, and certain assumptions related tothe concluded equity volatility and applicable holding period,of 42.5%, all of which are Level 3 inputs. The valuation of our investment as of December 31, 2019 takes into consideration the equity value indication as well as the dilutive impact of the convertible debt issued by Shorelight in the first quarter of 2020, the terms of which were known or knowable as of December 31, 2019. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the investment, which would result in different impacts to our consolidated balance sheet and comprehensive income. Actual results may differ from our estimates. The fair value of the convertible debt investment is recorded in long-term investmentinvestments on our consolidated balance sheets.
| | | | | | | | |
| | Convertible Debt Investment |
Balance as of December 31, 2019 | | $ | 49,542 | |
Purchases | | 13,000 | |
Change in fair value of convertible debt investment | | (1,420) | |
Balance as of September 30, 2020 | | $ | 61,122 | |
Deferred compensation assets: We have a non-qualified deferred compensation plan (the "Plan") for the members of our board of directors and a select group of our employees. The deferred compensation liability is funded by the Plan assets, which consist of life insurance policies maintained within a trust. The cash surrender value of the life insurance policies approximates fair value and is based on third-party broker
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
statements which provide the fair value of the life insurance policies' underlying investments, which are Level 2 inputs. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The Plan assets are included in other non-current assets on our consolidated balance sheets. Realized and unrealized gains (losses) from the deferred compensation assets are recorded to other income (expense), net in our consolidated statements of operations.
Contingent consideration for business acquisitions: We estimate the fair value of acquisition-related contingent consideration using either a probability-weighted assessment of the specific financial performance targets being achieved or a Monte Carlo simulation model, as appropriate. These fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 inputs. The significant unobservable inputs used in the fair value measurements of our contingent consideration are our measures of the estimated payouts based on internally generated financial projections on a probability-weighted basis and discount rates, which typically reflect a risk-free rate. The fair value of the contingent consideration is reassessed quarterly based on assumptions used in our latest projections and input provided by practice leaders and management. Any change in the fair value estimate is recorded in our consolidated statement of operations for that period. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of our contingent consideration liability, which would result in different impacts to our consolidated balance sheets and consolidated statements of operations. Actual results may differ from our estimates. The table below sets forth the changes in the balance of the contingent consideration for business acquisitions for the nine months ended September 30, 2019. |
| | | | |
| | Contingent Consideration for Business Acquisitions |
Balance as of December 31, 2018 | | $ | 11,441 |
|
Payments | | (10,041 | ) |
Remeasurement of contingent consideration for business acquisitions | | (1,506 | ) |
Unrealized loss due to foreign currency translation | | 106 |
|
Balance as of September 30, 2019 | | $ | — |
|
Financial assets and liabilities not recorded at fair value are as follows:
Preferred Stock Investment
In the fourth quarter of 2019, we invested $5.0 million, in the form of preferred stock, in Medically Home Group, Inc. ("Medically Home"), a healthcare technology-enabled services company. To determine the appropriate accounting treatment for our 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 the 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 the fair value of the preferred stock using such identified transactions, with changes in the fair value recorded in consolidated statement of operations. Following our purchase, there has been no impairment, nor any observable price changes to our investment.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Senior Secured Credit Facility
The carrying value of our borrowings outstanding under our senior secured credit facility is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the senior secured credit facility bears interest at variable rates based on current market rates as set forth in the Amended Credit Agreement. Refer to Note 87 “Financing Arrangements” for additional information on our senior secured credit facility.
Promissory Note due 2024
The carrying value of our promissory note due 2024 is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the promissory note bears interest at rates based on current market rates as set forth in the terms of the promissory note. Refer to Note 87 “Financing Arrangements” for additional information on our promissory note due 2024.
Convertible Notes
The carrying amountCash and estimated fair value of the Convertible Notes are as follows:
|
| | | | | | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
1.25% convertible senior notes due 2019 | $ | 250,000 |
| | $ | 249,525 |
| | $ | 242,617 |
| | $ | 242,940 |
|
The difference between the $250 million principal amount of the Convertible NotesCash Equivalents and the carrying amount shown as of December 31, 2018 represents the unamortized debt discount and issuance costs. As of September 30, 2019, and December 31, 2018, 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, 2019 and December 31, 2018.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Based on the closing price of our common stock of $61.34 on September 30, 2019, the if-converted value of the Convertible Notes was less than the principal amount.Other Financial Instruments
Cash and cash equivalents are stated at cost, which approximates fair market value. The carrying values of all other financial instruments not described above reasonably approximate fair market value due to the nature of the financial instruments and the short-term maturity of these items.
12.11. Other Comprehensive Income (Loss)
The table below sets forth the components of other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 20192020 and 2018.2019.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | Three Months Ended September 30, 2018 |
| Before Taxes | | Tax (Expense) Benefit | | Net of Taxes | | Before Taxes | | Tax (Expense) Benefit | | Net of Taxes |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | (630 | ) | | $ | — |
| | $ | (630 | ) | | $ | (579 | ) | | $ | — |
| | $ | (579 | ) |
Unrealized gain (loss) on investment | $ | 1,586 |
| | $ | (418 | ) | | $ | 1,168 |
| | $ | (1,151 | ) | | $ | 299 |
| | $ | (852 | ) |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | |
Change in fair value | $ | (158 | ) | | $ | 42 |
| | $ | (116 | ) | | $ | 301 |
| | $ | (78 | ) | | $ | 223 |
|
Reclassification adjustments into earnings | (46 | ) | | 13 |
| | (33 | ) | | (23 | ) | | 6 |
| | (17 | ) |
Net unrealized gain (loss) | $ | (204 | ) | | $ | 55 |
| | $ | (149 | ) | | $ | 278 |
| | $ | (72 | ) | | $ | 206 |
|
Other comprehensive income (loss) | $ | 752 |
| | $ | (363 | ) | | $ | 389 |
| | $ | (1,452 | ) | | $ | 227 |
| | $ | (1,225 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| Before Taxes | | Tax (Expense) Benefit | | Net of Taxes | | Before Taxes | | Tax (Expense) Benefit | | Net of Taxes |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | 381 | | | $ | 0 | | | $ | 381 | | | $ | (630) | | | $ | 0 | | | $ | (630) | |
Unrealized gain (loss) on investment | $ | 6,598 | | | $ | (1,713) | | | $ | 4,885 | | | $ | 1,586 | | | $ | (418) | | | $ | 1,168 | |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | |
Change in fair value | $ | (903) | | | $ | 234 | | | $ | (669) | | | $ | (158) | | | $ | 42 | | | $ | (116) | |
Reclassification adjustments into earnings | 576 | | | (150) | | | 426 | | | (46) | | | 13 | | | (33) | |
Net unrealized gain (loss) | $ | (327) | | | $ | 84 | | | $ | (243) | | | $ | (204) | | | $ | 55 | | | $ | (149) | |
Other comprehensive income (loss) | $ | 6,652 | | | $ | (1,629) | | | $ | 5,023 | | | $ | 752 | | | $ | (363) | | | $ | 389 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | Nine Months Ended September 30, 2018 |
| Before Taxes | | Tax (Expense) Benefit | | Net of Taxes | | Before Taxes | | Tax (Expense) Benefit | | Net of Taxes |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | (673 | ) | | $ | — |
| | $ | (673 | ) | | $ | (1,499 | ) | | $ | — |
| | $ | (1,499 | ) |
Unrealized gain on investment | $ | 10,514 |
| | $ | (2,774 | ) | | $ | 7,740 |
| | $ | 6,044 |
| | $ | (1,571 | ) | | $ | 4,473 |
|
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | |
Change in fair value | $ | (1,164 | ) | | $ | 308 |
| | $ | (856 | ) | | $ | 1,096 |
| | $ | (285 | ) | | $ | 811 |
|
Reclassification adjustments into earnings | (192 | ) | | 50 |
| | (142 | ) | | 13 |
| | (3 | ) | | 10 |
|
Net unrealized gain (loss) | $ | (1,356 | ) | | $ | 358 |
| | $ | (998 | ) | | $ | 1,109 |
| | $ | (288 | ) | | $ | 821 |
|
Other comprehensive income | $ | 8,485 |
| | $ | (2,416 | ) | | $ | 6,069 |
| | $ | 5,654 |
| | $ | (1,859 | ) | | $ | 3,795 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| Before Taxes | | Tax (Expense) Benefit | | Net of Taxes | | Before Taxes | | Tax (Expense) Benefit | | Net of Taxes |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | (294) | | | $ | 0 | | | $ | (294) | | | $ | (673) | | | $ | 0 | | | $ | (673) | |
Unrealized gain (loss) on investment | $ | (1,420) | | | $ | 369 | | | $ | (1,051) | | | $ | 10,514 | | | $ | (2,774) | | | $ | 7,740 | |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | |
Change in fair value | $ | (5,815) | | | $ | 1,510 | | | $ | (4,305) | | | $ | (1,164) | | | $ | 308 | | | $ | (856) | |
Reclassification adjustments into earnings | 909 | | | (237) | | | 672 | | | (192) | | | 50 | | | (142) | |
Net unrealized gain (loss) | $ | (4,906) | | | $ | 1,273 | | | $ | (3,633) | | | $ | (1,356) | | | $ | 358 | | | $ | (998) | |
Other comprehensive income (loss) | $ | (6,620) | | | $ | 1,642 | | | $ | (4,978) | | | $ | 8,485 | | | $ | (2,416) | | | $ | 6,069 | |
The before tax amounts reclassified from accumulated other comprehensive income related to our cash flow hedges are recorded to interest expense, net of interest income.
Accumulated other comprehensive income, net of tax, includes the following components:
|
| | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Available-for-Sale Investment | | Cash Flow Hedges | | Total |
Balance, December 31, 2018 | $ | (665 | ) | | $ | 16,584 |
| | $ | 576 |
| | $ | 16,495 |
|
Current period change | (673 | ) | | 7,740 |
| | (998 | ) | | 6,069 |
|
Balance, September 30, 2019 | $ | (1,338 | ) | | $ | 24,324 |
| | $ | (422 | ) | | $ | 22,564 |
|
16
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Accumulated other comprehensive income, net of tax, includes the following components:
13. | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Available-for-Sale Investment | | Cash Flow Hedges | | Total |
Balance, December 31, 2019 | $ | (566) | | | $ | 15,882 | | | $ | (380) | | | $ | 14,936 | |
Current period change | (294) | | | (1,051) | | | (3,633) | | | (4,978) | |
Balance, September 30, 2020 | $ | (860) | | | $ | 14,831 | | | $ | (4,013) | | | $ | 9,958 | |
12. Income Taxes
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act is a nearly $2 trillion emergency economic stimulus package in response to the COVID-19 outbreak, which among other items, includes income tax provisions relating to net operating loss carryback periods and technical corrections to tax depreciation methods for qualified improvement property. As a result of the enactment of this legislation during the first quarter of 2020, we recorded a tax benefit of $0.8 million related to the remeasurement of a portion of our income tax receivable due to the ability to apply the federal net operating loss incurred in 2018 to prior year income for a refund at a higher tax rate in the carryback period.
We apply an estimated annual effective tax rate to our year-to-date operating results to determine the interim provision for income tax expense. In addition, we recognize taxes related to unusual or infrequent items or resulting from a change in judgment regarding a position taken in a prior year as discrete items in the interim period in which the event occurs.
For the three months ended September 30, 2020, our effective tax rate was 17.7% as we recognized income tax expense from continuing operations of $2.4 million on income from continuing operations of $13.5 million. The effective tax rate of 17.7% was more favorable than the statutory rate, inclusive of state income taxes, of 26.0%, primarily due to the current year-to-date pre-tax losses and the impact during the quarter of certain nondeductible expense items, including the nondeductible portion of the goodwill impairment charges, based on the attribution of those expenses to the quarter in accordance with the allocation of income tax expense on a current year-to-date basis. The effective tax rate also reflected the positive impact of certain federal tax credits.
For the three months ended September 30, 2019, our effective tax rate was 15.0% as we recognized income tax expense from continuing operations of $2.4 million on income from continuing operations of $16.1 million. The effective tax rate of 15.0% was more favorable than the statutory rate, inclusive of state income taxes, of 26.4%, primarily due to a discrete tax benefit of $0.7 million for U.S. federal return to provision adjustments related to the 2018 corporate income tax return, which had a favorable impact of 4.6% on the effective tax rate.return. In addition, we recognized a $0.7 million discrete tax benefit related to a previously unrecognized tax benefit due to the expiration of statute of limitations on our "check-the-box" election made in 2015 to treat certain wholly-owned foreign subsidiaries as disregarded entities for U.S. federal income tax purposes, which had a favorable impact of 4.6% on the effective tax rate. purposes.
For the threenine months ended September 30, 2018,2020, our effective tax rate was 14.4%23.5% as we recognized an income tax expensebenefit from continuing operations of $1.4$5.4 million on incomea loss from continuing operations of $9.6$23.0 million. The effective tax rate of 14.4%23.5% was moreless favorable than the statutory rate, inclusive of state income taxes, of 26.0%, primarily due to certain nondeductible business expenses and the nondeductible portion of the goodwill impairment charges recorded during the first quarter of 2020. These unfavorable items were partially offset by a discrete tax benefit of $0.8 million for U.S. federal return to provision adjustments related toshare-based compensation awards that vested primarily during the 2017 corporate income tax return, which had a favorablefirst quarter, the positive impact of 8.6% oncertain federal tax credits, and the effective tax rate. In addition, the third quarter of 2018 included a discrete tax benefit for the remeasurement of $0.4 million for foreign return to provision adjustments, which had a favorable impactportion of 3.7% onour income tax receivable as a result of the effective tax rate.enactment of the CARES Act in the first quarter of 2020.
For the nine months ended September 30, 2019, our effective tax rate was 20.8% as we recognized income tax expense from continuing operations of $7.3 million on income from continuing operations of $34.9 million. The effective tax rate of 20.8% was more favorable than the statutory rate, inclusive of state income taxes, of 26.4%, primarily due to $1.0 million ofa discrete tax benefit recognized primarily in the third quarter of 2019 related to U.S. federal and foreign return to provision adjustments, which had a favorable impact of 2.8% on the effective tax rate.adjustments. In addition, we recognized a $0.7 million discrete tax benefit in the third quarter of 2019 related to a previously unrecognized tax benefit due to the expiration of statute of limitations on our "check-the-box" election made in 2015 to treat certain wholly-owned foreign subsidiaries as disregarded entities for U.S. federal income tax purposes, which had a favorable impactpurposes.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in the third quarter of 2018 related to U.S. federal and foreign return to provision adjustments, which had a favorable impact of 6.1% on the effective tax rate.thousands, except per share amounts)
As of September 30, 2019, we had $0.1 million of unrecognized tax benefits which would affect the effective tax rate of continuing operations if recognized.(Unaudited)
14.13. Commitments, Contingencies and Guarantees
Litigation
During the nine months ended September 30, 2018, we reached a settlement agreement related to Huron's claim in a class action lawsuit, resulting in a gain of $2.5 million.
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Quarterly Report on Form 10-Q, we are not a party to any litigation or legal proceeding that, in the current opinion of management, could have a material adverse effect on our financial position or results of operations. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expected results.
Guarantees
Guarantees in the form of letters of credit totaling $1.5 million and $1.6$1.7 million were outstanding at both September 30, 20192020 and December 31, 2018, respectively,2019, primarily to support certain office lease obligations.
In connection with certain business acquisitions, we may be required to pay post-closing consideration to the sellers if specific financial performance targets are met over a number of years as specified in the related purchase agreements. As of September 30, 2020 and December 31, 2019, the total estimated fair value of our contingent consideration liabilitiesliability was zero. As of December 31, 2018, the total estimated fair value of our contingent consideration liabilities was $11.4 million.
To the extent permitted by law, our bylaws and articles of incorporation require that we indemnify our officers and directors against judgments, fines and amounts paid in settlement, including attorneys’ fees, incurred in connection with civil or criminal action or proceedings, as it relates
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
to their services to us if such person acted in good faith. Although there is no limit on the amount of indemnification, we may have recourse against our insurance carrier for certain payments made.
15.14. Segment Information
Segments are defined as components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker, who is our chief executive officer, manages the business under 3 operating segments, which are our reportable segments: Healthcare, Business Advisory, and Education.
•Healthcare
Our Healthcare segment has a depth of expertise in care transformation, financial and operational improvement, care transformation, culture and organizational excellence, strategy, and technology and analytics, and leadership development.analytics. We serve national and regional hospitals, and integrated health systems, academic medical centers, community hospitals, and medical groups. Our solutions help clients evolve and adapt to the rapidly changing healthcare environment and achieve growth, optimize performance, enhance profitability, improve quality and clinical outcomes, align leaders, improve organizational culture, and drive physician, patient, and employee engagement across the enterprise to deliver better consumer outcomes.
We help organizations transform and innovate their delivery model to focus on patient wellness by improving quality outcomes, minimizing care variation and fundamentally improving patient and population health. Our consultants partner with clients to help build and sustain today’s business to invest in the future by reducing complexity, improving operational efficiency and growing market share. We enable the healthcare of the future by identifying, integrating and optimizing technology investments to collect data that transforms care delivery and improves patient outcomes. We also develop future leaders capable of driving meaningful operationalcultural and organizational change and who transform the consumer experience.
•Business Advisory
Business Advisory
Our Business Advisory segment provides services to large and middle market organizations, not-for-profit organizations, lending institutions, law firms, investment banks, and private equity firms.firms, and not-for-profit organizations, including higher education and healthcare institutions. We assist clients in a broad range of industries and across the spectrum from healthy, well-capitalized companies to organizations in transition, as well as creditors, equity owners, and other key constituents. Our Enterprise Solutions and Analytics experts advise, deliver, and optimize technology and analytics solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our Business Advisory professionalsexperts resolve complex business issues and enhance client enterprise value through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. Our Enterprise Solutions and Analytics professionals deliver technology and analytic solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our Strategy and Innovation professionals collaborate with clients across a range of industries to identify new growth opportunities, build new ventures and capabilities, and accelerate
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
organizational change. Our Life Sciences professionals provide strategic solutions to help pharmaceutical, medical device, and biotechnology companies deliver more value to patients, payers, and providers, and comply with regulations.
•Education
Our Education segment provides consulting and technology solutions to higher education institutions and academic medical centers. We partnercollaborate with clients to address challenges relating to business and technology strategy, financial management,and operational and organizational effectiveness,excellence, student success, research administration, and regulatory compliance. Our institutional strategy, market research, budgeting and financial management, business operations and student life cycle management solutions align missions with business priorities, improve quality and reduce costs institution-wide. Our student solutions improve attraction, retention and graduation rates, increase student satisfaction and help generate quality outcomes. Our technology strategy, enterprise applications, and analytic solutions transform and optimize operations, deliver time and cost savings, and enhance the student experience. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance. Our technology strategy, enterprise applications, and analytics solutions transform and optimize operations, deliver time and cost savings, and enhance the student experience. Our institutional strategy, budgeting and financial management, and business operations align missions with business priorities, improve quality, and reduce costs institution-wide. Our student solutions improve attraction, retention and graduation rates, increase student satisfaction and help generate quality outcomes.
Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative expenses that are incurred directly by the segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
include costs for corporate office support, certain office facility costs, costs relating to accounting and finance, human resources, legal, marketing, information technology, and company-wide business development functions, as well as costs related to overall corporate management.
The table below sets forth information about our operating segments for the three and nine months ended September 30, 2019 and 2018, 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, |
| 2019 | | 2018 | | 2019 | | 2018 |
Healthcare: | | | | | | | |
Revenues | $ | 100,000 |
| | $ | 90,417 |
| | $ | 295,621 |
| | $ | 271,812 |
|
Operating income | $ | 32,863 |
| | $ | 26,640 |
| | $ | 94,058 |
| | $ | 78,172 |
|
Segment operating income as a percentage of segment revenues | 32.9 | % | | 29.5 | % | | 31.8 | % | | 28.8 | % |
Business Advisory: | | | | | | | |
Revenues | $ | 62,519 |
| | $ | 57,175 |
| | $ | 183,602 |
| | $ | 170,790 |
|
Operating income | $ | 11,942 |
| | $ | 11,815 |
| | $ | 32,997 |
| | $ | 35,031 |
|
Segment operating income as a percentage of segment revenues | 19.1 | % | | 20.7 | % | | 18.0 | % | | 20.5 | % |
Education: | | | | | | | |
Revenues | $ | 56,770 |
| | $ | 50,856 |
| | $ | 165,265 |
| | $ | 147,069 |
|
Operating income | $ | 14,413 |
| | $ | 15,014 |
| | $ | 43,235 |
| | $ | 37,694 |
|
Segment operating income as a percentage of segment revenues | 25.4 | % | | 29.5 | % | | 26.2 | % | | 25.6 | % |
Total Company: | | | | | | | |
Revenues | $ | 219,289 |
| | $ | 198,448 |
| | $ | 644,488 |
| | $ | 589,671 |
|
Reimbursable expenses | 23,636 |
| | 21,296 |
| | 65,787 |
| | 59,648 |
|
Total revenues and reimbursable expenses | $ | 242,925 |
| | $ | 219,744 |
| | $ | 710,275 |
| | $ | 649,319 |
|
| | | | | | | |
Segment operating income | $ | 59,218 |
| | $ | 53,469 |
| | $ | 170,290 |
| | $ | 150,897 |
|
Items not allocated at the segment level: | | | | | | | |
Other operating expenses | 32,310 |
| | 30,460 |
| | 105,369 |
| | 94,585 |
|
Litigation and other losses (gains), net | (630 | ) | | 887 |
| | (1,571 | ) | | (4,990 | ) |
Depreciation and amortization | 6,962 |
| | 8,561 |
| | 21,285 |
| | 26,281 |
|
Other expense, net | 4,456 |
| | 3,921 |
| | 10,326 |
| | 19,767 |
|
Income from continuing operations before taxes | $ | 16,120 |
| | $ | 9,640 |
| | $ | 34,881 |
| | $ | 15,254 |
|
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, 2020 and 2019, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Healthcare: | | | | | | | |
Revenues | $ | 87,406 | | | $ | 100,000 | | | $ | 268,340 | | | $ | 295,621 | |
Operating income | $ | 25,610 | | | $ | 32,863 | | | $ | 70,831 | | | $ | 94,058 | |
Segment operating income as a percentage of segment revenues | 29.3 | % | | 32.9 | % | | 26.4 | % | | 31.8 | % |
Business Advisory: | | | | | | | |
Revenues | $ | 66,048 | | | $ | 62,519 | | | $ | 201,423 | | | $ | 183,602 | |
Operating income | $ | 10,780 | | | $ | 11,942 | | | $ | 37,306 | | | $ | 32,997 | |
Segment operating income as a percentage of segment revenues | 16.3 | % | | 19.1 | % | | 18.5 | % | | 18.0 | % |
Education: | | | | | | | |
Revenues | $ | 51,850 | | | $ | 56,770 | | | $ | 176,017 | | | $ | 165,265 | |
Operating income | $ | 12,548 | | | $ | 14,413 | | | $ | 41,792 | | | $ | 43,235 | |
Segment operating income as a percentage of segment revenues | 24.2 | % | | 25.4 | % | | 23.7 | % | | 26.2 | % |
Total Company: | | | | | | | |
Revenues | $ | 205,304 | | | $ | 219,289 | | | $ | 645,780 | | | $ | 644,488 | |
Reimbursable expenses | 2,860 | | | 23,636 | | | 25,133 | | | 65,787 | |
Total revenues and reimbursable expenses | $ | 208,164 | | | $ | 242,925 | | | $ | 670,913 | | | $ | 710,275 | |
| | | | | | | |
Segment operating income | $ | 48,938 | | | $ | 59,218 | | | $ | 149,929 | | | $ | 170,290 | |
Items not allocated at the segment level: | | | | | | | |
Other operating expenses | 29,042 | | | 32,310 | | | 87,826 | | | 105,369 | |
Litigation and other gains | 0 | | | (630) | | | (150) | | | (1,571) | |
Depreciation and amortization | 6,197 | | | 6,962 | | | 18,635 | | | 21,285 | |
Goodwill impairment charges1 | 0 | | | 0 | | | 59,816 | | | 0 | |
Other expense, net | 224 | | | 4,456 | | | 6,829 | | | 10,326 | |
Income (loss) from continuing operations before taxes | $ | 13,475 | | | $ | 16,120 | | | $ | (23,027) | | | $ | 34,881 | |
(1) The non-cash goodwill impairment charges are not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segments. We do not include the impact of goodwill impairment charges in our evaluation of segment performance.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
The following table illustrates the disaggregation of revenues by billing arrangements, employee types, and timing of revenue recognition, including a reconciliation of the disaggregated revenues to revenues from our three operating segments for the three and nine months ended September 30,
20192020 and
2018.2019. | | | Three Months Ended September 30, 2019 | | Three Months Ended September 30, 2020 |
| Healthcare | | Business Advisory | | Education | | Total | | Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | | Billing Arrangements | | | | | | | |
Fixed-fee | $ | 65,610 |
| | $ | 24,333 |
| | $ | 12,418 |
| | $ | 102,361 |
| Fixed-fee | $ | 51,491 | | | $ | 20,675 | | | $ | 10,958 | | | $ | 83,124 | |
Time and expense | 12,307 |
| | 35,212 |
| | 39,688 |
| | 87,207 |
| Time and expense | 14,627 | | | 40,511 | | | 35,214 | | | 90,352 | |
Performance-based | 16,313 |
| | 1,614 |
| | — |
| | 17,927 |
| Performance-based | 15,641 | | | 3,671 | | | 0 | | | 19,312 | |
Software support, maintenance and subscriptions | 5,770 |
| | 1,360 |
| | 4,664 |
| | 11,794 |
| Software support, maintenance and subscriptions | 5,647 | | | 1,191 | | | 5,678 | | | 12,516 | |
Total | $ | 100,000 |
|
| $ | 62,519 |
|
| $ | 56,770 |
|
| $ | 219,289 |
| Total | $ | 87,406 | | | $ | 66,048 | | | $ | 51,850 | | | $ | 205,304 | |
| | | | | | | | |
Employee Type (1) | | | | | | | | Employee Type (1) | |
Revenue generated by full-time billable consultants | $ | 72,142 |
| | $ | 60,131 |
| | $ | 48,928 |
| | $ | 181,201 |
| Revenue generated by full-time billable consultants | $ | 65,084 | | | $ | 62,340 | | | $ | 44,234 | | | $ | 171,658 | |
Revenue generated by full-time equivalents | 27,858 |
| | 2,388 |
| | 7,842 |
| | 38,088 |
| Revenue generated by full-time equivalents | 22,322 | | | 3,708 | | | 7,616 | | | 33,646 | |
Total | $ | 100,000 |
|
| $ | 62,519 |
|
| $ | 56,770 |
|
| $ | 219,289 |
| Total | $ | 87,406 | | | $ | 66,048 | | | $ | 51,850 | | | $ | 205,304 | |
| | | | | | | | |
Timing of Revenue Recognition | | | | | | | | Timing of Revenue Recognition | |
Revenue recognized over time | $ | 98,204 |
| | $ | 62,519 |
| | $ | 56,274 |
| | $ | 216,997 |
| Revenue recognized over time | $ | 86,413 | | | $ | 66,048 | | | $ | 51,663 | | | $ | 204,124 | |
Revenue recognized at a point in time | 1,796 |
| | — |
| | 496 |
| | 2,292 |
| Revenue recognized at a point in time | 993 | | | 0 | | | 187 | | | 1,180 | |
Total | $ | 100,000 |
| | $ | 62,519 |
|
| $ | 56,770 |
| | $ | 219,289 |
| Total | $ | 87,406 | | | $ | 66,048 | | | $ | 51,850 | | | $ | 205,304 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 158,079 | | | $ | 73,442 | | | $ | 35,530 | | | $ | 267,051 | |
Time and expense | 43,389 | | | 118,364 | | | 123,493 | | | 285,246 | |
Performance-based | 49,042 | | | 5,903 | | | 695 | | | 55,640 | |
Software support, maintenance and subscriptions | 17,830 | | | 3,714 | | | 16,299 | | | 37,843 | |
Total | $ | 268,340 | | | $ | 201,423 | | | $ | 176,017 | | | $ | 645,780 | |
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by full-time billable consultants | $ | 188,750 | | | $ | 191,566 | | | $ | 150,857 | | | $ | 531,173 | |
Revenue generated by full-time equivalents | 79,590 | | | 9,857 | | | 25,160 | | | 114,607 | |
Total | $ | 268,340 | | | $ | 201,423 | | | $ | 176,017 | | | $ | 645,780 | |
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 265,813 | | | $ | 201,423 | | | $ | 175,715 | | | $ | 642,951 | |
Revenue recognized at a point in time | 2,527 | | | 0 | | | 302 | | | 2,829 | |
Total | $ | 268,340 | | | $ | 201,423 | | | $ | 176,017 | | | $ | 645,780 | |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 188,875 |
| | $ | 72,693 |
| | $ | 37,926 |
| | $ | 299,494 |
|
Time and expense | 39,345 |
| | 104,325 |
| | 114,122 |
| | 257,792 |
|
Performance-based | 50,144 |
| | 2,810 |
| | — |
| | 52,954 |
|
Software support, maintenance and subscriptions | 17,257 |
| | 3,774 |
| | 13,217 |
| | 34,248 |
|
Total | $ | 295,621 |
| | $ | 183,602 |
| | $ | 165,265 |
| | $ | 644,488 |
|
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by full-time billable consultants | $ | 206,508 |
| | $ | 177,279 |
| | $ | 144,338 |
| | $ | 528,125 |
|
Revenue generated by full-time equivalents | 89,113 |
| | 6,323 |
| | 20,927 |
| | 116,363 |
|
Total | $ | 295,621 |
| | $ | 183,602 |
| | $ | 165,265 |
| | $ | 644,488 |
|
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 289,452 |
| | $ | 183,602 |
| | $ | 164,164 |
| | $ | 637,218 |
|
Revenue recognized at a point in time | 6,169 |
| | — |
| | 1,101 |
| | 7,270 |
|
Total | $ | 295,621 |
| | $ | 183,602 |
| | $ | 165,265 |
| | $ | 644,488 |
|
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 65,610 | | | $ | 24,333 | | | $ | 12,418 | | | $ | 102,361 | |
Time and expense | 12,307 | | | 35,212 | | | 39,688 | | | 87,207 | |
Performance-based | 16,313 | | | 1,614 | | | 0 | | | 17,927 | |
Software support, maintenance and subscriptions | 5,770 | | | 1,360 | | | 4,664 | | | 11,794 | |
Total | $ | 100,000 | | | $ | 62,519 | | | $ | 56,770 | | | $ | 219,289 | |
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by full-time billable consultants | $ | 72,142 | | | $ | 60,131 | | | $ | 48,928 | | | $ | 181,201 | |
Revenue generated by full-time equivalents | 27,858 | | | 2,388 | | | 7,842 | | | 38,088 | |
Total | $ | 100,000 | | | $ | 62,519 | | | $ | 56,770 | | | $ | 219,289 | |
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 98,204 | | | $ | 62,519 | | | $ | 56,274 | | | $ | 216,997 | |
Revenue recognized at a point in time | 1,796 | | | 0 | | | 496 | | | 2,292 | |
Total | $ | 100,000 | | | $ | 62,519 | | | $ | 56,770 | | | $ | 219,289 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 188,875 | | | $ | 72,693 | | | $ | 37,926 | | | $ | 299,494 | |
Time and expense | 39,345 | | | 104,325 | | | 114,122 | | | 257,792 | |
Performance-based | 50,144 | | | 2,810 | | | 0 | | | 52,954 | |
Software support, maintenance and subscriptions | 17,257 | | | 3,774 | | | 13,217 | | | 34,248 | |
Total | $ | 295,621 | | | $ | 183,602 | | | $ | 165,265 | | | $ | 644,488 | |
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by full-time billable consultants | $ | 206,508 | | | $ | 177,279 | | | $ | 144,338 | | | $ | 528,125 | |
Revenue generated by full-time equivalents | 89,113 | | | 6,323 | | | 20,927 | | | 116,363 | |
Total | $ | 295,621 | | | $ | 183,602 | | | $ | 165,265 | | | $ | 644,488 | |
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 289,452 | | | $ | 183,602 | | | $ | 164,164 | | | $ | 637,218 | |
Revenue recognized at a point in time | 6,169 | | | 0 | | | 1,101 | | | 7,270 | |
Total | $ | 295,621 | | | $ | 183,602 | | | $ | 165,265 | | | $ | 644,488 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 60,462 |
| | $ | 24,129 |
| | $ | 9,259 |
| | $ | 93,850 |
|
Time and expense | 15,723 |
| | 32,197 |
| | 37,654 |
| | 85,574 |
|
Performance-based | 8,372 |
| | (60 | ) | | — |
| | 8,312 |
|
Software support, maintenance and subscriptions | 5,860 |
| | 909 |
| | 3,943 |
| | 10,712 |
|
Total | $ | 90,417 |
| | $ | 57,175 |
| | $ | 50,856 |
| | $ | 198,448 |
|
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by full-time billable consultants | $ | 62,409 |
| | $ | 54,379 |
| | $ | 44,876 |
| | $ | 161,664 |
|
Revenue generated by full-time equivalents | 28,008 |
| | 2,796 |
| | 5,980 |
| | 36,784 |
|
Total | $ | 90,417 |
| | $ | 57,175 |
| | $ | 50,856 |
| | $ | 198,448 |
|
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 88,372 |
| | $ | 57,175 |
| | $ | 50,104 |
| | $ | 195,651 |
|
Revenue recognized at a point in time | 2,045 |
| | — |
| | 752 |
| | 2,797 |
|
Total | $ | 90,417 |
| | $ | 57,175 |
| | $ | 50,856 |
| | $ | 198,448 |
|
(1) Full-time billable consultants consist of our full-time professionals who provide consulting services to our clients and are billable to our clients based on the number of hours worked. Full-time equivalent professionals consist of leadership coaches and their support staff within our Culture and Organizational Excellence solution, consultants who work variable schedules as needed by our clients, and full-time employees who provide software support and maintenance services to our clients. |
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Healthcare | | Business Advisory | | Education | | Total |
Billing Arrangements | | | | | | | |
Fixed-fee | $ | 182,491 |
| | $ | 70,103 |
| | $ | 28,699 |
| | $ | 281,293 |
|
Time and expense | 42,755 |
| | 94,357 |
| | 108,019 |
| | 245,131 |
|
Performance-based | 27,776 |
| | 3,117 |
| | — |
| | 30,893 |
|
Software support, maintenance and subscriptions | 18,790 |
| | 3,213 |
| | 10,351 |
| | 32,354 |
|
Total | $ | 271,812 |
| | $ | 170,790 |
| | $ | 147,069 |
| | $ | 589,671 |
|
| | | | | | | |
Employee Type (1) | | | | | | | |
Revenue generated by full-time billable consultants | $ | 183,820 |
| | $ | 162,564 |
| | $ | 128,613 |
| | $ | 474,997 |
|
Revenue generated by full-time equivalents | 87,992 |
| | 8,226 |
| | 18,456 |
| | 114,674 |
|
Total | $ | 271,812 |
| | $ | 170,790 |
| | $ | 147,069 |
| | $ | 589,671 |
|
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Revenue recognized over time | $ | 266,320 |
| | $ | 170,790 |
| | $ | 144,118 |
| | $ | 581,228 |
|
Revenue recognized at a point in time | 5,492 |
| | — |
| | 2,951 |
| | 8,443 |
|
Total | $ | 271,812 |
| | $ | 170,790 |
| | $ | 147,069 |
| | $ | 589,671 |
|
| |
(1) | Full-time billable consultants consist of our full-time professionals who provide consulting services to our clients and are billable to our clients based on the number of hours worked. Full-time equivalent professionals consist of leadership coaches and their support staff within our Healthcare Leadership solution, consultants who work variable schedules as needed by our clients, and full-time employees who provide software support and maintenance services to our clients. |
At September 30, 20192020 one client in our Healthcare segment had a total receivable and unbilled services balance that accounted for 15.0% of our combined balance of receivables from clients, net and unbilled services, net. The outstanding balance for this client is the result of outstanding invoices due in the normal course of the contract payment terms and services performed in advance of the contract billing schedule. At December 31, 2018,2019, no single client accounted for greater than 10% of our combined balance of receivables from clients, net and unbilled services, net. During the three and nine months ended September 30, 20192020 and 2018,2019, no single client generated greater than 10% of our consolidated revenues.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
15. Subsequent Event
Acquisition of ForceIQ, Inc.
On October 15, 2020, we entered into an agreement to acquire ForceIQ, Inc. ("ForceIQ"), a Salesforce Industries partner focused on helping clients drive digital transformation and innovation at scale powered by the cloud. The acquisition expands our cloud-based technology offerings within the Business Advisory segment. The results of operations of ForceIQ will be included within the Business Advisory segment from the effective close date, November 1, 2020. The acquisition of ForceIQ is not significant to our consolidated financial statements.
Fourth Quarter 2020 Restructuring Plan
On October 29, 2020, we announced a restructuring plan to reduce operating costs to address the impact of the COVID-19 pandemic on our business. The restructuring plan provides for a reduction in workforce and leased office space that is expected to result in initial restructuring charges in a range of approximately $15.5 million to $19.5 million. We do not anticipate a material revenue impact related to the restructuring actions.
The reduction in workforce impacts approximately 145 employees across all segments and corporate operations. We expect the reduction in workforce to be substantially complete by the end of the fourth quarter of 2020 and expect to incur an estimated restructuring charge in a range of approximately $3.5 million to $4.5 million related to cash payments for employee severance and benefits.
The reduction in leased office space is expected to result in estimated non-cash restructuring charges in a range of approximately $12.0 million to $15.0 million, consisting of operating lease right-of-use asset and leasehold improvement impairment charges and accelerated depreciation on other fixed assets. The non-cash restructuring charges related to the reduction in leased office space are expected to be recorded primarily in the fourth quarter of 2020. Future cash expenditures related to the leased office space are expected to continue through 2029. The exact amount and timing of the office space reductions, and the associated payments and expenses, depend on a number of factors, including our ability to terminate or modify existing lease contracts and/or enter into sublease agreements for the exited spaces to lower future cash expenditures.
In addition, in the fourth quarter of 2020, we announced our intent to divest our life sciences drug safety practice, a UK-based business that is part of the Life Sciences reporting unit within our Business Advisory segment. For the nine months ended September 30, 2020, this practice generated $1.9 million of revenue and is not significant to our consolidated financial statements. We expect the divestiture to be completed in the fourth quarter of 2020.
We believe these measures will better align delivery capacity with anticipated demand and strengthen our financial position amidst the ongoing disruption, creating a foundation from which our business can grow.
|
| | | | |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Huron,” “Company,” “we,” “us” and “our” refer to Huron Consulting Group Inc. and its subsidiaries.
Statements in this Quarterly Report on Form 10-Q that are not historical in nature, including those concerning the Company’s current expectations about its future results, are “forward-looking” statements as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as “may,” “should,” “expects,” “provides,” “anticipates,” “assumes,” “can,” “will,” “meets,” “could,” “likely,” “intends,” “might,” “predicts,” “seeks,” “would,” “believes,” “estimates,” “plans,” “continues,” “guidance,” or “outlook,” or similar expressions. These forward-looking statements reflect our current expectations about our future requirements and needs, results, levels of activity, performance, or achievements. Some of the factors that could cause actual results to differ materially from the forward-looking statements contained herein include, without limitation: the impact of the COVID-19 pandemic on the economy, our clients and client demand for our services, and our ability to sell and provide services, including the measures taken by governmental authorities and businesses in response to the pandemic, which may cause or contribute to other risks and uncertainties that we face; failure to achieve expected utilization rates, billing rates, and the number of revenue-generating professionals; inability to expand or adjust our service offerings in response to market demands; our dependence on renewal of client-based services; dependence on new business and retention of current clients and qualified personnel; failure to maintain third-party provider relationships and strategic alliances; inability to license technology to and from third parties; the impairment of goodwill; various factors related to income and other taxes; difficulties in successfully integrating the businesses we acquire and achieving expected benefits from such acquisitions; risks relating to privacy, information security, and related laws and standards; and a general downturn in market conditions. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, among others, those described under Item 1A. “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 20182019 and under Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q, that may cause actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. We disclaim any obligation to update or revise any forward-looking statements as a result of new information or future events, or for any other reason.
OVERVIEW
Our Business
Huron is a global consultancy that helps clients drive growth, enhance performance and sustain leadership in the markets they serve. We partnercollaborates with clients to develop strategiesdrive strategic growth, ignite innovation and implement solutions that enablenavigate constant change. Through a combination of strategy, expertise and creativity, we help clients accelerate operational, digital and cultural transformation, enabling the transformative change our clientsthey need to own their future. By embracing diverse perspectives, encouraging new ideas and challenging the status quo, we create sustainable results for the organizations we serve.
We provide professional services through three operating segments: Healthcare, Business Advisory, and Education.
•Healthcare
Our Healthcare segment has a depth of expertise in care transformation, financial and operational improvement, care transformation, culture and organizational excellence, strategy, and technology and analytics, and leadership development.analytics. We serve national and regional hospitals, and integrated health systems, academic medical centers, community hospitals, and medical groups. Our solutions help clients evolve and adapt to the rapidly changing healthcare environment and achieve growth, optimize performance, enhance profitability, improve quality and clinical outcomes, align leaders, improve organizational culture, and drive physician, patient, and employee engagement across the enterprise to deliver better consumer outcomes.
We help organizations transform and innovate their delivery model to focus on patient wellness by improving quality outcomes, minimizing care variation and fundamentally improving patient and population health. Our consultants partner with clients to help build and sustain today’s business to invest in the future by reducing complexity, improving operational efficiency and growing market share. We enable the healthcare of the future by identifying, integrating and optimizing technology investments to collect data that transforms care delivery and improves patient outcomes. We also develop future leaders capable of driving meaningful operationalcultural and organizational change and who transform the consumer experience.
•Business Advisory
Business Advisory
Our Business Advisory segment provides services to large and middle market organizations, not-for-profit organizations, lending institutions, law firms, investment banks, and private equity firms.firms, and not-for-profit organizations, including higher education and healthcare institutions. We assist clients in a broad range of industries and across the spectrum from healthy, well-capitalized companies to organizations in transition, as well as creditors, equity owners, and other key constituents. Our Enterprise Solutions and Analytics experts advise, deliver, and optimize technology and analytics solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our Business Advisory professionalsexperts resolve complex business issues and enhance client enterprise value
through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. Our Enterprise Solutions and Analytics professionals deliver technology and analytic solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our 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 provide strategic solutions to help pharmaceutical, medical device, and biotechnology companies deliver more value to patients, payers, and providers, and comply with regulations.
•Education
Education
Our Education segment provides consulting and technology solutions to higher education institutions and academic medical centers. We partnercollaborate with clients to address challenges relating to business and technology strategy, financial management,and operational and organizational effectiveness,excellence, student success, research administration, and regulatory compliance. Our institutional strategy, market research, budgeting and financial management, business operations and student life cycle management solutions align missions with business priorities, improve quality and reduce costs institution-wide. Our student solutions improve attraction, retention and graduation rates, increase student satisfaction and help generate quality outcomes. Our technology strategy, enterprise applications, and analytic solutions transform and optimize operations, deliver time and cost savings, and enhance the student experience. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance. Our technology strategy, enterprise applications, and analytics solutions transform and optimize operations, deliver time and cost savings, and enhance the student experience. Our institutional strategy, budgeting and financial management, and business operations align missions with business priorities, improve quality, and reduce costs institution-wide. Our student solutions improve attraction, retention and graduation rates, increase student satisfaction and help generate quality outcomes.
Huron is a Platinum level member of the Oracle PartnerNetwork, an Oracle Cloud Premier Partner within North America, a Workday Services Partner, and a Gold level consulting partner with Salesforce.com.Salesforce.com and a Workday Services Partner.
Coronavirus (COVID-19)
The worldwide spread of the coronavirus (COVID-19) in 2020 has created significant volatility, uncertainty and disruption to the global economy. The pandemic has had an unfavorable impact on aspects of our business, operations, and financial results, and has caused us to significantly change the way we operate. Near the end of the first quarter of 2020, we suspended almost all business travel and our employees began working from their homes. While traditionally a majority of the work performed by our revenue-generating professionals occurred at client sites, the nature of the services we provide allows for our revenue-generating professionals to continue to serve clients in a remote work environment. As state and local governments ease their restrictions, we continue to develop and implement our comprehensive plan to return to our offices and client sites with our people’s safety and the needs of our clients guiding how we manage our phased transition. As of September 30, 2020, our employees continue to primarily work from their homes.
In each of our operating segments, we are working closely with our clients to support them and provide relevant services to address their needs caused by the COVID-19 pandemic. However, as some clients reprioritized and delayed projects as a result of the pandemic, demand for certain offerings has been negatively impacted, particularly within our Healthcare and Education segments. While the COVID-19 pandemic did not have a significant impact on our consolidated revenues in the first quarter of 2020, revenues in the second and third quarters of 2020 declined 2.1% and 5.8%, sequentially. Revenues in the third quarter of 2020 decreased by 6.4% compared to the third quarter of 2019, and revenues for the first nine months of 2020 increased by just 0.2% compared to the same prior year period.
The COVID-19 pandemic has strengthened demand for other services we provide, such as our cloud-based technology and analytics solutions within our Business Advisory segment and our restructuring and capital advisory solutions provided to organizations in transition within our Business Advisory segment.
In order to support our liquidity during the COVID-19 pandemic, we took proactive measures to increase available cash on hand including, but not limited to, borrowing under our senior secured credit facility in the first quarter of 2020 and reducing discretionary operating and capital spending. During the second and third quarters of 2020, we made repayments on our borrowings to reduce our total debt outstanding due to our ability to maintain adequate cash flows from operations and improved clarity around access to capital resources. To further support our liquidity during the COVID-19 pandemic, we elected to defer the deposit of our employer portion of social security taxes beginning in April 2020 and through the end of the year, which we expect to pay in equal installments in the fourth quarters of 2021 and 2022, as provided for under the Coronavirus Aid, Relief, and Economic Security Act ("CARES") Act.
First Quarter 2020 Goodwill Impairment Charges
The services provided by our Strategy and Innovation and Life Sciences reporting units within our Business Advisory segment focus on strategic solutions for healthy, well-capitalized companies to identify new growth opportunities, which may be considered by our clients to be more discretionary in nature, and the duration of the projects within these practices are typically short-term. Therefore, due to the uncertainty caused by the COVID-19 pandemic, we are cautious about near-term results for these two reporting units. Based on our internal projections and the preparation of our financial statements for the quarter ended March 31, 2020, and considering the expected decrease in demand due to the COVID-19 pandemic, during the first quarter of 2020 we believed that the fair value of these two reporting units no longer exceeded their carrying values and performed an interim goodwill impairment test on both reporting units. Based on the estimated fair values of the Strategy and Innovation and Life Sciences reporting units, we recorded non-cash pretax goodwill impairment charges of $49.9 million and $9.9 million, respectively. The non-cash
goodwill impairment charge related to the Strategy and Innovation reporting unit reduced the goodwill balance of the reporting unit to $37.5 million as of March 31, 2020. The non-cash goodwill impairment charge related to the Life Sciences reporting unit reduced the goodwill balance to zero as of March 31, 2020. We did not identify any indicators that would lead us to believe that the fair values of our Healthcare, Education, and Business Advisory reporting units may not exceed their carrying values. See the "Critical Accounting Policies" section below and Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on the charges and evaluations performed.
During the second and third quarters of 2020, we did not identify any indicators that would lead us to believe that the fair values of our reporting units may not exceed their carrying values. We will continue to evaluate goodwill for impairment during future periods. Any future significant decline in the performance of our Strategy and Innovation reporting unit, or any other reporting unit with a goodwill balance, compared to our internal forecasts could result in additional non-cash goodwill impairment charges.
Enterprise Resource Planning System Implementation
In the fourth quarter of 2019, we committed to the implementation of a new enterprise resource planning system designed to improve the efficiency of our internal operational, financial and administrative activities. The implementation continues to progress and is on schedule and has not been significantly impacted by the COVID-19 pandemic.
See Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q for additional information on the potential impact the COVID-19 pandemic could have on our business, operations and financial results.
How We Generate Revenues
A large portion of our revenues is generated by our full-time consultants who provide consulting services to our clients and are billable to our clients based on the number of hours worked. A smaller portion of our revenues is generated by our other professionals, also referred to as full-time equivalents, some of whom work variable schedules as needed by our clients. Full-time equivalent professionals consist of our leadership coaches and their support staff from our Culture and Organizational Excellence solution, consultants who work variable schedules as needed by our clients, employees who provide managed services in our Healthcare Leadership solution, specialized finance and operational consultants,segment, and our employees who provide software support and maintenance services to our clients. We translate the hours that these other professionals work on client engagements into a full-time equivalent measure that we use to manage our business. We refer to our full-time consultants and other professionals collectively as revenue-generating professionals.
Revenues generated by our full-time consultants are primarily driven by the number of consultants we employ and their utilization rates, as well as the billing rates we charge our clients. Revenues generated by our other professionals, or full-time equivalents, are largely dependent on the number of consultants we employ, their hours worked, and billing rates charged. Revenues generated by our leadership coaches are largely dependent on the number of coaches we employ and the total value, scope, and terms of the consulting contracts under which they provide services, which are primarily fixed-fee contracts. Revenues generated by our Managed Services solution are dependent on the total value, scope and terms of the related contracts.
We generate our revenues from providing professional services under four types of billing arrangements: fixed-fee (including software license revenue); time-and-expense; performance-based; and software support, maintenance and subscriptions.
In fixed-fee billing arrangements, we agree to a pre-established fee in exchange for a predetermined set of professional services. We set the fees based on our estimates of the costs and timing for completing the engagements. It is the client’s expectation in these engagements that the pre-established fee will not be exceeded except in mutually agreed upon circumstances. We generally recognize revenues under fixed-fee billing arrangements using a proportionate performance approach, which is based on work completed to-date versus our estimates of the total services to be provided under the engagement. Contracts within our Healthcare LeadershipCulture and Organizational Excellence solution include fixed-fee partner contracts with multiple performance obligations, which primarily consist of coaching services, as well as speaking engagements, conferences, publications and software products (“Partner Contracts”). Revenues for coaching services and software products are generally recognized on a straight-line basis over the length of the contract. All other revenues under Partner Contracts, including speaking engagements, conferences and publications, are recognized at the time the goods or services are provided.
Fixed-fee arrangements also include software licenses for our revenue cycle management software and research administration and compliance software. Licenses for our revenue cycle management software are sold only as a component of our consulting projects, and the services we provide are essential to the functionality of the software. Therefore, revenues from these software licenses are recognized over the term of the related consulting services contract. License revenue from our research administration and compliance software is generally recognized in the month in which the software is delivered.
Fixed-fee engagements represented 46.7%40.5% and 47.3%46.7% of our revenues for the three months ended September 30, 20192020 and 2018,2019, respectively, and 46.5%41.3% and 47.7%46.5% of our revenues for the nine months ended September 30, 20192020 and 2018,2019, respectively.
Time-and-expense billing arrangements require the client to pay based on the number of hours worked by our revenue-generating professionals at agreed upon rates. Time-and-expense arrangements also include certain speaking engagements, conferences and publications purchased by our clients outside of Partner Contracts within our Healthcare LeadershipCulture and Organizational Excellence solution. We recognize revenues under time-and-expense billing arrangements as the related services or publications are provided. Time-and-expense engagements represented 39.7%44.0% and 43.1%39.7% of our
revenues for the three months ended September 30, 20192020 and 2018,2019, respectively, and 40.0%44.2% and 41.6%40.0% of our revenues for the nine months ended September 30, 20192020 and 2018,2019, respectively.
In performance-based fee billing arrangements, fees are tied to the attainment of contractually defined objectives. We enter into performance-based engagements in essentially two forms. First, we generally earn fees that are directly related to the savings formally acknowledged by the client as a
result of adopting our recommendations for improving operational and cost effectiveness in the areas we review. Second, we have performance-based engagements in which we earn a success fee when and if certain predefined outcomes occur. Often, performance-based fees supplement our fixed-feetime-and-expense or time-and-expensefixed-fee engagements. We recognize revenues under performance-based billing arrangements by estimating the amount of variable consideration that is probable of being earned and recognizing that estimate over the length of the contract using a proportionate performance approach. Performance-based fee revenues represented 8.2%9.4% and 4.2%8.2% of our revenues for the three months ended September 30, 20192020 and 2018,2019, respectively, and 8.2%8.6% and 5.2%8.2% of our revenues for the nine months ended September 30, 20192020 and 2018,2019, respectively. The level of performance-based fees earned may vary based on our clients' risk sharing preferences and the mix of services we provide.
Clients that have purchased one of our software licenses can pay an annual fee for software support and maintenance. We also generate subscription revenue from our cloud-based analytic tools and solutions. Software support, maintenance and subscription revenues are recognized ratably over the support or subscription period. These fees are generally billed in advance and included in deferred revenues until recognized. Software support, maintenance and subscription revenues represented 6.1% and 5.4% of our revenues for both the three months ended September 30, 2020 and 2019, respectively, and 2018,5.9% and 5.3% and 5.5% of our revenues for the nine months ended September 30, 20192020 and 2018,2019, respectively.
Our quarterly results are impacted principally by our full-time consultants’ utilization rate, the bill rates we charge our clients, and the number of our revenue-generating professionals who are available to work. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that results in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. For example, during the third and fourth quarters of the year, vacations taken by our clients can result in the deferral of activity on existing and new engagements, which would negatively affect our utilization rate. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period.
Time-and-expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. Moreover, our clients typically retain us on an engagement-by-engagement basis, rather than under long-term recurring contracts. The volume of work performed for any particular client can vary widely from period to period.
Business Strategy, Opportunities and Challenges
Our primary strategy is to meet the needs of our clients by providing a balanced portfolio of service offerings and capabilities so that we can adapt quickly and effectively to emerging opportunities in the marketplace. To achieve this, we continue to hire highly qualified professionals and have entered into select acquisitions of complementary businesses.
To expand our business, we will remain focused on growing our existing relationships and developing new relationships, executing our managing director compensation plan to attract and retain senior practitioners, continuing to promote and provide an integrated approach to service delivery, broadening the scope of our existing services, and acquiring complementary businesses. We will regularly evaluate the performance of our practices to ensure our investments meet these objectives. Furthermore, we intend to enhance our visibility in the marketplace by refining our overarching messaging and value propositions for the organization as well as each practice. We will continue to focus on reaching our client base through clear, concise, and endorsed messages.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected segment and consolidated operating results and other operating data. |
| | | | | | | | | | | | | | | | |
Segment and Consolidated Operating Results (in thousands, except per share amounts): | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Healthcare: | | | | | | | | |
Revenues | | $ | 100,000 |
| | $ | 90,417 |
| | $ | 295,621 |
| | $ | 271,812 |
|
Operating income | | $ | 32,863 |
| | $ | 26,640 |
| | $ | 94,058 |
| | $ | 78,172 |
|
Segment operating income as a percentage of segment revenues | | 32.9 | % | | 29.5 | % | | 31.8 | % | | 28.8 | % |
Business Advisory: | | | | | | | | |
Revenues | | $ | 62,519 |
| | $ | 57,175 |
| | $ | 183,602 |
| | $ | 170,790 |
|
Operating income | | $ | 11,942 |
| | $ | 11,815 |
| | $ | 32,997 |
| | $ | 35,031 |
|
Segment operating income as a percentage of segment revenues | | 19.1 | % | | 20.7 | % | | 18.0 | % | | 20.5 | % |
Education: | | | | | | | | |
Revenues | | $ | 56,770 |
| | $ | 50,856 |
| | $ | 165,265 |
| | $ | 147,069 |
|
Operating income | | $ | 14,413 |
| | $ | 15,014 |
| | $ | 43,235 |
| | $ | 37,694 |
|
Segment operating income as a percentage of segment revenues | | 25.4 | % | | 29.5 | % | | 26.2 | % | | 25.6 | % |
Total Company: | | | | | | | | |
Revenues | | $ | 219,289 |
| | $ | 198,448 |
| | $ | 644,488 |
| | $ | 589,671 |
|
Reimbursable expenses | | 23,636 |
| | 21,296 |
| | 65,787 |
| | 59,648 |
|
Total revenues and reimbursable expenses | | $ | 242,925 |
| | $ | 219,744 |
| | $ | 710,275 |
| | $ | 649,319 |
|
Statements of Operations reconciliation: | | | | | | | | |
Segment operating income | | $ | 59,218 |
| | $ | 53,469 |
| | $ | 170,290 |
| | $ | 150,897 |
|
Items not allocated at the segment level: | | | | | | | | |
Other operating expenses | | 32,310 |
| | 30,460 |
| | 105,369 |
| | 94,585 |
|
Litigation and other losses (gains), net | | (630 | ) | | 887 |
| | (1,571 | ) | | (4,990 | ) |
Depreciation and amortization | | 6,962 |
| | 8,561 |
| | 21,285 |
| | 26,281 |
|
Operating income | | 20,576 |
| | 13,561 |
| | 45,207 |
| | 35,021 |
|
Other expense, net | | (4,456 | ) | | (3,921 | ) | | (10,326 | ) | | (19,767 | ) |
Income from continuing operations before taxes | | 16,120 |
| | 9,640 |
| | 34,881 |
| | 15,254 |
|
Income tax expense | | 2,414 |
| | 1,391 |
| | 7,256 |
| | 4,365 |
|
Net income from continuing operations | | $ | 13,706 |
| | $ | 8,249 |
| | $ | 27,625 |
| | $ | 10,889 |
|
Earnings per share from continuing operations: | | | | | | | | |
Basic | | $ | 0.62 |
| | $ | 0.38 |
| | $ | 1.26 |
| | $ | 0.50 |
|
Diluted | | $ | 0.61 |
| | $ | 0.37 |
| | $ | 1.23 |
| | $ | 0.50 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment and Consolidated Operating Results (in thousands, except per share amounts): | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Healthcare: | | | | | | | | |
Revenues | | $ | 87,406 | | | $ | 100,000 | | | $ | 268,340 | | | $ | 295,621 | |
Operating income | | $ | 25,610 | | | $ | 32,863 | | | $ | 70,831 | | | $ | 94,058 | |
Segment operating income as a percentage of segment revenues | | 29.3 | % | | 32.9 | % | | 26.4 | % | | 31.8 | % |
Business Advisory: | | | | | | | | |
Revenues | | $ | 66,048 | | | $ | 62,519 | | | $ | 201,423 | | | $ | 183,602 | |
Operating income | | $ | 10,780 | | | $ | 11,942 | | | $ | 37,306 | | | $ | 32,997 | |
Segment operating income as a percentage of segment revenues | | 16.3 | % | | 19.1 | % | | 18.5 | % | | 18.0 | % |
Education: | | | | | | | | |
Revenues | | $ | 51,850 | | | $ | 56,770 | | | $ | 176,017 | | | $ | 165,265 | |
Operating income | | $ | 12,548 | | | $ | 14,413 | | | $ | 41,792 | | | $ | 43,235 | |
Segment operating income as a percentage of segment revenues | | 24.2 | % | | 25.4 | % | | 23.7 | % | | 26.2 | % |
Total Company: | | | | | | | | |
Revenues | | $ | 205,304 | | | $ | 219,289 | | | $ | 645,780 | | | $ | 644,488 | |
Reimbursable expenses | | 2,860 | | | 23,636 | | | 25,133 | | | 65,787 | |
Total revenues and reimbursable expenses | | $ | 208,164 | | | $ | 242,925 | | | $ | 670,913 | | | $ | 710,275 | |
Statements of Operations reconciliation: | | | | | | | | |
Segment operating income | | $ | 48,938 | | | $ | 59,218 | | | $ | 149,929 | | | $ | 170,290 | |
Items not allocated at the segment level: | | | | | | | | |
Other operating expenses | | 29,042 | | | 32,310 | | | 87,826 | | | 105,369 | |
Litigation and other gains | | — | | | (630) | | | (150) | | | (1,571) | |
Depreciation and amortization | | 6,197 | | | 6,962 | | | 18,635 | | | 21,285 | |
Goodwill impairment charges (1) | | — | | | — | | | 59,816 | | | — | |
Operating income (loss) | | 13,699 | | | 20,576 | | | (16,198) | | | 45,207 | |
Other income (expense), net | | (224) | | | (4,456) | | | (6,829) | | | (10,326) | |
Income (loss) from continuing operations before taxes | | 13,475 | | | 16,120 | | | (23,027) | | | 34,881 | |
Income tax expense (benefit) | | 2,388 | | | 2,414 | | | (5,413) | | | 7,256 | |
Net income (loss) from continuing operations | | $ | 11,087 | | | $ | 13,706 | | | $ | (17,614) | | | $ | 27,625 | |
Earnings (loss) per share from continuing operations: | | | | | | | | |
Basic | | $ | 0.50 | | | $ | 0.62 | | | $ | (0.81) | | | $ | 1.26 | |
Diluted | | $ | 0.50 | | | $ | 0.61 | | | $ | (0.81) | | | $ | 1.23 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Other Operating Data: | | 2020 | | 2019 | | 2020 | | 2019 |
Number of full-time billable consultants (at period end) (2): | | | | | | | | |
Healthcare | | 838 | | | 886 | | | 838 | | | 886 | |
Business Advisory | | 1,001 | | | 954 | | | 1,001 | | | 954 | |
Education | | 790 | | | 727 | | | 790 | | | 727 | |
Total | | 2,629 | | | 2,567 | | | 2,629 | | | 2,567 | |
Average number of full-time billable consultants (for the period) (2): | | | | | | | | |
Healthcare | | 844 | | | 858 | | | 873 | | | 835 | |
Business Advisory | | 976 | | | 920 | | | 940 | | | 876 | |
Education | | 772 | | | 698 | | | 779 | | | 665 | |
Total | | 2,592 | | | 2,476 | | | 2,592 | | | 2,376 | |
Full-time billable consultant utilization rate (3): | | | | | | | | |
Healthcare | | 71.4 | % | | 81.8 | % | | 70.2 | % | | 80.4 | % |
Business Advisory | | 72.6 | % | | 72.0 | % | | 72.6 | % | | 72.7 | % |
Education | | 66.5 | % | | 75.5 | % | | 71.7 | % | | 76.7 | % |
Total | | 70.4 | % | | 76.3 | % | | 71.5 | % | | 76.5 | % |
Full-time billable consultant average billing rate per hour (4): | | | | | | | | |
Healthcare | | $ | 252 | | | $ | 226 | | | $ | 233 | | | $ | 225 | |
Business Advisory (5) | | $ | 186 | | | $ | 193 | | | $ | 197 | | | $ | 195 | |
Education | | $ | 184 | | | $ | 197 | | | $ | 189 | | | $ | 200 | |
Total (5) | | $ | 206 | | | $ | 206 | | | $ | 206 | | | $ | 207 | |
Revenue per full-time billable consultant (in thousands): | | | | | | | | |
Healthcare | | $ | 77 | | | $ | 84 | | | $ | 216 | | | $ | 247 | |
Business Advisory | | $ | 64 | | | $ | 65 | | | $ | 204 | | | $ | 202 | |
Education | | $ | 57 | | | $ | 70 | | | $ | 194 | | | $ | 217 | |
Total | | $ | 66 | | | $ | 73 | | | $ | 205 | | | $ | 222 | |
Average number of full-time equivalents (for the period) (6): | | | | | | | | |
Healthcare | | 279 | | | 217 | | | 279 | | | 237 | |
Business Advisory | | 35 | | | 19 | | | 27 | | | 14 | |
Education | | 46 | | | 52 | | | 56 | | | 44 | |
Total | | 360 | | | 288 | | | 362 | | | 295 | |
Revenue per full-time equivalent (in thousands): | | | | | | | | |
Healthcare | | $ | 80 | | | $ | 128 | | | $ | 285 | | | $ | 375 | |
Business Advisory | | $ | 106 | | | $ | 126 | | | $ | 370 | | | $ | 465 | |
Education | | $ | 165 | | | $ | 151 | | | $ | 453 | | | $ | 480 | |
Total | | $ | 93 | | | $ | 132 | | | $ | 317 | | | $ | 395 | |
(1)The non-cash goodwill impairment charges are not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segments. We do not include the impact of goodwill impairment charges in our evaluation of segment performance. |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Other Operating Data: | | 2019 | | 2018 | | 2019 | | 2018 |
Number of full-time billable consultants (at period end) (1): | | | | | | | | |
Healthcare | | 886 |
| | 829 |
| | 886 |
| | 829 |
|
Business Advisory | | 954 |
| | 775 |
| | 954 |
| | 775 |
|
Education | | 727 |
| | 618 |
| | 727 |
| | 618 |
|
Total | | 2,567 |
| | 2,222 |
| | 2,567 |
| | 2,222 |
|
Average number of full-time billable consultants (for the period) (1): | | | | | | | | |
Healthcare | | 858 |
| | 821 |
| | 835 |
| | 802 |
|
Business Advisory | | 920 |
| | 735 |
| | 876 |
| | 761 |
|
Education | | 698 |
| | 607 |
| | 665 |
| | 579 |
|
Total | | 2,476 |
| | 2,163 |
| | 2,376 |
| | 2,142 |
|
Full-time billable consultant utilization rate (2): | | | | | | | | |
Healthcare | | 81.8 | % | | 81.2 | % | | 80.4 | % | | 81.6 | % |
Business Advisory | | 72.0 | % | | 74.4 | % | | 72.7 | % | | 71.7 | % |
Education | | 75.5 | % | | 77.3 | % | | 76.7 | % | | 76.8 | % |
Total | | 76.3 | % | | 77.8 | % | | 76.5 | % | | 76.8 | % |
Full-time billable consultant average billing rate per hour (3): | | | | | | | | |
Healthcare | | $ | 226 |
| | $ | 211 |
| | $ | 225 |
| | $ | 205 |
|
Business Advisory (4) | | $ | 193 |
| | $ | 213 |
| | $ | 195 |
| | $ | 212 |
|
Education | | $ | 197 |
| | $ | 205 |
| | $ | 200 |
| | $ | 203 |
|
Total (4) | | $ | 206 |
| | $ | 210 |
| | $ | 207 |
| | $ | 207 |
|
Revenue per full-time billable consultant (in thousands): | | | | | | | | |
Healthcare | | $ | 84 |
| | $ | 76 |
| | $ | 247 |
| | $ | 229 |
|
Business Advisory | | $ | 65 |
| | $ | 74 |
| | $ | 202 |
| | $ | 214 |
|
Education | | $ | 70 |
| | $ | 74 |
| | $ | 217 |
| | $ | 222 |
|
Total | | $ | 73 |
| | $ | 75 |
| | $ | 222 |
| | $ | 222 |
|
Average number of full-time equivalents (for the period) (5): | | | | | | | | |
Healthcare | | 217 |
| | 228 |
| | 237 |
| | 215 |
|
Business Advisory | | 19 |
| | 28 |
| | 14 |
| | 23 |
|
Education | | 52 |
| | 40 |
| | 44 |
| | 41 |
|
Total | | 288 |
| | 296 |
| | 295 |
| | 279 |
|
Revenue per full-time equivalent (in thousands): | | | | | | | | |
Healthcare | | $ | 128 |
| | $ | 123 |
| | $ | 375 |
| | $ | 409 |
|
Business Advisory | | $ | 126 |
| | $ | 99 |
| | $ | 465 |
| | $ | 355 |
|
Education | | $ | 151 |
| | $ | 149 |
| | $ | 480 |
| | $ | 447 |
|
Total | | $ | 132 |
| | $ | 124 |
| | $ | 395 |
| | $ | 410 |
|
(2)Consists of our full-time professionals who provide consulting services and generate revenues based on the number of hours worked. | |
(1) | Consists of our full-time professionals who provide consulting services and generate revenues based on the number of hours worked. |
| |
(2) | Utilization rate for our full-time billable consultants is calculated by dividing the number of hours our full-time billable consultants worked on client assignments during a period by the total available working hours for these consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days. |
| |
(3) | 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. |
| |
(4) | The Business Advisory segment includes operations of Huron Eurasia India. Absent the impact of Huron Eurasia India, the average billing rate per hour for the Business Advisory segment would have been $221 and $241 for the three months ended September 30, 2019 and 2018, respectively; and $220 and $242 for the nine months ended September 30, 2019 and 2018, respectively. |
(3)Utilization rate for our full-time billable consultants is calculated by dividing the number of hours our full-time billable consultants worked on client assignments during a period by the total available working hours for these consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days.
(4)Average billing rate per hour for our full-time billable consultants is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period.
(5)The Business Advisory segment includes operations of Huron Eurasia India. Absent the impact of Huron Eurasia India, the average billing rate per hour for the Business Advisory segment would have been $201 and $221 for the three months ended September 30, 2020 and 2019, respectively; and $217 and $220 for the nine months ended September 30, 2020 and 2019, respectively.
Absent the impact of Huron Eurasia India, Huron's consolidated average billing rate per hour would have been $216$212 and $218$216 for the three months ended September 30, 20192020 and 2018,2019, respectively; and $213 and $216 for both the nine months ended September 30, 2020 and 2019, and 2018.
| |
(5) | Consists of leadership coaches and their support staff within the Healthcare Leadership solution, consultants who work variable schedules as needed by our clients, and full-time employees who provide software support and maintenance services to our clients. |
respectively.
(6)Consists of coaches and their support staff within our Culture and Organizational Excellence solution, consultants who work variable schedules as needed by our clients, employees who provide managed services in our Healthcare segment, and full-time employees who provide software support and maintenance services to our clients.
Non-GAAP Measures
We also assess our results of operations using certain non-GAAP financial measures. These non-GAAP financial measures differ from GAAP because the non-GAAP financial measures we calculate to measure earnings before interest, taxes, depreciation and amortization ("EBITDA"), adjusted EBITDA, adjusted EBITDA as a percentage of revenues, adjusted net income from continuing operations, and adjusted diluted earnings per share from continuing operations exclude a number of items required by GAAP, each discussed below. These non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance, cash flows, or liquidity prepared in accordance with GAAP. Our non-GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how we define our non-GAAP financial measures.
Our management uses the non-GAAP financial measures to gain an understanding of our comparative operating performance, for example when comparing such results with previous periods or forecasts. These non-GAAP financial measures are used by management in their financial and operating decision making because management believes they reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons. Management also uses these non-GAAP financial measures when publicly providing our business outlook, for internal management purposes, and as a basis for evaluating potential acquisitions and dispositions. We believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating Huron’s current operating performance and future prospects in the same manner as management does and in comparing in a consistent manner Huron’s current financial results with Huron’s past financial results.
The reconciliations of these financial measures from GAAP to non-GAAP are as follows (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues | $ | 219,289 |
| | $ | 198,448 |
| | $ | 644,488 |
| | $ | 589,671 |
|
Net income from continuing operations | $ | 13,706 |
| | $ | 8,249 |
| | $ | 27,625 |
| | $ | 10,889 |
|
Add back: | | | | | | | |
Income tax expense | 2,414 |
| | 1,391 |
| | 7,256 |
| | 4,365 |
|
Interest expense, net of interest income | 4,374 |
| | 4,628 |
| | 13,156 |
| | 14,636 |
|
Depreciation and amortization | 8,124 |
| | 9,570 |
| | 24,735 |
| | 29,476 |
|
Earnings before interest, taxes, depreciation and amortization (EBITDA) | 28,618 |
| | 23,838 |
|
| 72,772 |
| | 59,366 |
|
Add back: | | | | | | | |
Restructuring charges | 127 |
| | (31 | ) | | 2,156 |
| | 2,665 |
|
Litigation and other losses (gains), net | (630 | ) | | 887 |
| | (1,571 | ) | | (4,990 | ) |
Loss on sale of business | — |
| | 32 |
| | — |
| | 5,863 |
|
Transaction-related expenses | 563 |
| | — |
| | 2,613 |
| | — |
|
Foreign currency transaction losses, net | 114 |
| | 9 |
| | 36 |
| | 196 |
|
Adjusted EBITDA | $ | 28,792 |
| | $ | 24,735 |
|
| $ | 76,006 |
| | $ | 63,100 |
|
Adjusted EBITDA as a percentage of revenues | 13.1 | % | | 12.5 | % |
| 11.8 | % | | 10.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Revenues | $ | 205,304 | | | $ | 219,289 | | | $ | 645,780 | | | $ | 644,488 | |
Net income (loss) from continuing operations | $ | 11,087 | | | $ | 13,706 | | | $ | (17,614) | | | $ | 27,625 | |
Add back: | | | | | | | |
Income tax expense (benefit) | 2,388 | | | 2,414 | | | (5,413) | | | 7,256 | |
Interest expense, net of interest income | 2,259 | | | 4,374 | | | 7,516 | | | 13,156 | |
Depreciation and amortization | 7,546 | | | 8,124 | | | 22,488 | | | 24,735 | |
Earnings before interest, taxes, depreciation and amortization (EBITDA) | 23,280 | | | 28,618 | | | 6,977 | | | 72,772 | |
Add back: | | | | | | | |
Restructuring and other charges | 59 | | | 127 | | | 2,626 | | | 2,156 | |
Litigation and other gains | — | | | (630) | | | (150) | | | (1,571) | |
Goodwill impairment charges | — | | | — | | | 59,816 | | | — | |
Loss on sale of business | — | | | — | | | 102 | | | — | |
Transaction-related expenses | 437 | | | 563 | | | 437 | | | 2,613 | |
Foreign currency transaction losses (gains), net | (194) | | | 114 | | | 245 | | | 36 | |
Adjusted EBITDA | $ | 23,582 | | | $ | 28,792 | | | $ | 70,053 | | | $ | 76,006 | |
Adjusted EBITDA as a percentage of revenues | 11.5 | % | | 13.1 | % | | 10.8 | % | | 11.8 | % |
| | | | | | | | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | 2020 | | 2019 | | 2020 | | 2019 |
| 2019 | | 2018 | | 2019 | | 2018 | |
Net income from continuing operations | $ | 13,706 |
| | $ | 8,249 |
| | $ | 27,625 |
| | $ | 10,889 |
| |
Net income (loss) from continuing operations | | Net income (loss) from continuing operations | $ | 11,087 | | | $ | 13,706 | | | $ | (17,614) | | | $ | 27,625 | |
Weighted average shares - diluted | 22,561 |
| | 22,110 |
| | 22,425 |
| | 21,947 |
| Weighted average shares - diluted | 22,175 | | | 22,561 | | | 21,868 | | | 22,425 | |
Diluted earnings per share from continuing operations | $ | 0.61 |
| | $ | 0.37 |
| | $ | 1.23 |
| | $ | 0.50 |
| |
Diluted earnings (loss) per share from continuing operations | | Diluted earnings (loss) per share from continuing operations | $ | 0.50 | | | $ | 0.61 | | | $ | (0.81) | | | $ | 1.23 | |
Add back: | | | | | | | | Add back: | | | | | | | |
Amortization of intangible assets | 4,205 |
| | 5,934 |
| | 13,036 |
| | 18,233 |
| Amortization of intangible assets | 3,155 | | | 4,205 | | | 9,558 | | | 13,036 | |
Restructuring charges | 127 |
| | (31 | ) | | 2,156 |
| | 2,665 |
| |
Litigation and other losses (gains), net | (630 | ) | | 887 |
| | (1,571 | ) | | (4,990 | ) | |
Restructuring and other charges | | Restructuring and other charges | 59 | | | 127 | | | 2,626 | | | 2,156 | |
Litigation and other gains | | Litigation and other gains | — | | | (630) | | | (150) | | | (1,571) | |
Goodwill impairment charges | | Goodwill impairment charges | — | | | — | | | 59,816 | | | — | |
Non-cash interest on convertible notes | 2,171 |
| | 2,070 |
| | 6,436 |
| | 6,138 |
| Non-cash interest on convertible notes | — | | | 2,171 | | | — | | | 6,436 | |
Loss on sale of business | — |
| | 32 |
| | — |
| | 5,863 |
| Loss on sale of business | — | | | — | | | 102 | | | — | |
Transaction-related expenses | 563 |
| | — |
| | 2,613 |
| | — |
| Transaction-related expenses | 437 | | | 563 | | | 437 | | | 2,613 | |
Tax effect of adjustments | (1,673 | ) | | (2,312 | ) | | (5,909 | ) | | (7,109 | ) | Tax effect of adjustments | (1,692) | | | (1,673) | | | (17,041) | | | (5,909) | |
Tax benefit related to the enactment of Tax Cut and Jobs Act of 2017 | — |
| | (747 | ) | | — |
| | (615 | ) | |
| Tax benefit related to "check-the-box" election | (736 | ) | | — |
| | (736 | ) | | — |
| Tax benefit related to "check-the-box" election | — | | | (736) | | | — | | | (736) | |
Total adjustments, net of tax | 4,027 |
| | 5,833 |
| | 16,025 |
| | 20,185 |
| Total adjustments, net of tax | 1,959 | | | 4,027 | | | 55,348 | | | 16,025 | |
Adjusted net income from continuing operations | $ | 17,733 |
| | $ | 14,082 |
| | $ | 43,650 |
| | $ | 31,074 |
| Adjusted net income from continuing operations | $ | 13,046 | | | $ | 17,733 | | | $ | 37,734 | | | $ | 43,650 | |
Weighted average shares - diluted | 22,561 |
| | 22,110 |
| | 22,425 |
| | 21,947 |
| |
Adjusted weighted average shares - diluted | | Adjusted weighted average shares - diluted | 22,175 | | | 22,561 | | | 22,207 | | | 22,425 | |
Adjusted diluted earnings per share from continuing operations | $ | 0.79 |
| | $ | 0.64 |
| | $ | 1.95 |
| | $ | 1.42 |
| Adjusted diluted earnings per share from continuing operations | $ | 0.59 | | | $ | 0.79 | | | $ | 1.70 | | | $ | 1.95 | |
These non-GAAP financial measures include adjustments for the following items:
Amortization of intangible assets: We have excluded the effect of amortization of intangible assets from the calculation of adjusted net income from continuing operations presented above. Amortization of intangible assets is inconsistent in its amount and frequency and is significantly affected by the timing and size of our acquisitions.
Restructuring and other charges: We have incurred charges due to the restructuring of various parts of our business. These restructuring charges have primarily consisted of costs associated with office space consolidations, including lease impairment charges and accelerated depreciation on lease-related property and equipment, and severance charges. Additionally, we have excluded the effect of a $0.8 million one-time charge incurred during the first quarter of 2020, related to redundant administrative costs in our corporate operations which is recorded within selling, general and administrative expenses on our consolidated statement of operations. We have excluded the effect of the restructuring and other charges from our non-GAAP measures because the amount of each restructuring charge is significantly affected by the timing and size of the restructured business or component of a business.
Litigation and other losses (gains), net: We have excluded the effects of litigation and other losses (gains), net which primarily consist of net remeasurement losses and gains related to contingent acquisition liabilities and the litigation settlement gain recorded in the second quarter of 2018 to permit comparability with periods that were not impacted by these items.
Litigation and other gains: We have excluded the effects of the litigation settlement gain recognized in the first quarter of 2020 and the remeasurement gains recognized in the first nine months of 2019 to decrease the estimated fair value of our liabilities for contingent consideration payments related to business acquisitions to permit comparability with periods that were not impacted by these items.
Goodwill impairment charges: We have excluded the effect of the goodwill impairment charges recognized in the first quarter of 2020 as these are infrequent events and their exclusion permits comparability with periods that were not impacted by such charges.
Non-cash interest on convertible notes: We incurincurred non-cash interest expense relating to the implied value of the equity conversion component of our Convertible Notes. The value of the equity conversion component iswas treated as a debt discount and amortized to interest expense over the life of the Convertible Notes using the effective interest rate method. We exclude this non-cash interest expense that does not represent cash interest payments from the calculation of adjusted net income from continuing operations as management believes that this non-cash expense is not indicative of the ongoing performance of our business.
Loss on sale of business: We excluded the effect of the loss on the sale of the Middle East practicea software-based solution within theour Business Advisory segment in the secondfirst quarter of 2018.2020. Divestitures of businesses are infrequent and are not indicative of the ongoing performance of our business.
Transaction-related expenses:expenses: To permit comparability with prior periods, we excluded the impact of transaction-related expenses for acquisitions, whether or not ultimately consummated, and which primarily relate to third-party legal and accounting fees. The transaction-related expensesfees incurred in the threethird quarter of 2020 related to the acquisition of ForceIQ, Inc., which closed effective November 1, 2020. See Note 15 "Subsequent Events" for additional information. We have also excluded the impact of third-party legal and accounting fees incurred in the first nine months ended September 30,of 2019 primarily related to the evaluation of a potential acquisition that ultimately did not consummate.consummate to permit comparability with periods that were not impacted by this item.
Foreign currency transaction losses (gains), net: We have excluded the effect of foreign currency transaction losses and gains from the calculation of adjusted EBITDA because the amount of each loss or gain is significantly affected by changes in foreign exchange rates.
Tax effect of adjustments: The non-GAAP income tax adjustment reflects the incremental tax impact applicable to the non-GAAP adjustments.
Tax benefit related to the enactment of Tax Cuts and Jobs Act of 2017 ("2017 Tax Reform"): We have excluded the impact of the 2017 Tax Reform, which was enacted in the fourth quarter of 2017. In the first quarter of 2018, we recorded an adjustment to our estimated one-time income tax expense related to the transition tax on accumulated foreign earnings; and in the third quarter of 2018, we recorded a U.S. federal return to provision
adjustment related to 2017 Tax Reform items on our 2017 corporate tax return. The exclusion of the 2017 Tax Reform impact permits comparability with periods that were not impacted by this item.
Tax benefit related to "check-the-box" election:We have excluded the positive impact of a tax benefit, recorded in the third quarter of 2019, from
recognizing a previously unrecognized tax benefit due to the expiration of statute of limitations on our "check-the-box" election made in 2015 to treat
certain wholly-owned foreign subsidiaries as disregarded entities for U.S. federal income tax purposes. The exclusion of this discrete tax benefit
permits comparability with periods that were not impacted by this item. Refer toSee Note 1312 "Income Taxes" within the notes to the consolidated financial
statements for additional information.
Income tax expense, Interest expense, net of interest income, Depreciation and amortization: We have excluded the effects of income tax expense, interest expense, net of interest income, and depreciation and amortization in the calculation of EBITDA as these are customary exclusions as defined by the calculation of EBITDA to arrive at meaningful earnings from core operations excluding the effect of such items.
Adjusted weighted average shares - diluted: As we reported a net loss for the first nine months of 2020, GAAP diluted weighted average shares outstanding equals the basic weighted average shares outstanding for that period. The non-GAAP adjustments described above resulted in adjusted net income from continuing operations for the first nine months of 2020. Therefore, we included the dilutive common stock equivalents in the calculation of adjusted diluted weighted average shares outstanding for that period.
Three Months Ended September 30, 20192020 Compared to Three Months Ended September 30, 20182019
Revenues
Revenues increased $20.8decreased $14.0 million, or 10.5%6.4%, to $205.3 million for the third quarter of 2020 from $219.3 million for the third quarter of 2019 from $198.4 million for2019. In the third quarter of 2018. 2020, as some clients reprioritized and delayed projects as a result of the COVID-19 pandemic, demand for certain offerings have been negatively impacted, particularly within our Healthcare and Education segments. The negative impact of the COVID-19 pandemic has been partially offset by strengthened demand within our Business Advisory segment for cloud-based technology and analytics solutions and restructuring and capital advisory solutions provided to organizations in transition.
Of the overall $20.8$14.0 million increasedecrease in revenues, $19.5$9.5 million was attributable to an increasea decrease in revenues from our full-time billable consultants and $1.3$4.5 million was attributable to an increasea decrease in revenues from our full-time equivalents.
The increasedecrease in full-time billable consultant revenues reflected a decrease in demand for services in our Healthcare and Education segments, partially offset by a strengthened demand for services in all of our segments,Business Advisory segment, as discussed below in Segment Results, andResults. The decrease in full-time billable consultant revenues was primarily attributable to an overall decrease in the consultant utilization rate, partially offset by an overall increase in the average number of billable consultants partially offset by a decrease in the consultant utilization rate and average billing rate for the third quarter of 20192020 compared to the same prior year period.
The decrease in full-time equivalent revenues was attributable to decreases in full-time equivalent revenues in our Healthcare and Education segments, partially offset by an increase in full-time equivalent revenues was primarily attributable toin our EducationBusiness Advisory segment, as discussed below in Segment Results; andResults. The decrease in full-time equivalent revenues reflected an increasea decrease in revenue per full-time equivalent;equivalent, partially offset by a decreasean increase in the average number of full-time equivalents forin the third quarter of 20192020 compared to the same prior year period.
In the third quarter of 2020, the COVID-19 pandemic negatively impacted sales and elongated the sales cycle for new opportunities for certain services we provide, particularly within our Healthcare and Education segments, and therefore is expected to continue to have an unfavorable impact on our financial results in the fourth quarter of 2020.
Total Direct Costs
Our total directDirect costs, includingexcluding amortization of intangible assets and software development costs, increased $14.6$2.4 million, or 11.3%1.7%, to $144.2$145.5 million infor the three months ended September 30, 2019,2020, from $129.6$143.0 million infor the three months ended September 30, 2018.2019. The $14.6$2.4 million increase primarily related to a $9.9$4.2 million increase in salaries and related expenses for our revenue-generating professionals, which was largely driven by increased headcount in our Education segment that primarily occurred prior to the COVID-19 pandemic and increased headcount in our Business Advisory and Education segments; a $3.7 million increase in performance bonus expense for our revenue-generating professionals; and a $1.5 million increase in share-based compensation expense for our revenue-generating professionals. These increases weresegment; partially offset by a $0.5$1.0 million decrease in signing, retention and other bonus expense for our revenue-generating professionals. As a percentage of revenues, our total direct costs increased to 65.8% during the third quarter of 2019 compared to 65.3% during the third quarter of 2018, primarily due to the increases in performance bonus expense and share-based compensation expense for our revenue-generating professionals, as percentages of revenues, partially offset by the decrease in signing, retention and other bonus expense for our revenue-generating professionals and revenue growth that outpaceda $0.9 million decrease in product and event costs. As a percentage of revenues, direct costs increased to 70.9% during the third quarter of 2020 compared to 65.2% during the third quarter of 2019, primarily due to the decrease in revenues and the increase in salaries and related expenses for our revenue-generating professionals.
Total direct costs for the three months ended September 30, 20192020 included $1.2$1.4 million of amortization expense for internal software development costs and intangible assets, compared to $1.0$1.2 million of amortization expense for the same prior year period. The $0.2 million increase in amortization expense was primarily attributable to an increase in amortization for internal software development costs. Intangible asset amortization included within direct costs for the three months ended September 30, 20192020 and 20182019 primarily related to technology and software, certain customer relationships and customer contracts acquired in connection with our business acquisitions. See Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on our intangible assets.
Operating Expenses and Other Losses (Gains), Net
Selling, general and administrative expenses increaseddecreased by $2.2$9.6 million, or 4.8%19.9%, to $38.6 million in the third quarter of 2020 from $48.1 million in the third quarter of 2019 from $45.9 million in the third quarter of 2018.2019. The overall $2.2$9.6 million increasedecrease primarily related to a $1.2$3.8 million increasedecrease in promotion and marketing expenses; a $2.1 million decrease in share-based compensation expense for our support personnel; a $1.0$1.3 million increasedecrease in computerpractice administration and related equipmentmeetings expenses; a $0.9 million decrease in training expenses; a $0.9 million decrease in third-party consulting expenses, a $0.8 million decrease in facilities expense; a $0.5 million decrease in recruiting expenses; and a $0.6$0.5 million increasedecrease in legal expenses.salaries and related expenses for our support personnel. These increasesdecreases were partially offset by a $0.8$1.8 million increase in deferred compensation expense attributable to the change in the market value of our deferred compensation liability. During the third quarter of 2020, the market value of our deferred compensation liability increased by $1.8 million, compared to an immaterial increase in the third quarter of 2019. This $1.8 million increase in expense is offset by a $1.8 million increase in the gain recognized for the change in the market value of investments that are used to fund our deferred compensation liability and recognized in other income (expense), net. The decreases in promotion and marketing expenses, practice administration and meetings expenses, and training expenses primarily relate to the cancellation or delay of in-person meetings and events and business travel due to the COVID-19 pandemic. The decrease in travel and entertainment expenses.share-based compensation expense primarily related to a decrease in the expected funding of performance-based share awards for our executive officers recorded in the third quarter of 2020. As a percentage of revenues, selling, general and administrative expenses decreased to 18.8% during the third quarter of 2020 compared to 21.9% during the third quarter of 2019 compared to 23.1% during the third quarter of 2018.2019. This decrease was primarily attributable to revenue growth that outpaced an increase in salaries and related expenses for our support personnel, as well asthe decreases in travelselling, general and entertainmentadministrative expenses and facilities expense. These decreases werenoted above, as percentages of revenues; partially offset by the increaseschange in share-basedthe market value of our deferred compensation expense for our support personnel and computer and related equipment expenses, as percentages of revenues.liability.
Restructuring charges for both the third quarter of 2020 and 2019 were $0.1 million. The $0.1 million and netted to an immaterial amount forcharge recognized in the third quarter of 2018.The2020 primarily related to rent and related expenses, net of sublease income, for vacated office spaces. The $0.1 million charge recognized in the third quarter of 2019 primarily related to workforce reductions as we continuecontinued to better align resources with market demand.
The restructuring charges incurred in the third quarter of 2018 consisted of a $0.3 million decrease in the accrual of remaining lease payments, net of estimated sublease income, as a result of updated lease assumptions for our San Francisco office vacated in the third quarter of 2017, which was accounted for in accordance with ASC 840, Leases; and a net $0.2 million charge related to workforce reductions to better align resources with market demand. See Note 98 "Restructuring Charges" within the notes to our consolidated financial statements for additional information on our restructuring charges.
Litigation and other losses (gains), netgains totaled a gain of $0.6 million for the third quarter of 2019, andwhich consisted of a remeasurement gainsgain to decrease the estimated fair value of our liabilitiesliability for contingent consideration payments related to a business acquisition. Litigation andWe did not recognize any litigation or other losses (gains), net totaled a net loss of $0.9 million forgains in the third quarter of 2018, and consisted of net remeasurement losses to increase the estimated fair value of contingent consideration liabilities. 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.2020.
Depreciation and amortization expense decreased $1.6$0.8 million, or 18.7%11.3%, to $6.2 million in the three months ended September 30, 2020 compared to $7.0 million in the three months ended September 30, 2019 compared to $8.6 million in the three months ended September 30, 2018.2019. The $1.6$0.8 million decrease in depreciation and amortization expense was primarily attributable to decreasinga decrease in amortization expense offor the trade name and customer relationships acquired in our Studer Group acquisition that was fully amortized in the fourth quarter of 2019; decreasing amortization expense for customer relationships due to the accelerated basis of amortization in prior periods, as well as certainincluding the customer relationships acquired in our Studer Group acquisition; and customer relationships acquired in other business acquisitions that were fully amortized in prior periods. Intangible asset amortization expense included within operating expenses primarily related to certain customer relationships, trade names, and non-competition agreements acquired in connection with our business acquisitions. See Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on our intangible assets.
Operating Income
Operating income increased $7.0decreased $6.9 million, or 33.4% to $13.7 million in the third quarter of 2020 from $20.6 million in the third quarter of 2019 from $13.6 million in the third quarter of 2018.2019. Operating margin, which is defined as operating income expressed as a percentage of revenues, was 9.4% in6.7% for the three months ended September 30, 2019,2020, compared to 6.8% in9.4% for the three months ended September 30, 2018.2019. The increasedecrease in operating margin was primarily attributable to the decrease in intangible asset amortization, revenue growth that outpacedrevenues and the increase in salaries and related expenses for our support personnel, andrevenue-generating professionals. These decreases to the decrease in litigation and other losses (gains), net;operating margin were partially offset by the increasesdecrease in performance bonus expenseselling, general and share-based compensation expense for our revenue-generating professionals,administrative expenses discussed above, as percentages of revenues.
Total Other Expense,Income (Expense), Net
Total otherInterest expense, net increased $0.5of interest income decreased $2.1 million to $4.5$2.3 million in the third quarter of 20192020 from $3.9$4.4 million in the third quarter of 2018.2019. The increasedecrease in interest expense was primarily attributable to the maturity of our Convertible Notes on October 1, 2019, partially offset by higher levels of borrowing under our credit facility during the third quarter of 2020 compared to the same prior year period. See Note 7 "Financing Arrangements" within the notes to our consolidated financial statements for additional information about our Convertible Notes and credit facility.
Other expense, net decreased $2.1 million to a net gain of $2.0 million in the third quarter of 2020 from a net loss of $0.1 million in the third quarter of 2019. The decrease in other expense, net was primarily attributable to the immateriala $1.8 million gain recognized duringin the first nine monthsthird quarter of 20192020 for the market value of our investments that are used to fund our deferred compensation liability, compared to aan immaterial gain of $0.7 million recognized duringin the third quarter of 2018, partially offset by a decrease in interest2019. Additionally, other expense, net includes the recognition of interest income$0.2 million of foreign currency transaction gains in the third quarter of 2020 compared to $0.1 million of foreign currency transaction losses recognized in the third quarter of 2019 compared to the third quarter2019.
Income Tax Expense
For the three months ended September 30, 2020, our effective tax rate was 17.7% as we recognized income tax expense from continuing operations of $2.4 million on income from continuing operations of $13.5 million. The effective tax rate of 17.7% was more favorable than the statutory rate, inclusive of state income taxes, of 26.0%, primarily due to the current year-to-date pre-tax losses and the impact during the quarter of certain nondeductible business expense items, including the nondeductible portion of the goodwill impairment charges, based on the attribution of those expenses to the quarter in accordance with the allocation of income tax expense on a current year-to-date basis. The effective tax rate also reflected the positive impact of certain federal tax credits.
For the three months ended September 30, 2019, our effective tax rate was 15.0% as we recognized income tax expense from continuing operations of $2.4 million on income from continuing operations of $16.1 million. The effective tax rate of 15.0% was more favorable than the statutory rate, inclusive of state income taxes, of 26.4% primarily due to a discrete tax benefit of $0.7 millionbenefits for U.S. federal return to provision adjustments related to the 2018 corporate income tax return, which had a favorable impact of 4.6% on the effective tax rate.return. In addition, we recognized a $0.7 million discrete tax benefit related to a previously unrecognized tax benefit due to the expiration of statute of limitations on our "check-the-box" election made in 2015 to treat certain wholly-owned foreign subsidiaries as disregarded entities for U.S. federal income tax purposes, which had a favorable impact of 4.6%purposes.
See Note 12 "Income Taxes" within the notes to our consolidated financial statements for additional information on the effective tax rate. For the three months ended September 30, 2018, our effective tax rate was 14.4% as we recognized income tax expense from continuing operations of $1.4 million on income from continuing operations of $9.6 million. The effective tax rate of 14.4% was more favorable than the statutory rate, inclusive of state income taxes, of 26.0% primarily due to a discrete tax benefit of $0.8 million for U.S. federal return to provision adjustments related to the 2017 corporate income tax return, which had a favorable impact of 8.6% on the effective tax rate. In addition, the third quarter of 2018 included a discrete tax benefit of $0.4 million for foreign return to provision adjustments, which had a favorable impact of 3.7% on the effective tax rate.
expense.
Net Income from Continuing Operations and Earnings per Share
Net income from continuing operations increased $5.5decreased $2.6 million to $13.7$11.1 million for the three months ended September 30, 20192020 from $8.2$13.7 million for the same period last year. As a result of the increasedecrease in net income from continuing operations, diluted incomeearnings per share from continuing operations for the third quarter of 20192020 was $0.61$0.50 compared to $0.37$0.61 for the third quarter of 2018.2019.
EBITDA and Adjusted EBITDA
EBITDA increased $4.8decreased $5.3 million to $23.3 million for the three months ended September 30, 2020 from $28.6 million for the three months ended September 30, 2019 from $23.8 million for the three months ended September 30, 2018.2019. Adjusted EBITDA increased $4.1decreased $5.2 million to $23.6 million in the third quarter of 2020 from $28.8 million in the third quarter of 2019 from $24.7 million2019. The decrease in the third quarter of 2018. The increases inboth EBITDA and adjusted EBITDA werewas primarily attributable to the increasedecrease in revenuesoperating income, excluding the change in the market value of our deferred compensation liability for the third quarter of 20192020 compared to the third quarter of 2018, partially offset by the increases in selling, general and administrative expenses, salaries and related expenses for our revenue-generating professionals, and performance bonus expense for our revenue-generating professionals.2019.
Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share
Adjusted net income from continuing operations increased $3.7decreased $4.7 million to $13.0 million in the third quarter of 2020 compared to $17.7 million in the third quarter of 2019 compared to $14.1 million in the third quarter of 2018.2019. As a result of the increasedecrease in adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations was $0.59 for the third quarter of 2020, compared to $0.79 for the third quarter of 2019, compared to $0.64 for the third quarter of 2018.2019.
Segment Results
Healthcare
Revenues
Healthcare segment revenues increased $9.6decreased $12.6 million, or 10.6%12.6%, to $87.4 million for the third quarter of 2020 from $100.0 million for the third quarter of 2019, from $90.4 millionprimarily due to the negative impact of the COVID-19 pandemic on demand for our services within this segment, as some clients reprioritized and delayed certain projects as a result of the third quarter of 2018.uncertainties surrounding the pandemic.
During the three months ended September 30, 2019,2020, revenues from fixed-fee engagements; time-and-expense engagements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 65.6%58.9%, 12.3%16.7%, 16.3%17.9%, and 5.8%6.5% of this segment’s revenues, respectively, compared to 66.8%65.6%, 17.4%12.3%, 9.3%16.3%, and 6.5%5.8% of this segment’s revenues, respectively, for the same prior year period. Performance-based fee revenue was $15.6 million for the third quarter of 2020 compared to $16.3 million for the third quarter of 2019 compared to $8.4 million for the third quarter of 2018.2019. The level of performance-based fees earned may vary based on our clients’ risk sharing preferences and the mix of services we provide.
TheOf the overall $9.6$12.6 million increasedecrease in revenues, $7.1 million was attributable to an increasea decrease in revenues from our full-time billable consultants.consultants and $5.5 million was attributable to a decrease in revenues from our full-time equivalents. The increasedecrease in revenues attributable to our full-time billable consultants reflected increasesdecreases in the consultant utilization rate and the average number of full-time billable consultants, partially offset by an increase in the average billing rate, the average number of billable consultants and the consultant utilization rate in the third quarter of 20192020 compared to the same prior year period. The decrease in full-time equivalent revenues reflected a decrease in revenue per full-time equivalent, partially offset by an increase in the average number of full-time equivalents in the third quarter of 2020 compared to the same prior year period.
Operating Income
Healthcare segment operating income increased $6.2decreased $7.3 million, or 23.4%22.1%, to $25.6 million for the three months ended September 30, 2020 from $32.9 million for the three months ended September 30, 2019 from $26.6 million for the three months ended September 30, 2018.2019. The Healthcare segment operating margin, defined as segment operating income expressed as a percentage of segment revenues, increaseddecreased to 32.9%29.3% for the third quarter of 20192020 from 29.5%32.9% in the same period last year. The increasedecrease in this segment’s operating margin was primarily attributable to revenue growth that outpaced the increaseincreases in salaries and related expenses for our revenue-generating professionals and support personnel, as well as decreases in contractor expense and restructuring charges;technology expenses; partially offset by an increasedecreases in performanceproduct and event costs, practice administration and meetings expenses, promotion and marketing expenses, contractor expenses, and signing, retention and other bonus expense and share-based compensation expense for our revenue-generating professionals, as a percentagepercentages of revenues.
Business Advisory
Revenues
Business Advisory segment revenues increased $5.3$3.5 million, or 9.3%5.6%, to $66.0 million for the third quarter of 2020 from $62.5 million for the third quarter of 2019, from $57.2 millionprimarily related to strengthened demand for the third quarter of 2018.our cloud-based technology and analytics solutions and our restructuring and capital advisory solutions provided to organizations in transition.
During the three months ended September 30, 2019,2020, revenues from fixed-fee engagements; time-and-expense engagements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 31.3%, 61.3%, 5.6%, and 1.8% of this segment’s revenues, respectively, compared to 38.9%, 56.3%, 2.6%, and 2.2% of this segment’s revenues, respectively. During the three months ended September 30, 2018, revenues from fixed-fee engagements; time-and-expense engagements; and software support, maintenance and subscription arrangements represented 42.2%, 56.3%, and 1.5% of this segment's revenues, respectively, for the same prior year period. Performance-based fee revenue was $3.7 million for the third quarter of 2020 compared to $1.6 million for the third quarter of 2019 and was immaterial for the third quarter of 2018.2019. The level of performance-based fees earned may vary based on our clients’ preferences and the mix of services we provide.
Of the overall $5.3$3.5 million increase in revenues, $5.8$2.2 million was attributable to an increase in revenues from our full-time billable consultants; partially offset by a $0.4consultants and $1.3 million decreasewas attributable to an increase in revenues generated byfrom our full-time equivalents. The increase in revenues from our full-time billable consultants reflected an increaseincreases in the average number of billable consultants and the consultant utilization rate, partially offset by decreasesa decrease in the average billing rate and the consultant utilization rate in the third quarter of 20192020 compared to the same prior year period. The decreaseincrease in revenues generated by our full-time equivalents was driven by an increased use of contractors; and reflected an increase in the average number of full-time equivalents, partially offset by a decrease in revenue per full-time equivalent in the third quarter of 2020 compared to the same prior year period.
Operating Income
Business Advisory segment operating income decreased by $1.2 million, or 9.7%, to $10.8 million for the three months ended September 30, 2020 from $11.9 million for the three months ended September 30, 2019. The Business Advisory segment operating margin decreased to 16.3% for the third quarter of 2020 from 19.1% in the same period last year. The decrease in this segment’s operating margin was primarily attributable to increases in performance bonus expense for our revenue-generating professionals and contractor expenses, as percentages of revenues; partially offset by decreases in promotion and marketing expenses and signing, retention and other bonus expense for our revenue-generating professionals.
Education
Revenues
Education segment revenues decreased $4.9 million, or 8.7%, to $51.9 million for the third quarter of 2020 from $56.8 million for the third quarter of 2019, primarily due to the negative impact of the COVID-19 pandemic on demand for our services within this segment, as some clients reprioritized and delayed certain projects as a result of the uncertainties surrounding the pandemic.
During the three months ended September 30, 2020, revenues from fixed-fee engagements; time-and-expense engagements; and software support, maintenance and subscription arrangements represented 21.1%, 67.9%, and 11.0% of this segment’s revenues, respectively, compared to 21.9%, 69.9%, and 8.2% of this segment’s revenues, respectively, for the same prior year period.
Of the overall $4.9 million decrease in revenues, $4.7 million was attributable to our full-time billable consultants and $0.2 million was attributable to our full-time equivalents. The decrease in revenues attributable to our full-time billable consultants reflected decreases in the consultant utilization rate and the average billing rate, partially offset by an increase in the average number of full-time billable consultants in the third quarter of 2020 compared to the same prior year period. The increase in the average number of full-time billable consultants primarily related to hiring that occurred prior to the COVID-19 pandemic. The decrease in revenues from our full-time equivalents was primarily driven by a decreased use of contractors;contractors and project consultants, largely offset by an increase in software subscriptions and data hosting revenues. The overall decrease in full-time equivalent revenues reflected a decrease in the average number of full-time equivalents, partially offset by an increase in revenue per full-time equivalent in the third quarter of 20192020 compared to the same prior year period.
Operating Income
Business AdvisoryEducation segment operating income increased by $0.1decreased $1.9 million, or 1.1%,12.9% to $11.9$12.5 million for the three months ended September 30, 20192020 from $11.8$14.4 million for the three months ended September 30, 2018.2019. The Business AdvisoryEducation segment operating margin decreased to 19.1%24.2% for the third quarter of 20192020 from 20.7%25.4% in the same period last year. The decrease in this segment’s operating margin was primarily attributable to increases in salaries and related expenses, performance bonus expense and share-based compensation expense for our revenue-generating professionals, all as percentages of revenues; partially offset by decreases in signing, retention and other bonus expense for our revenue-generating professionals, practice and administration expenses, and contractor expense.
Education
Revenues
Education segment revenues increased $5.9 million, or 11.6%, to $56.8 million for the third quarter of 2019 from $50.9 million for the third quarter of 2018.
During the three months ended September 30, 2019, revenues from fixed-fee engagements; time-and-expense engagements; and software support, maintenance and subscription arrangements represented 21.9%, 69.9%, and 8.2% of this segment’s revenues, respectively, compared to 18.2%, 74.0%, and 7.8% of this segment’s revenues, respectively, for the same prior year period.
Of the overall $5.9 million increase in revenues, $4.1 million was attributable to our full-time billable consultants and $1.9 million was attributable to our full-time equivalents. The increase in revenues attributable to our full-time billable consultants reflected an increase in the average number of full-time billable consultants, partially offset by decreases in the average billing rate and the consultant utilization rate in the third quarter of 2019 compared to the same prior year period. The increase in revenues from our full-time equivalents was primarily driven by an increase in software and data hosting revenues; and reflected increases in the average number of full-time equivalents and revenue per full-time equivalent in the third quarter of 2019 compared to the same prior year period.
Operating Income
Education segment operating income decreased $0.6 million, or 4.0%, to $14.4 million for the three months ended September 30, 2019 from $15.0 million for the three months ended September 30, 2018. The Education segment operating margin decreased to 25.4% for the third quarter of 2019 from 29.5% in the same period last year. The decrease in this segment’s operating margin was primarily attributable to increases in salaries and related expenses for our revenue generating professionals; contractor expense; share-based compensation expense andpartially offset by decreases in performance bonus expense for our revenue-generating professionals;professionals and promotion and marketing expense, allexpenses, as percentages of revenues.
Nine Months Ended September 30, 20192020 Compared to Nine Months Ended September 30, 20182019
Revenues
Revenues increased $54.8$1.3 million, or 9.3%0.2%, to $645.8 million for the first nine months of 2020 from $644.5 million for the first nine months of 2019 from $589.7 million for2019. While the COVID-19 pandemic did not have a significant impact on our consolidated revenues in the first nine monthsquarter of 2018. 2020, the second and third quarters of 2020 were negatively impacted by the pandemic as some clients reprioritized or delayed certain projects, primarily in our Healthcare and Education segments. Conversely, the COVID-19 pandemic has strengthened demand for other services we provide, such as our cloud-based technology and analytics solutions within our Business Advisory segment and our restructuring and capital advisory solutions provided to organizations in transition within our Business Advisory segment.
Of the overall $54.8$1.3 million increase in revenues, $53.1$3.0 million was attributable to an increase in revenues from our full-time billable consultants, andpartially offset by a $1.7 million wasdecrease in revenues attributable to our full-time equivalents.
The increase in full-time billable consultant revenues was attributable to strengthened demand for services in allour Business Advisory and Education segments, partially offset by a decrease in demand for services in our Healthcare segment, as discussed below in Segment Results. The overall increase in full-time billable consultant revenues reflected an increase in the average number of full-time billable consultants, partially offset by overall decreases in the consultant utilization rate and the average billing rate during the first nine months of 2020 compared to the same prior year period.
The decrease in full-time equivalent revenues was attributable to decreases in full-time equivalent revenues in our Healthcare segment, partially offset by an increase in full-time equivalent revenues in our Education and Business Advisory segments, as discussed below in Segment Results; and reflected an overall increasedecrease in the average number of full-time billable consultants during the first nine months of 2019 compared to the same prior year period.
The increase inrevenue per full-time equivalent, revenues was attributable to increases in full-time equivalent revenues in our Education and Healthcare segments, largelypartially offset by a decrease in full-time equivalent revenues in our Business Advisory segment, as discussed below in Segment Results; and reflected an overall increase in the average number of full-time equivalents partially offset byduring the first nine months of 2020 compared to the first nine months of 2019.
In the second and third quarters of 2020, the COVID-19 pandemic negatively impacted sales and elongated the sales cycle for new opportunities for certain services, particularly within our Healthcare and Education segments, and therefore is expected to continue to have an overall decreaseunfavorable impact on our financial results in revenue per full-time equivalent.the fourth quarter of 2020 compared to the fourth quarter of 2019.
Total Direct Costs
Our total directDirect costs, includingexcluding amortization of intangible assets and software development costs, increased $33.7$28.8 million, or 8.6%6.8%, to $425.9$451.2 million for the nine months ended September 30, 2019,2020, from $392.2$422.4 million for the nine months ended September 30, 2018.2019. The overall $33.7$28.8 million
increase primarily related to an $18.2a $27.1 million increase in salaries and related expenses for our revenue-generating professionals, which was largely driven by increased headcount in all three of our Educationsegments and Business Advisory segments; an $11.5 million increaseprimarily reflected hiring that occurred in performance bonus expense for our revenue-generating professionals;the second half of 2019 prior to the COVID-19 pandemic, as well as a $2.9$2.4 million increase in share-based compensation expense for our revenue-generating professionals; andprofessionals, a $1.2$2.1 million increase in technology expenses, a $1.1 million increase in contractor expense.expenses, and a $0.9 million increase in performance bonus expenses for our revenue-generating professionals. These increases were partially offset by a $2.3 million decrease in signing, retention and other bonus expense for our revenue-generating professionals, a $1.4 million decrease in product and event costs, and a $0.9 million decrease in project costs. As a percentage of revenues, our total direct costs decreasedincreased to 66.1%69.9% during the first nine months of 2020 compared to 65.5% during the first nine months of 2019 compared to 66.5% during the first nine months of 2018 primarily due to revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals, partially offset by the increase in performance bonus expense for our revenue-generating professionals, as a percentage of revenues.
Total direct costs for the nine months ended September 30, 20192020 included $3.5$4.0 million of amortization expense for internal software development costs and intangible assets, compared to $3.2$3.5 million of amortization expense for the same prior year period. The $0.3 million increase in amortization expense was attributable to a $0.9 million increase in amortization for internal software development costs, partially offset by a $0.6 million decrease in intangible asset amortization attributable to certain intangible assets acquired in our Studer Group acquisition which were fully amortized in prior periods. Intangible asset amortization included within direct costs for the nine months ended September 30, 20192020 and 20182019 related to technology and software, certain customer relationships, publishing content and customer contracts acquired in connection with our business acquisitions. See Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information about our intangible assets.
Operating Expenses and Other Losses (Gains), Net
Selling, general and administrative expenses increased $12.9decreased $24.5 million, or 9.3%16.2%, to $126.9 million in the nine months ended September 30, 2020, from $151.4 million in the nine months ended September 30, 2019, from $138.52019. The $24.5 million in the nine months ended September 30, 2018. The overall $12.9 million increasedecrease primarily related to an $8.0 million decrease in promotion and marketing expenses, a $5.0$2.6 million decrease in facilities expense, a $2.6 million decrease in performance bonus expense for our support personnel, a $2.2 million decrease in training expenses, a $2.1 million decrease in third-party consulting expenses, a $2.0 million decrease
in practice administration and meetings expenses, and a $1.8 million decrease in the change in the market value of our deferred compensation liability. During the first nine months of 2020, the market value of our deferred compensation liability increased by $1.0 million, compared to an increase of $2.8 million during the first nine months of 2019. This $1.8 million decrease in expense is offset by a $1.8 million decrease in the gain recognized for the change in the market value of our investments that are used to fund our deferred compensation liability and recognized in other income (expense), net. Additional decreases in selling, general and administrative expenses include a $1.7 million decrease in share-based compensation expense for our support personnel, a $1.3 million decrease in legal expenses, and a $1.3 million decrease in recruiting expenses. These decreases were partially offset by a $1.4 million increase in data hosting and software related expenses and a $1.2 million increase in salaries and related expenses for our support personnel; a $2.4 million increasepersonnel. The decreases in promotion and marketing expenses, training expenses, and practice administration and meetings expenses primarily relate to the cancellation or delay of in-person meetings and events and business travel due to the COVID-19 pandemic. The decrease in share-based compensation expense primarily related to a decrease in the expected funding of performance-based share awards for our support personnel; a $2.3 million increaseexecutive officers recorded in computer and related equipment expenses; a $1.9 million increasethe third quarter of 2020. The decrease in legal expenses; and a $0.7 million increase in performance bonus expense for our support personnel. The increase in legal feesexpenses was primarily due to third-party transaction-related expenses related to the evaluation of a potential acquisition in the second quarter of 2019 that ultimately did not consummate. As a percentage of revenues, selling, general and administrative expenses was 23.5% for bothdecreased to 19.6% during the first nine months of 20192020 compared to 23.5% during the first nine months of 2019. This decrease was primarily attributable to the overall decrease in selling, general and 2018.administrative expenses noted above.
Restructuring charges for the first nine months of 20192020 totaled $2.2$1.8 million, compared to $2.7$2.2 million for the first nine months of 2018.2019. The $1.8 million restructuring charge incurred in the first nine months of 2020 primarily related to a $1.2 million accrual for the termination of a third-party advisor agreement; $0.3 million related to workforce reductions to better align resources with market demand; $0.2 million related to rent and related expenses, net of sublease income, for office spaces previously vacated, and $0.1 million related to workforce reductions in our corporate operations. During the first quarternine months of 2019, we exited a portion of our Lake Oswego, Oregon corporate office resulting in a $0.7 million lease impairment charge on the related operating lease right-of-use ("ROU") asset and leasehold improvements and $0.2 million of accelerated depreciation on furniture and fixtures in that office. The lease impairment charge recognizedAdditionally, in the first quarter of 2019 was recognized in accordance with ASC 842, Leases, which we adopted on a modified retrospective basis on January 1, 2019. See Note 2 "Basis of Presentation and Significant Accounting Policies" and Note 3 "New Accounting Pronouncements" within the notes to our consolidated financial statements for additional information on our adoption of ASC 842. See Note 5 "Leases" within the notes to our consolidated financial statements for additional information on the long-lived asset impairment test performed in the first quarter of 2019. In the second quarternine months of 2019, we exited the remaining portion of our Middleton, Wisconsin office and an office space in Houston, Texas, resulting in restructuring charges of $0.4 million and $0.1 million, respectively, which primarily related to accelerated depreciation on related furniture and fixtures. Additional restructuring charges during the first nine months of 2019 include $0.5 million related to workforce reductions as we continue to better align resources with market demand.
The $2.7 million restructuring charge incurred in the first nine monthsa total of 2018 primarily consisted of $1.2$0.5 million related to workforce reductions to better align resources with market demand; $0.7 million related to the accrual of remaining lease payments, net of estimated sublease income, and accelerated depreciation on leasehold improvements due to exiting a portion of our Middleton, Wisconsin office in the second quarter of 2018; $0.3 million related to updated lease assumptions for our San Francisco office vacated in the third quarter of 2017; and $0.3 million related to the divestiture of our Middle East practice within the Business Advisory segment in the second quarter of 2018. During the second quarter of 2018, we sold our Middle East practice to a former employee who was the practice leader of that business at the time; and we recorded a $5.9 million loss for the nine months ended September 30, 2018, which is included in other income (expense), net in our consolidated statements of operations. The restructuring charges recorded in the first nine months of 2018 related to office space reductions were accounted for in accordance with ASC 840, Leases. demand. See Note 98 "Restructuring Charges" within the notes to our consolidated financial statements for additional information on our restructuring charges.
Litigation and other losses (gains), netgains totaled $0.2 million for the nine months ended September 30, 2020, which consisted of a litigation settlement gain for the resolution of a claim that was settled in the first quarter of 2020. Other gains totaled $1.6 million for the nine months ended September 30, 2019, which primarily consisted of $1.5 million of remeasurement gains to decrease the estimated fair value of our liabilities for contingent consideration payments related to business acquisitions. Litigation
Depreciation and other losses (gains)amortization expense decreased by $2.8 million, or 13.2%, net totaled a gain of $5.0to $18.5 million for the nine months ended September 30, 2018, which consisted of a $2.5 million litigation settlement gain for the resolution of Huron's claim in a class action lawsuit in the second quarter of 2018 and $2.5 million of net remeasurement gains to decrease the estimated fair value of our contingent consideration liabilities. 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 decreased by $5.0 million, or 19.0%, to2020, from $21.3 million infor the nine months ended September 30, 2019, from $26.3 million in the nine months ended September 30, 2018.2019. The decrease was primarily attributable to decreasinga decrease in amortization expense offor the trade name and customer relationships acquired in our Studer Group acquisition and certainthat was fully amortized in the fourth quarter of 2019; decreasing amortization expense for customer relationships acquired in other business acquisitions, due to the accelerated basis of amortization in prior periods, as well as certain otherincluding the customer relationships acquired in our Studer Group acquisition; and customer relationships acquired in other business acquisitions that were fully amortized in prior periods. Intangible asset amortization included within operating expenses for the nine months ended September 30, 20192020 and 20182019 primarily related to certain customer relationships, trade names and non-competition agreements acquired in connection with our business acquisitions. See Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information about our intangible assets.
During the first quarter of 2020, we recorded $59.8 million of non-cash pretax goodwill impairment charges related to our Strategy and Innovation and Life Sciences reporting units within our Business Advisory segment; primarily related to the expected decline in sales, increased uncertainty in the backlog and a decrease in the demand for the services these reporting units provide, as a result of the COVID-19 pandemic. These charges are non-cash in nature and do not affect our liquidity or debt covenants. See the "Critical Accounting Policies" section below and Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on the charges. The non-cash goodwill impairment charge related to the Strategy and Innovation reporting unit reduced the goodwill balance of the reporting unit to $37.5 million as of March 31, 2020. The non-cash goodwill impairment charge related to the Life Sciences reporting unit reduced the goodwill balance to zero as of March 31, 2020. Any future significant decline in the performance of our Strategy and Innovation reporting unit compared to our internal forecasts could result in another non-cash goodwill impairment charge. During the second and third quarters of 2020, we did not identify any indicators that would lead us to believe that the fair value of any of our reporting units may not exceed their carrying values. We will continue to evaluate goodwill for impairment during future periods.
Operating Income (Loss)
Operating income increased $10.2decreased $61.4 million to a loss of $16.2 million in the first nine months of 2020 from operating income of $45.2 million in the first nine months of 2019 from $35.02019. This decrease is primarily attributable to the $59.8 million of non-cash pretax goodwill impairment charges related to our Business Advisory segment that were recognized in the first nine monthsquarter of 2018.2020 and the increase in direct costs, partially offset by the decrease in selling, general and administrative expenses as discussed above. See the "Critical Accounting Policies" section below and Note 4 "Goodwill and
Intangible Assets" within the notes to our consolidated financial statements for additional information on the non-cash goodwill impairment charges. Operating margin, which is defined as operating income (loss) expressed as a percentage of revenues, increaseddecreased to (2.5)% for the nine months ended September 30, 2020, compared to an operating margin of 7.0% for the nine months ended September 30, 2019, compared to 5.9% for the nine months ended September 30, 2018.2019. The increasedecrease in operating margin was primarily attributable to the revenue growth that outpacedgoodwill impairment charges and the increase in salaries and related expenses for our revenue-generating professionals, andas a percentage of revenues. These decreases to the decrease in intangible asset amortization expense;operating margin were partially offset by the increasedecreases in performance bonus expense for our revenue-generating professionals, as a percentage of revenues.
Other Expense, Netselling, general and administrative expenses.
Total otherOther Income (Expense), Net
Interest expense, net of interest income decreased by $9.4$5.6 million to $10.3$7.5 million in the first nine months of 2020 from $13.2 million in the first nine months of 2019, from $19.8primarily attributable to the maturity of our Convertible Notes on October 1, 2019, partially offset by higher levels of borrowing under our credit facility during the first nine months of 2020 compared to the same prior year period. See Note 7 "Financing Arrangements" within the notes to our consolidated financial statements for additional information about our Convertible Notes and credit facility.
Other income, net decreased by $2.1 million to a net gain of $0.7 million in the first nine months of 2018.2020 from a net gain of $2.8 million in the first nine months of 2019. The decrease in total other expense,income, net was primarily attributable to a $5.9 million loss recorded in the first nine months of 2018 related to the divestiture of our Middle East practice within our Business Advisory segment. During the second quarter of 2018, we sold our Middle East business to a former employee who was the practice leader of that business at the time. The decrease in total other expense, net was also attributable to a $2.8$1.0 million gain recognized during the first nine months of 20192020 for the market value of our investments that are used to fund our deferred compensation liability, compared to a $2.8 million gain of $0.9 millionrecognized during the first nine months of 2018. Interest expense,2019. Additionally, other income, net includes the recognition of interest income decreased $1.5$0.2 million to $13.2 millionof foreign currency transaction losses in the first nine months of 2019 from $14.6 million2020 compared to an immaterial amount of foreign currency transaction losses recognized in the first nine months of 2018. The decrease2019.
Income Tax Expense (Benefit)
On March 27, 2020, the President of the United States signed into law the CARES Act, a nearly $2 trillion emergency economic stimulus package in interest expense was dueresponse to lower levelsthe COVID-19 outbreak, which among other items, includes income tax provisions relating to net operating loss carryback periods and technical corrections to tax depreciation methods for qualified improvement property. As a result of borrowing under our credit facilitythe enactment of this legislation during the first quarter of 2020, we recorded a tax benefit of $0.8 million related to the remeasurement of a portion of our income tax receivable due to the ability to apply the federal net operating loss incurred in 2018 to prior year income for a refund at a higher tax rate in the carryback period.
For the nine months ended September 30, 2020, our effective tax rate was 23.5% as we recognized an income tax benefit from continuing operations of 2019 compared$5.4 million on a loss from continuing operations of $23.0 million. The effective tax rate of 23.5% was less favorable than the statutory rate, inclusive of state income taxes, of 26.0%, primarily due to certain nondeductible business expenses and the same prior year period,nondeductible portion of the goodwill impairment charges recorded during the first quarter of 2020. These unfavorable items were partially offset by higher interest ratesa discrete tax benefit for share-based compensation awards that vested during the first nine monthsquarter, the positive impact of 2019 compared tocertain federal tax credits, and the same prior year period.
Income Tax Expensediscrete tax benefit for the remeasurement of a portion of our income tax receivable as a result of the enactment of the CARES Act in the first quarter of 2020.
For the nine months ended September 30, 2019, our effective tax rate was 20.8% as we recognized income tax expense from continuing operations of $7.3 million on income from continuing operations of $34.9 million. The effective tax rate of 20.8% was more favorable than the statutory rate, inclusive of state income taxes, of 26.4%, primarily due to $1.0 million of discrete tax benefitbenefits recognized primarily in the third quarter of 2019 related to U.S. federal and foreign return to provision adjustments, which had a favorable impact of 2.8% on the effective tax rate.adjustments. In addition, we recognized a $0.7 million discrete tax benefit in the third quarter of 2019 related to a previously unrecognized tax benefit due to the expiration of statute of limitations on our "check-the-box" election made in 2015 to treat certain wholly-owned foreign subsidiaries as disregarded entities for U.S. federal income tax purposes, which had a favorable impact of 2.1%purposes.
See Note 12 "Income Taxes" within the notes to our consolidated financial statements for additional information on the effective tax rate. For the nine months ended September 30, 2018, our effective tax rate was 28.6% as we recognized income tax expense from continuing operations of $4.4 million on income from continuing operations of $15.3 million. The effective tax rate of 28.6% was less favorable than the statutory rate, inclusive of state income taxes, of 26.0% primarily due to discrete tax expense of $1.2 million for share-based compensation awards that vested during the first quarter of 2018, which had an unfavorable impact of 8.1% on the effective tax rate. This unfavorable discrete item was partially offset by a $0.9 million discrete tax benefit recorded in the third quarter of 2018 related to U.S. federal and foreign return to provision adjustments, which had a favorable impact of 6.1% on the effective tax rate.expense.
Net Income (Loss) from Continuing Operations and Earnings (Loss) Per Share
Net income from continuing operations increaseddecreased by $16.7$45.2 million to $27.6a net loss from continuing operations of $17.6 million for the nine months ended September 30, 2019,2020, from $10.9net income from continuing operations of $27.6 million for the same prior year period. This decrease is primarily attributable to the $59.8 million of non-cash pretax goodwill impairment charges related to our Business Advisory segment recognized in the first quarter of 2020. As a result of the increasedecrease in net income from continuing operations, diluted loss per share from continuing operations for the first nine months of 2020 was $0.81 compared to diluted earnings per share from continuing operations of $1.23 for the first nine months of 2019. The non-cash goodwill impairment charges had a $2.11 unfavorable impact on diluted earnings per share from continuing operations for the first nine months of 2019 was $1.23 compared to $0.50 for the first nine months of 2018.2020.
EBITDA and Adjusted EBITDA
EBITDA increased $13.4decreased $65.8 million to $7.0 million for the nine months ended September 30, 2020, from $72.8 million for the nine months ended September 30, 2019, from $59.42019. The decrease in EBITDA was primarily attributable to the non-cash goodwill impairment charges of $59.8 million recognized in the first quarter of 2020 and the increase in salaries and related expense for our revenue-generating professionals for the first nine months ended September 30, 2018. of 2020 compared to the first nine months of 2019; partially offset by the decrease in selling, general and administrative expenses, excluding the change in the market value of our deferred compensation liability for the first nine months of 2020 compared to the same prior year period.
Adjusted EBITDA increased $12.9decreased $6.0 million to $70.1 million in the first nine months of 2020 from $76.0 million in the first nine months of 2019 from $63.1 million in the first nine months of 2018.2019. The increase in EBITDA was primarily attributable to the increase in revenues for the first nine months of 2019 compared to the same prior year period and the loss on the divestiture of our Middle East business within our Business Advisory segment recorded in the first nine months of 2018. These increases to EBITDA were partially offset by the increases in salaries and related expenses for our revenue-generating professionals, selling, general and administrative expenses, and performance bonus expense for our revenue-generating professionals; as well as the decrease in litigation and other gains, net recognized in the first nine months of 2019 compared to the same prior year period. The increase in adjusted EBITDA was primarily attributable to the increase in revenues, partially offset by the increases in salaries and related expenses for our
revenue-generating professionals,2020 compared to the first nine months of 2019; largely offset by the decrease in selling, general and administrative expenses, excluding the change in the market value of our deferred compensation liability and performance bonus expensetransaction-related expenses related to the evaluation of potential acquisitions, for our revenue-generating professionals in the first nine months of 20192020 compared to the same prior year period.
Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share
Adjusted net income from continuing operations increased $12.6decreased $5.9 million to $37.7 million in the first nine months of 2020 compared to $43.7 million in the first nine months of 2019 compared to $31.1 million in the first nine months of 2018.2019. As a result of the increasedecrease in adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations for the first nine months of 20192020 was $1.95$1.70 compared to $1.42$1.95 for the first nine months of 2018.2019.
Segment Results
Healthcare
Revenues
Healthcare segment revenues increased $23.8decreased $27.3 million, or 8.8%9.2%, to $268.3 million for the first nine months of 2020 from $295.6 million for the first nine months of 2019, from $271.8 millionprimarily due to the negative impact of the COVID-19 pandemic on demand for our services within this segment, as some clients reprioritized and delayed certain projects as a result of the first nine months of 2018.uncertainties surrounding the pandemic.
During the nine months ended September 30, 2019,2020, revenues from fixed-fee engagements; time-and-expense engagements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 63.9%58.9%, 13.3%16.2%, 17.0%18.3%, and 5.8%6.6% of this segment’s revenues, respectively, compared to 67.2%63.9%, 15.7%13.3%, 10.2%17.0%, and 6.9%5.8% of this segment’s revenues, respectively, for the same prior year period. Performance-based fee revenue was $49.0 million during the first nine months of 2020, compared to $50.1 million during the first nine months of 2019, compared to $27.8 million during the first nine months of 2018.2019. The level of performance-based fees earned may vary based on our clients’ risk sharing preferences and the mix of services we provide.
Of the overall $23.8$27.3 million increasedecrease in revenues, $22.7$17.8 million was attributable to an increasea decrease in revenues from our full-time billable consultants and $1.1$9.5 million was attributable to our full-time equivalents. The increasedecrease in revenues attributable to our full-time billable consultants reflected increasesa decrease in the average billingconsultant utilization rate, andpartially offset by increases in the average number of full-time billable consultants partially offset by a decrease inand the consultant utilizationaverage billing rate in the first nine months of 20192020 compared to the same prior year period. The increasedecrease in full-time equivalent revenues attributable to ourreflected a decrease in revenue per full-time equivalents reflectedequivalent, partially offset by an increase in the average number of full-time equivalents partially offset by a decrease in revenue per full-time equivalent induring the first nine months of 20192020 compared to the same prior year period.
Operating Income
Healthcare segment operating income increased $15.9decreased $23.2 million, or 20.3%24.7%, to $70.8 million for the nine months ended September 30, 2020, from $94.1 million for the nine months ended September 30, 2019, from $78.2 million for the nine months ended September 30, 2018.2019. The Healthcare segment operating margin increaseddecreased to 31.8%26.4% for the first nine months of 20192020 from 28.8%31.8% in the same period last year. The increasedecrease in this segment’s operating margin was primarily attributable to revenue growth that outpaced the increaseincreases in salaries and related expenses for our revenue-generating professionals and technology expenses; partially offset by an increasedecreases in performance bonus expense for our revenue-generating professionals, contractor expenses, and product and event costs, as a percentagepercentages of revenues.
Business Advisory
Revenues
Business Advisory segment revenues increased $12.8$17.8 million, or 7.5%9.7%, to $201.4 million for the first nine months of 2020 from $183.6 million for the first nine months of 2019, from $170.8 millionprimarily related to strengthened demand for the first nine months of 2018.our cloud-based technology and analytics solutions and our restructuring and capital advisory solutions provided to organizations in transition.
During the first nine months of 2019,2020, revenues from fixed-fee engagements; time-and-expense engagements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 39.6%36.5%, 56.8%58.8%, 1.5%2.9%, and 2.1%1.8% of this segment’s revenues, respectively, compared to 41.0%39.6%, 55.3%56.8%, 1.8%1.5%, and 1.9%2.1% of this segment’s revenues, respectively, during the same prior year period. Performance-based fee revenue was $5.9 million for the first nine months of 2020, compared to $2.8 million for the first nine months of 2019, compared to $3.1 million for the first nine months of 2018.2019. The level of performance-based fees earned may vary based on our clients’ preferences and the mix of services we provide.
Of the overall $12.8$17.8 million increase in revenues, $14.7$14.3 million was attributable to an increase in revenues fromgenerated by our full-time billable consultants partially offset by a $1.9and $3.5 million decrease in revenueswas attributable to our full-time equivalents. The increase in revenues from our full-time billable consultants was primarily driven by increases in the average number of full-time billable consultants and the consultant utilization rate, partially offset by a decrease in the average billing rate in the first nine months of 20192020 compared to the same prior year period. The decreaseincrease in revenues from our full-time equivalents was driven by a decreasedan increased use of contractors and our part-time project consultants;contractors; and reflected a decreasean increase in the average number of full-time equivalents, partially offset by an increasea decrease in revenue per full-time equivalent in the first nine months of 20192020 compared to the same prior year period.
Operating Income
Business Advisory segment operating income decreasedincreased by $2.0$4.3 million, or 5.8%13.1%, to $37.3 million for the nine months ended September 30, 2020, from $33.0 million for the nine months ended September 30, 2019, from $35.0 million for the nine months ended September 30, 2018.2019. The Business Advisory segment operating margin decreasedincreased to 18.0%18.5% for the first nine months of 20192020 from 20.5%18.0% in the same period last year. The decreaseincrease in this segment’s operating margin was primarily attributable to a decrease in promotion and marketing expenses, revenue growth that outpaced an increase in salaries and related expenses for our revenue-generating professionals, and decreases in signing, retention and other bonus expense for our revenue-generating professionals and practice administration and meetings expenses. These increases to the segment's operating margin were partially offset by increases in performance bonus expense for our revenue-generating professionals, contractor expenses, share-based compensation expense for our revenue-generating professionals, and restructuring charges, all as a percentagepercentages of revenues. The restructuring charge recorded in the first nine months of 2020 related to the termination of a third-party advisor agreement.
The non-cash goodwill impairment charges related to the Strategy and Innovation and Life Sciences reporting units within the Business Advisory segment, which are discussed above within consolidated results, are not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segment. We do not include the impact of goodwill impairment charges in our evaluation of segment performance. See the "Critical Accounting Policies" section below and Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on the goodwill impairment charges and our goodwill balances.
Education
Revenues
Education segment revenues increased $18.2$10.8 million, or 12.4%6.5%, to $165.3$176.0 million for the first nine months of 20192020 from $147.1 million for$165.3 million. The increase in revenues was primarily related to an increase in our cloud-based technology and analytics solutions and strategy and research consulting solutions in the first nine monthshalf of 2018.2020, partially offset by the negative impact of the COVID-19 pandemic on demand for our on-premise technology consulting solutions.
For the nine months ended September 30, 2019,2020, revenues from fixed-fee engagements; time-and-expense engagements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 20.2%, 70.1%, 0.4% and 9.3% of this segment’s revenues, respectively. Revenues from fixed-fee engagements; time-and-expense engagements; and software support, maintenance and subscription arrangements represented 22.9%, 69.1%, and 8.0% of this segment’s revenues, respectively, compared to 19.5%, 73.5%, and 7.0% of this segment's revenues, respectively, during the same prior year period.
Of the overall $18.2$10.8 million increase in revenues, $15.7$6.5 million was attributable to revenues generated by our full-time billable consultants and $2.5$4.3 million was attributable to revenues generated by our full-time equivalents. The increase in revenues from our full-time billable consultants reflected an increase in the average number of full-time billable consultants;consultants, partially offset by a decreasedecreases in the consultant utilization rate and average billing rate in the first nine months of 20192020 compared to the same prior year period. The increase in the average number of full-time billable consultants primarily related to hiring that occurred prior to the COVID-19 pandemic. The increase in revenues from our full-time equivalents was primarily driven by an increased use of contractors and project consultants as well as an increase in software subscriptions and data hosting revenues; and reflected increasesan increase in revenue per full-time equivalent and the average number of full-time equivalents, partially offset by a decrease in revenue per full-time equivalent in the first nine months of 20192020 compared to the same prior year period.
Operating Income
Education segment operating income increased $5.5decreased $1.4 million, or 14.7%3.3%, to $41.8 million for the nine months ended September 30, 2020, from $43.2 million for the nine months ended September 30, 2019, from $37.7 million for the nine months ended September 30, 2018.2019. The Education segment operating margin increaseddecreased to 26.2%23.7% for the first nine months of 20192020 from 25.6%26.2% in the same period last year. The increasedecrease in this segment’s operating margin was primarily attributable to revenue growth that outpaced the increaseincreases in salaries and related expenses for our revenue-generating professionals, technology expenses, and contractor expenses, all as percentages of revenues; partially offset by a decrease in practice administrationpromotion and meetings expenses; partially offset by an increase in contractormarketing expenses and performance bonus expense as a percentagefor our revenue-generating professionals.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $16.3$63.1 million to $49.4$74.7 million at September 30, 20192020 from $33.1$11.6 million at December 31, 2018.2019. As of September 30, 2019,2020, our primary sources of liquidity are cash on hand, cash flows from our U.S. operations, and borrowing capacity available under our credit facility.
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
Cash Flows (in thousands): | | 2019 | | 2018 | Cash Flows (in thousands): | | 2020 | | 2019 |
Net cash provided by operating activities | | $ | 51,745 |
| | $ | 48,867 |
| Net cash provided by operating activities | | $ | 77,985 | | | $ | 51,745 | |
Net cash used in investing activities | | (24,420 | ) | | (13,496 | ) | Net cash used in investing activities | | (28,388) | | | (24,420) | |
Net cash used in financing activities | | (11,060 | ) | | (43,141 | ) | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | | 13,517 | | | (11,060) | |
Effect of exchange rate changes on cash | | 38 |
| | (114 | ) | Effect of exchange rate changes on cash | | 27 | | | 38 | |
Net increase (decrease) in cash and cash equivalents | | $ | 16,303 |
| | $ | (7,884 | ) | |
Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | | $ | 63,141 | | | $ | 16,303 | |
Operating Activities
Net cash provided by operating activities totaled $78.0 million for the nine months ended September 30, 2020, compared to $51.7 million for the nine months ended September 30, 2019, compared to of $48.9 million for the nine months ended September 30, 2018, respectively.2019. Our operating assets and liabilities consist primarily of receivables from billed and unbilled services, accounts payable and accrued expenses, accrued payroll and related benefits, and deferred revenues. The volume of services rendered and the related billings and timing of collections on those billings, as well as payments of our accounts payable and salaries, bonuses, and related benefits to employees affect these account balances.
The increase in cash provided by operating activities for the first nine months of 20192020 compared to cash provided by operating activities in the same prior year period was primarily attributable to an increase in cash collections, from clientsa decrease in selling, general and administrative expenses for the first nine months of 2020 compared to the first nine months of 2019; and the deferral of the employer's portion of social security taxes as provided for under the CARES Act. These increases to cash provided by operating activities were partially offset by increases in payments to employees for salaries and related benefits in the nine months ended September 30, 20192020 compared to the nine months ended September 30, 2018, largely offset by2019 and the amount paid for annual performance bonuses duringin the first quarter of 20192020 compared to the first quarter of 2018.
2019.
Investing Activities
Net cash used in investing activities was $24.4$28.4 million and $13.5$24.4 million for the nine months ended September 30, 2020 and 2019, respectively.
The use of cash in the first nine months of 2020 primarily consisted of $13.0 million for the purchase of an additional convertible debt investment in Shorelight Holdings, LLC; $6.8 million for payments related to internally developed software; $5.7 million for purchases of property and 2018, respectively.equipment, primarily related to purchases of leasehold improvements and furniture for certain office spaces and computers and related equipment; and $2.0 million for contributions to our life insurance policies which fund our deferred compensation plan.
The use of cash in the first nine months of 2019 primarily consisted of $10.0 million for purchases of property and equipment, primarily related to purchases of computers and related equipment and leasehold improvements for new office spaces in certain locations; $7.5 million for payments related to internally developed software; $4.4 million for contributions to our life insurance policies which fund our deferred compensation plan; and $2.5 million for the purchase of a business in the third quarter of 2019.
The useIn order to support our liquidity during the COVID-19 pandemic, we took proactive measures to increase available cash on hand, including reducing discretionary capital expenses. As a result, as of cash in the first nine months of 2018 primarily consisted of $6.7 million for purchases of property and equipment, primarily related to purchases of computers and related equipment; $3.6 million for payments related to internally developed software; $2.4 million for payments related to the divestiture of our Middle East practice within the Business Advisory segment; and $1.7 million for contributions to our life insurance policies which fund our deferred compensation plan.
WeSeptember 30, 2020, we estimate that cash utilized for purchases of software development and property and equipment and software development in 20192020 will betotal approximately $20$16 million to $24 million,$20 million. These purchases will primarily consistingconsist of software development costs, leasehold improvements for certain office locations, and information technology related equipment to support our corporate infrastructure.infrastructure, and leasehold improvements for certain office locations.
Financing Activities
Net cash provided by financing activities was $13.5 million for the nine months ended September 30, 2020. During the first nine months of 2020, we borrowed $283.0 million, all of which was in the first quarter of 2020, including $125.0 million in March 2020 to maintain excess cash and support liquidity during the period of uncertainty created by the COVID-19 pandemic, as well as to fund our annual performance bonus payment. During the first nine months of 2020, we made repayments on our borrowings of $240.4 million, including $200.0 million in the second and third quarters of 2020 due to our ability to maintain adequate cash flows from operations and improved clarity around access to capital resources. Additionally, we repurchased and retired $20.9 million of our common stock under our Share Repurchase Program, as defined below, and settled $1.2 million of share repurchases that were accrued as of December 31, 2019.
Net cash used in financing activities was $11.1 million for the nine months ended September 30, 2019. During the first nine months of 2019, we paid $10.0 million to the sellers of certain business acquisitions for achieving specified financial performance targets in accordance with the related
purchase agreements. Of the total $10.0 million payments made, $4.7 million is classified as a cash outflow from financing activities and represents the amount paid up to the fair value of the contingent consideration liability recorded as of the acquisition date. The remaining $5.3 million is classified as a cash outflow from operating activities. During the first nine months of 2019, we borrowed $105.5 million under our credit facility, primarily to fund our annual performance bonus payment, and made repayments on our borrowings of $105.9 million.
Net cash used in financing activities was $43.1 million for the nine months ended September 30, 2018. During the first nine months of 2018, we borrowed $179.8 million under our credit facility and made repayments on our borrowings of $213.7 million. During the first nine months of 2018, we paid $7.8 million to the sellers of certain business acquisitions for achieving specified financial performance targets in accordance with the related purchase agreements. Of the total $7.8 million payments made, $4.9 million is classified as a cash outflow from financing activities and represents the amount paid up to the fair value of the contingent consideration liability recorded as of the acquisition date. The remaining $2.9 million is classified as a cash outflow from operating activities.
Share Repurchase Program
We currently haveAs of September 30, 2020, we had a share repurchase program permitting us to repurchase up to $125 million of our common stock through October 31, 20192020 (the "Share Repurchase Program"). DuringIn the fourthfirst quarter of 2019, our board2020, we repurchased and retired 313,998 shares for $20.9 million. Additionally, in the first quarter of directors authorized an extension2020, we settled the repurchase of the Share Repurchase Program through October18,000 shares for $1.2 million that were accrued as of December 31, 2020. The amount and timing of the repurchases will be determined by management and will depend on a variety of factors, including the trading price of our common stock, capacity under our credit facility, general market and business conditions, and applicable legal requirements.2019. No shares were repurchased in the first nine monthssecond and third quarters of 2019 or 2018.2020. As of September 30, 2019, $35.12020, less than $0.1 million remainsremained available for share repurchases. The Share Repurchase Program expired on October 31, 2020.
Financing Arrangements
At September 30, 2019,2020, we had $250.0 million principal amount of our 1.25% convertible senior notes outstanding, $50.0$248.0 million outstanding under our senior secured credit facility and $4.0$3.5 million outstanding under a promissory note, as discussed below.
1.25% Convertible Senior Notes
In September 2014, we issued $250.0 million principal amount of the Convertible Notes in a private offering. The Convertible Notes are senior unsecured obligations of the Company and paid interest semi-annually on April 1 and October 1 of each year at an annual rate of 1.25%. The Convertible Notes matured on October 1, 2019. Upon maturity, we refinanced $217.0 million of the principal amount of the outstanding Convertible Notes with the borrowing capacity available under our revolving credit facility and funded the remaining $33.0 million principal payment with cash on hand.
In connection with the issuance of the Convertible Notes, we entered into convertible note hedge transactions and warrant transactions. The convertible note hedge transactions were intended to reduce the potential future economic dilution associated with the conversion of the Convertible Notes and, combined with the warrants, effectively raised the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share. The convertible note hedge transactions expired in the third quarter of 2019. 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.
The carrying amount of our Convertible Notes as of September 30, 2019 and December 31, 2018, was $250.0 million and $242.6 million, respectively, which represented the $250.0 million principal amount net of unamortized debt discount and issuance costs. The carrying amount of our Convertible Notes is included in current maturities of long-term debt on the consolidated balance sheet.
For further information, see Note 8 “Financing Arrangements” within the notes to our consolidated financial statements.
Senior Secured Credit Facility
The Company has a $600 million senior secured revolving credit facility, subject to the terms of a Second Amended and Restated Credit Agreement dated as of March 31, 2015, as amended to date (as amended and modified the "Amended Credit Agreement"), that becomes due and payable in full upon maturity on September 27, 2024. The Amended Credit Agreement provides the option to increase the revolving credit facility or establish term loan facilities in an aggregate amount of up to $150 million, subject to customary conditions and the approval of any lender whose commitment would be increased, resulting in a maximum available principal amount under the Amended Credit Agreement of $750 million. The initial borrowings under the Amended Credit Agreement were used to refinance borrowings outstanding under a prior credit agreement, and future borrowingsBorrowings under the Amended Credit Agreement may be used for working capital, capital expenditures, acquisitions of businesses, share repurchases, and general corporate purposes.
Fees and interest on borrowings vary based on our Consolidated Leverage Ratio (as defined in the Amended Credit Agreement). At our option, borrowings under the Amended Credit Agreement will bear interest at one, two, three or six-month LIBOR or an alternate base rate, in each case plus the applicable margin. The applicable margin will fluctuate between 1.125% per annum and 1.875% per annum, in the case of LIBOR borrowings, or between 0.125% per annum and 0.875% per annum, in the case of base rate loans, based upon our Consolidated Leverage Ratio at such time.
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. 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) of 3.75 to 1.00; however the maximum permitted Consolidated Leverage Ratio will increase to 4.00 to 1.00 upon the occurrence of certain transactions, and (ii) a minimum Consolidated Interest Coverage Ratio (defined as the ratio of consolidated EBITDA to interest) of 3.50 to 1.00. Consolidated EBITDA for purposes of the financial covenants is calculated on a continuing operations basis and includes adjustments to add back non-cash goodwill impairment charges, share-based compensation costs, certain non-cash restructuring charges, pro forma historical EBITDA for businesses acquired, and other specified items in accordance with the Amended Credit Agreement. For purposes of the Consolidated Leverage Ratio, total debt is on a gross basis and is not netted against our cash balances. At September 30, 2020 and December 31, 2019, we were in compliance with these financial covenants with acovenants. Our Consolidated Leverage Ratio as of 2.42September 30, 2020 was 2.09 to 1.00, and acompared to 1.64 to 1.00 as of December 31, 2019. Our Consolidated Interest Coverage Ratio as of 15.33September 30, 2020 was 13.19 to 1.00.1.00, compared to 15.29 to 1.00 as of December 31, 2019. The increase in our Consolidated Leverage Ratio as of September 30, 2020 compared to December 31, 2019 was driven by increased borrowings under the Amended Credit Agreement to maintain excess cash and support liquidity during the period of uncertainty created by the COVID-19 pandemic and to fund our annual performance bonus payment in the first quarter of 2020. As a result of these borrowings, cash and cash equivalents increased $63.1 million to $74.7 million at September 30, 2020 from $11.6 million at December 31, 2019.
The Amended Credit Agreement contains restricted payment provisions, including a potential limit on the amount of dividends we may pay. Pursuant to the terms of the Amended Credit Agreement, if our Consolidated Leverage Ratio is greater than 3.25, the amount of dividends and other Restricted Payments (as defined in the Amended Credit Agreement) we may pay is limited to an amount up to $25 million.
BorrowingsPrincipal borrowings outstanding under the Amended Credit Agreement at September 30, 2020 and December 31, 2019 totaled $50.0 million.$248.0 million and $205.0 million, respectively. These borrowings carried a weighted average interest rate of 3.3%,2.5% at September 30, 2020 and 3.0% at December 31, 2019 including the impact of the interest rate swap in effect as of September 30, 2019 andswaps described in Note 109 “Derivative Instrument and Hedging Activity” within the notes to the consolidated financial statements. Borrowings outstanding under the Amended Credit Agreement at December 31, 2018 were $50.0 million and carried a weighted average interest rate of 3.7%, including the impact of the interest rate swap described in Note 10 “Derivative InstrumentInstruments and Hedging Activity” within the notes to the consolidated financial statements. 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, 2019,2020, we had outstanding letters of credit totaling $1.5$1.7 million, which are primarily used as security deposits for our office facilities. As of September 30, 2019,2020, the unused borrowing capacity under the revolving credit facility was $548.5$350.3 million.
On October 1, 2019, we refinanced $217.0 million of the $250.0 million outstanding principal amount of the Convertible Notes with the borrowing capacity available under our revolving credit facility, which resulted in outstanding borrowings of $267.0 million. As of October 1, 2019, the unused borrowing capacity under the revolving credit facility was $331.5 million and our pro forma Consolidated Leverage Ratio was 2.16 to 1.00.
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, 2020, the outstanding principal amount of the promissory note was $3.5 million, and the aircraft had a carrying amount of $4.6 million. At December 31, 2019, the outstanding principal amount of the promissory note was $4.0$3.9 million, and the aircraft had a carrying amount of $5.3 million. At December 31, 2018, the outstanding principal amount of the promissory note was $4.4 million, and the aircraft had a carrying amount of $5.8$5.1 million.
For further information, see Note 87 “Financing Arrangements” within the notes to the consolidated financial statements.
Future Financing Needs
Our current primary financing need is to support our operations during the COVID-19 pandemic. The pandemic has created significant volatility and uncertainty in the economy, which could limit our access to capital resources and could increase our borrowing costs. In order to support our liquidity during the pandemic, we took proactive measures to increase available cash on hand, including, but not limited to, borrowing under our senior secured credit facility in the first quarter of 2020 and reducing discretionary operating and capital expenses. To further support our liquidity, we elected to defer the deposit of our employer portion of social security taxes beginning in April 2020 and through the end of the year, which we expect to pay in equal installments in the fourth quarters of 2021 and 2022, as provided for under the CARES Act. Our long-term financing need has been to fund our growth. Our growth strategy is to expand our service offerings, which may require investments in new hires, acquisitions of complementary businesses, possible expansion into other geographic areas, and related capital expenditures. We believe our internally generated liquidity, together with our available cash, and the borrowing capacity available under our revolving credit facility and access to external capital resources will be adequate to fundsupport our current financing needs and long-term growth and capital needs arising from cash commitments and debt service obligations.strategy. Our ability to secure short-term and long-termadditional financing, if needed, in the future will depend on several factors, including our future profitability, the quality of our accounts receivable and unbilled services, our relative levels of debt and equity, and the overall condition of the credit markets.
CONTRACTUAL OBLIGATIONS
For a summary of our commitments to make future payments under contractual obligations, see 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, 2018.
On2019. As of September 27, 2019, we entered into the fourth amendment (the "Fourth Amendment") to the Second Amended and Restated Credit Agreement dated as of March 31, 2015, as amended to date (as amended and modified the "Amended Credit Facility"). The Fourth Amendment extended the maturity date from March 23, 2023 to September 27, 2024. In addition, the Fourth Amendment provided for, among other things, i) an increase to the Aggregate Revolving Commitments from $500 million to $600 million; ii) a more favorable pricing structure; iii) unlimited Restricted Payments when the Consolidated Leverage Ratio is less than 3.25 to 1.00, and establishes a base amount of allowable Restricted Payments of $25 million when the Consolidated Leverage Ratio is greater than 3.25 to 1.00; and iv) an increase to the maximum permitted Consolidated Leverage Ratio to 3.75 to 1.00, and provides an additional increase to the maximum permitted Consolidated Leverage Ratio to 4.00 to 1.00 upon the occurrence of certain transactions. Borrowings30, 2020, borrowings outstanding under the Amended Credit Agreementour senior secured credit facility totaled $248.0 million compared to $205.0 million at September 30, 2019 totaled $50.0 million.
The capitalized terms above are defined inDecember 31, 2019. See the Amended Credit Facility or Fourth Amendment, as applicable. Refer to "Liquidity and Capital Resources" section above and Note 87 "Financing Arrangements" within the notes to theour consolidated financial statements for moreadditional information on our outstanding borrowings.
During October 2019, we entered into an amendment to the office lease agreement for our principal executive offices in Chicago, Illinois. Among other items, this amendment i) extends the termborrowings as of the lease from September 30, 2024 to September 30, 2029; ii) terminates the lease with respect to certain leased spaces previously vacated; iii) modifies the future base rent payments; and iv) provides abatement of the future base rent payments from October 1, 2019 through January 15, 2021. The amendment increased the contractual obligations related to our Chicago office lease as of October 1, 2019 by $12.7 million, primarily related to the contractual lease payments for the extended term beyond September 30, 2024.
2020. There have been no other material changes to our contractual obligations since December 31, 2018. See Note 2 "Basis of Presentation and Significant Accounting Policies" and Note 3 "New Accounting Pronouncements" within the notes to our consolidated financial statements for information on our adoption of ASC 842, Leases. See Note 5 "Leases" within the notes to our consolidated financial statements for information on our future lease payments and a reconciliation of those lease payments to our operating lease liabilities recorded on our consolidated balance sheet.2019.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any material off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. We regularly review our financial reporting and disclosure practices and accounting policies to ensure that our financial reporting and disclosures provide accurate information relative to the current economic and business environment. The preparation of financial statements in conformity with GAAP requires management to make assessments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to impact our financial position and operating results. While all decisions regarding accounting policies are important, we believe there are five accounting policies that could be considered critical: revenue recognition, allowances for doubtful accounts and unbilled services, business combinations, carrying values of goodwill and other intangible assets, and accounting for income taxes. For a detailed discussion of these critical accounting policies, see Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. Below is an update to our critical accounting policy related to the carrying value of goodwill and other intangible assets. There have been no material changes to our other critical accounting policies during the first nine months of 2019.2020.
Carrying Values of Goodwill and Other Intangible Assets
First Quarter 2020 Goodwill Impairment Analysis
The worldwide spread of the coronavirus (COVID-19) in the first quarter of 2020 created significant volatility, uncertainty and disruption to the global economy. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how we expect it will continue to negatively impact our clients, employees and business partners. While the COVID-19 pandemic did not have a significant impact on our consolidated revenues in the first quarter of 2020, we expected it to have an unfavorable impact on sales, increase uncertainty in the backlog and negatively impact full year 2020 results. The services provided by our Strategy and Innovation and Life Sciences reporting units within our Business Advisory segment focus on strategic solutions for healthy, well-capitalized companies to identify new growth opportunities, which may be considered by our clients to be more discretionary in nature, and the duration of the projects within these practices are typically short-term. Therefore, due to the uncertainty caused by the COVID-19 pandemic, we are cautious about near-term results for these two reporting units. Based on our internal projections and the preparation of our financial statements for the quarter ended March 31, 2020, and considering the expected decrease in demand due to the COVID-19 pandemic, during the first quarter of 2020 we believed that the fair value of these two reporting units no longer exceeded their carrying values and performed an interim impairment test on both reporting units as of March 31, 2020.
Based on the estimated fair values of the Strategy and Innovation and Life Sciences reporting units described below, we recorded non-cash pretax goodwill impairment charges of $49.9 million and $9.9 million, respectively, in the first quarter of 2020. The $49.9 million non-cash pretax charge related to the Strategy and Innovation reporting unit reduced the goodwill balance of the reporting unit to $37.5 million. The $9.9 million non-cash pretax charge related to the Life Sciences reporting unit reduced the goodwill balance of the reporting unit to zero.
Our goodwill impairment test was performed by comparing the fair value of each of the Strategy and Innovation and Life Sciences reporting units with its respective carrying value and recognizing an impairment charge for the amount by which the carrying value exceeded the fair value. To estimate the fair value of each 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 each reporting unit and then discounting those cash flows to present value, reflecting the relevant risks associated with each 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 discount rates that reflect the risk inherent in the future cash flows. In estimating future cash flows, we relied on internally generated seven-year forecasts. For periods after the seven-year forecast, we assumed a long-term annual revenue growth rate of 3.0% for both the Strategy and Innovation and Life Sciences reporting units and a long-term EBITDA margin of 24.8% and 6.7%, respectively. Our forecasts are based on historical experience, current backlog, expected market demand, and other industry information. Our discounted cash flow analysis assumed weighted average cost of capital discount rates of 16.0% and 10.5% for the Strategy and Innovation and Life Sciences reporting units, respectively.
In the market approach, we utilized the guideline company method, which involved calculating valuation multiples based on operating data from guideline publicly traded companies. Multiples derived from guideline companies provide an indication of how much a knowledgeable investor in the marketplace would be willing to pay for a company. These multiples were evaluated and adjusted based on specific characteristics of the Strategy and Innovation and Life Sciences reporting units relative to the selected guideline companies and applied to the reporting units' operating data to arrive at an indication of value. The range of revenue multiples used in the valuation of the Strategy and Innovation and Life Sciences reporting units was 1.20x to 1.70x and 0.30x to 0.40x, respectively.
Determining the fair value of any reporting unit requires us to make significant judgments, estimates, and assumptions. While we believe that the estimates and assumptions underlying our valuation methodology are reasonable, these estimates and assumptions could have a significant impact on whether or not a non-cash impairment charge is recognized 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 reporting units will be consistent with our projections. We will continue to monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods. Any significant decline in our operations compared to our internal forecasts could result in additional non-cash goodwill impairment charges, which could be material.
Concurrently with the goodwill impairment tests performed over the Strategy and Innovation and Life Sciences reporting units, we evaluated whether any indicators exist that would lead us to believe that the fair values of our Healthcare, Education, and Business Advisory reporting units may not exceed their carrying values. Based on our internal projections, consideration of the impact of the COVID-19 pandemic on these reporting units, and review of the amounts by which the fair values of these reporting units exceeded their carrying values in the most recent quantitative goodwill impairment analysis performed, we did not identify any indicators that would lead us to believe that the fair values of these reporting units may not exceed their carrying values as of March 31, 2020. Additionally, in the second and third quarters of 2020, we did not identify any indicators that would lead us to believe that the fair values of any of our reporting units may not exceed their carrying values. We will monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods.
The carrying values of goodwill for each of our reporting units as of September 30, 2020 are as follows (in thousands):
| | | | | | | | |
Reporting Unit | | Carrying Value of Goodwill |
Healthcare | | $ | 428,729 | |
Education | | 104,384 | |
Business Advisory | | 16,094 | |
Strategy and Innovation | | 37,523 | |
Life Sciences | | — | |
Enterprise Solutions and Analytics | | — | |
Total | | $ | 586,730 | |
Intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill. Our intangible assets, net of accumulated amortization, totaled $22.3 million at September 30, 2020 and primarily consist of customer relationships, trade names, technology and software, non-competition agreements, and customer contracts, all of which were acquired through business combinations. We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In connection with the goodwill impairment tests performed for the Strategy and Innovation and Life Sciences reporting units in the first quarter of 2020, which resulted in non-cash goodwill impairment charges, we performed impairment tests on the long-lived assets allocated to the asset groups of the Strategy and Innovation and Life Sciences reporting units. Based on the impairment tests performed, we concluded that the long-lived assets allocated to the asset groups were not impaired as of March 31, 2020. We did not identify any indicators that would lead us to believe that the carrying values of the long-lived assets allocated to our other asset groups may not be recoverable as of March 31, 2020, June 30, 2020, and September 30, 2020.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 3 "New Accounting Pronouncements" within the notes to the consolidated financial statements for information on new accounting pronouncements.
SUBSEQUENT EVENTS
Acquisition of ForceIQ, Inc.
On October 15, 2020, we entered into an agreement to acquire ForceIQ, Inc. ("ForceIQ"), a Salesforce Industries partner focused on helping clients drive digital transformation and innovation at scale powered by the cloud. The acquisition expands our cloud-based technology offerings within the Business Advisory segment. The results of operations of ForceIQ will be included within the Business Advisory segment from the effective close date, November 1, 2020. The acquisition of ForceIQ is not significant to our consolidated financial statements.
Fourth Quarter 2020 Restructuring Plan
On October 29, 2020, we announced a restructuring plan to reduce operating costs to address the impact of the COVID-19 pandemic on our business. The restructuring plan provides for a reduction in workforce and leased office space that is expected to result in initial restructuring charges in a range of approximately $15.5 million to $19.5 million and annualized savings in a range of approximately $23.0 million to $27.0 million. We do not anticipate a material revenue impact related to the restructuring actions.
The reduction in workforce impacts approximately 145 employees across all segments and corporate operations. We expect the reduction in workforce to be substantially complete by the end of the fourth quarter of 2020 and expect to incur an estimated restructuring charge in a range of approximately $3.5 million to $4.5 million related to cash payments for employee severance and benefits.
The reduction in leased office space is expected to result in estimated non-cash restructuring charges in a range of approximately $12.0 million to $15.0 million, consisting of operating lease right-of-use asset and leasehold improvement impairment charges and accelerated depreciation on other fixed assets. The non-cash restructuring charges related to the reduction in leased office space are expected to be recorded primarily in the fourth quarter of 2020. Future cash expenditures related to the leased office space are expected to continue through 2029. The exact amount and timing of the office space reductions, and the associated payments and expenses, depend on a number of factors, including our ability to terminate or modify existing lease contracts and/or enter into sublease agreements for the exited spaces to lower future cash expenditures.
In addition, in the fourth quarter of 2020, we announced our intent to divest our life sciences drug safety practice, a UK-based business that is part of the Life Sciences reporting unit within our Business Advisory segment. For the nine months ended September 30, 2020, this practice generated $1.9 million of revenue and is not significant to our consolidated financial statements. We expect the divestiture to be completed in the fourth quarter of 2020.
We believe these measures will better align delivery capacity with anticipated demand and strengthen our financial position amidst the ongoing disruption, creating a foundation from which our business can grow.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
We are exposed to market risks primarily from changes in interest rates and changes in the market value of our investments.
Market Risk and Interest Rate Risk
The value of our Convertible Notes is exposed to interest rate risk. Generally, the fair value of our fixed interest rate Convertible Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of our Convertible Notes is affected by our stock price. The carrying value of our Convertible Notes was $250.0 million as of September 30, 2019, which equaled the $250.0 million principal balance due on October 1, 2019. The estimated fair value of our Convertible Notes at September 30, 2019 was $249.5 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, 2019, which was $99.810 per $100 principal amount. At December 31, 2018, the carrying value of our Convertible Notes was $242.6 million, and the estimated fair value of our Convertible Notes was $242.9 million, which 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 year ended December 31, 2018, which was $97.176 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 were intended to reduce the potential future economic dilution associated with the conversion of the Convertible Notes and, combined with the warrants, effectively raised 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 had 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. The convertible note hedge transactions expired in the third quarter of 2019. 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. 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.
We have exposure to changes in interest rates associated with borrowings under our bank credit facility, which has variable interest rates tied to LIBOR or an alternate base rate, at our option. At September 30, 2020, we had borrowings outstanding under the credit facility totaling $248.0 million that carried a weighted average interest rate of 2.5%, including the impact of the interest rate swaps described below. A hypothetical 100 basis point change in the interest rate would have a $0.5 million effect on our pretax income on an annualized basis, including the effect of the interest rate swaps outstanding at September 30, 2020. At December 31, 2019, we had borrowings outstanding under the credit facility totaling $50.0$205.0 million that carried a weighted average interest rate of 3.3%,3.0% including the impact of the interest rate swap described below. As of September 30, 2019, these variable rate borrowings were fully hedged against changes in interest rates by the interest rate swap, which had a notional amount of $50.0 million. As our variable rate borrowings were fully hedged as of September 30, 2019, aoutstanding at December 31, 2019. A hypothetical 100 basis point change in the interest rate would have had no impacta $1.6 million effect on our consolidated financial statements. At December 31, 2018, we had borrowings outstanding under the credit facility totaling $50.0 million that carried a weighted average interest rate of 3.7%pretax income on an annualized basis, including the impacteffect of the interest rate swap described below. As of December 31, 2018, these variable rate borrowings were fully hedged against changes in interest rates by the interest rate swap, which had a notional amount of $50.0 million. As our variable rate borrowings were fully hedged as of December 31, 2018, a change in the interest rate would have had no impact on our consolidated financial statements.swap.
On June 22, 2017, we entered into a forward interest rate swap agreement effective August 31, 2017 and ending August 31, 2022, with a notional amount of $50.0 million. We entered into this derivative instrument to hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and we pay to the counterparty a fixed rate of 1.900%.
On January 30, 2020, we entered into a forward interest rate swap agreement effective December 31, 2019 and ending December 31, 2024, with a notional amount of $50.0 million. We entered into this derivative instrument to further hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one month LIBOR and we pay to the counterparty a fixed rate of 1.500%.
On March 16, 2020, we entered into a forward interest rate swap agreement effective February 28, 2020 and ending February 28, 2025, with a notional amount of $100.0 million. We entered into this derivative instrument to further hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one month LIBOR and we pay to the counterparty a fixed rate of 0.885%.
We also have exposure to changes in interest rates associated with the promissory note assumed on June 30, 2017 in connection with our purchase of an aircraft, which has variable interest rates tied to LIBOR. At September 30, 2019,2020, the outstanding principal amount of the promissory note was $4.0$3.5 million and carried an interest rate of 4.2%2.1%. A hypothetical 100 basis point change in this interest rate would not have a material effect on our
pretax income. At December 31, 2018,2019, the outstanding principal amount of the promissory note was $4.4$3.9 million and carried an interest rate of 4.3%3.7%. A hypothetical 100 basis point change in the interest rate as of December 31, 20182019 would not have had a material effect on our pretax income.
We do not use derivative instruments for trading or other speculative purposes. From time to time, we invest excess cash in short-term marketable securities. These investments principally consist of overnight sweep accounts. Due to the short maturity of these investments, we have concluded that we do not have material market risk exposure.
We have a non-interest bearingan investment in the form of 1.69% convertible debt investment in Shorelight Holdings, LLC, a privately-held company, which we account for as an available-for-sale debt security. As such, the investment is carried at fair value with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income. As of September 30, 2020, the fair value of the investment was $61.1 million, with a total cost basis of $40.9 million. At December 31, 2019, the fair value of the investment was $60.9 million, with a total cost basis of $27.9 million. At December 31, 2018, the fair value of the investment was $50.4$49.5 million, with a total cost basis of $27.9 million.
We have a preferred stock investment in Medically Home Group, Inc., a privately-held company, which we account for as an equity security without a readily determinable fair value using the measurement alternative. As such, the investment is carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment. Any unrealized holding gains and losses resulting from observable price changes are recorded in our consolidated statement of operations. As of September 30, 2020, the carrying value of the investment was $5.0 million. Following our purchase, there has been no impairment, nor any observable price changes to our investment. See Note 10 “Fair Value of Financial Instruments” for further information on our long-term investments in Shorelight Holdings, LLC and Medically Home Group, Inc.
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ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of September 30, 2019.2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2019,2020, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports we file or submit under the Exchange Act, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 20192020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
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ITEM 1. | LEGAL PROCEEDINGS. |
The information required by this Item is incorporated by reference from Note 1413 "Commitments, Contingencies and Guarantees" included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Quarterly Report on Form 10-Q, we are not a party to any litigation or legal proceeding that, in the current opinion of management, could have a material adverse effect on our financial position or results of operations. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expected results.
SeeThe following information updates, and should be read in conjunction with, the information disclosed in Part 1, Item 1A, "Risk Factors"“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019 (the “2019 Annual Report”), which was filed with the Securities and Exchange Commission on February 27, 2019, for a complete description26, 2020.
Our results of operations have been adversely affected and, in the future, could be materially adversely impacted by the coronavirus (COVID-19) pandemic.
The worldwide spread of coronavirus (COVID-19) has created significant volatility, uncertainty and disruption to the global economy. The pandemic is adversely impacting and, in the future, could materially adversely impact our business, operations and financial results. The extent to which the COVID-19 pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including:
•the severity of the materialpandemic;
•the timing of the development and distribution of an effective vaccine or treatments for COVID-19;
•governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic, including quarantines, social distancing and other risk mitigating measures taken to prevent the spread of COVID-19;
•the effect on our clients and client demand for our services and solutions, including the effect on the healthcare and higher education industries which are areas of significant focus for our business;
•the health and welfare of our employees, including our senior management team, practice leaders and managing directors, and their ongoing ability to serve clients and manage operations if they contract COVID-19;
•the impact on our key third-party vendors;
•the effect on the businesses in which we have invested;
•our ability to sell and provide our services and solutions and maintain adequate utilization levels, including as a result of travel restrictions, shelter-in-place and quarantine orders and people working from home;
•the ability of our clients to pay for our services and solutions;
•any disruption to the Internet and related systems, which may impact our ability to provide our services and solutions remotely, and increased vulnerability to hackers or third parties seeking to disrupt operations; and
•any closures of our clients’ offices and facilities.
Additionally, in some instances, clients have slowed down decision making, delayed planned work or are seeking to reduce the scope of current engagements or terminate existing agreements, which may continue. Any of these events could cause or contribute to the risks and uncertainties enumerated in our 2019 Annual Report and could materially adversely affect our business, financial condition, results of operations and/or stock price.
Our goodwill and other intangible assets represent a substantial amount of our total assets, and we face.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, 2019, goodwill and other intangible assets totaled $678.3 million, or 61%, of our total assets. During the first quarter of 2020, we incurred non-cash pretax goodwill impairment charges totaling $59.8 million related to our Strategy and Innovation and Life Sciences reporting units within our Business Advisory segment, as discussed below. At September 30, 2020, goodwill and other intangible assets totaled $609.0 million, or 56%, of our total assets as of September 30, 2020. The goodwill results from our acquisitions, representing the excess of the fair value of consideration transferred over the fair value of the net assets acquired. We test goodwill for impairment at the reporting unit level, annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. The worldwide spread of the coronavirus (COVID-19) in the first quarter of 2020 created significant volatility, uncertainty and disruption to the global economy. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how we expect it will continue to negatively impact our clients, employees and business partners. While the COVID-19 pandemic did not have a significant impact on our consolidated revenues in the first quarter of 2020, we expected it to have an unfavorable impact on sales, increase uncertainty in the backlog and negatively impact full year 2020 results. The services provided by our Strategy and Innovation and Life Sciences reporting units within our Business Advisory segment focus on strategic solutions for healthy, well-capitalized companies to identify new growth opportunities, which may be considered by our clients to be more discretionary in nature, and the duration of the projects within these practices are typically short-term. Therefore, due to the uncertainty caused by the COVID-19 pandemic, we are cautious about near-term results for these two reporting units. Based on our internal projections and the preparation of our financial statements for the quarter ended March 31, 2020, and considering the expected decrease in demand due to the COVID-19 pandemic, during the first quarter of 2020 we believed that the fair value of these two reporting units no longer exceeded their carrying values and performed an interim impairment test on both reporting units as of March 31, 2020.
Based on the estimated fair values of the Strategy and Innovation and Life Sciences reporting units, we recorded non-cash pretax goodwill impairment charges of $49.9 million and $9.9 million, respectively, in the first quarter of 2020. The $49.9 million non-cash pretax charge related to the Strategy and Innovation reporting unit reduced the goodwill balance of the reporting unit to $37.5 million. The $9.9 million non-cash pretax charge related to the Life Sciences reporting unit reduced the goodwill balance of the reporting unit to zero.
Determining the fair value of any reporting unit requires us to make significant judgments, estimates, and assumptions. While we believe that the estimates and assumptions underlying our valuation methodology are reasonable, these estimates and assumptions could have a significant impact on whether or not a non-cash impairment charge is recognized 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 reporting units will be consistent with our projections. We continue to monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods. Any significant decline in our operations could result in additional non-cash goodwill impairment charges or impairment charges with respect to our other intangible assets, which could be material.
Refer to “Critical Accounting Policies” within Part I - Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 4 “Goodwill and Intangible Assets” within the notes to our consolidated financial statements for further discussion of our goodwill, intangible assets, and impairment tests performed in 2020.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
Our Stock Ownership Participation Program, 2012 Omnibus Incentive Plan, and 2004 Omnibus Stock Plan, which was replaced by the 2012 Omnibus Incentive Plan, permit the netting of common stock upon vesting of restricted stock awards to satisfy individual tax withholding requirements. During the quarter ended September 30, 2019,2020, we reacquired 12,65712,468 shares of common stock with a weighted average fair market value of $58.91$46.49 as a result of such tax withholdings.
We currently havehad a share repurchase program permitting us to repurchase up to $125 million of our common stock through October 31, 20192020 (the "Share Repurchase Program"). During the fourth quarter, with less than $0.1 million available for share repurchases as of 2019, our board of directors authorized an extension of the SharesSeptember 30, 2020. The Share Repurchase Program throughexpired on October 31, 2020. The amount and timing of the repurchases will be determined by management and will depend on a variety of factors, including the trading price of our common stock, capacity under our line of credit, general market and business conditions, and applicable legal requirements.
The following table provides information with respect to purchases we made of our common stock during the quarter ended September 30, 2019.2020.
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Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Dollar Value of Shares that may yet be Purchased under the Plans or Programs (2) |
July 1, 2020 - July 31, 2020 | | 3,106 | | | $ | 44.25 | | | — | | | $ | 43,572 | |
August 1, 2020 - August 31, 2020 | | 8,705 | | | $ | 47.66 | | | — | | | $ | 43,572 | |
September 1, 2020 - September 30, 2020 | | 657 | | | $ | 41.57 | | | — | | | $ | 43,572 | |
Total | | 12,468 | | | $ | 46.49 | | | — | | | |
(2)As of the end of the period.
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Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Dollar Value of Shares that may yet be Purchased under the Plans or Programs (2) |
July 1, 2019 - July 31, 2019 | | 2,489 |
| | $ | 50.38 |
| | — |
| | $ | 35,143,546 |
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August 1, 2019 - August 31, 2019 | | 9,342 |
| | $ | 60.91 |
| | — |
| | $ | 35,143,546 |
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September 1, 2019 - September 30, 2019 | | 826 |
| | $ | 62.02 |
| | — |
| | $ | 35,143,546 |
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Total | | 12,657 |
| | $ | 58.91 |
| | — |
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(1) | The number of shares repurchased for each period represents shares to satisfy employee tax withholding requirements. These shares do not reduce the repurchase authority under the Share Repurchase Program. |
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(2) | As of the end of the period. |
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ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
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ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
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ITEM 5. | OTHER INFORMATION. |
None.
(a) The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
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| | | | | | | | Incorporated by Reference |
Exhibit Number | | Exhibit Description | | Filed herewith | | Furnished herewith | | Form | | Period Ending | | Exhibit | | Filing Date |
31.1 | | | | X | | | | | | | | | | |
31.2 | | | | X | | | | | | | | | | |
32.1 | | | | | | X | | | | | | | | |
32.2 | | | | | | X | | | | | | | | |
101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | X | | | | | | | | | | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | X | | | | | | | | | | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X | | | | | | | | | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | | | | | | | | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | | | | | | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X | | | | | | | | | | |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | X | | | | | | | | | | |
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| | | | | | | | Incorporated by Reference |
Exhibit Number | | Exhibit Description | | Filed herewith | | Furnished herewith | | Form | | Period Ending | | Exhibit | | Filing Date |
10.1 | | | | | | | | 8-K | | | | 10.1 | | 9/16/2019 |
10.2 | | Amendment No. 4 of the Credit Agreement, the Pledge Agreement and the Security Agreement, dated as of September 27, 2019, by and among Huron Consulting Group Inc., as Borrower, certain subsidiaries, as Guarantors, and Bank of America, N.A., as Administrative Agent for and on behalf of the Lenders. | | | | | | 8-K | | | | 10.1 | | 10/3/2019 |
10.3 | | | | | | | | 8-K | | | | 10.1 | | 10/16/2019 |
31.1 | | | | X | | | | | | | | | | |
31.2 | | | | X | | | | | | | | | | |
32.1 | | | | | | X | | | | | | | | |
32.2 | | | | | | X | | | | | | | | |
101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | X | | | | | | | | | | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | X | | | | | | | | | | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X | | | | | | | | | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | | | | | | | | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | | | | | | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X | | | | | | | | | | |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | X | | | | | | | | | | |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | Huron Consulting Group Inc. |
| | | | (Registrant) |
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Date: | October 29, 2019November 2, 2020 | | | /S/ JOHN D. KELLY |
| | | | John D. Kelly |
| | | | Executive Vice President, Chief Financial Officer and Treasurer
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