PART I
OVERVIEW
Huron is a global professional services firm committed to achieving sustainable results in partnership with its clients. We bring a depth of expertise in strategy, technology, operations, advisory services, and analytics to drive lasting and measurable results in the healthcare, higher education, life sciences and commercial sectors.
Huron is headquartered in Chicago, Illinois, with additional locations in the United States in California, Colorado, the District of Columbia, Florida, Massachusetts, New York, Oregon, Texas, and Wisconsin and abroad in Canada, India, Saudi Arabia, Singapore, Switzerland, the United Arab Emirates, and the United Kingdom.
2017 Acquisitions
Pope Woodhead and Associates Limited
On January 9, 2017, we completed our acquisition of Pope Woodhead and Associates Limited ("Pope Woodhead"), a U.K.-based consulting firm providing market access capabilities to assist clients in developing value propositions for innovative medicines and technologies. The acquisition expands our life sciences strategy expertise and strengthens our ability to lead clients through complex payer and regulatory environments. Pope Woodhead's results of operations have been included in our consolidated financial statements and results of operations of our Business Advisory segment from the date of acquisition.
Innosight Holdings, LLC
On March 1, 2017, we completed our acquisition of Innosight Holdings, LLC ("Innosight"), a growth strategy firm focused on helping companies navigate disruptive change, enable innovation, and manage strategic transformation. Together with Innosight, we use our strategic, operational, and technology capabilities to help clients across multiple industries develop pioneering solutions to address disruption and achieve sustained growth. Innosight's results of operations have been included in our consolidated financial statements and results of operations of our Business Advisory segment from the date of acquisition.
ADI Strategies, Inc. (International)
On April 1, 2017, we completed our acquisition of the international assets of ADI Strategies, Inc. ("ADI Strategies") in Dubai and India. We acquired the U.S. assets of ADI Strategies in the second quarter of 2016. ADI Strategies is a leading enterprise performance management, risk management and business intelligence firm. The acquisition strengthens our technology and analytics competencies and expands our
global reach. The international results of operations of ADI Strategies have been included in our consolidated financial statements and results of operations of our Business Advisory segment from the date of acquisition.
Refer to Note 4 "Acquisitions" within our consolidated financial statements for further information on our recent acquisitions.
2017 Divestiture
Life Sciences Compliance and Operations
During the second quarter of 2017, we divested our Life Sciences Compliance and Operations practice ("Life Sciences C&O"), which was part of our broader Life Sciences practice within the Business Advisory segment. The sale of Life Sciences C&O did not meet the criteria for reporting separately as discontinued operations. Refer to Note 5 "Goodwill and Intangible Assets" within our consolidated financial statements for further information on the sale.
OUR SERVICES
We provide professional services through three operating segments: Healthcare, Education, and Business Advisory. For the year ended
December 31, 2017
, we derived
49%
,
23%
, and
28%
of our revenues from Healthcare, Education, and Business Advisory, respectively.
During the second quarter of 2017, we reorganized our internal financial reporting structure, which management uses to assess performance and allocate resources, by moving our Life Sciences practice from the Education and Life Sciences segment to the Business Advisory segment. The remaining Education and Life Sciences segment is now referred to as the Education segment. While our consolidated results have not been impacted, we have reclassified our historical segment information for consistent presentation.
For further financial information on our segment results, refer to Part II—Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 18 “Segment Information” within the notes to our consolidated financial statements.
Healthcare
Our Healthcare segment has a depth of expertise in strategy and innovation, care transformation, financial and operational excellence, technology and analytics, and leadership development. 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, and drive physician, patient, and employee engagement across the enterprise.
We help organizations transform and innovate the 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 operational and organizational change and who transform the patient experience.
Education
Our Education segment provides management consulting and technology solutions to higher education institutions and academic medical centers to address challenges relating to business and technology strategy, financial management, operational and organizational effectiveness, research administration, and regulatory compliance.
Our institutional strategy, market research, budgeting and financial management, business operations and student lifecycle management solutions align missions with business priorities, improve quality and reduce costs institution-wide. Our technology strategy, enterprise applications, and analytic solutions transform and optimize operations, deliver time and cost savings, and enhance the student experience. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance. Huron is a Platinum level member of the Oracle PartnerNetwork (OPN), a Workday Services Partner and a Gold level consulting partner with Salesforce.com.
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. 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.
This segment’s primary service lines include:
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Enterprise Solutions and Analytics.
Our Enterprise Solutions and Analytics professionals deliver technology and analytic solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our expertise in full-service enterprise performance management (EPM), enterprise resource planning (ERP), business intelligence and analytics, customer relationship management (CRM), and data management services helps clients identify and execute on business and technology strategies to drive results and gain a competitive advantage. Huron is a Platinum level member of the Oracle PartnerNetwork (OPN), a Workday Services Partner, and a Gold level consulting partner with Salesforce.com.
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Business Advisory.
Our Business Advisory professionals resolve complex business issues and enhance client enterprise value through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. We improve operations or capital structures for businesses performing at less than optimal levels, assess the short-term and long-term prospects of potential acquisition and divestiture opportunities, and provide independent valuation and advisory services to assist clients in making informed decisions for transaction, tax or litigation purposes. Securities transactions are handled by our registered broker-dealer, Huron Transaction Advisory LLC, a member of FINRA.
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Strategy and Innovation.
Our Strategy and Innovation professionals collaborate with clients across a range of industries to achieve repeatable business growth and innovation. We help organizations identify new growth opportunities, build new ventures and capabilities, and accelerate organizational change.
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Life Sciences.
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. We advise clients in the areas of corporate and financial strategy, compliance and operations, reimbursement and access strategy, commercial contracting strategy, R&D and product strategy commercial segmentation, fair market value analysis, lifecycle management, litigation and investigations, government pricing and transparency reporting, auditing and monitoring, and overall business process improvement.
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OUR CLIENTS AND INDUSTRIES
We provide professional services to a wide variety of both financially sound and distressed organizations, including healthcare organizations, leading academic and research institutions, large and mid-sized companies, and governmental entities. In
2017
, we served over 1,300 clients, including over 300 new clients.
Our clients are in a broad array of industries, including healthcare, education, pharmaceutical and medical device, financial services, energy and utilities, retail, aerospace, automotive, technology, telecommunications, consumer products, governmental, metals and mining, engineering and construction, hospitality and gaming, logistics, and manufacturing.
EMPLOYEES
Our success depends on our ability to attract, engage, and develop highly talented professionals by creating a work environment where employees and teams thrive and individuals are rewarded not only for their own contributions but also for the success of our organization. To accomplish these goals, we focus on every facet of the employee lifecycle beginning with the recruiting process through post-employment or retirement to ensure the employee experience is engaging and impactful. We have developed comprehensive programs incorporating training and development opportunities beginning with the onboarding process and continuing through one’s career journey. We provide a competitive total rewards package including benefits that tailor to the needs of our employee population. Our commitment to corporate social responsibility is facilitated through our Huron Helping Hands program and the Diversity and Inclusion council.
Our employee population is divided into two groups: client-serving and support. As of
December 31, 2017
, we had
3,083
full-time employees, including
142
client-serving managing directors. Our client-serving employees serve as critical business advisors collaborating with clients to help solve their most complex business problems. Our managing directors are the key drivers of growth in our business, generating new revenue streams from existing and new clients. They enhance our market reputation by partnering with clients as advisors and engagement team leaders. Internally, they create our intellectual capital, develop our people, and foster our culture. Our senior directors, directors, and managers manage day-to-day client relationships, develop our people, and oversee the delivery and quality of our work product. Our associates and analysts gather and organize data, conduct detailed analyses, and prepare presentations that synthesize and distill information to support recommendations we deliver to clients. Our support employees include our senior management team as well as professionals who provide sales support, methodology creation, software development, and corporate functions consisting of our facilities, finance and accounting, human resources, information technology, legal, and marketing teams. These employees provide strategic direction and support that enables the success of our client-serving employees. At
December 31, 2017
, our support team was led by
23
managing directors, executives and corporate vice presidents.
In addition to our full-time client-serving employees, we engage contractors on an as-needed basis to provide unique skill sets that are not required to be staffed on a full-time basis.
Supporting our professionals' career progression is critical to our employee retention and engagement. As part of our onboarding process, our learning and organizational effectiveness team facilitates a robust and structured training curriculum for newly hired employees to help develop and integrate them more effectively into the company. Leadership development programs are offered to recently promoted employees to support their transition to and success in a new role with broader responsibility. In addition to these milestone programs, we offer a variety of leadership development for those we deem capable of taking on broader roles in the organization. We also provide a variety of continuing education opportunities to all of our employees, including formal classroom environments, online courses, and webinars to further develop employees’ capabilities including technical knowledge, people skills, team dynamics and coaching and developing others. We encourage our employees to enhance their professional skills through outside courses that certify their technical skills and to pursue certain advanced degrees. Employees are assigned internal performance coaches to help them establish expectations that are reviewed regularly, including identifying opportunities for professional development, formal training and technical skill certifications.
Our total rewards philosophy focuses on rewarding and retaining our high performing employees. To accomplish this, we offer employees a competitive base salary, performance incentives and benefits.
Our incentive compensation plan is designed to recognize and reward performance of both the organization and individuals and to ensure we properly recognize and retain our top performers. We take both practice and company financial performance into consideration in the determination of bonus pool funding. At the practice level, the annual bonus pool is funded based on achievement of its annual financial goals. The board of directors then reviews and approves the total incentive compensation pool for all practices in the context of the company’s overall financial performance. Individual bonus awards are based on the practice’s financial performance, individual bonus targets, and the individual’s performance as evaluated through our performance management process. The intent of the incentive compensation plan is to differentiate rewards based on individual performance, ensuring that our top performers for the year receive incentives that are commensurate with their contributions, enabling us to retain them and continue to provide our clients with exceptional service. The incentive compensation plan for our named executive officers is funded based on a blend of achievement of financial goals and strategic initiatives.
Managing directors’ individual compensation levels, including base salary and target incentive awards, are set to align with the value of their expected contributions to the organization. As the key drivers of the organization’s success, their compensation is designed to include equity awards as a core component. The use of equity is intended to encourage retention, align the interests of our managing directors with shareholders, and help build wealth over a managing director's career at Huron through annual grants as well as stock price appreciation.
Our benefit programs are designed to be both comprehensive and tailored to the needs of our employee population, such as a paid time off policy that allows for flexibility and a travel reward program which recognizes the significant travel commitment of our client-serving workforce. Our wellness benefits are aimed at encouraging employees to be aware of their current state of health and providing various tools and resources given the demanding nature of the work. Through these unique benefits, as well as our health and welfare plans, retirement benefits, stock purchase plan, and other benefit programs, we provide a core sense of security to our employees.
Our corporate social responsibility efforts are designed to support an individual’s charitable interests while also providing a venue for our employees to come together to make an impact in the communities in which we live and work. In addition, the Diversity and Inclusion council supports the needs of our growing employee population through employee resource groups that provide corporate-wide educational opportunities, build awareness, celebrate our differences, develop mentoring relationships, and ensure we are fostering a welcoming and engaging environment for all employees.
BUSINESS DEVELOPMENT AND MARKETING
Our business development and marketing activities are aimed at cultivating relationships, generating leads, and building a strong brand reputation with hospital, health system, and university administrators; offices of the C-suite; and senior level influencers and decision makers of middle market and large corporate organizations. We believe excellent service delivery to clients is critical to building and maintaining relationships and our brand reputation, and we emphasize the importance of client service to all of our employees.
Currently, we generate new business opportunities through the combination of relationships our managing directors have with individuals working in healthcare organizations, academic and research institutions, and corporations, and marketing lead generation activities. We also view cross-selling as a key component in building our business. Often, the client relationship of a managing director in one area of our business leads to opportunities in another area. All of our managing directors understand their roles in ongoing relationship and business development, which is reinforced through our compensation and incentive programs. We actively seek to identify new business opportunities and frequently receive referrals and repeat business from past and current clients. In addition, to complement the business development efforts of our managing directors, we have dedicated business development professionals who are focused exclusively on developing client relationships and generating new business.
COMPETITION
The professional services industry is extremely competitive, highly fragmented, and constantly evolving. The industry includes a large number of participants with a variety of skills and industry expertise, including other strategy, business operations, technology, and financial consulting firms; general management consulting firms; the consulting practices of major accounting firms; technical and economic advisory firms; regional and specialty consulting firms; and the internal professional resources of organizations. We compete with a large number of service and technology providers in all of our segments. Our competitors vary, depending on the particular practice area, and we expect to continue to face competition from new market entrants.
We believe the principal competitive factors in our market include reputation, the ability to attract and retain top talent, and the capacity to manage engagements effectively to drive high value to clients. There is also competition on price, although to a lesser extent due to the criticality of the issues that many of our services address. Some competitors have a greater geographic footprint, broader international presence, and more resources than we do, but we believe our reputation and ability to deliver high-value, quality service and measurable results to our clients across a balanced portfolio of services and attract and retain employees with broad capabilities and deep industry expertise enable us to compete favorably in the professional services marketplace.
AVAILABLE INFORMATION
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on the investor relations page of our website,
www.huronconsultinggroup.com
, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The content posted on our website is not incorporated by reference into this report or any other reports filed with, or furnished to, the SEC. Any materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (
http://www.sec.gov
) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The following discussion of risk factors may be important to understanding the statements in this Annual Report on Form 10-K or elsewhere. The following information should be read in conjunction with Part II—Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes in this Annual Report on Form 10-K. Discussions about the important operational risks that our business encounters can be found in Part II—Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
An inability to retain our senior management team and other managing directors would be detrimental to the success of our business.
We rely heavily on our senior management team, our practice leaders, and other managing directors; our ability to retain them is particularly important to our future success. Given the highly specialized nature of our services, the senior management team must have a thorough understanding of our service offerings as well as the skills and experience necessary to manage an organization consisting of a diverse group of professionals. In addition, we rely on our senior management team and other managing directors to generate and market our business. Further, our senior management’s and other managing directors’ personal reputations and relationships with our clients are a critical element in obtaining and maintaining client engagements. Although we enter into non-solicitation agreements with our senior management team and other managing directors, we generally do not enter into non-competition agreements. Accordingly, members of our senior management team and our other managing directors are not contractually prohibited from leaving or joining one of our competitors, and some of our clients could choose to use the services of that competitor instead of our services. If one or more members of our senior management team or our other managing directors leave and we cannot replace them with a suitable candidate quickly, we could experience difficulty in securing and successfully completing engagements and managing our business properly, which could harm our business prospects and results of operations.
Our inability to hire and retain talented people in an industry where there is great competition for talent could have a serious negative effect on our prospects and results of operations.
Our business involves the delivery of professional services and is highly labor-intensive. Our success depends largely on our general ability to attract, develop, motivate, and retain highly skilled professionals. Further, we must successfully maintain the right mix of professionals with relevant experience and skill sets as we continue to grow, as we expand into new service offerings, and as the market evolves. The loss of a significant number of our professionals, the inability to attract, hire, develop, train, and retain additional skilled personnel, or failure to maintain the right mix of professionals could have a serious negative effect on us, including our ability to manage, staff, and successfully complete our existing engagements and obtain new engagements. Qualified professionals are in great demand, and we face significant
competition for both senior and junior professionals with the requisite credentials and experience. Our principal competition for talent comes from other consulting firms and accounting firms, as well as from organizations seeking to staff their internal professional positions. Many of these competitors may be able to offer significantly greater compensation and benefits or more attractive lifestyle choices, career paths, or geographic locations than we do. Therefore, we may not be successful in attracting and retaining the skilled consultants we require to conduct and expand our operations successfully. Increasing competition for these revenue-generating professionals may also significantly increase our labor costs, which could negatively affect our margins and results of operations.
Additional hiring, departures, business acquisitions and dispositions could disrupt our operations, increase our costs or otherwise harm our business.
Our business strategy is dependent in part upon our ability to grow by hiring individuals or groups of individuals and by acquiring complementary businesses. However, we may be unable to identify, hire, acquire, or successfully integrate new employees and acquired businesses without substantial expense, delay, or other operational or financial obstacles. From time to time, we will evaluate the total mix of services we provide and we may conclude that businesses may not achieve the results we previously expected. Competition for future hiring and acquisition opportunities in our markets could increase the compensation we offer to potential employees or the prices we pay for businesses we wish to acquire. In addition, we may be unable to achieve the financial, operational, and other benefits we anticipate from any hiring or acquisition, as well as any disposition, including those we have completed so far. New acquisitions could also negatively impact existing practices and cause current employees to depart. Hiring additional employees or acquiring businesses could also involve a number of additional risks, including:
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the diversion of management’s time, attention, and resources from managing and marketing our Company;
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the failure to retain key acquired personnel or existing personnel who may view the acquisition unfavorably;
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the potential loss of clients of acquired businesses;
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the need to compensate new employees while they wait for their restrictive covenants with other institutions to expire;
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the potential need to raise significant amounts of capital to finance a transaction or the potential issuance of equity securities that could be dilutive to our existing stockholders;
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increased costs to improve, coordinate, or integrate managerial, operational, financial, and administrative systems;
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the potential assumption of liabilities of an acquired business;
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the inability to attain the expected synergies with an acquired business;
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the usage of earn-outs based on the future performance of our business acquisitions may deter the acquired company from fully integrating into our existing business;
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the perception of inequalities if different groups of employees are eligible for different benefits and incentives or are subject to different policies and programs; and
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difficulties in integrating diverse backgrounds and experiences of consultants, including if we experience a transition period for newly hired consultants that results in a temporary drop in our utilization rates or margins.
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All of our acquisitions have been accounted for as purchases, some of which involved purchase prices well in excess of tangible asset values, resulting in the creation of a significant amount of goodwill and other intangible assets. Under generally accepted accounting principles, we do not amortize goodwill or intangible assets acquired in a business combination that are determined to have indefinite useful lives, but instead review them annually (or more frequently if impairment indicators arise) for impairment. To the extent that we determine that such an asset has been impaired, we will write down its carrying value on our balance sheet and book a non-cash impairment charge in our statement of earnings. If, as a result of acquisitions or otherwise, the amount of intangible assets being amortized increases, so will our amortization charges in future periods.
Also, selling practices and shutting down operations present similar challenges in a service business. Dispositions not only require management’s time, but they can impair existing relationships with clients or otherwise affect client satisfaction, particularly in situations where the divestiture eliminates only part of the complement of consulting services provided to a client. Dispositions may also involve continued financial involvement, as we may be required to retain responsibility for, or agree to indemnify buyers against, liabilities related to a business sold. For example, in connection with the sale of our Huron Legal segment to Consilio, Inc., which was completed on December 31, 2015, we have contractually agreed to indemnify the buyer against certain liabilities. If we fail to successfully address these risks, our ability to compete may be impaired and our results of operations may be adversely affected.
Our goodwill and other intangible assets represent a substantial amount of our total assets, and we may be required to recognize a non-cash impairment charge for these assets if the performance of one or more of our reporting units falls below our expectations.
Our total assets reflect a substantial amount of intangible assets, primarily goodwill. At December 31, 2017, goodwill and other intangible assets totaled
$718.1 million
, or
69%
, of our total assets. 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. Intangible assets other than goodwill represent purchased assets that lack physical substance but can be distinguished from goodwill. Our intangible assets primarily consist of customer relationships, trade names, customer contracts, technology and software, non-competition agreements, and publishing content, 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. No impairment charges for intangible assets were recorded in 2017.
During 2017, we recorded
$253.1 million
of non-cash goodwill impairment charges. As further explained in the following paragraphs, of the
$253.1 million
,
$208.1 million
related to our Healthcare reporting unit and
$45.0 million
related to our Enterprise Solutions and Analytics reporting unit which is included in our Business Advisory segment.
During the second quarter of 2017, we performed a goodwill impairment analysis for our Healthcare reporting unit as our Healthcare business had experienced a prolonged period of declining revenues, primarily driven by softness in our revenue cycle offering within our performance improvement solution. This softness was attributable to decreased demand for our services, the winding down of some of our larger projects, and a trend toward smaller projects, as well as fewer large integrated projects. In light of these challenges, several initiatives have been undertaken to improve the segment's financial performance, including repositioning our solutions to address the most critical needs of our clients, the expansion of our existing services such as those in our Studer Group, strategy, physician and technology offerings, and workforce reductions to better align resources with market demand. While the initiatives undertaken to improve the financial performance of our Healthcare segment began yielding some positive impacts, hospitals and health systems continued to face regulatory and funding uncertainty; therefore, we remained cautious about near-term growth. As we had previously disclosed in prior quarters, if the financial performance of our Healthcare segment continued to decline and did not meet our expectations, we could be required to perform an interim impairment analysis with respect to our carrying value of goodwill for the Healthcare reporting unit prior to our usual annual test. Based on forecasts prepared in the second quarter of 2017 in connection with our quarterly forecasting cycle, we determined that the likely time frame to improve the financial results of this segment would take longer than originally anticipated. As such, we concluded, during the second quarter of 2017, that the fair value of the Healthcare reporting unit may have no longer exceeded its carrying value. In connection with the preparation of our financial statements for the quarter ended June 30, 2017, we performed an interim impairment test on the Healthcare reporting unit. Based on the estimated fair value of the Healthcare reporting unit, we recorded a
$208.1 million
non-cash pretax goodwill impairment charge to reduce the carrying value of goodwill in our Healthcare reporting unit.
Our Enterprise Solutions and Analytics reporting unit was established with the acquisition of Blue Stone International, LLC in 2013. Since that time, we completed five additional business acquisitions within the reporting unit, most recently the acquisitions of the U.S. assets and international assets of ADI Strategies in May 2016 and April 2017, respectively. We record the assets acquired and liabilities assumed in business combinations, including identifiable intangible assets, at their estimated fair values as of the acquisition date, and goodwill is recorded as the excess of the fair value of consideration transferred, including any contingent consideration, over the fair value of the net assets acquired. Therefore, the initial accounting for an acquisition results in its fair value equaling its carrying value. As we have previously disclosed in prior quarters, due to this reporting unit’s relatively low headroom, in the event that the financial performance of the reporting unit did not meet our expectations during 2017, we could be required to take a non-cash impairment charge as a result of any goodwill impairment test. During the first three quarters of 2017, the performance of Enterprise Solutions and Analytics continued to reasonably meet our expectations. However, both revenues and operating margin during the fourth quarter of 2017 fell short of our expectations resulting in a reduction in workforce within the reporting unit during that quarter. Further, in connection with our annual budget process for 2018, which coincided with our annual goodwill impairment test during the fourth quarter of 2017, we determined that the reporting unit's expected future revenue growth rates and operating margin would be lower than previously anticipated for this reporting unit. As a result, our goodwill impairment test indicated that the fair value of the Enterprise Solutions and Analytics reporting unit no longer exceeded its carrying value, and we recorded a
$45.0 million
non-cash pretax charge to write-off the entire carrying value of this reporting unit's goodwill during the fourth quarter of 2017.
The Life Sciences reporting unit has also been established primarily through recent business acquisitions: The Frankel Group Associates LLC in January 2014 and Pope Woodhead in January 2017. As discussed above, goodwill is recorded for such business acquisitions as the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed, resulting in the fair value equaling the carrying value at the acquisition date. Based on the results of our annual goodwill impairment test as of November 30, 2017, the Life Sciences reporting unit's fair value exceeded its carrying value by 14%. We will monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods.
Determining the fair value of a 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 goodwill 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 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.
Refer to “Critical Accounting Policies” within Part I - Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 “Goodwill and Intangible Assets” within the notes to our consolidated financial statements for further discussion of our business combinations, goodwill, intangible assets, and impairment tests performed in 2017.
Changes in capital markets, legal or regulatory requirements, and general economic or other factors beyond our control could reduce demand for our services, in which case our revenues and profitability could decline.
A number of factors outside of our control affect demand for our services. These include:
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fluctuations in U.S. and global economies;
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the U.S. or global financial markets and the availability, costs, and terms of credit;
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changes in laws and regulations; and
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other economic factors and general business conditions.
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We are not able to predict the positive or negative effects that future events or changes to the U.S. or global economy, financial markets, or regulatory and business environment could have on our operations.
Changes in U.S. tax laws could have a material adverse effect on our business, cash flow, results of operations and financial conditions.
We are subject to income and other taxes in the U.S. at the state and federal level and also in foreign jurisdictions. Changes in applicable U.S. state, federal or foreign tax laws and regulations, or their interpretation and application, could materially affect our tax expense and profitability.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“2017 Tax Reform”), a tax reform bill which contains significant changes to corporate taxation, including a reduction in the current corporate federal income tax rate from 35% to 21%, additional limitations on the tax deductibility of interest, substantial changes to the taxation of foreign earnings, and modification or repeal of many business deductions and credits. The changes included in the 2017 Tax Reform are broad and complex. The final transition impact of the 2017 Tax Reform may differ materially from our current estimates due to, among other things, additional regulatory and interpretive guidance, as well as any statutory technical corrections that are subsequently enacted.
The 2017 Tax Reform, or any related, similar or amended legislation or other changes in U.S. federal income tax laws, could adversely affect the U.S. federal income taxation of our ongoing operations. Any such changes and related consequences could have a material adverse impact on our financial results.
If we are unable to manage fluctuations in our business successfully, we may not be able to sustain profitability.
We have grown significantly since we commenced operations and have increased the number of our full-time professionals from 249 in 2002 to
3,083
as of
December 31, 2017
. Additionally, our considerable growth has placed demands on our management and our internal systems, procedures, and controls and will continue to do so in the near future. To successfully manage growth, we must periodically adjust and strengthen our operating, financial, accounting, and other systems, procedures, and controls, which could increase our costs and may adversely affect our gross profits and our ability to sustain profitability if we do not generate increased revenues to offset the costs. As a public company, our information and control systems must enable us to prepare accurate and timely financial information and other required disclosures. If we discover deficiencies in our existing information and control systems that impede our ability to satisfy our reporting requirements, we must successfully implement improvements to those systems in an efficient and timely manner.
Although we have generated positive earnings since we became a public company, we may not sustain profitability in the future. Additionally, the nature of our services and the general economic environment make it difficult to predict our future operating results. To sustain profitability, we must:
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attract, integrate, retain, and motivate highly qualified professionals;
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achieve and maintain adequate utilization and suitable billing rates for our revenue-generating professionals;
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expand our existing relationships with our clients and identify new clients in need of our services;
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successfully resell engagements and secure new engagements every year;
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maintain and enhance our brand recognition; and
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adapt quickly to meet changes in our markets, our business mix, the economic environment, the credit markets, and competitive developments.
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Our financial results could suffer if we are unable to achieve or maintain adequate utilization and suitable billing rates for our consultants.
Our profitability depends to a large extent on the utilization and billing rates of our professionals. Utilization of our professionals is affected by a number of factors, including:
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the number and size of client engagements;
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the timing of the commencement, completion and termination of engagements, which in many cases is unpredictable;
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our ability to transition our consultants efficiently from completed engagements to new engagements;
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the hiring of additional consultants because there is generally a transition period for new consultants that results in a temporary drop in our utilization rate;
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unanticipated changes in the scope of client engagements;
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our ability to forecast demand for our services and thereby maintain an appropriate level of consultants; and
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conditions affecting the industries in which we practice as well as general economic conditions.
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The billing rates of our consultants that we are able to charge are also affected by a number of factors, including:
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our clients’ perception of our ability to add value through our services;
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the market demand for the services we provide;
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an increase in the number of engagements in the government sector, which are subject to federal contracting regulations;
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introduction of new services by us or our competitors;
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our competition and the pricing policies of our competitors; and
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current economic conditions.
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If we are unable to achieve and maintain adequate overall utilization as well as maintain or increase the billing rates for our consultants, our financial results could materially suffer. In addition, our consultants oftentimes perform services at the physical locations of our clients. If there are natural disasters, disruptions to travel and transportation or problems with communications systems, our ability to perform services for, and interact with, our clients at their physical locations may be negatively impacted which could have an adverse effect on our business and results of operations.
Our quarterly results of operations have fluctuated in the past and may continue to fluctuate in the future as a result of certain factors, some of which may be outside of our control.
A key element of our strategy is to market our products and services directly to certain large organizations, such as health systems and acute care hospitals, and to increase the number of our products and services utilized by existing clients. The sales cycle for some of our products and services is often lengthy and may involve significant commitment of client personnel. As a consequence, the commencement date of a client engagement often cannot be accurately forecasted. As discussed below, certain of our client contracts contain terms that result in revenue that is deferred and cannot be recognized until the occurrence of certain events. As a result, the period of time between contract signing and recognition of associated revenue may be lengthy, and we are not able to predict with certainty the period in which revenue will be recognized.
Certain of our contracts provide that some portion or all of our fees are at risk if our services do not result in the achievement of certain performance targets. To the extent that any revenue is contingent upon the achievement of a performance target, we only recognize revenue
upon client confirmation that the performance targets have been achieved. If a client fails to provide such confirmation in a timely manner, our ability to recognize revenue will be delayed.
Fee discounts, pressure to not increase or even decrease our rates, and less advantageous contract terms could result in the loss of clients, lower revenues and operating income, higher costs, and less profitable engagements. More discounts or write-offs than we expect in any
period would have a negative impact on our results of operations.
Other fluctuations in our quarterly results of operations may be due to a number of other factors, some of which are not within our control, including:
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the timing and volume of client invoices processed and payments received, which may affect the fees payable to us under certain of our engagements;
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client decisions regarding renewal or termination of their contracts;
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the amount and timing of costs related to the development or acquisition of technologies or businesses; and
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unforeseen legal expenses, including litigation and other settlement gains or losses.
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We base our annual employee bonus expense upon our expected annual adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for that year. If we experience lower adjusted EBITDA in a quarter without a corresponding change to our full-year adjusted EBITDA expectation, our estimated bonus expense will not be reduced, which will have a negative impact on our quarterly results of operations for that quarter. Our quarterly results of operations may vary significantly and period-to-period comparisons of our results of operations may not be meaningful. The results of one quarter should not be relied upon as an indication of future performance. If our quarterly results of operations fall below the expectations of securities analysts or investors, the price of our common stock could decline substantially.
Revenues from our performance-based engagements are difficult to predict, and the timing and extent of recovery of our costs is uncertain.
We have engagement agreements under which our fees include a significant performance-based component. Performance-based fees are contingent on the achievement of specific measures, such as our clients meeting cost-saving or other contractually-defined goals. The achievement of these contractually-defined goals may be subject to acknowledgment by the client and is often impacted by factors outside of our control, such as the actions of the client or other third parties. Because performance-based fees are contingent, revenues on such engagements, which are recognized when all revenue recognition criteria are met, are not certain and the timing of receipt is difficult to predict and may not occur evenly throughout the year. The percentage of our revenues derived from performance-based fees for the years ended
December 31, 2017
,
2016
, and
2015
, was
4.9%
,
8.9%
, and
8.7%
, respectively. A greater number of performance-based fee arrangements may result in increased volatility in our working capital requirements and greater variations in our quarter-to-quarter results, which could affect the price of our common stock. In addition, an increase in the proportion of performance-based fee arrangements may temporarily offset the positive effect on our operating results from an increase in our utilization rate until the related revenues are recognized.
The profitability of our fixed-fee engagements with clients may not meet our expectations if we underestimate the cost of these engagements.
When making proposals for fixed-fee engagements, we estimate the costs and timing for completing the engagements. These estimates reflect our best judgment regarding the efficiencies of our methodologies and consultants as we plan to deploy them on engagements. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-fee engagements, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which would have an adverse effect on our profit margin. For the years ended
December 31, 2017
,
2016
, and
2015
, fixed-fee engagements represented
46.7%
,
47.4%
, and
58.0%
of our revenues, respectively.
Our business is becoming increasingly dependent on information technology and will require additional investments in order to grow and meet the demands of our clients.
We depend on the use of sophisticated technologies and systems. Some of our practices provide services that are increasingly dependent on the use of software applications and systems that we do not own and could become unavailable. Moreover, our technology platforms will require continuing investments by us in order to expand existing service offerings and develop complementary services. Our future success depends on our ability to adapt our services and infrastructure while continuing to improve the performance, features, and reliability of our services in response to the evolving demands of the marketplace.
Adverse changes to our relationships with key third-party vendors, or in the business of our key third-party vendors, could unfavorably impact our business.
A portion of our services and solutions depend on technology or software provided by third-party vendors. Some of these third-party vendors refer potential clients to us, and others require that we obtain their permission prior to accessing their software while performing services for our clients. These third-party vendors could terminate their relationship with us without cause and with little or no notice, which could limit our service offerings and harm our financial condition and operating results. In addition, if a third-party vendor’s business changes or is reduced, that could adversely affect our business. Moreover, if third-party technology or software that is important to our business does not continue to be available or utilized within the marketplace, or if the services that we provide to clients is no longer relevant in the marketplace, our business may be unfavorably impacted.
We could experience system failures, service interruptions, or security breaches that could negatively impact our business.
Our organization is comprised of employees who work on matters throughout the United States and overseas. Our technology platform is a “virtual office” from which we all operate. We may be subject to disruption to our operating systems from technology events that are beyond our control, including the possibility of failures at third-party data centers, disruptions to the Internet, natural disasters, power losses, and malicious attacks. In addition, despite the implementation of security measures, our infrastructure and operating systems, including the Internet and related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, computer viruses, programming errors, denial-of-service attacks, or other attacks by third parties seeking to disrupt operations or misappropriate information or similar physical or electronic breaches of security. While we have taken and are taking reasonable steps to prevent and mitigate the damage of such events, including implementation of system security measures, information backup, and disaster recovery processes, those steps may not be effective and there can be no assurance that any such steps can be effective against all possible risks. We will need to continue to invest in technology in order to achieve redundancies necessary to prevent service interruptions. Access to our systems as a result of a security breach, the failure of our systems, or the loss of data could result in legal claims or proceedings, liability, or regulatory penalties and disrupt operations, which could adversely affect our business and financial results.
Our reputation could be damaged and we could incur additional liabilities if we fail to protect client and employee data through our own accord or if our information systems are breached.
We rely on information technology systems to process, transmit, and store electronic information and to communicate among our locations around the world and with our clients, partners, and employees. The breadth and complexity of this infrastructure increases the potential risk of security breaches which could lead to potential unauthorized disclosure of confidential information.
In providing services to clients, we may manage, utilize, and store sensitive or confidential client or employee data, including personal data and protected health information. As a result, we are subject to numerous laws and regulations designed to protect this information, such as the U.S. federal and state laws governing the protection of health or other personally identifiable information, including the Health Insurance Portability and Accountability Act (HIPAA), and international laws such as the European Union Directive on Data Protection. In addition, many states, U.S. federal governmental authorities and non-U.S. jurisdictions have adopted, proposed or are considering adopting or proposing, additional data security and/or data privacy statutes or regulations. Continued governmental focus on data security and privacy may lead to additional legislative and regulatory action, which could increase the complexity of doing business. The increased emphasis on information security and the requirements to comply with applicable U.S. and foreign data security and privacy laws and regulations may increase our costs of doing business and negatively impact our results of operations.
These laws and regulations are increasing in complexity and number. If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to client or employee data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages, regulatory enforcement actions, fines, and/or criminal prosecution.
In addition, unauthorized disclosure of sensitive or confidential client or employee data, whether through systems failure, employee negligence, fraud, or misappropriation, could damage our reputation and cause us to lose clients and their related revenue in the future.
Our international expansion could result in additional risks.
We operate both domestically and internationally, including in Canada, Europe, Asia, and the Middle East. Although historically our international operations have been limited, we intend to continue to expand internationally. Such expansion may result in additional risks that are not present domestically and which could adversely affect our business or our results of operations, including:
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compliance with additional U.S. regulations and those of other nations applicable to international operations;
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cultural and language differences;
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employment laws and rules and related social and cultural factors;
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losses related to start-up costs, lack of revenue, higher costs due to low utilization, and delays in purchase decisions by prospective clients;
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currency fluctuations between the U.S. dollar and foreign currencies, which are harder to predict in the current adverse global economic climate;
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restrictions on the repatriation of earnings;
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potentially adverse tax consequences and limitations on our ability to utilize losses generated in our foreign operations;
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different regulatory requirements and other barriers to conducting business;
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different or less stable political and economic environments;
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greater personal security risks for employees traveling to or located in unstable locations; and
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civil disturbances or other catastrophic events.
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Further, conducting business abroad subjects us to increased regulatory compliance and oversight. For example, in connection with our international operations, we are subject to laws prohibiting certain payments to governmental officials, such as the Foreign Corrupt Practices Act. A failure to comply with applicable regulations could result in regulatory enforcement actions as well as substantial civil and criminal penalties assessed against us and our employees.
Our obligations under the Amended Credit Agreement are secured by a pledge of certain of the equity interests in our subsidiaries and a lien on substantially all of our assets and those of our subsidiary grantors. If we default on these obligations, our lenders may foreclose on our assets, including our pledged equity interest in our subsidiaries.
On March 31, 2015, we entered into a second amended and restated security agreement with Bank of America (the “Security Agreement”) and a second amended and restated pledge agreement (the “Pledge Agreement”) in connection with our entry into the Second Amended and Restated Credit Agreement, dated as of March 31, 2015 (as amended and restated, the “Amended Credit Agreement”). Pursuant to the Security Agreement and to secure our obligations under the Amended Credit Agreement, we granted our lenders a first-priority lien, subject to permitted liens, on substantially all of the personal property assets that we and the subsidiary grantors own. Pursuant to the Pledge Agreement, we granted our lenders 100% of the voting stock or other equity interests in our domestic subsidiaries and 65% of the voting stock or other equity interests in certain of our foreign subsidiaries. If we default on our obligations under the Amended Credit Agreement, our lenders could accelerate our indebtedness and may be able to exercise their liens on the equity interests subject to the Pledge Agreement and their liens on substantially all of our assets and the assets of our subsidiary grantors, which would have a material adverse effect on our business, operations, financial condition, and liquidity. In addition, the covenants contained in the Amended Credit Agreement impose restrictions on our ability to engage in certain activities, such as the incurrence of additional indebtedness, certain investments, certain acquisitions and dispositions, and the payment of dividends.
Our indebtedness could adversely affect our ability to raise additional capital to fund our operations and obligations, expose us to interest rate risk to the extent of our variable-rate debt, and adversely affect our financial results.
At
December 31, 2017
, we had outstanding indebtedness of $250 million principal amount of our 1.25% convertible senior notes due October 1, 2019,
$105.0 million
on our revolving line of credit that becomes due and payable in full upon maturity on March 31, 2020, and
$4.9 million
principal amount of our promissory note due March 1, 2024. Our ability to make scheduled payments of the principal, to pay interest, to make payments upon conversion, or to refinance our indebtedness, depends on our future performance. Our business may not continue to generate cash flow from operations in the future sufficient to satisfy our obligations under our current indebtedness and any future indebtedness we may incur and to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our current indebtedness or future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the current indebtedness or future indebtedness.
In addition, our indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:
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expose us to the risk of increased interest rates because some of our borrowings are at variable interest rates;
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make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry, and competitive conditions and adverse changes in government regulation;
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limit our ability to obtain additional financing and flexibility in planning for, or reacting to, changes in our business and our industry;
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place us at a disadvantage compared to our competitors who have less debt or have better access to capital resources; and
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require us to dedicate a larger portion of our cash from operations to service our indebtedness and thus reduce the level of cash for other purposes such as funding working capital, strategic acquisitions, capital expenditures, and other general corporate purposes.
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Any of these factors could materially and adversely affect our business, financial condition, and results of operations. In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.
The accounting method for convertible debt securities that may be settled in cash, such as our convertible notes, could have a material effect on our reported financial results.
Under GAAP, an entity must separately account for the debt component and the embedded conversion option of convertible debt instruments that may be settled entirely or partially in cash upon conversion, such as our convertible notes, in a manner that reflects a company’s economic interest cost. The effect of the accounting treatment for such instruments is that the value of such embedded conversion option would be treated as an original issue discount for purposes of accounting for the debt component of the notes and that original issue discount is amortized into interest expense over the term of the notes using an effective yield method. As a result, over the term of our convertible notes, we will initially be required to record a greater amount of non-cash interest expense. Accordingly, we will report lower net income in our financial results because of the recognition of both the current period’s amortization of the debt discount and our convertible notes’ coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock, and the trading price of our convertible notes.
Under certain circumstances, the shares of common stock underlying convertible debt instruments (such as our convertible notes) that may be settled entirely or partially in cash are reflected in earnings per share utilizing the treasury stock method, the effect of which is that such shares of common stock are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the notes exceeds their principal amount at the end of the reporting period. Under the treasury stock method, for diluted earnings per share purposes, our convertible notes are accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares of common stock, are issued. The accounting standards in the future may not continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares of common stock issuable upon conversion of our convertible notes, then our diluted earnings per share could be adversely affected.
In addition, if the conditional conversion feature of our convertible notes is triggered, even if holders do not elect to convert their convertible notes, we could be required under applicable accounting rules to reclassify all of the outstanding principal of our convertible notes as a current, rather than long-term, liability, which would result in a material reduction of our net working capital.
We may not have the ability to raise the funds necessary to pay the amount of cash due upon conversion of our convertible notes, if relevant, or the fundamental change repurchase price due when a holder submits its convertible notes for repurchase upon the occurrence of a fundamental change, and our debt may contain limitations on our ability to pay cash upon conversion or required repurchase of our convertible notes.
Upon the occurrence of a fundamental change as defined in the indenture governing our convertible notes, holders of our convertible notes may require us to repurchase, for cash, all or a portion of their convertible notes at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any. In addition, upon conversion of our convertible notes, we will be required to make cash payments in respect of our convertible notes being converted, including if the conditional conversion feature of our convertible notes is triggered, unless we elect to deliver solely shares of our common stock to settle such conversion.
We may not have sufficient financial resources, or may be unable to arrange financing, to pay the fundamental change repurchase price if holders of our convertible notes submit their convertible notes for purchase by us upon the occurrence of a fundamental change or to pay the amount of cash (if any) due if holders of our convertible notes surrender their convertible notes for conversion. In addition, the occurrence of a fundamental change may cause an event of default under agreements governing our or our subsidiaries’ indebtedness. Agreements governing any of our future debt may restrict our ability to make each of the required cash payments even if we have sufficient funds to make them. Furthermore, our ability to purchase our convertible notes or to pay cash (if any) due upon the conversion of our convertible notes may be limited by law or regulatory authorities. In addition, if we fail to repurchase our convertible notes or to pay the amount of cash (if any) due upon conversion of our convertible notes, we will be in default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which in turn may result in the acceleration of such other indebtedness we may then have outstanding. If the repayment of the other indebtedness were to be accelerated, we may not have sufficient funds to repay that indebtedness and to repurchase our convertible notes or to pay the amount of cash (if any) due upon conversion.
The fundamental change provisions associated with our convertible notes may delay or prevent an otherwise beneficial takeover attempt of us.
The fundamental change purchase rights, which will allow holders of our convertible notes to require us to repurchase all or a portion of their convertible notes upon the occurrence of a fundamental change, and the provisions requiring an increase to the conversion rate for conversions in connection with certain other circumstances may delay or prevent a takeover of us that might otherwise be beneficial to investors.
The convertible note hedge transactions and the warrant transactions may affect the value of our convertible notes and our common stock.
In connection with the pricing of our convertible notes, we entered into privately negotiated convertible note hedge transactions with affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities as hedge counterparties. The convertible note hedge transactions collectively cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie our convertible notes. We also entered into separate privately negotiated warrant transactions with the hedge counterparties relating to the same number of shares of our common stock, subject to customary anti-dilution adjustments.
We expect that the hedge counterparties and/or their affiliates may modify their hedge positions with respect to the convertible note hedge transactions and the warrant transactions from time to time by purchasing and/or selling shares of our common stock and/or our convertible notes in privately negotiated transactions and/or open market transactions or by entering into and/or unwinding various over-the-counter derivative transactions with respect to our common stock. This activity could also cause or prevent an increase or decrease in the market value of our common stock. In addition, the hedge counterparties and/or their affiliates may choose to engage in, or to discontinue engaging in, any of these transactions with or without notice at any time, and their decisions will be in their sole discretion and not within our control.
The hedge counterparties are financial institutions which will be subject to the risk that one or both of the hedge counterparties might default under their respective convertible note hedge transactions. Upon a default by any hedge counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the hedge counterparties.
Our intellectual property rights in our “Huron Consulting Group” name are important, and any inability to use that name could negatively impact our ability to build brand identity.
We believe that establishing, maintaining, and enhancing the “Huron Consulting Group” name and "Huron" brand is important to our business. We are, however, aware of a number of other companies that use names containing “Huron.” There could be potential trade name or service mark infringement claims brought against us by the users of these similar names and marks and those users may have trade name or service mark rights that are senior to ours. If another company were to successfully challenge our right to use our name, or if we were unable to prevent a competitor from using a name that is similar to our name, our ability to build brand identity could be negatively impacted.
Our business performance might not be sufficient for us to meet the full-year financial guidance that we provide publicly.
We provide full-year financial guidance to the public based upon our expectations regarding our financial performance. While we believe that our annual financial guidance provides investors and analysts with insight to our view of the Company’s future performance, such financial guidance is based on assumptions that may not always prove to be accurate and may vary from actual results. If we fail to meet the full-year financial guidance that we provide, or if we find it necessary to revise such guidance during the year, the market value of our common stock could be adversely affected.
Expanding our service offerings or number of offices may not be profitable.
We may choose to develop new service offerings, open new offices, or eliminate service offerings because of market opportunities or client demands. Developing new service offerings involves inherent risks, including:
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our inability to estimate demand for the new service offerings;
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competition from more established market participants;
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a lack of market understanding; and
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unanticipated expenses to recruit and hire qualified consultants and to market our new service offerings.
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In addition, expanding into new geographic areas and expanding current service offerings is challenging and may require integrating new employees into our culture as well as assessing the demand in the applicable market. If we cannot manage the risks associated with new
service offerings or new locations effectively, we are unlikely to be successful in these efforts, which could harm our ability to sustain profitability and our business prospects.
The healthcare industry is an area of significant focus for our business, and factors that adversely affect the financial condition of the healthcare industry could consequently affect our business.
We derive a significant portion of our revenue from clients in the healthcare industry. As a result, our financial condition and results of operations could be adversely affected by conditions affecting the healthcare industry generally and hospitals and health systems particularly. The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory, and other influences. Uncertainty in any of these areas could cause our clients to delay or postpone decisions to use our services. Existing and new federal and state laws and regulations affecting the healthcare industry could create unexpected liabilities for us, could cause us or our clients to incur additional costs, and could restrict our or our clients’ operations. Many healthcare laws are complex and their application to us, our clients, or the specific services and relationships we have with our clients are not always clear. In addition, federal and state legislatures have periodically introduced programs to reform or amend the U.S. healthcare system at both the federal and state level, such as the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and continue to consider further significant reforms. Due to the significant implementation issues arising under these laws and potential new legislation, it is unclear what long-term effects they will have on the healthcare industry and in turn on our business, financial condition, and results of operations. Our failure to accurately anticipate the application of new laws and regulations, or our failure to comply with such laws and regulations, could create liability for us, result in adverse publicity and negatively affect our business.
There are many factors that could affect the purchasing practices, operations, and, ultimately, the operating funds of healthcare organizations, such as reimbursement policies for healthcare expenses, federal and state budgetary considerations, consolidation in the healthcare industry, and regulation, litigation, and general economic conditions. In particular, we could be required to make unplanned modifications of our products and services (which would require additional time and investment) or we could suffer reductions in demand for our products and services as a result of changes in regulations affecting the healthcare industry, such as changes in the way that healthcare organizations are paid for their services (e.g., based on patient outcomes instead of services provided). Furthermore, as a result of the 2016 election and the new presidential administration, there is an increased uncertainty surrounding the future of the Affordable Care Act and the regulation of the healthcare industry, and therefore healthcare organizations may wait to buy services such as ours until the regulatory environment is more certain.
In addition, state tax authorities have challenged the tax-exempt status of some hospitals and other healthcare facilities claiming such status on the basis that they are operating as charitable and/or religious organizations. If the tax-exempt status of any of our clients is revoked or compromised by new legislation or interpretation of existing legislation, that client’s financial health could be adversely affected, which could adversely impact demand for our services, our sales, revenue, financial condition, and results of operations.
Our ability to maintain and attract new business and talented personnel depends upon our reputation, the professional reputation of our revenue-generating employees, and the quality of our services.
As a professional services firm, our ability to secure new engagements and retain and attract talented personnel depends heavily upon our reputation and the individual reputations of our professionals. Any factor that diminishes our reputation or that of our employees, including not meeting client expectations or misconduct by our employees, could make it substantially more difficult for us to attract new engagements, clients, and employees. Similarly, because we obtain many of our new engagements from former or current clients or from referrals by those clients or by law firms that we have worked with in the past, any client that questions the quality of our work or that of our consultants could impair our ability to secure additional new engagements and clients.
A significant portion of our revenues is derived from a limited number of clients, and our engagement agreements, including those related to our largest clients, can be terminated by our clients with little or no notice and without penalty, which may cause our operating results to be unpredictable and may result in unexpected declines in our utilization and revenues.
As a consulting firm, we have derived, and expect to continue to derive, a significant portion of our revenues from a limited number of clients. Our 10 largest clients accounted for approximately
19.5%
,
28.8%
, and
29.9%
of our revenues for the years ended
December 31, 2017
,
2016
, and
2015
, respectively. No single client accounted for more than 10% of our revenues in
2017
,
2016
, or
2015
. Our clients typically retain us on an engagement-by-engagement basis, rather than under fixed-term contracts. The volume of work performed for any particular client is likely to vary from year to year, and a major client in one fiscal period may not require or may decide not to use our services in any subsequent fiscal period. Moreover, a large portion of our new engagements comes from existing clients. Accordingly, the failure to obtain new large engagements or multiple engagements from existing or new clients could have a material adverse effect on the amount of revenues we generate.
In addition, almost all of our engagement agreements can be terminated by our clients with little or no notice and without penalty. In client engagements that involve multiple engagements or stages, there is a risk that a client may choose not to retain us for additional stages of an engagement or that a client will cancel or delay additional planned engagements. For clients in bankruptcy, a bankruptcy court could elect not
to retain our interim management consultants, terminate our retention, require us to reduce our fees for the duration of an engagement, or elect not to approve claims against fees earned by us prior to or after the bankruptcy filing.
Terminations of engagements, cancellations of portions of the project plan, delays in the work schedule, or reductions in fees could result from factors unrelated to our services. When engagements are terminated or reduced, we lose the associated future revenues, and we may not be able to recover associated costs or redeploy the affected employees in a timely manner to minimize the negative impact. In addition, our clients’ ability to terminate engagements with little or no notice and without penalty makes it difficult to predict our operating results in any particular fiscal period.
Our engagements could result in professional liability, which could be very costly and hurt our reputation.
Our engagements typically involve complex analyses and the exercise of professional judgment. As a result, we are subject to the risk of professional liability. From time to time, lawsuits with respect to our work are pending. Litigation alleging that we performed negligently or breached any other obligations could expose us to significant legal liabilities and, regardless of outcome, is often very costly, could distract our management, could damage our reputation, and could harm our financial condition and operating results. In addition, certain of our engagements, including interim management engagements and corporate restructurings, involve greater risks than other consulting engagements. We are not always able to include provisions in our engagement agreements that are designed to limit our exposure to legal claims relating to our services. While we attempt to identify and mitigate our exposure with respect to liability arising out of our consulting engagements, these efforts may be ineffective and an actual or alleged error or omission on our part or the part of our client or other third parties in one or more of our engagements could have an adverse impact on our financial condition and results of operations. In addition, we carry professional liability insurance to cover many of these types of claims, but the policy limits and the breadth of coverage may be inadequate to cover any particular claim or all claims plus the cost of legal defense. For example, we provide services on engagements in which the impact on a client may substantially exceed the limits of our errors and omissions insurance coverage. If we are found to have professional liability with respect to work performed on such an engagement, we may not have sufficient insurance to cover the entire liability.
The consulting services industry is highly competitive and we may not be able to compete effectively.
The consulting services industry in which we operate includes a large number of participants and is intensely competitive. We face competition from other business operations and financial consulting firms, general management consulting firms, the consulting practices of major accounting firms, regional and specialty consulting firms, and the internal professional resources of organizations. In addition, because there are relatively low barriers to entry, we expect to continue to face additional competition from new entrants into the business operations and financial consulting industries. Competition in several of the sectors in which we operate is particularly intense as many of our competitors are seeking to expand their market share in these sectors. Many of our competitors have a greater national and international presence, as well as have a significantly greater number of personnel, financial, technical, and marketing resources. In addition, these competitors may generate greater revenues and have greater name recognition than we do. Some of our competitors may also have lower overhead and other costs and, therefore, may be able to more effectively compete through lower cost service offerings. Our ability to compete also depends in part on the ability of our competitors to hire, retain, and motivate skilled professionals, the price at which others offer comparable services, the ability of our competitors to offer new and valuable products and services to clients, and our competitors’ responsiveness to their clients. If we are unable to compete successfully with our existing competitors or with any new competitors, our financial results will be adversely affected.
Conflicts of interest could preclude us from accepting engagements thereby causing decreased utilization and revenues.
We provide services in connection with bankruptcy and other proceedings that usually involve sensitive client information and frequently are adversarial. In connection with bankruptcy proceedings, we are required by law to be "disinterested" and may not be able to provide multiple services to a particular client. In addition, our engagement agreement with a client or other business reasons may preclude us from accepting engagements from time to time with the client's competitors or adversaries. Moreover, in many industries in which we provide services, there has been a continuing trend toward business consolidations and strategic alliances. These consolidations and alliances reduce the number of companies that may seek our services and increase the chances that we will be unable to accept new engagements as a result of conflicts of interest. If we are unable to accept new engagements for any reason, our consultants may become underutilized, which would adversely affect our revenues and results of operations in future periods.
|
|
|
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS.
|
None.
As of
December 31, 2017
, our principal executive offices in Chicago, Illinois, consisted of approximately 134,000 square feet of office space, under a lease expiring September 2024. We have one five-year renewal option that will allow us to continue to occupy this office space until September 2029. This facility accommodates our executive team and corporate departments, as well as professionals in our practices.
Additionally, we occupy leased facilities for our other domestic and international offices, including those located in the following cities: Boston, Massachusetts; Buffalo, New York; Dallas, Texas; Denver, Colorado; Houston, Texas; Madison, Wisconsin; New York City, New York; Pensacola, Florida; Portland, Oregon; San Francisco, California; Washington, D.C.; Bangalore, India; Dubai, United Arab Emirates; London, United Kingdom; Luasanne, Switzerland; Riyadh, Saudi Arabia; Singapore; St. Ives, United Kingdom; and Toronto, Canada. We do not own any real property. We believe that our leased facilities are adequate to meet our current needs and that additional facilities are available for lease to meet future needs.
|
|
|
ITEM 3.
|
LEGAL PROCEEDINGS.
|
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 Annual Report on Form 10-K, 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.
|
|
|
ITEM 4.
|
MINE SAFETY DISCLOSURES.
|
Not applicable.
HURON CONSULTING GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income (loss)
|
$
|
(170,117
|
)
|
|
$
|
37,617
|
|
|
$
|
59,052
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
50,089
|
|
|
46,816
|
|
|
58,053
|
|
Share-based compensation
|
14,838
|
|
|
16,577
|
|
|
21,487
|
|
Amortization of debt discount and issuance costs
|
10,203
|
|
|
9,609
|
|
|
9,329
|
|
Goodwill impairment charge
|
253,093
|
|
|
—
|
|
|
—
|
|
Allowances for doubtful accounts and unbilled services
|
3,217
|
|
|
4,250
|
|
|
1,025
|
|
Deferred income taxes
|
(53,753
|
)
|
|
1,189
|
|
|
6,353
|
|
(Gain) loss on sale of businesses
|
(931
|
)
|
|
—
|
|
|
2,303
|
|
Change in fair value of contingent consideration liabilities
|
1,111
|
|
|
(1,990
|
)
|
|
(1,126
|
)
|
Changes in operating assets and liabilities, net of acquisitions and divestitures:
|
|
|
|
|
|
(Increase) decrease in receivables from clients
|
1,650
|
|
|
1,440
|
|
|
(2,836
|
)
|
(Increase) decrease in unbilled services
|
(4,332
|
)
|
|
2,443
|
|
|
31,696
|
|
(Increase) decrease in current income tax receivable / payable, net
|
210
|
|
|
(4,410
|
)
|
|
8,818
|
|
(Increase) decrease in other assets
|
(366
|
)
|
|
11,904
|
|
|
(14,742
|
)
|
Increase (decrease) in accounts payable and accrued liabilities
|
3,732
|
|
|
(3,144
|
)
|
|
8,805
|
|
Increase (decrease) in accrued payroll and related benefits
|
(10,966
|
)
|
|
3,044
|
|
|
(25,221
|
)
|
Increase (decrease) in deferred revenues
|
2,117
|
|
|
3,898
|
|
|
4,859
|
|
Net cash provided by operating activities
|
99,795
|
|
|
129,243
|
|
|
167,855
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property and equipment, net
|
(24,402
|
)
|
|
(13,936
|
)
|
|
(18,571
|
)
|
Investment in life insurance policies
|
(1,826
|
)
|
|
(2,035
|
)
|
|
(5,804
|
)
|
Distributions from life insurance policies
|
2,889
|
|
|
—
|
|
|
—
|
|
Purchases of businesses, net of cash acquired
|
(106,915
|
)
|
|
(69,133
|
)
|
|
(339,966
|
)
|
Purchases of convertible debt investment
|
—
|
|
|
—
|
|
|
(15,438
|
)
|
Capitalization of internally developed software
|
(1,370
|
)
|
|
(1,086
|
)
|
|
(866
|
)
|
Proceeds from note receivable
|
1,177
|
|
|
—
|
|
|
—
|
|
Proceeds from sale of businesses, net of cash sold
|
1,499
|
|
|
(446
|
)
|
|
108,487
|
|
Net cash used in investing activities
|
(128,948
|
)
|
|
(86,636
|
)
|
|
(272,158
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from exercises of stock options
|
—
|
|
|
123
|
|
|
—
|
|
Shares redeemed for employee tax withholdings
|
(4,846
|
)
|
|
(4,953
|
)
|
|
(7,154
|
)
|
Share repurchases
|
—
|
|
|
(55,265
|
)
|
|
(34,591
|
)
|
Proceeds from borrowings under credit facility
|
277,500
|
|
|
200,000
|
|
|
314,000
|
|
Repayments of debt
|
(240,745
|
)
|
|
(224,000
|
)
|
|
(365,750
|
)
|
Payments for debt issuance costs
|
(408
|
)
|
|
—
|
|
|
—
|
|
Payments for capital lease obligations
|
—
|
|
|
—
|
|
|
(48
|
)
|
Deferred acquisition payments
|
(2,680
|
)
|
|
—
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
28,821
|
|
|
(84,095
|
)
|
|
(93,543
|
)
|
Effect of exchange rate changes on cash
|
214
|
|
|
78
|
|
|
(589
|
)
|
Net decrease in cash and cash equivalents
|
(118
|
)
|
|
(41,410
|
)
|
|
(198,435
|
)
|
Cash and cash equivalents at beginning of the period
|
17,027
|
|
|
58,437
|
|
|
256,872
|
|
Cash and cash equivalents at end of the period
|
$
|
16,909
|
|
|
$
|
17,027
|
|
|
$
|
58,437
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Property and equipment expenditures included in accounts payable and accrued expenses
|
$
|
1,567
|
|
|
$
|
4,461
|
|
|
$
|
2,089
|
|
Promissory note assumed for purchase of property and equipment
|
$
|
5,113
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Contingent consideration related to business acquisitions
|
$
|
15,489
|
|
|
$
|
8,754
|
|
|
$
|
2,963
|
|
Common stock issued related to business acquisitions
|
$
|
9,560
|
|
|
$
|
—
|
|
|
$
|
2,204
|
|
Cash paid during the year for:
|
|
|
|
|
|
Interest
|
$
|
9,068
|
|
|
$
|
6,470
|
|
|
$
|
9,274
|
|
Income taxes
|
$
|
5,399
|
|
|
$
|
24,584
|
|
|
$
|
10,955
|
|
The accompanying notes are an integral part of the consolidated financial statements.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
1. Description of Business
Huron is a global professional services firm committed to achieving sustainable results in partnership with its clients. We bring a depth of expertise in strategy, technology, operations, advisory services, and analytics to drive lasting and measurable results in the healthcare, higher education, life sciences and commercial sectors.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements reflect the financial position at
December 31, 2017
and
2016
, and the results of operations and cash flows for the years ended
December 31, 2017
,
2016
, and
2015
.
The consolidated financial statements include the accounts of Huron Consulting Group Inc. and its subsidiaries, all of which are wholly-owned. All intercompany balances and transactions have been eliminated in consolidation.
During the second quarter of 2017, we recorded a non-cash pretax goodwill impairment charge of
$209.6 million
related to our Healthcare reporting unit. During the fourth quarter of 2017, we identified that our calculation of the non-deductible portion of this goodwill impairment charge erroneously excluded a portion of goodwill that was related to an acquisition completed in 2008 that has since been divested. To correct this error, in the fourth quarter of 2017, we recorded a
$1.5 million
decrease to our non-cash pretax goodwill impairment charge with an offsetting
$1.5 million
increase to our goodwill balance. We also recorded a
$1.5 million
decrease to our income tax benefit with an offsetting
$1.5 million
increase to our deferred tax asset balance. This error had no impact on our consolidated net loss from continuing operations, and we concluded that the impact of the error was not material for the second, third, or fourth quarter financial statements, or the financial statements for the year ended December 31, 2017.
During the fourth quarter of 2017, we identified an error on our previously reported consolidated balance sheets as of June 30, 2017 and September 30, 2017 related to the classification of deferred tax assets and liabilities. We incorrectly netted
$1.5 million
of deferred tax liabilities related to certain jurisdictions with the deferred tax assets of unrelated jurisdictions as of June 30, 2017 and September 30, 2017. This error has been corrected as of December 31, 2017. This error had no impact on our statement of operations, and we concluded that the impact of the error was not material to the second and third quarter financial statements or the financial statements for the year ended December 31, 2017.
On December 31, 2015, we sold our Huron Legal segment to a third party. The operations of our Huron Legal segment have been classified as discontinued operations in our consolidated statements of operations for all periods presented. As of
December 31, 2017
and
2016
, no assets or liabilities of the disposed business remained on our consolidated balance sheet. See Note 3 "Discontinued Operations" for additional information on the divestiture of our Huron Legal segment.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures. Actual results may differ from these estimates and assumptions.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, the related services are provided, the price is fixed or determinable, and collectability is reasonably assured. We generate the majority of 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 and maintenance and subscriptions.
In fixed-fee billing arrangements, we agree to a pre-established fee in exchange for a predetermined set of professional services. We set the fees based on our estimates of the costs and timing for completing the engagements. We generally recognize revenues under fixed-fee billing arrangements using a proportionate performance approach, which is based on work completed to-date versus our estimates of the total services to be provided under the engagement. Contracts within our Studer Group solution are fixed-fee partner contracts with multiple deliverables, which primarily consist of coaching services, as well as seminars, materials and software products (“Partner Contracts”). Revenues for coaching services and software products are generally recognized on a straight-line basis over the length of the contract. All other revenues under Partner Contracts are recognized at the time the service is provided. Estimates of total engagement revenues and cost
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
of services are monitored regularly during the term of the engagement. If our estimates indicate a potential loss, such loss is recognized in the period in which the loss first becomes probable and reasonably estimable.
We also generate revenues from 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.
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 publication orders purchased by our clients outside of Partner Contracts within our Studer Group solution. We recognize revenues under time-and-expense arrangements as the related services or publications are provided.
In performance-based 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. We do not recognize revenues under performance-based billing arrangements until all related performance criteria are met.
Clients that have purchased one of our software licenses can pay an annual fee for software support and maintenance. We also generate subscription revenue from our cloud-based analytic tools and solutions. Software support and maintenance and subscription-based revenues are recognized ratably over the support or subscription period, which ranges from one to three years. These fees are billed in advance and included in deferred revenues until recognized.
We have arrangements with clients in which we provide multiple elements of services under one engagement contract. Revenues under these types of arrangements are allocated to each element based on the element’s fair value and recognized pursuant to the criteria described above.
Provisions are recorded for the estimated realization adjustments on all engagements, including engagements for which fees are subject to review by the bankruptcy courts. Expense reimbursements that are billable to clients are included in total revenues and reimbursable expenses, and typically an equivalent amount of reimbursable expenses are included in total direct costs and reimbursable expenses. Reimbursable expenses are primarily recognized as revenue in the period in which the expense is incurred. Subcontractors that are billed to clients at cost are also included in reimbursable expenses. When billings do not specifically identify reimbursable expenses, we allocate the portion of the billings equivalent to these expenses to reimbursable expenses.
Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services or deferred revenues in the accompanying consolidated balance sheets. Revenues recognized for services performed but not yet billed to clients are recorded as unbilled services. Client prepayments and retainers are classified as deferred revenues and recognized over future periods as earned in accordance with the applicable engagement agreement.
Allowances for Doubtful Accounts and Unbilled Services
We maintain allowances for doubtful accounts and for services performed but not yet billed based on several factors, including the estimated cash realization from amounts due from clients, an assessment of a client’s ability to make required payments, and the historical percentages of fee adjustments and write-offs by age of receivables and unbilled services. The allowances are assessed by management on a regular basis. These estimates may differ from actual results. If the financial condition of a client deteriorates in the future, impacting the client’s ability to make payments, an increase to our allowance might be required or our allowance may not be sufficient to cover actual write-offs.
We record the provision for doubtful accounts and unbilled services as a reduction in revenue to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the provision relates to a client’s inability to make required payments on accounts receivables, we record the provision to selling, general and administrative expenses.
Direct Costs and Reimbursable Expenses
Direct costs and reimbursable expenses consist primarily of revenue-generating employee compensation and their related benefits and share-based compensation costs, as well as commissions, the cost of outside consultants or subcontractors assigned to revenue-generating activities, technology costs, other third-party costs directly attributable to our revenue-generating activities, and direct expenses to be reimbursed by clients. Direct costs and reimbursable expenses incurred on engagements are expensed in the period incurred.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Cash and Cash Equivalents
We consider all highly liquid investments, including overnight investments and commercial paper, with original maturities of
three
months or less to be cash equivalents.
Concentrations of Credit Risk
To the extent receivables from clients become delinquent, collection activities commence. No single client balance is considered large enough to pose a material credit risk. The allowances for doubtful accounts and unbilled services are based upon the expected ability to collect accounts receivable and bill and collect unbilled services. Management does not anticipate incurring losses on accounts receivable in excess of established allowances. See Note 18 “Segment Information” for concentration of accounts receivable and unbilled services.
We hold our cash in accounts at multiple third-party financial institutions. These deposits, at times, may exceed federally insured limits. We review the credit ratings of these financial institutions, regularly monitor the cash balances in these accounts, and adjust the balances as appropriate. However, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets.
Long-term Investment
Our long-term investment consists of our convertible debt investment in Shorelight Holdings, LLC. We classified the investment as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. The investment is carried at fair value with unrealized holding gains and losses reported in other comprehensive income. If the investment is in an unrealized loss position, we assess whether the investment is other than temporarily impaired. We consider impairments to be other than temporary if they are related to significant credit deterioration or if it is likely we will sell the security before the recovery of its cost basis. We have not identified any other than temporary impairments for our convertible debt investment. In the event there are realized gains and losses or declines in value judged to be other than temporary, we will record the amount in earnings. See Note 12 “Fair Value of Financial Instruments” for further information on our convertible debt investment.
Fair Value of Financial Instruments
See Note 12 “Fair Value of Financial Instruments” for the accounting policies used to measure the fair value of our financial assets and liabilities that are measured at fair value on a recurring basis.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation of property and equipment is computed on a straight-line basis over the estimated useful lives of the assets. Software, computers, and related equipment are depreciated over an estimated useful life of
two
to
four
years. Furniture and fixtures are depreciated over
five
years. Aircraft are depreciated over
ten
years. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the initial term of the lease.
Software Development Costs
We incur internal and external software development costs related to our cloud computing applications and software for internal use. We capitalize these software development costs incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Once the project is substantially complete and ready for its intended use these costs are amortized on a straight-line basis over the technology's estimated useful life. Acquired technology assets are initially recorded at fair value and amortized on a straight-line basis over the estimated useful life.
We also incur internal and external software development costs related to our software products that will be sold, leased, or otherwise marketed. We expense these software development costs until technological feasibility has been established. Thereafter and until the software is available for general release to customers, these software development costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. These capitalized development costs are amortized in proportion to current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product.
We classify capitalized software development costs as other non-current assets on our consolidated balance sheet. Unamortized capitalized software development costs were
$2.0 million
and
$1.4 million
at
December 31, 2017
and
2016
, respectively. During the years ended
December 31, 2017
,
2016
, and
2015
, we amortized
$0.8 million
,
$1.1 million
, and
$1.0 million
, respectively, of capitalized software development costs.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Intangible Assets Other Than Goodwill
Identifiable intangible assets are amortized over their expected useful lives using a method that reflects the economic benefit expected to be derived from the assets or on a straight-line basis. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a significant decline in forecasted operating results over an extended period of time. We evaluate the recoverability of long-lived assets based on forecasted undiscounted cash flows.
In connection with the goodwill impairment tests performed for the Healthcare and Enterprise Solutions and Analytics reporting units in 2017, which resulted in non-cash goodwill impairment charges, we performed impairment tests on the long-lived assets allocated to the asset groups within the Healthcare and Enterprise Solutions and Analytics reporting units. Based on the impairment tests performed, we concluded that the long-lived assets allocated to the asset groups were not impaired. No impairment charges for long-lived assets were recorded in 2017,
2016
, or
2015
.
Goodwill
For acquisitions accounted for as a business combination, goodwill represents the excess of the cost over the fair value of the net assets acquired. We are required to test goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate the fair value of a reporting unit may be below its carrying value. A reporting unit is an operating segment or one level below an operating segment (referred to as a component) to which goodwill is assigned when initially recorded. We assign goodwill to reporting units based on our integration plans and the expected synergies resulting from the acquisition. We have
six
reporting units: Healthcare, Education, Business Advisory, Enterprise Solutions and Analytics, Strategy and Innovation, and Life Sciences. The Business Advisory, Enterprise Solutions and Analytics, Strategy and Innovation, and Life Sciences reporting units make up our Business Advisory operating segment.
We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. We perform our annual goodwill impairment test as of November 30 and monitor for interim triggering events on an ongoing basis.
In 2017, we performed three goodwill impairment tests: an interim impairment test on our Healthcare reporting unit in the second quarter of 2017; an interim impairment test on our Education and Life Sciences reporting units as a result of our segment reorganization in the second quarter of 2017; and the annual impairment test on all reporting units in the fourth quarter of 2017. As a result of these tests, we recorded total non-cash pretax goodwill impairment charges of
$253.1 million
. No goodwill impairment charges were recorded in 2016 or 2015. See Note 5 "Goodwill and Intangible Assets" for additional information regarding our interim and annual goodwill impairment tests, and the non-cash goodwill impairment charges recorded in 2017.
Business Combinations
We use the acquisition method of accounting for business combinations
.
Each acquired company’s operating results are included in our consolidated financial statements starting on the date of acquisition. The purchase price is equivalent to the fair value of consideration transferred. Tangible and identifiable intangible assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. Goodwill is recognized for the excess of purchase price over the net fair value of tangible and intangible assets acquired and liabilities assumed. Contingent consideration, which is primarily based on the business achieving certain performance targets, is recognized at its fair value on the acquisition date, and changes in fair value are recognized in earnings until settled. Refer to Note 12 “Fair Value of Financial Instruments” for further information regarding our contingent acquisition liability balances.
Deferred Lease Incentives
We record the portion of the deferred lease incentive liability that we expect to recognize over a period greater than one year as a non-current liability. The non-current portion of the deferred lease incentive liability totaled
$15.3 million
and
$10.7 million
at
December 31, 2017
and
2016
, respectively, and was primarily generated from tenant improvement allowances and rent abatement. Deferred lease incentives are amortized on a straight-line basis over the life of the lease. The portion of the deferred lease incentive corresponding to the rent payments that will be paid within 12 months of the balance sheet date is classified as a current liability. We monitor the classification of such liabilities based on the expectation of their utilization periods.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Income Taxes
Current tax liabilities and assets are recognized for the estimated taxes payable or refundable, respectively, on the tax returns for the current year. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. To the extent that deferred tax assets will not likely be recovered from future taxable income, a valuation allowance is established against such deferred tax assets.
Refer to Note 16 "Income Taxes" for information on the impact of the Tax Cuts and Jobs Act of 2017 ("2017 Tax Reform") enacted in the fourth quarter on our consolidated financial statements.
Share-Based Compensation
Share-based compensation cost is measured based on the grant date fair value of the respective awards. We generally recognize share-based compensation ratably using the straight-line attribution method; however, for those awards with performance criteria and graded vesting features, we use the graded vesting attribution method. It is our policy to account for forfeitures as they occur.
Sponsorship and Advertising Costs
Sponsorship and advertising costs are expensed as incurred. Such expenses for the years ended
December 31, 2017
,
2016
, and
2015
totaled
$6.6 million
,
$7.1 million
, and
$6.4 million
, respectively, and are a component of selling, general and administrative expenses on our consolidated statement of earnings.
Convertible Senior Notes
In September 2014, we issued
$250 million
principal amount of
1.25%
convertible senior notes due 2019 (the “Convertible Notes”) in a private offering. We have separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying value of the equity component representing the conversion option, which is recognized as a debt discount, was determined by deducting the fair value of the liability component from the proceeds of the Convertible Notes. The debt discount is amortized to interest expense using the effective interest method over the term of the Convertible Notes. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification. Refer to Note 7 “Financing Arrangements” for further information regarding the Convertible Notes.
Debt Issuance Costs
We amortize the costs we incur to obtain debt financing over the contractual life of the related debt using the effective interest method for non-revolving debt and the straight-line method for revolving debt. The amortization expense is included in interest expense, net of interest income in our statement of earnings. Unamortized debt issuance costs attributable to our revolving credit facility are included as a component of other non-current assets. Unamortized debt issuance costs attributable to our Convertible Notes are recorded as a deduction from the carrying amount of the debt liability.
Foreign Currency
Assets and liabilities of foreign subsidiaries whose functional currency is not the United States Dollar (USD) are translated into the USD using the exchange rates in effect at period end. Revenue and expense items are translated using the average exchange rates for the period. Foreign currency translation adjustments are included in accumulated other comprehensive income, which is a component of stockholders’ equity.
Foreign currency transaction gains and losses are included in other income, net on the statement of earnings. We recognized
$0.4 million
of foreign currency transaction gains in
2017
, de minimis foreign currency transaction gains in
2016
, and
$1.6 million
of foreign currency transaction losses in
2015
.
Segment Reporting
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 manages the business under
three
operating segments, which are reportable segments: Healthcare, Education, and Business Advisory. During the second quarter of 2017, we reorganized our internal financial reporting structure, which management uses to assess performance and
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
allocate resources, by moving our Life Sciences practice from the Education and Life Sciences segment to the Business Advisory segment. The remaining Education and Life Sciences segment is now referred to as the Education segment. While our consolidated results have not been impacted, we have reclassified our historical segment information for consistent presentation.
New Accounting Pronouncements
Recently Adopted
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. ASU 2018-02 allows entities to reclassify stranded tax effects resulting from the enactment of the 2017 Tax Cuts and Jobs Act ("2017 Tax Reform") from accumulated other comprehensive income to retained earnings. We adopted ASU 2018-02 upon issuance and reclassified
$0.5 million
of stranded tax effects, primarily related to our convertible debt investment, from accumulated other comprehensive income to retained earnings as of December 31, 2017. Refer to Note 16 "Income Taxes" for additional information on the 2017 Tax Reform.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. ASU 2017-04 eliminates Step 2 of the goodwill impairment test, which required us to determine the implied fair value of goodwill by allocating the reporting unit's fair value to each of its assets and liabilities as if the reporting unit was acquired in a business acquisition. Instead, the updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. We adopted this ASU in the second quarter of 2017 on a prospective basis and applied the new guidance to our interim goodwill impairment tests performed in the second quarter of 2017 and our annual impairment test performed as of November 30, 2017. Refer to Note 5 “Goodwill and Intangible Assets” for additional information on our interim and annual goodwill impairment tests performed.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, classification of excess tax benefits on the statement of cash flows, and forfeitures. We adopted this guidance in the first quarter of 2017, at which time we began recognizing excess tax benefits and deficiencies as income tax benefit or expense in our consolidated statements of operations on a prospective basis. We recognized
$1.8 million
of net excess tax deficiencies as income tax expense in our consolidated statement of operations for the year ended
December 31, 2017
. Additionally, upon adoption, we began classifying excess tax benefits as an operating activity on the statement of cash flows on a retrospective basis. As a result, we reclassified
$0.9 million
and
$3.6 million
of excess tax benefits for the years ended
December 31, 2016
and
2015
, respectively, from cash flows from financing activities to cash flows from operating activities on our statement of cash flows. We elected to account for share-based award forfeitures as they occur, and applied this accounting change on a modified retrospective basis as a cumulative-effect adjustment to retained earnings of
$0.4 million
during the first quarter of 2017.
In March 2016, the FASB issued ASU 2016-06,
Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments
. ASU 2016-06 clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to perform only the four-step decision sequence in ASC 815-15-25-42 (as amended by the ASU). The entity does not have to separately assess whether the event that triggers its ability to exercise the contingent option is itself indexed only to interest rates or credit risk. We adopted these amendments in the first quarter of 2017 on a modified retrospective basis. The adoption of these amendments did not have any impact on our consolidated financial statements.
Not Yet Adopted
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
. The amendments to the guidance improve and simplify accounting rules for hedge accounting to better present the economic results of an entity’s risk management activities in its financial statements and improve the disclosures of hedging arrangements. Additionally, ASU 2017-12 simplifies the hedge documentation and effectiveness assessment requirements. The updated guidance is effective for us beginning January 1, 2019. We do not expect this guidance to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-02,
Leases
, which supersedes ASC Topic 840,
Leases
, and sets forth the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record on the balance sheet a right-of-use asset and a lease liability, equal to the present value of the remaining lease payments, for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or a straight-line basis over the term of the lease. ASU 2016-02 will be effective for us beginning January 1, 2019, with early adoption permitted. Entities are required to
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
use a modified retrospective transition method for existing leases. We are currently evaluating the potential impact this guidance will have on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. The amendments to the guidance enhance the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation, and disclosure. The updated guidance is effective for us beginning January 1, 2018. We do not expect this guidance to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
as a new Topic
,
ASC 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In accordance with the new standard, we will adopt ASU 2014-09 on January 1, 2018 using the modified retrospective transition method, under which the new guidance will be applied to the current period presented in the financial statements and a cumulative-effect adjustment will be recorded as of the date of adoption. We are currently completing our analysis to determine the impact of ASC 606 on our consolidated financial statements, and expect the more impactful aspect of ASC 606 will relate to how we recognize revenue under performance-based fee billing arrangements. Currently, we recognize revenue under these arrangements once all related performance criteria are met and the amount to be recognized is fixed or determinable. However, upon adoption of the new standard, we will estimate these amounts and recognize the estimated amounts as services are performed over the contractual term of the engagements. The cumulative-effect adjustment will capture the amount of revenue we would have recognized on all outstanding performance-based fee billing arrangements under ASC 606 as of the adoption date, and record the difference as a cumulative-effect adjustment to retained earnings. Further, ASC 606 provides for certain practical expedients that we intend to use, including the option to expense contract acquisition costs as incurred if the contract term is one year or shorter. We also intend to use the as-invoiced practical expedient, which permits us to recognize revenue in the amount to which we have the right to invoice a customer if that amount corresponds to the value of the performance completed to date.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
3. Discontinued Operations
During 2015, we began evaluating strategic alternatives related to our Huron Legal segment, including the potential divestiture of the practice. On December 10, 2015, we entered into an agreement to sell Huron Legal to Consilio, Inc. ("Consilio"). Pursuant to this agreement, Consilio acquired substantially all of the assets and assumed certain liabilities of Huron Legal, and acquired all issued and outstanding equity interests in certain entities wholly owned by Huron. Huron Legal provided eDiscovery services, consulting services and contract management services related to law department management, information governance and compliance, legal discovery, litigation management, and legal analytics.
The sale closed on December 31, 2015, at which time we received proceeds of
$110.1 million
and recognized a pretax disposal loss of
$2.3 million
. The divestiture of the Huron Legal segment represented a strategic shift that had a major effect on our operations and financial results. As such, the operations of our Huron Legal segment have been classified as discontinued operations in our consolidated statements of operations for all periods presented. As of
December 31, 2017
and
2016
, no assets or liabilities of the disposed business remained on our consolidated balance sheets.
For the year ended
December 31, 2017
, we recognized income from discontinued operations, net of tax, of
$0.4 million
primarily related to updated lease assumptions for vacated office space directly related to the sale of the Huron Legal segment. For the year ended
December 31, 2016
, we recognized a loss from discontinued operations, net of tax, of
$1.9 million
, primarily related to obligations for former employees, legal fees, and updated lease assumptions for vacated office space directly related to the sale of the Huron Legal segment. The table below summarizes the operating results of Huron Legal for the year ended December 31, 2015.
|
|
|
|
|
|
Year Ended
December 31, 2015
|
Revenues and reimbursable expenses:
|
|
Revenues
|
$
|
139,430
|
|
Reimbursable expenses
|
3,148
|
|
Total revenues and reimbursable expenses
|
142,578
|
|
Direct costs and reimbursable expenses
(exclusive of depreciation and amortization shown in operating expenses):
|
|
Direct costs
|
95,247
|
|
Amortization of intangible assets and software development costs
|
233
|
|
Reimbursable expenses
|
3,153
|
|
Total direct costs and reimbursable expenses
|
98,633
|
|
Operating expenses and other operating gain:
|
|
Selling, general and administrative expenses
|
20,640
|
|
Restructuring charges
(1)
|
13,341
|
|
Other gain
|
(900
|
)
|
Depreciation and amortization
|
9,605
|
|
Total operating expenses and other operating gain
|
42,686
|
|
Operating income
|
1,259
|
|
Other expense, net
|
(13
|
)
|
Income from discontinued operations before taxes
|
1,246
|
|
Loss on disposal
|
(2,303
|
)
|
Total loss from discontinued operations before taxes
|
(1,057
|
)
|
Income tax benefit
(2)
|
1,786
|
|
Net loss from discontinued operations
|
$
|
(2,843
|
)
|
(1) During 2015, the Huron Legal segment incurred a
$13.3 million
restructuring charge. Of the
$13.3 million
,
$6.1 million
related to accelerated depreciation on assets disposed of as a result of the sale,
$5.1 million
related to employee costs incurred in connection with the sale,
$1.1 million
related to the accrual of our remaining lease obligations for vacated spaces, net of estimated sublease income, and
$1.0 million
related to severance costs incurred from prior workforce reductions.
|
|
(2)
|
Refer to Note 16 "Income Taxes" for additional detail on the income tax benefit recognized for discontinued operations.
|
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The table below summarizes the amounts reflected in our consolidated statements of cash flows that relate to the discontinued operations for the year ended December 31, 2015.
|
|
|
|
|
|
Year Ended
December 31, 2015
|
Depreciation and amortization
|
$
|
15,974
|
|
Share-based compensation
|
$
|
2,215
|
|
Purchases of property and equipment
|
$
|
6,234
|
|
Significant non-cash investing items of discontinued operations:
|
|
Contingent consideration related to a business acquisition
|
$
|
900
|
|
In connection with the sale of Huron Legal, we entered into a transition services agreement ("TSA") with Consilio, under which we provided certain post-closing services, support, and facilities to Consilio to facilitate an orderly transfer of the Huron Legal business operations. Billings under the TSA, which we did not consider to be significant, were recorded as a reduction of the costs to provide the respective services, primarily in selling, general and administrative expenses in the consolidated statements of operations. Services under the TSA ended as of June 30, 2017. We have no continuing involvement with the Huron Legal segment.
4. Acquisitions
2017
Pope Woodhead and Associates Limited
On January 9, 2017, we completed our acquisition of Pope Woodhead and Associates Limited ("Pope Woodhead"), a U.K.-based consulting firm providing market access capabilities to assist clients in developing value propositions for innovative medicines and technologies. The acquisition expands our life sciences strategy expertise and strengthens our ability to lead clients through complex payer and regulatory environments. Pope Woodhead's results of operations have been included in our consolidated financial statements and the results of operations of our Business Advisory segment from the date of acquisition.
ADI Strategies, Inc.
On April 1, 2017, we completed our acquisition of the international assets of ADI Strategies, Inc. ("ADI Strategies") in Dubai and India. We acquired the U.S. assets of ADI Strategies in the second quarter of 2016. ADI Strategies is a leading enterprise performance management, risk management and business intelligence firm. The acquisition strengthens our technology and analytics competencies and expands our global reach. The international results of operations of ADI Strategies have been included in our consolidated financial statements and results of operations of the Business Advisory segment from the date of acquisition.
The acquisitions of ADI Strategies and Pope Woodhead are not significant to our consolidated financial statements individually or in the aggregate as of and for the twelve months ended December 31, 2017.
Innosight Holdings, LLC
On
March 1, 2017
, we acquired
100%
of the membership interests of Innosight Holdings, LLC ("Innosight"). Innosight is a growth strategy firm focused on helping companies navigate disruptive change and manage strategic transformation. Together with Innosight, we use our strategic, operational, and technology capabilities to help clients across multiple industries develop pioneering solutions to address disruption and achieve sustained growth.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The acquisition was accounted for using the acquisition method of accounting. Tangible and identifiable intangible assets acquired and liabilities assumed are recorded at fair value as of the acquisition date.
The current fair values of assets acquired and liabilities assumed are considered preliminary and are based on the information that is currently available. We believe that the information provides a reasonable basis for estimating the preliminary fair values of assets acquired and liabilities assumed, but certain items, such as working capital amounts, may be subject to change as additional information is received. Thus, the provisional measurements of fair value and goodwill are subject to change. We will finalize the valuation in the first quarter of 2018.
The acquisition date fair value of the consideration transferred for Innosight was
$113.6 million
, which consisted of the following:
|
|
|
|
|
Fair value of consideration transferred
|
|
Cash
|
$
|
90,725
|
|
Common stock
|
9,560
|
|
Contingent consideration liability
|
12,050
|
|
Net working capital adjustment
|
1,272
|
|
Total consideration transferred
|
$
|
113,607
|
|
We funded the cash component of the purchase price with cash on hand and borrowings of
$89.0 million
under our senior secured credit facility. We issued
221,558
shares of our common stock as part of the consideration transferred, with an acquisition date fair value of
$9.6 million
based on our common stock's closing price of
$43.15
on the date of acquisition. The contingent consideration liability of
$12.1 million
represents the acquisition date fair value of the contingent consideration arrangement, pursuant to which we may be required to pay additional consideration to the sellers if specific financial performance targets are met over a four-year term. The maximum amount of contingent consideration that may be paid is
$35.0 million
. See Note 12 "Fair Value of Financial Instruments" for additional information on the valuation of contingent consideration liabilities.
The following table summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed as of the acquisition date.
|
|
|
|
|
|
March 1, 2017
|
Assets acquired:
|
|
Accounts receivable
|
$
|
7,752
|
|
Unbilled services
|
1,881
|
|
Prepaid expenses and other current assets
|
468
|
|
Property and equipment
|
419
|
|
Intangible assets
|
18,015
|
|
Liabilities assumed:
|
|
Accounts payable
|
531
|
|
Accrued expenses and other current liabilities
|
894
|
|
Accrued payroll and related benefits
|
883
|
|
Deferred revenues
|
30
|
|
Total identifiable net assets
|
26,197
|
|
Goodwill
|
87,410
|
|
Total purchase price
|
$
|
113,607
|
|
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the acquisition date.
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life in
Years
|
Customer relationships
|
$
|
9,500
|
|
|
6
|
Trade name
|
6,000
|
|
|
6
|
Customer contracts
|
1,000
|
|
|
1
|
Non-compete agreements
|
1,300
|
|
|
5
|
Favorable lease contract
|
215
|
|
|
1
|
Total intangible assets subject to amortization
|
$
|
18,015
|
|
|
|
The weighted average amortization period for the identifiable intangible assets shown above is
5.6
years. Customer relationships and customer contracts represent the fair values of the underlying relationships and agreements with Innosight customers. The trade name represents the fair value of the brand and name recognition associated with the marketing of Innosight's service offerings. Non-compete agreements represent the value derived from preventing certain Innosight executives from entering into or starting a similar, competing business. The favorable lease contract represents the difference between the fair value and minimum lease obligations under the current outstanding lease. Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed, and largely reflects the expanded market opportunities expected from combining the service offerings of Huron and Innosight, as well as the assembled workforce of Innosight. Goodwill recognized in conjunction with the acquisition of Innosight was recorded in the Business Advisory segment. Goodwill of
$87.4 million
is expected to be deductible for income tax purposes.
Innosight’s results of operations have been included in our unaudited consolidated statements of operations and results of operations of our Business Advisory segment from the date of acquisition. For the year ended
December 31, 2017
, revenues from Innosight were
$34.3 million
and operating loss was
$0.9 million
, which included
$3.4 million
of amortization expense for intangible assets acquired. In connection with the acquisition of Innosight, we incurred
$1.7 million
of transaction and acquisition-related expenses. Of the
$1.7 million
of expense,
$1.4 million
was incurred in the first quarter of 2017 and
$0.3 million
was incurred in the second quarter in 2017. These costs are recorded in selling, general and administrative expenses.
The following unaudited supplemental pro forma information summarizes the combined results of operations of Huron and Innosight as though the companies were combined on January 1, 2016.
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2017
|
|
2016
|
Revenues
|
$
|
741,695
|
|
|
$
|
769,114
|
|
Net income (loss) from continuing operations
|
$
|
(167,346
|
)
|
|
$
|
42,760
|
|
Net income (loss) from continuing operations per share - basic
|
$
|
(7.79
|
)
|
|
$
|
2.01
|
|
Net income (loss) from continuing operations per share - diluted
|
$
|
(7.79
|
)
|
|
$
|
1.98
|
|
The historical financial information has been adjusted to give effect to pro forma adjustments consisting of intangible asset amortization expense, acquisition-related costs, interest expense, and the related income tax effects. The unaudited pro forma information above includes adjustments to include additional expense of
$0.6 million
and
$11.4 million
for the years ended
December 31, 2017
and
2016
, respectively. Additionally, the historical financial information has been adjusted to give effect to the shares issued as consideration. All of these adjustments are based upon currently available information and certain assumptions. Therefore, the pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisition on January 1, 2016. The historical results included in the pro forma consolidated results do not purport to project future results of operations of the combined companies nor do they reflect the expected realization of any cost savings or revenue synergies associated with the acquisition.
2016
MyRounding Solutions, LLC
On February 1, 2016, we completed the acquisition of MyRounding Solutions, LLC ("MyRounding"), a Denver, Colorado-based firm specializing in digital health solutions to improve patient care. The MyRounding application is designed to standardize, automate, and track rounding activity, allowing nurses and staff to improve the care and experience of patients in real time. The addition of MyRounding expands
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
the integration of our software and consulting solutions and strengthens our transformation services for healthcare providers. The results of operations of MyRounding have been included in our consolidated financial statements and the results of operations of our Healthcare segment from the date of acquisition.
ADI Strategies, Inc.
On May 1, 2016, we completed the acquisition of the U.S. assets of ADI Strategies, Inc. ("ADI Strategies"), a leading enterprise performance management, risk management, and business intelligence firm focused on implementing the Oracle enterprise application suite. The results of operations of ADI Strategies have been included in our consolidated financial statements and the results of operations of our Business Advisory segment from the date of acquisition.
Healthcare Services Management, Inc.
On August 1, 2016, we completed the acquisition of Healthcare Services Management, Inc. ("HSM Consulting"), a firm specializing in healthcare information technology and management consulting. The results of operations of HSM Consulting have been included in our consolidated financial statements and results of operations of our Healthcare segment from the date of acquisition.
The acquisitions of MyRounding, ADI Strategies, and HSM Consulting are not significant to our consolidated financial statements individually or in the aggregate as of and for the twelve months ended December 31, 2016.
2015
Studer Holdings, Inc.
On
February 12, 2015
, we acquired
100%
of the outstanding stock of Studer Holdings, Inc. (“Studer Group”) from the existing shareholders in accordance with an Agreement and Plan of Merger dated
January 26, 2015
(the “Merger Agreement”). Studer Group is a professional services firm that assists healthcare providers achieve cultural transformation to deliver and sustain improvement in clinical outcomes and financial results. The acquisition combines Healthcare’s performance improvement and clinical transformation capabilities with Studer Group’s Evidence-Based Leadership
SM
framework to provide leadership and cultural transformation expertise for healthcare provider clients.
The acquisition date fair value of the consideration transferred for Studer Group was approximately
$325.2 million
, which consisted of the following:
|
|
|
|
|
Fair value of consideration transferred
|
Cash
|
$
|
323,237
|
|
Common stock
|
2,204
|
|
Net working capital adjustment
|
(255
|
)
|
Total consideration transferred
|
$
|
325,186
|
|
We funded the cash component of the purchase price with cash on hand and borrowings of
$102.0 million
under our senior secured credit facility. We issued
28,486
shares of our common stock as part of the consideration transferred, with an acquisition date fair value of
$2.2 million
based on the closing price of our stock of
$77.35
on the date of acquisition.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The acquisition was accounted for using the acquisition method of accounting. Tangible and identifiable intangible assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. The following table summarizes the allocation of the purchase price to the fair value of assets acquired and liabilities assumed as of the acquisition date.
|
|
|
|
|
|
February 12, 2015
|
Assets acquired:
|
|
Accounts receivable
|
$
|
14,906
|
|
Prepaid expenses and other current assets
|
1,385
|
|
Deferred income tax asset
|
4,335
|
|
Property and equipment
|
4,509
|
|
Intangible assets
|
97,500
|
|
Liabilities assumed:
|
|
Accounts payable
|
760
|
|
Accrued expenses and other current liabilities
|
2,868
|
|
Accrued payroll and related benefits
|
1,574
|
|
Deferred revenues
|
2,449
|
|
Deferred income tax liability
|
21,263
|
|
Other non-current liabilities
|
1,211
|
|
Total identifiable net assets
|
92,510
|
|
Goodwill
|
232,676
|
|
Total purchase price
|
$
|
325,186
|
|
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the acquisition date.
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life in
Years
|
Customer relationships
|
$
|
42,400
|
|
|
9
|
Customer contracts
|
25,100
|
|
|
4
|
Trade name
|
22,800
|
|
|
5
|
Technology and software
|
3,900
|
|
|
3
|
Publishing content
|
3,300
|
|
|
3
|
Total intangible assets subject to amortization
|
$
|
97,500
|
|
|
|
The weighted average amortization period for the identifiable intangible assets shown above is
6.3
years. Customer relationships and customer contracts represent the fair values of the underlying relationships and agreements with Studer Group customers. The trade name represents the fair value of the brand and name recognition associated with the marketing of Studer Group’s service offerings. Technology and software and publishing content represent the estimated fair values of Studer Group’s software and books that are sold to customers. Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed, and largely reflects the expanded market opportunities expected from combining the service offerings of Huron and Studer Group, as well as the assembled workforce of Studer Group. Goodwill recognized in conjunction with the acquisition of Studer Group was recorded in the Healthcare segment. Goodwill of
$119.5 million
is expected to be deductible for income tax purposes.
Studer Group’s results of operations have been included in our consolidated statements of operations and other comprehensive income and results of operations of our Healthcare segment from the date of acquisition. For the year ended December 31, 2015, revenues from Studer Group were
$79.9 million
and operating income was
$5.1 million
, which included
$21.3 million
of amortization expense for intangible assets acquired. In connection with the acquisition of Studer Group, we incurred
$2.1 million
of transaction and acquisition-related expenses,
$0.9 million
of which were incurred in 2014, and
$1.2 million
of which were incurred in 2015. These costs are recorded in selling, general and administrative expenses in the period in which they were incurred.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The following unaudited supplemental pro forma information summarizes the combined results of operations for Huron and Studer Group for the twelve months ended December 31, 2015 as though the companies were combined on January 1, 2014.
|
|
|
|
|
|
|
|
Year Ended
December 31, 2015
|
Revenues
|
|
$
|
709,813
|
|
Net income from continuing operations
|
|
$
|
63,600
|
|
Net income from continuing operations per share - basic
|
|
$
|
2.87
|
|
Net income from continuing operations per share - diluted
|
|
$
|
2.81
|
|
The historical financial information shown above has been adjusted to give effect to pro forma adjustments totaling
$2.4 million
of additional expense, which consist of intangible assets amortization expense, acquisition-related costs, interest expense, and the related income tax effects. The historical per share information has been adjusted to give effect to the shares issued as consideration. These adjustments are based upon currently available information and certain assumptions. Therefore, the pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisition on January 1, 2014. The historical results included in the pro forma consolidated results do not purport to project future results of operations of the combined companies, nor do they reflect the expected realization of any cost savings or revenue synergies associated with the acquisition.
Sky Analytics, Inc.
Effective January 1, 2015, we completed the acquisition of Sky Analytics, Inc. ("Sky Analytics"), a Massachusetts-based provider of legal spend management software for corporate law departments. Sky Analytics' results of operations were included in the results of operations of our Huron Legal segment from the date of acquisition, and classified as discontinued operations upon the sale of the Huron Legal segment in the fourth quarter of 2015. Refer to Note 3 "Discontinued Operations" for additional detail on the sale of the Huron Legal segment.
Rittman Mead India
Effective July 1, 2015, we completed the acquisition of Rittman Mead Consulting Private Limited ("Rittman Mead India"), the India affiliate of Rittman Mead Consulting Ltd. Rittman Mead India is a data and analytics consulting firm that specializes in the implementation of enterprise performance management and analytics systems. Rittman Mead India's results of operations have been included in our consolidated financial statements and results of operations of our Business Advisory segment from the date of acquisition.
Cloud62, Inc.
Effective October 1, 2015, we completed the acquisition of Cloud62, Inc. ("Cloud62"), a New York-based consulting firm specializing in Salesforce.com implementations and related cloud-based applications. Cloud62's results of operations have been included in our consolidated financial statements and results of operations of our Business Advisory segment from the date of acquisition.
The acquisitions of Sky Analytics, Rittman Mead India, and Cloud62 were not significant to our consolidated financial statements individually or in the aggregate as of and for the twelve months ended December 31, 2015.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
5. Goodwill and Intangible Assets
The table below sets forth the changes in the carrying amount of goodwill by reportable segment for the years ended
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
Education
|
|
Business
Advisory
|
|
Total
|
Balance as of December 31, 2015:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
610,264
|
|
|
$
|
102,906
|
|
|
$
|
181,213
|
|
|
$
|
894,383
|
|
Accumulated impairment losses
|
|
—
|
|
|
—
|
|
|
(142,983
|
)
|
|
(142,983
|
)
|
Goodwill, net as of December 31, 2015
|
|
$
|
610,264
|
|
|
$
|
102,906
|
|
|
$
|
38,230
|
|
|
$
|
751,400
|
|
Goodwill recorded in connection with business combinations
(1)
|
|
26,538
|
|
|
—
|
|
|
21,824
|
|
|
48,362
|
|
Foreign currency translation
|
|
—
|
|
|
—
|
|
|
100
|
|
|
100
|
|
Balance as of December 31, 2016:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
636,802
|
|
|
102,906
|
|
|
203,137
|
|
|
942,845
|
|
Accumulated impairment losses
|
|
—
|
|
|
—
|
|
|
(142,983
|
)
|
|
(142,983
|
)
|
Goodwill, net as of December 31, 2016
|
|
$
|
636,802
|
|
|
$
|
102,906
|
|
|
$
|
60,154
|
|
|
$
|
799,862
|
|
Goodwill recorded in connection with business combinations
(1)
|
|
8
|
|
|
10,252
|
|
|
88,183
|
|
|
98,443
|
|
Goodwill impairment charge
|
|
(208,081
|
)
|
|
—
|
|
|
(45,012
|
)
|
|
(253,093
|
)
|
Goodwill reallocation
(2)
|
|
—
|
|
|
(10,794
|
)
|
|
10,794
|
|
|
—
|
|
Goodwill allocated to disposal of business
(3)
|
|
—
|
|
|
—
|
|
|
(568
|
)
|
|
(568
|
)
|
Foreign currency translation
|
|
—
|
|
|
465
|
|
|
641
|
|
|
1,106
|
|
Balance as of December 31, 2017:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
636,810
|
|
|
102,829
|
|
|
302,187
|
|
|
1,041,826
|
|
Accumulated impairment losses
|
|
(208,081
|
)
|
|
—
|
|
|
(187,995
|
)
|
|
(396,076
|
)
|
Goodwill, net as of December 31, 2017:
|
|
$
|
428,729
|
|
|
$
|
102,829
|
|
|
$
|
114,192
|
|
|
$
|
645,750
|
|
|
|
(1)
|
Refer to Note 4 "Acquisitions" for additional information on the goodwill recorded in connection with business combinations.
|
|
|
(2)
|
In the second quarter of 2017, we reorganized our internal financial reporting structure, which management uses to assess performance and allocate resources, by moving our Life Sciences practice from the Education and Life Sciences segment to the Business Advisory segment. The remaining Education and Life Sciences segment is now referred to as the Education segment. The Life Sciences practice is a separate reporting unit for purposes of goodwill impairment testing. See Note 18 "Segment Information" for additional information on our reportable segments.
|
|
|
(3)
|
On June 16, 2017, we sold our Life Sciences Compliance and Operations practice ("Life Sciences C&O") to a third-party, and allocated a portion of goodwill within the Life Sciences reporting unit to the disposed business based on the relative fair values of Life Sciences C&O and the remaining reporting unit. The allocated goodwill of
$0.6 million
was written off and included in the gain on sale of Life Sciences C&O. The sale of Life Sciences C&O did not meet the criteria for reporting separately as discontinued operations. In connection with the sale, we recorded a
$0.9 million
gain which is included in other income, net in our consolidated statements of operations.
|
Second Quarter 2017 Goodwill Impairment Charge
During the second quarter of 2017, we performed a goodwill impairment analysis for our Healthcare reporting unit as our Healthcare business had experienced a prolonged period of declining revenues, primarily driven by softness in our revenue cycle offering within our performance improvement solution. This softness was attributable to decreased demand for our services, the winding down of some of our larger projects, and a trend toward smaller projects, as well as fewer large integrated projects. In light of these challenges, several initiatives were undertaken to improve the segment's financial performance, including repositioning our solutions to address the most critical needs of our clients, the expansion of our existing services such as those in our Studer Group, strategy, physician and technology offerings, and workforce reductions to better align resources with market demand. While these initiatives have yielded some positive impacts, hospitals and health systems continue to face regulatory and funding uncertainty; therefore, we remain cautious about near-term growth. As we had previously
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
disclosed in prior quarters, if the financial performance of our Healthcare segment continued to decline and did not meet our expectations, we could be required to perform an interim impairment analysis with respect to our carrying value of goodwill for the Healthcare reporting unit prior to our usual annual test. Based on forecasts prepared in the second quarter of 2017 in connection with our quarterly forecasting cycle, we determined that the likely time frame to improve the financial results of this segment would take longer than originally anticipated. As such, we concluded, during the second quarter of 2017, that the fair value of the Healthcare reporting unit may have no longer exceeded its carrying value. In connection with the preparation of our financial statements for the quarter ended June 30, 2017, we performed an interim impairment test on the Healthcare reporting unit.
Our goodwill impairment test was performed by comparing the fair value of the Healthcare reporting unit with its carrying value and, in accordance with ASU 2017-04, which we adopted in the second quarter of 2017, recognizing an impairment charge for the amount by which the carrying value exceeded the fair value. To estimate the fair value of the Healthcare reporting unit, we relied on a combination of the income approach and the market approach, utilizing the guideline company method, with a fifty-fifty weighting. Based on the estimated fair value of the Healthcare reporting unit, we recorded a
$209.6 million
non-cash pretax charge in the second quarter of 2017 to reduce the carrying value of goodwill in our Healthcare reporting unit. As discussed in Note 2 "Summary of Significant Accounting," during the fourth quarter of 2017, we identified that our calculation of the non-deductible portion of our goodwill impairment charge recorded in the second quarter of 2017 erroneously excluded a portion of goodwill that was related to an acquisition completed in 2008 and has since been divested. To correct this error, in the fourth quarter of 2017, we recorded a
$1.5 million
decrease to our non-cash pretax goodwill impairment charge related to our Healthcare reporting unit. The total non-cash pretax goodwill impairment charge recorded in 2017 related to our Healthcare reporting unit, including the adjustment in the fourth quarter of 2017, was
$208.1 million
.
In connection with the goodwill impairment test performed on the Healthcare reporting unit, we performed an impairment test on the long-lived assets allocated to the asset groups within the Healthcare reporting unit. Based on the impairment test performed, we concluded that the long-lived assets allocated to the asset groups within the Healthcare reporting unit were not impaired as of June 30, 2017.
Second Quarter 2017 Goodwill Reallocation
As a result of the segment reorganization in the second quarter of 2017, we reallocated
$10.8 million
of the goodwill balance associated with the previous Education and Life Sciences reporting unit to the new Life Sciences reporting unit based on the relative fair values of the Life Sciences reporting unit and the remaining Education reporting unit. The estimated fair values were determined using a combination of the income approach and the market approach, utilizing the guideline company method, with a fifty-fifty weighting.
In conjunction with the goodwill reallocation, we performed a goodwill impairment test for the goodwill balances within our Education reporting unit and Life Sciences reporting unit as of June 1, 2017. Based on the results of the goodwill impairment test, we determined that the fair values of our Education reporting unit and Life Sciences reporting unit exceeded their carrying values. As such, we concluded that there was no indication of goodwill impairment for either reporting unit at that time.
2017 Annual Goodwill Impairment Test
Pursuant to our policy, we performed our annual goodwill impairment test as of November 30,
2017
for our six reporting units with goodwill balances: Healthcare, Education, Business Advisory, Enterprise Solutions and Analytics, Strategy and Innovation, and Life Sciences. We elected to bypass the qualitative assessment and proceeded directly to the quantitative goodwill impairment test.
For each reporting unit, we reviewed goodwill for impairment by comparing the fair value of the reporting unit to its carrying value, including goodwill. In estimating the fair value of each reporting unit, we relied on a combination of the income approach and the market approach, utilizing the guideline company method, with a fifty-fifty weighting. Based on the results of the goodwill impairment test, we determined that the fair value of the Healthcare, Education, Business Advisory, Strategy and Innovation, and Life Sciences reporting units exceeded its carrying value by
40%
,
120%
,
115%
,
33%
, and
14%
, respectively. As such, we concluded that there was no indication of goodwill impairment for these five reporting units. However, the results of the quantitative impairment test indicated that the fair value of the Enterprise Solutions and Analytics reporting unit did not exceed its carrying value. Based on the estimated fair value of the Enterprise Solutions and Analytics reporting unit, we recorded a
$45.0 million
non-cash pretax charge to reduce the carrying value of this reporting unit's goodwill to zero.
Our Enterprise Solutions and Analytics reporting unit was established with the acquisition of Blue Stone International, LLC in 2013. Since that time, we completed five additional business acquisitions within the reporting unit, most recently the acquisitions of the U.S. assets and international assets of ADI Strategies in May 2016 and April 2017, respectively. We record the assets acquired and liabilities assumed in business combinations, including identifiable intangible assets, at their estimated fair values as of the acquisition date, and goodwill is recorded as the excess of the fair value of consideration transferred, including any contingent consideration, over the fair value of the net assets acquired. Therefore, the initial accounting for an acquisition results in its fair value equaling its carrying value. As we have previously disclosed in prior quarters, due to this reporting unit’s relatively low headroom, in the event that the financial performance of the reporting unit
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
did not meet our expectations during 2017, we could be required to take a non-cash impairment charge as a result of any goodwill impairment test. During the first three quarters of 2017, the performance of Enterprise Solutions and Analytics continued to reasonably meet our expectations. However, both revenues and operating margin during the fourth quarter of 2017 fell short of our expectations resulting in a reduction in workforce within the reporting unit during that quarter. Further, in connection with our annual budget process for 2018, which coincided with our annual goodwill impairment test during the fourth quarter of 2017, we determined that the reporting unit's expected future revenue growth rates and operating margin would be lower than previously anticipated for this reporting unit. As a result, our goodwill impairment test indicated that the fair value of the Enterprise Solutions and Analytics reporting unit no longer exceeded its carrying value, and we recorded a
$45.0 million
non-cash pretax charge to write off the entire carrying value of this reporting unit's goodwill.
In connection with the goodwill impairment test performed on the Enterprise Solutions and Analytics reporting unit, we performed an impairment test on the long-lived assets allocated to the asset groups within the Enterprise Solutions and Analytics reporting unit. Based on the impairment test performed, we concluded that the long-lived assets allocated to the asset groups within the Enterprise Solutions and Analytics reporting unit were not impaired as of November 30, 2017.
Further, we evaluated whether any events have occurred or any circumstances have changed since November 30, 2017 that would indicate any additional goodwill may have become impaired since our annual impairment test. Based on our evaluation as of
December 31, 2017
, which included the impact of the 2017 Tax Reform on our deferred tax balances and forecasted tax rates, we determined that no indications of impairment have arisen since our annual goodwill impairment test. 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 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.
Intangible Assets
Intangible assets as of
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2017
|
|
2016
|
|
Useful Life
in Years
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Customer relationships
|
4 to 13
|
|
$
|
106,195
|
|
|
$
|
51,588
|
|
|
$
|
89,279
|
|
|
$
|
34,827
|
|
Trade names
|
2 to 6
|
|
29,016
|
|
|
18,915
|
|
|
22,930
|
|
|
11,652
|
|
Customer contracts
|
1 to 4
|
|
25,154
|
|
|
24,751
|
|
|
26,497
|
|
|
21,295
|
|
Technology and software
|
3 to 5
|
|
9,340
|
|
|
5,098
|
|
|
8,970
|
|
|
2,667
|
|
Non-competition agreements
|
3 to 5
|
|
5,163
|
|
|
2,637
|
|
|
3,685
|
|
|
1,697
|
|
Publishing content
|
3
|
|
3,300
|
|
|
3,163
|
|
|
3,300
|
|
|
2,062
|
|
Favorable lease contract
|
3
|
|
720
|
|
|
425
|
|
|
720
|
|
|
203
|
|
In-process technology
|
Indefinite
|
|
—
|
|
|
—
|
|
|
370
|
|
|
—
|
|
Total
|
|
|
$
|
178,888
|
|
|
$
|
106,577
|
|
|
$
|
155,751
|
|
|
$
|
74,403
|
|
Identifiable intangible assets with finite lives are amortized over their estimated useful lives. Customer relationships and customer contracts, as well as certain trade names and technology and software, are amortized on an accelerated basis to correspond to the cash flows expected to be derived from the assets. All other intangible assets with finite lives are amortized on a straight-line basis. In connection with the acquisition of MyRounding, we acquired in-process technology which was accounted for as an indefinite-lived intangible asset until the development of the technology was complete, which occurred in the first quarter of 2017. Upon completion, we reclassified the technology to definite-lived technology and software, and began amortizing the asset over a
five
-year useful life on a straight-line basis.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Intangible assets amortization expense was
$35.0 million
,
$33.1 million
, and
$28.7 million
for the years ended
December 31, 2017
,
2016
, and
2015
, respectively. The table below sets forth the estimated annual amortization expense for each of the five succeeding years for the intangible assets recorded as of
December 31, 2017
.
|
|
|
|
|
|
Year Ending December 31,
|
|
Estimated
Amortization Expense
|
2018
|
|
$
|
23,936
|
|
2019
|
|
$
|
17,279
|
|
2020
|
|
$
|
12,116
|
|
2021
|
|
$
|
8,070
|
|
2022
|
|
$
|
6,092
|
|
Actual future amortization expense could differ from these estimated amounts as a result of future acquisitions, dispositions, and other factors.
6. Property and Equipment, Net
Depreciation expense for property and equipment was
$13.3 million
,
$12.5 million
, and
$12.3 million
for the years ended
December 31, 2017
,
2016
, and
2015
, respectively. Property and equipment, net at
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Computers, related equipment, and software
|
$
|
46,216
|
|
|
$
|
48,607
|
|
Leasehold improvements
|
45,244
|
|
|
38,502
|
|
Furniture and fixtures
|
16,434
|
|
|
12,545
|
|
Aircraft
|
7,541
|
|
|
—
|
|
Assets under construction
|
250
|
|
|
294
|
|
Property and equipment
|
115,685
|
|
|
99,948
|
|
Accumulated depreciation and amortization
|
(70,144
|
)
|
|
(67,514
|
)
|
Property and equipment, net
|
$
|
45,541
|
|
|
$
|
32,434
|
|
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
7. Financing Arrangements
A summary of the carrying amounts of our debt follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
1.25% convertible senior notes due 2019
|
$
|
233,140
|
|
|
$
|
224,065
|
|
Senior secured credit facility
|
105,000
|
|
|
68,000
|
|
Promissory note due 2024
|
4,868
|
|
|
—
|
|
Total long-term debt
|
$
|
343,008
|
|
|
$
|
292,065
|
|
Current maturities of debt
(1)
|
(501
|
)
|
|
—
|
|
Long-term debt, net of current portion
|
$
|
342,507
|
|
|
$
|
292,065
|
|
|
|
(1)
|
The current maturities of debt are included as a component of accrued expenses and other current liabilities on our consolidated balance sheets.
|
Below is a summary of the scheduled remaining principal payments of our debt as of
December 31, 2017
.
|
|
|
|
|
|
Principal Payments of Long-Term Debt
|
2018
|
$
|
501
|
|
2019
|
$
|
250,515
|
|
2020
|
$
|
105,529
|
|
2021
|
$
|
544
|
|
2022
|
$
|
559
|
|
Thereafter
|
$
|
2,221
|
|
Convertible Notes
In September 2014, the Company issued
$250 million
principal amount of
1.25%
convertible senior notes due 2019 (the “Convertible Notes”) in a private offering. The Convertible Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as Trustee (the “Indenture”). The Convertible Notes are senior unsecured obligations of the Company and will pay interest semi-annually on April 1 and October 1 of each year at an annual rate of
1.25%
. The Convertible Notes will mature on
October 1, 2019
, unless earlier repurchased by the Company or converted in accordance with their terms.
Upon conversion, the Convertible Notes will be settled, at our election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. Our current intent and policy is to settle conversions with a combination of cash and shares of common stock with the principal amount of the Convertible Notes paid in cash, in accordance with the settlement provisions of the Indenture.
The initial conversion rate for the Convertible Notes is
12.5170
shares of our common stock per
$1,000
principal amount of the Convertible Notes, which is equal to an initial conversion price of approximately
$79.89
per share of our common stock. The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest, except in certain limited circumstances described in the Indenture. Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture) the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Convertible Notes in connection with such make-whole fundamental change. Additionally, if the Company undergoes a “fundamental change” (as defined in the Indenture), a holder will have the option to require the Company to repurchase all or a portion of its Convertible Notes for cash at a price equal to
100%
of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest. As discussed below, the convertible note hedge transactions and warrants, which were entered into in connection with the Convertible Notes, effectively raise the price at which economic dilution would occur from the initial conversion price of approximately
$79.89
to approximately
$97.12
per share.
Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to
July 1, 2019
, only under the following circumstances:
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
|
|
•
|
during any calendar quarter (and only during such calendar quarter) commencing after December 31, 2014 if, for each of at least
20
trading days (whether or not consecutive) during the
30
consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter, the last reported sale price of the Company’s common stock for such trading day is equal to or greater than
130%
of the applicable conversion price on such trading day;
|
|
|
•
|
during the five consecutive business day period immediately following any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which, for each trading day of the measurement period, the “trading price” (as defined in the Indenture) per
$1,000
principal amount of the Convertible Notes for such trading day was less than
98%
of the product of the last reported sale price of the Company’s common stock for such trading day and the applicable conversion rate on such trading day; or
|
|
|
•
|
upon the occurrence of specified corporate transactions described in the Indenture.
|
On or after July 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or a portion of its Convertible Notes, regardless of the foregoing circumstances.
We have separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar liability that does not have an associated convertible feature, assuming our non-convertible debt borrowing rate. The carrying value of the equity component representing the conversion option, which is recognized as a debt discount, was determined by deducting the fair value of the liability component from the proceeds of the Convertible Notes. The debt discount is amortized to interest expense using an effective interest rate of
4.751%
over the term of the Convertible Notes. As of
December 31, 2017
, the remaining life of the Convertible Notes is
1.8
years. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.
The transaction costs related to the issuance of the Convertible Notes were separated into liability and equity components based on their relative values, as determined above. Transaction costs attributable to the liability component are recorded as a deduction to the carrying amount of the liability and amortized to interest expense over the term of the Convertible Notes; and transaction costs attributable to the equity component are netted with the equity component of the Convertible Notes in stockholders’ equity. Total debt issuance costs were approximately
$7.3 million
, of which
$6.2 million
was allocated to liability issuance costs and
$1.1 million
was allocated to equity issuance costs.
As of
December 31, 2017
and
2016
, the Convertible Notes consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Liability component:
|
|
|
|
Proceeds
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Less: debt discount, net of amortization
|
(14,668
|
)
|
|
(22,520
|
)
|
Less: debt issuance costs, net of amortization
|
(2,192
|
)
|
|
(3,415
|
)
|
Net carrying amount
|
$
|
233,140
|
|
|
$
|
224,065
|
|
Equity component
(1)
|
$
|
39,287
|
|
|
$
|
39,287
|
|
|
|
(1)
|
Included in additional paid-in capital on the consolidated balance sheet.
|
The following table presents the amount of interest expense recognized related to the Convertible Notes for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Contractual interest coupon
|
$
|
3,125
|
|
|
$
|
3,125
|
|
|
$
|
3,125
|
|
Amortization of debt discount
|
7,851
|
|
|
7,488
|
|
|
7,141
|
|
Amortization of debt issuance costs
|
1,224
|
|
|
1,201
|
|
|
1,180
|
|
Total interest expense
|
$
|
12,200
|
|
|
$
|
11,814
|
|
|
$
|
11,446
|
|
In connection with the issuance of the Convertible Notes, we entered into convertible note hedge transactions and warrant transactions. The convertible note hedge transactions are intended to reduce the potential future economic dilution associated with the conversion of the
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Convertible Notes and, combined with the warrants, effectively raise the price at which economic dilution would occur from the initial conversion price of approximately
$79.89
to approximately
$97.12
per share. For purposes of the computation of diluted earnings per share in accordance with GAAP, dilution will occur when the average share price of our common stock for a given period exceeds the conversion price of the Convertible Notes, which initially is equal to approximately
$79.89
per share. The convertible note hedge transactions and warrant transactions are discussed separately below.
|
|
•
|
Convertible Note Hedge Transactions
. In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions whereby the Company has call options to purchase a total of approximately
3.1 million
shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the Convertible Notes in full, at a price of approximately
$79.89
, which corresponds to the initial conversion price of the Convertible Notes, subject to customary anti-dilution adjustments substantially similar to those in the Convertible Notes. The convertible note hedge transactions are exercisable upon conversion of the Convertible Notes and will expire in 2019 if not earlier exercised. We paid an aggregate amount of
$42.1 million
for the convertible note hedge transactions, which was recorded as additional paid-in capital on the consolidated balance sheets. The convertible note hedge transactions are separate transactions and are not part of the terms of the Convertible Notes.
|
|
|
•
|
Warrants.
In connection with the issuance of the Convertible Notes, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately
3.1 million
shares of the Company’s common stock at a strike price of approximately
$97.12
. The warrants will expire incrementally on 100 different dates from January 6, 2020 to May 28, 2020 and are exercisable at each such expiry date. If the average market value per share of our common stock for the reporting period exceeds the strike price of the warrants, the warrants will have a dilutive effect on our earnings per share. We received aggregate proceeds of
$23.6 million
from the sale of the warrants, which was recorded as additional paid-in capital on the consolidated balance sheets. The warrants are separate transactions and are not part of the terms of the Convertible Notes or the convertible note hedge transactions.
|
The Company recorded an initial deferred tax liability of
$15.4 million
in connection with the debt discount associated with the Convertible Notes and recorded an initial deferred tax asset of
$16.5 million
in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are included in deferred income taxes, net on the consolidated balance sheets.
Senior Secured Credit Facility
The Company has a
$500 million
five
-year senior secured revolving credit facility, subject to the terms of a Second Amended and Restated Credit Agreement dated as of March 31, 2015, as amended to date (as amended and modified the "Amended Credit Facility"), that becomes due and payable in full upon maturity on
March 31, 2020
. The Amended Credit Agreement provides the option to increase the revolving credit facility or establish term loan facilities in an aggregate amount of up to
$100 million
, subject to customary conditions and the approval of any lender whose commitment would be increased, resulting in a maximum available principal amount under the Amended Credit Agreement of
$600 million
. The initial borrowings under the Amended Credit Agreement were used to refinance borrowings outstanding under a prior credit agreement, and future borrowings under the Amended Credit Agreement may be used for working capital, capital expenditures, acquisitions of businesses, share repurchases, and general corporate purposes.
Fees and interest on borrowings vary based on our Consolidated Leverage Ratio (as defined in the Amended Credit Agreement). At our option, borrowings under the Amended Credit Agreement will bear interest at one, two, three or six-month LIBOR or an alternate base rate, in each case plus the applicable margin. The applicable margin will fluctuate between
1.25%
per annum and
2.00%
per annum, in the case of LIBOR borrowings, or between
0.25%
per annum and
1.00%
per annum, in the case of base rate loans, based upon our Consolidated Leverage Ratio at such time.
Amounts borrowed under the Amended Credit Agreement may be prepaid at any time without premium or penalty. We are required to prepay the amounts outstanding under the Amended Credit Agreement in certain circumstances, including a requirement to pay all amounts outstanding
90
days prior to the Convertible Indebtedness Maturity Date (as defined in the Amended Credit Agreement) unless (1) the Convertible Indebtedness Maturity Date is waived or extended to a later date, (2) the Company can demonstrate (a) Liquidity (as defined in the Amended Credit Agreement) in an amount at least equal to the principal amount due on the Convertible Indebtedness Maturity Date, and (b) financial covenant compliance after giving effect to such payments and any additional indebtedness incurred on a pro forma basis, or (3) this requirement is waived by the Required Lenders (as defined in the Amended Credit Agreement). In addition, we have the right to permanently reduce or terminate the unused portion of the commitments provided under the Amended Credit Agreement at any time.
The loans and obligations under the Amended Credit Agreement are secured pursuant to a Second Amended and Restated Security Agreement and a Second Amended and Restated Pledge Agreement (the “Pledge Agreement”) with Bank of America, N.A. as collateral agent, pursuant to which the Company and the subsidiary guarantors grant Bank of America, N.A., for the ratable benefit of the lenders under
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
the Amended Credit Agreement, a first-priority lien, subject to permitted liens, on substantially all of the personal property assets of the Company and the subsidiary guarantors, and a pledge of
100%
of the stock or other equity interests in all domestic subsidiaries and
65%
of the stock or other equity interests in each “material first-tier foreign subsidiary” (as defined in the Pledge Agreement).
The Amended Credit Agreement contains usual and customary representations and warranties; affirmative and negative covenants, which include limitations on liens, investments, additional indebtedness, and restricted payments; and two quarterly financial covenants as follows: (i) a maximum Consolidated Leverage Ratio (defined as the ratio of debt to consolidated EBITDA) ranging from
3.25
to 1.00 to
3.75
to 1.00, depending on the measurement period, 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, among other items, share-based compensation costs, non-cash goodwill impairment charges, non-cash restructuring charges, and pro forma historical EBITDA for businesses acquired. At
December 31, 2017
, we were in compliance with these financial covenants with a Consolidated Leverage Ratio of
3.02
to 1.00 and a Consolidated Interest Coverage Ratio of
12.43
to 1.00.
Borrowings outstanding under the Amended Credit Agreement at
December 31, 2017
totaled
$105.0 million
. These borrowings carried a weighted average interest rate of
3.7%
, including the impact of the interest rate swap described in Note 11 “Derivative Instruments and Hedging Activity" that was in effect at December 31, 2017. Borrowings outstanding under the Amended Credit Agreement at
December 31, 2016
were
$68.0 million
and carried a weighted average interest rate of
2.5%
, including the impact of the interest rate swap that was in effect at December 31, 2016. 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
December 31, 2017
, we had outstanding letters of credit totaling
$1.9 million
, which are primarily used as security deposits for our office facilities. As of
December 31, 2017
, the unused borrowing capacity under the revolving credit facility was
$393.1 million
.
Promissory Note due 2024
On June 30, 2017, in conjunction with our purchase of an aircraft related to the acquisition of Innosight, we assumed, from the sellers of the aircraft, a promissory note with an outstanding principal balance of
$5.1 million
. The principal balance of the promissory note is subject to scheduled monthly principal payments until the maturity date of
March 1, 2024
, at which time a final payment of
$1.5 million
, plus any accrued and unpaid interest, will be due. Under the terms of the promissory note, we will pay interest on the outstanding principal amount at a rate of
one
-month LIBOR plus
1.97%
per annum. The obligations under the promissory note are secured pursuant to a Loan and Aircraft Security Agreement with Banc of America Leasing & Capital, LLC, which grants the lender a first priority security interest in the aircraft. At
December 31, 2017
, the outstanding principal amount of the promissory note was
$4.9 million
. As of
December 31, 2017
, the aircraft had a carrying amount of
$6.5 million
.
8. Capital Structure
Preferred Stock
We are authorized to issue up to
50,000,000
shares of preferred stock. Our certificate of incorporation authorizes our board of directors, without any further stockholder action or approval, to issue these shares in one or more classes or series, to establish from time to time the number of shares to be included in each class or series, and to fix the rights, preferences and privileges of the shares of each wholly unissued class or series and any of its qualifications, limitations or restrictions. As of
December 31, 2017
and
2016
, no such preferred stock has been approved or issued.
Common Stock
We are authorized to issue up to
500,000,000
shares of common stock, par value
$.01
per share. The holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. Subject to the rights and preferences of the holders of any series of preferred stock that may at the time be outstanding, holders of common stock are entitled to such dividends as our board of directors may declare. In the event of any liquidation, dissolution or winding-up of our affairs, after payment of all of our debts and liabilities and subject to the rights and preferences of the holders of any series of preferred stock that may at the time be outstanding, holders of common stock will be entitled to receive the distribution of any of our remaining assets.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
9. Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, excluding unvested restricted common stock. Diluted earnings per share reflects the potential reduction in earnings per share that could occur if securities or other contracts to issue common stock were exercised or converted into common stock under the treasury stock method. Such securities or other contracts include unvested restricted stock awards, outstanding common stock options, convertible senior notes, and outstanding warrants, to the extent dilutive. In periods for which we report a net loss from continuing operations, diluted weighted average common shares outstanding excludes all potential common stock equivalents as their impact on diluted net loss from continuing operations per share would be anti-dilutive.
Earnings (loss) per share under the basic and diluted computations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income (loss) from continuing operations
|
$
|
(170,505
|
)
|
|
$
|
39,480
|
|
|
$
|
61,895
|
|
Income (loss) from discontinued operations, net of tax
|
388
|
|
|
(1,863
|
)
|
|
(2,843
|
)
|
Net income (loss)
|
$
|
(170,117
|
)
|
|
$
|
37,617
|
|
|
$
|
59,052
|
|
Weighted average common shares outstanding—basic
|
21,439
|
|
|
21,084
|
|
|
22,136
|
|
Weighted average common stock equivalents
|
—
|
|
|
340
|
|
|
464
|
|
Weighted average common shares outstanding—diluted
|
21,439
|
|
|
21,424
|
|
|
22,600
|
|
Net earnings (loss) per basic share:
|
|
|
|
|
|
Net income (loss) from continuing operations
|
$
|
(7.95
|
)
|
|
$
|
1.87
|
|
|
$
|
2.80
|
|
Income (loss) from discontinued operations, net of tax
|
0.02
|
|
|
(0.09
|
)
|
|
(0.13
|
)
|
Net income (loss)
|
$
|
(7.93
|
)
|
|
$
|
1.78
|
|
|
$
|
2.67
|
|
Net earnings (loss) per diluted share:
|
|
|
|
|
|
Net income (loss) from continuing operations
|
$
|
(7.95
|
)
|
|
$
|
1.84
|
|
|
$
|
2.74
|
|
Income (loss) from discontinued operations, net of tax
|
0.02
|
|
|
(0.08
|
)
|
|
(0.13
|
)
|
Net income (loss)
|
$
|
(7.93
|
)
|
|
$
|
1.76
|
|
|
$
|
2.61
|
|
The number of anti-dilutive securities excluded from the computation of the weighted average common stock equivalents presented above were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
|
2015
|
Unvested restricted stock awards
|
636
|
|
|
2
|
|
|
21
|
|
Outstanding common stock options
|
194
|
|
|
—
|
|
|
—
|
|
Convertible senior notes
|
3,129
|
|
|
3,129
|
|
|
3,129
|
|
Warrants related to the issuance of convertible senior notes
|
3,129
|
|
|
3,129
|
|
|
3,129
|
|
Total anti-dilutive securities
|
7,088
|
|
|
6,260
|
|
|
6,279
|
|
See Note 7 “Financing Arrangements” for further information on the convertible senior notes and warrants related to the issuance of convertible notes.
We currently have a share repurchase program permitting us to repurchase up to
$125 million
of our common stock through October 31, 2018 (the "Share Repurchase Program"). The amount and timing of the repurchases will be determined by management and will depend on a variety of factors, including the trading price of our common stock, capacity under our credit facility, general market and business conditions, and applicable legal requirements. No shares were repurchased under this program in 2017. In 2016, we repurchased and retired
982,192
shares for
$55.3 million
, and in 2015, we repurchased and retired
583,880
shares for
$34.6 million
. As of
December 31, 2017
,
$35.1 million
remains available for share repurchases.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
10. Restructuring Charges
In 2017, we incurred
$6.2 million
of pretax restructuring expense. This expense primarily consisted of the following charges:
Severance -
We incurred
$3.7 million
of severance expense as a result of workforce reductions to better align resources with market demand. Of the
$3.7 million
,
$2.1 million
related to our Healthcare segment,
$1.1 million
related to our Business Advisory segment, and
$0.4 million
related to our corporate operations.
Office exit costs
- We incurred
$2.4 million
of office exit costs primarily related to the accrual of remaining lease obligations, net of estimated sublease income, due to relocating our San Francisco office to a smaller space and consolidating our Chicago and New York offices, and accelerated depreciation on leasehold improvements for our San Francisco office.
Of the
$6.2 million
pretax restructuring charge,
$2.1 million
was related to our Healthcare segment,
$1.1 million
was related to our Business Advisory segment, and
$2.9 million
was related to our corporate operations.
In 2016, we incurred
$9.6 million
of pretax restructuring expense. This expense consisted of the following charges:
Severance
- We incurred
$7.3 million
of severance expense as a result of workforce reductions, of which
$6.4 million
was related to our Healthcare and Business Advisory segments to better align our resources with market demand and
$0.9 million
was related to our corporate infrastructure as a result of our Huron Legal divestiture.
Office exit costs
- We incurred
$1.5 million
of office exit costs primarily related to our Washington, D.C. space that we vacated in the fourth quarter of 2014. During the third quarter of 2016, we entered into a sublease agreement and adjusted our Washington, D.C. lease accrual to reflect the terms specified in the sublease agreement.
Other
- We also incurred
$0.8 million
of restructuring expense related to the wind down of our foreign consulting operations based in the Middle East and other exit costs.
Of the
$9.6 million
pretax restructuring charge,
$5.8 million
was related to our Healthcare segment,
$3.2 million
was related to our corporate operations, and
$0.6 million
was related to our Business Advisory segment.
In 2015, we incurred
$3.3 million
of pretax restructuring expense. This expense primarily consisted of the following charges:
Severance -
We incurred
$2.8 million
of severance expense as a result of workforce reductions to better align our resources with market demand.
Office exit costs -
We incurred
$0.5 million
of office exit costs primarily related to updated assumptions for the lease accrual of the Washington, D.C. space vacated in the fourth quarter of 2014.
Of the
$3.3 million
pretax restructuring expense,
$1.2 million
was related to our Healthcare segment,
$1.1 million
was related to our All Other segment as we wound down our public sector consulting practice and our foreign consulting operations based in the Middle East, and
$1.0 million
was related to our corporate operations.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The table below sets forth the changes in the carrying amount of our restructuring charge liability by restructuring type for the years ended December 31,
2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Costs
|
|
Office Space Reductions
|
|
Other
|
|
Total
|
Balance as of December 31, 2015
|
$
|
2,323
|
|
|
$
|
6,379
|
|
|
$
|
—
|
|
|
$
|
8,702
|
|
Additions
(1)
|
9,082
|
|
|
57
|
|
|
585
|
|
|
9,724
|
|
Payments
|
(5,906
|
)
|
|
(2,424
|
)
|
|
(482
|
)
|
|
(8,812
|
)
|
Adjustments
(1)
|
(317
|
)
|
|
1,765
|
|
|
245
|
|
|
1,693
|
|
Non-cash items
|
—
|
|
|
(4
|
)
|
|
(324
|
)
|
|
(328
|
)
|
Balance as of December 31, 2016
|
5,182
|
|
|
5,773
|
|
|
24
|
|
|
10,979
|
|
Additions
(1)
|
3,859
|
|
|
2,426
|
|
|
110
|
|
|
6,395
|
|
Payments
|
(7,611
|
)
|
|
(2,860
|
)
|
|
5
|
|
|
(10,466
|
)
|
Adjustments
(1)
|
(117
|
)
|
|
(973
|
)
|
|
(78
|
)
|
|
(1,168
|
)
|
Non-cash items
|
(46
|
)
|
|
(119
|
)
|
|
(61
|
)
|
|
(226
|
)
|
Balance as of December 31, 2017
|
$
|
1,267
|
|
|
$
|
4,247
|
|
|
$
|
—
|
|
|
$
|
5,514
|
|
|
|
(1)
|
Additions and adjustments for the years ended December 31,
2017
and
2016
include a gain of
$1.0 million
and a charge of
$2.0 million
, respectively, related to updated lease assumptions for vacated offices spaces directly related to discontinued operations. Refer to Note 3 "Discontinued Operations" for additional information on our discontinued operations.
|
As of
December 31, 2017
, our restructuring charge liability related to office space reductions of
$4.2 million
represented the present value of remaining lease payments, net of estimated sublease income, primarily for our vacated office spaces in Washington, D.C., Houston, Chicago, and San Francisco. This restructuring charge liability is included as a component of accrued expenses and other current liabilities and deferred compensation and other liabilities. All of the
$1.3 million
restructuring charge liability related to employee costs at
December 31, 2017
is expected to be paid in 2018. The restructuring charge liability related to employee costs is included as a component of accrued payroll and related benefits.
11. Derivative Instruments and Hedging Activity
On April 4, 2013, we entered into a forward amortizing interest rate swap agreement effective
March 31, 2014
which ended
August 31, 2017
. We entered into this derivative instrument to hedge against the interest rate risks of our variable-rate borrowings. The swap had an initial notional amount of
$60.0 million
and amortized quarterly until April 2016. In April 2016, the notional amount of this interest rate swap increased to
$86.0 million
and continued to amortize quarterly until it expired in August 2017. Under the terms of the interest rate swap agreement, we received from the counterparty interest on the notional amount based on
one
-month LIBOR and we paid to the counterparty a fixed rate of
0.985%
.
On June 22, 2017, we entered into a forward interest rate swap agreement effective
August 31, 2017
and ending
August 31, 2022
, with a notional amount of
$50.0 million
. We entered into this derivative instrument to continue to hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on
one
-month LIBOR and we pay to the counterparty a fixed rate of
1.900%
.
We recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. We have designated these derivative instruments as cash flow hedges. Therefore, changes in the fair value of the derivative instruments are recorded to other comprehensive income (“OCI”) to the extent effective and reclassified into interest expense upon settlement. The ineffective portion of the change in fair value of the derivative instruments is recognized in interest expense. Our interest rate swap agreement was effective during the year ended
December 31, 2017
. As of
December 31, 2017
, it was anticipated that less than
$0.1 million
of the accumulated other comprehensive income, net of tax, currently recorded on our consolidated balance sheet will be reclassified into earnings within the next
12
months.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The table below sets forth additional information relating to our interest rate swaps designated as cash flow hedging instruments as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
Fair Value (Derivative Asset and Liability)
As of December 31,
|
Balance Sheet Location
|
2017
|
|
2016
|
Other non-current assets
|
$
|
581
|
|
|
$
|
—
|
|
Accrued expenses
|
$
|
48
|
|
|
$
|
54
|
|
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 13 “Other Comprehensive Income (Loss)” for additional information on our derivative instrument.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
12. Fair Value of Financial Instruments
Certain of our assets and liabilities are measured at fair value. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy for inputs used in measuring fair value and requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy consists of three levels based on the objectivity of the inputs as follows:
|
|
|
|
Level 1 Inputs
|
|
Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
|
|
Level 2 Inputs
|
|
Quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
Level 3 Inputs
|
|
Unobservable inputs for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability.
|
The table below sets forth our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
December 31, 2017
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
—
|
|
|
$
|
533
|
|
|
$
|
—
|
|
|
$
|
533
|
|
Promissory note
|
—
|
|
|
—
|
|
|
1,078
|
|
|
1,078
|
|
Convertible debt investment
|
—
|
|
|
—
|
|
|
39,904
|
|
|
39,904
|
|
Deferred compensation assets
|
—
|
|
|
17,786
|
|
|
—
|
|
|
17,786
|
|
Total assets
|
$
|
—
|
|
|
$
|
18,319
|
|
|
$
|
40,982
|
|
|
$
|
59,301
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent consideration for business acquisitions
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,828
|
|
|
$
|
22,828
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,828
|
|
|
$
|
22,828
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Promissory note
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,325
|
|
|
$
|
2,325
|
|
Convertible debt investment
|
—
|
|
|
—
|
|
|
34,675
|
|
|
34,675
|
|
Deferred compensation assets
|
—
|
|
|
16,408
|
|
|
—
|
|
|
16,408
|
|
Total assets
|
$
|
—
|
|
|
$
|
16,408
|
|
|
$
|
37,000
|
|
|
$
|
53,408
|
|
Liabilities:
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
—
|
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
54
|
|
Contingent consideration for business acquisitions
|
—
|
|
|
—
|
|
|
8,827
|
|
|
8,827
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
54
|
|
|
$
|
8,827
|
|
|
$
|
8,881
|
|
Interest rate swaps:
The fair values of our interest rate swaps were derived using estimates to settle the interest rate swap agreements, which are based on the net present value of expected future cash flows on each leg of the swaps utilizing market-based inputs and discount rates reflecting the risks involved.
Promissory note
: As part of the consideration received for the sale of our Accounting Advisory practice on December 30, 2011, we received a
$3.5 million
promissory note payable over
four
years. During the fourth quarter of 2017, we amended and restated the note which established
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
scheduled annual principal payments, increased the interest rate, reduced the outstanding principal amount by
$0.5 million
, and extended the maturity date to September 30, 2020. Additionally, at the closing of this amended promissory note, we received a
$1.0 million
principal payment. As a result of the amendment, we recorded a
$0.3 million
fair value remeasurement loss on the promissory note which is recorded in other income (expense), net in the consolidated statement of operations. The scheduled principal payments will be paid to us annually until the maturity date of
September 30, 2020
, at which time the remaining principal balance and any accrued interest is due. The fair value of the note is based on the net present value of the projected cash flows using a discount rate of
10%
, which accounts for the risks associated with the amended note. This fair value measurement is based on significant inputs not observable in the market and thus represent Level 3 inputs. As of
December 31, 2017
,
$0.5 million
is recorded in prepaid expenses and other current assets and represents the present value of the payments expected to be received in the next 12 months, and the remaining
$0.6 million
is recorded in other non-current assets. As of December 31, 2017, there was
$1.0 million
principal amount outstanding under the promissory note.
The table below sets forth the changes in the balance of the promissory note for the years ended
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
Promissory Note
|
Balance as of December 31, 2015
|
|
$
|
2,309
|
|
Interest payments received
|
|
(191
|
)
|
Change in fair value of promissory note
|
|
207
|
|
Balance as of December 31, 2016
|
|
2,325
|
|
Interest payments received
|
|
(185
|
)
|
Principal payments received
|
|
(1,177
|
)
|
Change in fair value of promissory note
|
|
115
|
|
Balance as of December 31, 2017
|
|
$
|
1,078
|
|
Convertible debt investment:
In 2014 and 2015, we invested
$27.9 million
, in the form of zero coupon convertible debt, in Shorelight Holdings, LLC (“Shorelight”), the parent company of Shorelight Education, a U.S.-based company that partners with leading nonprofit universities to increase access to and retention of international students, boost institutional growth, and enhance an institution’s global footprint. The notes will mature on
July 1, 2020
, unless converted earlier.
To determine the appropriate accounting treatment for our investment, we performed a variable interest entity (“VIE”) analysis and concluded that Shorelight does not meet the definition of a VIE. We also reviewed the characteristics of our investment to confirm that the convertible notes are not in-substance common stock that would warrant equity method accounting. After we reviewed all of the terms of the investment, we concluded the appropriate accounting treatment to be that of an available-for-sale debt security.
The investment is carried at fair value with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income. We estimated the fair value of our investment using a Monte Carlo simulation model, cash flow projections discounted at a risk-adjusted rate, and certain assumptions related to equity volatility, default probability, and recovery rate, all of which are Level 3 inputs. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the investment, which would result in different impacts to our consolidated balance sheet and comprehensive income. Actual results may differ from our estimates. The fair value of the convertible debt investment is recorded in long-term investment.
The table below sets forth the changes in the balance of the convertible debt investment for the years ended
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
Convertible Debt Investment
|
Balance as of December 31, 2015
|
|
$
|
34,831
|
|
Change in fair value of convertible debt investment
|
|
(156
|
)
|
Balance as of December 31, 2016
|
|
34,675
|
|
Change in fair value of convertible debt investment
|
|
5,229
|
|
Balance as of December 31, 2017
|
|
$
|
39,904
|
|
Deferred compensation assets:
We have a non-qualified deferred compensation plan (the "Plan") for the members of our board of directors and a select group of our employees. The deferred compensation liability is funded by the Plan assets, which consist of life insurance policies maintained within a trust. The cash surrender value of the life insurance policies approximates fair value, and is based on third-party broker statements which provide the fair value of the life insurance policies' underlying investments, which are Level 2 inputs. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The Plan assets are included in other non-current assets on our
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
consolidated balance sheet. 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. Refer to Note 4 “Acquisitions” for information on the acquisitions completed in
2017
,
2016
, and
2015
.
The table below sets forth the changes in the balance of the contingent consideration for business acquisitions for the years ended
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
Contingent Consideration for Business Acquisitions
|
Balance as of December 31, 2015
|
|
$
|
2,063
|
|
Acquisitions
|
|
8,754
|
|
Remeasurement of contingent consideration for business acquisitions
|
|
(1,990
|
)
|
Balance as of December 31, 2016
|
|
8,827
|
|
Acquisitions
|
|
15,489
|
|
Payments
|
|
(2,938
|
)
|
Remeasurement of contingent consideration for business acquisitions
|
|
1,111
|
|
Unrealized loss due to foreign currency translation
|
|
339
|
|
Balance as of December 31, 2017
|
|
$
|
22,828
|
|
Financial assets and liabilities not recorded at fair value are as follows:
Senior Secured Credit Facility
The carrying value of our borrowings outstanding under our senior secured credit facility is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the senior secured credit facility bears interest at variable rates based on current market rates as set forth in the Amended Credit Agreement. Refer to Note 7 “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 7 “Financing Arrangements” for additional information on our promissory note due 2024.
Convertible Notes
The carrying amount and estimated fair value of the Convertible Notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
1.25% convertible senior notes due 2019
|
$
|
233,140
|
|
|
$
|
232,578
|
|
|
$
|
224,065
|
|
|
$
|
245,018
|
|
The differences between the
$250 million
principal amount of the Convertible Notes and the carrying amounts shown above represent the unamortized debt discount and issuance costs. As of
December 31, 2017
and
2016
, the carrying value of the equity component of
$39.3
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
million
was unchanged from the date of issuance. Refer to Note 7 “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
December 31, 2017
and
2016
.
Based on the closing price of our common stock of
$40.45
on
December 31, 2017
, the if-converted value of the Convertible Notes was less than the principal amount.
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.
13. Other Comprehensive Income (Loss)
The table below sets forth the components of accumulated other comprehensive income (loss), net of tax for the years ended
December 31, 2017
,
2016
, and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
|
|
Available-for-
Sale
Investments
|
|
Cash Flow
Hedges
(1)
|
|
Total
|
Balance as of December 31, 2014
|
$
|
(2,334
|
)
|
|
$
|
(250
|
)
|
|
$
|
(71
|
)
|
|
$
|
(2,655
|
)
|
Foreign currency translation adjustment, net of tax of $0
|
(403
|
)
|
|
—
|
|
|
—
|
|
|
(403
|
)
|
Reclassification adjustment into earnings, net of tax of $0
(2)
|
2,220
|
|
|
—
|
|
|
—
|
|
|
2,220
|
|
Unrealized gain on investments, net of tax of $(2,709)
|
—
|
|
|
4,435
|
|
|
—
|
|
|
4,435
|
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $327
|
—
|
|
|
—
|
|
|
(492
|
)
|
|
(492
|
)
|
Reclassification adjustment into earnings, net of tax of $(320)
|
—
|
|
|
—
|
|
|
480
|
|
|
480
|
|
Balance as of December 31, 2015
|
(517
|
)
|
|
4,185
|
|
|
(83
|
)
|
|
3,585
|
|
Foreign currency translation adjustment, net of tax of $0
|
64
|
|
|
—
|
|
|
—
|
|
|
64
|
|
Unrealized loss on investments, net of tax of $59
|
—
|
|
|
(97
|
)
|
|
—
|
|
|
(97
|
)
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $122
|
—
|
|
|
—
|
|
|
(179
|
)
|
|
(179
|
)
|
Reclassification adjustment into earnings, net of tax of $(161)
|
—
|
|
|
—
|
|
|
242
|
|
|
242
|
|
Balance as of December 31, 2016
|
(453
|
)
|
|
4,088
|
|
|
(20
|
)
|
|
3,615
|
|
Foreign currency translation adjustment, net of tax of $0
|
1,602
|
|
|
—
|
|
|
—
|
|
|
1,602
|
|
Unrealized gain on investments:
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $(998)
|
—
|
|
|
4,231
|
|
|
—
|
|
|
4,231
|
|
Reclassification adjustment into retained earnings
(3)
|
—
|
|
|
493
|
|
|
—
|
|
|
493
|
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $(106)
|
—
|
|
|
—
|
|
|
366
|
|
|
366
|
|
Reclassification adjustment into earnings, net of tax of $(46)
|
—
|
|
|
—
|
|
|
69
|
|
|
69
|
|
Reclassification adjustment into retained earnings
(3)
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
Balance as of December 31, 2017
|
$
|
1,149
|
|
|
$
|
8,812
|
|
|
$
|
409
|
|
|
$
|
10,370
|
|
|
|
(1)
|
The before tax amounts reclassified from accumulated other comprehensive income (loss) related to our cash flow hedges are recorded to interest expense, net of interest income.
|
|
|
(2)
|
In connection with the divestiture of Huron Legal, which included the sale of certain wholly-owned foreign subsidiaries, we reclassified
$2.2 million
of accumulated translation losses to net income from discontinued operations.
|
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
|
|
(3)
|
Upon adoption of ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
we reclassified
$0.5 million
of stranded tax effects, which resulted from the enactment of the 2017 Tax Reform, from accumulated other comprehensive income to retained earnings. Refer to Note 2 "Summary of Significant Accounting Policies" for additional information on the adoption of ASU 2018-02.
|
14. Employee Benefit and Deferred Compensation Plans
We sponsor a qualified defined contribution 401(k) plan covering substantially all of our employees. Under the plan, employees are entitled to make pretax contributions and/or Roth post-tax contributions up to the annual maximums established by the Internal Revenue Service. We match an amount equal to the employees’ contributions up to
6%
of the employees’ salaries. Our matching contributions, including those related to our discontinued operations, for the years ended
December 31, 2017
,
2016
, and
2015
were
$20.0 million
,
$19.4 million
, and
$17.6 million
, respectively.
We have a non-qualified deferred compensation plan (the “Plan”) that is administered by our board of directors or a committee designated by the board of directors. Under the Plan, members of the board of directors and a select group of our employees may elect to defer the receipt of their director retainers and meeting fees or base salary and bonus, as applicable. Additionally, we may credit amounts to a participant’s deferred compensation account in accordance with employment or other agreements entered into between us and the participant. At our sole discretion, we may, but are not required to, credit any additional amount we desire to any participant’s deferred compensation account. Amounts credited are subject to vesting schedules set forth in the Plan, employment agreement, or any other agreement entered into between us and the participant. The deferred compensation liability at
December 31, 2017
and
2016
was
$17.7 million
and
$16.4 million
, respectively. This deferred compensation liability is funded by the Plan assets.
15. Equity Incentive Plans
In 2012, Huron adopted the 2012 Omnibus Incentive Plan (the “2012 Plan”), in order to increase the number of shares of common stock available as equity compensation to employees, non-employee directors, and independent contractors, and to make certain updates to reflect changes in market practices. The 2012 Plan replaced, on a prospective basis, our 2004 Omnibus Stock Plan (the "2004 Plan") such that future grants will be granted under the 2012 Plan and any outstanding awards granted under the 2004 Plan that are cancelled, expired, forfeited, settled in cash, or otherwise terminated without a delivery of shares to the participant will not become available for grant under the 2012 Plan. The 2012 Plan permits the grant of stock options, stock appreciation rights, restricted stock, performance shares and other share-based or cash-based awards valued in whole or in part by reference to, or otherwise based on, our common stock. The 2012 Plan was amended on May 2, 2014 to increase the number of shares authorized for issuance by
850,000
shares. On May 5, 2017, an amendment and restatement of the 2012 Plan was approved by shareholders to increase the number of shares authorized for issuance by
804,000
shares. As of
December 31, 2017
, approximately
1.3 million
shares remain available for issuance under the 2012 Plan.
On May 1, 2015, we adopted the Stock Ownership Participation Program (the “SOPP”), which is available to Huron employees below the managing director level who do not receive equity-based awards as part of their normal compensation plan. Under the SOPP, eligible employees may elect to use after-tax payroll deductions, or cash contributions, to purchase shares of the Company’s common stock on certain designated purchase dates. Employees who purchase stock under the SOPP are granted restricted stock equal to
25%
of their purchased shares. Vesting of the restricted stock is subject to both a time-based vesting schedule and a requirement that the purchased shares be held for a specified holding period. The initial number of shares available for issuance under the SOPP was
300,000
. Prior to adopting the SOPP, the matching share grants and the employee purchased shares under the stock ownership participation program were governed by the 2012 Plan. As of
December 31, 2017
, approximately
0.1 million
shares remain available for issuance under the SOPP.
It has been our practice to issue shares of common stock upon exercise of stock options and granting of restricted stock from authorized but unissued shares, with the exception of the SOPP under which shares are issued from treasury stock. Certain grants of restricted stock under the 2012 Plan may be issued from treasury stock at the direction of the Compensation Committee.
The Compensation Committee of the board of directors has the responsibility of interpreting the 2012 Plan and SOPP and determining all of the terms and conditions of awards made under the plans, including when the awards will become exercisable or otherwise vest. In 2013, the Compensation Committee amended certain share-based awards outstanding under our 2012 Plan and our 2004 Plan to provide for a retirement eligibility provision. Under this provision, eligible employees who have reached
62
years of age and have completed
seven
years of employment with Huron will continue vesting in their share-based awards after retirement, subject to certain conditions. This retirement eligibility provision will also apply to future awards granted to eligible employees under the 2012 Plan.
Total share-based compensation cost recognized for the years ended
December 31, 2017
,
2016
, and
2015
was
$14.8 million
,
$16.6 million
, and
$19.2 million
, respectively, with related income tax benefits of
$5.8 million
,
$6.4 million
, and
$7.6 million
, respectively. As of
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
December 31, 2017
, there was
$17.6 million
of total unrecognized compensation cost related to nonvested share-based awards. This cost is expected to be recognized over a weighted average period of
2.2
years.
Restricted Stock Awards
The grant date fair values of our restricted stock awards are measured based on the fair value of our common stock at grant date and amortized into expense over the service period. Subject to acceleration under certain conditions, the majority of our restricted stock vests annually over
four
years.
The table below summarizes the restricted stock activity for the year ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted
Average
Grant Date
Fair Value
(in dollars)
|
|
2012 Omnibus Incentive Plan
|
|
Stock Ownership Participation Program
|
|
Total
|
|
Nonvested restricted stock at December 31, 2016
|
610
|
|
|
12
|
|
|
622
|
|
|
$
|
59.77
|
|
Granted
|
270
|
|
|
14
|
|
|
284
|
|
|
$
|
42.11
|
|
Vested
|
(247
|
)
|
|
(9
|
)
|
|
(256
|
)
|
|
$
|
57.80
|
|
Forfeited
|
(72
|
)
|
|
(4
|
)
|
|
(76
|
)
|
|
$
|
59.18
|
|
Nonvested restricted stock at December 31, 2017
|
561
|
|
|
13
|
|
|
574
|
|
|
$
|
51.97
|
|
The aggregate fair value of restricted stock that vested during the years ended
December 31, 2017
,
2016
, and
2015
was
$11.1 million
,
$14.9 million
, and
$23.9 million
, respectively. The weighted average grant date fair value per share of restricted stock granted during 2016 and 2015 was
$56.28
and
$66.21
, respectively.
Performance-based Share Awards
During
2017
,
2016
, and
2015
, the Company granted performance-based share awards to our named executive officers and certain managing directors. The total number of shares earned by recipients of these awards is contingent upon meeting practice specific and Company-wide performance goals. Following the performance period, the awards are subject to the completion of a service period, which is generally an additional
one
to
three
years. The earned awards vest on a graded vesting schedule over the service period. For certain performance awards, the recipients may earn additional shares of stock for performance achieved above the stated target. The grant date fair values of our performance-based share awards are measured based on the fair value of our common stock at grant date. Compensation cost is amortized into expense over the service period, including the performance period.
The table below summarizes the performance-based stock activity for the year ended
December 31, 2017
. All nonvested performance-based stock outstanding at December 31,
2016
and
2017
was granted under the 2012 Omnibus Incentive Plan.
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
(in dollars)
|
Nonvested performance-based stock at December 31, 2016
|
239
|
|
|
$
|
58.47
|
|
Granted
(1)
|
328
|
|
|
$
|
42.75
|
|
Vested
|
(85
|
)
|
|
$
|
61.66
|
|
Forfeited
(2)
|
(129
|
)
|
|
$
|
54.85
|
|
Nonvested performance-based stock at December 31, 2017
(3)
|
353
|
|
|
$
|
44.45
|
|
|
|
(1)
|
Shares granted in
2017
are presented at the stated target, which represents the base number of shares that could be earned. Actual shares earned may be below or, for certain grants, above the target based on the achievement of specific financial goals.
|
|
|
(2)
|
Forfeited shares include shares forfeited as a result of not meeting the performance criteria of the award as well as shares forfeited upon termination.
|
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
|
|
(3)
|
Of the
353,000
nonvested performance-based shares outstanding as of
December 31, 2017
, approximately
316,000
shares were unearned and subject to achievement of specific financial goals. Once earned, the awards will be subject to time-based vesting according to the terms of the award. Based on
2017
financial results, approximately
235,000
of the
316,000
unearned shares will be forfeited in the first quarter of
2018
.
|
The aggregate fair value of performance-based stock that vested during the years ended
December 31, 2017
,
2016
, and
2015
was
$3.6 million
,
$3.0 million
, and
$6.5 million
, respectively. The weighted average grant date fair value per share of performance-based stock granted during
2016
and
2015
was
$55.52
and
$66.63
, respectively.
Stock Options
Prior to 2014, the Company granted stock option awards to certain named executive officers.
No
stock option awards were granted in 2017, 2016, or 2015. The exercise prices of stock options are equal to the fair value of a share of common stock on the date of grant. Subject to acceleration under certain conditions, our stock options vest annually over
four
years. All stock options have a
10
-year contractual term.
Stock option activity for the year ended
December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Options
(in thousands)
|
|
Weighted
Average
Exercise
Price
(in dollars)
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(in millions)
|
Outstanding at December 31, 2016
|
194
|
|
|
$
|
29.06
|
|
|
4.3
|
|
$
|
4.2
|
|
Granted
|
—
|
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
|
|
|
|
|
Forfeited or expired
|
—
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
(1)
|
194
|
|
|
$
|
29.06
|
|
|
3.3
|
|
$
|
2.2
|
|
Exercisable at December 31, 2017
|
194
|
|
|
$
|
29.06
|
|
|
3.3
|
|
$
|
2.2
|
|
|
|
(1)
|
Of the
194,000
outstanding options, approximately
157,000
were granted under the 2004 Omnibus Stock Plan, and the remaining
37,000
options were granted under the 2012 Omnibus Incentive Plan.
|
No
options were exercised in 2017. The aggregate intrinsic value of options exercised during
2016
was
$0.1 million
.
No
options were exercised in 2015.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
16. Income Taxes
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“2017 Tax Reform”), a tax reform bill which, among other items, reduces the current corporate federal income tax rate from 35% to 21% and moves from a worldwide tax system to a territorial system. The rate reduction is effective January 1, 2018. As a result of the enactment of the legislation in 2017, we have estimated the remeasurement of our net deferred taxes based on the new lower tax rate, as well as provided for additional one-time income tax expense estimates primarily related to the transition tax on accumulated foreign earnings and elimination of foreign tax credits for dividends that are subject to the 100 percent exemption in our consolidated financial statements as of and for the year ended December 31, 2017. Our provisional analysis resulted in
$8.8 million
of additional income tax expense for the year ended December 31, 2017. Of the
$8.8 million
,
$7.9 million
related to the remeasurement of our deferred tax balances at the lower federal income tax rate;
$0.6 million
related to the transition tax on accumulated foreign earnings, net of applicable foreign tax credits; and
$0.3 million
related to withholding tax on outside basis differences due to our change in assertion for permanent reinvestment. The impacts on our financial statements as a result of 2017 Tax Reform are considered provisional and are based on the information that is currently available. These provisional results may be subject to future adjustments as additional analysis is anticipated based on technical corrections and regulatory interpretations to come. We expect to finalize the analysis as soon as practicable, but, in accordance with Staff Accounting Bulletin (“SAB”) No. 118, which was issued as a result of 2017 Tax Reform, not later than one year from the enactment date. Any changes to our provisional analysis will be included as an adjustment to tax expense or benefit in the period the amounts are determined.
The income tax expense for continuing operations for the years ended
December 31, 2017
,
2016
, and
2015
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(635
|
)
|
|
$
|
15,726
|
|
|
$
|
4,806
|
|
State
|
545
|
|
|
1,623
|
|
|
2,380
|
|
Foreign
|
2,040
|
|
|
1,021
|
|
|
350
|
|
Total current
|
1,950
|
|
|
18,370
|
|
|
7,536
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(46,103
|
)
|
|
1,662
|
|
|
12,450
|
|
State
|
(6,576
|
)
|
|
(274
|
)
|
|
1,482
|
|
Foreign
|
(1,270
|
)
|
|
(81
|
)
|
|
202
|
|
Total deferred
|
(53,949
|
)
|
|
1,307
|
|
|
14,134
|
|
Income tax expense for continuing operations
|
$
|
(51,999
|
)
|
|
$
|
19,677
|
|
|
$
|
21,670
|
|
The components of income from continuing operations before taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
U.S.
|
$
|
(221,137
|
)
|
|
$
|
56,141
|
|
|
$
|
85,164
|
|
Foreign
|
(1,367
|
)
|
|
3,016
|
|
|
(1,599
|
)
|
Total
|
$
|
(222,504
|
)
|
|
$
|
59,157
|
|
|
$
|
83,565
|
|
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
A reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Percent of pretax income from continuing operations:
|
|
|
|
|
|
At U.S. statutory tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
2.7
|
|
|
1.7
|
|
|
4.6
|
|
Goodwill impairment charges
|
(10.2
|
)
|
|
—
|
|
|
—
|
|
U.S. federal rate change
|
(3.4
|
)
|
|
—
|
|
|
—
|
|
Transition tax on accumulated foreign earnings, net of credits
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
(0.8
|
)
|
|
—
|
|
|
—
|
|
Meals and entertainment
|
(0.3
|
)
|
|
1.1
|
|
|
0.6
|
|
Valuation allowance
|
(0.2
|
)
|
|
(3.2
|
)
|
|
0.5
|
|
Foreign source income
|
0.1
|
|
|
(0.5
|
)
|
|
0.5
|
|
Tax credits / Section 199 Deduction
|
0.2
|
|
|
(1.1
|
)
|
|
(1.0
|
)
|
Net tax benefit related to “check-the-box” election
(1)
|
1.2
|
|
|
—
|
|
|
(14.7
|
)
|
Other
|
(0.6
|
)
|
|
0.3
|
|
|
0.4
|
|
Effective income tax rate for continuing operations
|
23.4
|
%
|
|
33.3
|
%
|
|
25.9
|
%
|
|
|
(1)
|
In the fourth quarter of 2015, we made a tax election to classify two of our wholly-owned foreign subsidiaries as disregarded entities for U.S. federal income tax purposes (commonly referred to as a “check-the-box” election). As a result of this election, we realized an income tax benefit of
$13.0 million
, of which
$0.7 million
is unrecognized, resulting in a net recognized tax benefit of
$12.3 million
. Due to the expiration of statute of limitations, in the third quarter of 2017, we recognized a
$2.7 million
tax benefit, including the reversal of accrued interest and penalties, related to a previously unrecognized tax benefit from our "check-the-box" election made in 2014 to treat one of our wholly-owned foreign subsidiaries as a disregarded entity for U.S federal income tax purposes.
|
The effective tax rate for discontinued operations in
2017
was
60.0%
, based on tax expense of
$0.6 million
and pretax income from discontinued operations of
$1.0 million
, and was higher than the statutory tax rate primarily due to the settlement of foreign tax audits. The effective tax rate for discontinued operations in 2016 was
(33.4)%
, based on tax benefits of
$0.9 million
and a pretax loss from discontinued operations of
$2.8 million
, and was lower than the statutory tax rate primarily due to an increase in the valuation allowance for foreign tax credits. The effective tax rate for discontinued operations in 2015 was
169.0%
, based on tax expense of
$1.8 million
and a pretax loss from discontinued operations of
$1.1 million
, and was higher than the statutory tax rate primarily due to the tax expense recognized from the sale of the Huron Legal segment. Refer to Note 3 "Discontinued Operations" for further detail on the sale of the Huron Legal segment.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The net deferred tax liabilities for continuing operations at
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
Share-based compensation
|
$
|
5,674
|
|
|
$
|
10,151
|
|
Accrued payroll and other liabilities
|
7,010
|
|
|
10,004
|
|
Intangibles and goodwill
|
2,137
|
|
|
—
|
|
Deferred lease incentives
|
4,352
|
|
|
4,666
|
|
Convertible note hedge transactions
|
250
|
|
|
12,197
|
|
Revenue recognition
|
1,586
|
|
|
1,983
|
|
Restructuring charge liability
|
1,104
|
|
|
2,230
|
|
Net operating loss carry-forwards
|
495
|
|
|
92
|
|
Tax credits
|
1,918
|
|
|
1,804
|
|
Other
|
882
|
|
|
1,934
|
|
Total deferred tax assets
|
25,408
|
|
|
45,061
|
|
Valuation allowance
|
(1,247
|
)
|
|
(626
|
)
|
Net deferred tax assets
|
24,161
|
|
|
44,435
|
|
Deferred tax liabilities:
|
|
|
|
Prepaid expenses
|
(1,229
|
)
|
|
(2,500
|
)
|
Property and equipment
|
(4,031
|
)
|
|
(2,933
|
)
|
Intangibles and goodwill
|
—
|
|
|
(60,411
|
)
|
Convertible note discount
|
(3
|
)
|
|
(11,586
|
)
|
Convertible debt investment
|
(3,110
|
)
|
|
(2,600
|
)
|
Other
|
(133
|
)
|
|
(38
|
)
|
Total deferred tax liabilities
|
(8,506
|
)
|
|
(80,068
|
)
|
Net deferred tax asset (liability) for continuing operations
|
$
|
15,655
|
|
|
$
|
(35,633
|
)
|
As of
December 31, 2017
and
2016
, we had valuation allowances of
$1.2 million
and
$0.6 million
, respectively, primarily due to uncertainties relating to the ability to utilize deferred tax assets recorded for foreign losses. The increase in valuation allowances in 2017 primarily related to increases of net operating losses in jurisdictions where the net operating loss credits cannot be benefited and valuation allowances recorded on certain tax credits.
We have federal and state tax credit carry-forwards of
$1.9 million
which expire in
2022
and
2019
, respectively. We have no federal net operating losses or state net operating loss carry-forwards as of December 31, 2017.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
A reconciliation of our beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
Unrecognized Tax Benefits
|
Balance at January 1, 2015
|
|
$
|
2,488
|
|
Additions based on tax positions related to the current year
|
|
735
|
|
Balance at December 31, 2015
|
|
3,223
|
|
Additions based on tax positions related to the current year
|
|
117
|
|
Balance at December 31, 2016
|
|
3,340
|
|
Decrease due to lapse of statute of limitations
|
|
(2,410
|
)
|
Decrease based on tax positions related to the prior year
|
|
(117
|
)
|
Balance at December 31, 2017
|
|
$
|
813
|
|
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
As of
December 31, 2017
, we had
$0.8 million
of unrecognized tax benefits which would affect the effective tax rate of continuing operations if recognized.
As of
December 31, 2017
and
2016
, we had
$0.1 million
and
$0.3 million
accrued for the potential payment of interest and penalties. Accrued interest and penalties are recorded as a component of provision for income taxes on our consolidated statement of earnings.
We file income tax returns with federal, state, local and foreign jurisdictions. Tax years
2013 through 2016
are subject to future examinations by federal tax authorities. Tax years
2010 through 2016
are subject to future examinations by state and local tax authorities. Currently, the Company is not under audit by any tax authority. Our foreign income tax filings are subject to future examinations by the local foreign tax authorities for tax years
2010 through 2016
.
17. Commitments, Contingencies and Guarantees
Lease Commitments
We lease office space under non-cancelable operating lease arrangements expiring on various dates through 2028, with various renewal options. Our principal executive offices located in Chicago, Illinois are under a lease expiring in
September 2024
. We have a
five
-year renewal option that will allow us to continue to occupy this office space until
September 2029
. Office facilities under operating leases include fixed or minimum payments plus, in some cases, scheduled base rent increases over the term of the lease. Certain leases require monthly payments of real estate taxes, insurance and other operating expenses applicable to the property. Some of the leases contain provisions whereby the future rental payments may be adjusted for increases in operating expenses above the specified amount. Rent expense, including operating costs and taxes, for the years ended
December 31, 2017
,
2016
, and
2015
was
$14.3 million
,
$11.5 million
, and
$12.3 million
, respectively. Future minimum rental commitments under non-cancelable leases and sublease income as of
December 31, 2017
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Lease
Obligations
|
|
Sublease
Income
|
2018
|
|
$
|
14,739
|
|
|
$
|
1,316
|
|
2019
|
|
13,444
|
|
|
291
|
|
2020
|
|
12,266
|
|
|
—
|
|
2021
|
|
11,298
|
|
|
—
|
|
2022
|
|
10,409
|
|
|
—
|
|
Thereafter
|
|
37,804
|
|
|
—
|
|
Total
|
|
$
|
99,960
|
|
|
$
|
1,607
|
|
Litigation
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Annual Report on Form 10-K, 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
$1.9 million
and
$4.8 million
were outstanding at
December 31, 2017
and
2016
, respectively, primarily to support certain office lease obligations.
In connection with certain business acquisitions, we may be required to pay post-closing consideration to the sellers if specific financial performance targets are met over a number of years as specified in the related purchase agreements. As of
December 31, 2017
and
2016
, the total estimated fair value of our contingent consideration liabilities was
$22.8 million
and
$8.8 million
, respectively.
To the extent permitted by law, our bylaws and articles of incorporation require that we indemnify our officers and directors against judgments, fines and amounts paid in settlement, including attorneys’ fees, incurred in connection with civil or criminal action or proceedings, as it relates to their services to us if such person acted in good faith. Although there is no limit on the amount of indemnification, we may have recourse against our insurance carrier for certain payments made.
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
18. Segment Information
Segments are defined as components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker, who is our chief executive officer, manages the business under
three
operating segments, which are our reportable segments: Healthcare, Education, and Business Advisory.
During the second quarter of 2017, we reorganized our internal financial reporting structure, which management uses to assess performance and allocate resources, by moving our Life Sciences practice from the Education and Life Sciences segment to the Business Advisory segment. The remaining Education and Life Sciences segment is now referred to as the Education segment. While our consolidated results have not been impacted, we have reclassified our historical segment information for consistent presentation.
Our Healthcare segment has a depth of expertise in strategy and innovation, care transformation, financial and operational excellence, technology and analytics, and leadership development. 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, and drive physician, patient, and employee engagement across the enterprise.
We help organizations transform and innovate the 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 operational and organizational change and who transform the patient experience.
Our Education segment provides management consulting and technology solutions to higher education institutions and academic medical centers. We partner with clients to address challenges relating to business and technology strategy, financial management, operational and organizational effectiveness, research administration, and regulatory compliance. Our institutional strategy, market research, budgeting and financial management, business operations and student lifecycle management solutions align missions with business priorities, improve quality and reduce costs institution-wide. Our technology strategy, enterprise applications, and analytic solutions transform and optimize operations, deliver time and cost savings, and enhance the student experience. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance.
Our Business Advisory segment provides services to large and middle market, not-for-profit organizations, lending institutions, law firms, investment banks, and private equity firms. We assist clients in a broad range of industries and across the spectrum from healthy, well-capitalized companies to organizations in transition as well as creditors, equity owners, and other key constituents. Our Business Advisory professionals resolve complex business issues and enhance client enterprise value through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. Our Enterprise Solutions and Analytics professionals deliver technology and analytic solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our 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.
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)
include costs for corporate office support, 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 tables below set forth information about our operating segments for the years ended
December 31, 2017
,
2016
, and
2015
, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements. We do not present financial information by geographic area because our international operations are immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Healthcare:
|
|
|
|
|
|
Revenues
|
$
|
356,909
|
|
|
$
|
424,912
|
|
|
$
|
446,887
|
|
Operating income
|
$
|
118,761
|
|
|
$
|
147,903
|
|
|
$
|
169,560
|
|
Segment operating income as a percentage of segment revenues
|
33.3
|
%
|
|
34.8
|
%
|
|
37.9
|
%
|
Education:
|
|
|
|
|
|
Revenues
|
$
|
167,908
|
|
|
$
|
149,817
|
|
|
$
|
134,009
|
|
Operating income
|
$
|
40,318
|
|
|
$
|
38,310
|
|
|
$
|
32,246
|
|
Segment operating income as a percentage of segment revenues
|
24.0
|
%
|
|
25.6
|
%
|
|
24.1
|
%
|
Business Advisory:
|
|
|
|
|
|
Revenues
|
$
|
207,753
|
|
|
$
|
151,543
|
|
|
$
|
116,892
|
|
Operating income
|
$
|
46,600
|
|
|
$
|
29,382
|
|
|
$
|
31,233
|
|
Segment operating income as a percentage of segment revenues
|
22.4
|
%
|
|
19.4
|
%
|
|
26.7
|
%
|
All Other:
(1)
|
|
|
|
|
|
Revenues
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,222
|
|
Operating loss
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,718
|
)
|
Segment operating loss as a percentage of segment revenues
|
N/A
|
|
|
N/A
|
|
|
N/M
|
|
Total Company:
|
|
|
|
|
|
Revenues
|
$
|
732,570
|
|
|
$
|
726,272
|
|
|
$
|
699,010
|
|
Reimbursable expenses
|
75,175
|
|
|
71,712
|
|
|
70,013
|
|
Total revenues and reimbursable expenses
|
$
|
807,745
|
|
|
$
|
797,984
|
|
|
$
|
769,023
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
205,679
|
|
|
$
|
215,595
|
|
|
$
|
231,321
|
|
Items not allocated at the segment level:
|
|
|
|
|
|
Other operating expenses
|
120,718
|
|
|
111,852
|
|
|
112,164
|
|
Litigation and other losses (gains), net
|
1,111
|
|
|
(1,990
|
)
|
|
(9,476
|
)
|
Depreciation and amortization
|
38,213
|
|
|
31,499
|
|
|
25,135
|
|
Goodwill impairment charges
(2)
|
253,093
|
|
|
—
|
|
|
—
|
|
Other expense, net
|
15,048
|
|
|
15,077
|
|
|
19,933
|
|
Income (loss) from continuing operations before taxes
|
$
|
(222,504
|
)
|
|
$
|
59,157
|
|
|
$
|
83,565
|
|
|
|
(1)
|
During 2015, we wound down the businesses within our All Other operating segment, which consisted of our public sector consulting practice and our foreign consulting operations based in the Middle East. We did not generate any revenues from our All Other segment during 2016 and 2017.
|
|
|
(2)
|
The 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.
|
N/M – Not Meaningful
N/A – Not Applicable
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Segment Assets:
|
|
2017
|
|
2016
|
|
2015
|
Healthcare
|
|
$
|
70,097
|
|
|
$
|
69,274
|
|
|
$
|
84,088
|
|
Education
|
|
31,367
|
|
|
33,094
|
|
|
28,192
|
|
Business Advisory
|
|
58,217
|
|
|
43,151
|
|
|
29,609
|
|
Unallocated assets
(1)
|
|
877,247
|
|
|
1,007,696
|
|
|
1,017,654
|
|
Total assets
|
|
$
|
1,036,928
|
|
|
$
|
1,153,215
|
|
|
$
|
1,159,543
|
|
|
|
(1)
|
Unallocated assets includes goodwill and intangible assets and our convertible debt investment, as management does not evaluate these items at the segment level when assessing segment performance or allocating resources. Refer to Note 5 “Goodwill and Intangible Assets" and Note 12 "Fair Value of Financial Instruments" for further information on these assets.
|
For the years ended
December 31, 2017
,
2016
, and
2015
, substantially all of our revenues and long-lived assets were attributed to or located in the United States.
At
December 31, 2017
and
2016
, no single client accounted for greater than 10% of our combined receivables and unbilled services balances. During the years ended
December 31, 2017
,
2016
, and
2015
, no single client generated greater than 10% of our consolidated revenues.
19. Valuation and Qualifying Accounts
The table below sets forth the changes in the carrying amount of our allowances for doubtful accounts and unbilled services and valuation allowance for deferred tax assets for the years ended
December 31, 2017
,
2016
, and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
Additions
(1)
|
|
Deductions
|
|
Ending
balance
|
Year ended December 31, 2015:
|
|
|
|
|
|
|
|
Allowances for doubtful accounts and unbilled services
|
$
|
14,129
|
|
|
40,003
|
|
|
37,246
|
|
|
$
|
16,886
|
|
Valuation allowance for deferred tax assets
|
$
|
2,431
|
|
|
1,212
|
|
|
1,401
|
|
|
$
|
2,242
|
|
Year ended December 31, 2016:
|
|
|
|
|
|
|
|
Allowances for doubtful accounts and unbilled services
|
$
|
16,886
|
|
|
48,901
|
|
|
44,528
|
|
|
$
|
21,259
|
|
Valuation allowance for deferred tax assets
|
$
|
2,242
|
|
|
113
|
|
|
1,729
|
|
|
$
|
626
|
|
Year ended December 31, 2017:
|
|
|
|
|
|
|
|
Allowances for doubtful accounts and unbilled services
|
$
|
21,259
|
|
|
43,888
|
|
|
40,648
|
|
|
$
|
24,499
|
|
Valuation allowance for deferred tax assets
|
$
|
626
|
|
|
793
|
|
|
172
|
|
|
$
|
1,247
|
|
|
|
(1)
|
Additions to allowances for doubtful accounts and unbilled services are charged to revenues to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the provision relates to a client’s inability to make required payments on accounts receivables, the provision is charged to operating expenses. Additions also include allowances acquired in business acquisitions, which were not material in any period presented.
|
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
20. Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
2017
|
Mar. 31
|
|
Jun. 30
|
|
Sep. 30
|
|
Dec. 31
|
Revenues
|
$
|
188,849
|
|
|
$
|
181,418
|
|
|
$
|
176,376
|
|
|
$
|
185,927
|
|
Reimbursable expenses
|
16,950
|
|
|
20,930
|
|
|
17,982
|
|
|
19,313
|
|
Total revenues and reimbursable expenses
|
205,799
|
|
|
202,348
|
|
|
194,358
|
|
|
205,240
|
|
Gross profit
|
70,203
|
|
|
64,981
|
|
|
59,847
|
|
|
71,540
|
|
Operating income (loss)
|
14,149
|
|
|
(200,575
|
)
|
|
6,098
|
|
|
(27,128
|
)
|
Net income (loss) from continuing operations
|
5,155
|
|
|
(150,482
|
)
|
|
4,132
|
|
|
(29,310
|
)
|
Income (loss) from discontinued operations, net of tax
|
143
|
|
|
309
|
|
|
238
|
|
|
(302
|
)
|
Net income (loss)
|
5,298
|
|
|
(150,173
|
)
|
|
4,370
|
|
|
(29,612
|
)
|
Net earnings (loss) per basic share:
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
$
|
0.24
|
|
|
$
|
(7.00
|
)
|
|
$
|
0.19
|
|
|
$
|
(1.36
|
)
|
Income (loss) from discontinued operations, net of tax
|
0.01
|
|
|
0.01
|
|
|
0.01
|
|
|
(0.02
|
)
|
Net income (loss)
|
$
|
0.25
|
|
|
$
|
(6.99
|
)
|
|
$
|
0.20
|
|
|
$
|
(1.38
|
)
|
Net earnings (loss) per diluted share:
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
$
|
0.24
|
|
|
$
|
(7.00
|
)
|
|
$
|
0.19
|
|
|
$
|
(1.36
|
)
|
Income (loss) from discontinued operations, net of tax
|
0.01
|
|
|
0.01
|
|
|
0.01
|
|
|
(0.02
|
)
|
Net income (loss)
|
$
|
0.25
|
|
|
$
|
(6.99
|
)
|
|
$
|
0.20
|
|
|
$
|
(1.38
|
)
|
Weighted average shares used in calculating earnings per share:
|
|
|
|
|
|
|
|
Basic
|
21,239
|
|
|
21,492
|
|
|
21,505
|
|
|
21,515
|
|
Diluted
|
21,474
|
|
|
21,492
|
|
|
21,622
|
|
|
21,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
2016
|
Mar. 31
|
|
Jun. 30
|
|
Sep. 30
|
|
Dec. 31
|
Revenues
|
$
|
180,489
|
|
|
$
|
184,259
|
|
|
$
|
183,400
|
|
|
$
|
178,124
|
|
Reimbursable expenses
|
16,561
|
|
|
18,982
|
|
|
19,093
|
|
|
17,076
|
|
Total revenues and reimbursable expenses
|
197,050
|
|
|
203,241
|
|
|
202,493
|
|
|
195,200
|
|
Gross profit
|
65,180
|
|
|
77,138
|
|
|
71,131
|
|
|
60,090
|
|
Operating income
|
14,376
|
|
|
28,209
|
|
|
23,240
|
|
|
8,409
|
|
Net income from continuing operations
|
6,866
|
|
|
16,139
|
|
|
12,288
|
|
|
4,187
|
|
Income (loss) from discontinued operations, net of tax
|
(864
|
)
|
|
(970
|
)
|
|
4
|
|
|
(33
|
)
|
Net income
|
6,002
|
|
|
15,169
|
|
|
12,292
|
|
|
4,154
|
|
Net earnings per basic share:
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
0.33
|
|
|
$
|
0.77
|
|
|
$
|
0.58
|
|
|
$
|
0.20
|
|
Income (loss) from discontinued operations, net of tax
|
(0.05
|
)
|
|
(0.05
|
)
|
|
—
|
|
|
—
|
|
Net income
|
$
|
0.28
|
|
|
$
|
0.72
|
|
|
$
|
0.58
|
|
|
$
|
0.20
|
|
Net earnings per diluted share:
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
0.32
|
|
|
$
|
0.76
|
|
|
$
|
0.57
|
|
|
$
|
0.19
|
|
Income (loss) from discontinued operations, net of tax
|
(0.04
|
)
|
|
(0.05
|
)
|
|
—
|
|
|
—
|
|
Net income
|
$
|
0.28
|
|
|
$
|
0.71
|
|
|
$
|
0.57
|
|
|
$
|
0.19
|
|
Weighted average shares used in calculating earnings per share:
|
|
|
|
|
|
|
|
Basic
|
21,114
|
|
|
21,061
|
|
|
21,076
|
|
|
21,083
|
|
Diluted
|
21,460
|
|
|
21,376
|
|
|
21,445
|
|
|
21,473
|
|
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