Document
Table of Contents




 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10–Q 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-50976 
 
HURON CONSULTING GROUP INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
01-0666114
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
550 West Van Buren Street
Chicago, Illinois
60607
(Address of principal executive offices)
(Zip Code)
(312) 583-8700
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 23, 2018, 22,553,838 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.
 


Table of Contents




Huron Consulting Group Inc.
HURON CONSULTING GROUP INC.
INDEX

 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 



Table of Contents




PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HURON CONSULTING GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited) 
 
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,025

 
$
16,909

Receivables from clients, net
108,747

 
101,778

Unbilled services, net
75,290

 
57,618

Income tax receivable
1,754

 
4,039

Prepaid expenses and other current assets
13,328

 
10,951

Total current assets
208,144

 
191,295

Property and equipment, net
41,164

 
45,541

Deferred income taxes, net
14,028

 
16,752

Long-term investment
45,948

 
39,904

Other non-current assets
32,035

 
25,375

Intangible assets, net
53,703

 
72,311

Goodwill
645,543

 
645,750

Total assets
$
1,040,565

 
$
1,036,928

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,979

 
$
9,194

Accrued expenses and other current liabilities
21,016

 
20,144

Accrued payroll and related benefits
83,069

 
73,698

Accrued contingent consideration for business acquisitions
8,003

 
8,515

Deferred revenues
30,043

 
27,916

Total current liabilities
152,110

 
139,467

Non-current liabilities:
 
 
 
Deferred compensation and other liabilities
22,837

 
20,895

Accrued contingent consideration for business acquisitions, net of current portion
4,886

 
14,313

Long-term debt, net of current portion
315,691

 
342,507

Deferred lease incentives
14,110

 
15,333

Deferred income taxes, net
1,058

 
1,097

Total non-current liabilities
358,582

 
394,145

Commitments and contingencies

 

Stockholders’ equity
 
 
 
Common stock; $0.01 par value; 500,000,000 shares authorized; 25,104,739 and 24,560,468 shares issued at September 30, 2018 and December 31, 2017, respectively
244

 
241

Treasury stock, at cost, 2,549,822 and 2,443,577 shares at September 30, 2018 and December 31, 2017, respectively
(124,169
)
 
(121,994
)
Additional paid-in capital
446,649

 
434,256

Retained earnings
192,984

 
180,443

Accumulated other comprehensive income
14,165

 
10,370

Total stockholders’ equity
529,873

 
503,316

Total liabilities and stockholders’ equity
$
1,040,565

 
$
1,036,928


The accompanying notes are an integral part of the consolidated financial statements.

1

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HURON CONSULTING GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited) 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenues and reimbursable expenses:
 
 
 
 
 
 
 
Revenues
$
198,448

 
$
176,376

 
$
589,671

 
$
546,643

Reimbursable expenses
21,296

 
17,982

 
59,648

 
55,862

Total revenues and reimbursable expenses
219,744

 
194,358

 
649,319

 
602,505

Direct costs and reimbursable expenses (exclusive of depreciation and amortization shown in operating expenses):
 
 
 
 
 
 
 
Direct costs
128,596

 
113,775

 
388,956

 
343,185

Amortization of intangible assets and software development costs
1,009

 
2,657

 
3,195

 
8,388

Reimbursable expenses
21,246

 
18,079

 
59,710

 
55,901

Total direct costs and reimbursable expenses
150,851

 
134,511

 
451,861

 
407,474

Operating expenses and other losses (gains), net
 
 
 
 
 
 
 
Selling, general and administrative expenses
45,915

 
41,576

 
138,481

 
132,137

Restructuring charges
(31
)
 
1,347

 
2,665

 
5,295

Other losses (gains), net
887

 
880

 
(4,990
)
 
(222
)
Depreciation and amortization
8,561

 
9,946

 
26,281

 
28,549

Goodwill impairment charge

 

 

 
209,600

Total operating expenses and other losses (gains), net
55,332

 
53,749

 
162,437

 
375,359

Operating income (loss)
13,561

 
6,098

 
35,021

 
(180,328
)
Other income (expense), net:
 
 
 
 
 
 
 
Interest expense, net of interest income
(4,628
)
 
(4,880
)
 
(14,636
)
 
(13,811
)
Other income (expense), net
707

 
930

 
(5,131
)
 
3,204

Total other expense, net
(3,921
)
 
(3,950
)
 
(19,767
)
 
(10,607
)
Income (loss) from continuing operations before taxes
9,640

 
2,148

 
15,254

 
(190,935
)
Income tax expense (benefit)
1,391

 
(1,984
)
 
4,365

 
(49,740
)
Net income (loss) from continuing operations
8,249

 
4,132

 
10,889

 
(141,195
)
Income (loss) from discontinued operations, net of tax
228

 
238

 
(304
)
 
690

Net income (loss)
$
8,477

 
$
4,370

 
$
10,585

 
$
(140,505
)
Net earnings (loss) per basic share:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
0.38

 
$
0.19

 
$
0.50

 
$
(6.59
)
Income (loss) from discontinued operations, net of tax
0.01

 
0.01

 
(0.01
)
 
0.03

Net income (loss)
$
0.39

 
$
0.20

 
$
0.49

 
$
(6.56
)
Net earnings (loss) per diluted share:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
0.37

 
$
0.19

 
$
0.50

 
$
(6.59
)
Income (loss) from discontinued operations, net of tax
0.01

 
0.01

 
(0.02
)
 
0.03

Net income (loss)
$
0.38

 
$
0.20

 
$
0.48

 
$
(6.56
)
Weighted average shares used in calculating earnings per share:
 
 
 
 
 
 
 
Basic
21,745

 
21,505

 
21,683

 
21,413

Diluted
22,110

 
21,622

 
21,947

 
21,413

Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
8,477

 
$
4,370

 
$
10,585

 
$
(140,505
)
Foreign currency translation adjustments, net of tax
(579
)
 
609

 
(1,499
)
 
1,835

Unrealized gain (loss) on investment, net of tax
(852
)
 
(2,200
)
 
4,473

 
(1,669
)
Unrealized gain (loss) on cash flow hedging instruments, net of tax
206

 
23

 
821

 
(4
)
Other comprehensive income (loss)
(1,225
)
 
(1,568
)
 
3,795

 
162

Comprehensive income (loss)
$
7,252

 
$
2,802

 
$
14,380

 
$
(140,343
)
The accompanying notes are an integral part of the consolidated financial statements.

2

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HURON CONSULTING GROUP INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)

 
Common Stock
 
Treasury Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Income
 
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
24,098,822

 
$
241

 
(2,591,135
)
 
$
(121,994
)
 
$
434,256

 
$
180,443

 
$
10,370

 
$
503,316

Comprehensive income
 
 
 
 
 
 
 
 
 
 
10,585

 
3,795

 
14,380

Issuance of common stock in connection with:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted stock awards, net of cancellations
251,965

 
3

 
20,407

 
916

 
(919
)
 
 
 
 
 

Exercise of stock options
30,000

 

 
 
 
 
 
703

 
 
 
 
 
703

Share-based compensation
 
 
 
 
 
 
 
 
12,609

 
 
 
 
 
12,609

Shares redeemed for employee tax withholdings
 
 
 
 
(84,956
)
 
(3,091
)
 
 
 
 
 
 
 
(3,091
)
Cumulative-effect adjustment from adoption of ASC 606
 
 
 
 
 
 
 
 
 
 
1,956

 
 
 
1,956

Balance at September 30, 2018
24,380,787

 
$
244

 
(2,655,684
)
 
$
(124,169
)
 
$
446,649

 
$
192,984

 
$
14,165

 
$
529,873

The accompanying notes are an integral part of the consolidated financial statements.


3

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HURON CONSULTING GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
10,585

 
$
(140,505
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
29,965

 
37,881

Share-based compensation
12,840

 
11,711

Amortization of debt discount and issuance costs
7,721

 
7,604

Goodwill impairment charge

 
209,600

Allowances for doubtful accounts and unbilled services
573

 
3,812

Deferred income taxes
179

 
(51,062
)
Loss (gain) on sale of businesses
5,863

 
(931
)
Change in fair value of contingent consideration liabilities
(2,463
)
 
(222
)
Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
(Increase) decrease in receivables from clients, net
(9,103
)
 
9,025

(Increase) decrease in unbilled services, net
(16,714
)
 
(12,251
)
(Increase) decrease in current income tax receivable / payable, net
1,400

 
(32
)
(Increase) decrease in other assets
(3,768
)
 
(1,802
)
Increase (decrease) in accounts payable and accrued liabilities
186

 
1,850

Increase (decrease) in accrued payroll and related benefits
9,445

 
(21,928
)
Increase (decrease) in deferred revenues
2,158

 
(318
)
Net cash provided by operating activities
48,867

 
52,432

Cash flows from investing activities:
 
 
 
Purchases of property and equipment, net
(6,662
)
 
(20,139
)
Investment in life insurance policies
(1,689
)
 
(1,826
)
Distributions from life insurance policies

 
2,889

Purchases of businesses, net of cash acquired
(215
)
 
(106,915
)
Capitalization of internally developed software costs
(3,611
)
 
(938
)
Proceeds from note receivable
1,040

 
177

Divestitures of businesses
(2,359
)
 
1,499

Net cash used in investing activities
(13,496
)

(125,253
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
703

 

Shares redeemed for employee tax withholdings
(3,091
)
 
(4,450
)
Proceeds from borrowings under credit facility
179,800

 
241,000

Repayments of debt
(213,674
)
 
(170,082
)
Payments for debt issuance costs
(1,385
)
 
(395
)
Deferred acquisition payments
(5,494
)
 
(1,811
)
Net cash provided by (used in) financing activities
(43,141
)
 
64,262

Effect of exchange rate changes on cash
(114
)
 
192

Net decrease in cash and cash equivalents
(7,884
)
 
(8,367
)
Cash and cash equivalents at beginning of the period
16,909

 
17,027

Cash and cash equivalents at end of the period
$
9,025

 
$
8,660

Supplemental disclosure of cash flow information:
 
 
 
Non-cash investing and financing activities:
 
 
 
Property and equipment expenditures included in accounts payable and accrued expenses
$
1,500

 
$
4,049

Promissory note assumed for purchase of property and equipment
$

 
$
5,113

Contingent consideration related to business acquisitions
$
212

 
$
15,489

Common stock issued related to a business acquisition
$

 
$
9,560

The accompanying notes are an integral part of the consolidated financial statements.

4

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)


1. Description of Business
Huron is a global consultancy that helps clients drive growth, enhance performance and sustain leadership in the markets they serve. We partner with clients to develop strategies and implement solutions that enable the transformative change our clients need to own their future.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements reflect the financial position, results of operations, and cash flows as of and for the three and nine months ended September 30, 2018 and 2017. These financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for Quarterly Reports on Form 10-Q. Accordingly, these financial statements do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements. In the opinion of management, these financial statements reflect all adjustments of a normal, recurring nature necessary for the fair statement of our financial position, results of operations, and cash flows for the interim periods presented in conformity with GAAP. These financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2017 included in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the periods ended March 31, 2018 and June 30, 2018. Our results for any interim period are not necessarily indicative of results for a full year or any other interim period.
On January 1, 2018, we adopted Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers. Below is an update to our revenue recognition and capitalized sales commissions accounting policies as a result of the adoption. Refer to Note 3 "New Accounting Pronouncements" for additional information on the adoption of ASU 2014-09.
Revenue Recognition
We generate substantially all of our revenues from providing professional services to our clients. We also generate revenues from software licenses; software support, maintenance and subscriptions to our cloud-based analytic tools and solutions; speaking engagements; conferences; and publications. A single contract could include one or multiple performance obligations. For those contracts that have multiple performance obligations, we allocate the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on our overall pricing objectives, taking into consideration market conditions and other factors.
Revenue is recognized when control of the goods and services provided are transferred to our customers and in an amount that reflects the consideration we expect to be entitled to in exchange for those goods and services using the following steps: 1) identify the contract, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue as or when we satisfy the performance obligations.
We typically satisfy our performance obligations for professional services over time as the related services are provided. The performance obligations related to software support, maintenance and subscriptions to our cloud-based analytic tools and solutions are typically satisfied evenly over the course of the service period. Other performance obligations, such as certain software licenses, speaking engagements, conferences, and publications, are satisfied at a point in time.
We generate our revenues under four types of billing arrangements: fixed-fee (including software license revenue); time-and-expense; performance-based; and software support, maintenance and subscriptions.
In fixed-fee billing arrangements, we agree to a pre-established fee in exchange for a predetermined set of professional services. We set the fees based on our estimates of the costs and timing for completing the engagements. 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 performance obligations, which primarily consist of coaching services, as well as speaking engagements, conferences, publications and software products (“Partner Contracts”). Revenues for coaching services and software products are generally recognized on a straight-line basis over the length of the contract. All other revenues under Partner Contracts, including speaking engagements, conferences and publications, are recognized at the time the goods or services are provided. Estimates of total engagement revenues and cost 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

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

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 publications 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 goods are provided, using the right to invoice practical expedient which allows us to recognize revenue in the amount that we have a right to invoice based on the number of hours worked and the agreed upon hourly rates or the value of the speaking engagements, conferences or publications purchased by our clients.
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 recognize revenue under performance-based billing arrangements using the following steps: 1) estimate variable consideration using a probability-weighted assessment of the fees to be earned, 2) apply a constraint to the estimated variable consideration to limit the amount that could be reversed when the uncertainty is resolved (the “constraint”), and 3) recognize revenue of estimated variable consideration, net of the constraint, based on work completed to-date versus our estimates of the total services to be provided under the engagement.
Clients that have purchased one of our software licenses can pay an annual fee for software support and maintenance. We also generate subscription revenue from our cloud-based analytic tools and solutions. Software support, maintenance and subscription revenues are recognized ratably over the support or subscription period. These fees are billed in advance and included in deferred revenues until recognized.
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. Under fixed-fee billing arrangements, we estimate the total amount of reimbursable expenses to be incurred over the course of the engagement and recognize the estimated amount as revenue 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. Under time-and-expense billing arrangements we recognize reimbursable expenses as revenue as the related services are provided, using the right to invoice practical expedient. Reimbursable expenses are recognized as expenses 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.
The payment terms and conditions in our customer contracts vary. Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services or deferred revenues in the accompanying consolidated balance sheets. Revenues recognized for services performed but not yet billed to clients are recorded as unbilled services. Revenues recognized, but for which we are not yet entitled to bill because certain events, such as the completion of the measurement period or client approval, must occur, are recorded as contract assets and included within 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.
Capitalized Sales Commissions
Sales commissions earned by our sales professionals are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions with an expected amortization period greater than one year are deferred and amortized on a straight-line basis over the period of the associated contract. We elected to apply the practical expedient to expense sales commissions as incurred when the expected amortization period is one year or less. Amortization expense is recorded to direct costs. The amount of capitalized sales commissions amortized during both the three and nine months ended September 30, 2018 was $0.1 million. Unamortized sales commissions were $0.4 million as of September 30, 2018.
3. New Accounting Pronouncements
Recently Adopted
In August 2017, the Financial Accounting Standards Board ("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 rules for hedge accounting to

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

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. We elected to early adopt this ASU effective January 1, 2018. The adoption of this guidance did not have an impact 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. We adopted this ASU effective January 1, 2018. The adoption of this guidance did not have an 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, which superseded ASC 605, Revenue Recognition. 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. We adopted ASC 606 effective January 1, 2018 on a modified retrospective basis to all open contracts, as modified, as of that date. Adoption of the new standard resulted in changes to our accounting policy for revenue recognition, most notably for performance-based billing arrangements, and sales commissions. Refer to Note 2 "Basis of Presentation" for additional information on our new accounting policies for revenue recognition and capitalized sales commissions. Adopting ASC 606 on a modified retrospective basis had no impact on our consolidated financial statements in the prior periods presented. Upon adoption, we recorded a $2.0 million cumulative-effect adjustment to record a net increase to retained earnings for the portion of performance-based billing arrangements that have been earned as of the adoption date but for which we had not recognized as revenue under previous revenue recognition guidance, the capitalization of sales commissions paid on open contracts as of the adoption date, and the related tax effects. The impact of the cumulative effect adjustment on our consolidated balance sheet upon adoption was as follows:
 
As of
December 31, 2017
 
Cumulative Effect Adjustment
 
As of
January 1, 2018
Assets
 
 
 
 
 
Unbilled services, net (1)
$
57,618

 
$
2,369

 
$
59,987

Prepaid expenses and other current assets
$
10,951

 
$
104

 
$
11,055

Deferred income taxes, net
$
16,752

 
$
(687
)
 
$
16,065

Other non-current assets
$
25,375

 
$
170

 
$
25,545

 
 
 
 
 
 
Equity
 
 
 
 
 
Retained earnings
$
180,443

 
$
1,956

 
$
182,399

(1)
The cumulative effect adjustment related to the portion of performance-based billing arrangements that have been earned as of the adoption date but for which we had not recognized as revenue under previous revenue recognition guidance was recorded as a contract asset within unbilled services, net on our consolidated balance sheet. Refer to Note 6 "Revenues" for additional information on our contract assets.

7

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

The impact of adoption on our consolidated balance sheet as of September 30, 2018 and consolidated statements of operations for the three and nine months ended September 30, 2018 was as follows:
Balance Sheet
As of September 30, 2018
As reported under ASC 606
 
As computed under ASC 605
 
Effect of Adoption
Increase/(Decrease)
Assets
 
 
 
 
 
Receivables from clients, net
$
108,747

 
$
108,083

 
$
664

Unbilled services, net
$
75,290

 
$
70,140

 
$
5,150

Income tax receivable
$
1,754

 
$
2,521

 
$
(767
)
Prepaid expenses and other current assets
$
13,328

 
$
13,146

 
$
182

Deferred income taxes, net
$
14,028

 
$
14,715

 
$
(687
)
Other non-current assets
$
32,035

 
$
31,808

 
$
227

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accrued payroll and related benefits
$
83,069

 
$
83,103

 
$
(34
)
Deferred revenues
$
30,043

 
$
29,379

 
$
664

 
 
 
 
 
 
Equity
 
 
 
 
 
Retained earnings
$
192,984

 
$
188,845

 
$
4,139

Statement of Operations
Three Months Ended September 30, 2018
As reported under ASC 606
 
As computed under ASC 605
 
Effect of Adoption
Increase/(Decrease)
Revenues (1)
$
198,448

 
$
202,326

 
$
(3,878
)
Direct costs
$
128,596

 
$
128,684

 
$
(88
)
 
 
 
 
 
 
Income from continuing operations before taxes
$
9,640

 
$
13,430

 
$
(3,790
)
Income tax expense
1,391

 
2,376

 
(985
)
Net income from continuing operations
$
8,249

 
$
11,054

 
$
(2,805
)
 
 
 
 
 
 
Earnings per share from continuing operations - basic
$
0.38

 
$
0.51

 
$
(0.13
)
Earnings per share from continuing operations - diluted
$
0.37

 
$
0.50

 
$
(0.13
)
 
Nine Months Ended September 30, 2018
As reported under ASC 606
 
As computed under ASC 605
 
Effect of Adoption
Increase/(Decrease)
Revenues (1)
$
589,671

 
$
586,890

 
$
2,781

Direct costs
$
388,956

 
$
389,125

 
$
(169
)
 
 
 
 
 
 
Income from continuing operations before taxes
$
15,254

 
$
12,304

 
$
2,950

Income tax expense
4,365

 
3,598

 
767

Net income from continuing operations
$
10,889

 
$
8,706

 
$
2,183

 
 
 
 
 
 
Earnings per share from continuing operations - basic
$
0.50

 
$
0.40

 
$
0.10

Earnings per share from continuing operations - diluted
$
0.50

 
$
0.40

 
$
0.10

(1)
The change in revenues due to the adoption of ASC 606 relates to revenue recognized for performance-based fee billing arrangements within our Healthcare segment.

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

Not Yet Adopted
In March 2016, the FASB issued ASU 2016-02, Leases, as a new Topic, ASC 842, 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 using an effective interest rate method or on a straight-line basis over the term of the lease. ASU 2016-02 will be effective for us beginning January 1, 2019 and requires the use of a modified retrospective transition method for existing leases. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an optional transition method that allows entities to initially apply ASC 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings on the adoption date. We will elect to adopt ASC 842 using the new transition method provided by ASU 2018-11. We have substantially completed our inventory of outstanding lease agreements and are currently evaluating the potential impact this guidance will have on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies certain disclosure requirements related to fair value measurements. ASU 2018-13 will be effective for us beginning January 1, 2020, with early adoption permitted. We do not expect this guidance to have an impact on the amounts reported on our consolidated financial statements, and we are currently evaluating the potential impact this guidance will have on our disclosures within the notes to our consolidated financial statements.
4. Acquisitions
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.
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
 
March 1, 2017
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 that may be paid is $35.0 million. See Note 11 "Fair Value of Financial Instruments" for additional information on the valuation of contingent consideration liabilities.

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

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.
 
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

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 three months ended September 30, 2017, revenues from Innosight were $11.0 million and operating loss was $0.6 million, which included $0.9 million of amortization expense for intangible assets acquired. For the nine months ended September 30, 2017, revenues from Innosight were $27.2 million and operating income was $0.8 million, which included $2.7 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.

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

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.
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
Revenues
$
176,376

 
$
555,768

Net income (loss) from continuing operations
$
4,170

 
$
(137,922
)
Net income (loss) from continuing operations per share - basic
$
0.19

 
$
(6.43
)
Net income (loss) from continuing operations per share - diluted
$
0.19

 
$
(6.43
)
The historical financial information has been adjusted to give effect to pro forma adjustments of intangible asset amortization expense, acquisition-related costs, interest expense, and the related income tax effects. For the three and nine months ended September 30, 2017, the unaudited pro forma adjustments decreased expense by less than $0.1 million and increased expense by $0.5 million, 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.
5. Goodwill and Intangible Assets
The table below sets forth the changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2018.
 

Healthcare
 

Business
Advisory
 
Education
 
Total
Balance as of December 31, 2017:
 
 
 
 
 
 
 
Goodwill
$
636,810

 
$
302,187

 
$
102,829

 
$
1,041,826

Accumulated impairment losses
(208,081
)
 
(187,995
)
 

 
(396,076
)
Goodwill, net as of December 31, 2017
428,729

 
114,192

 
102,829

 
645,750

Goodwill recorded in connection with business acquisitions

 
186

 

 
186

Foreign currency translation

 
(393
)
 

 
(393
)
Goodwill, net as of September 30, 2018
$
428,729

 
$
113,985

 
$
102,829

 
$
645,543

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. 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 no longer exceed its carrying value. In connection with the preparation of our financial statements for the quarter ended June 30, 2017, we performed an interim impairment test on the Healthcare reporting unit.
Our goodwill impairment test was performed by comparing the fair value of the Healthcare reporting unit to its carrying value and recognizing an impairment charge for the amount by which the carrying value exceeded the fair value. To estimate the fair value of 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 goodwill impairment charge in the second quarter of 2017 to reduce the carrying value of goodwill in our Healthcare reporting unit.

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

Intangible Assets
Intangible assets as of September 30, 2018 and December 31, 2017 consisted of the following:
 
 
 
As of September 30, 2018
 
As of December 31, 2017
 
Useful Life 
(in years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Customer relationships
4 to 13
 
$
98,371

 
$
56,611

 
$
106,195

 
$
51,588

Trade names
5 to 6
 
28,930

 
22,104

 
29,016

 
18,915

Customer contracts
4
 
25,097

 
24,999

 
25,154

 
24,751

Technology and software
3 to 5
 
5,694

 
2,466

 
9,340

 
5,098

Non-compete agreements
3 to 5
 
4,710

 
3,048

 
5,163

 
2,637

Publishing content
3
 

 

 
3,300

 
3,163

Favorable lease contract
3
 
720

 
591

 
720

 
425

Total
 
 
$
163,522

 
$
109,819

 
$
178,888

 
$
106,577

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.
Intangible asset amortization expense was $5.9 million and $8.8 million for the three months ended September 30, 2018 and 2017, respectively. Intangible asset amortization expense was $18.2 million and $26.4 million for the nine months ended September 30, 2018 and 2017, respectively. The table below sets forth the estimated annual amortization expense for the year ending December 31, 2018 and each of the five succeeding years for the definite-lived intangible assets recorded as of September 30, 2018.
Year Ending December 31,
 
Estimated Amortization Expense
2018
 
$
23,863

2019
 
$
17,206

2020
 
$
12,083

2021
 
$
8,064

2022
 
$
6,090

2023
 
$
3,512

Actual future amortization expense could differ from these estimated amounts as a result of future acquisitions, dispositions, and other factors.
6. Revenues
For the three and nine months ended September 30, 2018, we recognized revenues of $198.4 million and $589.7 million, respectively. For the three and nine months ended September 30, 2017, we recognized revenues of $176.4 million and $546.6 million, respectively. Of the $198.4 million recognized in the third quarter of 2018, we recognized revenues of $7.6 million from obligations satisfied, or partially satisfied, in prior periods, of which $4.3 million was primarily due to the release of allowances on unbilled services due to securing contract amendments and $3.3 million was due to changes in the estimates of our variable consideration under performance-based billing arrangements. Of the $589.7 million recognized in the first nine months of 2018, we recognized revenues of $10.1 million from obligations satisfied, or partially satisfied, in prior periods, of which $6.5 million was due to changes in the estimates of our variable consideration under performance-based billing arrangements and $3.6 million was primarily due to the release of allowances on unbilled services due to securing contract amendments.
As of September 30, 2018, we had $55.2 million of remaining performance obligations under engagements with original expected durations greater than one year. These remaining performance obligations exclude obligations under contracts with an original expected duration of one year or less, variable consideration which has been excluded from the total transaction price due to the constraint, and performance obligations under time-and-expense engagements which are recognized in the amount invoiced. Of the $55.2 million of performance obligations, we expect to recognize approximately $16.1 million as revenue in the fourth quarter of 2018, $30.1 million in 2019, and the

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

remaining $9.0 million thereafter. Actual revenue recognition could differ from these amounts as a result of changes in the estimated timing of work to be performed, adjustments to estimated variable consideration in performance-based arrangements, or other factors.
Contract Assets and Liabilities
The payment terms and conditions in our customer contracts vary. Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services or deferred revenues in the consolidated balance sheets.
Unbilled services include revenues recognized for services performed but not yet billed to clients. Services performed that we are not yet entitled to bill because certain events, such as the completion of the measurement period or client approval in performance-based engagements, must occur are recorded as contract assets and included within unbilled services, net. The contract asset balance within unbilled services, net was $2.8 million as of September 30, 2018 and $2.4 million as of January 1, 2018, upon adoption of ASC 606. The $0.4 million increase primarily reflects timing differences between the completion of our performance obligations and the amounts billed or billable to clients in accordance with their contractual billing terms. Refer to Note 3 "New Accounting Pronouncements" for additional information on the adoption of ASC 606.
Client prepayments and retainers are classified as deferred revenues and recognized over future periods in accordance with the applicable engagement agreement and our revenue recognition policy. Our deferred revenues balance as of September 30, 2018 and December 31, 2017, was $30.0 million and $27.9 million, respectively. The $2.1 million increase primarily reflects timing differences between client payments in accordance with their contract terms and the completion of our performance obligations. For the three and nine months ended September 30, 2018, $2.2 million and $22.8 million, respectively, of revenues recognized were included in the deferred revenue balance as of December 31, 2017.

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

7. 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 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: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss) from continuing operations
$
8,249

 
$
4,132

 
$
10,889

 
$
(141,195
)
Income (loss) from discontinued operations, net of tax
228

 
238

 
(304
)
 
690

Net income (loss)
$
8,477

 
$
4,370

 
$
10,585

 
$
(140,505
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
21,745

 
21,505

 
21,683

 
21,413

Weighted average common stock equivalents
365

 
117

 
264

 

Weighted average common shares outstanding – diluted
22,110

 
21,622

 
21,947

 
21,413

 
 
 
 
 
 
 
 
Net earnings (loss) per basic share:
 
 
 
 

 

Net income (loss) from continuing operations
$
0.38

 
$
0.19

 
$
0.50

 
$
(6.59
)
Income (loss) from discontinued operations, net of tax
0.01

 
0.01

 
(0.01
)
 
0.03

Net income (loss)
$
0.39

 
$
0.20

 
$
0.49

 
$
(6.56
)
 
 
 
 
 
 
 
 
Net earnings (loss) per diluted share:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
0.37

 
$
0.19

 
$
0.50

 
$
(6.59
)
Income (loss) from discontinued operations, net of tax
0.01

 
0.01

 
(0.02
)
 
0.03

Net income (loss)
$
0.38

 
$
0.20

 
$
0.48

 
$
(6.56
)
The number of anti-dilutive securities excluded from the computation of the weighted average common stock equivalents presented above were as follows:
 
As of September 30,
 
2018
 
2017
Unvested restricted stock awards
11

 
627

Outstanding common stock options

 
194

Convertible senior notes
3,129

 
3,129

Warrants related to the issuance of convertible senior notes
3,129

 
3,129

Total anti-dilutive securities
6,269

 
7,079

See Note 8 “Financing Arrangements” for further information on the convertible senior notes and warrants related to the issuance of convertible notes.
As of September 30, 2018, we had a share repurchase program permitting us to repurchase up to $125 million of our common stock through October 31, 2018 (the “Share Repurchase Program”). During the fourth quarter of 2018, our board of directors authorized an extension of the Share Repurchase Program through October 31, 2019. The amount and timing of the repurchases will be determined by management and will depend on a variety of factors, including the trading price of our common stock, capacity under our credit facility, general market and business conditions, and applicable legal requirements. No shares were repurchased during the first nine months of 2018 and 2017. As of September 30, 2018, $35.1 million remains available for share repurchases.

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

8. Financing Arrangements
A summary of the carrying amounts of our debt follows:
 
September 30, 2018
 
December 31, 2017
1.25% convertible senior notes due 2019
$
240,209

 
$
233,140

Senior secured credit facility
71,500

 
105,000

Promissory note due 2024
4,493

 
4,868

Total long-term debt
$
316,202

 
$
343,008

Current maturities of debt (1)
(511
)
 
(501
)
Long-term debt, net of current portion
$
315,691

 
$
342,507

(1)
The current maturities of debt are included as a component of accrued expenses and other current liabilities on our consolidated balance sheets.
Below is a summary of the scheduled remaining principal payments of our debt as of September 30, 2018.
 
Principal Payments of Long-Term Debt
2018
$
126

2019
$
250,514

2020
$
529

2021
$
544

2022
$
559

Thereafter
$
73,721

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.

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to July 1, 2019, only under the following circumstances: 
during any calendar quarter (and only during such calendar quarter) commencing after December 31, 2014 if, for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter, the last reported sale price of the Company’s common stock for such trading day is equal to or greater than 130% of the applicable conversion price on such trading day;
during the five consecutive business day period immediately following any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which, for each trading day of the measurement period, the “trading price” (as defined in the Indenture) per $1,000 principal amount of the Convertible Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock for such trading day and the applicable conversion rate on such trading day; or
upon the occurrence of specified corporate transactions described in the Indenture.
On or after July 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or a portion of its Convertible Notes, regardless of the foregoing circumstances.
We have separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar liability that does not have an associated convertible feature, assuming our non-convertible debt borrowing rate. The carrying value of the equity component representing the conversion option, which is recognized as a debt discount, was determined by deducting the fair value of the liability component from the proceeds of the Convertible Notes. The debt discount is amortized to interest expense using an effective interest rate of 4.751% over the term of the Convertible Notes. As of September 30, 2018, the remaining life of the Convertible Notes is one year. 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 September 30, 2018 and December 31, 2017, the Convertible Notes consisted of the following:
 
September 30, 2018
 
December 31, 2017
Liability component:
 
 
 
Proceeds
$
250,000

 
$
250,000

Less: debt discount, net of amortization
(8,530
)
 
(14,668
)
Less: debt issuance costs, net of amortization
(1,261
)
 
(2,192
)
Net carrying amount
$
240,209

 
$
233,140

Equity component (1)
$
39,287

 
$
39,287

(1)Included in additional paid-in capital on the consolidated balance sheet.

16

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

The following table presents the amount of interest expense recognized related to the Convertible Notes for the periods presented.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Contractual interest coupon
$
781

 
$
781

 
$
2,344

 
$
2,344

Amortization of debt discount
2,070

 
1,974

 
6,138

 
5,853

Amortization of debt issuance costs
312

 
306

 
931

 
915

Total interest expense
$
3,163

 
$
3,061

 
$
9,413

 
$
9,112

In connection with the issuance of the Convertible Notes, we entered into convertible note hedge transactions and warrant transactions. The convertible note hedge transactions are intended to reduce the potential future economic dilution associated with the conversion of the Convertible Notes and, combined with the warrants, effectively raise the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share. For purposes of the computation of diluted earnings per share in accordance with GAAP, dilution will occur when the average share price of our common stock for a given period exceeds the conversion price of the Convertible Notes, which initially is equal to approximately $79.89 per share. The convertible note hedge transactions and warrant transactions are discussed separately below. 
Convertible Note Hedge Transactions. In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions whereby the Company has call options to purchase a total of approximately 3.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the Convertible Notes in full, at a price of approximately $79.89, which corresponds to the initial conversion price of the Convertible Notes, subject to customary anti-dilution adjustments substantially similar to those in the Convertible Notes. The convertible note hedge transactions are exercisable upon conversion of the Convertible Notes and will expire in 2019 if not earlier exercised. We paid an aggregate amount of $42.1 million for the convertible note hedge transactions, which was recorded as additional paid-in capital on the consolidated balance sheet. 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 sheet. 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 Agreement"), that becomes due and payable in full upon maturity on March 23, 2023. The Amended Credit Agreement provides the option to increase the revolving credit facility or establish term loan facilities in an aggregate amount of up to $150 million, subject to customary conditions and the approval of any lender whose commitment would be increased, resulting in a maximum available principal amount under the Amended Credit Agreement of $650 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

17

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

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 under the Amended Credit Agreement 90 days prior to the Convertible Indebtedness Maturity Date (as defined in the Amended Credit Agreement) unless (1) the Convertible Indebtedness Maturity Date is waived or extended to a later date, (2) the Company can demonstrate (a) Liquidity (as defined in the Amended Credit Agreement) in an amount at least equal to the principal amount due on the Convertible Indebtedness Maturity Date, and (b) financial covenant compliance after giving effect to such payments and any additional indebtedness incurred on a pro forma basis, or (3) this requirement is waived by the Required Lenders (as defined in the Amended Credit Agreement). In addition, we have the right to permanently reduce or terminate the unused portion of the commitments provided under the Amended Credit Agreement at any time.
The loans and obligations under the Amended Credit Agreement are secured pursuant to a Second Amended and Restated Security Agreement and a Second Amended and Restated Pledge Agreement (the “Pledge Agreement”) with Bank of America, N.A. as collateral agent, pursuant to which the Company and the subsidiary guarantors grant Bank of America, N.A., for the ratable benefit of the lenders under the Amended Credit Agreement, a first-priority lien, subject to permitted liens, on substantially all of the personal property assets of the Company and the subsidiary guarantors, and a pledge of 100% of the stock or other equity interests in all domestic subsidiaries and 65% of the stock or other equity interests in each “material first-tier foreign subsidiary” (as defined in the Pledge Agreement).
The Amended Credit Agreement contains usual and customary representations and warranties; affirmative and negative covenants, which include limitations on liens, investments, additional indebtedness, and restricted payments; and two quarterly financial covenants as follows: (i) a maximum Consolidated Leverage Ratio (defined as the ratio of debt to consolidated EBITDA) ranging from 3.50 to 1.00 to 4.00 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 non-cash goodwill impairment charges, share-based compensation costs, certain non-cash restructuring charges, pro forma historical EBITDA for businesses acquired, and other specified items in accordance with the Amended Credit Agreement. At September 30, 2018, 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 10.57 to 1.00.
Borrowings outstanding under the Amended Credit Agreement at September 30, 2018 totaled $71.5 million. These borrowings carried a weighted average interest rate of 4.2%, including the effect of the interest rate swap described in Note 10 “Derivative Instruments and Hedging Activity." Borrowings outstanding under the Amended Credit Agreement at December 31, 2017 were $105.0 million and carried a weighted average interest rate of 3.7%, including the effect of the interest rate swap described in Note 10 “Derivative Instrument and Hedging Activity." The borrowing capacity under the revolving credit facility is reduced by any outstanding borrowings under the revolving credit facility and outstanding letters of credit. At September 30, 2018, we had outstanding letters of credit totaling $1.6 million, which are primarily used as security deposits for our office facilities. As of September 30, 2018, the unused borrowing capacity under the revolving credit facility was $426.9 million.
Promissory Note due 2024
On June 30, 2017, in conjunction with our purchase of an aircraft related to the acquisition of Innosight, we assumed, from the sellers of the aircraft, a promissory note with an outstanding principal balance of $5.1 million. The principal balance of the promissory note is subject to scheduled monthly principal payments until the maturity date of March 1, 2024, at which time a final payment of $1.5 million, plus any accrued and unpaid interest, will be due. Under the terms of the promissory note, we will pay interest on the outstanding principal amount at a rate of one-month LIBOR plus 1.97% per annum. The obligations under the promissory note are secured pursuant to a Loan and Aircraft Security Agreement with Banc of America Leasing & Capital, LLC, which grants the lender a first priority security interest in the aircraft. At September 30, 2018, the outstanding principal amount of the promissory note was $4.5 million. As of September 30, 2018, the aircraft had a carrying amount of $5.9 million. At December 31, 2017, the outstanding principal amount of the promissory note was $4.9 million, and the aircraft had a carrying amount of $6.5 million.
9. Restructuring Charges
Restructuring charges netted to an immaterial amount for the three months ended September 30, 2018 and were $2.7 million for the nine months ended September 30, 2018. The restructuring charges incurred in the third quarter of 2018 consisted of a $0.4 million accrual related to employee costs in our Healthcare segment, offset by a $0.3 million decrease in the accrual for remaining lease obligations, net of

18

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

estimated sublease income, as a result of updated lease assumptions for our San Francisco office vacated in the third quarter of 2017 and a $0.2 million decrease in the accrual related to workforce reductions in our Business Advisory segment recorded in the second quarter of 2018. The $2.7 million of restructuring charges incurred in the first nine months of 2018 primarily consisted of $0.7 million related to the accrual of remaining lease payments, net of estimated sublease income, and accelerated depreciation on leasehold improvements due to exiting a portion of our Middleton, Wisconsin office in the second quarter of 2018; $0.7 million and $0.5 million related to workforce reductions in our Healthcare segment and our Business Advisory segment, respectively, to better align resources with market demand; $0.3 million related to updated lease assumptions for our San Francisco office vacated in the third quarter of 2017; and $0.3 million related to the divestiture of our Middle East practice within the Business Advisory segment in the second quarter of 2018. During the second quarter of 2018, we sold our Middle East practice to a former employee who was the practice leader of that business at the time and we recorded a $5.9 million loss which is included in other income (expense), net in our consolidated statements of operations.
Restructuring charges for the three and nine months ended September 30, 2017 totaled $1.3 million and $5.3 million, respectively. The $1.3 million charge incurred in the third quarter of 2017 primarily related to the accrual of remaining lease obligations, net of estimated sublease income, due to relocating our San Francisco office to a smaller space and consolidating our New York offices in the third quarter of 2017, and accelerated depreciation on leasehold improvements for our San Francisco office. The $5.3 million of restructuring charges incurred in the first nine months of 2017 primarily consisted of $2.5 million related to the accrual of remaining lease obligations, net of estimated sublease income, due to relocating our San Francisco office to a smaller space and consolidating our Chicago and New York offices in the first nine months of 2017 and accelerated depreciation on leasehold improvements for our San Francisco office; $2.0 million related to workforce reductions in our Healthcare segment to better align our resources with market demand; and $0.4 million related to workforce reductions in our corporate operations primarily to adjust our infrastructure to align with the decreased workforce in the Healthcare segment.
The table below sets forth the changes in the carrying amount of our restructuring charge liability by restructuring type for the nine months ended September 30, 2018.
 
Employee Costs
 
Office Space Reductions
 
Other
 
Total
Balance as of December 31, 2017
$
1,267

 
$
4,247

 
$

 
$
5,514

Additions
1,259

 
896

 
151

 
2,306

Payments
(1,861
)
 
(2,710
)
 
(152
)
 
(4,723
)
Adjustments (1)
(47
)
 
833

 

 
786

Non-cash items

 
(325
)
 
1

 
(324
)
Balance as of September 30, 2018
$
618

 
$
2,941

 
$

 
$
3,559

(1)
Adjustments for the nine months ended September 30, 2018 includes restructuring charges of $0.4 million related to updated lease assumptions for vacated office spaces directly related to discontinued operations.
As of September 30, 2018, our restructuring charge liability related to office space reductions of $2.9 million represented the present value of remaining lease payments, net of estimated sublease income, primarily for our vacated office spaces in Washington, D.C., Chicago, Houston, San Francisco, and Middleton, Wisconsin. This restructuring charge liability is included as a component of accrued expenses and other current liabilities and deferred compensation and other liabilities. All of the $0.6 million restructuring charge liability related to employee costs at September 30, 2018 is expected to be paid in the next 12 months. The restructuring charge liability related to employee costs is included as a component of accrued payroll and related benefits.
10. Derivative Instrument and Hedging Activity
On June 22, 2017, we entered into a forward interest rate swap agreement effective August 31, 2017 and ending August 31, 2022, with a notional amount of $50.0 million. We entered into this derivative instrument to hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and we pay to the counterparty a fixed rate of 1.900%.
We recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. We have designated this derivative instrument as a cash flow hedge. Therefore, changes in the fair value of the derivative instrument are recorded to other comprehensive income (“OCI”) and reclassified into interest expense upon settlement. As of September 30, 2018, it was anticipated that $0.3 million of the gains, net of tax, currently recorded in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

19

Table of Contents

HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

The table below sets forth additional information relating to the interest rate swap designated as a cash flow hedging instrument as of September 30, 2018 and December 31, 2017.
 
 
Fair Value (Derivative Asset and Liability)
Balance Sheet Location
 
September 30,
2018
 
December 31,
2017
Prepaid expenses and other current assets
 
$
341

 
$

Other non-current assets
 
$
1,301

 
$
581

Accrued expenses
 
$

 
$
48

All of our derivative instruments are transacted under the International Swaps and Derivatives Association (ISDA) master agreements. These agreements permit the net settlement of amounts owed in the event of default and certain other termination events. Although netting is permitted, it is our policy to record all derivative assets and liabilities on a gross basis on our consolidated balance sheet.
We do not use derivative instruments for trading or other speculative purposes. Refer to Note 12 “Other Comprehensive Income (Loss)” for additional information on our derivative instrument.
11. 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.

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Table of Contents

HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

The table below sets forth our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017.
 
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2018
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Interest rate swap
 
$

 
$
1,642

 
$

 
$
1,642

Convertible debt investment
 

 

 
45,948

 
45,948

Deferred compensation assets
 

 
20,352

 

 
20,352

Total assets
 
$

 
$
21,994

 
$
45,948

 
$
67,942

Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration for business acquisitions
 
$

 
$

 
$
12,889

 
$
12,889

Total liabilities
 
$

 
$

 
$
12,889

 
$
12,889

December 31, 2017
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Interest rate swap
 
$

 
$
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

Interest rate swaps: The fair value of our interest rate swap was derived using estimates to settle the interest rate swap agreement, which is based on the net present value of expected future cash flows on each leg of the swap utilizing market-based inputs and a discount rate 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 promissory note with an initial principal amount of $3.5 million payable over four years. During the fourth quarter of 2017, we amended and restated the note which established 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. As of December 31, 2017, the outstanding principal balance was $1.0 million. During the first six months of 2018, we received payments for all of the outstanding principal balance and all accrued interest. Prior to the final payment, the fair value of the note was based on the net present value of the projected cash flows using a discount rate of 10%, which accounted for the risks associated with the amended note. This fair value measurement was based on significant inputs not observable in the market and thus represent Level 3 inputs.
The table below sets forth the changes in the balance of the promissory note for the nine months ended September 30, 2018.
 
 
Promissory Note
Balance as of December 31, 2017
 
$
1,078

Interest payments received
 
(81
)
Principal payments received
 
(1,040
)
Change in fair value of promissory note
 
43

Balance as of September 30, 2018
 
$

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

21

Table of Contents

HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

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 convertible debt investment is carried at fair value with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income. We estimate the fair value of our investment using a 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 on our consolidated balance sheets.
The table below sets forth the changes in the balance of the convertible debt investment for the nine months ended September 30, 2018.
 
 
Convertible Debt Investment
Balance as of December 31, 2017
 
$
39,904

Change in fair value of convertible debt investment
 
6,044

Balance as of September 30, 2018
 
$
45,948

Deferred compensation assets: We have a non-qualified deferred compensation plan (the "Plan") for the members of our board of directors and a select group of our employees. The deferred compensation liability is funded by the Plan assets, which consist of life insurance policies maintained within a trust. The cash surrender value of the life insurance policies approximates fair value and is based on third-party broker statements which provide the fair value of the life insurance policies' underlying investments, which are Level 2 inputs. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The Plan assets are included in other non-current assets on our consolidated balance sheets. Realized and unrealized gains (losses) from the deferred compensation assets are recorded to other income (expense), net in our consolidated statements of operations.
Contingent consideration for business acquisitions: We estimate the fair value of acquisition-related contingent consideration using either a probability-weighted assessment of the specific financial performance targets being achieved or a Monte Carlo simulation model, as appropriate. These fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 inputs. The significant unobservable inputs used in the fair value measurements of our contingent consideration are our measures of the estimated payouts based on internally generated financial projections on a probability-weighted basis and discount rates, which typically reflect a risk-free rate. The fair value of the contingent consideration is reassessed quarterly based on assumptions used in our latest projections and input provided by practice leaders and management. Any change in the fair value estimate is recorded in our consolidated statement of operations for that period. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of our contingent consideration liability, which would result in different impacts to our consolidated balance sheets and consolidated statements of operations. Actual results may differ from our estimates. The table below sets forth the changes in the balance of the contingent consideration for business acquisitions for the nine months ended September 30, 2018.
 
 
Contingent Consideration for Business Acquisitions
Balance as of December 31, 2017
 
$
22,828

Payments
 
(7,750
)
Remeasurement of contingent consideration for business acquisitions
 
(2,463
)
Acquisition
 
212

Unrealized loss due to foreign currency translation
 
62

Balance as of September 30, 2018
 
$
12,889

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 8 “Financing Arrangements” for additional information on our senior secured credit facility.

22

Table of Contents

HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

Promissory Note due 2024
The carrying value of our promissory note due 2024 is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the promissory note bears interest at rates based on current market rates as set forth in the terms of the promissory note. Refer to Note 8 “Financing Arrangements” for additional information on our promissory note due 2024.
Convertible Notes
The carrying amount and estimated fair value of the Convertible Notes are as follows: 
 
September 30, 2018
 
December 31, 2017
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
1.25% convertible senior notes due 2019
$
240,209

 
$
241,650

 
$
233,140

 
$
232,578

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 September 30, 2018 and December 31, 2017, the carrying value of the equity component of $39.3 million was unchanged from the date of issuance. Refer to Note 8 “Financing Arrangements” for additional information on our Convertible Notes. The estimated fair value of the Convertible Notes was determined based on the quoted bid price of the Convertible Notes in an over-the-counter market, which is a Level 2 input, on the last day of trading for the quarters ended September 30, 2018 and December 31, 2017.
Based on the closing price of our common stock of $49.40 on September 30, 2018, 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.
12. Other Comprehensive Income (Loss)
The tables below set forth the components of other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2018 and 2017.
 
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
 
Before
Taxes
 
Tax
(Expense)
Benefit
 
Net of
Taxes
 
Before
Taxes
 
Tax
(Expense)
Benefit
 
Net of
Taxes
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(579
)
 
$

 
$
(579
)
 
$
609

 
$

 
$
609

Unrealized loss on investment
$
(1,151
)
 
$
299

 
$
(852
)
 
$
(3,609
)
 
$
1,409

 
$
(2,200
)
Unrealized gain on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Change in fair value
$
301

 
$
(78
)
 
$
223

 
$
41

 
$
(16
)
 
$
25

Reclassification adjustments into earnings
(23
)
 
6

 
(17
)
 
(3
)
 
1

 
(2
)
Net unrealized gain
$
278

 
$
(72
)
 
$
206

 
$
38

 
$
(15
)
 
$
23

Other comprehensive loss
$
(1,452
)
 
$
227

 
$
(1,225
)
 
$
(2,962
)
 
$
1,394

 
$
(1,568
)

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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
 
Before
Taxes
 
Tax
(Expense)
Benefit
 
Net of
Taxes
 
Before
Taxes
 
Tax
(Expense)
Benefit
 
Net of
Taxes
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(1,499
)
 
$

 
$
(1,499
)
 
$
1,835

 
$

 
$
1,835

Unrealized gain (loss) on investment
$
6,044

 
$
(1,571
)
 
$
4,473

 
$
(2,738
)
 
$
1,069

 
$
(1,669
)
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Change in fair value
$
1,096

 
$
(285
)
 
$
811

 
$
(41
)
 
$
16

 
$
(25
)
Reclassification adjustments into earnings
13

 
(3
)
 
10

 
36

 
(15
)
 
21

Net unrealized gain (loss)
$
1,109

 
$
(288
)
 
$
821

 
$
(5
)
 
$
1

 
$
(4
)
Other comprehensive income (loss)
$
5,654

 
$
(1,859
)
 
$
3,795

 
$
(908
)
 
$
1,070

 
$
162

The before tax amounts reclassified from accumulated other comprehensive income related to our cash flow hedges are recorded to interest expense, net of interest income.
Accumulated other comprehensive income, net of tax, includes the following components: 
 
Foreign Currency
Translation
 
Available-for-Sale Investment
 
Cash Flow Hedges
 
Total
Balance, December 31, 2017
$
1,149

 
$
8,812

 
$
409