UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission file number: 000-50976
(Exact name of registrant as specified in its charter)
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(Address of principal executive offices and zip code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
☒ | Accelerated Filer | ☐ | Non-accelerated Filer | ☐ | Smaller Reporting Company | Emerging Growth Company | |||
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 Act). Yes ☐ No x
The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $1,128,100,000 .
As of February 18, 2020, 22,509,235 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.
Documents Incorporated By Reference
Portions of the registrant’s definitive Proxy Statement to be filed with Securities and Exchange Commission within 120 days after the end of its fiscal year are incorporated by reference into Part III.
HURON CONSULTING GROUP INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
In this Annual Report on Form 10-K, unless the context otherwise requires, the terms “Huron,” “Company,” “we,” “us” and “our” refer to Huron Consulting Group Inc. and its subsidiaries.
Statements in this Annual Report on Form 10-K that are not historical in nature, including those concerning the Company’s current expectations about its future requirements and needs, are “forward-looking” statements as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as “may,” “should,” “expects,” “provides,” “anticipates,” “assumes,” “can,” “will,” “meets,” “could,” “likely,” “intends,” “might,” “predicts,” “seeks,” “would,” “believes,” “estimates,” “plans,” “continues,” “guidance,” or “outlook,” or similar expressions. These forward-looking statements reflect our current expectations about our future requirements and needs, results, levels of activity, performance, or achievements. Some of the factors that could cause actual results to differ materially from the forward-looking statements contained herein include, without limitation: failure to achieve expected utilization rates, billing rates, and the number of revenue-generating professionals; inability to expand or adjust our service offerings in response to market demands; our dependence on renewal of client-based services; dependence on new business and retention of current clients and qualified personnel; failure to maintain third-party provider relationships and strategic alliances; inability to license technology to and from third parties; the impairment of goodwill; various factors related to income and other taxes; difficulties in successfully integrating the businesses we acquire and achieving expected benefits from such acquisitions; risks relating to privacy, information security, and related laws and standards; and a general downturn in market conditions. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, among others, those described under Item 1A. "Risk Factors," that may cause actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. We disclaim any obligation to update or revise any forward-looking statements as a result of new information or future events, or for any other reason.
PART I
ITEM 1. | BUSINESS. |
OVERVIEW
Huron is a global consultancy that collaborates with clients to drive strategic growth, ignite innovation and navigate constant change. Through a combination of strategy, expertise and creativity, we help clients accelerate operational, digital and cultural transformation, enabling the change they need to own their future. By embracing diverse perspectives, encouraging new ideas and challenging the status quo, we create sustainable results for the organizations we serve.
We are headquartered in Chicago, Illinois, with additional locations in the United States and abroad in Canada, India, Singapore, Switzerland, and the United Kingdom.
OUR SERVICES
We provide professional services through three operating segments: Healthcare, Business Advisory, and Education. For the year ended December 31, 2019, we derived 46%, 29%, and 25% of our revenues from the Healthcare, Business Advisory, and Education operating segments, respectively.
• | Healthcare |
Our Healthcare segment has a depth of expertise in financial and operational improvement, care transformation, culture and organizational excellence, strategy, and technology and analytics. We serve national and regional hospitals, integrated health systems, academic medical centers, community hospitals, and medical groups. Our solutions help clients evolve and adapt to the rapidly changing healthcare environment and achieve growth, optimize performance, enhance profitability, improve quality and clinical outcomes, align leaders, improve organizational culture, and drive physician, patient, and employee engagement across the enterprise to deliver better consumer outcomes.
We help organizations transform and innovate their delivery model to focus on patient wellness by improving quality outcomes, minimizing care variation and fundamentally improving patient and population health. Our consultants collaborate with clients to help build and sustain today’s business to invest in the future by reducing complexity, improving operational efficiency and growing market share. We enable the healthcare of the future by identifying, integrating and optimizing digital and technology investments to collect data that transforms care delivery and improves patient outcomes. We also develop future leaders capable of driving meaningful cultural and organizational change and who transform the consumer experience.
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• | Business Advisory |
Our Business Advisory segment provides services to large and middle market organizations, lending institutions, law firms, investment banks, private equity firms, and not-for-profit organizations, including higher education and healthcare institutions. We assist clients in a broad range of industries and across the spectrum from healthy, well-capitalized companies to organizations in transition, as well as creditors, equity owners, and other key constituents. Our Enterprise Solutions and Analytics experts advise, deliver, and optimize technology and analytic solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our Business Advisory experts resolve complex business issues and enhance client enterprise value through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. Our Strategy and Innovation professionals collaborate with clients across a range of industries to identify new growth opportunities, build new ventures and capabilities, and accelerate organizational change. Our Life Sciences professionals provide strategic solutions to help pharmaceutical, medical device, and biotechnology companies deliver more value to patients, payers, and providers, and comply with regulations.
• | Education |
Our Education segment provides consulting and technology solutions to higher education institutions and academic medical centers. We collaborate with clients to address challenges relating to business and technology strategy, financial and operational excellence, student success, research administration, and regulatory compliance. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance. Our technology strategy, enterprise applications, and analytic solutions transform and optimize operations, deliver time and cost savings, and enhance the student experience. Our institutional strategy, budgeting and financial management, and business operations align missions with business priorities, improve quality, and reduce costs institution-wide. Our student solutions improve attraction, retention and graduation rates, increase student satisfaction and help generate quality outcomes.
Huron is a Platinum level member of the Oracle PartnerNetwork (OPN), an Oracle Cloud Premier Partner within North America, a Gold level consulting partner with Salesforce.com and a Workday Services Partner.
OUR CLIENTS AND INDUSTRIES
We provide professional services to both financially sound organizations and organizations in transition, including: national and regional hospitals, integrated health systems, higher education institutions and academic medical centers, community hospitals, medical groups, large and middle market organizations, not-for-profit organizations, lending institutions, law firms, investment banks and private equity firms. In 2019, we served over 1,800 clients.
Our clients are in a broad array of industries, including healthcare, education, financial services, life sciences, energy and utilities, manufacturing and industrials, government and other commercial industries.
EMPLOYEES
Our success depends on our ability to attract, engage, develop and retain highly talented professionals. We know that by creating a work environment where employees can shape their futures, and individuals are rewarded not only for their own contributions, but also for the success of our organization, we can accomplish these goals. We are focused on advancing every facet of the employee experience, beginning with the recruiting process through post-employment or retirement. We create a personalized experience for our people, where they are empowered to make a meaningful impact on our clients, our communities, and with one another. We have developed comprehensive programs incorporating learning opportunities, beginning with the onboarding process and continuing throughout one’s career journey. We provide a competitive total rewards package including robust benefits that are tailored to the diverse needs of our employees and are refreshed regularly to maintain competitiveness. Our commitment to corporate social responsibility is facilitated through our employee and community experience team and encompasses our Helping Hands program, diversity and inclusion efforts, and a renewed focus on sustainability.
Our employee population is divided into two groups: client-serving and support professionals. As of December 31, 2019, we had 3,750 full-time employees, including 153 client-serving managing directors. Our client-serving employees serve as critical business advisors; collaborating with clients to help solve their most complex business problems. Our managing directors are the key drivers of growth in our business, generating new revenue streams from existing and new clients. They enhance our market reputation by partnering with clients as advisors and engagement team leaders. Internally, they create our intellectual capital, develop our people, and are stewards of our culture. Our senior directors, directors, and managers manage day-to-day client relationships, develop our people, nurture our culture, and oversee the delivery and quality of our work product. Our associates and analysts gather and organize data, conduct detailed analyses, and prepare presentations that synthesize and distill information to support recommendations we deliver to clients. Our support professionals include our senior management team as well as those who provide sales support, methodology creation, software development, and corporate functions
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consisting of our facilities, finance and accounting, human resources, information technology, legal, and marketing teams. These employees provide strategic direction and support that enables the success of our client-serving employees. At December 31, 2019, our support professionals team was led by 24 managing directors, executives and corporate vice presidents.
In addition to our full-time client-serving employees, we engage temporary employees on an as-needed basis to provide unique skill sets that are not required to be staffed on a full-time basis.
The ability to advance one’s career is critical to our employee retention and engagement. As part of our onboarding process, our employee experience team facilitates a robust and structured curriculum for newly hired employees to develop and onboard into the company. We strive to develop world class leaders and are committed to providing programs and opportunities that achieve this goal by focusing on key leadership attributes at all levels. We also provide a variety of learning opportunities, through online and classroom environments, to further develop employees’ capabilities, including technical knowledge; people skills; team dynamics; and coaching and developing others. We encourage our employees to enhance their professional skills through external learning opportunities that certify their technical skills and to pursue certain advanced degrees. Employees are matched with internal performance coaches and mentors to facilitate their growth, including identifying opportunities for professional development, formal training, and technical skill certifications. All employees have a coach to support them.
Our total rewards philosophy focuses on rewarding and retaining our high performing employees. To accomplish this, we offer employees a competitive base salary; performance incentives; and robust, market-competitive benefits.
Our incentive compensation plan is designed to recognize and reward performance of both the organization and individuals and to ensure we retain our top performers. We take both practice and company financial performance into consideration in the determination of bonus pool funding. At the practice level, the annual bonus pool is funded based on achievement of its annual financial goals. Our board of directors reviews and approves the total incentive compensation pool for all practices in the context of the Company’s overall financial performance. Individual bonus awards are based on the practice’s financial performance, individual bonus targets, and the individual’s performance as evaluated through our performance management process. The intent of the incentive compensation plan is to differentiate rewards based on individual performance, ensuring that our top performers for the year receive incentives that are commensurate with their contributions, which enables Huron to retain them and continue to provide our clients with exceptional service. The incentive compensation plan for our named executive officers is funded based on a blend of achievement of financial goals and strategic initiatives.
Managing directors’ individual compensation levels, including base salary and target incentive awards, are set to align with the value of their expected contributions to the organization, including collaboration across practices. As the key drivers of the organization’s success, their compensation is designed to include equity awards as a core component. The use of equity is intended to encourage retention, align the interests of our managing directors with shareholders, and help build wealth over a managing director's career at Huron through annual grants as well as stock price appreciation.
Our benefit programs are designed to be comprehensive, competitive and personalized to the needs of our employees. Examples of these programs include flexible paid time off and a travel reward program which recognizes the significant travel commitment of our client-serving workforce. We provide opportunities that allow employees to focus and care for their personal well-being which are aimed at providing tools and resources to focus on their physical, financial, social, and emotional health given the demanding nature of their work. In addition, our health and welfare plans, retirement benefits, and stock purchase plan provide a core foundation of security to our employees and their families.
Our corporate social responsibility efforts are designed to support an individual’s charitable interests while also providing a venue for our employees to come together to make an impact in the communities in which we live and work. In addition, the diversity and inclusion efforts support the needs of our growing employee population through employee resource groups that provide corporate-wide educational opportunities, build awareness, celebrate our differences, develop mentoring relationships, and ensure we are fostering a welcoming and engaging environment for all employees.
BUSINESS DEVELOPMENT AND MARKETING
Our business development and marketing activities are aimed at cultivating relationships, generating leads, and building a strong brand reputation with health systems, hospitals, and university administrators; offices of the C-suite; and senior level influencers and decision makers of middle market and large corporate organizations. We believe excellent service delivery to clients is critical to building and maintaining relationships and our brand reputation, and we emphasize the importance of client service to all of our employees.
Currently, we generate new business opportunities through the combination of relationships our managing directors have with individuals working in healthcare organizations, academic and research institutions, and corporations, and marketing lead generation activities. We also view market-based collaboration between our managing directors as a key component in building our business. Often, the client relationship of a managing director in one area of our business leads to opportunities in another area. All of our managing directors understand their roles in ongoing relationship and business development, which is reinforced through our compensation and incentive programs. We actively seek
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to identify new business opportunities and frequently receive referrals and repeat business from past and current clients. In addition, to complement the business development efforts of our managing directors, we have dedicated business development professionals who are focused exclusively on developing client relationships and generating new business.
COMPETITION
The professional services industry is extremely competitive, highly fragmented, and constantly evolving. The industry includes a large number of participants with a variety of skills and industry expertise, including other strategy, business operations, technology, and financial consulting firms; general management consulting firms; the consulting practices of major accounting firms; technical and economic advisory firms; regional and specialty consulting firms; and the internal professional resources of organizations. We compete with a large number of service and technology providers in all of our segments. Our competitors vary, depending on the particular practice area, and we expect to continue to face competition from new market entrants.
We believe the principal competitive factors in our market include reputation, the ability to attract and retain top talent, the capacity to manage engagements effectively to drive high value to clients, and the ability to deliver measurable and sustainable results. There is also competition on price, although to a lesser extent due to the criticality of the issues that many of our services address. Some competitors have a greater geographic footprint, broader international presence, and more resources than we do, but we believe our reputation and ability to deliver high-value, quality service and measurable results to our clients across a balanced portfolio of services and attract and retain employees with broad capabilities and deep industry expertise enable us to compete favorably in the professional services marketplace.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements, and other information with the Securities and Exchange Commission (the “SEC”). These filings are available on the SEC’s website at http://www.sec.gov.
Our website is located at www.huronconsultinggroup.com, and our investor relations website is located at ir.huronconsultinggroup.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 available through our website, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
We provide information about our business and financial performance, including our corporate profile, on the Investor Relations page of our website. Additionally, we webcast our earnings calls and certain events we participate in with members of the investment community on the Investor Relations page of our website. Further corporate governance information, including our code of ethics, code of business conduct, corporate governance guidelines, and board committee charters, is also available on the Investor Relations page of our website. The content of our websites is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
ITEM 1A. | RISK FACTORS. |
The following discussion of risk factors may be important to understanding the statements in this Annual Report on Form 10-K or elsewhere. The following information should be read in conjunction with Part II—Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes in this Annual Report on Form 10-K. Discussions about the important operational risks that our business encounters can be found in Part II—Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
An inability to retain our senior management team and other managing directors would be detrimental to the success of our business.
We rely heavily on our senior management team, our practice leaders, and other managing directors; our ability to retain them is particularly important to our future success. Given the highly specialized nature of our services, the senior management team must have a thorough understanding of our service offerings as well as the skills and experience necessary to manage an organization consisting of a diverse group of professionals. In addition, we rely on our senior management team and other managing directors to generate and market our business. Further, our senior management’s and other managing directors’ personal reputations and relationships with our clients are a critical element in obtaining and maintaining client engagements. Members of our senior management team and our other managing directors could choose to leave or join one of our competitors and some of our clients could choose to use the services of that competitor instead of our services. If one or more members of our senior management team or our other managing directors leave and we cannot replace them with a suitable candidate quickly, we could experience difficulty in securing and successfully completing engagements and managing our business properly, which could harm our business prospects and results of operations.
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Our inability to hire and retain talented people in an industry where there is great competition for talent could have a serious negative effect on our prospects and results of operations.
Our business involves the delivery of professional services and is highly labor-intensive. Our success depends largely on our general ability to attract, develop, motivate, and retain highly skilled professionals. Further, we must successfully maintain the right mix of professionals with relevant experience and skill sets as we continue to grow, as we expand into new service offerings, and as the market evolves. The loss of a significant number of our professionals, the inability to attract, hire, develop, train, and retain additional skilled personnel, or failure to maintain the right mix of professionals could have a serious negative effect on us, including our ability to manage, staff, and successfully complete our existing engagements and obtain new engagements. Qualified professionals are in great demand, and we face significant competition for both senior and junior professionals with the requisite credentials and experience. Our principal competition for talent comes from other consulting firms and accounting firms, as well as from organizations seeking to staff their internal professional positions. Many of these competitors may be able to offer greater compensation and benefits or more attractive lifestyle choices, career paths, or geographic locations than we do. Therefore, we may not be successful in attracting and retaining the skilled consultants we require to conduct and expand our operations successfully. Increasing competition for these revenue-generating professionals may also significantly increase our labor costs, which could negatively affect our margins and results of operations.
Changes in capital markets, legal or regulatory requirements, and general economic or other factors beyond our control could reduce demand for our services, in which case our revenues and profitability could decline.
A number of factors outside of our control affect demand for our services. These include:
• | fluctuations in U.S. and global economies; |
• | the U.S. or global financial markets and the availability, costs, and terms of credit; |
• | changes in laws and regulations; and |
• | other economic factors and general business conditions. |
For example, some portion of the services we provide may be considered by our clients to be more discretionary in nature, as the demand for the services may be impacted by economic slowdowns. We are not able to predict the positive or negative effects that future events or changes to the U.S. or global economy, financial markets, or regulatory and business environment could have on our operations.
Our goodwill and other intangible assets represent a substantial amount of our total assets, and we may be required to recognize a non-cash impairment charge for these assets if the performance of one or more of our reporting units falls below our expectations.
Our total assets reflect a substantial amount of intangible assets, primarily goodwill. At December 31, 2019, goodwill and other intangible assets totaled $678.3 million, or 61%, of our total assets. Goodwill results from our acquisitions, representing the excess of the fair value of consideration transferred over the fair value of the net assets acquired. We test goodwill for impairment at the reporting unit level, annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. Intangible assets other than goodwill represent purchased assets that lack physical substance but can be distinguished from goodwill. Our intangible assets primarily consist of customer relationships, trade names, customer contracts, technology and software, and non-competition agreements, all of which were acquired through business combinations. We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. No material impairment charges for intangible assets were recorded in 2019, 2018, and 2017. During the years ended 2019 and 2018, we did not record any non-cash goodwill impairment charges. During 2017, we recorded $253.1 million of non-cash goodwill impairment charges. Of the $253.1 million, $208.1 million related to our Healthcare reporting unit and $45.0 million related to our Enterprise Solutions and Analytics reporting unit which is included in our Business Advisory segment.
Determining the fair value of a reporting unit requires us to make significant judgments, estimates, and assumptions. While we believe that the estimates and assumptions underlying our valuation methodology are reasonable, these estimates and assumptions could have a significant impact on whether or not a non-cash goodwill impairment charge is recognized and also the magnitude of any such charge. The results of an impairment analysis are as of a point in time. There is no assurance that the actual future earnings or cash flows of our reporting units will be consistent with our projections. We will monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods. Any significant decline in our operations could result in additional non-cash goodwill impairment charges.
Refer to “Critical Accounting Policies” within Part I - Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 4 “Goodwill and Intangible Assets” within the notes to our consolidated financial statements for further discussion of our business combinations, goodwill, intangible assets, and impairment tests performed.
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We may incur costs to support our business and the inability to effectively build a support structure for the business could have an adverse impact on our growth and profitability.
We have grown significantly since we commenced operations and have increased the number of our full-time professionals from 249 in 2002 to 3,750 as of December 31, 2019. Additionally, our considerable growth has placed demands on our management and our internal systems, procedures, and controls and will continue to do so in the near future. To successfully manage growth, we must periodically adjust and strengthen our operating, financial, accounting, and other systems, procedures, and controls, which may increase our total costs and may adversely affect our gross profits and our ability to sustain profitability if we do not generate increased revenues to offset the costs. As a public company, our information and control systems must enable us to prepare accurate and timely financial information and other required disclosures. If we discover deficiencies in our existing information and control systems that impede our ability to satisfy our reporting requirements, we must successfully implement improvements to those systems in an efficient and timely manner.
In the fourth quarter of 2019, we committed to the implementation of a new enterprise resource planning (“ERP”) system designed to improve the efficiency of our internal operational, financial and administrative activities. The implementation of a new ERP system, which will take place over several years, subjects us to inherent costs and risks including substantial capital expenditures, additional administration and operating expenses, potential disruption of our internal control structure, retention of sufficiently skilled personnel to implement and operate the new system, demand on management time, and other risks and costs of delays or difficulties in transition. Our system implementation may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing a new ERP system may cause disruptions or have an adverse effect on our business operations, if not anticipated and appropriately mitigated.
Our financial results could suffer if we are unable to achieve or maintain adequate utilization and suitable billing rates for our consultants, or if we are unable to deliver our services due to factors that disrupt travel to our client sites.
Our profitability depends to a large extent on the utilization and billing rates of our professionals. Utilization of our professionals is affected by a number of factors, including:
• | the number and size of client engagements; |
• | the timing of the commencement, completion and termination of engagements, which in many cases is unpredictable; |
• | our ability to transition our consultants efficiently from completed engagements to new engagements; |
• | the hiring of additional consultants because there is generally a transition period for new consultants that results in a temporary drop in our utilization rate; |
• | unanticipated changes in the scope of client engagements; |
• | our ability to forecast demand for our services and thereby maintain an appropriate level of consultants; and |
• | conditions affecting the industries in which we practice as well as general economic conditions. |
The billing rates of our consultants that we are able to charge are also affected by a number of factors, including:
• | our clients’ perception of our ability to add value through our services; |
• | the market demand for the services we provide; |
• | an increase in the number of engagements in the government sector, which are subject to federal contracting regulations; |
• | introduction of new services by us or our competitors; |
• | our competition and the pricing policies of our competitors; and |
• | current economic conditions. |
If we are unable to achieve and maintain adequate overall utilization as well as maintain or increase the billing rates for our consultants, our financial results could materially suffer. In addition, our consultants oftentimes perform services at the physical locations of our clients. If there are natural disasters, widespread outbreak of contagious disease, disruptions to travel and transportation, or problems with communications systems, our ability to perform services for, and interact with, our clients at their physical locations may be negatively impacted which could have an adverse effect on our business and results of operations.
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Expanding our service offerings or number of offices may add additional risks and may not be profitable.
We may choose to develop new service offerings, open new offices, or eliminate service offerings because of market opportunities or client demands. Developing new service offerings involves inherent risks, including:
• | our inability to estimate demand for the new service offerings; |
• | competition from more established market participants; |
• | exposure to new legal and operational risks; |
• | a lack of market understanding; |
• | unanticipated expenses to recruit and hire qualified consultants and to market our new service offerings; and |
• | unanticipated challenges with service delivery. |
For example, our recently launched Huron Managed Services business provides revenue cycle management services to hospitals and health systems. These services include the coding, preparation, submission and collection of claims for medical service to payers for reimbursement. Such claims are governed by U.S. federal and state laws. U.S. federal law provides civil liability to any persons that knowingly submit, or cause to be submitted, a claim to a payer, including Medicare, Medicaid and private health plans, seeking payment for any services or items that overbills or bills for services or items that have not been provided to the patient. U.S. federal law may also impose criminal penalties for intentionally submitting such false claims. In addition, federal and state law regulates the collection of debt and may impose monetary penalties for violating those regulations. In connection with these laws, we may be subjected to U.S. federal or state government investigations and possible penalties may be imposed upon us, false claims actions may have to be defended and private payers may file claims against us. Any investigation or proceeding related to these laws, even if unwarranted or without merit, may have a material adverse effect on our business, results of operations and financial condition.
In addition, expanding into new geographic areas and expanding current service offerings is challenging and may require integrating new employees into our culture as well as assessing the demand in the applicable market. If we cannot manage the risks associated with new service offerings or new locations effectively, we are unlikely to be successful in these efforts, which could harm our ability to sustain profitability and our business prospects.
Our quarterly results of operations have fluctuated in the past and may continue to fluctuate in the future as a result of certain factors, some of which may be outside of our control.
A key element of our strategy is to market our products and services directly to certain large organizations, such as health systems and acute care hospitals, and to increase the number of our products and services utilized by existing clients. The sales cycle for some of our products and services is often lengthy and may involve significant commitment of client personnel. As a consequence, the commencement date of a client engagement often cannot be accurately forecasted. As discussed below, certain of our client contracts contain terms that result in revenue that is deferred and cannot be recognized until the occurrence of certain events. As a result, the period of time between contract signing and recognition of associated revenue may be lengthy, and we are not able to predict with certainty the period in which revenue will be recognized.
Fee discounts, pressure to not increase or even decrease our rates, and less advantageous contract terms could result in the loss of clients, lower revenues and operating income, higher costs, and less profitable engagements. More discounts or write-offs than we expect in any period would have a negative impact on our results of operations.
Other fluctuations in our quarterly results of operations may be due to a number of other factors, some of which are not within our control, including:
• | the timing and volume of client invoices processed and payments received, which may affect the fees payable to us under certain of our engagements; |
• | client decisions regarding renewal or termination of their contracts; |
• | the amount and timing of costs related to the development or acquisition of technologies or businesses; and |
• | unforeseen legal expenses, including litigation and other settlement gains or losses. |
We base our annual employee bonus expense upon our expected annual adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for that year. If we experience lower adjusted EBITDA in a quarter without a corresponding change to our full-year adjusted EBITDA expectation, our estimated bonus expense will not be reduced, which will have a negative impact on our quarterly results of
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operations for that quarter. Our quarterly results of operations may vary significantly and period-to-period comparisons of our results of operations may not be meaningful. The results of one quarter should not be relied upon as an indication of future performance. If our quarterly results of operations fall below the expectations of securities analysts or investors, the price of our common stock could decline substantially.
Revenues from our performance-based engagements are difficult to predict, and the timing and extent of recovery of our costs is uncertain.
We have engagement agreements under which our fees include a significant performance-based component. Performance-based fees are contingent on the achievement of specific measures, such as our clients meeting cost-saving or other contractually-defined goals. The achievement of these contractually-defined goals may be subject to acknowledgment by the client and is often impacted by factors outside of our control, such as the actions of the client or other third parties. To the extent that any revenue is contingent upon the achievement of a performance target, we recognize such revenue using a process that requires us to make significant management judgments, estimates, and assumptions. While we believe that the estimates and assumptions we have used for revenue recognition are reasonable, subsequent changes could have a material impact to our future financial results. The percentage of our revenues derived from performance-based fees for the years ended December 31, 2019, 2018, and 2017, was 8.9%, 6.1%, and 4.9%, respectively. A greater number of performance-based fee arrangements may result in increased volatility in our working capital requirements and greater variations in our quarter-to-quarter results, which could affect the price of our common stock. In addition, an increase in the proportion of performance-based fee arrangements may temporarily offset the positive effect on our operating results from an increase in our utilization rate until the related revenues are recognized.
The profitability of our fixed-fee engagements with clients may not meet our expectations if we underestimate the cost of these engagements.
When making proposals for fixed-fee engagements, we estimate the costs and timing for completing the engagements. These estimates reflect our best judgment regarding the efficiencies of our methodologies and consultants as we plan to deploy them on engagements. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-fee engagements, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which would have an adverse effect on our profit margin. For the years ended December 31, 2019, 2018, and 2017, fixed-fee engagements represented 45.8%, 47.4%, and 46.7% of our revenues, respectively.
Our business is becoming increasingly dependent on information technology and will require additional investments in order to grow and meet the demands of our clients.
We depend on the use of sophisticated technologies and systems. Some of our practices provide services that are increasingly dependent on the use of software applications and systems that we do not own and could become unavailable. Moreover, our technology platforms will require continuing investments by us in order to expand existing service offerings and develop complementary services. For example, we have subscription-based offerings that require us to incur costs associated with upgrades and maintenance that could impact profit margins associated with those offerings and related services. Our future success depends on our ability to adapt our services and infrastructure while continuing to improve the performance, features, and reliability of our services in response to the evolving demands of the marketplace.
Adverse changes to our relationships with key third-party vendors, or in the business of our key third-party vendors, could unfavorably impact our business.
A portion of our services and solutions depend on technology or software provided by third-party vendors. Some of these third-party vendors refer potential clients to us, and others require that we obtain their permission prior to accessing their software while performing services for our clients. These third-party vendors could terminate their relationship with us without cause and with little or no notice, which could limit our service offerings and harm our financial condition and operating results. In addition, if a third-party vendor’s business changes, is reduced or fails to adapt to changing market demands, that could adversely affect our business. Moreover, if third-party technology or software that is important to our business does not continue to be available or utilized within the marketplace, or if the services that we provide to clients is no longer relevant in the marketplace, our business may be unfavorably impacted.
We could experience system failures, service interruptions, or security breaches that could negatively impact our business.
Our organization is comprised of employees who work on matters throughout the United States and overseas. Our technology platform is a “virtual office” from which we all operate. We may be subject to disruption to our operating systems from technology events that are beyond our control, including the possibility of failures at third-party data centers, disruptions to the Internet, natural disasters, power losses, and malicious attacks. In addition, despite the implementation of security measures, our infrastructure and operating systems, including the Internet and related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, computer viruses, programming errors, denial-of-service attacks, or other attacks by third parties seeking to disrupt operations or misappropriate information or similar physical or electronic breaches of security. While we have taken and are taking reasonable steps to prevent and mitigate the damage of such events, including implementation of system security measures, information backup, and disaster recovery processes, those steps
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may not be effective and there can be no assurance that any such steps can be effective against all possible risks. We will need to continue to invest in technology in order to achieve redundancies necessary to prevent service interruptions. Access to our systems as a result of a security breach, the failure of our systems, or the loss of data could result in legal claims or proceedings, liability, or regulatory penalties and disrupt operations, which could adversely affect our business and financial results.
Our reputation could be damaged and we could incur additional liabilities if we fail to protect client and employee data through our own accord or if our information systems are breached.
We rely on information technology systems to process, transmit, and store electronic information and to communicate among our locations around the world and with our clients, partners, and employees. These locations include Canada, the United Kingdom, Switzerland, Singapore, and India, all of which have their own either recently updated or potential new data protection laws. The breadth and complexity of this infrastructure increases the potential risk of security breaches which could lead to potential unauthorized disclosure of confidential information.
In providing services to clients, we may manage, utilize, and store sensitive or confidential client or employee data, including personal data and protected health information. As a result, we are subject to numerous laws and regulations designed to protect this information, such as the U.S. federal and state laws governing the protection of health or other personally identifiable information, including the Health Insurance Portability and Accountability Act (HIPAA), and international laws such as the European Union's General Data Protection Regulation (GDPR), which went into effect in 2018. In addition, many states, U.S. federal governmental authorities and non-U.S. jurisdictions have adopted, proposed or are considering adopting or proposing, additional data security and/or data privacy statutes or regulations. Continued governmental focus on data security and privacy may lead to additional legislative and regulatory action, which could increase the complexity of doing business. The increased emphasis on information security and the requirements to comply with applicable U.S. and foreign data security and privacy laws and regulations may increase our costs of doing business and negatively impact our results of operations.
These laws and regulations are increasing in complexity and number. If any person, including any of our employees or third-party vendors, negligently disregards or intentionally breaches our established controls or contractual obligations with respect to client or employee data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages, regulatory enforcement actions, fines, and/or criminal prosecution. We maintain certain insurance coverages for cybersecurity incidents through our directors and officers insurance policy, in amounts we believe to be reasonable and at a cost that is included in our general insurance premiums.
In addition, unauthorized disclosure of sensitive or confidential client or employee data, whether through systems failure, employee negligence, fraud, or misappropriation, could damage our reputation and cause us to lose clients and their related revenue in the future.
Our international expansion could result in additional risks.
We operate both domestically and internationally, including in Canada, Europe, Asia, and the Middle East. Although historically our international operations have been limited, we intend to continue to expand internationally. Such expansion may result in additional risks that are not present domestically and which could adversely affect our business or our results of operations, including:
• | compliance with additional U.S. regulations and those of other nations applicable to international operations; |
• | cultural and language differences; |
• | employment laws, including immigration laws affecting the mobility of employees, and rules and related social and cultural factors; |
• | losses related to start-up costs, lack of revenue, higher costs due to low utilization, and delays in purchase decisions by prospective clients; |
• | currency fluctuations between the U.S. dollar and foreign currencies; |
• | restrictions on the repatriation of earnings; |
• | potentially adverse tax consequences and limitations on our ability to utilize losses generated in our foreign operations; |
• | different regulatory requirements and other barriers to conducting business; |
• | different or less stable political and economic environments; |
• | greater personal security risks for employees traveling to or located in unstable locations; and |
• | civil disturbances or other catastrophic events. |
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Further, conducting business abroad subjects us to increased regulatory compliance and oversight. For example, we are subject to laws prohibiting certain payments to governmental officials, such as the Foreign Corrupt Practices Act, which increases the risk from our international operations relative to our competitors who do not operate outside the United States. A failure to comply with applicable regulations could result in regulatory enforcement actions as well as substantial civil and criminal penalties assessed against us and our employees.
Our obligations under the Amended Credit Agreement are secured by a pledge of certain of the equity interests in our subsidiaries and a lien on substantially all of our assets and those of our subsidiary grantors. If we default on these obligations, our lenders may foreclose on our assets, including our pledged equity interest in our subsidiaries.
We entered into a second amended and restated security agreement with Bank of America (the “Security Agreement”) and a second amended and restated pledge agreement (the “Pledge Agreement”) in connection with our entry into the Second Amended and Restated Credit Agreement, dated as of March 31, 2015 (as amended and restated, the “Amended Credit Agreement”). Pursuant to the Security Agreement and to secure our obligations under the Amended Credit Agreement, we granted our lenders a first-priority lien, subject to permitted liens, on substantially all of the personal property assets that we and the subsidiary grantors own. Pursuant to the Pledge Agreement, we granted our lenders a security interest in 100% of the voting stock or other equity interests in our domestic subsidiaries and 65% of the voting stock or other equity interests in certain of our foreign subsidiaries. If we default on our obligations under the Amended Credit Agreement, our lenders could accelerate our indebtedness and may be able to exercise their liens on the equity interests subject to the Pledge Agreement and their liens on substantially all of our assets and the assets of our subsidiary grantors, which would have a material adverse effect on our business, operations, financial condition, and liquidity. In addition, the covenants contained in the Amended Credit Agreement impose restrictions on our ability to engage in certain activities, such as the incurrence of additional indebtedness, certain investments, certain acquisitions and dispositions, and the payment of dividends.
Our indebtedness could adversely affect our ability to raise additional capital to fund our operations and obligations, expose us to interest rate risk to the extent of our variable-rate debt, and adversely affect our financial results.
At December 31, 2019, we had outstanding indebtedness of $205.0 million on our revolving line of credit that becomes due and payable in full upon maturity on September 27, 2024, and $3.9 million principal amount of our promissory note due March 1, 2024. Our ability to make scheduled payments of the principal, to pay interest, or to refinance our indebtedness, depends on our future performance. If we are unable to generate cash flow from operations sufficient to satisfy our obligations under our current indebtedness and any future indebtedness, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing, or obtaining additional equity capital on terms that may be onerous or dilutive. Our ability to refinance our current indebtedness or future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the current indebtedness or future indebtedness.
The interest rates on our revolving line of credit and promissory note are linked to LIBOR. In 2017, the Financial Conduct Authority (FCA) in the U.K. announced that it would phase out LIBOR as a benchmark rate by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021, or whether different benchmark rates will develop. If LIBOR ceases to exist, the method and rates used to calculate our interest rates and/or payments on our debt may result in interest rates and/or payments that are higher than, or that do not otherwise correlate over time with, the interest rates and/or payments that would have been applicable to our obligations if LIBOR was available in its current form, which could have a material adverse effect on our financial condition and results of operations. While we continue to take steps to mitigate the impact of the phase-out or replacement of LIBOR, such efforts may not prove successful. Furthermore, the U.S. or global financial markets may be disrupted as a result of the phase-out or replacement of LIBOR, which could also have a material adverse effect on our business, financial condition and results of operations.
In addition, our indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences such as exposing us to the risk of increased interest rates because some of our borrowings are at variable interest rates; making us more vulnerable to adverse changes in general U.S. and worldwide economic, industry, and competitive conditions and adverse changes in government regulation; or reducing our capacity to obtain additional financing and flexibility in planning for, or reacting to, changes in our business and our industry. Any of these factors could materially and adversely affect our business, financial condition, and results of operations.
Our business performance might not be sufficient for us to meet the full-year financial guidance that we provide publicly.
We provide full-year financial guidance to the public based upon our expectations regarding our financial performance. While we believe that our annual financial guidance provides investors and analysts with insight to our view of the Company’s future performance, such financial guidance is based on assumptions that may not always prove to be accurate and may vary from actual results. If we fail to meet the full-year financial guidance that we provide, or if we find it necessary to revise such guidance during the year, the market value of our common stock could be adversely affected.
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The healthcare industry is an area of significant focus for our business, and factors that adversely affect the financial condition of the healthcare industry could consequently affect our business.
We derive a significant portion of our revenue from clients in the healthcare industry. As a result, our financial condition and results of operations could be adversely affected by conditions affecting the healthcare industry generally and hospitals and health systems particularly. The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory, and other influences. Uncertainty in any of these areas could cause our clients to delay or postpone decisions to use our services. Existing and new federal and state laws and regulations affecting the healthcare industry could create unexpected liabilities for us, could cause us or our clients to incur additional costs, and could restrict our or our clients’ operations. Many healthcare laws are complex and their application to us, our clients, or the specific services and relationships we have with our clients are not always clear. In addition, federal and state legislatures have periodically introduced programs to reform or amend the U.S. healthcare system at both the federal and state level, such as the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and continue to consider further significant reforms. Due to the significant implementation issues arising under these laws and potential new legislation, it is unclear what long-term effects they will have on the healthcare industry and in turn on our business, financial condition, and results of operations. Our failure to accurately anticipate the application of new laws and regulations, or our failure to comply with such laws and regulations, could create liability for us, result in adverse publicity and negatively affect our business.
There are many factors that could affect the purchasing practices, operations, and, ultimately, the operating funds of healthcare organizations, such as reimbursement policies for healthcare expenses, federal and state budgetary considerations, consolidation in the healthcare industry, and regulation, litigation, and general economic conditions. In particular, we could be required to make unplanned modifications of our products and services (which would require additional time and investment) or we could suffer reductions in demand for our products and services as a result of changes in regulations affecting the healthcare industry, such as changes in the way that healthcare organizations are paid for their services (e.g., based on patient outcomes instead of services provided). Furthermore, as a result of the current presidential administration and the upcoming presidential election, there is an increased uncertainty surrounding the future of the Affordable Care Act and the regulation of the healthcare industry, and therefore healthcare organizations may wait to buy services such as ours until the regulatory environment is more certain.
In addition, state tax authorities have challenged the tax-exempt status of some hospitals and other healthcare facilities claiming such status on the basis that they are operating as charitable and/or religious organizations. If the tax-exempt status of any of our clients is revoked or compromised by new legislation or interpretation of existing legislation, that client’s financial health could be adversely affected, which could adversely impact demand for our services, our sales, revenue, financial condition, and results of operations.
Additional hiring, departures, business acquisitions and dispositions could disrupt our operations, increase our costs or otherwise harm our business.
Our business strategy is dependent in part upon our ability to grow by hiring individuals or groups of individuals and by acquiring complementary businesses. However, we may be unable to identify, hire, acquire, or successfully integrate new employees and acquired businesses without substantial expense, delay, or other operational or financial obstacles. From time to time, we will evaluate the total mix of services we provide and we may conclude that businesses may not achieve the results we previously expected. Competition for future hiring and acquisition opportunities in our markets could increase the compensation we offer to potential employees or the prices we pay for businesses we wish to acquire. In addition, we may be unable to achieve the financial, operational, and other benefits we anticipate from any hiring or acquisition, as well as any disposition, including those we have completed so far. New acquisitions could also negatively impact existing practices and cause current employees to depart. Hiring additional employees or acquiring businesses could also involve a number of additional risks, including the diversion of management’s time, attention, and resources from managing and marketing our Company; the potential assumption of liabilities of an acquired business; the inability to attain the expected synergies with an acquired business; and the perception of inequalities if different groups of employees are eligible for different benefits and incentives or are subject to different policies and programs.
Selling practices and shutting down operations present similar challenges in a service business. Dispositions not only require management’s time, but they can impair existing relationships with clients or otherwise affect client satisfaction, particularly in situations where the divestiture eliminates only part of the complement of consulting services provided to a client. Dispositions may also involve continued financial involvement, as we may be required to retain responsibility for, or agree to indemnify buyers against, liabilities related to a business sold.
Our ability to maintain and attract new business depends upon our reputation, the professional reputation of our revenue-generating employees, and the quality of our services.
As a professional services firm, our ability to secure new engagements depends heavily upon our reputation and the individual reputations of our professionals. Any factor that diminishes our reputation or that of our employees, including not meeting client expectations or misconduct by our employees, could make it substantially more difficult for us to attract new engagements and clients. Similarly, because we obtain many of our new engagements from former or current clients or from referrals by those clients or by law firms that we have worked with in the past,
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any client that questions the quality of our work or that of our consultants could impair our ability to secure additional new engagements and clients.
A significant portion of our revenues is derived from a limited number of clients, and our engagement agreements, including those related to our largest clients, can be terminated by our clients with little or no notice and without penalty, which may cause our operating results to be unpredictable and may result in unexpected declines in our utilization and revenues.
As a consulting firm, we have derived, and expect to continue to derive, a significant portion of our revenues from a limited number of clients. Our clients typically retain us on an engagement-by-engagement basis, rather than under fixed-term contracts. The volume of work performed for any particular client is likely to vary from year to year, and a major client in one fiscal period may not require or may decide not to use our services in any subsequent fiscal period. Moreover, a large portion of our new engagements comes from existing clients. Accordingly, the failure to obtain new large engagements or multiple engagements from existing or new clients could have a material adverse effect on the amount of revenues we generate.
In addition, almost all of our engagement agreements can be terminated by our clients with little or no notice and without penalty. In client engagements that involve multiple engagements or stages, there is a risk that a client may choose not to retain us for additional stages of an engagement or that a client will cancel or delay additional planned engagements. For clients in bankruptcy, a bankruptcy court could elect not to retain our interim management consultants, terminate our retention, require us to reduce our fees for the duration of an engagement, elect not to approve claims against fees earned by us prior to or after the bankruptcy filing, or subject previously paid amounts to be returned to the bankruptcy estate as preferential payments under the bankruptcy code.
Terminations of engagements, cancellations of portions of the project plan, delays in the work schedule, or reductions in fees could result from factors unrelated to our services. When engagements are terminated or reduced, we lose the associated future revenues, and we may not be able to recover associated costs or redeploy the affected employees in a timely manner to minimize the negative impact. In addition, our clients’ ability to terminate engagements with little or no notice and without penalty makes it difficult to predict our operating results in any particular fiscal period.
Our engagements could result in professional liability, which could be very costly and hurt our reputation.
Our engagements typically involve complex analyses and the exercise of professional judgment. As a result, we are subject to the risk of professional liability. From time to time, lawsuits with respect to our work are pending. Litigation alleging that we performed negligently or breached any other obligations could expose us to significant legal liabilities and, regardless of outcome, is often very costly, could distract our management, could damage our reputation, and could harm our financial condition and operating results. We also face increased litigation risk as a result of an expanded workforce. In addition, certain of our engagements, including interim management engagements and corporate restructurings, involve greater risks than other consulting engagements. We are not always able to include provisions in our engagement agreements that are designed to limit our exposure to legal claims relating to our services. While we attempt to identify and mitigate our exposure with respect to liability arising out of our consulting engagements, these efforts may be ineffective and an actual or alleged error or omission on our part or the part of our client or other third parties in one or more of our engagements could have an adverse impact on our financial condition and results of operations. In addition, we carry professional liability insurance to cover many of these types of claims, but the policy limits and the breadth of coverage may be inadequate to cover any particular claim or all claims plus the cost of legal defense. For example, we provide services on engagements in which the impact on a client may substantially exceed the limits of our errors and omissions insurance coverage. If we are found to have professional liability with respect to work performed on such an engagement, we may not have sufficient insurance to cover the entire liability.
Changes in U.S. tax laws could have a material adverse effect on our business, cash flow, results of operations and financial condition.
We are subject to income and other taxes in the U.S. at the state and federal level and also in foreign jurisdictions. Changes in applicable U.S. state, federal or foreign tax laws and regulations, or their interpretation and application, could materially affect our tax expense and profitability.
Future changes in tax laws, treaties or regulations, and their interpretation or enforcement, may be unpredictable, particularly as taxing jurisdictions face an increasing number of political, budgetary and other fiscal challenges. Tax rates in the jurisdictions in which we operate may change as a result of macroeconomic and other factors outside of our control, making it increasingly difficult for multinational corporations like ourselves to operate with certainty about taxation in many jurisdictions. As a result, we could be materially adversely affected by future changes in tax law or policy (or in their interpretation or enforcement) in the jurisdictions where we operate, including the United States, which could have a material adverse effect on our business, cash flow, results of operations, financial condition, as well as our effective income tax rate.
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The consulting services industry is highly competitive and we may not be able to compete effectively.
The consulting services industry in which we operate includes a large number of participants and is intensely competitive. We face competition from other business operations and financial consulting firms, general management consulting firms, the consulting practices of major accounting firms, regional and specialty consulting firms, and the internal professional resources of organizations. In addition, because there are relatively low barriers to entry, we expect to continue to face additional competition from new entrants into the business operations and financial consulting industries. Competition in several of the sectors in which we operate is particularly intense as many of our competitors are seeking to expand their market share in these sectors. Many of our competitors have a greater national and international presence, as well as have a significantly greater number of personnel, financial, technical, and marketing resources. In addition, these competitors may generate greater revenues and have greater name recognition than we do. Some of our competitors may also have lower overhead and other costs and, therefore, may be able to more effectively compete through lower cost service offerings. Our ability to compete also depends in part on the ability of our competitors to hire, retain, and motivate skilled professionals, the price at which others offer comparable services, the ability of our competitors to offer new and valuable products and services to clients, and our competitors’ responsiveness to their clients. If we are unable to compete successfully with our existing competitors or with any new competitors, our financial results will be adversely affected.
Our intellectual property rights in our “Huron Consulting Group” name are important, and any inability to use that name could negatively impact our ability to build brand identity.
We believe that establishing, maintaining, and enhancing the “Huron Consulting Group” name and “Huron” brand is important to our business. We are, however, aware of a number of other companies that use names containing “Huron.” There could be potential trade name or service mark infringement claims brought against us by the users of these similar names and marks and those users may have trade name or service mark rights that are senior to ours. If another company were to successfully challenge our right to use our name, or if we were unable to prevent a competitor from using a name that is similar to our name, our ability to build brand identity could be negatively impacted.
We may incur impairment charges with respect to our convertible debt investment in Shorelight.
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. The investment is carried at its fair value of $49.5 million as of December 31, 2019, with unrealized holding gains and losses reported in other comprehensive income. In the first quarter of 2020, we invested an additional $13.0 million, in the form of 1.69% convertible debt with a senior liquidation preference. As of December 31, 2019, our investment in Shorelight is in an unrealized gain position. If the investment were to be in an unrealized loss position, we would assess whether the investment is other-than-temporarily impaired. We consider impairments to be other-than-temporary if they are related to significant credit deterioration or if it is likely we will sell the security before the recovery of its cost basis. As of December 31, 2019, we have not identified any factors that indicate an other-than-temporary impairment. In the future, if there are adverse developments in Shorelight's business that may be the result of events within or outside of Shorelight's control or declines in value judged to be other-than-temporary, we may incur impairment charges with respect to our convertible debt investment, which could materially impact our results of operations.
Conflicts of interest could preclude us from accepting engagements thereby causing decreased utilization and revenues.
We provide services in connection with bankruptcy and other proceedings that usually involve sensitive client information and frequently are adversarial. In connection with bankruptcy proceedings, we are required by law to be “disinterested” and may not be able to provide multiple services to a particular client. In addition, our engagement agreement with a client or other business reasons may preclude us from accepting engagements from time to time with the client's competitors or adversaries. Moreover, in many industries in which we provide services, there has been a continuing trend toward business consolidations and strategic alliances. These consolidations and alliances reduce the number of companies that may seek our services and increase the chances that we will be unable to accept new engagements as a result of conflicts of interest. If we are unable to accept new engagements for any reason, our consultants may become underutilized, which would adversely affect our revenues and results of operations in future periods.
ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
ITEM 2. | PROPERTIES. |
We do not own any real estate or other physical properties. Our administrative and principal executive offices are located at 550 W. Van Buren Street, Chicago, Illinois 60607. We believe that our office facilities are suitable and adequate for our business as it is presently conducted.
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ITEM 3. | LEGAL PROCEEDINGS. |
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Annual Report on Form 10-K, we are not a party to any litigation or legal proceeding that, in the current opinion of management, could have a material adverse effect on our financial position or results of operations. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expected results.
ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Market Information
Our common stock is traded on The NASDAQ Global Select Market under the symbol “HURN.” As of February 18, 2020, there were 370 registered holders of record of Huron’s common stock. A number of Huron’s stockholders hold their shares in street name; therefore, the Company believes that there are substantially more beneficial owners of its common stock.
Dividends
We have not declared or paid dividends on our common stock since we became a public company. Our board of directors re-evaluates this policy periodically. Any determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our results of operations, financial condition, capital requirements, terms of our financing arrangements, and such other factors as the board of directors deems relevant. In addition, the amount of dividends we may pay is subject to the restricted payment provisions of our senior secured credit facility. See the Liquidity and Capital Resources section under Part II—Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further information on the restricted payment provisions of our senior secured credit facility.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item appears under Part III—Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.”
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our Stock Ownership Participation Program, 2012 Omnibus Incentive Plan, and 2004 Omnibus Stock Plan, which was replaced by the 2012 Omnibus Incentive Plan, permit the netting of common stock upon vesting of restricted stock awards to satisfy individual tax withholding requirements. During the quarter ended December 31, 2019, we reacquired 2,816 shares of common stock with a weighted average fair market value of $62.69 as a result of such tax withholdings.
We currently have a share repurchase program pursuant to which we may, from time to time, repurchase up to $125 million of our common stock through October 31, 2020 (the "Share Repurchase Program"). The amount and timing of the repurchases will be determined by management and will depend on a variety of factors, including the trading price of our common stock, capacity under our line of credit, general market and business conditions, and applicable legal requirements.
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The following table provides information with respect to purchases we made of our common stock during the quarter ended December 31, 2019.
Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (2) | ||||||||||
October 1, 2019 – October 31, 2019 | 2,026 | $ | 60.64 | — | $ | 35,143,546 | ||||||||
November 1, 2019 – November 30, 2019 | 89,263 | $ | 66.63 | 89,263 | $ | 29,193,168 | ||||||||
December 1, 2019 – December 31, 2019 | 121,964 | $ | 68.21 | 121,174 | $ | 20,924,416 | ||||||||
Total | 213,253 | $ | 67.48 | 210,437 | ||||||||||
(1) | The number of shares repurchased included 2,026 shares in October 2019 and 790 shares in December 2019 to satisfy employee tax withholding requirements. No shares were repurchased in November 2019 to satisfy employee tax withholding requirements. These shares do not reduce the repurchase authority under the Share Repurchase Program. |
(2) | As of the end of the period. |
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ITEM 6. | SELECTED FINANCIAL DATA. |
We have derived the following selected consolidated financial data as of and for the years ended December 31, 2015 through 2019 from our consolidated financial statements. The following data reflects the business acquisitions that we have completed through December 31, 2019. The results of operations for acquired businesses have been included in our results of operations since the date of their acquisitions. See Note 3 "Acquisitions" within the notes to our consolidated financial statements for additional information regarding our acquisitions. The following data also reflects the classification of discontinued operations.
The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K.
Consolidated Statements of Operations (in thousands, except per share data): | Year Ended December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
Revenues and reimbursable expenses: | ||||||||||||||||||||
Revenues | $ | 876,757 | $ | 795,125 | $ | 732,570 | $ | 726,272 | $ | 699,010 | ||||||||||
Reimbursable expenses | 88,717 | 82,874 | 75,175 | 71,712 | 70,013 | |||||||||||||||
Total revenues and reimbursable expenses | 965,474 | 877,999 | 807,745 | 797,984 | 769,023 | |||||||||||||||
Direct costs and reimbursable expenses (exclusive of depreciation and amortization shown in operating expenses) (1): | ||||||||||||||||||||
Direct costs | 575,602 | 521,537 | 454,806 | 437,556 | 401,915 | |||||||||||||||
Amortization of intangible assets and software development costs | 5,375 | 4,247 | 10,932 | 15,140 | 16,788 | |||||||||||||||
Reimbursable expenses | 88,696 | 82,923 | 75,436 | 71,749 | 69,932 | |||||||||||||||
Total direct costs and reimbursable expenses | 669,673 | 608,707 | 541,174 | 524,445 | 488,635 | |||||||||||||||
Operating expenses and other losses (gains), net: | ||||||||||||||||||||
Selling, general and administrative expenses | 203,071 | 180,983 | 175,364 | 160,204 | 157,902 | |||||||||||||||
Restructuring charges | 1,855 | 3,657 | 6,246 | 9,592 | 3,329 | |||||||||||||||
Litigation and other losses (gains), net | (1,196 | ) | (2,019 | ) | 1,111 | (1,990 | ) | (9,476 | ) | |||||||||||
Depreciation and amortization (1) | 28,365 | 34,575 | 38,213 | 31,499 | 25,135 | |||||||||||||||
Goodwill impairment charges | — | — | 253,093 | — | — | |||||||||||||||
Total operating expenses and other losses (gains), net | 232,095 | 217,196 | 474,027 | 199,305 | 176,890 | |||||||||||||||
Operating income (loss) | 63,706 | 52,096 | (207,456 | ) | 74,234 | 103,498 | ||||||||||||||
Other income (expense), net: | ||||||||||||||||||||
Interest expense, net of interest income | (15,648 | ) | (19,013 | ) | (18,613 | ) | (16,274 | ) | (18,136 | ) | ||||||||||
Other income (expense), net | 4,433 | (7,862 | ) | 3,565 | 1,197 | (1,797 | ) | |||||||||||||
Total other expense, net | (11,215 | ) | (26,875 | ) | (15,048 | ) | (15,077 | ) | (19,933 | ) | ||||||||||
Income (loss) from continuing operations before taxes | 52,491 | 25,221 | (222,504 | ) | 59,157 | 83,565 | ||||||||||||||
Income tax expense (benefit) | 10,512 | 11,277 | (51,999 | ) | 19,677 | 21,670 | ||||||||||||||
Net income (loss) from continuing operations | 41,979 | 13,944 | (170,505 | ) | 39,480 | 61,895 | ||||||||||||||
Income (loss) from discontinued operations, net of tax | (236 | ) | (298 | ) | 388 | (1,863 | ) | (2,843 | ) | |||||||||||
Net income (loss) | $ | 41,743 | $ | 13,646 | $ | (170,117 | ) | $ | 37,617 | $ | 59,052 | |||||||||
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Consolidated Statements of Operations (in thousands, except per share data): | Year Ended December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
Net earnings (loss) per basic share: | ||||||||||||||||||||
Net income (loss) from continuing operations | $ | 1.91 | $ | 0.64 | $ | (7.95 | ) | $ | 1.87 | $ | 2.80 | |||||||||
Income (loss) from discontinued operations, net of tax | (0.01 | ) | (0.01 | ) | 0.02 | (0.09 | ) | (0.13 | ) | |||||||||||
Net income (loss) | $ | 1.90 | $ | 0.63 | $ | (7.93 | ) | $ | 1.78 | $ | 2.67 | |||||||||
Net earnings (loss) per diluted share: | ||||||||||||||||||||
Net income (loss) from continuing operations | $ | 1.87 | $ | 0.63 | $ | (7.95 | ) | $ | 1.84 | $ | 2.74 | |||||||||
Income (loss) from discontinued operations, net of tax | (0.02 | ) | (0.01 | ) | 0.02 | (0.08 | ) | (0.13 | ) | |||||||||||
Net income (loss) | $ | 1.85 | $ | 0.62 | $ | (7.93 | ) | $ | 1.76 | $ | 2.61 | |||||||||
Weighted average shares used in calculating net earnings (loss) per share: | ||||||||||||||||||||
Basic | 21,993 | 21,706 | 21,439 | 21,084 | 22,136 | |||||||||||||||
Diluted | 22,507 | 22,058 | 21,439 | 21,424 | 22,600 | |||||||||||||||
Consolidated Balance Sheet Data (in thousands): | As of December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
Cash and cash equivalents | $ | 11,604 | $ | 33,107 | $ | 16,909 | $ | 17,027 | $ | 58,437 | ||||||||||
Working capital (2) | $ | 20,192 | $ | (185,374 | ) | $ | 51,828 | $ | 44,314 | $ | 96,966 | |||||||||
Total assets | $ | 1,104,271 | $ | 1,049,532 | $ | 1,036,928 | $ | 1,153,215 | $ | 1,159,543 | ||||||||||
Long-term debt, net of current portion (2) | $ | 208,324 | $ | 53,853 | $ | 342,507 | $ | 292,065 | $ | 307,376 | ||||||||||
Total stockholders’ equity (3) | $ | 585,465 | $ | 540,624 | $ | 503,316 | $ | 648,033 | $ | 652,325 | ||||||||||
(1) | Intangible asset amortization relating to customer contracts, certain client relationships, and software and amortization of software development costs are presented as a component of total direct costs. Depreciation and intangible assets amortization not classified as direct costs are presented as a component of operating expenses. |
(2) | Our Convertible Notes with a principal amount of $250.0 million were classified as short-term debt on our consolidated balance sheet at December 31, 2018 as they had a maturity date of October 1, 2019. Upon maturity, we refinanced the outstanding notes with the borrowing capacity available under our revolving credit facility, which is classified as long-term debt on our consolidated balance sheet. Refer to the "Liquidity and Capital Resources" section under Part II—Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 7 “Financing Arrangements” within the notes to our consolidated financial statements for more information on our outstanding borrowings. |
(3) | We have not declared or paid dividends on our common stock in the periods presented above. See Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividends." |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the information under Part II—Item 6. "Selected Financial Data," and our Consolidated Financial Statements and related notes appearing under Part II—Item 8. "Financial Statements and Supplementary Data." The following MD&A contains forward-looking statements and involves numerous risks and uncertainties, including, without limitation, those described under Part I—Item 1A. "Risk Factors" and "Forward-Looking Statements" of this Annual Report on Form 10-K. Actual results may differ materially from those contained in any forward-looking statements.
The following information summarizes our results of operations for 2019, 2018, and 2017; and discusses those results of operations for 2019 compared to 2018. For a discussion of our results of operations for 2018 compared to 2017, refer to Part II—Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of the Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the United States Securities and Exchange Commission on February 27, 2019.
OVERVIEW
Huron is a global consultancy that collaborates with clients to drive strategic growth, ignite innovation and navigate constant change. Through a combination of strategy, expertise and creativity, we help clients accelerate operational, digital and cultural transformation, enabling the change they need to own their future. By embracing diverse perspectives, encouraging new ideas and challenging the status quo, we create sustainable results for the organizations we serve.
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We provide our services and manage our business under three operating segments: Healthcare, Business Advisory, and Education. See Part I—Item 1. "Business—Overview—Our Services” and Note 19 “Segment Information” within the notes to our consolidated financial statements for a discussion of our three segments.
How We Generate Revenues
A large portion of our revenues is generated by our full-time consultants who provide consulting services to our clients and are billable to our clients based on the number of hours worked. A smaller portion of our revenues is generated by our other professionals, also referred to as full-time equivalents, some of whom work variable schedules as needed by our clients. Full-time equivalent professionals consist of our coaches and their support staff from our Culture and Organizational Excellence solution, consultants who work variable schedules as needed by our clients, employees who provide managed services in our Healthcare segment, and our employees who provide software support and maintenance services to our clients. We translate the hours that these other professionals work on client engagements into a full-time equivalent measure that we use to manage our business. We refer to our full-time consultants and other professionals collectively as revenue-generating professionals.
Revenues generated by our full-time consultants are primarily driven by the number of consultants we employ and their utilization rates, as well as the billing rates we charge our clients. Revenues generated by our other professionals, or full-time equivalents, are largely dependent on the number of consultants we employ, their hours worked, and billing rates charged. Revenues generated by our coaches are largely dependent on the number of coaches we employ and the total value, scope, and terms of the consulting contracts under which they provide services, which are primarily fixed-fee contracts. Revenues generated by our Managed Services solution are dependent on the total value, scope and terms of the related contracts.
We generate our revenues from providing professional services under four types of billing arrangements: fixed-fee (including software license revenue); time-and-expense; performance-based; and software support, maintenance and subscriptions.
In fixed-fee billing arrangements, we agree to a pre-established fee in exchange for a predetermined set of professional services. We set the fees based on our estimates of the costs and timing for completing the engagements. It is the client’s expectation in these engagements that the pre-established fee will not be exceeded except in mutually agreed upon circumstances. We generally recognize revenues under fixed-fee billing arrangements using a proportionate performance approach, which is based on work completed to-date versus our estimates of the total services to be provided under the engagement. Contracts within our Culture and Organizational Excellence solution include fixed-fee partner contracts with multiple performance obligations, which primarily consist of coaching services, as well as speaking engagements, conferences, publications and software products (“Partner Contracts”). Revenues for coaching services and software products are generally recognized on a straight-line basis over the length of the contract. All other revenues under Partner Contracts, including speaking engagements, conferences and publications, are recognized at the time the goods or services are provided.
Fixed-fee arrangements also include software licenses for our revenue cycle management software and research administration and compliance software. Licenses for our revenue cycle management software are sold only as a component of our consulting projects, and the services we provide are essential to the functionality of the software. Therefore, revenues from these software licenses are recognized over the term of the related consulting services contract. License revenue from our research administration and compliance software is generally recognized in the month in which the software is delivered.
Fixed-fee engagements represented 45.8%, 47.4%, and 46.7% of our revenues for the years ended December 31, 2019, 2018, and 2017, respectively.
Time-and-expense billing arrangements require the client to pay based on the number of hours worked by our revenue-generating professionals at agreed upon rates. Time-and-expense arrangements also include certain speaking engagements, conferences and publications purchased by our clients outside of Partner Contracts within our Culture and Organizational Excellence solution. We recognize revenues under time-and-expense billing arrangements as the related services or publications are provided. Time-and-expense engagements represented 39.9%, 41.2%, and 43.0% of our revenues in 2019, 2018, and 2017, respectively.
In performance-based fee billing arrangements, fees are tied to the attainment of contractually defined objectives. We enter into performance-based engagements in essentially two forms. First, we generally earn fees that are directly related to the savings formally acknowledged by the client as a result of adopting our recommendations for improving operational and cost effectiveness in the areas we review. Second, we have performance-based engagements in which we earn a success fee when and if certain predefined outcomes occur. Often, performance-based fees supplement our time-and-expense or fixed-fee engagements. Effective January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, on a modified retrospective basis and began recognizing revenues under performance-based billing arrangements by estimating the amount of variable consideration that is probable of being earned and recognizing that estimate over the length of the contract using a proportionate performance approach. Prior to adopting ASC 606 in 2018, we recognized revenues under performance-based billing arrangements when all related performance criteria were met. Performance-based fee revenues represented 8.9%, 6.1%, and 4.9% of our revenues in 2019, 2018, and 2017, respectively. The level of performance-based fees earned may vary based on our clients’ risk sharing preferences and the mix of services we provide.
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Clients that have purchased one of our software licenses can pay an annual fee for software support and maintenance. We also generate subscription revenue from our cloud-based analytic tools and solutions. Software support, maintenance and subscription revenues are recognized ratably over the support or subscription period. These fees are generally billed in advance and included in deferred revenues until recognized. Software support and maintenance and subscription-based revenues represented 5.4%, 5.3%, and 5.4% of our revenues in 2019, 2018, and 2017, respectively.
Our quarterly results are impacted principally by our full-time consultants’ utilization rate, the bill rates we charge our clients, and the number of our revenue-generating professionals who are available to work. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that results in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. For example, during the third and fourth quarters of the year, vacations taken by our clients can result in the deferral of activity on existing and new engagements, which would negatively affect our utilization rate. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period.
Time-and-expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. Moreover, our clients typically retain us on an engagement-by-engagement basis, rather than under long-term recurring contracts. The volume of work performed for any particular client can vary widely from period to period.
Reimbursable Expenses
Reimbursable expenses that are billed to clients, primarily relating to travel and out-of-pocket expenses incurred in connection with engagements, 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 the 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.
We manage our business on the basis of revenues before reimbursable expenses, which we believe is the most accurate reflection of our services because it eliminates the effect of reimbursable expenses that we bill to our clients at cost.
Total Direct Costs
Our most significant expenses are costs classified as total direct costs. These total direct costs primarily include salaries, performance bonuses, signing and retention bonuses, payroll taxes, and benefits for revenue-generating professionals, as well as commissions, technology costs, product and event costs, and fees paid to independent contractors that we retain to supplement our revenue-generating professionals, typically on an as-needed basis for specific client engagements. Direct costs also include share-based compensation, which represents the cost of restricted stock and performance-based share awards granted to our revenue-generating professionals. Compensation expense for restricted stock awards and performance-based share awards is recognized ratably using either the straight-line attribution method or the graded vesting attribution method, as appropriate, over the requisite service period, which is generally three to four years. Total direct costs also include amortization of intangible assets, primarily relating to certain customer relationships, technology and software, and customer contracts acquired in business combinations, and internally developed software costs.
Operating Expenses and Other Losses (Gains), Net
Our operating expenses include selling, general and administrative expenses, which consist primarily of salaries, performance bonuses, payroll taxes, benefits, and share-based compensation for our support personnel. Also included in selling, general and administrative expenses is rent and other office related expenses, sales and marketing related expenses, professional fees, recruiting and training expenses, and practice administration and meetings expenses. Other operating expenses include restructuring charges, other gains and losses, depreciation and certain amortization expenses not included in total direct costs.
Segment Results
Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative expenses that are incurred directly by the segment. Unallocated costs include corporate costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs
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include corporate office support costs, office facility costs, costs relating to accounting and finance, human resources, legal, marketing, information technology, and company-wide business development functions, as well as costs related to overall corporate management.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected segment and consolidated operating results and other operating data. The results of operations for acquired businesses have been included in our results of operations since the date of their respective acquisition.
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Segment and Consolidated Operating Results (in thousands): | |||||||||||
Healthcare: | |||||||||||
Revenues | $ | 399,221 | $ | 364,763 | $ | 356,909 | |||||
Operating income | $ | 125,724 | $ | 108,060 | $ | 118,761 | |||||
Segment operating income as a percentage of segment revenues | 31.5 | % | 29.6 | % | 33.3 | % | |||||
Business Advisory: | |||||||||||
Revenues | $ | 252,508 | $ | 236,185 | $ | 207,753 | |||||
Operating income | $ | 49,695 | $ | 50,625 | $ | 46,600 | |||||
Segment operating income as a percentage of segment revenues | 19.7 | % | 21.4 | % | 22.4 | % | |||||
Education: | |||||||||||
Revenues | $ | 225,028 | $ | 194,177 | $ | 167,908 | |||||
Operating income | $ | 55,741 | $ | 48,243 | $ | 40,318 | |||||
Segment operating income as a percentage of segment revenues | 24.8 | % | 24.8 | % | 24.0 | % | |||||
Total Company: | |||||||||||
Revenues | $ | 876,757 | $ | 795,125 | $ | 732,570 | |||||
Reimbursable expenses | 88,717 | 82,874 | 75,175 | ||||||||
Total revenues and reimbursable expenses | $ | 965,474 | $ | 877,999 | $ | 807,745 | |||||
Statements of Operations reconciliation: | |||||||||||
Segment operating income | $ | 231,160 | $ | 206,928 | $ | 205,679 | |||||
Items not allocated at the segment level: | |||||||||||
Other operating expenses | 140,285 | 122,276 | 120,718 | ||||||||
Litigation and other losses (gains), net | (1,196 | ) | (2,019 | ) | 1,111 | ||||||
Depreciation and amortization | 28,365 | 34,575 | 38,213 | ||||||||
Goodwill impairment charges (1) | — | — | 253,093 | ||||||||
Total operating income (loss) | 63,706 | 52,096 | (207,456 | ) | |||||||
Other expense, net | 11,215 | 26,875 | 15,048 | ||||||||
Income (loss) from continuing operations before taxes | 52,491 | 25,221 | (222,504 | ) | |||||||
Income tax expense (benefit) | 10,512 | 11,277 | (51,999 | ) | |||||||
Net income (loss) from continuing operations | $ | 41,979 | $ | 13,944 | $ | (170,505 | ) | ||||
Earnings (loss) per share from continuing operations | |||||||||||
Basic | $ | 1.91 | $ | 0.64 | $ | (7.95 | ) | ||||
Diluted | $ | 1.87 | $ | 0.63 | $ | (7.95 | ) | ||||
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Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Other Operating Data: | |||||||||||
Number of full-time billable consultants (at period end) (2): | |||||||||||
Healthcare | 890 | 813 | 778 | ||||||||
Business Advisory | 930 | 813 | 809 | ||||||||
Education | 756 | 621 | 549 | ||||||||
Total | 2,576 | 2,247 | 2,136 | ||||||||
Average number of full-time billable consultants (for the period) (2): | |||||||||||
Healthcare | 849 | 807 | 796 | ||||||||
Business Advisory | 892 | 769 | 740 | ||||||||
Education | 686 | 589 | 509 | ||||||||
Total | 2,427 | 2,165 | 2,045 | ||||||||
Full-time billable consultant utilization rate (3): | |||||||||||
Healthcare | 79.4 | % | 81.7 | % | 78.4 | % | |||||
Business Advisory | 72.5 | % | 73.8 | % | 71.5 | % | |||||
Education | 76.8 | % | 76.6 | % | 72.8 | % | |||||
Total | 76.1 | % | 77.5 | % | 74.5 | % | |||||
Full-time billable consultant average billing rate per hour (4): | |||||||||||
Healthcare | $ | 231 | $ | 209 | $ | 206 | |||||
Business Advisory (5) | $ | 201 | $ | 215 | $ | 205 | |||||
Education | $ | 199 | $ | 202 | $ | 213 | |||||
Total (5) | $ | 211 | $ | 209 | $ | 207 | |||||
Revenue per full-time billable consultant (in thousands): | |||||||||||
Healthcare | $ | 331 | $ | 307 | $ | 295 | |||||
Business Advisory | $ | 273 | $ | 293 | $ | 268 | |||||
Education | $ | 285 | $ | 289 | $ | 291 | |||||
Total | $ | 297 | $ | 297 | $ | 284 | |||||
Average number of full-time equivalents (for the period) (6): | |||||||||||
Healthcare | 244 | 219 | 213 | ||||||||
Business Advisory | 14 | 22 | 20 | ||||||||
Education | 47 | 39 | 35 | ||||||||
Total | 305 | 280 | 268 | ||||||||
Revenue per full-time equivalent (in thousands): | |||||||||||
Healthcare | $ | 485 | $ | 536 | $ | 576 | |||||
Business Advisory | $ | 655 | $ | 484 | $ | 464 | |||||
Education | $ | 617 | $ | 601 | $ | 564 | |||||
Total | $ | 513 | $ | 541 | $ | 566 | |||||
(1) | The non-cash goodwill impairment charges are not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segments. We do not include the impact of goodwill impairment charges in our evaluation of segment performance. |
(2) | Consists of our full-time professionals who provide consulting services and generate revenues based on the number of hours worked. |
(3) | Utilization rate for our full-time billable consultants is calculated by dividing the number of hours all of our full-time billable consultants worked on client assignments during a period by the total available working hours for all of these consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days. |
(4) | Average billing rate per hour for our full-time billable consultants is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period. |
(5) | The Business Advisory segment includes operations of Huron Eurasia India. Absent the impact of Huron Eurasia India, the average billing rate per hour for the Business Advisory segment would have been $228, $246, and $233 for the years ended December 31, 2019, 2018 and 2017, respectively. |
Absent the impact of Huron Eurasia India, Huron's consolidated average billing rate per hour would have been $220, $218, and $216 for the years ended December 31, 2019, 2018 and 2017, respectively.
(6) | Consists of coaches and their support staff within our Culture and Organizational Excellence solution, consultants who work variable schedules as needed by our clients, employees who provide managed services in our Healthcare segment, and full-time employees who provide software support and maintenance services to our clients. |
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Non-GAAP Measures
We also assess our results of operations using certain non-GAAP financial measures. These non-GAAP financial measures differ from GAAP because the non-GAAP financial measures we calculate to measure earnings (loss) before interest, taxes, depreciation and amortization ("EBITDA"), adjusted EBITDA, adjusted EBITDA as a percentage of revenues, adjusted net income from continuing operations, and adjusted diluted earnings per share from continuing operations exclude a number of items required by GAAP, each discussed below. These non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance, cash flows, or liquidity prepared in accordance with GAAP. Our non-GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how we define our non-GAAP financial measures.
Our management uses the non-GAAP financial measures to gain an understanding of our comparative operating performance, for example when comparing such results with previous periods or forecasts. These non-GAAP financial measures are used by management in their financial and operating decision making because management believes they reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons. Management also uses these non-GAAP financial measures when publicly providing our business outlook, for internal management purposes, and as a basis for evaluating potential acquisitions and dispositions. We believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating Huron’s current operating performance and future prospects in the same manner as management does and in comparing in a consistent manner Huron’s current financial results with Huron’s past financial results.
The reconciliations of these financial measures from GAAP to non-GAAP are as follows (in thousands, except per share amounts):
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Revenues | $ | 876,757 | $ | 795,125 | $ | 732,570 | |||||
Net income (loss) from continuing operations | $ | 41,979 | $ | 13,944 | $ | (170,505 | ) | ||||
Add back: | |||||||||||
Income tax expense (benefit) | 10,512 | 11,277 | (51,999 | ) | |||||||
Interest expense, net of interest income | 15,648 | 19,013 | 18,613 | ||||||||
Depreciation and amortization | 33,740 | 38,822 | 49,145 | ||||||||
Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA) | 101,879 | 83,056 | (154,746 | ) | |||||||
Add back: | |||||||||||
Restructuring charges | 1,855 | 3,657 | 6,246 | ||||||||
Litigation and other losses (gains), net | (1,196 | ) | (2,019 | ) | 1,111 | ||||||
Transaction-related expenses | 2,680 | — | — | ||||||||
Goodwill impairment charges | — | — | 253,093 | ||||||||
Other non-operating expense (income), net | — | 5,807 | (696 | ) | |||||||
Foreign currency transaction losses (gains), net | 160 | 475 | (434 | ) | |||||||
Adjusted EBITDA | $ | 105,378 | $ | 90,976 | $ | 104,574 | |||||
Adjusted EBITDA as a percentage of revenues | 12.0 | % | 11.4 | % | 14.3 | % | |||||
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Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Net income (loss) from continuing operations | $ | 41,979 | $ | 13,944 | $ | (170,505 | ) | ||||
Weighted average shares - diluted | 22,507 | 22,058 | 21,439 | ||||||||
Diluted earnings (loss) per share from continuing operations | $ | 1.87 | $ | 0.63 | $ | (7.95 | ) | ||||
Add back: | |||||||||||
Amortization of intangible assets | 17,793 | 23,955 | 35,027 | ||||||||
Restructuring charges | 1,855 | 3,657 | 6,246 | ||||||||
Litigation and other losses (gains), net | (1,196 | ) | (2,019 | ) | 1,111 | ||||||
Transaction-related expenses | 2,680 | — | — | ||||||||
Goodwill impairment charges | — | — | 253,093 | ||||||||
Non-cash interest on convertible notes | 6,436 | 8,232 | 7,851 | ||||||||
Other non-operating expense (income), net | — | 5,807 | (696 | ) | |||||||
Tax effect of adjustments | (7,200 | ) | (9,487 | ) | (91,557 | ) | |||||
Tax expense related to the enactment of Tax Cuts and Jobs Act of 2017 | — | 1,749 | 8,762 | ||||||||
Tax benefit related to "check-the-box" election | (736 | ) | — | (2,728 | ) | ||||||
Total adjustments, net of tax | 19,632 | 31,894 | 217,109 | ||||||||
Adjusted net income from continuing operations | $ | 61,611 | $ | 45,838 | $ | 46,604 | |||||
Adjusted weighted average shares - diluted | 22,507 | 22,058 | 21,627 | ||||||||
Adjusted diluted earnings per share from continuing operations | $ | 2.74 | $ | 2.08 | $ | 2.15 | |||||
These non-GAAP financial measures include adjustments for the following items:
Amortization of intangible assets: We have excluded the effect of amortization of intangible assets from the calculation of adjusted net income from continuing operations presented above. Amortization of intangibles is inconsistent in its amount and frequency and is significantly affected by the timing and size of our acquisitions.
Restructuring charges: We have incurred charges due to the restructuring of various parts of our business. These restructuring charges have primarily consisted of costs associated with office space consolidations, including lease impairment charges and accelerated depreciation on lease-related property and equipment, and severance charges. We have excluded the effect of the restructuring charges from our non-GAAP measures because the amount of each restructuring charge is significantly affected by the timing and size of the restructured business or component of a business.
Litigation and other losses (gains), net: We have excluded the effects of litigation and other losses (gains), net which primarily consist of net remeasurement losses and gains related to contingent acquisition liabilities and litigation settlement losses and gains to permit comparability with periods that were not impacted by these items.
Transaction-related expenses: To permit comparability with prior periods, we excluded the impact of transaction-related expenses for acquisitions, whether or not ultimately consummated, and which primarily relate to third-party legal and accounting fees. The transaction-related expenses incurred in 2019 primarily related to the evaluation of a potential acquisition that ultimately did not consummate.
Goodwill impairment charges: We have excluded the effect of the goodwill impairment charges that occurred in 2017 as these are infrequent events and their exclusion permits comparability with periods that were not impacted by such charges.
Non-cash interest on convertible notes: We incurred non-cash interest expense relating to the implied value of the equity conversion component of our Convertible Notes. The value of the equity conversion component was treated as a debt discount and amortized to interest expense over the life of the Convertible Notes using the effective interest rate method. We exclude this non-cash interest expense that does not represent cash interest payments from the calculation of adjusted net income from continuing operations as management believes that this non-cash expense is not indicative of the ongoing performance of our business.
Other non-operating expense (income), net: We have excluded the effects of other non-operating income and expense items as they are infrequent, management believes that these items are not indicative of the ongoing performance of our business, and their exclusion permits comparability with periods that were not impacted by such items. The other non-operating expense for 2018 consists of the loss on the sale of the Middle East practice within the Business Advisory segment in 2018. The other non-operating income for 2017 is primarily attributable to a $0.9 million gain on the sale of our Life Sciences C&O practice, partially offset by a $0.3 million remeasurement loss recorded on a promissory note that was amended in 2017.
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Foreign currency transaction losses (gains), net: We have excluded the effect of foreign currency transaction losses and gains from the calculation of adjusted EBITDA because the amount of each loss or gain is significantly affected by timing and changes in foreign exchange rates.
Tax effect of adjustments: The non-GAAP income tax adjustment reflects the incremental tax impact applicable to the non-GAAP adjustments.
Tax expense related to the enactment of Tax Cuts and Jobs Act of 2017 ("2017 Tax Reform"): We have excluded the impact of the 2017 Tax Reform, which was enacted in the fourth quarter of 2017. The net tax expense recorded in 2018 was due to a valuation allowance for foreign tax credits and an adjustment to our withholding tax on outside basis differences due to our change in assertion for permanent reinvestment, which were partially offset by U.S. federal return to provision adjustments related to 2017 Tax Reform items on our 2017 corporate tax return. The tax expense for 2017 was primarily due to the remeasurement of net deferred tax balances at the lower federal income tax rate, additional one-time income tax expense related to the transition tax on accumulated foreign earnings, and withholding tax on outside basis differences due to our change in assertion for permanent reinvestment. The exclusion of the 2017 Tax Reform permits comparability with periods that were not impacted by this item.
Tax benefit related to "check-the-box" election: We have excluded the positive impacts of tax benefits related to our "check-the-box" elections. The tax benefit recorded in 2019 was the result of recognizing a previously unrecognized tax benefit due to the expiration of statute of limitations on our "check-the-box" election made in 2015 to treat certain wholly-owned foreign subsidiaries as disregarded entities for U.S. federal income tax purposes. The tax benefit recorded in 2017 was the result of recognizing a previously unrecognized tax benefit from our "check-the-box" election made in 2014 to treat one of our wholly-owned foreign subsidiaries as a disregarded entity for U.S. federal income tax purposes. The exclusion of these discrete tax benefits permit comparability with periods that were not impacted by this item. Refer to Note 17 “Income Taxes” within the notes to the consolidated financial statements for additional information on our "check-the-box" elections.
Income tax expense, Interest expense, net of interest income, Depreciation and amortization: We have excluded the effects of income tax expense, interest expense, net of interest income, and depreciation and amortization in the calculation of EBITDA as these are customary exclusions as defined by the calculation of EBITDA to arrive at meaningful earnings from core operations excluding the effect of such items.
Adjusted weighted average shares - diluted: As we reported a net loss for the year ended December 31, 2017, GAAP diluted weighted average shares outstanding equals the basic weighted average shares outstanding for that period. For the year ended December 31, 2017, the non-GAAP adjustments described above resulted in adjusted net income from continuing operations. Therefore, we included the dilutive common stock equivalents in the calculation of adjusted diluted weighted average shares outstanding for that period.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenues
Revenues increased $81.6 million, or 10.3%, to $876.8 million for the year ended December 31, 2019, from $795.1 million for the year ended December 31, 2018. Of the overall $81.6 million increase in revenues, $76.9 million was driven by our full-time billable consultants and $4.7 million was driven by our full-time equivalents.
The increase in full-time billable consultant revenues was attributable to strengthened demand for services in all of our segments, as discussed below in Segment Results, and reflected an increase in the average number of full-time billable consultants in 2019 compared to 2018.
The increase in full-time equivalent revenues was attributable to increases in full-time equivalent revenues in our Education and Healthcare segments, partially offset by a decrease in full-time equivalent revenues in our Business Advisory segment, as discussed below in Segment Results; and reflected an overall increase in the average number of full-time equivalents, partially offset by an overall decrease in revenue per full-time equivalent.
Total Direct Costs
Our total direct costs, including amortization of intangible assets and software development costs, increased $55.2 million, or 10.5%, to $581.0 million for the year ended December 31, 2019 from $525.8 million for the year ended December 31, 2018. The overall $55.2 million increase in direct costs primarily related to a $32.2 million increase in salaries and related expenses for our revenue-generating professionals, which was largely driven by increased headcount in all of our segments; a $15.7 million increase in performance bonus expense for our revenue-generating professionals; a $3.2 million increase in contractor expense; and a $2.3 million increase in share-based compensation expense for our revenue-generating professionals. As a percentage of revenues, our total direct costs increased to 66.3% during 2019 compared to 66.1% during 2018, primarily due to the increase in performance bonus expense for our revenue-generating professionals as a percentage of revenues, largely offset by revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals.
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Total direct costs for the year ended December 31, 2019 included $5.4 million of amortization expense for internal software development costs and intangible assets, compared to $4.2 million of amortization expense in 2018. The $1.1 million increase in amortization expense was primarily attributable to a $1.4 million increase in amortization of internal software development costs, partially offset by a $0.2 million decrease in intangible asset amortization attributable to certain intangible assets acquired in our Studer Group acquisition which were fully amortized in prior periods. Intangible asset amortization included within direct costs for the years ended December 31, 2019 and 2018 related to technology and software, certain customer relationships, publishing content and customer contracts acquired in connection with our business acquisitions. See Note 3 "Acquisitions" and Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information about our intangible assets.
Operating Expenses and Other Losses (Gains), Net
Selling, general and administrative expenses increased $22.1 million, or 12.2%, to $203.1 million for the year ended December 31, 2019, compared to $181.0 million for the year ended December 31, 2018. The overall increase of $22.1 million was primarily related to a $10.9 million increase in salaries and related expenses for our support personnel; a $4.5 million increase in data hosting and software related expenses; a $2.7 million increase in share-based compensation expense for our support personnel; a $2.4 million increase in legal expenses; a $1.7 million increase in performance bonus expense for our support personnel; and a $1.3 million increase in promotion and marketing expenses. These increases were partially offset by a $2.2 million decrease in facilities expense. The increases in share-based compensation expense and performance bonus expense for our support personnel were largely driven by overall improved company-wide performance. The increase in legal expenses was primarily due to third-party transaction-related expenses related to the evaluation of a potential acquisition that ultimately did not consummate. As a percentage of revenues, selling, general and administrative expenses increased to 23.2% during 2019 compared to 22.8% during 2018, primarily due to the items described above.
Restructuring charges for the year ended December 31, 2019 totaled $1.9 million, compared to $3.7 million for the year ended December 31, 2018. During 2019, we exited a portion of our Lake Oswego, Oregon office resulting in a $0.7 million lease impairment charge on the related operating lease right-of-use (“ROU”) asset and leasehold improvements and $0.2 million of accelerated depreciation on furniture and fixtures in that office. The lease impairment charge was recognized in accordance with ASC 842, Leases, which we adopted on a modified retrospective basis on January 1, 2019. See Note 2 “Summary of Significant Accounting Policies” within the notes to our consolidated financial statements for additional information on our adoption of ASC 842. See Note 5 “Leases” within the notes to our consolidated financial statements for additional information on the long-lived asset impairment test performed in 2019. Additionally, during 2019, we exited the remaining portion of our Middleton, Wisconsin office and an office space in Houston, Texas, resulting in restructuring charges of $0.4 million and $0.1 million, respectively, which primarily related to accelerated depreciation on related furniture and fixtures in those offices. During the fourth quarter of 2019, we entered into an amendment to the lease of our principal executive offices in Chicago, Illinois. Among other items, the amendment terminated the lease with respect to certain leased space which we previously vacated and currently sublease to a third-party. As a result of the amendment, we recognized a restructuring gain of $0.4 million. See Note 5 “Leases” for additional information on the amendment. Additional restructuring charges during 2019 include $0.6 million related to workforce reductions as we continue to better align resources with market demand and workforce reductions in our corporate operations.
The $3.7 million of restructuring charges in 2018 primarily consisted of $2.1 million related to workforce reductions to better align resources with market demand; $0.8 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; $0.4 million related to updated lease assumptions and commission costs for our San Francisco office vacated in 2017; and $0.3 million related to the divestiture of our Middle East practice within the Business Advisory segment. During the second quarter of 2018, we sold our Middle East business to a former employee who was the practice leader of that business at the time. The office exit costs incurred in 2018 were accounted for in accordance with ASC 840, Leases. See Note 11 “Restructuring Charges” within the notes to our consolidated financial statements for further discussion of our restructuring expenses.
Litigation and other losses (gains), net totaled to a net gain of $1.2 million for the year ended December 31, 2019, which primarily consisted of $1.5 million of remeasurement gains to decrease the estimated fair value of our liabilities for contingent consideration payments related to business acquisitions, partially offset by a $0.4 million litigation loss accrual related to a legal claim that was subsequently settled during the first quarter of 2020. Litigation and other losses (gains), net totaled a net gain of $2.0 million for the year ended December 31, 2018, which primarily consisted of a $2.5 million litigation settlement gain for the resolution of Huron's claim in a class action lawsuit, partially offset by $0.4 million of net remeasurement losses to increase the estimated fair value of our contingent consideration liabilities related to business acquisitions. In connection with certain business acquisitions, we may be required to pay post-closing consideration to the sellers if specific financial performance targets are met over a number of years as specified in the related purchase agreements. See Note 13 “Fair Value of Financial Instruments” within the notes to our consolidated financial statements for additional information on the fair value of contingent consideration liabilities.
Depreciation and amortization expense decreased $6.2 million, or 18.0%, to $28.4 million for the year ended December 31, 2019, from $34.6 million for the year ended December 31, 2018. The decrease was primarily attributable to decreasing amortization expense of the trade name and customer relationships acquired in our Studer Group acquisition and certain customer relationships acquired in other business
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acquisitions, due to the accelerated basis of amortization in prior periods, as well as certain other customer relationships acquired in business acquisitions that were fully amortized in prior periods. Intangible asset amortization included within operating expenses for the years ended December 31, 2019 and 2018 primarily related to certain customer relationships, trade names and non-competition agreements acquired in connection with our business acquisitions. See Note 3 “Acquisitions” and Note 4 “Goodwill and Intangible Assets” within the notes to our consolidated financial statements for additional information about our intangible assets.
Operating Income
Operating income increased $11.6 million, to $63.7 million for the year ended December 31, 2019, from $52.1 million for the year ended December 31, 2018. Operating margin, which is defined as operating income expressed as a percentage of revenues, increased to 7.3% in 2019 compared to 6.6% in 2018. The increase in operating margin was primarily attributable to the revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals and the decrease in intangible asset amortization expense; partially offset by the increase in performance bonus expense for our revenue-generating professionals, as a percentage of revenues.
Other Expense, Net
Total other expense, net decreased by $15.7 million to $11.2 million for the year ended December 31, 2019, from $26.9 million for the year ended December 31, 2018. The decrease in total other expense, net was primarily attributable to a $4.5 million net gain recognized in 2019 for the market value of our investments that are used to fund our deferred compensation liability, compared to a net loss of $1.6 million in 2018; as well as a $5.8 million loss recorded in 2018 related to the divestiture of our Middle East practice within our Business Advisory segment. During the second quarter of 2018, we sold our Middle East business to a former employee who was the practice leader of that business at the time. Interest expense, net of interest income decreased $3.4 million to $15.6 million in 2019 from $19.0 million in 2018, which was primarily attributable to the maturity of our Convertible Notes on October 1, 2019. See Note 7 “Financing Arrangements” within the notes to our consolidated financial statements for additional information about our Convertible Notes.
Income Tax Expense
For the year ended December 31, 2019, our effective tax rate was 20.0% as we recognized income tax expense from continuing operations of $10.5 million on income from continuing operations of $52.5 million. For the year ended December 31, 2018, our effective tax rate was 44.7% as we recognized income tax expense from continuing operations of $11.3 million on income from continuing operations of $25.2 million.
The effective tax rate for 2019 was more favorable than the statutory rate, inclusive of state income taxes, of 25.9%, primarily due to a $1.6 million tax benefit related to federal and state tax credits, which had a favorable impact of 3.1% on the effective tax rate; a $1.5 million tax benefit related to the change in valuation allowance primarily due to realizing deferred tax assets recorded for foreign tax credits, which had a favorable impact of 2.9% on the effective tax rate; and a $1.0 million tax benefit related to non-taxable gains on our investments used to fund our deferred compensation liability, which had a favorable impact of 1.8% on the effective tax rate. These favorable items were partially offset by $1.0 million of additional tax expense related to disallowed executive compensation, which had an unfavorable impact of 2.0% on the effective tax rate.
The effective tax rate for 2018 was less favorable than the statutory rate, inclusive of state income taxes, of 26.2%, primarily due to $1.8 million of discrete tax expense for valuation allowances, primarily due to uncertainties relating to the ability to utilize deferred tax assets recorded for foreign tax credits, which had an unfavorable impact of 6.9% on the effective tax rate; $1.2 million of discrete tax expense for share-based compensation awards that vested during 2018, which had an unfavorable impact of 4.9% on the effective tax rate; $0.6 million of additional tax expense related to disallowed executive compensation, which had an unfavorable impact of 2.5% on the effective tax rate; and $0.6 million of additional tax expense related to the change in fair value of contingent consideration, which had an unfavorable impact of 2.4% on the effective tax rate.
Net Income from Continuing Operations
Net income from continuing operations increased by $28.0 million to $42.0 million for the year ended December 31, 2019, from $13.9 million for the year ended December 31, 2018. As a result of the increase in net income from continuing operations, diluted earnings per share from continuing operations for the year ended December 31, 2019 was $1.87 compared to $0.63 for 2018.
EBITDA and Adjusted EBITDA
EBITDA increased $18.8 million to $101.9 million for the year ended December 31, 2019, from $83.1 million for the year ended December 31, 2018. Adjusted EBITDA increased $14.4 million to $105.4 million in 2019 from $91.0 million in 2018. The increase in EBITDA was primarily attributable to the increase in revenues for the year ended December 31, 2019 compared to the same prior year period and the loss on the divestiture of our Middle East business within our Business Advisory segment recorded in 2018. These increases to EBITDA were partially offset by the increases in salaries and related expenses for our revenue-generating professionals, selling, general and administrative
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expenses, and performance bonus expense for our revenue-generating professionals recognized in 2019 compared to 2018. The increase in adjusted EBITDA was primarily attributable to the increase in revenues, partially offset by the increases in salaries and related expenses for our revenue-generating professionals, selling, general and administrative expenses, and performance bonus expense for our revenue-generating professionals in 2019 compared to 2018.
Adjusted Net Income from Continuing Operations
Adjusted net income from continuing operations increased $15.8 million to $61.6 million for the year ended December 31, 2019, compared to $45.8 million for the year ended December 31, 2018. As a result of the increase in adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations increased by $0.66 to $2.74 in 2019, compared to $2.08 in 2018.
Segment Results
Healthcare
Revenues
Healthcare segment revenues increased $34.5 million, or 9.4%, to $399.2 million for the year ended December 31, 2019, from $364.8 million for the year ended December 31, 2018.
For the year ended December 31, 2019, revenues from fixed-fee arrangements; time-and-expense arrangements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 62.5%, 13.8%, 17.8%, and 5.9% of this segment’s revenues, respectively, compared to 65.6%, 16.0%, 11.7%, and 6.7%, respectively, in 2018. Performance-based fee revenue was $71.1 million in 2019, compared to $42.7 million in 2018. The level of performance-based fees earned may vary based on our clients’ risk sharing preferences and the mix of services we provide.
Of the overall $34.5 million increase in revenues, $33.5 million was attributable to an increase in revenues from our full-time billable consultants and $1.0 million was attributable to our full-time equivalents. The increase in revenues attributable to our full-time billable consultants reflected increases in the average billing rate and the average number of full-time billable consultants, partially offset by a decrease in the consultant utilization rate in 2019 compared to 2018. The increase in revenues attributable to our full-time equivalents reflected an increase in the average number of full-time equivalents, partially offset by a decrease in the revenue per full-time equivalent in 2019 compared to 2018.
Operating Income
Healthcare segment operating income increased $17.7 million, or 16.3%, to $125.7 million for the year ended December 31, 2019, from $108.1 million for the year ended December 31, 2018. The Healthcare segment operating margin, defined as segment operating income expressed as a percentage of segment revenues, increased to 31.5% in 2019 from 29.6% in 2018. The increase in this segment’s operating margin was primarily attributable to revenue growth that outpaced an increase in salaries and related expenses for our revenue-generating professionals, partially offset by an increase in performance bonus expense for our revenue-generating professionals, as a percentage of revenues.
Business Advisory
Revenues
Business Advisory segment revenues increased $16.3 million, or 6.9%, to $252.5 million for the year ended December 31, 2019, from $236.2 million for the year ended December 31, 2018.
For the year ended December 31, 2019, revenues from fixed-fee arrangements; time-and-expense arrangements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 39.9%, 55.3%, 2.7%, and 2.1% of this segment's revenues, respectively, compared to 41.5%, 54.5%, 2.3%, and 1.7%, respectively, in 2018. Performance-based fee revenue for the year ended December 31, 2019 was $6.9 million compared to $5.4 million in 2018. The level of performance-based fees earned may vary based on our clients’ preferences and the mix of services we provide.
Of the overall $16.3 million increase in revenues, $18.0 million was attributable to an increase in revenues generated by our full-time billable consultants; partially offset by a $1.7 million decrease in revenues generated by our full-time equivalents. The increase in revenues from our full-time billable consultants reflected an increase in the average number of full-time billable consultants, partially offset by decreases in the average billing rate and the consultant utilization rate. The decrease in revenues from our full-time equivalents was driven by a decreased use of contractors and project consultants, partially offset by an increase in software support and maintenance revenues; and reflected a decrease in the average number of full-time equivalents, partially offset by an increase in revenue per full-time equivalent in 2019 compared to 2018.
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Operating Income
Business Advisory segment operating income decreased by $0.9 million, or 1.8%, to $49.7 million for the year ended December 31, 2019, compared to $50.6 million for the year ended December 31, 2018. Segment operating margin decreased to 19.7% for 2019 from 21.4% for 2018. The decrease in this segment’s operating margin was also attributable to increases in salaries and related expenses and performance bonus expense for our revenue-generating professionals, as percentages of revenues. These decreases to the operating margin, were offset by decreases in contractor expense, restructuring charges, and third-party consulting expenses. Additionally, the decrease in the operating margin reflected a higher percentage of this segment's revenues derived from our lower margin solutions in 2019 compared to 2018.
Education
Revenues
Education segment revenues increased $30.9 million, or 15.9%, to $225.0 million for the year ended December 31, 2019, from $194.2 million for the year ended December 31, 2018.
For the year ended December 31, 2019, revenues from fixed-fee arrangements; time-and-expense arrangements; and software support, maintenance and subscription arrangements represented 23.0%, 68.8%, and 8.2% of this segment’s revenues, respectively, compared to 20.4%, 72.5%, and 7.1%, respectively, in 2018.
Of the overall $30.9 million increase in revenues, $25.4 million was attributable to revenues generated by our full-time billable consultants and $5.5 million was attributable to our full-time equivalents. The increase in revenues from our full-time billable consultants reflected an increase in the average number of full-time billable consultants; partially offset by a decrease in the average billing rate in 2019 compared to 2018. The increase in revenues from our full-time equivalents was primarily driven by an increased use of contractors and an increase in software and data hosting revenues, partially offset by a decreased use of project consultants; and reflected increases in the average number of full-time equivalents and revenue per full-time equivalent in 2019 compared to 2018.
Operating Income
Education segment operating income increased $7.5 million, or 15.5%, to $55.7 million for the year ended December 31, 2019, from $48.2 million for the year ended December 31, 2018. The Education segment operating margin was 24.8% for both 2019 and 2018. The Education segment's revenue growth outpaced increases in salaries and related expenses for our revenue-generating professionals and selling, general and administrative expenses. This increase to the operating margin was offset by increases in contractor expense and performance bonus expense for our revenue-generating professionals, as percentages of revenues.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $11.6 million, $33.1 million, and $16.9 million at December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, our primary sources of liquidity are cash on hand, cash flows from our U.S. operations, and borrowing capacity available under our credit facility.
Cash Flows (in thousands): | Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | ||||||||||
Net cash provided by operating activities | $ | 132,220 | $ | 101,658 | $ | 99,795 | ||||||
Net cash used in investing activities | (35,002 | ) | (18,562 | ) | (128,948 | ) | ||||||
Net cash provided by (used in) financing activities | (118,836 | ) | (66,690 | ) | 28,821 | |||||||
Effect of exchange rate changes on cash | 115 | (208 | ) | 214 | ||||||||
Net increase (decrease) in cash and cash equivalents | $ | (21,503 | ) | $ | 16,198 | $ | (118 | ) | ||||
Operating Activities
Net cash provided by operating activities totaled $132.2 million and $101.7 million for the years ended December 31, 2019 and 2018, respectively. Our operating assets and liabilities consist primarily of receivables from billed and unbilled services, accounts payable and accrued expenses, accrued payroll and related benefits, and deferred revenues. The volume of services rendered and the related billings and timing of collections on those billings, as well as payments of our accounts payable and salaries, bonuses, and related benefits to employees affect these account balances.
The increase in cash provided by operating activities in 2019 compared to 2018 was primarily attributable to an increase in cash collections from clients, which was driven by revenue growth, partially offset by the higher amount paid for annual performance bonuses during the first quarter of 2019 compared to the first quarter of 2018.
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Investing Activities
Net cash used in investing activities was $35.0 million and $18.6 million for the years ended December 31, 2019 and 2018, respectively.
The use of cash in 2019 primarily consisted of $13.2 million for purchases of property and equipment, primarily related to purchases of computers and network equipment and leasehold improvements for new office spaces in certain locations; $10.3 million for payments related to internally developed software; $5.0 million for a purchase of investment securities in the fourth quarter of 2019; $4.7 million for contributions to our life insurance policies which fund our deferred compensation plan; and $2.5 million for the purchase of a business in the third quarter of 2019.
The use of cash in 2018 primarily consisted of $8.9 million for purchases of property and equipment, primarily related to purchases of computers and network equipment; $6.1 million for payments related to internally developed software; $2.3 million for payments related to the divestiture of our Middle East practice within the Business Advisory segment; and $2.0 million for contributions to our life insurance policies which fund our deferred compensation plan.
We estimate that cash utilized for purchases of property and equipment and software in 2020 will be approximately $25 to $30 million; primarily consisting of software development costs, information technology related equipment to support our corporate infrastructure, and leasehold improvements for certain office locations.
Financing Activities
Net cash used in financing activities was $118.8 million and $66.7 million for the years ended December 31, 2019 and 2018, respectively.
During 2019, we borrowed $347.0 million under our credit facility, of which $217.0 million was used to repay a portion of the $250.0 million outstanding principal on our Convertible Notes in the fourth quarter of 2019. The remaining $33.0 million outstanding principal on our Convertible Notes was repaid with cash on hand. During 2019, we also made repayments on our credit facility of $192.5 million. Additionally, we repurchased and retired $14.2 million of our common stock under our Share Repurchase Program, as defined below, of which $1.2 million settled in the first quarter of 2020. During 2019, we paid $10.0 million to the sellers of certain business acquisitions for achieving specified financial performance targets in accordance with the related purchase agreements. Of the total $10.0 million paid, $4.7 million is classified as a cash outflow from financing activities and represents the amount paid up to the initial fair value of contingent consideration liability recorded as of the acquisition date. The remaining $5.3 million is classified as a cash outflow from operating activities.
During 2018, we borrowed $204.3 million under our credit facility and made repayments on our credit facility of $259.8 million. We also paid $12.0 million to the sellers of certain businesses acquisitions for achieving specified financial performance targets in accordance with the related purchase agreements. Of the $12.0 million paid, $7.0 million is classified as a cash outflow from financing activities and represents the amount paid up to the initial fair value of the contingent consideration liability recorded as of the acquisition date. The remaining $5.0 million is classified as a cash outflow from operating activities.
Share Repurchase Program
We currently have a share repurchase program permitting us to repurchase up to $125 million of our common stock through October 31, 2020 (the "Share Repurchase Program"). The amount and timing of the repurchases will be determined by management and will depend on a variety of factors, including the trading price of our common stock, capacity under our credit facility, general market and business conditions, and applicable legal requirements. In 2019, we repurchased and retired 210,437 shares for $14.2 million, of which $1.2 million settled in the first quarter of 2020. No shares were repurchased under this program in 2018. As of December 31, 2019, $20.9 million remains available for share repurchases.
Financing Arrangements
At December 31, 2019, we had $205.0 million outstanding under our senior secured credit facility and $3.9 million outstanding under a promissory note, as discussed below. The Convertible Notes matured on October 1, 2019.
1.25% Convertible Senior Notes
In September 2014, we issued $250 million principal amount of 1.25% convertible senior notes due 2019 in a private offering. The Convertible Notes were senior unsecured obligations of the Company and paid interest semi-annually on April 1 and October 1 of each year at an annual rate of 1.25%. The Convertible Notes matured on October 1, 2019. Upon maturity, we refinanced $217.0 million of the principal amount of the outstanding Convertible Notes with the borrowing capacity available under our revolving credit facility and funded the remaining $33.0 million principal payment with cash on hand. See Note 7 “Financing Arrangements” within the notes to the consolidated financial statements for additional information on our Convertible Notes.
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Senior Secured Credit Facility
The Company has a $600 million senior secured revolving credit facility, subject to the terms of a Second Amended and Restated Credit Agreement dated as of March 31, 2015, as amended to date (as amended and modified the "Amended Credit Agreement"), that becomes due and payable in full upon maturity on September 27, 2024. The Amended Credit Agreement provides the option to increase the revolving credit facility or establish term loan facilities in an aggregate amount of up to $150 million, subject to customary conditions and the approval of any lender whose commitment would be increased, resulting in a maximum available principal amount under the Amended Credit Agreement of $750 million. 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 1.125% per annum and 1.875% per annum, in the case of LIBOR borrowings, or between 0.125% per annum and 0.875% per annum, in the case of base rate loans, based upon our Consolidated Leverage Ratio at such time.
Amounts borrowed under the Amended Credit Agreement may be prepaid at any time without premium or penalty. We are required to prepay the amounts outstanding under the Amended Credit Agreement in certain circumstances. In addition, we have the right to permanently reduce or terminate the unused portion of the commitments provided under the Amended Credit Agreement at any time.
The Amended Credit Agreement contains usual and customary representations and warranties; affirmative and negative covenants, which include limitations on liens, investments, additional indebtedness, and restricted payments; and two quarterly financial covenants as follows: (i) a maximum Consolidated Leverage Ratio (defined as the ratio of debt to consolidated EBITDA) of 3.75 to 1.00; however, the maximum permitted Consolidated Leverage Ratio will increase to 4.00 to 1.00 upon the occurrence of certain transactions, and (ii) a minimum Consolidated Interest Coverage Ratio (defined as the ratio of consolidated EBITDA to interest) of 3.50 to 1.00. Consolidated EBITDA for purposes of the financial covenants is calculated on a continuing operations basis and includes adjustments to add back non-cash goodwill impairment charges, share-based compensation costs, certain non-cash restructuring charges, pro forma historical EBITDA for businesses acquired, and other specified items in accordance with the Amended Credit Agreement. At December 31, 2019 and December 31, 2018, we were in compliance with these financial covenants. Our Consolidated Leverage Ratio as of December 31, 2019 was 1.64 to 1.00, compared to 2.83 to 1.00 as of December 31, 2018. Our Consolidated Interest Coverage Ratio as of December 31, 2019 was 15.29 to 1.00, compared to 11.03 to 1.00 as of December 31, 2018. The reduction in our Consolidated Leverage Ratio as of December 31, 2019 compared to December 31, 2018 was driven by an increase in cash flows from operations, deployment of cash to reduce borrowings and improved profitability. Our maximum borrowing capacity, after consideration of our restrictive covenants and the unused borrowing capacity under the revolving credit facility, was $271.6 million at December 31, 2019 compared to $100.1 million at December 31, 2018.
Principal borrowings outstanding under the Amended Credit Agreement at December 31, 2019 and December 31, 2018 totaled $205.0 million and $50.0 million, respectively. These borrowings carried a weighted average interest rate of 3.0% at December 31, 2019 and 3.7% at December 31, 2018 including the impact of the interest rate swap described in Note 12 “Derivative Instruments and Hedging Activity" within the notes to the consolidated financial statements. The borrowing capacity under the revolving credit facility is reduced by any outstanding borrowings under the revolving credit facility and outstanding letters of credit. At December 31, 2019, we had outstanding letters of credit totaling $1.7 million, which are primarily used as security deposits for our office facilities.
The Amended Credit Agreement contains restricted payment provisions, including a potential limit on the amount of dividends we may pay. Pursuant to the terms of the Amended Credit Agreement, if our Consolidated Leverage Ratio is greater than 3.25, the amount of dividends and other Restricted Payments (as defined in the Amended Credit Agreement) we may pay is limited to an amount up to $25 million.
For further information, see Note 7 “Financing Arrangements” within the notes to the consolidated financial statements. For a discussion of certain risks and uncertainties related to the Amended Credit Agreement, see Part I—Item 1A. "Risk Factors.”
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 pay interest on the outstanding principal amount at a rate of one-month LIBOR plus 1.97% per annum. The obligations under the promissory note are secured pursuant to a Loan and Aircraft Security Agreement with Banc of America Leasing & Capital, LLC, which grants the lender a first priority security interest in the aircraft. At December 31, 2019, the outstanding principal amount of the promissory note was $3.9 million, and the aircraft had a carrying amount of $5.1 million. At December 31, 2018, the outstanding principal amount of the promissory note was $4.4 million, and the aircraft had a carrying amount of $5.8 million.
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For further information, see Note 7 “Financing Arrangements” within the notes to the consolidated financial statements.
Future Needs
Our primary financing need has been to fund our growth. Our growth strategy is to expand our service offerings, which may require investments in new hires, acquisitions of complementary businesses, possible expansion into other geographic areas, and related capital expenditures. We believe our internally generated liquidity, together with our available cash, the borrowing capacity available under our revolving credit facility, and access to external capital resources will be adequate to fund our long-term growth and capital needs arising from cash commitments and debt service obligations. Our ability to secure short-term and long-term financing in the future will depend on several factors, including our future profitability, the quality of our accounts receivable and unbilled services, our relative levels of debt and equity, and the overall condition of the credit markets.
CONTRACTUAL OBLIGATIONS
The following table represents our significant obligations and commitments as of December 31, 2019 and the scheduled years of payments (in thousands).
Payments Due by Period | |||||||||||||||||||
Total | 2020 | 2021-2022 | 2023-2024 | Thereafter | |||||||||||||||
Long-term bank borrowings—principal and interest (1) | $ | 234,037 | $ | 6,113 | $ | 12,226 | $ | 215,698 | $ | — | |||||||||
Promissory note—principal and interest (2) | 4,276 | 661 | 1,308 | 2,307 | — | ||||||||||||||
Operating lease obligations (3) | 90,887 | 9,772 | 23,541 | 22,363 | 35,211 | ||||||||||||||
Purchase obligations (4) | 29,593 | 15,504 | 9,869 | 4,220 | — | ||||||||||||||
Deferred compensation (5) | 27,544 | ||||||||||||||||||
Uncertain tax positions (6) | 78 | ||||||||||||||||||
Total contractual obligations | $ | 386,415 | $ | 32,050 | $ | 46,944 | $ | 244,588 | $ | 35,211 | |||||||||
(1) | The interest payments on long-term bank borrowings are estimated based on the principal amount outstanding and the interest rate in effect as of December 31, 2019. Actual future interest payments will differ due to changes in our borrowings outstanding and the interest rate on those borrowings, as the interest rate varies based on the fluctuations in the variable base rates and the spread we pay over those base rates pursuant to the Amended Credit Agreement. Refer to “Liquidity and Capital Resources” and Note 7 “Financing Arrangements” within the notes to our consolidated financial statements for more information on our outstanding borrowings. |
(2) | The interest payments on the promissory note are estimated based on the principal amount outstanding, scheduled principal payments, and the interest rate in effect as of December 31, 2019. Actual future interest payments may differ due to changes in the principal amount outstanding and the interest rate on that principal amount, as the interest rate varies based on the fluctuations in the one-month LIBOR rate. Refer to “Liquidity and Capital Resources” and Note 7 “Financing Arrangements” within the notes to our consolidated financial statements for more information on the promissory note. |
(3) | We lease our facilities under operating lease arrangements expiring on various dates through 2029, with various renewal options. We lease office facilities under non-cancelable operating leases that include fixed or minimum payments plus, in some cases, scheduled base rent increases over the term of the lease. Refer to Note 5 “Leases” within the notes to our consolidated financial statements for more information on our operating lease obligations. |
(4) | Purchase obligations include agreements to purchase goods or services that are enforceable, are legally binding, and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include agreements that are cancelable without penalty. |
(5) | Included in deferred compensation and other liabilities on our consolidated balance sheet as of December 31, 2019 is a $27.5 million obligation for deferred compensation. The specific payment dates for the deferred compensation are unknown; therefore, the related balances have not been reflected in the “Payments Due by Period” section of the table. This deferred compensation liability is funded by corresponding deferred compensation plan assets. Refer to Note 15 “Employee Benefit and Deferred Compensation Plans” within the notes to our consolidated financial statements for more information on our deferred compensation plan. |
(6) | Our liabilities for uncertain tax positions are classified as non-current and includes the accrual of potential payment of interest and penalties. We are unable to reasonably estimate the timing of future payments as it depends on examinations by taxing authorities; as such, the related balance has not been reflected in the “Payments Due by Period” section of the table. |
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OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any material off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our significant accounting policies are discussed in Note 2 “Summary of Significant Accounting Policies,” within the notes to our consolidated financial statements. We regularly review our financial reporting and disclosure practices and accounting policies to ensure that our financial reporting and disclosures provide accurate information relative to the current economic and business environment. The preparation of financial statements in conformity with GAAP requires management to make assessments, estimates, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to impact our financial position and operating results. While all decisions regarding accounting policies are important, we believe that there are five accounting policies that could be considered critical: revenue recognition, allowances for doubtful accounts and unbilled services, business combinations, carrying values of goodwill and other intangible assets, and accounting for income taxes.
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 and 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 and 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 Culture and Organizational Excellence solution include fixed-fee partner contracts with multiple performance obligations, which primarily consist of coaching services, as well as speaking engagements, conferences, publications and software products (“Partner Contracts”). Revenues for coaching services and software products are generally recognized on a straight-line basis over the length of the contract. All other revenues under Partner Contracts, including speaking engagements, conferences and publications, are recognized at the time the goods or services are provided. 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 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 Culture and Organizational Excellence solution. We recognize revenues under time-and-expense arrangements as the related services or publications are provided, using the right to invoice practical
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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 generally 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.
Allowances for Doubtful Accounts and Unbilled Services
We maintain allowances for doubtful accounts and for services performed but not yet billed based on several factors, including the estimated cash realization from amounts due from clients, an assessment of a client’s ability to make required payments, and the historical percentages of fee adjustments and write-offs by age of receivables and unbilled services. The allowances are assessed by management on a regular basis. These estimates may differ from actual results. If the financial condition of a client deteriorates in the future, impacting the client’s ability to make payments, an increase to our allowance might be required or our allowance may not be sufficient to cover actual write-offs.
We record the provision for doubtful accounts and unbilled services as a reduction in revenue to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the provision relates to a client’s inability to make required payments on accounts receivables, we record the provision to selling, general and administrative expenses.
Business Combinations
The assets acquired and liabilities assumed in a business combination, including identifiable intangible assets, are recorded at their estimated fair values as of the acquisition date. Goodwill is recorded as the excess of the fair value of consideration transferred, including any contingent consideration, over the fair value of the net assets acquired. We base the fair values of identifiable intangible assets on detailed valuations that require management to make significant judgments, estimates, and assumptions, such as the expected future cash flows to be derived from the intangible assets, discount rates that reflect the risk factors associated with future cash flows, and estimates of useful lives.
We measure and recognize contingent consideration at fair value as of the acquisition date. We estimate the fair value of contingent consideration based on 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 require the use of significant judgments, estimates, and assumptions, including financial performance projections and discount rates. The fair value of the contingent consideration is reassessed quarterly based on assumptions used in our latest financial projections and input provided by practice leaders and management, with any change in the fair value estimate recorded in earnings in that period. Increases or decreases in the fair value of contingent consideration liabilities resulting from changes in the estimates or assumptions could materially impact the financial statements. See Note 3 "Acquisitions" within the notes to our consolidated financial statements for additional information regarding our acquisitions.
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Carrying Values of Goodwill and Other Intangibles Assets
We test goodwill for impairment, at the reporting unit level, annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. We perform our annual goodwill impairment test as of November 30 and monitor for interim triggering events on an ongoing basis. A reporting unit is an operating segment or one level below an operating segment (referred to as a component) to which goodwill is assigned when initially recorded. We assign goodwill to reporting units based on our integration plans and the expected synergies resulting from the acquisition. At the time of our November 30, 2019 annual goodwill impairment test, we had five reporting units with goodwill balances: Healthcare, Education, Business Advisory, Strategy and Innovation, and Life Sciences. The Business Advisory, Strategy and Innovation, and Life Sciences reporting units, along with the Enterprise Solutions and Analytics reporting unit which does not have a goodwill balance, make up our Business Advisory operating segment.
Under GAAP, we have the option to first assess qualitative factors to determine whether the existence of current events or circumstances would lead to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying value. If we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying value, no further testing is necessary. However, if we conclude otherwise, then we are required to perform a quantitative impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying value of the reporting unit. If the fair value of the reporting unit is less than its carrying value, a non-cash impairment charge is recorded in an amount equal to that difference with the loss not to exceed the total amount of goodwill allocated to the reporting unit.
We have the option to bypass the qualitative assessment for any reporting unit and proceed directly to performing the quantitative goodwill impairment test.
For reporting units where we perform the quantitative test, we determine the fair value using a combination of the income approach and the market approach. For a company such as ours, the income and market approaches will generally provide the most reliable indications of fair value because the value of such companies is dependent on their ability to generate earnings.
The following is a discussion of our goodwill impairment analysis performed during 2019.
2019 Annual Goodwill Impairment Analysis
Pursuant to our policy, we performed our annual goodwill impairment test as of November 30, 2019 on our five reporting units with goodwill balances: Healthcare, Education, Business Advisory, Strategy and Innovation, and Life Sciences. We performed a qualitative assessment over the Healthcare, Education, Business Advisory, and Life Sciences reporting units to determine if it was more likely than not the respective fair values of these reporting units were less than their carrying amounts, including goodwill. We elected to bypass the qualitative assessment and performed a quantitative impairment test for the Strategy and Innovation reporting unit as the reporting unit is a relatively new business resulting from an acquisition in 2017 and also fell short of internal financial expectations in 2019.
For our qualitative assessment of the Healthcare, Education, Business Advisory and Life Sciences reporting units, we considered the most recent quantitative analysis performed for these reporting units, which was as of November 30, 2017, including the key assumptions used within that analysis, the indicated fair values, and the amount by which those fair values exceeded their carrying amounts. One of the key assumptions used within the prior quantitative analysis was our internal financial projections; therefore, we considered the actual performance of each reporting unit during 2019 and 2018 compared to the internal financial projections used, as well as specific outlooks for each reporting unit based on our most recent internal financial projections. We also considered the market-based valuation multiples used in the market approach within our prior quantitative analysis, which were derived from guideline companies, and noted that the valuation multiples generally increased compared to November 30, 2017. We also reviewed the current carrying value of each reporting unit in comparison to the carrying values as of the prior quantitative analysis. In addition, we considered various factors, including macroeconomic conditions, relevant industry and market trends for each reporting unit, and other entity-specific events, that could indicate a potential change in the fair value of our reporting units or the composition of their carrying values. Based on our assessments, we determined that it was more likely than not that the fair values of the Healthcare, Education, Business Advisory and Life Sciences reporting units exceeded their respective carrying amounts. As such, the goodwill for these reporting units was not considered impaired as of November 30, 2019, and a quantitative goodwill impairment analysis was not necessary.
The qualitative assessment of our reporting units requires us to make significant judgments, estimates, and assumptions. While we believe that the estimates and assumptions underlying our analysis are reasonable, there is no assurance that the actual future earnings or cash flows of our reporting units will be consistent with our projections. We will monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods. Any significant decline in our operations could result in non-cash goodwill impairment charges.
For the Strategy and Innovation reporting unit, we reviewed goodwill for impairment by comparing the fair value of the reporting unit to its carrying value, including goodwill. In estimating the fair value of the reporting unit, we relied on a combination of the income approach and the market approach utilizing the guideline company method, with a fifty-fifty weighting. Based on the results of the goodwill impairment test,
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we determined the fair value of the Strategy and Innovation reporting unit exceeded its carrying value by 41%. As such, we concluded that there was no indication of goodwill impairment for the reporting unit.
In the income approach used to calculate the fair value of the Strategy and Innovation reporting unit, we utilized a discounted cash flow analysis, which involves estimating the expected after-tax cash flows that will be generated by the reporting unit and then discounting those cash flows to present value reflecting the relevant risks associated with the reporting unit and the time value of money. This approach requires the use of significant estimates and assumptions, such as long-term projections of future cash flows, including estimates of revenues and operating margins; market conditions; tax rates; and discount rates reflecting the risk inherent in future cash flows. In estimating future cash flows, we relied on internally generated forecasts based on historical experience, current backlog, expected market demand, and other industry information, and assumed a long-term annual revenue growth rate of 3.0%. Our discounted cash flow analysis assumed a weighted average cost of capital discount rate of 14.0% for the Strategy and Innovation reporting unit.
In the market approach, we utilized the guideline company method, which involved calculating valuation multiples based on operating data from guideline publicly traded companies. Multiples derived from guideline companies provide an indication of how much a knowledgeable investor in the marketplace would be willing to pay for a company. For the Strategy and Innovation reporting unit, these multiples are evaluated and adjusted based on specific characteristics of the reporting unit relative to the selected guideline companies and applied to the reporting unit's operating data to arrive at an indication of value.
Determining the fair value of the Strategy and Innovation reporting unit requires us to make significant judgments, estimates, and assumptions. While we believe that the estimates and assumptions underlying our valuation methodology are reasonable, these estimates and assumptions could have a significant impact on whether or not a non-cash goodwill impairment charge is recognized and also the magnitude of any such charge. The results of an impairment analysis are as of a point in time. There is no assurance that the actual future earnings or cash flows of our reporting units will be consistent with our projections. We will monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods. Any significant decline in our operations could result in non-cash goodwill impairment charges.
The table below presents, based on the quantitative goodwill impairment test performed as of November 30, 2019, the decrease in the fair value of the Strategy and Innovation reporting unit given a 100 basis point increase in the assumed discount rate or a 100 basis point decrease in the assumed long-term annual revenue growth rate.
Discount rate increased by 100 bps | Long-term growth rate decreased by 100 bps | |||||
Strategy and Innovation: | ||||||
Decrease in fair value | $ | (5,600 | ) | $ | (3,600 | ) |
Percentage by which fair value exceeds carrying value | 35 | % | 37 | % | ||
The carrying values of goodwill for each of our reporting units as of December 31, 2019 are as follows (in thousands):
Reporting Unit | Carrying Value of Goodwill | |||
Healthcare | $ | 428,729 | ||
Education | 103,889 | |||
Business Advisory | 16,094 | |||
Strategy and Innovation | 87,410 | |||
Life Sciences | 10,558 | |||
Enterprise Solutions and Analytics | — | |||
Total | $ | 646,680 | ||
Intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill. Our intangible assets, net of accumulated amortization, totaled $31.6 million at December 31, 2019 and primarily consist of customer relationships, trade names, technology and software, non-competition agreements, and customer contracts, all of which were acquired through business combinations. We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. No material impairment charges for intangible assets were recorded in 2019.
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Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. In determining our provision for income taxes on an interim basis, we estimate our annual effective tax rate based on information available at each interim period.
Deferred tax assets and liabilities are recorded for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in management’s opinion, it is more likely than not that some portion or the entire deferred tax asset will not be realized.
Our tax positions are subject to income tax audits by federal, state, local, and foreign tax authorities. A tax benefit from an uncertain position may be recognized in the financial statements only if it is more likely than not that the position is sustainable, based on its technical merits. We measure the tax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. The estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at that time.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 “Summary of Significant Accounting Policies" within the notes to the consolidated financial statements for information on new accounting pronouncements.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
We are exposed to market risks primarily from changes in interest rates and changes in the market value of our investments.
Market Risk and Interest Rate Risk
Concurrent with the issuance of our Convertible Notes, we entered into separate convertible note hedge and warrant transactions. The convertible note hedge transactions were intended to reduce the potential future economic dilution associated with the conversion of the Convertible Notes and, combined with the warrants, effectively raised the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share. Under the convertible note hedge transactions, we had the option to purchase a total of approximately 3.1 million shares of our common stock, which was the number of shares initially issuable upon conversion of the Convertible Notes in full, at a price of approximately $79.89, which corresponds to the initial conversion price of the Convertible Notes, subject to customary anti-dilution adjustments substantially similar to those in the Convertible Notes. The convertible note hedge transactions expired in the third quarter of 2019. Under the warrant transactions, the holders of the warrants have the option to purchase a total of approximately 3.1 million shares of our common stock at a price of approximately $97.12. If the average market value per share of our common stock for the reporting period exceeds the strike price of the warrants, the warrants will have a dilutive effect on our earnings per share. The warrants will expire incrementally on 100 different dates from January 6, 2020 to May 28, 2020 and are exercisable at each such expiry date. See Note 7 “Financing Arrangements” within the notes to the consolidated financial statements for additional information on our Convertible Notes, which matured on October 1, 2019.
We have exposure to changes in interest rates associated with borrowings under our bank credit facility, which has variable interest rates tied to LIBOR or an alternate base rate, at our option. At December 31, 2019, we had borrowings outstanding under the credit facility totaling $205.0 million that carried a weighted average interest rate of 3.0% including the impact of the interest rate swap described below. A hypothetical 100 basis point change in the interest rate would have a $1.6 million effect on our pretax income, on an annualized basis, including the effect of the interest rate swap. At December 31, 2018, our borrowings outstanding under the credit facility totaled $50.0 million which carried a weighted average interest rate of 3.7%, including the effect of the interest rate swap described below. As of December 31, 2018, these variable rate borrowings were fully hedged against changes in interest rates by the interest rate swap, which had a notional amount of $50.0 million as of December 31, 2018. A hypothetical 100 basis point change in the interest rate as of December 31, 2018, would have had no impact on our consolidated financial statements.
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 also have exposure to changes in interest rates associated with the promissory note assumed on June 30, 2017 in connection with our purchase of an aircraft, which has variable interest rates tied to LIBOR. At December 31, 2019, the outstanding principal amount of the promissory note was $3.9 million and carried an interest rate of 3.7%. A hypothetical 100 basis point change in this interest rate would not
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have a material effect on our pretax income. At December 31, 2018 the outstanding principal amount of the promissory note was $4.4 million and carried an interest rate of 4.3%. A hypothetical 100 basis point change in the interest rate as of December 31, 2018 would not have had a material effect on our pretax income.
We do not use derivative instruments for trading or other speculative purposes. From time to time, we invest excess cash in short-term marketable securities. These investments principally consist of overnight sweep accounts. Due to the short maturity of these investments, we have concluded that we do not have material market risk exposure.
We have a non-interest bearing convertible debt investment in Shorelight Holdings, LLC, a privately-held company, which we account for as an available-for-sale debt security. As such, the investment is carried at fair value with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income. As of December 31, 2019, the fair value of the investment was $49.5 million, with a total cost basis of $27.9 million. At December 31, 2018, the fair value of the investment was $50.4 million, with a total cost basis of $27.9 million.
We have a preferred stock investment in Medically Home Group, Inc., a privately-held company, which we account for as an equity security without a readily determinable fair value using the measurement alternative. As such, the investment is carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment. Any unrealized holding gains and losses resulting from observable price changes are recorded in our consolidated statement of operations. As of December 31, 2019, the carrying value of the investment was $5.0 million. Following our purchase, there has been no impairment, nor any observable price changes to our investment. See Note 13 “Fair Value of Financial Instruments” for further information on our long-term investments.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
The Company’s Consolidated Financial Statements and supplementary data begin on page F-1 of this Annual Report on Form 10-K.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
ITEM 9A. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2019, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports we file or submit under the Exchange Act, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the Company. Internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, and effected by the Company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
(i) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
(ii) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
(iii) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
37
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of this report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the internal control over financial reporting as of December 31, 2019 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013). As a result of that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing on page F-2 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION. |
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors, Executive Officers, Promoters and Control Persons
The information required by this item is incorporated by reference from portions of our definitive proxy statement for our annual meeting of stockholders to be filed with the SEC pursuant to Regulation 14A by April 29, 2020 (the “Proxy Statement”) under “Nominees to Board of Directors,” “Directors Not Standing For Election” and “Executive Officers.”
Compliance with Section 16(a) of the Exchange Act
The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Section 16(a) Beneficial Ownership Reporting Compliance.”
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics (the “Code”) that is applicable to all of our employees, officers and directors. The Code is available on the Corporate Governance page of our website at ir.huronconsultinggroup.com. If we make any amendments to or grant any waivers from the Code which are required to be disclosed pursuant to the Securities Exchange Act of 1934, we will make such disclosures on our website.
Corporate Governance
The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Board Meetings and Committees.”
ITEM 11. | EXECUTIVE COMPENSATION. |
Executive Compensation
The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Executive Compensation.”
Compensation Committee Interlocks and Insider Participation
The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Compensation Committee Interlocks and Insider Participation.”
38
Compensation Committee Report
The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Compensation Committee Report.”
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes information with respect to equity compensation plans approved by shareholders as of December 31, 2019. We do not have equity compensation plans that have not been approved by shareholders.
Plan Category | Number of Shares to be Issued Upon Exercise of Outstanding Options | Weighted Average Exercise Price of Outstanding Options | Number of Shares Remaining Available for Future Issuance (excluding shares in 1st column) | ||||||
Equity compensation plans approved by shareholders: | |||||||||
2004 Omnibus Stock Plan (1) | 74,608 | $ | 29.74 | — | |||||
2012 Omnibus Incentive Plan (2) | 31,785 | $ | 39.19 | 1,073,349 | |||||
Stock Ownership Participation Program (3) | — | $ | — | 33,497 | |||||
Equity compensation plans not approved by shareholders | N/A | N/A | N/A | ||||||
Total | 106,393 | $ | 32.57 | 1,106,846 | |||||
(1) | Our 2004 Omnibus Stock Plan was approved by the existing shareholders prior to our initial public offering. Upon adoption of the 2012 Omnibus Incentive Plan, we terminated the 2004 Omnibus Stock Plan with respect to future awards and no further awards will be granted under this plan. |
(2) | Our 2012 Omnibus Incentive Plan was approved by our shareholders at our annual meeting held on May 1, 2012. Subsequent to the initial approval and through December 31, 2019, our shareholders have approved amendments to the 2012 Omnibus Incentive Plan to increase the number of shares reserved for issuance by 2,254,000, in the aggregate. |
(3) | Our Stock Ownership Participation Program was approved by our shareholders at our annual meeting held on May 1, 2015. |
Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Stock Ownership of Certain Beneficial Owners and Management.”
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Certain Relationships and Related Transactions.”
Director Independence
The information required by this item is incorporated by reference from portions of the Proxy Statement under “Nominees to Board of Directors,” “Directors Not Standing For Election,” and “Board Meetings and Committees.”
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Audit and Non-Audit Fees.”
39
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) Documents filed as part of this Annual Report on Form 10-K.
1. | Financial Statements—Our independent registered public accounting firm’s report and our Consolidated Financial Statements are listed below and begin on page F-1 of this Form 10-K. |
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Other Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. | Financial Statement Schedules—The financial statement schedules required by this item are included in the Consolidated Financial Statements and accompanying notes. |
3. | Exhibit Index |
Exhibit Number | Exhibit Description | Filed herewith | Furnished herewith | Incorporated by Reference | |||
Form | Period Ending | Exhibit | Filing Date | ||||
3.1 | 10-K | 12/31/2004 | 3.1 | 2/16/2005 | |||
3.2 | 8-K | 3.1 | 10/28/2015 | ||||
4.1 | S-1 (File No. 333- 115434) | 4.1 | 10/5/2004 | ||||
4.2 | X | ||||||
4.3 | 8-K | 4.1 | 9/16/2014 | ||||
10.1 | S-1 (File No. 333- 115434) | 10.1 | 10/5/2004 | ||||
10.2* | S-8 | 10.1 | 5/5/2010 | ||||
10.3* | 10-K | 12/31/2008 | 10.12 | 2/24/2009 | |||
10.4* | 8-K | 10.1 | 1/6/2017 | ||||
10.5* | 8-K | 10.2 | 1/6/2017 | ||||
10.6* | 8-K | 10.3 | 1/6/2017 | ||||
10.7* | 8-K | 10.4 | 1/6/2017 | ||||
10.8* | 8-K | 10.1 | 9/16/2019 | ||||
40
Exhibit Number | Exhibit Description | Filed herewith | Furnished herewith | Incorporated by Reference | |||
Form | Period Ending | Exhibit | Filing Date | ||||
10.9 | 10-K | 12/31/2012 | 10.17 | 2/21/2013 | |||
10.10 | 10-K | 12/31/2012 | 10.18 | 2/21/2013 | |||
10.11 | 10-K | 12/31/2012 | 10.19 | 2/21/2013 | |||
10.12 | 8-K | 10.1 | 1/4/2013 | ||||
10.13† | X | ||||||
10.14 | 8-K | 10.1 | 10/16/2019 | ||||
10.15* | 10-K | 12/31/2012 | 10.20 | 2/21/2013 | |||
10.16 | 8-K | 10.2 | 9/5/2014 | ||||
10.17 | 8-K | 10.3 | 9/5/2014 | ||||
10.18 | 8-K | 10.4 | 9/5/2014 | ||||
10.19 | 8-K | 10.5 | 9/5/2014 | ||||
10.20 | 8-K | 10.1 | 9/16/2014 | ||||
10.21 | 8-K | 10.2 | 9/16/2014 | ||||
10.22 | 8-K | 10.3 | 9/16/2014 | ||||
10.23 | 8-K | 10.4 | 9/16/2014 | ||||
41
Exhibit Number | Exhibit Description | Filed herewith | Furnished herewith | Incorporated by Reference | |||
Form | Period Ending | Exhibit | Filing Date | ||||
10.24* | 10-K | 12/31/2014 | 10.31 | 2/24/2015 | |||
10.25* | 10-K | 12/31/2014 | 10.32 | 2/24/2015 | |||
10.26* | 10-K | 12/31/2014 | 10.33 | 2/24/2015 | |||
10.27* | 10-K | 12/31/2014 | 10.34 | 2/24/2015 | |||
10.28 | 8-K | 10.1 | 4/2/2015 | ||||
10.29 | 8-K | 10.2 | 4/2/2015 | ||||
10.30 | 8-K | 10.3 | 4/2/2015 | ||||
10.31* | DEF 14A | Appendix A | 3/20/2015 | ||||
10.32* | DEF 14A | Appendix A | 3/27/2017 | ||||
10.33* | DEF 14A | Appendix A | 3/22/2019 | ||||
10.34* | X | ||||||
10.35 | 8-K | 10.1 | 3/6/2017 | ||||
10.36 | 10-Q | 9/30/2017 | 10.1 | 11/1/2017 | |||
10.37 | 8-K | 10.1 | 3/29/2018 | ||||
42
Exhibit Number | Exhibit Description | Filed herewith | Furnished herewith | Incorporated by Reference | |||
Form | Period Ending | Exhibit | Filing Date | ||||
10.38 | 8-K | 10.1 | 10/3/2019 | ||||
21.1 | X | ||||||
23.1 | X | ||||||
31.1 | X | ||||||
31.2 | X | ||||||
32.1 | X | ||||||
32.2 | X | ||||||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | X | |||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | |||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | |||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | |||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | |||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | |||||
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | X | |||||
* | Indicates the exhibit is a management contract or compensatory plan or arrangement. |
† | Pursuant to Regulation S-K 601(b)(10)(iv), certain exhibits to this Exhibit have been omitted. The Company agrees to furnish supplementally to the Securities and Exchange Commission, upon its request, a copy of any or all omitted exhibits. |
ITEM 16. | FORM 10-K SUMMARY |
Not applicable.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Huron Consulting Group Inc. | ||||
(Registrant) | ||||
Signature | Title | Date | ||
/s/ JAMES H. ROTH | Chief Executive Officer and Director | 2/25/2020 | ||
James H. Roth | ||||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James H. Roth, John D. Kelly, and Diane Ratekin, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all and any other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
Signature | Title | Date | ||
/s/ JAMES H. ROTH | Chief Executive Officer and Director (Principal Executive Officer) | 2/25/2020 | ||
James H. Roth | ||||
/s/ JOHN F. MCCARTNEY | Non-Executive Chairman of the Board | 2/25/2020 | ||
John F. McCartney | ||||
/s/ GEORGE E. MASSARO | Vice Chairman of the Board | 2/25/2020 | ||
George E. Massaro | ||||
/s/ JOHN D. KELLY | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) | 2/25/2020 | ||
John D. Kelly | ||||
/s/ ELLEN P. WONG | Chief Accounting Officer (Principal Accounting Officer) | 2/25/2020 | ||
Ellen P. Wong | ||||
/s/ H. EUGENE LOCKHART | Director | 2/25/2020 | ||
H. Eugene Lockhart | ||||
/s/ HUGH E. SAWYER | Director | 2/25/2020 | ||
Hugh E. Sawyer | ||||
/s/ EKTA SINGH-BUSHELL | Director | 2/25/2020 | ||
Ekta Singh-Bushell | ||||
/s/ DEBRA ZUMWALT | Director | 2/25/2020 | ||
Debra Zumwalt | ||||
44
HURON CONSULTING GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page | |
F-2 | |
Consolidated Balance Sheets at December 31, 2019 and 2018 | F-3 |
Consolidated Statements of Operations and Other Comprehensive Income (Loss) for the years ended December 31, 2019, 2018, and 2017 | F-4 |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018, and 2017 | F-5 |
F-6 | |
F-7 | |
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Huron Consulting Group Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Huron Consulting Group Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations and other comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of January 1, 2019 and the manner in which it accounts for revenue from contracts with customers as of January 1, 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-2
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition - Fixed-Fee and Healthcare Performance-Based Billing Arrangements
As described in Notes 2 and 19 to the consolidated financial statements, in fixed-fee billing arrangements, which accounted for $401.9 million of revenues for the year ended December 31, 2019, the Company agrees to a pre-established fee in exchange for a predetermined set of professional services. As disclosed by management, under fixed-fee arrangements, revenues are recognized based upon work completed to date versus management’s estimates of the total services to be provided under the engagement. Additionally, the Company’s Healthcare practice enters into performance-based billing arrangements whereby fees are tied to the attainment of contractually defined objectives, as a result of adopting the Company’s recommendations, which accounted for $71.1 million of revenues for the year ended December 31, 2019. Under performance-based billing arrangements, revenue is recognized based on an estimate of variable consideration and work completed to date versus the estimates of the total services to be provided under the engagement. Variable consideration is estimated based on a probability-weighted assessment of the fees to be earned, net of a constraint to limit the amount that could be reversed when the uncertainty is resolved.
The principal considerations for our determination that performing procedures relating to revenue recognition under fixed-fee and healthcare performance-based billing arrangements is a critical audit matter are there was significant judgment by management when developing their estimates of revenue to be recognized from these billing arrangements. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s significant assumptions, including work completed to date versus management’s estimates of the total services to be provided for fixed-fee and performance-based billing arrangements, and the probability of attaining contractually defined objectives in performance-based billing arrangements.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process under fixed-fee and performance-based billing arrangements. These procedures also included, among others, testing the accuracy of the total contract amounts and evaluating the reasonableness of management’s assumption of work completed to-date versus management’s estimates of the total services to be provided by (i) inquiring with the Company’s employees regarding the expected remaining efforts for a sample of engagements, (ii) evaluating trends in past performance, and (iii) evaluating performance to date. Additionally, for performance-based billing arrangements, procedures included, among others, (i) evaluating the reasonableness of management’s assumption of the probability of attaining the contractually defined objectives by inquiring with the Company’s employees regarding the expected remaining efforts and the probability weighting of variable consideration to be earned for a sample of engagements and by evaluating trends in past performance, (ii) evaluating the necessity of applying a constraint based upon consideration of the initial forecasts developed during project procurement, and (iii) evaluating performance to date towards the attainment of contractually defined objectives.
Goodwill Impairment Assessment - Strategy and Innovation Reporting Unit
As described in Notes 2 and 4 to the consolidated financial statements, the Company’s consolidated goodwill balance was $646.7 million as of December 31, 2019, of which $87.4 million is attributed to the Strategy and Innovation reporting unit. Management conducts an annual goodwill impairment test as of November 30, and when events or circumstances indicate the fair value of a reporting unit may be below its carrying value. As disclosed by management, in performing the analysis, management first assesses qualitative factors to determine whether the existence of current events or circumstances would lead to a determination that it is more likely than not that the fair value of one of the reporting units is greater than its carrying value. If management determines it is more likely than not that the fair value of a reporting unit is greater than its carrying value, no further testing is necessary. However, if management concludes otherwise, a quantitative impairment test is performed by calculating the fair value of the reporting unit and comparing the fair value with the carrying value of the reporting unit, including goodwill. Fair value is estimated using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline company method, with a fifty-fifty weighting. The determination of fair value using the income approach requires the use of significant estimates and assumptions, including long-term projections of future cash flows, estimated revenues, operating margin, market conditions, tax rates, and discount rates. The determination of fair value using the market approach requires the
F-3
use of valuation multiples based on operating data from guideline publicly traded companies. If the fair value of the reporting unit is less than its carrying value, a non-cash impairment charge is recorded in an amount equal to that difference with the loss not to exceed the total amount of goodwill allocated to the reporting unit.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Strategy and Innovation reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management's cash flow projections and significant assumptions, including estimated revenues, operating margin, discount rate, and market multiples. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s annual goodwill impairment test, including controls over the determination of the fair value of the Strategy and Innovation reporting unit. These procedures also included, among others, testing management’s process for developing the fair value estimate; evaluating the allocation of assets to the reporting unit; evaluating the appropriateness of the income and market approaches; testing the completeness, accuracy and relevance of underlying data used in the income approach; testing the reasonableness and accuracy of the underlying data used in the market approach; and evaluating the significant assumptions used by management, including estimated revenues, operating margin, discount rate, and market multiples. Evaluating management’s assumptions related to estimated revenues, operating margin, discount rate, and market multiples involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the actions necessary to achieve future forecasts, (iii) the consistency with external market and industry data, and (iv) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the discounted cash flow analysis and certain significant assumptions, including the discount rate, as well as the selection and calculation of market multiples.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 25, 2020
We have served as the Company's auditor since 2002.
F-4
HURON CONSULTING GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31, 2019 | December 31, 2018 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | $ | |||||
Receivables from clients, net | |||||||
Unbilled services, net | |||||||
Income tax receivable | |||||||
Prepaid expenses and other current assets | |||||||
Total current assets | |||||||
Property and equipment, net | |||||||
Deferred income taxes, net | |||||||
Long-term investments | |||||||
Operating lease right-of-use assets | |||||||
Other non-current assets | |||||||
Intangible assets, net | |||||||
Goodwill | |||||||
Total assets | $ | $ | |||||
Liabilities and stockholders’ equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | $ | |||||
Accrued expenses and other current liabilities | |||||||
Accrued payroll and related benefits | |||||||
Accrued contingent consideration for business acquisitions | |||||||
Current maturities of long-term debt | |||||||
Current maturities of operating lease liabilities | |||||||
Deferred revenues | |||||||
Total current liabilities | |||||||
Non-current liabilities: | |||||||
Deferred compensation and other liabilities | |||||||
Accrued contingent consideration for business acquisitions, net of current portion | |||||||
Long-term debt, net of current portion | |||||||
Operating lease liabilities, net of current portion | |||||||
Deferred lease incentives | |||||||
Deferred income taxes, net | |||||||
Total non-current liabilities | |||||||
Commitments and contingencies | |||||||
Stockholders’ equity | |||||||
Common stock; $0.01 par value; 500,000,000 shares authorized; 25,144,764 and 25,114,739 shares issued at December 31, 2019 and December 31, 2018, respectively | |||||||
Treasury stock, at cost, 2,425,430 and 2,568,288 shares at December 31, 2019 and December 31, 2018, respectively | ( | ) | ( | ) | |||
Additional paid-in capital | |||||||
Retained earnings | |||||||
Accumulated other comprehensive income | |||||||
Total stockholders’ equity | |||||||
Total liabilities and stockholders’ equity | $ | $ | |||||
The accompanying notes are an integral part of the consolidated financial statements.
F-5
HURON CONSULTING GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Revenues and reimbursable expenses: | |||||||||||
Revenues | $ | $ | $ | ||||||||
Reimbursable expenses | |||||||||||
Total revenues and reimbursable expenses | |||||||||||
Direct costs and reimbursable expenses (exclusive of depreciation and amortization shown in operating expenses): | |||||||||||
Direct costs | |||||||||||
Amortization of intangible assets and software development costs | |||||||||||
Reimbursable expenses | |||||||||||
Total direct costs and reimbursable expenses | |||||||||||
Operating expenses and other losses (gains), net: | |||||||||||
Selling, general and administrative expenses | |||||||||||
Restructuring charges | |||||||||||
Litigation and other losses (gains), net | ( | ) | ( | ) | |||||||
Depreciation and amortization | |||||||||||
Goodwill impairment charges | |||||||||||
Total operating expenses and other losses (gains), net | |||||||||||
Operating income (loss) | ( | ) | |||||||||
Other income (expense), net: | |||||||||||
Interest expense, net of interest income | ( | ) | ( | ) | ( | ) | |||||
Other income (expense), net | ( | ) | |||||||||
Total other expense, net | ( | ) | ( | ) | ( | ) | |||||
Income (loss) from continuing operations before taxes | ( | ) | |||||||||
Income tax expense (benefit) | ( | ) | |||||||||
Net income (loss) from continuing operations | ( | ) | |||||||||
Income (loss) from discontinued operations, net of tax | ( | ) | ( | ) | |||||||
Net income (loss) | $ | $ | $ | ( | ) | ||||||
Net earnings (loss) per basic share: | |||||||||||
Net income (loss) from continuing operations | $ | $ | $ | ( | ) | ||||||
Income (loss) from discontinued operations, net of tax | ( | ) | ( | ) | |||||||
Net income (loss) | $ | $ | $ | ( | ) | ||||||
Net earnings (loss) per diluted share: | |||||||||||
Net income (loss) from continuing operations | $ | $ | $ | ( | ) | ||||||
Income (loss) from discontinued operations, net of tax | ( | ) | ( | ) | |||||||
Net income (loss) | $ | $ | $ | ( | ) | ||||||
Weighted average shares used in calculating earnings per share: | |||||||||||
Basic | |||||||||||
Diluted | |||||||||||
Comprehensive income (loss): | |||||||||||
Net income (loss) | $ | $ | $ | ( | ) | ||||||
Foreign currency translation adjustments, net of tax | ( | ) | |||||||||
Unrealized gain (loss) on investment, net of tax | ( | ) | |||||||||
Unrealized gain (loss) on cash flow hedging instruments, net of tax | ( | ) | |||||||||
Other comprehensive income (loss) | ( | ) | |||||||||
Comprehensive income (loss) | $ | $ | $ | ( | ) | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-6
HURON CONSULTING GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income | Stockholders' Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at December 31, 2016 | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
Comprehensive income | ( | ) | ( | ) | |||||||||||||||||||||||||
Issuance of common stock in connection with: | |||||||||||||||||||||||||||||
Restricted stock awards, net of cancellations | ( | ) | ( | ) | |||||||||||||||||||||||||
Business acquisition | |||||||||||||||||||||||||||||
Share-based compensation | |||||||||||||||||||||||||||||
Shares redeemed for employee tax withholdings | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
Cumulative-effect adjustment from adoption of ASU 2016-09 | ( | ) | |||||||||||||||||||||||||||
Cumulative-effect adjustment from adoption of ASU 2018-02 | ( | ) | ( | ) | |||||||||||||||||||||||||
Balance at December 31, 2017 | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
Comprehensive income | |||||||||||||||||||||||||||||
Issuance of common stock in connection with: | |||||||||||||||||||||||||||||
Restricted stock awards, net of cancellations | ( | ) | |||||||||||||||||||||||||||
Exercise of stock options | |||||||||||||||||||||||||||||
Share-based compensation | |||||||||||||||||||||||||||||
Shares redeemed for employee tax withholdings | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
Cumulative-effect adjustment from adoption of ASU 2014-09 | |||||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
Comprehensive income | ( | ) | |||||||||||||||||||||||||||
Issuance of common stock in connection with: | |||||||||||||||||||||||||||||
Restricted stock awards, net of cancellations | ( | ) | |||||||||||||||||||||||||||
Exercise of stock options | |||||||||||||||||||||||||||||
Share-based compensation | |||||||||||||||||||||||||||||
Shares redeemed for employee tax withholdings | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
Other capital contributions | |||||||||||||||||||||||||||||
Share repurchases | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Balance at December 31, 2019 | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-7
HURON CONSULTING GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | $ | $ | ( | ) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | |||||||||||
Non-cash lease expense | |||||||||||
Share-based compensation | |||||||||||
Amortization of debt discount and issuance costs | |||||||||||
Goodwill impairment charges | |||||||||||
Allowances for doubtful accounts and unbilled services | |||||||||||
Deferred income taxes | ( | ) | |||||||||
Loss (gain) on sale of businesses | ( | ) | |||||||||
Change in fair value of contingent consideration liabilities | ( | ) | |||||||||
Other, net | |||||||||||
Changes in operating assets and liabilities, net of acquisitions and divestiture: | |||||||||||
(Increase) decrease in receivables from clients | ( | ) | ( | ) | |||||||
(Increase) decrease in unbilled services | ( | ) | ( | ) | ( | ) | |||||
(Increase) decrease in current income tax receivable / payable, net | ( | ) | |||||||||
(Increase) decrease in other assets | ( | ) | ( | ) | ( | ) | |||||
Increase (decrease) in accounts payable and accrued liabilities | ( | ) | ( | ) | |||||||
Increase (decrease) in accrued payroll and related benefits | ( | ) | |||||||||
Increase (decrease) in deferred revenues | |||||||||||
Net cash provided by operating activities | |||||||||||
Cash flows from investing activities: | |||||||||||
Purchases of property and equipment, net | ( | ) | ( | ) | ( | ) | |||||
Investment in life insurance policies | ( | ) | ( | ) | ( | ) | |||||
Distributions from life insurance policies | |||||||||||
Purchases of businesses, net of cash acquired | ( | ) | ( | ) | ( | ) | |||||
Purchase of investment securities | ( | ) | |||||||||
Capitalization of internally developed software | ( | ) | ( | ) | ( | ) | |||||
Proceeds from note receivable | |||||||||||
Proceeds from sale of property and equipment | |||||||||||
Divestitures of businesses, net of cash sold | ( | ) | |||||||||
Net cash used in investing activities | ( | ) | ( | ) | ( | ) | |||||
Cash flows from financing activities: | |||||||||||
Proceeds from exercises of stock options | |||||||||||
Shares redeemed for employee tax withholdings | ( | ) | ( | ) | ( | ) | |||||
Share repurchases | ( | ) | |||||||||
Proceeds from bank borrowings | |||||||||||
Repayments of bank borrowings | ( | ) | ( | ) | ( | ) | |||||
Repayment of convertible notes | ( | ) | |||||||||
Payments for debt issuance costs | ( | ) | ( | ) | ( | ) | |||||
Payments for contingent consideration liabilities | ( | ) | ( | ) | ( | ) | |||||
Net cash provided by (used in) financing activities | ( | ) | ( | ) | |||||||
Effect of exchange rate changes on cash | ( | ) | |||||||||
Net increase (decrease) in cash and cash equivalents | ( | ) | ( | ) | |||||||
Cash and cash equivalents at beginning of the period | |||||||||||
Cash and cash equivalents at end of the period | $ | $ | $ | ||||||||
Supplemental disclosure of cash flow information: | |||||||||||
Non-cash investing and financing activities: | |||||||||||
Property and equipment expenditures and capitalized software included in accounts payable and accrued expenses | $ | $ | $ | ||||||||
Promissory note assumed for purchase of property and equipment | $ | $ | $ | ||||||||
Contingent consideration related to business acquisitions | $ | $ | $ | ||||||||
Common stock issued related to business acquisition | $ | $ | $ | ||||||||
Share repurchases included in accounts payable | $ | $ | $ | ||||||||
Cash paid during the year for: | |||||||||||
Interest | $ | $ | $ | ||||||||
Income taxes | $ | $ | $ | ||||||||
F-8
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
1. Description of Business
Huron is a global consultancy that collaborates with clients to drive strategic growth, ignite innovation and navigate constant change. Through a combination of strategy, expertise and creativity, we help clients accelerate operational, digital and cultural transformation, enabling the change they need to own their future. By embracing diverse perspectives, encouraging new ideas and challenging the status quo, we create sustainable results for the organizations we serve.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements reflect the financial position at December 31, 2019 and 2018, and the results of operations and cash flows for the years ended December 31, 2019, 2018, and 2017.
On January 1, 2019, we adopted Accounting Standard Update ("ASU") 2016-02, Leases. For additional information on the adoption of ASU 2016-02, refer to our leases policy and new accounting pronouncements below.
On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, 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 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. 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. Refer to our revenue recognition and capitalized sales commissions policies below for additional information.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures. Actual results may differ from these estimates and assumptions.
Revenue Recognition
We generate substantially all of our revenues from providing professional services to our clients. We also generate revenues from software licenses; software support and 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 and 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.
F-9
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
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 Culture and Organizational Excellence solution include fixed-fee partner contracts with multiple performance obligations, which primarily consist of coaching services, as well as speaking engagements, conferences, publications and software products (“Partner Contracts”). Revenues for coaching services and software products are generally recognized on a straight-line basis over the length of the contract. All other revenues under Partner Contracts, including speaking engagements, conferences and publications, are recognized at the time the goods or services are provided. 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 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 Culture and Organizational Excellence solution. We recognize revenues under time-and-expense arrangements as the related services or publications 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 generally 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 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
F-10
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
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.
Allowances for Doubtful Accounts and Unbilled Services
We maintain allowances for doubtful accounts and for services performed but not yet billed based on several factors, including the estimated cash realization from amounts due from clients, an assessment of a client’s ability to make required payments, and the historical percentages of fee adjustments and write-offs by age of receivables and unbilled services. The allowances are assessed by management on a regular basis. These estimates may differ from actual results. If the financial condition of a client deteriorates in the future, impacting the client’s ability to make payments, an increase to our allowance might be required or our allowance may not be sufficient to cover actual write-offs.
We record the provision for doubtful accounts and unbilled services as a reduction in revenue to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the provision relates to a client’s inability to make required payments on accounts receivables, we record the provision to selling, general and administrative expenses.
Direct Costs and Reimbursable Expenses
Direct costs and reimbursable expenses consist primarily of revenue-generating employee compensation and their related benefits and share-based compensation costs; as well as commissions, the cost of outside consultants or subcontractors assigned to revenue-generating activities, technology costs, other third-party costs directly attributable to our revenue-generating activities, and direct expenses to be reimbursed by clients. Direct costs and reimbursable expenses incurred on engagements are expensed in the period incurred.
Cash and Cash Equivalents
We consider all highly liquid investments, including overnight investments and commercial paper, with original maturities of three months or less to be cash equivalents.
Concentrations of Credit Risk
To the extent receivables from clients become delinquent, collection activities commence. No single client balance is considered large enough to pose a material credit risk. The allowances for doubtful accounts and unbilled services are based upon the expected ability to collect accounts receivable and bill and collect unbilled services. Management does not anticipate incurring losses on accounts receivable in excess of established allowances. See Note 19 “Segment Information” for concentration of accounts receivable and unbilled services.
We hold our cash in accounts at multiple third-party financial institutions. These deposits, at times, may exceed federally insured limits. We review the credit ratings of these financial institutions, regularly monitor the cash balances in these accounts, and adjust the balances as appropriate. However, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets.
Long-term Investments
Our long-term investments consist of our convertible debt investment in Shorelight Holdings, LLC ("Shorelight") and preferred stock investment in Medically Home Group, Inc. ("Medically Home").
We classified the convertible debt investment in Shorelight as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. The investment is carried at fair value with unrealized holding gains and losses reported in other comprehensive income. If the investment is in an unrealized loss position, we assess whether the investment is other-than-temporarily impaired. We consider impairments to be other-than-temporary if they are related to significant credit deterioration or if it is likely we will sell the security before the recovery of its cost basis. We have not identified any other-than-temporary impairments for our convertible debt investment. In the event there are realized gains and losses or declines in value judged to be other-than-temporary, we will record the amount in earnings.
F-11
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
See Note 13 “Fair Value of Financial Instruments” for further information on our long-term investments.
Fair Value of Financial Instruments
See Note 13 “Fair Value of Financial Instruments” for the accounting policies used to measure the fair value of our financial assets and liabilities that are measured at fair value on a recurring basis.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation of property and equipment is computed on a straight-line basis over the estimated useful lives of the assets. Software, computers, and related equipment are depreciated over an estimated useful life of two to four years . Furniture and fixtures are depreciated over five years . Aircraft are depreciated over ten years . Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the initial term of the lease.
Leases
We determine if an arrangement contains a lease and the classification of such lease at inception. As of December 31, 2019, all of our material leases are classified as operating leases; we have not entered into any material finance leases. For all operating leases with an initial term greater than 12 months, we recognize an operating lease right-of-use ("ROU") asset and operating lease liability. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Operating lease ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date and provided by the administrative agent for our senior secured credit facility in determining the present value of lease payments. Operating lease ROU assets exclude lease incentives. We elected the practical expedient to combine lease and nonlease components. Certain lease agreements contain variable lease payments that do not depend on an index or rate. These variable lease payments are not included in the calculation of the operating lease ROU asset and operating lease liability; instead, they are expensed as incurred. Our leases may contain options to extend or terminate the lease, and we include these terms in our calculation of the operating lease ROU asset and operating lease liability when it is reasonably certain that we will exercise the option.
Operating lease expense is recognized on a straight-line basis over the lease term and recorded within selling, general and administrative expenses on our consolidated statement of operations. In accordance with our accounting policy for impairment of long-lived assets, operating lease ROU assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group to which the operating lease ROU asset is assigned may not be recoverable. We evaluate the recoverability of the asset group based on forecasted undiscounted cash flows. See Note 5 "Leases" for additional information on our leases, including the lease impairment charges recorded in 2019.
Software Development Costs
We incur internal and external software development costs related to our cloud computing applications and software for internal use. We capitalize these software development costs incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Once the project is substantially complete and ready for its intended use these costs are amortized on a straight-line basis over the technology's estimated useful life. Acquired technology assets are initially recorded at fair value and amortized on a straight-line basis over the estimated useful life.
Development costs related to software products that will be sold, leased, or otherwise marketed are expensed until technological feasibility has been established. Thereafter and until the software is available for general release to customers, these software development costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. These capitalized development costs are
F-12
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
amortized in proportion to current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. We did not capitalize any development costs for this type of software during 2019 or 2018.
Intangible Assets Other Than Goodwill
Identifiable intangible assets are amortized over their expected useful lives using a method that reflects the economic benefit expected to be derived from the assets or on a straight-line basis. We evaluate the recoverability of intangible assets periodically by considering events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
Impairment of Long-Lived Assets
Goodwill
Pursuant to our policy, we performed the annual goodwill impairment test as of November 30, 2019 and determined that no impairment of goodwill existed as of that date. Further, we evaluated whether any events have occurred, or any circumstances have changed since November 30, 2019 that would indicate goodwill may have become impaired since our annual impairment test. Based on our evaluation as of December 31, 2019, we determined that no indications of impairment have arisen since our annual goodwill impairment test.
Business Combinations
F-13
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Income Taxes
Share-Based Compensation
Share-based compensation cost is measured based on the grant date fair value of the respective awards. We generally recognize share-based compensation ratably using the straight-line attribution method; however, for those awards with performance criteria and graded vesting features, we use the graded vesting attribution method. It is our policy to account for forfeitures as they occur.
Sponsorship and Advertising Costs
Convertible Senior Notes
In September 2014, we issued $250 million principal amount of 1.25 % convertible senior notes due 2019 (the “Convertible Notes”) in a private offering. The Convertible Notes matured on October 1, 2019, and the outstanding principal and accrued interest were paid in full at that time. At issuance, we separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying value of the equity component representing the conversion option, which was 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 was amortized to interest expense using the effective interest method over the term of the Convertible Notes. The equity component was not remeasured as it continued to meet the conditions for equity classification. Refer to Note 7 “Financing Arrangements” for further information regarding the Convertible Notes.
Debt Issuance Costs
Foreign Currency
Assets and liabilities of foreign subsidiaries whose functional currency is not the United States Dollar (USD) are translated into the USD using the exchange rates in effect at period end. Revenue and expense items are translated using the average exchange rates for the period. Foreign currency translation adjustments are included in accumulated other comprehensive income, which is a component of stockholders’ equity.
Segment Reporting
Segments are defined as components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker manages the business under three operating segments, which are our reportable segments: Healthcare, Business Advisory, and Education.
F-14
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
New Accounting Pronouncements
Recently Adopted
In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases, as a new Topic, ASC 842, which superseded ASC Topic 840, Leases, and sets forth the principles for the recognition, measurement, presentation, and disclosure of leases for 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. 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 adopted ASC 842 effective January 1, 2019 on a modified retrospective basis for existing leases using the transition method allowed by ASU 2018-11, which had no impact on our consolidated financial statements in the prior periods presented. The new lease standard had a material impact on our consolidated balance sheet upon adoption but did not impact our consolidated statement of operations. The most significant impact to our consolidated balance sheet is the recognition of ROU assets and lease liabilities for operating leases. The impact of the new lease standard on our consolidated balance sheet upon adoption follows:
As of December 31, 2018 | ASC 842 Adjustment | As of January 1, 2019 | |||||||||
Assets | |||||||||||
Operating lease right-of-use assets | $ | $ | $ | ||||||||
Liabilities | |||||||||||
Accrued expenses and other current liabilities | $ | $ | ( | ) | $ | ||||||
Current maturities of operating lease liabilities | $ | $ | $ | ||||||||
Deferred compensation and other liabilities | $ | $ | ( | ) | $ | ||||||
Deferred lease incentives | $ | $ | ( | ) | $ | ||||||
Operating lease liabilities, net of current portion | $ | $ | $ | ||||||||
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Capitalized implementation costs are amortized on a straight-line basis generally over the term of the service contract with the amortization recognized in the same financial statement line item as the fees related to the service contract. ASU 2018-15 is effective beginning January 1, 2020, with early adoption permitted. We adopted this ASU in the third quarter of 2019 on a prospective basis. In 2019, we capitalized an immaterial amount of implementation costs for cloud computing arrangements that are service contracts. The future impact of adoption of this ASU on our consolidated financial statements will depend on the magnitude of implementation costs we may incur to implement cloud computing arrangements that are service contracts.
Not Yet Adopted
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. We do not expect this guidance to have an impact on the amounts reported on our consolidated financial statements, and we will update our disclosures within the notes to our consolidated financial statements as required by ASU 2018-13.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740, Income Taxes, related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies other aspects of the accounting for franchise taxes and enacted changes in tax laws or tax rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 will be effective for us beginning January 1, 2021, with early adoption permitted. We are currently evaluating the potential impact this guidance will have on our consolidated financial statements.
F-15
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
3. Acquisitions
During the twelve months ended December 31, 2019 and 2018, we completed no acquisitions that were significant to our consolidated financial statements individually or in the aggregate.
2017
Pope Woodhead and Associates Limited
On January 9, 2017, we completed our acquisition of Pope Woodhead and Associates Limited ("Pope Woodhead"), a U.K.-based consulting firm providing market access capabilities to assist clients in developing value propositions for innovative medicines and technologies. The acquisition expands our life sciences strategy expertise and strengthens our ability to lead clients through complex payer and regulatory environments. Pope Woodhead's results of operations have been included in our consolidated financial statements and the results of operations of our Business Advisory segment from the date of acquisition.
ADI Strategies, Inc.
On April 1, 2017, we completed our acquisition of the international assets of ADI Strategies, Inc. ("ADI Strategies") in Dubai and India. We acquired the U.S. assets of ADI Strategies in the second quarter of 2016. ADI Strategies is a leading enterprise performance management, risk management and business intelligence firm. The international results of operations of ADI Strategies have been included in our consolidated financial statements and results of operations of the Business Advisory segment from the date of acquisition. During the second quarter of 2018, we sold our Middle East practice, which primarily consisted of the international assets of the ADI Strategies acquisition, to a former employee who was the practice leader of that business at the time.
The acquisitions of ADI Strategies and Pope Woodhead are not significant to our consolidated financial statements individually or in the aggregate as of and for the twelve months ended December 31, 2017.
Innosight Holdings, LLC
On March 1, 2017 , we acquired 100 % of the membership interests of Innosight Holdings, LLC ("Innosight"). Innosight is a growth strategy firm focused on helping companies navigate disruptive change and manage strategic transformation. Together with Innosight, we use our strategic, operational, and technology capabilities to help clients across multiple industries develop pioneering solutions to address disruption and achieve sustained growth.
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 | $ | ||
Common stock | |||
Contingent consideration liability | |||
Net working capital adjustment | |||
Total consideration transferred | $ | ||
We funded the cash component of the purchase price with cash on hand and borrowings of $89.0 million under our senior secured credit facility. We issued 221,558 shares of our common stock as part of the consideration transferred, with an acquisition date fair value of $9.6 million based on our common stock's closing price of $43.15 on the date of acquisition. The contingent consideration liability of $12.1 million represents the acquisition date fair value of the contingent consideration arrangement, pursuant to which we may be required to pay additional consideration to the sellers if specific financial performance targets are met over a four-year term. The maximum amount of contingent consideration that may be paid is $35.0 million. See Note 13 "Fair Value of Financial Instruments" for additional information on the valuation of contingent consideration liabilities.
The acquisition was accounted for using the acquisition method of accounting. Tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the acquisition date.
F-16
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
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 | $ | ||
Unbilled services | |||
Prepaid expenses and other current assets | |||
Property and equipment | |||
Intangible assets | |||
Liabilities assumed: | |||
Accounts payable | |||
Accrued expenses and other current liabilities | |||
Accrued payroll and related benefits | |||
Deferred revenues | |||
Total identifiable net assets | |||
Goodwill | |||
Total purchase price | $ | ||
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 | $ | ||||
Trade name | |||||
Customer contracts | |||||
Non-compete agreements | |||||
Favorable lease contract | |||||
Total intangible assets subject to amortization | $ | ||||
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 consolidated statements of operations and results of operations of our Business Advisory segment from the date of acquisition. For the year ended December 31, 2017, revenues from Innosight were $34.3 million and operating loss was $0.9 million, which included $3.4 million of amortization expense for intangible assets acquired. In connection with the acquisition of Innosight, we incurred $1.7 million of transaction and acquisition-related expenses in 2017. These costs are recorded in selling, general and administrative expenses.
F-17
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The following unaudited supplemental pro forma information summarizes the combined results of operations of Huron and Innosight as though the companies were combined on January 1, 2016.
Year Ended December 31, 2017 | |||
Revenues | $ | ||
Net income (loss) from continuing operations | $ | ( | ) |
Net income (loss) from continuing operations per share - basic | $ | ( | ) |
Net income (loss) from continuing operations per share - diluted | $ | ( | ) |
The historical financial information has been adjusted to give effect to pro forma adjustments consisting of intangible asset amortization expense, acquisition-related costs, interest expense, and the related income tax effects. The unaudited pro forma information above includes adjustments to include additional expense of $0.6 million for the year ended December 31, 2017. 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.
4. Goodwill and Intangible Assets
The table below sets forth the changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2019 and 2018.
Healthcare | Business Advisory | Education | Total | |||||||||||||
Balance as of December 31, 2017: | ||||||||||||||||
Goodwill | $ | $ | $ | $ | ||||||||||||
Accumulated impairment losses | ( | ) | ( | ) | ( | ) | ||||||||||
Goodwill, net as of December 31, 2017 | $ | $ | $ | $ | ||||||||||||
Goodwill recorded in connection with a business combination | ||||||||||||||||
Foreign currency translation | ( | ) | ( | ) | ||||||||||||
Balance as of December 31, 2018: | ||||||||||||||||
Goodwill | ||||||||||||||||
Accumulated impairment losses | ( | ) | ( | ) | ( | ) | ||||||||||
Goodwill, net as of December 31, 2018 | $ | $ | $ | $ | ||||||||||||
Goodwill recorded in connection with a business combination (1) | ||||||||||||||||
Foreign currency translation | ||||||||||||||||
Balance as of December 31, 2019: | ||||||||||||||||
Goodwill | ||||||||||||||||
Accumulated impairment losses | ( | ) | ( | ) | ( | ) | ||||||||||
Goodwill, net as of December 31, 2019: | $ | $ | $ | $ | ||||||||||||
(1) | On September 30, 2019, we completed the acquisition of a business in our Education segment. The results of operations of the acquired business is included in our consolidated financial statements and results of operations of our Education segment from the date of acquisition. This acquisition is not significant to our consolidated financial statements. |
Pursuant to our policy, we performed our annual goodwill impairment test as of November 30, 2019 on our five reporting units with goodwill balances: Healthcare, Education, Business Advisory, Strategy and Innovation, and Life Sciences. We performed a quantitative impairment test for Strategy and Innovation as the reporting unit is a relatively new business resulting from an acquisition in 2017 and also fell slightly short of internal financial expectations in 2019. We performed qualitative assessments over the Healthcare, Education, Business Advisory, and Life Sciences reporting units to determine if it was more likely than not the respective fair values of these reporting units were less than their carrying amounts, including goodwill.
F-18
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
For the Strategy and Innovation reporting unit, we reviewed goodwill for impairment by comparing the fair value of the reporting unit to its carrying value, including goodwill. In estimating the fair value of the reporting unit, we relied on a combination of the income approach and the market approach utilizing the guideline company method, with a fifty-fifty weighting. Based on the results of the goodwill impairment test, we determined the fair value of Strategy and Innovation reporting unit exceeded its carrying value by 41 %. As such, we concluded that there is no indication of goodwill impairment for the reporting unit.
For our qualitative assessment of the Healthcare, Education, Business Advisory and Life Sciences reporting units, we considered the most recent quantitative analysis performed for these reporting units, which was as of November 30, 2017, including the key assumptions used within that analysis, the indicated fair values, and the amount by which those fair values exceeded their carrying amounts. One of the key assumptions used within the prior quantitative analysis was our internal financial projections; therefore, we considered the actual performance of each reporting unit during 2019 and 2018 compared to the internal financial projections used, as well as specific outlooks for each reporting unit based on our most recent internal financial projections. We also considered the market-based valuation multiples used in the market approach within our prior quantitative analysis, which were derived from guideline companies, and noted that the valuation multiples generally increased compared to November 30, 2017. We also reviewed the current carrying value of each reporting unit in comparison to the carrying values as of the prior quantitative analysis. In addition, we considered various factors, including macroeconomic conditions, relevant industry and market trends for each reporting unit, and other entity-specific events, that could indicate a potential change in the fair value of our reporting units or the composition of their carrying values. Based on our assessments, we determined that it was more likely than not that the fair values of the Healthcare, Education, Business Advisory and Life Sciences reporting units exceeded their respective carrying amounts. As such, the goodwill for these reporting units was not considered impaired as of November 30, 2019, and a quantitative goodwill impairment analysis was not necessary.
Further, we evaluated whether any events occurred or any circumstances changed since November 30, 2019 that would indicate goodwill may have become impaired since our annual impairment test. Based on our evaluation as of December 31, 2019, we determined that no indications of impairment arose since our annual goodwill impairment test.
The results of an impairment analysis are as of a point in time. There is no assurance that the actual future earnings or cash flows of our reporting units will be consistent with our projections. We will monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods. Any significant decline in our operations could result in non-cash goodwill impairment charges.
2017 Goodwill Impairment Charges
Healthcare
During the second quarter of 2017, we performed a goodwill impairment analysis for our Healthcare reporting unit as our Healthcare business was experiencing a prolonged period of declining revenues at the time, 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 $208.1 million non-cash pretax goodwill impairment charge in 2017 to reduce the carrying value of goodwill in our Healthcare reporting unit.
Enterprise Solutions and Analytics
Our Enterprise Solutions and Analytics reporting unit was established with the acquisition of Blue Stone International, LLC in 2013. Since that time, we completed five additional business acquisitions within the reporting unit, most recently the acquisitions of the U.S. assets and international assets of ADI Strategies in May 2016 and April 2017, respectively. We record the assets acquired and liabilities assumed in business combinations, including identifiable intangible assets, at their estimated fair values as of the acquisition date, and goodwill is recorded as the excess of the fair value of consideration transferred, including any contingent consideration, over the fair value of the net assets acquired. Therefore, the initial accounting for an acquisition results in its fair value equaling its carrying value. Due to this reporting unit’s relatively low headroom, in the event that the financial performance of the reporting unit did not meet our expectations during 2017, we could be required to take a non-cash impairment charge as a result of any goodwill impairment test. During the first three quarters of 2017,
F-19
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
the performance of Enterprise Solutions and Analytics continued to reasonably meet our expectations. However, both revenues and operating margin during the fourth quarter of 2017 fell short of our expectations resulting in a reduction in workforce within the reporting unit during that quarter. Further, in connection with our annual budget process for 2018, which coincided with our annual goodwill impairment test during the fourth quarter of 2017, we determined that the reporting unit's expected future revenue growth rates and operating margin would be lower than previously anticipated for this reporting unit. As a result, our goodwill impairment test indicated that the fair value of the Enterprise Solutions and Analytics reporting unit no longer exceeded its carrying value.
Our goodwill impairment test was performed by comparing the fair value of the Enterprise Solutions and Analytics 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 Enterprise Solutions and Analytics 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 Enterprise Solutions and Analytics reporting unit, we recorded a $45.0 million non-cash pretax goodwill impairment charge to reduce the carrying value of this reporting unit's goodwill to zero.
Intangible Assets
Intangible assets as of December 31, 2019 and 2018 consisted of the following:
As of December 31, | |||||||||||||||||
2019 | 2018 | ||||||||||||||||
Useful Life in Years | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
Customer relationships | 3 to 13 | $ | $ | $ | $ | ||||||||||||
Trade names | 5 to 6 | ||||||||||||||||
Technology and software | 3 to 5 | ||||||||||||||||
Non-competition agreements | |||||||||||||||||
Customer contracts | |||||||||||||||||
Favorable lease contract | |||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||
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 assets amortization expense was $17.8 million, $24.0 million, and $35.0 million for the years ended December 31, 2019, 2018, and 2017, respectively. The table below sets forth the estimated annual amortization expense for each of the five succeeding years for the intangible assets recorded as of December 31, 2019.
Year Ending December 31, | Estimated Amortization Expense | |||
2020 | $ | |||
2021 | $ | |||
2022 | $ | |||
2023 | $ | |||
2024 | $ | |||
Actual future amortization expense could differ from these estimated amounts as a result of future acquisitions, dispositions, and other factors.
5. Leases
We lease office space, data centers and certain equipment under operating leases expiring on various dates through 2029, with various renewal options that can extend the lease terms by one to ten years . Our operating leases include fixed payments plus, in some cases, scheduled base rent increases over the term of the lease. Certain leases require variable payments of real estate taxes, insurance and
F-20
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
operating expenses. We exclude these variable payments from the measurements of our lease liabilities and expense them as incurred. We elected the practical expedient to combine lease and nonlease components. No lease agreements contain any residual value guarantees or material restrictive covenants. As of December 31, 2019, we have not entered into any material finance leases. We sublease certain office spaces to third parties resulting from restructuring activities in certain locations.
Operating lease right-of-use ("ROU") assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group to which the operating lease ROU asset is assigned may not be recoverable. First, we test the asset group for recoverability by comparing the undiscounted cash flows of the asset group, which include expected future lease and nonlease payments under the lease agreement offset by expected sublease income, to the carrying amount of the asset group. If the first step of the long-lived asset impairment test concludes that the carrying amount of the asset group is not recoverable, we perform the second step of the long-lived asset impairment test by comparing the fair value of the asset group to its carrying amount and recognizing a lease impairment charge for the amount by which the carrying amount exceeds the fair value. To estimate the fair value of the asset group, we rely on a discounted cash flow approach using market participant assumptions of the expected cash flows and discount rate. During 2019, we recorded $0.8 million of lease impairment charges for office spaces vacated during the year, of which $0.6 million was allocated to the operating lease ROU assets and $0.2 million was allocated to the leasehold improvements based on their relative carrying amounts. The $0.8 million lease impairment charge was recognized in restructuring charges on our consolidated statement of operations. See Note 11 "Restructuring Charges" for additional information on our restructuring activities.
In the fourth quarter of 2019, we entered into an amendment to the office lease agreement for our principal executive offices in Chicago, Illinois, which resulted in a non-cash gain on lease modification of $0.8 million. Among other items, this amendment i) extends the term of the lease from September 30, 2024 to September 30, 2029; ii) provides a renewal option to extend the lease for an additional five year period to September 30, 2034; iii) terminates the lease with respect to certain leased spaces previously vacated; iv) provides abatement of certain future base rent payments and our pro rata share of operating expenses and taxes; and v) provides a one-time cash payment from the lessor as an incentive.
Additional information on our operating leases as of December 31, 2019 follows.
Balance Sheet | December 31, 2019 | |||
Operating lease right-of-use assets | $ | |||
Current maturities of operating lease liabilities | $ | |||
Operating lease liabilities, net of current portion | ||||
Total lease liabilities | $ | |||
Lease Cost | Year Ended December 31, 2019 | |||
Operating lease cost | $ | |||
Short-term leases (1) | ||||
Variable lease costs | ||||
Sublease income | ( | ) | ||
Net lease cost (2)(3)(4) | $ | |||
(1) | Includes variable lease costs related to short-term leases. |
(2) | Net lease cost includes $ |
(3) | Net lease cost includes $ |
(4) | Rent expense, including operating expenses, real estate taxes and insurance, recorded under ASC 840 for the years ended December 31, 2018 and 2017 was $ |
F-21
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The table below summarizes the remaining expected lease payments under our operating leases as of December 31, 2019.
Future Lease Payments | December 31, 2019 | |||
2020 | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
Thereafter | ||||
Total operating lease payments | $ | |||
Less: imputed interest | ( | ) | ||
Present value of operating lease liabilities | $ | |||
The table below summarizes the future minimum rental commitments, as defined by ASC 840, under our non-cancelable operating leases as of December 31, 2018.
Lease Payments | December 31, 2018 (1) | |||
2019 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total | $ | |||
(1) | As of December 31, 2018, the expected total future minimum sublease income to be received was $ |
Other Information | Year Ended December 31, 2019 | |||
Cash paid for operating lease liabilities | $ | |||
Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | |||
Weighted average remaining lease term - operating leases | ||||
Weighted average discount rate - operating leases | % | |||
F-22
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
6. Property and Equipment, Net
Depreciation expense for property and equipment was $13.0 million, $13.4 million, and $13.3 million for the years ended December 31, 2019, 2018, and 2017, respectively. Property and equipment, net at December 31, 2019 and 2018 consisted of the following:
As of December 31, | |||||||
2019 | 2018 | ||||||
Computers, related equipment, and software | $ | $ | |||||
Leasehold improvements | |||||||
Furniture and fixtures | |||||||
Aircraft | |||||||
Assets under construction | |||||||
Property and equipment | |||||||
Accumulated depreciation and amortization | ( | ) | ( | ) | |||
Property and equipment, net | $ | $ | |||||
7. Financing Arrangements
A summary of the carrying amounts of our debt follows:
As of December 31, | |||||||
2019 | 2018 | ||||||
1.25% convertible senior notes due 2019 | $ | $ | |||||
Senior secured credit facility | |||||||
Promissory note due 2024 | |||||||
Total long-term debt | $ | $ | |||||
Current maturities of long-term debt | ( | ) | ( | ) | |||
Long-term debt, net of current portion | $ | $ | |||||
Below is a summary of the scheduled remaining principal payments of our debt as of December 31, 2019.
Principal Payments of Long-Term Debt | |||
2020 | $ | ||
2021 | $ | ||
2022 | $ | ||
2023 | $ | ||
2024 | $ | ||
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 were governed by the terms of an indenture between the Company and U.S. Bank National Association, as Trustee (the “Indenture”). The Convertible Notes were senior unsecured obligations of the Company and paid interest semi-annually on April 1 and October 1 of each year at an annual rate of 1.25 %. The Convertible Notes matured on October 1, 2019 . Upon maturity, we refinanced $217.0 million of the principal amount of the outstanding Convertible Notes with the borrowing capacity available under our revolving credit facility and funded the remaining $33.0 million principal payment with cash on hand.
Prior to maturity, upon conversion, the Convertible Notes would have been settled, at our election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. On October 1, 2019, one holder of the Convertible Notes converted their holding, which we settled in cash and resulted in an immaterial gain on conversion.
Upon issuance, we 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-
F-23
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
convertible debt borrowing rate. The carrying value of the equity component representing the conversion option, which was 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 was amortized to interest expense using an effective interest rate of 4.751 % over the term of the Convertible Notes. The equity component was not remeasured as it continued 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 were recorded as a deduction to the carrying amount of the liability and amortized to interest expense over the term of the Convertible Notes; and transaction costs attributable to the equity component were netted with the equity component of the Convertible Notes in stockholders’ equity. Total debt issuance costs were approximately $7.3 million, of which $6.2 million was allocated to liability issuance costs and $1.1 million was allocated to equity issuance costs.
As of December 31, 2018, the Convertible Notes consisted of the following:
As of December 31, 2018 | ||||
Liability component: | ||||
Proceeds | $ | |||
Less: debt discount, net of amortization | ( | ) | ||
Less: debt issuance costs, net of amortization | ( | ) | ||
Net carrying amount | $ | |||
Equity component (1) | $ | |||
(1) | Included in additional paid-in capital on the consolidated balance sheet. |
The following table presents the amount of interest expense recognized related to the Convertible Notes for the periods presented.
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Contractual interest coupon | $ | $ | $ | ||||||||
Amortization of debt discount | |||||||||||
Amortization of debt issuance costs | |||||||||||
Total interest expense | $ | $ | $ | ||||||||
In connection with the issuance of the Convertible Notes, we entered into convertible note hedge transactions and warrant transactions. The convertible note hedge transactions were intended to reduce the potential future economic dilution associated with the conversion of the Convertible Notes and, combined with the warrants, effectively raised the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share. For purposes of the computation of diluted earnings per share in accordance with GAAP, dilution would 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 had call options to purchase a total of approximately |
• | 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 |
F-24
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
aggregate proceeds of $23.6 million from the sale of the warrants, which was recorded as additional paid-in capital on the consolidated balance sheets. The warrants are separate transactions and are not part of the terms of the Convertible Notes or the convertible note hedge transactions.
The Company recorded an initial deferred tax liability of $15.4 million in connection with the debt discount associated with the Convertible Notes and recorded an initial deferred tax asset of $16.5 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset were included in deferred income taxes, net on the consolidated balance sheets.
Senior Secured Credit Facility
The Company has a $600 million senior secured revolving credit facility, subject to the terms of a Second Amended and Restated Credit Agreement dated as of March 31, 2015, as amended to date (as amended and modified the "Amended Credit Agreement"), that becomes due and payable in full upon maturity on September 27, 2024 . The Amended Credit Agreement provides the option to increase the revolving credit facility or establish term loan facilities in an aggregate amount of up to $150 million, subject to customary conditions and the approval of any lender whose commitment would be increased, resulting in a maximum available principal amount under the Amended Credit Agreement of $750 million. The initial borrowings under the Amended Credit Agreement were used to refinance borrowings outstanding under a prior credit agreement, and future 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 1.125 % per annum and 1.875 % per annum, in the case of LIBOR borrowings, or between 0.125 % per annum and 0.875 % per annum, in the case of base rate loans, based upon our Consolidated Leverage Ratio at such time.
Amounts borrowed under the Amended Credit Agreement may be prepaid at any time without premium or penalty. We are required to prepay the amounts outstanding under the Amended Credit Agreement in certain circumstances. In addition, we have the right to permanently reduce or terminate the unused portion of the commitments provided under the Amended Credit Agreement at any time.
The 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) of 3.75 to 1.00; however the maximum permitted Consolidated Leverage Ratio will increase to 4.00 to 1.00 upon the occurrence of certain transactions, and (ii) a minimum Consolidated Interest Coverage Ratio (defined as the ratio of consolidated EBITDA to interest) of 3.50 to 1.00. Consolidated EBITDA for purposes of the financial covenants is calculated on a continuing operations basis and includes adjustments to add back non-cash goodwill impairment charges, share-based compensation costs, certain non-cash restructuring charges, pro forma historical EBITDA for businesses acquired, and other specified items in accordance with the Amended Credit Agreement. At December 31, 2019, we were in compliance with these financial covenants with a Consolidated Leverage Ratio of 1.64 to 1.00 and a Consolidated Interest Coverage Ratio of 15.29 to 1.00.
Borrowings outstanding under the Amended Credit Agreement at December 31, 2019 totaled $205.0 million. These borrowings carried a weighted average interest rate of 3.0 %, including the impact of the interest rate swap described in Note 12 “Derivative Instruments and Hedging Activity." Borrowings outstanding under the Amended Credit Agreement at December 31, 2018 were $50.0 million and carried a weighted average interest rate of 3.7 %, including the impact of the interest rate swap described in Note 12 "Derivative Instruments 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 December 31, 2019, we had outstanding letters of credit totaling $1.7 million, which are primarily used as security deposits for our office facilities. As of December 31, 2019, the unused borrowing capacity under the revolving credit facility was $393.3 million.
F-25
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Promissory Note due 2024
In 2017, in conjunction with our purchase of an aircraft related to the acquisition of Innosight, we assumed, from the sellers of the aircraft, a promissory note with an outstanding principal balance of $5.1 million. The principal balance of the promissory note is subject to scheduled monthly principal payments until the maturity date of March 1, 2024 , at which time a final payment of $1.5 million, plus any accrued and unpaid interest, will be due. Under the terms of the promissory note, we will pay interest on the outstanding principal amount at a rate of one month LIBOR plus 1.97 % per annum. The obligations under the promissory note are secured pursuant to a Loan and Aircraft Security Agreement with Banc of America Leasing & Capital, LLC, which grants the lender a first priority security interest in the aircraft. At December 31, 2019, the outstanding principal amount of the promissory note was $3.9 million. As of December 31, 2019, the aircraft had a carrying amount of $5.1 million. At December 31, 2018, the outstanding principal amount of the promissory note was $4.4 million, and the aircraft had a carrying amount of $5.8 million.
8. Capital Structure
Preferred Stock
We are authorized to issue up to 50,000,000 shares of preferred stock. Our certificate of incorporation authorizes our board of directors, without any further stockholder action or approval, to issue these shares in one or more classes or series, to establish from time to time the number of shares to be included in each class or series, and to fix the rights, preferences and privileges of the shares of each wholly unissued class or series and any of its qualifications, limitations or restrictions. As of December 31, 2019 and 2018, no such preferred stock has been approved or issued.
Common Stock
We are authorized to issue up to 500,000,000 shares of common stock, par value $.01 per share. The holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. Subject to the rights and preferences of the holders of any series of preferred stock that may at the time be outstanding, holders of common stock are entitled to such dividends as our board of directors may declare. In the event of any liquidation, dissolution or winding-up of our affairs, after payment of all of our debts and liabilities and subject to the rights and preferences of the holders of any series of preferred stock that may at the time be outstanding, holders of common stock will be entitled to receive the distribution of any of our remaining assets.
9. Revenues
For the years ended December 31, 2019, 2018 and 2017 we recognized revenues of $876.8 million, $795.1 million, and $732.6 million, respectively. Of the $876.8 million recognized in 2019, we recognized revenues of $2.8 million from obligations satisfied, or partially satisfied, in prior periods due to the release of allowances on unbilled services as a result of securing contract amendments. During 2019, we recognized a $1.0 million decrease to revenues due to changes in the estimates of our variable consideration under performance-based billing arrangements. Of the $795.1 million recognized in 2018, we recognized revenues of $10.8 million from obligations satisfied, or partially satisfied, in prior periods, of which $7.2 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 December 31, 2019, we had $90.1 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 $90.1 million of performance obligations, we expect to recognize approximately $58.1 million as revenue in 2020, $20.9 million in 2021, and the remaining $11.1 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 must occur, such as the completion of the measurement period or client approval in performance-based engagements, are recorded as contract assets and included within unbilled services, net. The contract asset balance as of December 31, 2019 and 2018 was $12.6 million and $9.1 million, respectively. The $3.5 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.
F-26
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
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 December 31, 2019 and December 31, 2018 was $28.4 million and $28.1 million respectively. The $0.3 million increase primarily reflects timing differences between client payments in accordance with their contract terms and the completion of our performance obligations. For the year ended December 31, 2019, $22.8 million of revenues recognized were included in the deferred revenue balance as of December 31, 2018. For the year ended December 31, 2018, $23.5 million of revenues recognized were included in the deferred revenue balance as of December 31, 2017.
10. Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, excluding unvested restricted common stock. Diluted earnings per share reflects the potential reduction in earnings per share that could occur if securities or other contracts to issue common stock were exercised or converted into common stock under the treasury stock method. Such securities or other contracts include unvested restricted stock awards, outstanding common stock options, convertible senior notes, and outstanding warrants, to the extent dilutive. In periods for which we report a net loss from continuing operations, diluted weighted average common shares outstanding excludes all potential common stock equivalents as their impact on diluted net loss from continuing operations per share would be anti-dilutive.
Earnings (loss) per share under the basic and diluted computations are as follows:
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Net income (loss) from continuing operations | $ | $ | $ | ( | ) | ||||||
Income (loss) from discontinued operations, net of tax | ( | ) | ( | ) | |||||||
Net income (loss) | $ | $ | $ | ( | ) | ||||||
Weighted average common shares outstanding—basic | |||||||||||
Weighted average common stock equivalents | |||||||||||
Weighted average common shares outstanding—diluted | |||||||||||
Net earnings (loss) per basic share: | |||||||||||
Net income (loss) from continuing operations | $ | $ | $ | ( | ) | ||||||
Income (loss) from discontinued operations, net of tax | ( | ) | ( | ) | |||||||
Net income (loss) | $ | $ | $ | ( | ) | ||||||
Net earnings (loss) per diluted share: | |||||||||||
Net income (loss) from continuing operations | $ | $ | $ | ( | ) | ||||||
Income (loss) from discontinued operations, net of tax | ( | ) | ( | ) | |||||||
Net income (loss) | $ | $ | $ | ( | ) | ||||||
As of December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
Unvested restricted stock awards | ||||||||
Outstanding common stock options | ||||||||
Convertible senior notes | ||||||||
Warrants related to the issuance of convertible senior notes | ||||||||
Total anti-dilutive securities | ||||||||
F-27
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
See Note 7 “Financing Arrangements” for further information on the convertible senior notes and warrants related to the issuance of convertible notes.
We currently have a share repurchase program permitting us to repurchase up to $125 million of our common stock through October 31, 2020 (the "Share Repurchase Program"). The amount and timing of the repurchases will be determined by management and will depend on a variety of factors, including the trading price of our common stock, capacity under our credit facility, general market and business conditions, and applicable legal requirements. In 2019, we repurchased and retired 210,437 shares for $14.2 million, of which $1.2 million settled in the first quarter of 2020. All of the 210,437 shares repurchased and retired in 2019 were included as a reduction to our basic weighted average shares outstanding for the year ended December 31, 2019 based on the trade date of the share repurchase. No shares were repurchased under this program in 2018 or 2017. As of December 31, 2019, $20.9 million remains available for share repurchases.
11. Restructuring Charges
2019
In 2019, we incurred $1.9 million of pretax restructuring expense. This expense primarily consisted of the following charges:
Severance - We incurred $0.6 million of severance expense as a result of workforce reductions to better align resources with market demand and workforce reductions in our corporate operations.
Office exit costs - We incurred $1.2 million of office exit costs. During 2019, we exited a portion of our Lake Oswego, Oregon office resulting in a $0.7 million lease impairment charge on the related operating lease right-of-use asset and leasehold improvements and $0.2 million of accelerated depreciation on furniture and fixtures in that office. The lease impairment charge was recognized in accordance with ASC 842, Leases, which we adopted on a modified retrospective basis on January 1, 2019. See Note 2 "Summary of Significant Accounting Policies" for additional information on our adoption of ASC 842. See Note 5 "Leases" for additional information on the long-lived asset impairment test. Additionally, during 2019, we exited the remaining portion of our Middleton, Wisconsin office and an office in Houston, Texas, resulting in restructuring charges of $0.4 million and $0.1 million, respectively, which primarily consisted of accelerated depreciation on furniture and fixtures in those offices. During the fourth quarter of 2019, we entered into an amendment to the lease of our principal executive offices in Chicago, Illinois. Among other items, the amendment terminated the lease with respect to certain leased space which we previously vacated and currently sublease to a third-party. As a result of the amendment, we recognized a restructuring gain of $0.4 million. See Note 5 "Leases" for additional information on the amendment.
Of the $1.9 million pretax restructuring charge, $1.5 million related to our corporate operations, $0.3 million related to our Healthcare segment, and $0.1 million related to our Business Advisory segment.
2018
In 2018, we incurred $3.7 million of pretax restructuring expense. This expense primarily consisted of the following charges:
Severance - We incurred $2.1 million of severance expense as a result of workforce reductions to better align resources with market demand.
Office exit costs - We incurred $1.3 million of office exit costs. Of the $1.3 million, $0.8 million related to the accrual of remaining lease payments, net of estimated sublease income, accelerated depreciation on leasehold improvements, and moving expenses due to exiting a portion of our Middleton, Wisconsin office; $0.4 million related to updated lease assumptions, commission costs, and moving expenses for our San Francisco office vacated in 2017; and $0.1 million related to updated lease assumptions for our Chicago office consolidation. The office exit costs incurred in the 2018 were accounted for in accordance with ASC 840, Leases.
Other - We incurred $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 $5.8 million loss which is included in other income (expense), net in our consolidated statements of operations.
Of the $3.7 million pretax restructuring charge, $1.1 million was related to our Healthcare segment, $1.0 million was related to our Business Advisory segment, and $1.6 million was related to our corporate operations.
2017
In 2017, we incurred $6.2 million of pretax restructuring expense. This expense primarily consisted of the following charges:
F-28
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Severance - We incurred $3.7 million of severance expense as a result of workforce reductions to better align resources with market demand and workforce reductions in our corporate operations.
Office exit costs - We incurred $2.4 million of office exit costs primarily related to the accrual of remaining lease obligations, net of estimated sublease income, due to relocating our San Francisco office to a smaller space and consolidating our Chicago and New York offices, and accelerated depreciation on leasehold improvements for our San Francisco office. The office exit costs incurred in the 2017 were accounted for in accordance with ASC 840, Leases.
Of the $6.2 million pretax restructuring charge, $2.1 million was related to our Healthcare segment, $1.1 million was related to our Business Advisory segment, and $2.9 million was related to our corporate operations.
The table below sets forth the changes in the carrying amount of our restructuring charge liability by restructuring type for the years ended December 31, 2019 and 2018.
Employee Costs | Office Space Reductions | Other | Total | ||||||||||||
Balance as of December 31, 2017 | $ | $ | $ | $ | |||||||||||
Additions (1) (2) | |||||||||||||||
Payments | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Adjustments (1) (2) | ( | ) | |||||||||||||
Balance as of December 31, 2018 | |||||||||||||||
Adoption of ASC 842 (3) | ( | ) | ( | ) | |||||||||||
Balance as of January 1, 2019 | |||||||||||||||
Additions (2) | |||||||||||||||
Payments | ( | ) | ( | ) | ( | ) | |||||||||
Adjustments (2) | ( | ) | ( | ) | ( | ) | |||||||||
Balance as of December 31, 2019 | $ | $ | $ | $ | |||||||||||
(1) |
(2) | Additions and adjustments exclude non-cash items related to vacated office spaces, such as lease impairment charges and accelerated depreciation on fixed assets, which are recorded as restructuring charges on our consolidated statements of operations. |
(3) | Upon adoption of ASC 842 on January 1, 2019, we reclassified the restructuring charge liabilities, which represented the present value of remaining lease payments, net of estimated sublease income, for vacated office spaces from restructuring charge liabilities to operating lease right-of-use assets. See Note 2 "Summary of Significant Accounting Polices" for additional information on the impact of adoption. |
The $0.1 million restructuring charge liability related to office space reductions at December 31, 2019 is included as a component of deferred compensation and other liabilities. The $0.1 million restructuring charge liability related to employee costs at December 31, 2019 is expected to be paid in the next 12 months and is included as a component of accrued payroll and related benefits.
12. Derivative Instruments 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 %.
F-29
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The table below sets forth additional information relating to our interest rate swap designated as a cash flow hedging instrument as of December 31, 2019 and 2018.
Fair Value (Derivative Asset and Liability) As of December 31, | |||||||
Balance Sheet Location | 2019 | 2018 | |||||
Prepaid expenses and other current assets | $ | $ | |||||
Other non-current assets | $ | $ | |||||
Accrued expenses | $ | $ | |||||
Deferred compensation and other liabilities | $ | $ | |||||
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 14 “Other Comprehensive Income (Loss)” for additional information on our derivative instrument.
13. Fair Value of Financial Instruments
Certain of our assets and liabilities are measured at fair value. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy for inputs used in measuring fair value and requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy consists of three levels based on the objectivity of the inputs as follows:
Level 1 Inputs | Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. | |
Level 2 Inputs | Quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. | |
Level 3 Inputs | Unobservable inputs for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability. | |
The tables below sets forth our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018.
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
December 31, 2019 | |||||||||||||||
Assets: | |||||||||||||||
Convertible debt investment | $ | — | $ | — | $ | $ | |||||||||
Deferred compensation assets | — | — | |||||||||||||
Total assets | $ | — | $ | $ | $ | ||||||||||
Liabilities: | |||||||||||||||
Interest rate swap | $ | — | $ | $ | — | $ | |||||||||
Total liabilities | $ | — | $ | $ | $ | ||||||||||
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HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
December 31, 2018 | |||||||||||||||
Assets: | |||||||||||||||
Interest rate swap | $ | — | $ | $ | — | $ | |||||||||
Convertible debt investment | — | — | |||||||||||||
Deferred compensation assets | — | — | |||||||||||||
Total assets | $ | — | $ | $ | $ | ||||||||||
Liabilities: | |||||||||||||||
Contingent consideration for business acquisitions | $ | — | $ | — | $ | $ | |||||||||
Total liabilities | $ | — | $ | $ | $ | ||||||||||
Interest rate swap: 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 discount rates reflecting the risks involved.
Convertible debt investment: In 2014 and 2015, we invested $27.9 million, in the form of zero coupon convertible debt (the "initial convertible notes"), in Shorelight Holdings, LLC (“Shorelight”), the parent company of Shorelight, 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. In the second quarter of 2019, we amended the initial investment to extend the maturity date by one year to July 1, 2021 , unless converted earlier. In the first quarter of 2020, we invested an additional $13.0 million, in the form of 1.69 % convertible debt with a senior liquidation preference to the initial convertible notes (the "additional convertible note"); and amended our initial convertible notes to extend the maturity date to January 17, 2024 , which coincides with the maturity date of the additional convertible note.
To determine the appropriate accounting treatment for our investment, we performed a variable interest entity (“VIE”) analysis and concluded that Shorelight does not meet the definition of a VIE. We also reviewed the characteristics of our investment to confirm that the convertible notes are not in-substance common stock that would warrant equity method accounting. After we reviewed all of the terms of the investment, we concluded the appropriate accounting treatment to be that of an available-for-sale debt security.
The investment is carried at fair value with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income. We estimate the fair value of our investment using a scenario-based approach in the form of a hybrid analysis that consists of a Monte Carlo simulation model and an expected return analysis. The conclusion of value for our investment is based on the probability-weighted assessment of both scenarios. The hybrid analysis utilizes certain assumptions related to the assumed holding period, the applicable waterfall distribution at the end of the expected holding period based on the rights and privileges of the various instruments, cash flow projections discounted at the risk-adjusted rate, and the concluded equity volatility, all of which are Level 3 inputs. The valuation of our investment as of December 31, 2019 takes into consideration the equity value indication as well as the dilutive impact of the convertible debt issued by Shorelight in the first quarter of 2020, the terms of which were known or knowable as of December 31, 2019. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the investment, which would result in different impacts to our consolidated balance sheet and comprehensive income. Actual results may differ from our estimates. The fair value of the convertible debt investment is recorded in long-term investments on our consolidated balance sheets.
The table below sets forth the changes in the balance of the convertible debt investment for the years ended December 31, 2019 and 2018.
Convertible Debt Investment | ||||
Balance as of December 31, 2017 | $ | |||
Change in fair value of convertible debt investment | ||||
Balance as of December 31, 2018 | ||||
Change in fair value of convertible debt investment | ( | ) | ||
Balance as of December 31, 2019 | $ | |||
F-31
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
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 measured 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 years ended December 31, 2019 and 2018.
Contingent Consideration for Business Acquisitions | ||||
Balance as of December 31, 2017 | $ | |||
Acquisitions | ||||
Payments | ( | ) | ||
Remeasurement of contingent consideration for business acquisitions | ||||
Unrealized gain due to foreign currency translation | ( | ) | ||
Balance as of December 31, 2018 | ||||
Payments | ( | ) | ||
Remeasurement of contingent consideration for business acquisitions | ( | ) | ||
Unrealized loss due to foreign currency translation | ||||
Balance as of December 31, 2019 | $ | |||
Financial assets and liabilities not recorded at fair value on a recurring basis are as follows:
Preferred Stock Investment
In the fourth quarter of 2019, we invested $5.0 million, in the form of preferred stock, in Medically Home Group, Inc. ("Medically Home"), a healthcare technology-enabled services company. To determine the appropriate accounting treatment for our investment, we performed a VIE analysis and concluded that Medically Home does not meet the definition of a VIE. We also reviewed the characteristics of our investment to confirm that the preferred stock is not in-substance common stock that would warrant equity method accounting. After we reviewed all of the terms of the investment, we concluded the appropriate accounting treatment for our investment in Medically Home to be that of an equity security with no readily determinable fair value. We elected to apply the measurement alternative at the time of the purchase and will continue to do so until the investment does not qualify to be so measured. Under the measurement alternative, the investment is carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment in Medically Home. On a quarterly basis, we review the information available to determine whether an orderly and observable transaction for the same or similar equity instrument occurred, and remeasure the fair value of the preferred stock using such identified transactions, with changes in the fair value recorded in consolidated statement of operations. Following our purchase, there has been no impairment, nor any observable price changes to our investment.
Senior Secured Credit Facility
The carrying value of our borrowings outstanding under our senior secured credit facility is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the senior secured credit facility bears interest at variable rates based on current market rates as set forth in the Amended Credit Agreement. Refer to Note 7 “Financing Arrangements” for additional information on our senior secured credit facility.
F-32
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Promissory Note due 2024
The carrying value of our promissory note due 2024 is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the promissory note bears interest at rates based on current market rates as set forth in the terms of the promissory note. Refer to Note 7 “Financing Arrangements” for additional information on our promissory note due 2024.
Convertible Notes
The carrying amount and estimated fair value of the Convertible Notes as of December 31, 2018 follows. The Convertible Notes matured on October 1, 2019.
December 31, 2018 | |||||||
Carrying Amount | Estimated Fair Value | ||||||
1.25% convertible senior notes due 2019 | $ | $ | |||||
The difference between the $250 million principal amount of the Convertible Notes and the carrying amount shown above represented the unamortized debt discount and issuance costs. As of December 31, 2018, the carrying value of the equity component of $39.3 million was unchanged from the date of issuance. Refer to Note 7 “Financing Arrangements” for additional information on our Convertible Notes. The estimated fair value of the Convertible Notes was determined based on the quoted bid price of the Convertible Notes in an over-the-counter market, which is a Level 2 input, on the last day of trading for the year ended December 31, 2018.
F-33
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
14. Other Comprehensive Income (Loss)
The table below sets forth the components of accumulated other comprehensive income (loss), net of tax for the years ended December 31, 2019, 2018, and 2017.
Foreign Currency Translation | Available-for- Sale Investments | Cash Flow Hedges (1) | Total | ||||||||||||
Balance as of December 31, 2016 | $ | ( | ) | $ | $ | ( | ) | $ | |||||||
Foreign currency translation adjustment, net of tax of $0 | — | — | |||||||||||||
Unrealized gain on investments: | |||||||||||||||
Change in fair value, net of tax of $(998) | — | — | |||||||||||||
Reclassification adjustment into retained earnings (2) | — | — | |||||||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||
Change in fair value, net of tax of $(106) | — | — | |||||||||||||
Reclassification adjustment into earnings, net of tax of $(46) | — | — | |||||||||||||
Reclassification adjustment into retained earnings (2) | — | — | ( | ) | ( | ) | |||||||||
Balance as of December 31, 2017 | |||||||||||||||
Foreign currency translation adjustment, net of tax of $0 | ( | ) | — | — | ( | ) | |||||||||
Unrealized gain on investments: | |||||||||||||||
Change in fair value, net of tax of $(2,753) | — | — | |||||||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||
Change in fair value, net of tax of $(63) | — | — | |||||||||||||
Reclassification adjustment into earnings, net of tax of $(10) | — | — | ( | ) | ( | ) | |||||||||
Balance as of December 31, 2018 | ( | ) | |||||||||||||
Foreign currency translation adjustment, net of tax of $0 | — | — | |||||||||||||
Unrealized gain (loss) on investments: | |||||||||||||||
Change in fair value, net of tax of $185 | — | ( | ) | — | ( | ) | |||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||
Change in fair value, net of tax of $295 | — | — | ( | ) | ( | ) | |||||||||
Reclassification adjustment into earnings, net of tax of $48 | — | — | ( | ) | ( | ) | |||||||||
Balance as of December 31, 2019 | $ | ( | ) | $ | $ | ( | ) | $ | |||||||
(1) | The before tax amounts reclassified from accumulated other comprehensive income (loss) related to our cash flow hedges are recorded to interest expense, net of interest income. |
(2) | Upon adoption of ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, we reclassified $ |
15. Employee Benefit and Deferred Compensation Plans
We sponsor a qualified defined contribution 401(k) plan covering substantially all of our employees. Under the plan, employees are entitled to make pretax contributions and/or Roth post-tax contributions up to the annual maximums established by the Internal Revenue Service. We match an amount equal to the employees’ contributions up to 6 % of the employees’ eligible earnings. Our matching contributions for the years ended December 31, 2019, 2018, and 2017 were $22.8 million, $20.8 million, and $20.0 million, respectively.
We have a non-qualified deferred compensation plan (the “Plan”) that is administered by our board of directors or a committee designated by the board of directors. Under the Plan, members of the board of directors and a select group of our employees may elect to defer the receipt of their director retainers and meeting fees or base salary and bonus, as applicable. Additionally, we may credit amounts to a participant’s deferred compensation account in accordance with employment or other agreements entered into between us and the participant. At our sole
F-34
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
16. Equity Incentive Plans
In 2012, Huron adopted the 2012 Omnibus Incentive Plan (the “2012 Plan”)which replaced, on a prospective basis, our 2004 Omnibus Stock Plan (the "2004 Plan") such that future grants will be granted under the 2012 Plan and any outstanding awards granted under the 2004 Plan that are cancelled, expired, forfeited, settled in cash, or otherwise terminated without a delivery of shares to the participant will not become available for grant under the 2012 Plan. The 2012 Plan permits the grant of stock options, stock appreciation rights, restricted stock, performance shares and other share-based or cash-based awards valued in whole or in part by reference to, or otherwise based on, our common stock. Subsequent to the initial approval of the 2012 Plan and through December 31, 2019, our shareholders approved amendments to the 2012 Plan to increase the number of shares reserved for issuance by 2,254,000 , in the aggregate. As of December 31, 2019, approximately 1.1 million shares remain available for issuance under the 2012 Plan.
On May 1, 2015, we adopted the Stock Ownership Participation Program (the “SOPP”), which is available to Huron employees below the managing director level who do not receive equity-based awards as part of their normal compensation plan. Under the SOPP, eligible employees may elect to use after-tax payroll deductions, or cash contributions, to purchase shares of the Company’s common stock on certain designated purchase dates. Employees who purchase stock under the SOPP are granted restricted stock equal to 25 % of their purchased shares. Vesting of the restricted stock is subject to both a time-based vesting schedule and a requirement that the purchased shares be held for a specified period. The initial number of shares available for issuance under the SOPP was 300,000 . Prior to the adoption of the SOPP, the matching share grants and the employee purchased shares under the stock ownership participation program were governed by the 2012 Plan. As of December 31, 2019, less than 0.1 million shares remain available for issuance under the SOPP.
It has been our practice to issue shares of common stock upon exercise of stock options and granting of restricted stock from authorized but unissued shares, with the exception of the SOPP under which shares are issued from treasury stock. Certain grants of restricted stock under the 2012 Plan may be issued from treasury stock at the direction of the Compensation Committee.
Share-based awards outstanding under our 2012 Plan and our 2004 Plan provide for a retirement eligibility provision, under which eligible employees who have reached 62 years of age and have completed seven years of employment with Huron will continue vesting in their share-based awards after retirement, subject to certain conditions. This retirement eligibility provision also applies to future awards granted to eligible employees under the 2012 Plan. The Compensation Committee of the board of directors has the responsibility of interpreting the 2012 Plan and SOPP and determining all of the terms and conditions of awards made under the plans, including when the awards will become exercisable or otherwise vest.
Total share-based compensation cost recognized for the years ended December 31, 2019, 2018, and 2017 was $24.2 million, $18.8 million, and $14.8 million, respectively, with related income tax benefits of $5.3 million, $4.6 million, and $5.8 million, respectively. As of December 31, 2019, there was $26.2 million of total unrecognized compensation cost related to nonvested share-based awards. This cost is expected to be recognized over a weighted average period of 2.2 years.
Restricted Stock Awards
The grant date fair values of our restricted stock awards are measured based on the fair value of our common stock at grant date and amortized into expense over the service period. Subject to acceleration under certain conditions, the majority of our restricted stock vests annually over four years .
F-35
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The table below summarizes the restricted stock activity for the year ended December 31, 2019.
Number of Shares | Weighted Average Grant Date Fair Value (in dollars) | |||||||||||
2012 Omnibus Incentive Plan | Stock Ownership Participation Program | Total | ||||||||||
Nonvested restricted stock at December 31, 2018 | $ | |||||||||||
Granted | $ | |||||||||||
Vested | ( | ) | ( | ) | ( | ) | $ | |||||
Forfeited | ( | ) | ( | ) | ( | ) | $ | |||||
Nonvested restricted stock at December 31, 2019 | $ | |||||||||||
The aggregate fair value of restricted stock that vested during the years ended December 31, 2019, 2018, and 2017 was $14.5 million, $9.1 million, and $11.1 million, respectively. The weighted average grant date fair value per share of restricted stock granted during 2018 and 2017 was $38.45 and $42.11 , respectively.
Performance-based Share Awards
During 2019, 2018, and 2017, the Company granted performance-based stock awards to our named executive officers and certain managing directors. The total number of shares earned by recipients of these awards is contingent upon meeting practice specific and Company-wide performance goals. Following the performance period, certain awards are subject to the completion of a service period, which is generally an additional two years . These earned awards vest on a graded vesting schedule over the service period. For certain performance awards, the recipients may earn additional shares of stock for performance achieved above the stated target. The grant date fair values of our performance-based share awards are measured based on the fair value of our common stock at grant date. Compensation cost is amortized into expense over the service period, including the performance period.
The table below summarizes the performance-based stock activity for the year ended December 31, 2019. All nonvested performance-based stock outstanding at December 31, 2019 and 2018 was granted under the 2012 Omnibus Incentive Plan.
Number of Shares | Weighted Average Grant Date Fair Value (in dollars) | |||||
Nonvested performance-based stock at December 31, 2018 | $ | |||||
Granted (1) | $ | |||||
Vested | ( | ) | $ | |||
Forfeited (2) | ( | ) | $ | |||
Nonvested performance-based stock at December 31, 2019 (3) | $ | |||||
(1) | Shares granted in 2019 are presented at the stated target, which represents the base number of shares that could be earned. Actual shares earned may be below or, for certain grants, above the target based on the achievement of specific financial goals. |
(2) | Forfeited shares include shares forfeited as a result of not meeting the performance criteria of the award as well as shares forfeited upon termination. |
(3) | Of the |
The aggregate fair value of performance-based stock that vested during the years ended December 31, 2019, 2018, and 2017 was $3.4 million, $1.5 million, and $3.6 million, respectively. The weighted average grant date fair value per share of performance-based stock granted during 2018 and 2017 was $35.25 and $42.75 , respectively.
F-36
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Stock Options
Prior to 2014, the Company granted stock option awards to certain named executive officers. No stock option awards were granted in 2019, 2018, or 2017. The exercise prices of stock options are equal to the fair value of a share of common stock on the date of grant. Subject to acceleration under certain conditions, our stock options vest annually over four years . All stock options have a 10 -year contractual term.
Stock option activity for the year ended December 31, 2019 was as follows:
Number of Options (in thousands) | Weighted Average Exercise Price (in dollars) | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in millions) | |||||||||
Outstanding at December 31, 2018 | $ | $ | ||||||||||
Granted | ||||||||||||
Exercised | ( | ) | $ | $ | ||||||||
Forfeited or expired | ||||||||||||
Outstanding at December 31, 2019 (1) | $ | $ | ||||||||||
Exercisable at December 31, 2019 | $ | $ | ||||||||||
(1) | Of the |
17. Income Taxes
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“2017 Tax Reform”), a tax reform bill which, among other items, reduced the corporate federal income tax rate from 35% to 21% and moved from a worldwide tax system to a territorial system. As a result of the enactment of this legislation during the fourth quarter of 2017, we estimated the remeasurement of our net deferred taxes based on the new lower tax rate, as well as provided for additional one-time income tax expense estimates primarily related to the transition tax on accumulated foreign earnings and elimination of foreign tax credits for dividends that are subject to the 100 percent exemption in our consolidated financial statements as of and for the year ended December 31, 2017. In 2017 and the first nine months of 2018, we recorded provisional amounts for certain enactment-date effects of 2017 Tax Reform by applying the guidance in Staff Accounting Bulletin (“SAB”) No. 118 because we had not yet completed our enactment-date accounting for these effects.
During the fourth quarter of 2018, we completed our accounting for all of the enactment-date income tax effects of 2017 Tax Reform. For the year ended December 31, 2018, we recorded tax expense of $2.2 million related to establishing a valuation allowance for foreign tax credits, a tax benefit of $0.6 million related to the U.S. federal return to provision adjustments for the remeasurement of our net deferred taxes based on the new lower rate and tax expense of $0.2 million related to withholding tax on outside basis differences due to our change in assertion for permanent reinvestment. These amounts are recorded as a component of income tax expense from continuing operations.
2017 Tax Reform subjects a US shareholder to tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred. We have elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.
F-37
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
The income tax expense for continuing operations for the years ended December 31, 2019, 2018, and 2017 consists of the following:
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Current: | |||||||||||
Federal | $ | $ | ( | ) | $ | ( | ) | ||||
State | |||||||||||
Foreign | ( | ) | |||||||||
Total current | |||||||||||
Deferred: | |||||||||||
Federal | ( | ) | |||||||||
State | ( | ) | |||||||||
Foreign | ( | ) | ( | ) | ( | ) | |||||
Total deferred | ( | ) | |||||||||
Income tax expense for continuing operations | $ | $ | $ | ( | ) | ||||||
The components of income from continuing operations before taxes were as follows:
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
U.S. | $ | $ | $ | ( | ) | ||||||
Foreign | ( | ) | ( | ) | |||||||
Total | $ | $ | $ | ( | ) | ||||||
A reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations is as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
Percent of pretax income from continuing operations: | ||||||||
At U.S. statutory tax rate | % | % | % | |||||
State income taxes, net of federal benefit | ||||||||
Disallowed executive compensation | ||||||||
Meals and entertainment | ( | ) | ||||||
Tax credits | ( | ) | ( | ) | ||||
Valuation allowance | ( | ) | ( | ) | ||||
Realized investment (gains) losses | ( | ) | ||||||
Net tax benefit related to “check-the-box” election | ( | ) | ||||||
Stock-based compensation | ( | ) | ( | ) | ||||
Foreign source income | ( | ) | ( | ) | ||||
Change in fair value of contingent consideration liabilities | ||||||||
Global intangible low-taxed income | ||||||||
Transition tax on accumulated foreign earnings, net of credits | ( | ) | ||||||
U.S. federal rate change | ( | ) | ( | ) | ||||
Goodwill impairment charges | ( | ) | ||||||
Other | ( | ) | ( | ) | ||||
Effective income tax rate for continuing operations | % | % | % | |||||
The effective tax rate for discontinued operations in 2019 was 26.0 %, based on a tax benefit of $0.1 million and pretax loss from discontinued operations of $0.3 million, and was higher than the statutory tax rate primarily due to state income taxes. The effective tax rate for discontinued operations in 2018 was 26.7 %, based on tax expense of $0.1 million and a pretax loss from discontinued operations of $0.4 million, and was higher than the statutory tax rate primarily due to state income taxes. The effective tax rate for discontinued operations in
F-38
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
2017 was 60.0 %, based on tax expense of $0.6 million and a pretax income from discontinued operations of $1.0 million, and was higher than the statutory tax rate primarily due the settlement of foreign tax audits.
The net deferred tax liabilities for continuing operations at December 31, 2019 and 2018 consisted of the following:
As of December 31, | |||||||
2019 | 2018 | ||||||
Deferred tax assets: | |||||||
Operating lease liabilities | $ | $ | — | ||||
Accrued payroll and other liabilities | |||||||
Share-based compensation | |||||||
Tax credits | |||||||
Net operating loss carryforwards | |||||||
Deferred lease incentives | |||||||
Restructuring charge liability | |||||||
Other | |||||||
Total deferred tax assets | |||||||
Valuation allowance | ( | ) | ( | ) | |||
Net deferred tax assets | |||||||
Deferred tax liabilities: | |||||||
Intangibles and goodwill | ( | ) | ( | ) | |||
Operating lease right-of-use assets | ( | ) | — | ||||
Convertible debt investment | ( | ) | ( | ) | |||
Software development costs | ( | ) | ( | ) | |||
Property and equipment | ( | ) | ( | ) | |||
Prepaid expenses | ( | ) | ( | ) | |||
Other | ( | ) | ( | ) | |||
Total deferred tax liabilities | ( | ) | ( | ) | |||
Net deferred tax asset (liability) for continuing operations | $ | ( | ) | $ | |||
We have federal and state tax credit carryforwards of $0.5 million which will begin to expire in 2020, if not utilized. We also have foreign net operating losses of $0.3 million, which carryforward indefinitely. We have no federal or state net operating loss carryforwards as of December 31, 2019.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
F-39
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Unrecognized Tax Benefits | ||||
Balance at January 1, 2017 | $ | |||
Decrease due to lapse of statute of limitations | ( | ) | ||
Decrease based on tax positions related to prior years | ( | ) | ||
Balance at December 31, 2017 | ||||
Additions based on tax positions related to prior years | ||||
Decrease due to lapse of statute of limitations | ( | ) | ||
Balance at December 31, 2018 | ||||
Decrease due to settlements of prior year tax positions | ( | ) | ||
Decrease due to lapse of statute of limitations | ( | ) | ||
Balance at December 31, 2019 | $ | |||
As of December 31, 2019, we had $0.1 million of unrecognized tax benefits which would affect the effective tax rate of continuing operations if recognized.
As of December 31, 2019 and 2018, we had less than $0.1 million and $0.1 million accrued for the potential payment of interest and penalties. Accrued interest and penalties are recorded as a component of provision for income taxes on our consolidated statement of operations.
We file income tax returns with federal, state, local and foreign jurisdictions. Tax years 2016 through 2018 are subject to future examinations by federal tax authorities. Tax years 2013 through 2018 are subject to future examinations by state and local tax authorities. Our foreign income tax filings are subject to future examinations by the local foreign tax authorities for tax years 2014 through 2018 . Currently, we are not under audit by any tax authority.
18. Commitments, Contingencies and Guarantees
Lease Commitments
We lease office space, data centers and certain equipment under non-cancelable operating lease arrangements expiring on various dates through 2029, with various renewal options. Office facilities under operating leases include fixed payments plus, in some cases, scheduled base rent increases over the term of the lease. Certain leases require variable payments of real estate taxes, insurance and operating expenses. See Note 5 "Leases" for additional information on our leases, including the remaining expected lease payments under our operating leases as of December 31, 2019.
Litigation
During the year ended December 31, 2019, we recorded a $0.4 million litigation loss accrual related to a legal claim that was subsequently settled during the first quarter of 2020. During the year ended December 31, 2018, we reached a settlement agreement related to Huron's claim in a class action lawsuit, resulting in a gain of $2.5 million. These items are recorded in litigation and other losses (gains), net on our consolidated statement of operations.
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Annual Report on Form 10-K, we are not a party to any litigation or legal proceeding that, in the current opinion of management, could have a material adverse effect on our financial position or results of operations. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expected results.
Guarantees
Guarantees in the form of letters of credit totaling $1.7 million and $1.6 million were outstanding at December 31, 2019 and 2018, respectively, primarily to support certain office lease obligations.
In connection with certain business acquisitions, we may be required to pay post-closing consideration to the sellers if specific financial performance targets are met over a number of years as specified in the related purchase agreements. As of December 31, 2019, the
F-40
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
estimated fair value of our outstanding contingent consideration liability was zero. As of December 31, 2018, the total estimated fair value of our contingent consideration liabilities was $11.4 million.
To the extent permitted by law, our bylaws and articles of incorporation require that we indemnify our officers and directors against judgments, fines and amounts paid in settlement, including attorneys’ fees, incurred in connection with civil or criminal action or proceedings, as it relates to their services to us if such person acted in good faith. Although there is no limit on the amount of indemnification, we may have recourse against our insurance carrier for certain payments made.
19. Segment Information
Segments are defined as components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker, who is our chief executive officer, manages the business under three operating segments, which are our reportable segments: Healthcare, Business Advisory, and Education.
• | Healthcare |
Our Healthcare segment has a depth of expertise in financial and operational improvement, care transformation, culture and organizational excellence, strategy, and technology and analytics. We serve national and regional hospitals, integrated health systems, academic medical centers, community hospitals, and medical groups. Our solutions help clients evolve and adapt to the rapidly changing healthcare environment and achieve growth, optimize performance, enhance profitability, improve quality and clinical outcomes, align leaders, improve organizational culture, and drive physician, patient, and employee engagement across the enterprise to deliver better consumer outcomes.
We help organizations transform and innovate their delivery model to focus on patient wellness by improving quality outcomes, minimizing care variation and fundamentally improving patient and population health. Our consultants collaborate with clients to help build and sustain today’s business to invest in the future by reducing complexity, improving operational efficiency and growing market share. We enable the healthcare of the future by identifying, integrating and optimizing digital and technology investments to collect data that transforms care delivery and improves patient outcomes. We also develop future leaders capable of driving meaningful cultural and organizational change and who transform the consumer experience.
• | Business Advisory |
Our Business Advisory segment provides services to large and middle market organizations, lending institutions, law firms, investment banks, private equity firms, and not-for-profit organizations, including higher education and healthcare institutions. We assist clients in a broad range of industries and across the spectrum from healthy, well-capitalized companies to organizations in transition, as well as creditors, equity owners, and other key constituents. Our Enterprise Solutions and Analytics experts advise, deliver, and optimize technology and analytic solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our Business Advisory experts resolve complex business issues and enhance client enterprise value through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. Our Strategy and Innovation professionals collaborate with clients across a range of industries to identify new growth opportunities, build new ventures and capabilities, and accelerate organizational change. Our Life Sciences professionals provide strategic solutions to help pharmaceutical, medical device, and biotechnology companies deliver more value to patients, payers, and providers, and comply with regulations.
• | Education |
Our Education segment provides consulting and technology solutions to higher education institutions and academic medical centers. We collaborate with clients to address challenges relating to business and technology strategy, financial and operational excellence, student success, research administration, and regulatory compliance. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance. Our technology strategy, enterprise applications, and analytic solutions transform and optimize operations, deliver time and cost savings, and enhance the student experience. Our institutional strategy, budgeting and financial management, and business operations align missions with business priorities, improve quality, and reduce costs institution-wide. Our student solutions improve attraction, retention and graduation rates, increase student satisfaction and help generate quality outcomes.
F-41
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative expenses that are incurred directly by the segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include costs for corporate office support, office facility costs, costs relating to accounting and finance, human resources, legal, marketing, information technology, and company-wide business development functions, as well as costs related to overall corporate management.
The tables below set forth information about our operating segments for the years ended December 31, 2019, 2018, and 2017, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements. We do not present financial information by geographic area because our international operations are immaterial.
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Healthcare: | |||||||||||
Revenues | $ | $ | $ | ||||||||
Operating income | $ | $ | $ | ||||||||
Segment operating income as a percentage of segment revenues | % | % | % | ||||||||
Business Advisory: | |||||||||||
Revenues | $ | $ | $ | ||||||||
Operating income | $ | $ | $ | ||||||||
Segment operating income as a percentage of segment revenues | % | % | % | ||||||||
Education: | |||||||||||
Revenues | $ | $ | $ | ||||||||
Operating income | $ | $ | $ | ||||||||
Segment operating income as a percentage of segment revenues | % | % | % | ||||||||
Total Company: | |||||||||||
Revenues | $ | $ | $ | ||||||||
Reimbursable expenses | |||||||||||
Total revenues and reimbursable expenses | $ | $ | $ | ||||||||
Segment operating income | $ | $ | $ | ||||||||
Items not allocated at the segment level: | |||||||||||
Other operating expenses | |||||||||||
Litigation and other losses (gains), net | ( | ) | ( | ) | |||||||
Depreciation and amortization | |||||||||||
Goodwill impairment charges (1) | |||||||||||
Other expense, net | |||||||||||
Income (loss) from continuing operations before taxes | $ | $ | $ | ( | ) | ||||||
(1) | The goodwill impairment charges are not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segments. We do not include the impact of goodwill impairment charges in our evaluation of segment performance. |
F-42
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
As of December 31, | ||||||||||||
Segment Assets: | 2019 | 2018 | 2017 | |||||||||
Healthcare | $ | $ | $ | |||||||||
Business Advisory | ||||||||||||
Education | ||||||||||||
Unallocated assets (1) | ||||||||||||
Total assets | $ | $ | $ | |||||||||
(1) | Unallocated assets include goodwill and intangible assets and our long-term investments, as management does not evaluate these items at the segment level when assessing segment performance or allocating resources. Refer to Note 4 “Goodwill and Intangible Assets" and Note 13 "Fair Value of Financial Instruments" for further information on these assets. |
The following table illustrates the disaggregation of revenues by billing arrangements, employee types, and timing of revenue recognition, including a reconciliation of the disaggregated revenues to revenues from our three operating segments for the year ended December 31, 2019 and 2018.
Year Ended December 31, 2019 | |||||||||||||||
Healthcare | Business Advisory | Education | Total | ||||||||||||
Billing Arrangements | |||||||||||||||
Fixed-fee | $ | $ | $ | $ | |||||||||||
Time and expense | |||||||||||||||
Performance-based | |||||||||||||||
Software support, maintenance and subscriptions | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
Employee Type (1) | |||||||||||||||
Revenue generated by full-time billable consultants | $ | $ | $ | $ | |||||||||||
Revenue generated by full-time equivalents | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
Timing of Revenue Recognition | |||||||||||||||
Revenue recognized over time | $ | $ | $ | $ | |||||||||||
Revenue recognized at a point in time | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
F-43
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
Year Ended December 31, 2018 | |||||||||||||||
Healthcare | Business Advisory | Education | Total | ||||||||||||
Billing Arrangements | |||||||||||||||
Fixed-fee | $ | $ | $ | $ | |||||||||||
Time and expense | |||||||||||||||
Performance-based | |||||||||||||||
Software support, maintenance and subscriptions | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
Employee Type (1) | |||||||||||||||
Revenue generated by full-time billable consultants | $ | $ | $ | $ | |||||||||||
Revenue generated by full-time equivalents | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
Timing of Revenue Recognition | |||||||||||||||
Revenue recognized over time | $ | $ | $ | $ | |||||||||||
Revenue recognized at a point in time | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
(1) | Full-time billable consultants consist of our full-time professionals who provide consulting services to our clients and are billable to our clients based on the number of hours worked. Full-time equivalent professionals consist of our coaches and their support staff within our Culture and Organizational Excellence solution, consultants who work variable schedules as needed by our clients, employees who provide managed services in our Healthcare segment, and full-time employees who provide software support and maintenance services to our clients. |
For the years ended December 31, 2019, 2018, and 2017, substantially all of our revenues and long-lived assets were attributed to or located in the United States.
At December 31, 2019 and 2018, no single client accounted for greater than 10% of our combined receivables and unbilled services balances. During the years ended December 31, 2019, 2018, and 2017, no single client generated greater than 10% of our consolidated revenues.
20. Valuation and Qualifying Accounts
The table below sets forth the changes in the carrying amount of our allowances for doubtful accounts and unbilled services and valuation allowance for deferred tax assets for the years ended December 31, 2019, 2018, and 2017.
Beginning balance | Additions (1) | Deductions | Ending balance | ||||||||||
Year ended December 31, 2017: | |||||||||||||
Allowances for doubtful accounts and unbilled services | $ | $ | |||||||||||
Valuation allowance for deferred tax assets | $ | $ | |||||||||||
Year ended December 31, 2018: | |||||||||||||
Allowances for doubtful accounts and unbilled services | $ | $ | |||||||||||
Valuation allowance for deferred tax assets | $ | $ | |||||||||||
Year ended December 31, 2019: | |||||||||||||
Allowances for doubtful accounts and unbilled services | $ | $ | |||||||||||
Valuation allowance for deferred tax assets | $ | $ | |||||||||||
(1) | Additions to allowances for doubtful accounts and unbilled services are charged to revenues to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the provision relates to a client’s inability to make required payments on accounts receivables, the provision is charged to operating expenses. Additions also include allowances acquired in business acquisitions, which were not material in any period presented. |
F-44
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
21. Selected Quarterly Financial Data (Unaudited)
Quarter Ended | |||||||||||||||
2019 | Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | |||||||||||
Revenues | $ | $ | $ | $ | |||||||||||
Reimbursable expenses | |||||||||||||||
Total revenues and reimbursable expenses | |||||||||||||||
Gross profit | |||||||||||||||
Operating income | |||||||||||||||
Net income from continuing operations | |||||||||||||||
Loss from discontinued operations, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net income | |||||||||||||||
Net earnings per basic share: | |||||||||||||||
Net income from continuing operations | $ | $ | $ | $ | |||||||||||
Loss from discontinued operations, net of tax | |||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Net earnings per diluted share: | |||||||||||||||
Net income from continuing operations | $ | $ | $ | $ | |||||||||||
Loss from discontinued operations, net of tax | |||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Weighted average shares used in calculating earnings per share: | |||||||||||||||
Basic | |||||||||||||||
Diluted | |||||||||||||||
Quarter Ended | |||||||||||||||
2018 | Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | |||||||||||
Revenues | $ | $ | $ | $ | |||||||||||
Reimbursable expenses | |||||||||||||||
Total revenues and reimbursable expenses | |||||||||||||||
Gross profit | |||||||||||||||
Operating income | |||||||||||||||
Net income (loss) from continuing operations | ( | ) | |||||||||||||
Income (loss) from discontinued operations, net of tax | ( | ) | ( | ) | |||||||||||
Net income (loss) | ( | ) | |||||||||||||
Net earnings (loss) per basic share: | |||||||||||||||
Net income (loss) from continuing operations | $ | ( | ) | $ | $ | $ | |||||||||
Income (loss) from discontinued operations, net of tax | ( | ) | |||||||||||||
Net income (loss) | $ | ( | ) | $ | $ | $ | |||||||||
Net earnings (loss) per diluted share: | |||||||||||||||
Net income (loss) from continuing operations | $ | ( | ) | $ | $ | $ | |||||||||
Income (loss) from discontinued operations, net of tax | ( | ) | |||||||||||||
Net income (loss) | $ | ( | ) | $ | $ | $ | |||||||||
Weighted average shares used in calculating earnings per share: | |||||||||||||||
Basic | |||||||||||||||
Diluted | |||||||||||||||
F-45
Exhibit 4.2
Description of Huron Consulting Group Inc.’s Securities Registered Pursuant To Section 12 of the Securities Exchange Act Of 1934
The following description sets forth certain material terms and provisions of the securities of Huron Consulting Group Inc. (“we,” “us” or “our”) that are registered under Section 12 of the Securities Exchange Act of 1934, as amended. This description also summarizes relevant provisions of Delaware law. The following summary does not purport to be complete and is subject to, and is qualified in its entirety by, the provisions of our certificate of incorporation and bylaws, copies of which are incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.2 is a part, and by the applicable provisions of Delaware law.
Our authorized capital stock consists of 500,000,000 shares of common stock, par value $0.01 per share; and 50,000,000 shares of preferred stock.
Our common stock is quoted on the NASDAQ Global Select Market under the symbol “HURN.”
Common Stock
Voting
The holders of our common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including the election of directors, and do not have any right to cumulate votes in the election of directors.
Dividends
Subject to the rights and preferences of the holders of any series of preferred stock which may at the time be outstanding, holders of our common stock are entitled to such dividends as our board of directors may declare out of funds legally available.
Liquidation Rights
In the event of any liquidation, dissolution or winding-up of our affairs, after payment of all of our debts and liabilities and subject to the rights and preferences of the holders of any series of our preferred stock, the holders of our common stock will be entitled to receive the distribution of any of our remaining assets.
Other Matters
Holders of our common stock have no conversion, preemptive or other subscription rights and there are no redemption rights or sinking fund provisions with respect to the common stock. All outstanding shares of our common stock are validly issued, fully paid and non-assessable.
Preferred Stock
Our certificate of incorporation authorizes our board, without any further stockholder action or approval, to issue preferred stock in one or more classes or series, to establish from time to time the number of shares to be included in each class or series and to fix the rights, preferences and privileges of the shares of each wholly unissued class or series and any of its qualifications, limitations or restrictions. Our board may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common stock.
Anti-Takeover Effects of Various Provisions of Our Certificate of Incorporation and Our Bylaws
Provisions of our certificate of incorporation and bylaws, which are summarized below, may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in such stockholder’s best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders.
Classified Board of Directors
Our certificate of incorporation provides for a board of directors divided into three classes, with one class to be elected each year to serve for a three-year term. The provision for a classified board will have the effect of making it more difficult for stockholders to change the composition of our board.
Number of Directors; Removal for Cause; Filling Vacancies
Our certificate of incorporation and our bylaws provide that our board of directors will consist of not less than five nor more than fifteen members, the exact number of which will be fixed from time to time by our board.
Under the General Corporation Law of the State of Delaware, or the DGCL, unless otherwise provided in our certificate of incorporation, directors serving on a classified board may be removed by the stockholders only for cause. Our certificate of incorporation provides that directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of the issued and outstanding shares of our capital stock entitled to vote in an election of directors. Our certificate of incorporation and bylaws also provide that any newly created directorships on our board may be filled by a majority of the board then in office, provided that a quorum is present, and any other vacancy occurring on the board may be filled by a majority of the board then in office, even if less than a quorum, or by a sole remaining director. Any director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director’s successor shall have been elected and qualified. No decrease in the number of directors constituting the board of directors shall have the effect of removing or shortening the term of any incumbent director.
The director removal and vacancy provisions will make it more difficult for a stockholder to remove incumbent directors and simultaneously gain control of the board by filling vacancies created by such removal with its own nominees.
Special Meetings of Stockholders
Our certificate of incorporation and bylaws deny stockholders the right to call a special meeting of stockholders. Our certificate of incorporation and bylaws provide that a special meeting of stockholders may be called only by a majority of our entire board of directors, the chairman of our board or our President.
Stockholder Action by Written Consent
Our certificate of incorporation requires all stockholder actions to be taken by a vote of the stockholders at an annual or special meeting, and denies the ability of stockholders to act by written consent without a meeting.
Third Amended and Restated Certificate of Incorporation and Bylaws
The DGCL provides generally that the affirmative vote of a majority of the outstanding shares entitled to vote is required to amend or repeal a corporation’s certificate of incorporation or bylaws, unless the certificate of incorporation requires a greater percentage. Our certificate of incorporation generally requires the approval of the holders of at least two-thirds of the voting power of the issued and outstanding shares of our capital stock entitled to vote in connection with the election of directors to amend any provisions of our certificate of incorporation. Our certificate of incorporation and bylaws provide that the holders of at least two-thirds of the voting power of the issued and outstanding shares of our capital stock entitled to vote in connection with the election of directors have the power to amend or repeal our bylaws. In addition, our certificate of incorporation grants our board of directors the authority to amend and repeal our bylaws without a stockholder vote in any manner not inconsistent with the laws of the State of Delaware or our certificate of incorporation.
Limitations on Liability and Indemnification of Directors and Officers
We have adopted provisions in our certificate of incorporation that limit or eliminate the personal liability of our directors to the maximum extent permitted by the DGCL. The DGCL expressly permits a corporation to provide that its directors will not be liable for monetary damages for a breach of their fiduciary duties as directors, except for liability:
• | for any breach of the director’s duty of loyalty to us or our stockholders; |
• | for any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; |
• | under Section 174 of the DGCL (relating to unlawful stock repurchases, redemptions or other distributions or payment of dividends); or |
• | for any transaction from which the director derived an improper personal benefit. |
These limitations of liability do not generally affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws also authorize us to indemnify our officers, directors and other agents to the fullest extent permitted under the DGCL and we may advance expenses to our directors, officers and employees in connection with a legal proceeding, subject to limited exceptions.
As permitted by the DGCL, our certificate of incorporation and bylaws provide that:
• | we must indemnify our board members and officers to the fullest extent permitted by the DGCL, subject to limited exceptions; and |
• | we may purchase and maintain insurance on behalf of our current or former board members, officers, employees or agents against any liability asserted against them and incurred by them in any such capacity, or arising out of their status as such. |
We may enter into separate indemnification agreements with each of our board members and officers that may be broader than the specific indemnification provisions contained in the DGCL. These indemnification agreements may require us, among other things, to indemnify our board members and officers against liabilities that may arise by reason of their status or service as board members and officers, other than liabilities arising from willful misconduct. These indemnification agreements may also require us to advance any expenses incurred by the board members and officers as a result of any proceeding against them as to which they could be indemnified and to obtain directors’ and officers’ insurance if available on reasonable terms.
The limited liability and indemnification provisions in our certificate of incorporation and bylaws and in any indemnification agreements we enter into may discourage stockholders from bringing a lawsuit against our board members for breach of their fiduciary duties and may reduce the likelihood of derivative litigation against our board members and officers, even though a derivative action, if successful, might otherwise benefit us and our stockholders.
Exhibit 10.13
FIFTH AMENDMENT TO LEASE
THIS FIFTH AMENDMENT TO LEASE (this "Fifth Amendment") is made effective as of December 1, 2013 (the "Effective Date"), by and between UNION TOWER, LLC, a Delaware limited liability company ("Landlord") and HURON CONSULTING SERVICES LLC, a Delaware limited liability company, successor by assignment to HURON CONSULTING GROUP LLC ("Tenant"). The 10th/11th Floor Premises (as defined herein) shall be deemed leased as of such Effective Date, but delivery shall only be required as provided herein.
WITNESSETH
A.Landlord and Tenant's predecessor in interest entered into that certain Office Lease dated December, 2003 (the "Original Lease"), as amended by that certain First Amendment to Lease dated as of August 23, 2004 (the "First Amendment"), and by that certain Second Amendment to Lease dated May 14, 2007 (the "Second Amendment"), and by that certain Third Amendment to Lease dated April 2, 2010 (the "Third Amendment"), and by that certain Fourth Amendment to Lease dated December 31, 2012 (the "Fourth Amendment") together with the Original Lease, the First Amendment, the Second Amendment, the Third Amendment, and the Fourth Amendment, the "Amended Lease"), whereby Landlord leased to Tenant certain premises consisting of a total of 129,395 square feet of rentable area (the "Existing Premises"), consisting of the entire fourth, fifth, eighth, ninth, sixteenth, and seventeenth floors, each of which contain 20,667 square feet of rentable area, together with 5,393 square feet of rentable area on the third floor, all in that certain office building known as Union Tower, located at 550 West Van Buren Street, Chicago, Illinois (the "Building").
B. Landlord and Tenant now desire to amend the Amended Lease to modify the Premises and Rent, to further expand the Premises, and to amend the Amended Lease in certain other respects.
NOW, THEREFORE, in consideration of the foregoing recitals, which are hereby incorporated into the Amended Lease, and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, it is hereby agreed as follows:
1.Defined Terms. All defined terms used herein shall have the same meanings as are ascribed to such defined terms in the Amended Lease, except as otherwise specifically provided herein. As used herein and in the Amended Lease the term "Lease" shall mean the Amended Lease as modified by this Fifth Amendment.
2.Modification of Premises and Tenant's Pro Rata Share.
(a)Addition of Tenth Floor Space to Premises. Effective as of March 1, 2014 (the "10th Floor Commencement Date"), (i) the tenth floor of the Building, containing 20,667 square feet of rentable area (the "10th Floor Premises") shall be added to the Premises, as defined in the Lease, (ii) the Premises shall consist of 150,062 square feet of rentable area in the aggregate, (iii) the 10th Floor Premises shall be deemed to be included in all references in the Lease to "Premises", and (iv) Tenant's Pro Rata Share shall be amended to be 45.1167%.
(b)Addition of Eleventh Floor Space to Premises. Effective as of January 1, 2015 (the "11th Floor Commencement Date"), (i) Suite 1100 on the 11th floor of the Premises, containing 9,850 square feet of rentable area (the "11th Floor Premises" and collectively, with the 10th floor Premises, the "10th/11th Floor Premises") shall be added to the Premises, as defined in the Lease, (ii) the Premises shall consist of 159,912 square feet of rentable area in the aggregate, (iii) the 11th Floor Premises shall be deemed to be included in all references in the Lease to "Premises", and (iv)Tenant's Pro Rata Share shall be amended to be 48.0782%.
(c)Replacement Exhibit A. The 10th/11th Floor Premises are depicted on Exhibit A attached hereto.
(d)Possession. Landlord shall deliver possession of the 10th Floor Premises to Tenant in broom clean condition on the later of (i) December 1, 2013, or (ii) the date of Landlord's receipt of fully executed versions of this Fifth Amendment and the Consent of Guarantor attached hereto. Landlord shall deliver possession of the 11th Floor Premises to Tenant in broom clean condition on the 11th Floor Commencement Date, provided, however, at Tenant's option effective thirty (30) days after prior written notice to Landlord, Tenant may elect to take possession of the 11th Floor Premises at any time on or after September 1, 2014. Any possession of the 10th Floor Premises prior to the 10th Floor Commencement Date or of the 11th Floor Premises prior to the 11th Floor Commencement Date shall be deemed to be upon all the terms, covenants, conditions, and provisions of the Lease, subject to the provisions of Paragraph 7 below with respect to Abated Rent. In addition to the Abated Rent as provided in Paragraph 7 below, Tenant shall be entitled to an abatement of Base Rent and of Tenant's Pro Rata Share of Taxes and Operating Expenses for (a) any early possession of the 10th Floor Premises prior to the 10th Floor Commencement Date and (b) any early possession of the 11th Floor Premises prior to the 11th Floor Commencement Date, but all other costs and charges specified in the Lease shall remain as due and payable pursuant to the provisions of the Lease.
3.Deletion of Expansion Option and Reaffirmation of Extension Option. Section 9 of the Fourth Amendment entitled "Expansion Option" is hereby deleted and shall have no further force or effect. The Extension Option set forth in the Fourth Amendment shall remain in full force and effect and shall apply to the Premises, as enlarged to include the 10th Floor Premises and the 11th Floor Premises.
4.Base Rent.
(a) 10th/11th Floor Space. Effective as of March 1, 2014, the Base Rent for the 10th Floor Premises shall be $16.50 per square foot of rentable area escalating by $.50 per square foot of rentable area on each January 1 thereafter. Effective January 1, 2015, the Base Rent for the 11th Floor Premises shall be $17.25 per square foot of rentable area escalating by $.50 per square foot of rentable area on each January 1 thereafter.
(b) Entire Premises. Notwithstanding anything in the Lease to the contrary, the parties hereby confirm that the schedule of Base Rent
payable with respect to the Premises, from and after the Effective Date through and including September 30, 2024, after all rent abatements set forth in Section 7 herein and in previous amendments to the Original Lease, but excluding any space added in the future in excess of the 159,912 square feet of rentable area described herein, shall be as provided in Exhibit B hereto, provided, however, such Base Rent shall be subject to further adjustment if Tenant elects to apply certain amounts from the Existing Allowance (defined herein) to Base Rent as permitted by the terms of the Fourth Amendment.
5.Condition of Premises. Tenant shall accept the 0th Floor Premises in "as-is, where-is" condition on the 10th Floor Commencement Date. Tenant shall accept the 11th Floor Premises in "as-is, where-is" condition on the 11th Floor Commencement Date. No promise of Landlord to alter, remodel or improve the 10th/11th Floor Premises, the Premises or the Building and no representation respecting the condition of the 10th/11th Floor Premises, the Premises, or the Building has been made by Landlord to Tenant other than as expressly set forth in this Fifth Amendment.
6.Allowance and Tenant Improvements. Landlord shall give Tenant a total aggregate allowance (the "10th/11th Floor Allowance") of $1,680,852.50 ($57.50/rsf for the 20,667 square feet of rentable area in the 10th Floor Premises and $50.00/rsf for the 9,850 square feet of rentable area in the 11th Floor Premises) as a credit towards the cost of performing certain improvements in the Premises and/or 10th/11th Floor Premises, including but not limited to hard construction costs, soft costs, permit fees, moving costs, telephone cabling costs, specialty consulting fees, the cost of architectural drawings, MEP drawings, general conditions, overhead and profit of the general contractor and subcontractors, and the cost of wiring, furniture, fixtures and equipment for the Premises, as more particularly described in that certain Work Letter (the "Work Letter") attached hereto and made a part hereof as Exhibit C and defined therein as the "Work". The 10th/11th Floor Allowance described in this Section 6 shall be in addition to and separate from the $3,958,220.00 Allowance described in Section 6 of the Fourth Amendment (sometimes referred to herein as the "Existing Allowance"). Landlord shall not be obligated to fund the 10th/11th Floor Allowance prior to the following dates: $1,188,352.50 no earlier than December 1, 2013, and the remaining $492,500.00 no earlier than September 1, 2014. The 1Oth/11th Floor Allowance shall be paid upon receipt of lien waivers, invoices and other documentation reasonably requested by Landlord, as provided in the Work Letter. All work to be performed by Tenant in the Premises shall be performed in a good and workmanlike manner in accordance with the Lease and the Work Letter. $1,188,352.50 of the 10th/11th Floor Allowance must be used on or before December 31, 2015, and the remaining $492,500.00 of the 10th/11th Floor Allowance must be used on or before December 31, 2016, or it will no longer be available to Tenant.
7.Rent Abatement. Notwithstanding anything in Section 4 or elsewhere to the contrary herein, so long as Tenant is not in default under the Lease after expiration of all applicable cure periods, Tenant shall be entitled to an abatement of Base Rent and of Tenant's Pro Rata Share of Taxes and Operating facpenses (collectively, the "Abated Rent") as follows: (i) for the 10th Floor Premises, from the 10th Floor Commencement Date through and including December 31, 2014, and (ii) for the 11th Floor Premises, from the 11th Floor
Commencement Date through and including September 30, 2015 (the "Rent Abatement Period"). During the Rent Abatement Period, only Base Rent and Tenant's Pro Rata Share of Taxes and Operating Expenses shall be abated, and all other costs and charges specified in the Lease shall remain as due and payable pursuant to the provisions of the Lease.
8.Amendment of Right of First Offer. Section 8 of the Fourth Amendment is hereby amended as of the Effective Date to provide that "Offer Space" as used in Section 8 shall include only space either on the eleventh floor, or space containing at least 8,000 square feet of contiguous rentable area on other floors, but excluding any lease, renewal, extension, option, and/or renewal with respect to the fifteenth floor or any portion thereof by or with Crump Insurance Services, Inc., CRC Insurance Services, Inc. and/or their respective affiliates,-successors and/or assigns (collectively, "Crump"), provided, however, if at any time the space occupied by Crump becomes available due to a termination or expiration of the then-existing Crump lease or otherwise, Tenant's Right of First Offer shall be reinstated with respect to such space. Further, Tenant's Right of First Offer is subject to those existing tenant rights listed on updated Exhibit D hereto, which shall replace Exhibit C attached to the Fourth Amendment.
9.Amendment of Right To Terminate. The definition of "Lease Costs" in Section 10 of the Fourth Amendment is hereby amended to provide as follows:
““Lease Costs” shall be the sum of all of the following amounts (i) all leasing commissions relatedto the Fourth Amendment, this Fifth Amendment and any and all additional space now or hereafter added to the Premises after the Effective Date of the Fourth Amendment, including without limitation any Offer Space, (ii) the 10th/11th Floor Allowance, the Existing Allowance, and all other tenant improvement allowances paid after the Effective Date of the Fourth Amendment, including without limitation, those paid in connection with any Offer Space, and/or other space leased by Tenant hereunder (if any), (iii) the amount of all Abated Rent and other rent concessions granted pursuant to the terms of the Fourth Amendment (whether applicable to periods before or after the Effective Date of the Fourth Amendment), this Fifth Amendment and all further Lease amendments executed after the Effective Date, (iv) rent loss incurred (net of sublease income from CRC Insurance Services, Inc.) by Landlord's removal of Suite 1520 from the Premises when and as provided in the Fourth Amendment, and (v) Base Rent and of Tenant's Pro Rata Share of Taxes and Operating Expenses for the entire Premises for a two (2) month period, at the rate in effect as of the Termination Date. There shall be no duplication of costs included in Lease Costs, and Lease Costs shall be deemed to be "amortized" only to the extent of Base Rent actually received by Landlord with respect to the applicable space."”
10.Security Deposit.
(a) Amount. Notwithstanding anything contained in the Lease to the contrary, Landlord and Tenant agree that, effective as of January 1, 2014, the Security Deposit described in Section 35 of the Lease shall be increased to Eight Hundred Thousand and 00/l00ths Dollars ($800,000.00), through the remainder of the Term, subject to further
increase if the size of the Premises is increased after the date hereof by exercise of Tenant's Right of First Offer, in accordance with the terms stated in the Offer Notice.
(b) Solvency of Letter of Credit Issuer. ff the Security Deposit is in the form of a letter of credit, and during the Term of this Lease, the issuer of the letter of credit either: (1) fails to maintain a rating of at least AA- S&P or a Aa3 Moody's (the "Required Rating"), or (2) is declared insolvent by the FDIC, then Landlord shall be entitled to require that the letter of credit be re-issued (within fifteen (15) business days following Landlord's delivery of a written demand for re-issuance, provided that in any event such re-issuance must occur prior to any declaration of insolvency) by a financial institution with the Required Rating and delivered to Landlord, or replaced with cash by Tenant; and if Tenant fails to do so within such fifteen (15) business day period after notice from Landlord, Landlord may immediately draw the full amount of the letter of credit. All costs for the issuance (or reissuance as required by Landlord in the event of Landlord's sale of the Property) of said letter of credit shall be paid by Tenant. In the event that the letter of credit is re-issued or Tenant replaces the letter of credit with cash, Landlord shall promptly return the original letter of credit to Tenant.
11.Broker. Tenant and Landlord each represents to the other party that except for U.S. Equities Asset Management and Jones Lang LaSalle Midwest, LLC (whose commissions, if any, shall be paid by Landlord, pursuant to separate agreement), Landlord and Tenant have not dealt with any real estate broker, salesperson or finder in connection with this Fifth Amendment, and no other such person initiated or participated in the negotiation of this Fifth Amendment or is entitled to any commission in connection herewith. Tenant hereby agrees to indemnify, defend and hold Landlord, its property manager and their respective employees harmless from and against any and all liabilities, claims, demands, actions, damages, costs and expenses (including attorneys' fees) arising from either (i) a claim for a fee or commission made by any broker, other than the Brokers, claiming to have acted by or on behalf of Tenant in connection with this Fifth Amendment, or (ii) a claim of, or right to, lien under the Statutes of Illinois relating to real estate broker liens with respect to any such broker retained by Tenant. Landlord hereby agrees to indemnify, defend, and hold Tenant and its employees harmless from and against any and all liabilities, claims, demands, actions, damages, costs, and expenses (including attorneys' fees) arising from either (i) a claim for a fee or commission made by any broker, other than the Brokers, claiming to have acted by or on behalf of Landlord in connection with this Fifth Amendment, or (ii) a claim of, or right to, lien under the Statutes of Illinois relating to real estate broker liens with respect to any such broker retained by Landlord.
12.Energy and Environmental Initiatives. Tenant shall reasonably cooperate with Landlord in any commercially reasonable programs in which Landlord may elect to participate relating to the Building's (i) energy efficiency, management, and conservation; (ii) water conservation and management; (iii) environmental standards and efficiency; (iv) recycling and reduction programs; and/or (v) safety, which participation may include, without limitation, the Leadership in Energy and Environmental Design (LEED) program and related Green Building Rating System promoted by the U.S. Green Building Council, as
well as the Energy Star program promoted by the U.S. Environmental Protection Agency and the U.S. Department of Energy. All carbon tax credits and similar credits, offsets and deductions are the sole and exclusive property of Landlord.
13.Submission. Submission of this Fifth Amendment by Landlord or Landlord's agent, or their respective agents or representatives, to Tenant for examination and/or execution shall not in any manner bind Landlord and no obligations on Landlord shall arise under this Fifth Amendment unless and until this Fifth Amendment is fully signed and delivered by Landlord and Tenant. It is further understood that this Fifth Amendment is subject to: (i) review and approval by Landlord of Tenant's current financial condition; and (ii) review and approval of this proposed Fifth Amendment by Landlord's Investment Committee. provided, however, the execution and delivery by Tenant of this Fifth Amendment to Landlord or Landlord's agent, or their respective agents or representatives, shall constitute an irrevocable offer by Tenant to amend the Lease on the terms and conditions herein contained, which offer may not be revoked for five (5) business days after such delivery.
14.Binding Effect. The Lease, as hereby amended, shall continue in full force and effect, subject to the terms and provisions thereof and hereof. This Fifth Amendment shall be binding upon and inure to the benefit of Landlord, Tenant and their respective successors and permitted assigns.
15.Exculpatory Clause.
(a)Landlord. It is expressly understood and agreed by and between the parties hereto, anything in the contrary notwithstanding, that each and all of the representations, warranties, covenants, undertakings, indemnities and agreements herein made on the part of Landlord, are made and intended, not with the intention of binding Landlord personally or the assets of Landlord, but are made and intended for the purpose of subjecting only Landlord's interest in the Real Property, Premises and the Building, as the same may from time to time be encumbered, to the terms of the Lease and for no other purpose whatsoever. No personal liability shall at any time be asserted or enforceable against Landlord or its stockholders, officers, employees or partners or their respective heirs, legal representatives, successors and assigns on account of the Lease or on account of any representation, warranty, covenant, undertaking, indemnity or agreement of Landlord or Tenant, as applicable in the Lease. All such personal liability of Landlord, if any, is expressly waived and released by Tenant and by all persons claiming by, through or under Tenant.
(b)Tenant. It is expressly understood and agreed by and between the parties hereto, anything herein to the contrary notwithstanding, Tenant's individual stockholders, officers, employees and partners shall have no personal liability to Landlord on account of the Lease for the obligations of Tenant hereunder, except to the extent, if any, that such obligations may affect the value of any ownership interest such person may have in Tenant. Tenant's liabilities under the Lease shall be satisfied solely from Tenant's assets and any security deposit or other guaranty or collateral expressly provided by Tenant. Nothing herein is intended, however, to release any individual from liability for its own separate acts or omissions apart from the obligations of Tenant under the
Lease, and nothing shall be deemed to release Tenant from personal liability hereunder.
16.Conflict. In the event of any conflict between the terms of the Amended Lease and the terms of this Fifth Amendment, the terms of this Fifth Amendment shall control.
17.Governing Law. Interpretation of this Fifth Amendment shall be governed by the laws of the State of Illinois.
18.Guaranty. As a condition precedent to Landlord's execution of this Fifth Amendment, Huron Consulting Group, Inc., a Delaware corporation, shall execute the Consent of Guarantor following the signature pages of the parties hereto, confirming that the Guaranty shall apply to the Lease as amended by this Fifth Amendment and shall remain in full force and effect throughout the Term.
IN WITNESS WHEREOF, this Fifth Amendment is executed as of the day and year aforesaid.
LANDLORD:
UNION TOWER, LLC,
a Delaware limited liability company
By: UNION TOWER II, LLC, a Delaware limited liability company, its sole member
By: PRINCIPAL LIFE INSURANCE COMPANY, an Iowa corporation, its member, solely for its Principal U.S. Property Separate Account, formerly known as Principal Life Insurance Company, an Iowa corporation, for its Real Estate Separate Account
By: PRINCIPAL REAL ESTATE
INVESTORS, LLC, a Delaware limited liability company, its authorized signatory
By: | /s/ Brian Sandfort |
Name: | Brian K. Sandfort |
Title: | Managing Director, Asset Management |
Date: | |
By: | /s/ Katherine Gibbons |
Name: | Katherine Gibbons |
Title: | Investment Director |
Date: | 12/10/13 |
TENANT:
HURON CONSUTLING SERVICES LLC,
a Delaware limited liability company
By: | /s/ C. Mark Hussey |
Name: | C. Mark Hussey |
Title: | EVP, CFO & Treasurer |
CONSENT AND AGREEMENT OF GUARANTOR
The undersigned Guarantor executed a Guaranty dated as of December 31, 2012 (the "Guaranty ") guaranteeing to Landlord, the payment and performance of all obligations of Tenant under the Lease. Guarantor hereby consents and agrees to the modifications and all other matters contained in the forgoing Fifth Amendment. The Guaranty shall continue to be in full force and effect and shall remain unaffected and unchanged except as amended and modified to include the Fifth Amendment. The Guaranty is hereby ratified and reaffirmed, and Guarantor specifically acknowledges the continuing validity and enforceability thereof.
GUARANTOR:
HURON CONSULTING GROUP, INC.,
a Delaware corporation
By: | /s/ C. Mark Hussey |
Its: | EVP, CFO & Treasurer |
EXHIBIT A
THE INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED BECAUSE IT IS BOTH (I) NOT MATERIAL AND (II) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED.
EXHIBIT B
BASE RENT SCHEDULE FOR ENTIRE PREMISES FROM AND AFTER 12/1/2013
EXHIBIT C
WORK LETTER
This Work Letter ("Work Letter") is a part of that certain Fifth Amendment to Lease between HURON CONSULTING SERVICES, LLC, a Delaware limited liability company, as successor by assignment to HURON CONSULTING GROUP LLC, a Delaware limited liability company, as “Tenant” and UNION TOWER LLC, a Delaware limited liability company, as “Landlord”, relating to certain Premises as defined and more fully identified at the building located at 550 West Van Buren Street, Chicago, Illinois (the "Building"). Capitalized terms used herein, unless otherwise defined in this Work Letter, shall have the respective meanings ascribed to them in the Lease, as amended by the Fifth Amendment. This Work Letter is incorporated by referenced into the Lease and made a part thereof.
For and in consideration of the agreement to lease the Premises and the mutual covenants contained herein and in the Lease, Landlord and Tenant hereby agree as follows:
1. WORK. Tenant, at its sole cost and expense, shall perform, or cause to be performed, the work and all other tenant improvements (collectively, the “Work”) in the Premises provided for in the Approved Plans and Budget (as defined in Paragraph 2 hereof). Subject to Tenant's satisfaction of the conditions specified in this Work Letter, Tenant shall be entitled to the 10th/11th Floor Allowance (as defined in the Fifth Amendment).
2. PRE-CONSTRUCTION ACTIVITIES.
(a)On or before the commencement of the Work, Tenant shall submit the Plans (as hereinafter defined) for the Work, which Plans shall be subject to Landlord's approval which will not be unreasonably withheld, conditioned or delayed. Prior to commencement of the Work, Tenant shall submit the following information and items to Landlord for Landlord's review and approval, which will not be unreasonably withheld, conditioned or delayed:
(i)A budget (the "Budget") and an itemized statement of estimated construction and other costs (as such figure may be revised from time to time, the "Cost" or "Costs"), including all fees for permits and architectural and engineering fees and a reasonable contingency reserve. Such Budget and Cost amounts shall be revised as is reasonably necessary to reflect actual costs due to change orders, as shown in contracts, or for other reasons during the progress of the Work.
(ii)The names and addresses of Tenant's contractors (and said contractor's subcontractors) and materialmen to be engaged by Tenant for the Work (individually, a "Tenant Contractor," and collectively, "Tenant's Contractors"). Each of Tenant's Contractors shall be subject to the prior written approval of Landlord, which approval shall not be unreasonably
withheld, conditioned or delayed. If such contractor complies with Landlord's reasonable criteria and is duly qualified to perform the Work, Landlord shall approve such contractor. Landlord may, at its election, provide a list of approved contractors for performance of those portions of work involving electrical, mechanical, plumbing, heating, air conditioning or life safety systems, from which Tenant may select its contractors or subcontractors for such designated portions of work and such contractors or subcontractors will be included in Tenant's bid process.
(iii)Certified copies of insurance policies or certificates of insurance as hereinafter described. Tenant shall not permit Tenant's Contractors to commence work until the required insurance has been obtained and certified copies of policies or certificates have been delivered to Landlord.
Tenant will update such information and items by notice to Landlord of any changes thereto.
(b) As used herein the term "Approved Plans" shall mean the Plans (as hereinafter defined), as and when approved in writing by Landlord. As used herein, the term "Plans" shall mean the full and detailed architectural and engineering plans and specifications covering the Work (including, without limitation, architectural, structural, mechanical, electrical, plumbing, HVAC, and life safety work and all other items for which the 10th/11th Floor Allowance is to be used and all architectural, mechanical and electrical working drawings for such Work). The Plans shall be subject to Landlord's reasonable approval as provided herein, which approval shall not be unreasonably withheld, conditioned or delayed, and to the approval of all local governmental authorities requiring approval of the Work and/or the Approved Plans. Landlord shall respond to Tenant's submission of the Plans (giving detailed reasons in case of disapproval) within seven (7) business days after their delivery to Landlord. Landlord agrees not to unreasonably withhold, condition or delay its approval of said Plans; provided, however, that Landlord shall not be deemed to have acted unreasonably if it withholds it approval of the Plans because, in Landlord's reasonable opinion: the Work as shown in the Plans is substantially likely to adversely affect Building systems, the structure of the Building or the safety of the Building and/or its occupants; the Work as shown on the Plans is reasonably likely to impair Landlord's ability to furnish services to Tenant or other tenants; the Work would increase the cost of operating the Building; the Work would violate any Laws (or interpretations thereof); the Work is not in accordance with then-current Building standards; the Work contains or uses hazardous or toxic materials or substances; the Work would adversely affect the appearance of the Building outside of the Premises; or the Work has a reasonable likelihood of adversely affecting another tenant's premises. The foregoing reasons, however, shall not be exclusive of the reasons for which Landlord may withhold consent, whether or not such other reasons an similar or dissimilar to the foregoing. If Landlord notifies Tenant that changes are required to the final Plans submitted by Tenant, Tenant shall prior to commencement of any Work, submit to Landlord, for its approval, the Plans amended in accordance with the changes so required. Landlord
shall respond to Tenant's submission of such amended Plans within three (3) business days of receipt, it being agreed that Landlord's approval thereto shall be limited to those items to which Landlord had objected pursuant to the prior submission of the Plans. Such procedure for review with respect to any further objections to the Plans by Landlord shall continue until the Plans are finally approved by Landlord. If Landlord fails to respond to any request for approval of Plans within the time period provided herein, Tenant shall send a further notice to Landlord with the following typed in bold face type in a clearly visible location on the outside of the notice: "THIS CONTAINS PLANS SUBMITTED TO LANDLORD PURSUANT TO A LEASE. LANDLORD'S FAILURE TO RESPOND IN WRITING WITHIN THREE (3) BUSINESS DAYS SHALL BE DEEMED TO CONSTITUTE LANDLORD'S APPROVAL OF SUCH PLANS." If Landlord fails to respond within three (3) business days after receipt of such second notice, Landlord shall be deemed to have approved the Plans as submitted. The Plans shall also be revised, the Work shall be changed, all at Tenant’s cost and expense (but payable from the 10th/11th Floor Allowance), to incorporate any work required in the Premises by any local governmental field inspector. Landlord's approval of the Plans shall in no way be deemed to be (i) an acceptance or approval of any element therein contained which is in violation of any applicable Laws, or (ii) an assurance that work done pursuant to the Approved Plans will comply with all applicable Laws (or with the interpretations thereof) or satisfy Tenant's objectives and needs.
(c) No demolition or Work shall be undertaken or commenced by Tenant in the Premises being delivered to Tenant until (i) Tenant has delivered, and Landlord has approved, all items set forth in Paragraph 2(a) above, and (ii) all necessary building permits have been applied for and obtained by Tenant, and copies of all of such permits have been delivered to Landlord. Notwithstanding the foregoing or anything to the contrary in this Work Letter, Tenant shall have the right to secure a separate permit for demolishing work (the "Demolishing Work") prior to obtaining the applicable building permits and shall be entitled to commence such Demolishing Work upon receipt of the applicable permit (without waiting for such subsequent permits); provided, however, notwithstanding anything to the contrary contained herein, Tenant shall be required to submit full and detailed plans and drawings covering the Demolishing Work (the "Demolition Drawings") to Landlord for Landlord's approval (which process for approval shall follow the procedure set forth in Section 2(b) herein for Approved Plans) prior to commencing any such Demolishing Work.
3. CHARGES AND FEES. Tenant shall pay Landlord a supervisory fee in an amount equal to - 0 -- percent (0%) of the total costs of the materials and labor for the Work (and all change orders with respect thereto), to defray Landlord's administrative and overhead expenses incurred to review the Plans and coordinate with Tenant's on-site project manager the staging and progress of the Work. Notwithstanding the forgoing, if the Work as described in the Plans would have any effect on Building systems or structure, Landlord shall be permitted to submit the Plans to the Building's MEP engineer or other third party consultant for review, and Tenant shall be responsible for the reasonable, out of pocket costs incurred by Landlord for such review (the "Consultant
Fee").
4. CHANGE ORDERS. All changes to the Approved Plans requested by Tenant must be approved by Landlord in advance of the implementation of such changes as part of the Work which approval shall not be unreasonably withheld, conditioned or delayed. Landlord shall review all requested changes within two (2) business days after their delivery to Landlord, provided, however, in the event of extensive changes, such time period shall be extended to a length of time which is reasonable under the circumstances not to exceed five (5) business days. All delays caused by Tenant-initiated change orders, including, without limitation, any stoppage of work during the change order review process, are solely the responsibility of Tenant and shall cause no delay in the payment of Rent and other obligations therein set forth. All increases in the cost of the Work resulting from such change orders shall (subject to Paragraph 7 below) be borne by Tenant. Notwithstanding the foregoing, insubstantial and non-structural "field" changes of the type not customarily the subject of change orders and which do not affect any Building systems shall not require Landlord's prior written consent.
5. STANDARDS OF DESIGNAND CONSTRUCTION AND CONDITIONS OF TENANT'S PERFORMANCE. All work done in or upon the Premises by Tenant shall be done according to the standards set forth in this Paragraph 5, except as the same may be modified in the Approved Plans approved by or on behalf of Landlord and Tenant.
(a)Tenant's Approved Plans and all design and construction of the Work shall comply with all applicable statutes, ordinances, regulations, laws, codes and industry standards, including, but not limited to, reasonable requirements of Landlord's fire insurance underwriters and the Americans with Disabilities Act of 1990 (42 U.S.C. §12101 et. seq.), as amended.
(b)Tenant shall, at its own cost and expense (but payable from the 10th/11th Floor Allowance), obtain all required building permits and occupancy permits. Tenant's failure to obtain such permits shall not cause a delay in the obligation to pay Rent or any other obligations set forth in the Lease.
(c)Tenant shall, at its own cost and expense (but payable from the 10th/11th Floor Allowance), obtain all required building permits and occupancy permits. Tenant's failure to obtain such permits shall not cause a delay in the obligation to pay Rent or any other obligations set forth in the Lease.
(d)Tenant shall use only new, first-class material in the Work comparable to materials used in other tenant improvements in the Building, except where explicitly shown in the Approved Plans. The Work shall be performed in a good and workmanlike manner. Tenant shall obtain contractors' warranties of at least one (1) year duration from the completion of the Work against defects in workmanship and materials on all Work performed and equipment installed in the Premises unless such warranties are not customarily obtained for the type of work and/or material involved, in which event Tenant shall obtain customary
warranties. Tenant hereby assigns to Landlord all warranties and guaranties relating to the Work.
(e)Tenant and Tenant's Contractors shall make all commercially reasonable efforts and take all commercially reasonable steps appropriate to assure that all construction activities undertaken do not unreasonably interfere with the operation of the Building or with other tenants and occupants of the Building. In any event, Tenant shall during the performance of the Work and throughout the term of the Lease comply with all reasonable rules and regulations existing from time to time at the Building which have heretofore been provided to Tenant (provided Landlord shall provide reasonable prior notice in respect of any new rules and regulation or any modifications of existing rules and regulations). Tenant and Tenant's Contractors shall take all reasonable precautionary steps to minimize dust, noise and construction traffic, and to protect their facilities and the facilities of others affected by the Work and to properly police all personnel entering the Building in connection with the Work. Construction equipment and materials are to be kept within the Premises (subject to the limitations contained in the Fifth Amendment) and delivery and loading of equipment and materials shall be done at such locations and at such time as Landlord reasonably shall direct so as not to burden the constructions or operation of the Building, provided that Landlord shall use commercially reasonable efforts to coordinate the same.
(f)Landlord shall have the right to order Tenant or any of Tenant's Contractors who violate the Union Tower General Rules and Regulations for Contractors (a copy of which Tenant has received) or the other requirements of the Lease imposed on Tenant or Tenant’s Contractors to cease work and remove its equipment and employees from the Building provided, however, prior to any such order (i) if the violation is of such a nature that it threatens in Landlord's reasonable discretion to create a hazardous condition or disrupt building operations or other tenants, then Landlord shall provide one (1) written notice and one (1) day right to cure, and (ii) if the violation is of any other type, then Landlord shall provide one (1) written notice and three (3) days right to cure; further provided, however, that Landlord shall have no obligation to provide any notice or cure rights as to either (i) or (ii) if a repeat violation of a substantially similar type occurs. In any event, Landlord may make the continuation of work contingent upon payment by Tenant or Tenant's Contractors of any damages or costs incurred by Landlord or other tenants as a result of such violation. No such action by Landlord shall delay the obligation to pay Rent or any other obligations set forth in the Lease.
(g)Utility costs or charges for any service (including HVAC, hoisting and the like) to the Premises in connection with and during the performance of the Work shall be the responsibility of Tenant and shall be paid for by Tenant at Landlord's standard rates then in effect, provided, however, Landlord shall not charge for freight elevator usage unless an attendant or special operations are required, at Landlord's reasonable discretion. Tenant shall pay for all support services provided by Landlord's contractors at Tenant's written request or at Landlord's reasonable discretion resulting from breaches or defaults beyond applicable notice and cure periods by Tenant under this Work Letter. Tenant shall have the
nonexclusive right to use the freight elevators during the business day on a first-come, first-serve basis without additional charges; all after-hours use shall be subject to scheduling by Landlord and to Tenant's payment of Landlord's out-ofpocket for such after-hours usage, including costs of necessary personnel. Tenant shall arrange and pay for removal of construction debris and shall not place debris in the Building's waste containers. If required by Landlord by the giving of notice, Tenant shall sort and separate its waste and debris for recycling and/or environmental law compliance purposes.
(h)Tenant shall permit access to the Premises by Landlord upon reasonable prior notice to Tenant, and the Work shall be subject to inspection, by Landlord and Landlord's architects, engineers, contractors and other representatives, at all times during the period in which the Work is being constructed and installed and following completion of the Work, provided that Landlord shall use reasonable efforts to minimize its interference with the Work.
(i)Tenant shall proceed with its work expeditiously, continuously and efficiently, and Tenant shall notify Landlord upon completion of the Work and shall furnish Landlord and Landlord’s title insurance company with such further documentation as may be reasonably necessary under the requirements herein.
(j)Tenant shall have no authority to deviate from the Approved Plans in performance of the Work (except for de minimis deviations of a type customarily not the subject of change orders), except as authorized by Landlord or its designated representative in writing in a change order approved in writing by Landlord. Tenant shall furnish to Landlord "as-built" drawings of the Work within thirty (30) days after completion of the Work.
(k)Tenant shall impose on and enforce all applicable terms of this Work Letter against Tenant's architect and Tenant's Contractors.
Tenant acknowledges and agrees that the Work will include any work, both within and outside the Premises that may be necessary in order for Tenant to use and occupy the Premises.
6. INSURANCE.
In addition to the insurance requirements set forth in the Lease, Tenant shall also secure, pay for and maintain or cause Tenant's Contractors to secure, pay for and maintain during the progress of the Work the following minimum coverages and limits of liability:
(a)worker's compensation in amounts required by state statutes and employer's liability insurance with limits of not less than $500,000;
(b)comprehensive or commercial general liability insurance in an amount not less than $1,000,000 (One Million) per occurrence, whether involving bodily injury liability (or death resulting therefrom) or
property damage liability or a combination thereof with a minimum aggregate limit of $2,000,000 (Two Million), and with umbrella coverage with limits not less than $2,000,000 (Two Million). Such insurance shall provide for explosion and collapse, completed operations coverage and broad form blanket contractual liability coverage and damage to the property of others and arising from its operations under the contract whether such operations are performed by Tenant's Contractors or by anyone directly or indirectly employed by any of them;
(c)comprehensive automobile liability insurance, including the ownership, maintenance and operation of any automotive equipment, owned, hired or nonowned, in an amount not less than $1,000,000 (One Million) combined single limit; and
(d)"Builder's All Risk" insurance in an amount to cover the full insurable value of the work in the Premises, and shall insure against the perils of fire and extended coverage and shall include "all risk" builder's risk insurance for physical loss or damage including theft, vandalism and malicious mischief;
The policies required to be maintained by Tenant shall be with companies rated Al0 or better in the most current issue of A.M. Best's Rating Guide. Insurers shall be licensed to do business in the state in which the Premises are located and domiciled in the USA. All policies (except the worker’s compensation policy) shall be endorsed to include Landlord as an additional insured party. The waiver of subrogation provisions contained in the Lease shall apply to all insurance policies (except the workers' compensation policy) to be obtained by Tenant. The insurance policy endorsements shall also provide that all additional insured parties shall be given thirty (30) days' prior written notice of any reduction, cancellation or nonrenewal of coverage. Tenant shall not permit Tenant's Contractors to commence work until the required insurance has been obtained, and copies of all applicable insurance certificates (including the general contractor's) have been delivered to Landlord.
7. ALLOWANCE; EXCESS AMOUNTS.
(a)Upon Tenant's satisfaction of the requirements set forth in this Work Letter, Landlord shall make the 10th/11th Floor Allowance available to Tenant to pay the Costs of the Work (and after completion of the Work, for the purposes otherwise provided in the Fifth Amendment). The 10th/11th Floor Allowance shall be funded as the Tenant's Work is completed in accordance with the provisions of this Work Letter.
(b)If the Costs of the Work based on the initial Budget (plus the Consultant Fee) exceed the 10th/11th Floor Allowance, Tenant shall pay the amount of any excess costs (the "Excess") prior to funding by Landlord of any funds from the 10th/11th Floor Allowance. Further, if during the course of the Work the Budget is amended for any reason, or if Landlord reasonably estimates that the then-unfunded 10th/11th Floor Allowance is insufficient to complete the Work, Tenant shall pay Costs as necessary so that the remaining 10th/11th Floor Allowance is at least equal to the remaining Costs. Tenant shall provide Landlord with all documentation otherwise required for a Draw Request (defined below)
to evidence Tenant's payment of any such Excess. In addition to the Excess, Tenant shall pay the costs of all work, if any, other than the Work which Tenant may elect to do in the Premises (subject to Landlord's approval as provided herein). If the Costs of the Work are less than the 10th/11th Floor Allowance, then after Landlord's receipt of evidence of lien-free completion of the Work in accordance with the provisions herein, Landlord shall make remaining amounts available to Tenant for improvements to the Premises (subject to the limitations in and as otherwise provided in the Fifth Amendment).
(c)Subject to Tenant's payment of any Excess as required by Section 7(b), Landlord shall make progress payments from the 10th/11th Floor Allowance to Tenant on a monthly basis, for the portion of the Tenant's Work performed during the previous month, less a retainage of 10% of each progress payment ("Retainage"). Each of Landlord's progress payments shall be limited to an amount equal to the aggregate amounts (reduced) by the Retainage) therefore paid by Tenant to Tenant's contractors, subcontractors and material suppliers which have not been subject to previous disbursements from the 10th/11th Floor Allowance. Provided that Tenant delivers requisitions to Landlord on or prior to the 1st day of any month, such progress payments shall be made within 30 days next following the delivery to Landlord of requisitions therefor, which requisitions shall be in the form of AIA document G702 ("Draw Requests"), set forth the names of each contractor and subcontractor to whom payment is due, and the amount thereof, and shall be accompanied by (i) copies of trailing lien waivers from all contractors, subcontractors, and material suppliers whose payment exceeds $25,000, covering all work and materials which are the subject of the prior progress payment, (ii) the Tenant's Architect's certification on the pay application that the work for which the requisition is being made has been completed substantially in accordance with the plans and specifications approved by Landlord, and (iii) such other documents and information as Landlord may reasonably request, including any documents reasonably required by Landlord's title company in connection with title drawdowns and endorsements. Landlord shall disburse the Retainage upon submission by Tenant to Landlord of Tenant's requisition therefor accompanied by all documentation required under this paragraph together with (A) proof of the satisfactory completion of all required inspections and issuance of any required approvals, permits and sign-offs for the Tenant’s Work by governmental authorities having jurisdiction thereover, (B) issuance of final lien and unconditional waivers by all contractors and subcontractors covering all of the Tenant Work, (C) receipt of as-built plans for the Work, and (D) a copy of all warranties, guaranties, and operating manuals and information relating to the improvements, equipment, and systems affected by the Work.
8. MISCELLANEOUS.
(a)If the Plans for the Work require the construction and installation of additional life safety or other systems, Tenant agrees to pay all reasonable costs and expenses arising from the construction and installation of such additional systems, provided that the 10th/11th Floor Allowance may be applied to all such costs and expenses.
(b)Time is of the essence with respect to the express periods provided under this Work Letter.
(c)Tenant hereby indemnifies Landlord for any loss, claims, damages or delays arising from the actions of Tenant, the Tenant Contractor or Tenant’s agents on the Premises or in the Building. Tenant shall keep the Premises and the Building free from any liens arising out of any work performed, material furnished or obligations incurred by or on behalf of Tenant. If Landlord determines that any Work does not comply with the Approved Plans, or that the Work has not been completed in accordance with this Work Letter. Landlord will notify Tenant and Tenant agrees to use commercially reasonable efforts to cause such work to be corrected. Landlord's payment of any payment request shall not be deemed to be Landlord's approval or acceptance of the work furnished or materials supplied as set forth in such payment request.
(d)If Tenant fails to make any payment relating to all or any portion of the Work as required hereunder, and Tenant's failure to pay for such portion of the Work creates a safety risk, building code violation, or an unsightly condition, Landlord, at its option, may, after reasonable notice (unless the condition requires immediate cure) complete such portion of the Work pursuant to the Approved Plans necessary to cure such condition and continue to hold Tenant liable for the costs thereof and all other costs due to Landlord. Tenant's failure to pay any amounts owed by Tenant hereunder when due or Tenant's failure to perform its obligations hereunder shall also constitute a Default under the Lease, subject to applicable notice and cure periods, and Landlord shall have all the rights and remedies granted to Landlord under the Lease for nonpayment of any amounts owed therender or failure by Tenant to perform its obligations thereunder.
(e)Notices under this Work Letter shall be given in the same manner as under the the Lease.
(f)The headings set forth herein are for convenience only.
(g)This Work Letter sets forth the entire agreement of Tenant and Landlord regarding the Work. This Work Letter may only be amended if in writing, duly executed by both Landlord and Tenant. This Work Letter is incorporated into the Lease by reference and made a part thereof to the extent applicable to the Work.
(h)All amounts due from Tenant hereunder shall be deemed to be additional Rent due under the Lease. Notwithstanding any provision to the contrary contained in the Lease, if a Default under the Lease or a breach (after the expiration of any applicable notice and cure periods) by Tenant under this Work Letter occurs at any time on or before completion of the Work, then in addition to all other rights and remedies granted to Landlord pursuant to the Lease, Landlord shall have the right to withhold payment of all or any portion of the 10th/11th Floor Allowance and/or Landlord may cause the assignment of the construction contract to Landlord as set forth in this Work Letter.
9. LIMITATION OF LIABILITY. Any liability of Landlord and
Tenant under this Work Letter shall be limited as provided in Section 15 of the Fifth Amendment.
EXHIBIT D
THE INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED BECAUSE IT IS BOTH (I) NOT MATERIAL AND (II) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED.
Exhibit 10.34
HURON CONSULTING GROUP INC.
2012 OMNIBUS INCENTIVE PLAN
(As Amended and Restated Effective February 13, 2020)
1. | History and Purpose. Huron Consulting Group Inc., a Delaware corporation (“Huron”), previously established the Huron Consulting Group Inc. 2012 Omnibus Incentive Plan, as amended from time to time (the “Plan”) to attract and retain employees, non-employee directors and independent contractors providing services to Huron and/or the Affiliates (defined below), to motivate Participants (defined below) to achieve long-term goals of Huron and the Affiliates, to provide incentive compensation opportunities that are competitive with those of other corporations, and to further align Participants’ interests with those of Huron’s stockholders, and thereby to promote the long-term financial interest of Huron and the Affiliates, including growth in value of Huron’s equity and enhancement of long-term stockholder value. The Plan has been previously amended, and the following provisions constitute an amendment, restatement, and continuation of the Plan effective February 13, 2020. |
2. | Definitions. As used in the Plan, the following definitions apply to the terms indicated below: |
(a) | “Administrative Actions” shall have the meaning set forth in Section 5(d). |
(b) | “Affiliate” means any corporation, partnership, joint venture or other entity during any period in which (i) Huron, directly or indirectly, owns at least 50% of the combined voting power of all classes of stock of such entity or at least 50% of the ownership interests in such entity or (ii) such entity, directly or indirectly, owns at least 50% of the combined voting power of all classes of stock of Huron. |
(c) | “Agreement” shall mean an agreement between Huron and a Participant evidencing an Award or a notice of an Award, in a form approved by the Committee. |
(d) | “Alternative Agreement” shall mean, with respect to any Participant, an employment agreement, senior management agreement or other written agreement describing the Participant’s terms of employment with Huron or an Affiliate. |
(e) | “Award” shall mean any award described in Section 7 or 8 of the Plan. |
(f) | “Board of Directors” shall mean the Board of Directors of Huron. |
(g) | “Business Criteria” shall mean (i) return on total stockholder equity; (ii) earnings or book value per share of Common Stock (“EPS”); (iii) adjusted EPS; (iv) net income (before or after taxes); (v) earnings before all or any interest, taxes, depreciation and/or amortization (“EBIT”, “EBITA” or “EBITDA”) measured as a dollar amount or a percentage of revenue; return on assets, capital or investment; (vii) market share; (viii) market capitalization; (ix) cost reduction goals; (x) levels of expense, costs or liabilities; (xi) department, division or business unit level performance; (xii) operating income; sales or revenues; (xiv) stock price appreciation; (xv) total stockholder return (TSR); (xvi) implementation or completion of critical projects or processes; (xvii) adjusted EBITDA; (xviii) days sales outstanding (DSO); (xix) financial coverage ratios; other non-GAAP financial measures, or (xxi) any combination of the foregoing. |
Where applicable, Business Criteria may be expressed in terms of attaining a specified level of the particular criteria or the attainment of a percentage increase or decrease in the particular criteria, and may be applied to one or more of Huron, an Affiliate, or a department, division or strategic business unit of Huron and/or one or more Affiliates, or may be applied to the performance of Huron and/or one or more Affiliates relative to a market index, a group of other companies or a combination thereof, all as determined by the Committee. The Business Criteria may be subject to a threshold level of performance below which no payment will be made (or no vesting will occur), levels of performance at which specified payments will be made (or specified vesting will occur), and a maximum level of performance above which no additional payment will be made (or at which full vesting will occur).
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Each of the Business Criteria shall be determined, where applicable, in accordance with generally accepted accounting principles and shall be subject to certification by the Committee; provided that the Committee shall have the authority to make equitable adjustments to the Business Criteria applicable to any Award in recognition of (1) special, unusual or non-recurring events affecting Huron or any Affiliate or the financial statements of Huron or any Affiliate; (2) changes in applicable laws or regulations (including tax laws, accounting principles or other laws or provisions affecting reported results); (3) gains, losses or expenses determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment of a business or related to a change in accounting principles; (4) asset write-downs or impairments; (5) litigation, claim judgments, settlements or restatement related expenses; (6) accruals for reorganization and restructuring programs; (7) acquisitions or divestitures (including expenses related thereto), (8) foreign exchange gains and losses; (9) non-cash interest; and (10) an event either not directly related to the operations of Huron or not within the reasonable control of Huron’s management. To the extent that such inclusions or exclusions affect Awards to Covered Employees which are intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code and regulations thereunder, such adjustments shall be prescribed in a form that meets the requirements of Section 162(m) of the Code. However, notwithstanding the preceding sentence, unless the Committee determines otherwise prior to the end of the applicable time for establishing Business Criteria for an Award, to the extent any such item affects any Business Criteria applicable to an Award, then such shall be automatically excluded or included in determining the extent to which the Business Criteria has been achieved, whichever will produce the higher Award (subject to any exercise of “negative discretion” by the Committee).
(h) | “Cash Incentive Award” shall mean the grant of a right to receive a payment of cash (or, in the discretion of the Committee, shares of Common Stock having value equivalent to the cash otherwise payable) that is contingent on achievement of performance objectives or other conditions over a specified period established by the Committee. The grant of Cash Incentive Awards may also be subject to such other conditions, restrictions, and contingencies, as determined by the Committee, including provisions relating to deferred payment. |
(i) | “Cause” shall mean, unless otherwise defined in a Participant’s Agreement or an Alternative Agreement, any of the following actions or failures by the Participant, as determined in the reasonable judgment of Huron: (i) engaging in conduct that violates written policies of Huron or any Affiliate; (ii) failure to perform the essential functions of his or her job (except for a failure resulting from a bona fide illness or incapacity); (iii) failure to carry out the reasonable directions of Huron or any Affiliate, issued through Huron’s Chief Executive Officer, the Board of Directors, other appropriate senior employee responsible for the Participant’s business unit or area, the Participant’s supervisor, or the person to whom the Participant reports; (iv) embezzlement, misappropriation of corporate funds, any act of fraud, dishonesty or self-dealing, or the commission of a felony or any significant violation of any statutory or common law duty of loyalty to Huron or any Affiliate; an act or omission that could adversely and materially affect the business or reputation of Huron or any Affiliate or involves moral turpitude; or (vi) a breach of a material provision of this Plan, the Agreement evidencing an Award or an Alternate Agreement. |
(j) | “Change of Control” shall mean the first to occur of the following events: |
(i) | any Person becomes the Beneficial Owner, directly or indirectly, of Common Stock or voting securities of Huron (not including in the amounts beneficially owned by such Person any Common Stock or voting securities acquired directly from Huron or the Affiliates) representing 40% or more of the combined voting power of Huron’s then outstanding securities; |
(ii) | there is consummated a merger or consolidation of Huron or any direct or indirect subsidiary of Huron with any Person, other than (A) a merger or consolidation which would result in the voting securities of Huron outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the securities of Huron or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation; (B) a merger or consolidation effected to implement a recapitalization of Huron (or similar transaction) in which no Person other than existing security holders is or becomes the Beneficial Owner, directly or indirectly, of securities |
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of Huron (not including in the amount Beneficially Owned by such Person any Common Stock or voting securities acquired directly from Huron or any Affiliate) representing 50% or more of the combined voting power of Huron’s then outstanding securities; or (C) a merger or consolidation of a subsidiary of Huron that does not represent a sale of all or substantially all of the assets of Huron;
(iii) | the stockholders of Huron approve a plan of complete liquidation or dissolution of Huron (except for a plan of liquidation or dissolution effected to implement a recapitalization of Huron addressed in paragraph (ii) above); or |
(iv) | there is consummated an agreement for the sale or disposition of all or substantially all of the assets of Huron to a Person, other than a sale or disposition by Huron of all or substantially all of the assets of Huron to an entity, at least 50% of the combined voting power of the voting securities of which are owned by stockholders of Huron. |
Notwithstanding the foregoing, a “Change of Control” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the Common Stock of Huron immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of Huron immediately following such transaction or series of transactions.
For purposes of this Change of Control definition, (I) “Beneficial Owner” shall have the meaning set forth in Rule 13d-3 under the Exchange Act; (II) “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (w) Huron or any of Huron’s direct or indirect subsidiaries; (x) a trustee or other fiduciary holding securities under an employee benefit plan of Huron or any of the Affiliates; (y) an underwriter temporarily holding securities pursuant to an offering of such securities; or (z) a corporation owned, directly or indirectly, by the stockholders of Huron in substantially the same proportions as their ownership of stock of Huron; and (III) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.
(k) | “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder. |
(l) | “Committee” shall mean a committee of the Board of Directors consisting of two or more persons each of whom shall qualify as an “outside director” within the meaning of Section 162(m) of the Code, a “nonemployee director” within the meaning of Rule 16b-3 promulgated under the Exchange Act, as amended from time to time, and an “independent director” within the meaning of the NASD Rule 4350(c)(1). |
(m) | “Common Stock” shall mean the common stock of Huron, par value $.01 per share. |
(n) | “Covered Employee” shall have the meaning set forth in Section 162(m) of the Code. |
(o) | “Disabled” shall mean permanently and totally disabled within the meaning of Section 22(e)(3) of the Code. |
(p) | “Effective Date” shall have the meaning set forth in Section 3. |
(q) | “Eligible Individuals” shall mean employees of Huron or any of the Affiliates (including officers, whether or not they are directors of Huron or any Affiliate), independent contractors providing services to Huron or any Affiliate and non-employee directors of Huron or any Affiliate. |
(r) | “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time. |
(s) | “Exercise Price” shall have the meaning set forth in Section 7(c). |
(t) | “Fair Market Value” of a share of Common Stock as of any date shall mean the value determined in accordance with the following rules: |
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(i) | If the Common Stock is at the time listed or admitted to trading on any stock exchange, then the Fair Market Value shall be the closing price per share of Common Stock on such date on the principal exchange on which the Common Stock is then listed or admitted to trading or, if no such sale is reported on such date, on the last preceding date on which a sale was so reported. |
(ii) | If the Common Stock is not at the time listed or admitted to trading on a stock exchange but bid and asked prices for the Common Stock are regularly reported, then the Fair Market Value shall be the arithmetic mean between the closing or last bid and asked prices for the Common Stock on such date or, if no bid and asked prices for Common Stock are reported on such date, on the most recent day immediately prior thereto on which bid and asked prices were so reported. |
(iii) | If the Common Stock is not listed or admitted to trading on any stock exchange and if prices are not regularly reported for the Common Stock as described in paragraph (ii), the Fair Market Value shall be as determined by the Committee in good faith in its sole discretion or under procedures established by the Committee, whose determination shall be conclusive and binding. |
(iv) | For purposes of determining the Fair Market Value of shares of Common Stock that are sold pursuant to a broker- assisted cashless exercise program, Fair Market Value shall be the price at which such shares are sold. |
(u) | “Full Value Award” shall mean an Award that is granted pursuant to Section 8 hereof and that is the grant of one or more shares of Common Stock or a right to receive one or more shares of Common Stock in the future, which grant may be subject to one or more of the following, as determined by the Committee: |
(i) | The grant may be in consideration of a Participant’s previously performed services or surrender of other compensation that may be due. |
(ii) | The grant may be contingent on the achievement of performance or other objectives during a specified period. |
(iii) | The grant may be subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the Participant or achievement of performance or other objectives. |
The grant of Full Value Awards may also be subject to such other conditions, restrictions, and contingencies, as determined by the Committee, including provisions relating to dividend or dividend equivalent rights, deferred payment or settlement and purchase in the open market (including with a Participant’s own funds); provided, however, that dividends may be accrued but shall not be paid unless and until the Participant has vested in the underlying Award. Full Value Awards may include, but are not limited to, restricted stock, stock units, performance stock units, and bonus stock.
(v) | “Huron” shall have the meaning set forth in Section 1. |
(w) | “Incentive Stock Option” shall mean an Option that qualifies as an “incentive stock option” within the meaning of Section 422 of the Code, or any successor provision, and which is designated by the Committee as an Incentive Stock Option. |
(x) | “Nonqualified Stock Option” shall mean an Option other than an Incentive Stock Option. |
(y) | “Option” shall mean an Award that is granted pursuant to Section 7 hereof that entitles a Participant to purchase shares of Common Stock at the applicable Exercise Price established by the Committee. |
(z) | “Participant” shall mean an Eligible Individual to whom an Award is granted pursuant to the Plan. |
(aa) | “Performance-Based Compensation” shall have the meaning set forth in Section 9. |
(bb) “Plan” shall have the meaning set forth in Section 1.
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(cc) | “Retirement” shall mean the voluntary termination with Huron and the Affiliates of a Participant who is in the position of corporate vice president, managing director or executive officer and (i) such termination occurs on or after the date on which he or she has attained age 62 and completed at least seven years of employment with Huron and (ii) in conjunction with such termination such Participant has executed a non-competition and non-solicitation agreement provided by Huron. A Participant’s termination of employment shall not be considered to be on account of Retirement if the employment is terminated by Huron or any Affiliate for any reason. |
(dd) | “Stock Appreciation Right” shall mean an Award is granted pursuant to Section 7 hereof that entitles a Participant to receive, upon exercise of the Award, an amount of cash or shares of Common Stock (as determined in accordance with the terms of the Plan and the Award) having a value equal to the excess of: (i) the value, determined at the time of exercise, of a specified number of shares of Common Stock; over (ii) the applicable Exercise Price. |
(ee) | “Subsidiary” shall mean a “subsidiary corporation” of Huron within the meaning of Section 424(f) of the Code. |
3. | Effective Date and Duration of Plan. The Plan, as amended and restated, will be effective February 13, 2020 (the “Effective Date”), subject to approval by Huron’s stockholders. The Plan shall be unlimited in duration; however, in the event of Plan termination, the Plan shall remain in effect as long as any shares of Common Stock awarded under it are outstanding and not fully vested. No new Awards will be made under the Plan on or after the tenth anniversary of the Effective Date or, if earlier, on or after termination of the Plan. |
4. | Shares Reserved and Other Limitations. |
(a) | Source of Shares. Shares of Common Stock reserved for issuance under the Plan may be authorized but unissued shares of Common Stock or authorized and issued shares of Common Stock held in Huron’s treasury, including shares purchased in the open market or in private transactions. |
(b) | Shares Available for Awards. Subject to the terms and conditions of the Plan, the number of shares of Common Stock reserved for issuance under the Plan shall be 3,652,204 shares (comprised of: (i) the 1,398,204 shares of Common Stock authorized under the Plan as originally adopted, (ii) an additional 850,000 shares of Common Stock authorized in the amendment and restatement of the Plan effective May 2, 2014, (iii) an additional 804,000 shares of Common Stock authorized in the amendment and restatement of the Plan effective May 1, 2017, and (iv) an additional 600,000 shares of Common Stock authorized in the amendment of the Plan effective May 3, 2019), subject to adjustment as provided herein. |
Additionally, in the event that a corporation acquired by (or combined with) Huron or any subsidiary has shares available under a pre-existing plan approved by stockholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the holders of common stock of the entities party to such acquisition or combination) may be used for awards under the Plan and shall not reduce the shares of Common Stock authorized for grant under the Plan; provided that awards using such available shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan, absent the acquisition or combination, and shall only be made to individuals who were not employees or directors of Huron or any subsidiary prior to such acquisition or combination. Notwithstanding the foregoing, such shares shall not increase the number of shares available for Awards of Incentive Stock Options unless such additional share limit is approved by the stockholders in accordance with Section 422 of the Code.
(c) | Individual Limitations on Awards. |
(i) | The maximum number of shares of Common Stock that may be granted to any Participant during any calendar-year period with respect to Full Value Awards that are intended to be Performance-Based Compensation shall not exceed 500,000 shares in the aggregate (subject to adjustment as provided herein). |
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(1) | If Awards are denominated in shares of Common Stock but an equivalent amount of cash is delivered in lieu of shares of Common Stock, the foregoing limit shall be applied based on the methodology used by the Committee to convert the number of shares into cash. |
(2) | If delivery of shares of Common Stock or cash is deferred until after shares of Common Stock have been earned, any adjustment in the amount delivered to reflect actual or deemed investment experience after the date the shares are earned shall be disregarded. |
(ii) | For any participant who is an outside director of Huron, the aggregate grant date fair value of Awards granted to such individual during any calendar year, along with any regular cash retainer or meeting fees paid to such participant during such calendar year shall not exceed $1,500,000; provided, however, that if an individual employee becomes an outside director (or vice versa) during a calendar year, the limit in this sentence shall not apply to Awards granted to the individual in the individual’s capacity as an employee. |
(d) | Limits on Incentive Stock Options. The maximum number of shares of Common Stock to which Incentive Stock Options relate that may be granted under the Plan shall be 325,000 (subject to adjustment as provided herein). |
(e) | Individual Limitations on Cash Incentive Awards. The maximum amount payable to any Participant for any 12-month performance period with respect to a Cash Incentive Award granted under the Plan that is intended to be Performance- Based Compensation shall be $10,000,000 (prorated for performance periods that are greater or lesser than 12 months). For purposes of this Section 4(e): |
(i) | If the Award is denominated in cash but an equivalent amount of Common Stock is delivered in lieu of delivery of cash, the foregoing limit shall be applied to the cash based on the methodology used by the Committee to convert the cash into shares. |
(ii) | If delivery of shares of Common Stock or cash is deferred until after cash has been earned, any adjustment in the amount delivered to reflect actual or deemed investment experience after the date the cash is earned shall be disregarded. |
(f) | Adjustments for Change in Capitalization. In the event that any dividend or other distribution is declared (whether in the form of cash, Common Stock, or other property), or there occurs any recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange or other similar corporate transaction or event, the Committee shall equitably adjust, in its sole and absolute discretion, (i) the number and kind of shares of stock which may thereafter be issued in connection with Awards; (ii) the number and kind of shares of stock or other property issued or issuable in respect of outstanding Awards; (iii) the exercise price, grant price or purchase price relating to any Award; (iv) the limitations set forth in Sections 4(b), 4(c), 4(d), and 4(e) (provided that, with respect to Incentive Stock Options, such adjustment shall be made in accordance with Section 424 of the Code and any regulations thereunder and provided further that, to the extent applicable, such adjustment shall comply with Section 409A of the Code); and (v) any other adjustments that the Committee determines to be equitable (which may include, without limitation, replacement of Awards with other Awards which the Committee determines have comparable value and which are based on stock of a company resulting from the transaction and (2) cancellation of the Award in return for cash payment of the current value of the Award, determined as though the Award is fully vested at the time of payment, provided that in the case of an Option or Stock Appreciation Right, the amount of such payment may be the excess of value of the shares of Common Stock subject to the Option or Stock Appreciation Right at the time of the transaction over the Exercise Price). |
(g) | Reuse of Shares. Except to the extent that to do so would prevent the grant of Incentive Stock Options hereunder, the following shares of Common Stock shall again become available for Awards: |
(i) | any shares subject to an Award that remain unissued upon the cancellation, surrender, exchange, forfeiture or termination of such Award without having been exercised or settled; and |
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(ii) | to the extent an Award is paid or settled in cash, the number of shares of Common Stock with respect to which such payment or settlement is made. |
The following shares of Common Stock shall not again be made available for grants pursuant to the Plan:
(x) | any shares subject to an Award that are retained as payment of the exercise price of an Option; |
(y) | any shares retained to satisfy: (A) all tax withholding obligations with respect to an Option or Stock Appreciation Right, or (B) tax withholding obligations in excess of the minimum required withholding amount with respect to a Full Value Award; and |
(z) | any shares repurchased by Huron using stock option exercise proceeds. |
For stock-settled Stock Appreciation Rights, the shares subject to the Award shall be counted against the Plan reserve, regardless of the number of shares issued.
(h) | Special Vesting Rules for All Awards. Except for Awards (when aggregated with all other Awards under the Plan) which do not exceed 5% of the total number of shares of Common Stock reserved for issuance under the Plan in the aggregate, in no event shall the required period of service for full vesting be less than one year (subject, to the extent provided by the Committee, to acceleration of vesting in the event of the Participant’s death, Disability, or Change of Control). |
(i) | Dividends. Dividends may be accrued but shall not be paid with respect to any Award unless and until the Participant has vested in the underlying Award. |
5. | Administration of the Plan. |
(a) | General. The Plan shall be administered by the Committee. The Committee shall have the authority in its sole discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to (i) grant Awards; (ii) determine the Eligible Individuals to whom, and the time or times at which, Awards shall be granted; (iii) determine the type and number of Awards to be granted; the number of shares of Common Stock or cash or other property to which an Award may relate and the terms, conditions, restrictions and performance criteria relating to any Award; (iv) determine whether, to what extent, and under what circumstances an Award may be settled, cancelled, forfeited, exchanged, or surrendered; (v) conclusively construe and interpret the Plan and all Awards; (vi) prescribe, amend and rescind rules and regulations relating to the Plan; (vii) determine the terms and provisions of Agreements; and (viii) make all other determinations deemed necessary or advisable for the operation and administration of the Plan. The Committee may, in its sole and absolute discretion, without amendment to the Plan (but subject to the terms and conditions of the Plan), (w) accelerate the date on which any Option or Stock Appreciation Right becomes exercisable; (x) waive or amend the operation of Plan provisions respecting exercise after termination of employment (provided that the term of an Option or Stock Appreciation Right may not be extended beyond ten years from the date of grant); (y) accelerate the vesting date, or waive any condition imposed hereunder, with respect to any Full Value Award; and (z) otherwise adjust any of the terms applicable to any such Award in a manner consistent with the terms of the Plan. |
(b) | Decisions Binding. Any interpretations of the Plan by the Committee and any decisions made by it under the Plan are final and binding on all persons. |
(c) | Delegation. Except to the extent prohibited by the applicable rules of any stock exchange or applicable law, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Committee at any time. Without limiting the generality of the foregoing, the Committee may delegate to one or more officers of Huron or any of its Affiliates the authority to act on behalf of the Committee with respect to any matter, right, obligation, or election that is the responsibility of or that is allocated to the Committee herein, and that may be so delegated as a matter of law, except for grants of Awards to persons (i) who are non-employee members of the Board or otherwise are subject to Section 16 of the Exchange Act |
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or (ii) who are, or who are reasonably expected to be, “covered employees” for purposes of Section 162(m) of the Code.
(d) | Indemnification. No member of the Committee (or an authorized delegate of the Committee), and no officer of Huron or any of the Affiliates, shall be liable for any action taken or omitted to be taken by such individual or by any other member of the Committee or officer of Huron or any Affiliate in connection with the performance of duties under this Plan, except for such individual’s own willful misconduct or as expressly provided by law (the “Administrative Actions”). Further, the Committee (and all delegates of the Committee), in addition to such other rights of indemnification as they may have as members of the Board of Directors or officers of Huron or an Affiliate, any individual serving as a Committee member (and any authorized delegate) shall be indemnified and held harmless by Huron to the fullest extent allowed by law against all costs and expenses reasonably incurred by them in connection with any action, suit or proceeding to which they or any of them may be party by reason of any Administrative Action. |
6. | Participation. Subject to the terms and conditions of the Plan, the Committee shall determine and designate, from time to time, from among the Eligible Individuals those persons who will be granted one or more Awards under the Plan and, subject to the terms and conditions of the Plan, a Participant may be granted any Award permitted under the provisions of the Plan and more than one Award may be granted to a Participant. Except as otherwise agreed between Huron and the Participant, or except as otherwise provided in the Plan, an Award under the Plan shall not affect any previous Award under the Plan or an award under any other plan maintained by Huron or any of the Affiliates. No Participant or other person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Participants, or holders or beneficiaries of Awards, or of multiple Awards granted to a Participant. The terms and conditions of Awards and the Committee’s determinations and interpretations with respect thereto need not be the same with respect to each Participant (whether or not such Participants are similarly situated). |
7. | Options and Stock Appreciation Rights. |
(a) | Grant of Awards. The Committee may grant Options and/or Stock Appreciation Rights to Eligible Individuals, subject to the terms and conditions of the Plan. |
(b) | Identification of Options. Each Option shall be clearly identified as either an Incentive Stock Option or a Nonqualified Stock Option. |
(c) | Exercise Price. The “Exercise Price” of an Option or Stock Appreciation Right shall be established by the Committee at the time the Option or Stock Appreciation Right is granted; provided, however, that in no event shall the Exercise Price be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant (or, if greater, the par value of a share of Common Stock on the date of grant). |
(d) | No Repricing/Prohibition on Buy-Back. Except for either adjustments pursuant to Section 4(f) or reductions of the Exercise Price approved by Huron’s stockholders, the Exercise Price for any outstanding Option or Stock Appreciation Right may not be decreased after the date of grant nor may an outstanding Option or Stock Appreciation Right granted under the Plan be surrendered to Huron as consideration for the grant of a replacement Option or Stock Appreciation Right with a lower Exercise Price. Except as approved by Huron’s stockholders, in no event shall any Option or Stock Appreciation Right granted under the Plan be surrendered to Huron in consideration for a cash payment if, at the time of such surrender, the Exercise Price of the Option or Stock Appreciation Right is greater than the then current Fair Market Value of a share of Common Stock. In addition, no repricing of an Option shall be permitted without the approval of Huron’s stockholders if such approval is required under the rules of any stock exchange on which Common Stock is listed. |
(e) | Term and Exercise. |
(i) | Each Option or Stock Appreciation Right shall become exercisable at the time determined by the Committee at the date of grant, subject to the terms and conditions of the Plan. At the time of grant of an Option or Stock Appreciation Right, as applicable, the Committee may impose such restrictions or conditions of the exercisability of the Award as it, in its absolute discretion, deems appropriate, including, but not limited to, achievement of performance goals based on one or more Business Criteria or conditions relating to the completion of a specified |
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period of service. Subject to Section 7(g) hereof, the Committee shall determine the expiration date of each Option and Stock Appreciation Right, as applicable, which shall be no later than the tenth anniversary of the date of grant of the Award. No Option or Stock Appreciation Right, as applicable, may be exercised after the expiration date applicable thereto. If an Option (other than an Incentive Stock Option) has an expiration date during or within three days of a Blackout Period (defined as any period of time when, pursuant to any policies of Huron, any securities of the Corporation may not be traded by certain persons as designated by the Corporation), then the expiration date of such Option shall be extended for a period of 30 days following the end of the Blackout Period or such longer period as permitted by the Committee. Notwithstanding the foregoing, no extension of the exercise period may occur if it would cause the Option to become subject to and in violation of the requirements of Section 409A(a) of the Code.
(ii) | An Option or Stock Appreciation Right shall be exercised by delivering the form of notice of exercise provided by Huron. Unless otherwise provided in the Award Agreement, an Option will be automatically exercised via a broker- assisted cashless exercise upon the expiration date of the Option if the value of a share of Common Stock on the expiration date exceeds the Exercise Price for such Option. |
(iii) | Payment for shares of Common Stock purchased upon the exercise of the Option shall be made on the effective date of such exercise by one or a combination of the following means (except that in the case of exercise using a broker- assisted cashless exercise, payment may be made as soon as practicable after exercise): (1) in cash or cash equivalents; (2) by tendering, by actual delivery or attestation, shares of Common Stock owned by the Participant for at least six months prior to the date of exercise and valued on the effective date of such exercise; or (3) by any such other methods (including broker-assisted cashless exercise via a broker selected by the Committee) as the Committee may from time to time authorize; provided, however, that in all cases, the method of making such payment shall be in compliance with applicable law. |
(iv) | Payment in settlement of a Stock Appreciation Right may be made solely in whole shares of Common Stock valued on the date of exercise of the Stock Appreciation Right or alternatively, in the sole discretion of the Committee, solely in cash or a combination of cash and shares. If the Committee decides that payment will be made in shares of Common Stock, and the amount payable results in a fractional share, payment for the fractional share will be made in cash. |
(v) | Upon the exercise of an Option or settlement of a Stock Appreciation Right in shares of Common Stock, in a manner determined by the Committee, either (1) certificates for shares of Common Stock shall be issued in the name of or for the account of the Participant or other person entitled to receive such shares or (2) shares of Common Stock shall be credited to such person’s account via book-entry transfer and shall be registered in such person’s name solely on the records of Huron’s transfer agent, in each case, as soon as practicable following the effective date on which the Option or Stock Appreciation Right, as applicable, is exercised. |
(f) | Provisions Relating to Incentive Stock Options. Incentive Stock Options may only be granted to employees of Huron and its Subsidiaries, in accordance with the provisions of Section 422 of the Code. To the extent that the aggregate Fair Market Value of shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year under the Plan and any other stock option plan of Huron or any of its Subsidiaries shall exceed $100,000, such Options shall be treated as Nonqualified Stock Options. For purposes of the preceding sentence, Fair Market Value shall be determined as of the date on which each such Incentive Stock Option is granted. No Incentive Stock Option may be granted to an individual if, at the time of the proposed grant, such individual owns (or is deemed to own under the Code) stock possessing more than ten percent of the total combined voting power of all classes of stock of Huron and its Subsidiaries unless (i) the exercise price of such Incentive Stock Option is at least 110% of the Fair Market Value of a share of Common Stock at the time such Incentive Stock Option is granted and (ii) such Incentive Stock Option is not exercisable after the expiration of five years from the date such Incentive Stock Option is granted. A Participant shall be required to notify Huron of any disposition of shares of Common Stock issued pursuant to the exercise of an Incentive Stock Option under the circumstances |
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described in Section 421(b) of the Code (relating to certain disqualifying dispositions), within 10 days of such disposition.
(g) | Effect of Termination of Employment or Provision of Services on Options and Stock Appreciation Rights. The Committee shall determine the effect of termination of employment or termination of service on each Option and Stock Appreciation Right, subject to the terms and conditions of the Plan. Unless otherwise provided by the Committee: |
(i) | any Option or Stock Appreciation Right that is outstanding on the date on which a Participant’s employment or service with Huron and the Affiliates terminates due to death or as a result of the Participant’s being Disabled shall become fully vested and exercisable on the date on which the Participant’s employment or service terminates due to the Participant’s death or as a result of the Participant’s being Disabled; |
(ii) | any Option or Stock Appreciation Right that is outstanding on the date on which a Participant’s employment or service with Huron and the Affiliates terminates for Cause, whether or not then exercisable, shall be terminated effective as of the day immediately prior to the date of termination; |
(iii) | any Option or Stock Appreciation Right that is outstanding on the date that a Participant’s employment or service with Huron and the Affiliates terminates for any reason other than Cause, death, or the Participant’s being Disabled or Retirement, (1) shall remain exercisable for the 90-day period following such termination to the extent that it is exercisable at the time of such termination, but in no event following the expiration of its term and (2) shall be terminated effective as of the date of termination to the extent it remains unexercisable as of the date of termination; and |
(iv) | with respect to any Participant who is an employee of Huron or any Affiliate and who is in a position of corporate vice president, managing director or executive officer, any Option or Stock Appreciation Right that is outstanding on the date on which such Participant’s employment with Huron and the Affiliates terminates due to Retirement shall continue to vest and be exercisable in accordance with its terms as though the Participant had remained in the employ of Huron and its Affiliates, provided that the Participant complies with the terms of the non-competition agreement and non-solicitation agreement in the form determined by Huron and signed by the Participant; provided further, however, that the foregoing provisions of this paragraph (iv) shall not apply with respect to any Option or Stock Appreciation Right that is subject to Section 409A of the Code. Notwithstanding the foregoing, if a Participant dies following Retirement, any Option or Stock Appreciation Right that is still outstanding on the date of such Participant’s death shall become fully vested and exercisable on the date of such Participant’s death, and shall expire on the earlier of such Award’s expiration date and the one-year anniversary of the Participant’s death. |
(h) | Leaves of Absence. Unless otherwise provided by the Committee and, with respect to Incentive Stock Options, to the extent permitted under Section 422 of the Code, subject in all cases to the terms and conditions of the Award, in the case of any Participant who takes an approved unpaid leave of absence (i) the Participant’s employment or service shall not be deemed to be terminated solely because of such leave of absence; (ii) the Participant shall continue to vest in his or her outstanding Options and Stock Appreciation Rights under the Plan during the first 30 days of such leave of absence; and the Participant shall cease to vest in his or her outstanding Options and Stock Appreciation Rights under the Plan during any period of such leave of absence which exceeds 30 days. |
(i) | Post-Exercise Limitations. Without otherwise limiting the Committee’s authority under the Plan, the Committee, in its discretion, may impose such restrictions on shares of Common Stock acquired pursuant to the exercise of an Option or received in settlement of a Stock Appreciation Right as it determines to be desirable, including, without limitation, restrictions relating to disposition of the shares and forfeiture restrictions based on service, performance, share ownership by the Participant, conformity with Huron’s recoupment or clawback policies and such other factors as the Committee determines to be appropriate. |
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8. | Full Value Awards and Cash Incentive Awards. |
(a) | Grant of Awards. The Committee may grant Full Value Awards and/or Cash Incentive Awards to Eligible Individuals, subject to the terms and conditions of the Plan. |
(b) | Effect of Termination of Employment or Provision of Services on Full Value Awards. The Committee shall determine the effect of termination of employment or termination of service on each Full Value Award, subject to the terms and conditions of the Plan. Unless otherwise provided by the Committee: |
(i) | any Full Value Award that is outstanding on the date on which a Participant’s employment or service with Huron and the Affiliates terminates due to death or as a result of the Participant’s being Disabled shall become fully vested (and exercisable, if applicable) on the date on which the Participant’s employment or service terminates due to the Participant’s death or as a result of the Participant’s being Disabled; |
(ii) | a Full Value Award that is outstanding on the date on which a Participant’s employment or service with Huron and the Affiliates terminates for Cause shall be terminated effective as of the day immediately prior to the date of termination and all shares subject to the Full Value Award (whether or not then vested or distributable) shall be terminated effective as of the day immediately prior to the date of termination; |
(iii) | any Full Value Award that is outstanding on the date that a Participant’s employment or service with Huron and the Affiliates terminates for any reason other than Cause, death, the Participant’s being Disabled or Retirement and that has not vested on the date of termination (and all rights with respect thereto, such as dividends or dividend equivalents) shall be terminated effective as of the date of termination; and |
(iv) | with respect to any Participant who is an employee of Huron or any Affiliate and who is in a position of corporate vice president, managing director or executive officer, any Full Value Award that is outstanding on the date on which such Participant’s employment with Huron and the Affiliates terminates due to Retirement shall continue to vest and be distributable in accordance with its terms as though the Participant had remained in the employ of Huron and the Affiliates; provided that the Participant complies with the terms of the non-competition agreement and non-solicitation agreement in the form determined by Huron and signed by the Participant. Notwithstanding the foregoing, if a Participant dies following Retirement, any Full Value Award that is still outstanding on the date of such Participant's death shall become fully vested on the date of such Participant's death. |
(c) | Leaves of Absence. Unless otherwise provided by the Committee, subject in all cases to the terms and conditions of the Award, in the case of any Participant who takes an approved unpaid leave of absence (i) the Participant’s employment or service shall not be deemed to be terminated solely because of such leave of absence; (ii) the Participant shall continue to vest in his or her outstanding Full Value Awards under the Plan during the first 30 days of such leave of absence; and the Participant shall cease to vest in his or her outstanding Full Value Awards under the Plan during any period of such leave of absence which exceeds 30 days. |
(d) | Restrictions. Without otherwise limiting the Committee’s authority under the Plan, the Committee, in its discretion, may impose such restrictions on shares of Common Stock acquired pursuant to the grant or settlement of a Full Value Award or the payment or retention of a Cash Incentive Award as it determines to be desirable, including, without limitation, restrictions relating to disposition of the shares and forfeiture restrictions based on service, performance, share ownership by the Participant, conformity with Huron’s recoupment or clawback policies and such other factors as the Committee determines to be appropriate. |
9. | Performance-Based Compensation. The Committee may designate any Full Value Award or a Cash Incentive Award granted to a Participant under the Plan as “Performance-Based Compensation” within the meaning of Section 162(m) of the Code and regulations thereunder. To the extent required by Section162(m) of the Code, any such Award so designated shall be conditioned on the achievement of one or more performance targets as determined by the Committee and the following shall apply: |
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(a) | Establishment of Performance Criteria. The performance targets established for the performance period by the Committee shall be objective (as that term is described in regulations under Section 162(m) of the Code), and shall be established in writing by the Committee not later than 90 days after the beginning of the performance period (but in no event after 25% of the performance period has elapsed), and while the outcome as to the performance targets is substantially uncertain. The performance targets established by the Committee may be with respect to corporate performance, operating group or sub-group performance, individual performance, other group or individual performance, or division performance, and shall be based on one or more of the Business Criteria. |
(b) | Certification of Targets. A Participant otherwise entitled to receive a Performance-Based Compensation Award for any performance period shall not receive a settlement or payment of the Award until the Committee has determined that the applicable performance target(s) have been attained. To the extent that the Committee exercises discretion in making the determination required by this Section 9(b), such exercise of discretion may not result in an increase in the amount of the payment. |
(c) | Special Termination Rules. Subject to the other terms and conditions of the Plan, if an Award is intended to constitute Performance-Based Compensation, the Committee may provide that if a Participant’s employment with Huron and the Affiliates terminates because of death or the Participant’s being Disabled, or if a Change of Control occurs prior to the Participant’s termination date, the Participant’s Performance-Based Compensation may become vested without regard to whether the Award would continue to constitute Performance-Based Compensation, subject to the terms of Section 10 below. |
Nothing in this Section 9 shall preclude the Committee from granting Awards under the Plan, or the Committee, Huron or any Affiliate from granting any cash awards outside of the Plan, that are not intended to be Performance-Based Compensation; provided, however, that, at the time of grant of Awards by the Committee (other than a Stock Option or Stock Appreciation Right), the Committee shall designate whether such Awards are intended to constitute Performance-Based Compensation. To the extent that the provisions of this Section 9 reflect the requirements applicable to Performance-Based Compensation, such provisions shall not apply to the portion of an Award, if any, that is not intended to constitute Performance-Based Compensation.
10. | Change of Control. |
(a) | Termination of Employment without Cause; Termination of Plan without Substitution. |
(i) | Except as otherwise provided in an Agreement or an Alternative Agreement, in the event that (A) a Participant is employed, or performs services as a director or independent contractor, on the date of a Change of Control and the Participant's employment or service, as applicable, is terminated by Huron or the successor to Huron (or a Related Company which is his or her employer) for reasons other than Cause within 12 months following the Change of Control, or (B) the Plan is terminated by Huron or its successor following a Change of Control without provision for the continuation of outstanding Awards hereunder, then (i) all Options and Stock Appreciation Rights which are then outstanding shall become immediately exercisable, and (ii) all other Awards shall become fully vested. |
(ii) | In the case of an award constituting Performance-Based Compensation, the phrase "fully vested" in the immediately prior sentence shall mean the greater of (x) vesting at target (or, if target is not defined in the award, vesting at 100% of the number of units granted), or (y) vesting in the award based on the extent, as determined by the Committee, to which the applicable performance metrics have been met during the applicable performance period up through and including the effective date of the Change of Control. If an Agreement or Alternative Agreement contains a vesting provision for a Performance-Based Compensation award that would result in lesser vesting than per this subsection (ii), then the terms of the Agreement or Alternate Agreement, as applicable, shall govern. |
(iii) | In addition, to the extent any accelerated exercisability and/or vesting pursuant to clause (B) of Section 10(a)(i) above applies to an award that is deferred compensation subject to, and not exempt from, the provisions of Internal Revenue Code Section 409A, then the definition of "Change of Control" for purposes of accelerated exercisability and/or vesting under clause |
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(B) shall be no broader than the definition allowed by Treasury Regulations Section 1.409A-(3)(i)(5).
(b) | Substitution and Continued Employment. If, upon a Change of Control, awards in other shares or securities are substituted for outstanding Awards under the Plan and, immediately following the Change of Control, the Participant becomes employed (if the Participant was an employee immediately prior to the Change of Control) or remains in continued service (as a director or independent contractor if the Participant was a director or independent contractor immediately prior to the Change of Control) of the entity into which Huron merged, or the purchaser of substantially all of the assets of Huron or a successor to such entity or purchaser, then the Participant shall not be treated as having terminated employment or service for purposes of this Section 10 until such time as the Participant terminates employment or service with the merged entity or purchaser (or successor), as applicable. |
(c) | Failure to Take Comparable Job not Termination. If, as described in subsection 10(b) above, awards in other shares or securities are substituted for outstanding Awards under the Plan in connection with a Change of Control, in the event a Participant is offered employment with a successor to Huron (or an Affiliate) for which the Participant is reasonably qualified and on financial terms and conditions which are comparable to the financial terms and conditions that applied to the Participant's employment immediately prior to the Change of Control, then, if the Participant does not accept the offer of employment and, as a result, the Participant's employment with Huron, the Affiliates and their respective successors is terminated, such Participant shall not be treated as having a termination of employment for purposes of this Section 10. |
11. | Rights as a Stockholder. No person shall have any rights as a stockholder with respect to any shares of Common Stock covered by or relating to any Award until the date of issuance of a stock certificate with respect to such shares or the date of crediting such shares to such person’s account via book-entry transfer. Except for adjustments pursuant to Section 4(f), no adjustment to any Award shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued or credit via book-entry transfer is made. |
12. | Limitations of Implied Rights. |
(a) | No Right to Employment or Continued Service. Nothing contained in the Plan or any Agreement shall confer upon any Participant any right with respect to the continuation of employment by or provision of services to Huron and the Affiliates or interfere in any way with the right of Huron and the Affiliates, subject to the terms of any separate agreement to the contrary, at any time to terminate such employment or service or to increase or decrease the compensation of any Participant. |
(b) | No Claim to Award. No person shall have any claim or right to receive an Award hereunder. The grant of an Award to a Participant at any time shall neither require the Committee to grant any other Award to such Participant or other person at any time nor preclude the Committee from making subsequent grants to such Participant or any other person. |
(c) | No Right to Assets or Property. Neither a Participant nor any other person shall, by reason of the Plan, acquire any right in or title to any assets, funds or property of Huron or any Affiliate whatsoever, including, without limitation, any specific funds, assets, or other property which Huron or any Affiliate, in its sole discretion, may set aside in anticipation of a liability under the Plan. A Participant shall have only a contractual right to the amounts, if any, payable under the Plan, unsecured by any assets of Huron and any Affiliate. Nothing contained in the Plan shall constitute a guarantee by Huron or any Affiliate that the assets of such companies shall be sufficient to pay any benefits to any person. |
13. | Securities Matters. |
(a) | Compliance with Law. Notwithstanding anything herein to the contrary, Huron shall not be obligated to cause to be issued or delivered any certificates evidencing shares of Common Stock pursuant to the Plan (or any crediting of shares to a person’s account via book-entry transfer) unless and until Huron is advised by its counsel (which may be Huron’s in-house counsel) that the issuance and delivery of such certificates (or crediting of such shares to an account) is in compliance with all applicable laws, regulations of governmental authority and the requirements of any securities exchange on which shares of Common Stock are traded. The Committee may require, as a condition of the issuance and delivery of certificates (or crediting to an account) pursuant to the terms hereof, that the recipient of |
13
such shares make such agreements and representations, and that, if applicable, such certificates bear such legends, as the Committee, in its sole discretion, deems necessary or advisable.
(b) | Transfer of Shares. The transfer of any shares of Common Stock hereunder shall be effective only at such time as counsel to Huron (which may be Huron’s in-house counsel) shall have determined that the issuance and delivery of such shares is in compliance with all applicable laws, regulations of governmental authority and the requirements of any securities exchange on which shares of Common Stock are traded. The Committee may, in its sole discretion, defer the effectiveness of any transfer of shares of Common Stock hereunder in order to allow the issuance of such shares to be made pursuant to registration or an exemption from registration or other methods for compliance available under federal or state securities laws. The Committee shall inform the Participant in writing of its decision to defer the effectiveness of a transfer. During the period of such deferral in connection with the exercise of an Option, the Participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect thereto. |
14. | Withholding Taxes. All Awards and other payments under the Plan are subject to withholding of all applicable taxes. Whenever cash is to be paid pursuant to an Award, Huron and the Affiliates shall have the right to deduct therefrom an amount sufficient to satisfy any federal, state and local withholding tax requirements related thereto. Whenever shares of Common Stock are to be delivered pursuant to an Award, Huron and the Affiliates shall have the right to require the Participant to remit to Huron and the Affiliates in cash an amount sufficient to satisfy any federal, state and local withholding tax requirements related thereto. With the approval of the Committee, a Participant may satisfy the foregoing requirement by electing to have Huron and the Affiliates withhold from delivery shares of Common Stock having a value equal to the amount of tax required to be withheld, as determined by the Committee or through the surrender of shares of Common Stock which the Participant already owns. As determined solely by Huron and the Affiliates, the number of shares used for withholding may exceed the number needed to satisfy the required withholding but shall not exceed the number of shares of Common Stock needed for the maximum tax withholding under applicable law (or other rates that will not have a negative accounting impact). Such a withholding election may be made by the Participant with respect to all or any portion of the shares to be delivered pursuant to an Award. |
15. | Notification of Election Under Section 83(b) of the Code. If any Participant shall, in connection with the acquisition of shares of Common Stock under the Plan, make the election permitted under Section 83(b) of the Code, such Participant shall notify Huron of such election within 10 days of filing notice of the election with the Internal Revenue Service. |
16. | Amendment or Termination of the Plan. The Board of Directors may, at any time, suspend or terminate the Plan or revise or amend it in any respect whatsoever; provided, however, that approval of Huron’s stockholders shall be required for any such amendment if and to the extent such approval is required in order to comply with applicable law (including, but not limited to, the Incentive Stock Option regulations and any amendments thereto), or stock exchange or automated quotation system listing requirement. Without limiting the generality of the foregoing, no amendment of the Plan will be made without the approval of Huron’s stockholders if such amendment would (a) materially increase the benefits accruing to a Participant under the Plan; increase the aggregate number of shares of Common Stock that may be issued under the Plan; (c) modify the requirements as to eligibility for participation in the Plan; or (d) be required under Section 7(d) of the Plan (relating to prohibitions on repricing and buy-backs). |
Nothing in this Section 16 shall restrict the Committee’s ability to exercise its discretionary authority pursuant to Sections 4 and 5, which discretion may be exercised without amendment to the Plan. No action hereunder may, without the consent of a Participant, reduce the Participant’s rights under any outstanding Award.
17. | Transferability. |
(a) | General. Awards under the Plan are not transferable except as designated by the Participant by will or by the laws of descent and distribution. Upon the death of a Participant, outstanding Awards granted to such Participant may be exercised only by the executor or administrator of the Participant’s estate or by a person who shall have acquired the right to such exercise by will or by the laws of descent and distribution. No transfer of an Award by will or the laws of descent and distribution shall be effective to bind Huron unless the Committee shall have been furnished with (i) written notice thereof and with a copy of the will and/or such evidence as the Committee may deem necessary to establish the validity of the transfer and (ii) an agreement by the transferee to comply with all the terms and conditions of |
14
the Award that are or would have been applicable to the Participant and to be bound by the acknowledgments made by the Participant in connection with the grant of the Award.
(b) | Family Members. Notwithstanding Section 17(a), during a Participant’s lifetime, the Committee may, in its sole discretion, pursuant to the provisions set forth in this Section 17(b), permit the transfer, assignment or other encumbrance of an outstanding Option, unless such Option is an Incentive Stock Option and the Committee and the Participant intend that it shall retain such status. Subject to the approval of the Committee and to any conditions that the Committee may prescribe, a Participant may, upon providing written notice to Huron, elect to transfer any or all Options granted to such Participant pursuant to the Plan to members of his or her immediate family, including, but not limited to, children, grandchildren and spouse or to trusts for the benefit of such immediate family members or to partnerships in which such family members are the only partners; provided, however, that no such transfer by any Participant may be made in exchange for consideration. Any such transferee must agree, in writing, to be bound by all terms and conditions of the Plan. |
(c) | Beneficiary. A Participant may file with the Committee a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the Participant, the executor or administrator of the Participant’s estate shall be deemed to be the Participant’s beneficiary. |
18. | Miscellaneous. |
(a) | Notices. Any notice or document required to be filed with the Committee under the Plan will be properly filed if delivered or mailed by registered mail, postage prepaid, to the Committee, in care of Huron at its principal executive offices. The Committee may, by advance written notice to affected persons, revise such notice procedure from time to time. Any notice required under the Plan (other than exercise notice) may be waived by the person entitled to notice. |
(b) | Form and Time of Elections. Unless otherwise specified herein, each election required or permitted to be made by any Participant or other person entitled to benefits under the Plan, and any permitted modification or revocation thereof, shall be in writing filed with the applicable Committee at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the Plan, as the Committee shall require. |
(c) | Agreement. The Committee may require a Participant to enter into an Agreement evidencing the Award, which Agreement shall contain such terms and conditions, not inconsistent with the Plan, as the Committee determines in its discretion. |
(d) | Liability for Cash Payments. Subject to the terms and conditions of the Plan, Huron and each Affiliate shall be liable for payment of cash due under the Plan with respect to any Participant to the extent that such benefits are attributable to the service rendered for Huron or the Affiliate, as applicable, by the Participant. Any disputes relating to the liability of Huron or an Affiliate for cash payments shall be resolved by the Committee. |
(e) | Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. |
(f) | Gender and Number. Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular. |
(g) | Expenses and Receipts. The expenses of the Plan shall be paid by Huron. Any proceeds received by Huron in connection with any Award may be used for general corporate purposes. |
(h) | Applicable Law, Venue. Except to the extent preempted by any applicable federal law, the Plan shall be construed and administered in accordance with the laws of the State of Delaware without reference to its principles of conflicts of law. Any legal action related to this Plan shall be brought only in a federal or state court located in Chicago, Illinois. |
(i) | No Fractional Shares. No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan. The Committee shall determine whether cash, other Awards, or other property shall be |
15
issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
19. | Severability. If any provision of the Plan is held to be invalid or unenforceable, the other provisions of the Plan shall not be affected but shall be applied as if the invalid or unenforceable provision had not been included in the Plan. |
20. | Foreign Employees. Notwithstanding any other provision of the Plan to the contrary, the Committee may grant Awards to eligible persons who are foreign nationals on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to foster and promote achievement of the purposes of the Plan. In furtherance of such purposes, the Committee may make such modifications, amendments, procedures and subplans as may be necessary or advisable to comply with provisions of laws in other countries or jurisdictions in which Huron or an Affiliate operates or has employees. |
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EXHIBIT 21.1
LIST OF SUBSIDIARIES OF HURON CONSULTING GROUP INC.
(as of December 31, 2019)
Name | Jurisdiction of Organization | |
Huron Consulting Group Holdings LLC | Delaware | |
Huron Consulting Services LLC | Delaware | |
Huron Consulting South East Asia PTE. LTD. | Singapore | |
Huron Consulting Saudi Limited | Saudi Arabia | |
Huron Saudi Limited | Saudi Arabia | |
Huron Management Services LLC | Delaware | |
Huron Demand LLC | Delaware | |
Conseillers Huron Canada Limitée | Canada | |
Huron Technologies Inc. | Delaware | |
Huron Transaction Advisory LLC | Delaware | |
Studer Holdings, Inc. | Delaware | |
The Studer Group, LLC | Florida | |
Huron Eurasia India Private Limited | India | |
Pope Woodhead and Associates | England and Wales | |
Innosight Holdings, LLC | Delaware | |
Innosight International, LLC | Delaware | |
Innosight Consulting Asia Pacific PTE. LTD. | Singapore | |
Innosight Consulting SARL | Switzerland | |
Innosight Consulting, LLC | Delaware | |
Huron Aviation One LLC | Delaware | |
Huron Aviation Two LLC | Delaware | |
Huron Managed Services LLC | Delaware | |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-119697, 333-137107, 333-166542, 333-181445, 333-196397, 333-204353, 333-218108, and 333-231566) of Huron Consulting Group Inc. of our report dated February 25, 2020 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP |
Chicago, Illinois |
February 25, 2020 |
EXHIBIT 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER,
PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James H. Roth, certify that:
1. | I have reviewed this Annual Report on Form 10-K of Huron Consulting Group Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: | February 25, 2020 | By: | /S/ JAMES H. ROTH | |||
James H. Roth | ||||||
Chief Executive Officer | ||||||
EXHIBIT 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER,
PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John D. Kelly, certify that:
1. | I have reviewed this Annual Report on Form 10-K of Huron Consulting Group Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: | February 25, 2020 | By: | /S/ JOHN D. KELLY | |||
John D. Kelly | ||||||
Executive Vice President, Chief Financial Officer and Treasurer | ||||||
EXHIBIT 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER,
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Huron Consulting Group Inc. (the "Company") on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James H. Roth, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein. |
Date: | February 25, 2020 | By: | /S/ JAMES H. ROTH | |||
James H. Roth | ||||||
Chief Executive Officer | ||||||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-K and shall not be considered filed as part of the Form 10-K.
EXHIBIT 32.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER,
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Huron Consulting Group Inc. (the "Company") on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John D. Kelly, Executive Vice President, Chief Financial Officer and Treasurer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein. |
Date: | February 25, 2020 | By: | /S/ JOHN D. KELLY | |||
John D. Kelly | ||||||
Executive Vice President, Chief Financial Officer and Treasurer | ||||||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-K and shall not be considered filed as part of the Form 10-K.