Huron Consulting Group Inc. - FORM 10-Q

Attached files

file	filename
EX-10.1 - EXHIBIT 10.1 - Huron Consulting Group Inc.	exhibit101-amendmentno2tot.htm
EX-32.2 - EXHIBIT 32.2 - Huron Consulting Group Inc.	hurn20170930exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - Huron Consulting Group Inc.	hurn20170930exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Huron Consulting Group Inc.	hurn20170930exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Huron Consulting Group Inc.	hurn20170930exhibit311.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-50976

HURON CONSULTING GROUP INC.

(Exact name of registrant as specified in its charter)



Delaware		01-0666114
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

550 West Van Buren Street

Chicago, Illinois

60607

(Address of principal executive offices)

(Zip Code)

(312) 583-8700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 26, 2017, 22,129,393 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

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Huron Consulting Group Inc.

HURON CONSULTING GROUP INC.

INDEX



		Page
Part I – Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations and Other Comprehensive Income	2
	Consolidated Statement of Stockholders’ Equity	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	52

Part II – Other Information

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults Upon Senior Securities	54

Item 4.	Mine Safety Disclosures	54

Item 5.	Other Information	54

Item 6.	Exhibits	55

Signature		56

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PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HURON CONSULTING GROUP INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



	September 30, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	8,660		$	17,027
Receivables from clients, net	94,025			94,246
Unbilled services, net	65,432			51,290
Income tax receivable	4,018			4,211
Prepaid expenses and other current assets	15,106			13,308
Total current assets	187,241			180,082
Property and equipment, net	47,075			32,434
Deferred income taxes, net	15,159			—
Long-term investment	31,937			34,675
Other non-current assets	26,149			24,814
Intangible assets, net	80,861			81,348
Goodwill	689,375			799,862
Total assets	$	1,077,797		$	1,153,215
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	10,259		$	7,273
Accrued expenses and other current liabilities	22,846			19,788
Accrued payroll and related benefits	62,451			82,669
Accrued contingent consideration for business acquisitions	7,743			1,985
Deferred revenues	25,495			24,053
Total current liabilities	128,794			135,768
Non-current liabilities:
Deferred compensation and other liabilities	20,336			24,171
Accrued contingent consideration for business acquisitions, net of current portion	14,726			6,842
Long-term debt, net of current portion	374,328			292,065
Deferred lease incentives	15,236			10,703
Deferred income taxes, net	—			35,633
Total non-current liabilities	424,626			369,414
Commitments and contingencies
Stockholders’ equity
Common stock; $0.01 par value; 500,000,000 shares authorized; 24,560,468 and 24,126,118 shares issued at September 30, 2017 and December 31, 2016, respectively	241			235
Treasury stock, at cost, 2,428,971 and 2,408,343 shares at September 30, 2017 and December 31, 2016, respectively	(121,395		)	(113,195		)
Additional paid-in capital	431,211			405,895
Retained earnings	210,543			351,483
Accumulated other comprehensive income	3,777			3,615
Total stockholders’ equity	524,377			648,033
Total liabilities and stockholders’ equity	$	1,077,797		$	1,153,215

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

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HURON CONSULTING GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Revenues and reimbursable expenses:
Revenues	$	176,376		$	183,400		$	546,643		$	548,148
Reimbursable expenses	17,982			19,093			55,862			54,636
Total revenues and reimbursable expenses	194,358			202,493			602,505			602,784
Direct costs and reimbursable expenses (exclusive of depreciation and amortization shown in operating expenses):
Direct costs	113,775			108,354			343,185			323,310
Amortization of intangible assets and software development costs	2,657			4,052			8,388			11,278
Reimbursable expenses	18,079			18,956			55,901			54,747
Total direct costs and reimbursable expenses	134,511			131,362			407,474			389,335
Operating expenses and other losses (gains), net:
Selling, general and administrative expenses	41,576			38,256			132,137			119,937
Restructuring charges	1,347			1,049			5,295			4,129
Other losses (gains), net	880			494			(222		)	494
Depreciation and amortization	9,946			8,092			28,549			23,064
Goodwill impairment charge	—			—			209,600			—
Total operating expenses and other losses (gains), net	53,749			47,891			375,359			147,624
Operating income (loss)	6,098			23,240			(180,328		)	65,825
Other income (expense), net:
Interest expense, net of interest income	(4,880		)	(4,176		)	(13,811		)	(12,270		)
Other income, net	930			489			3,204			1,236
Total other expense, net	(3,950		)	(3,687		)	(10,607		)	(11,034		)
Income (loss) from continuing operations before income tax expense	2,148			19,553			(190,935		)	54,791
Income tax expense (benefit)	(1,984		)	7,265			(49,740		)	19,498
Net income (loss) from continuing operations	4,132			12,288			(141,195		)	35,293
Income (loss) from discontinued operations, net of tax	238			4			690			(1,830		)
Net income (loss)	$	4,370		$	12,292		$	(140,505	)	$	33,463
Net earnings (loss) per basic share:
Net income (loss) from continuing operations	$	0.19		$	0.58		$	(6.59	)	$	1.67
Income (loss) from discontinued operations, net of tax	0.01			—			0.03			(0.08		)
Net income (loss)	$	0.20		$	0.58		$	(6.56	)	$	1.59
Net earnings (loss) per diluted share:
Net income (loss) from continuing operations	$	0.19		$	0.57		$	(6.59	)	$	1.65
Income (loss) from discontinued operations, net of tax	0.01			—			0.03			(0.09		)
Net income (loss)	$	0.20		$	0.57		$	(6.56	)	$	1.56
Weighted average shares used in calculating earnings per share:
Basic	21,505			21,076			21,413			21,084
Diluted	21,622			21,445			21,413			21,427
Comprehensive income (loss):
Net income (loss)	$	4,370		$	12,292		$	(140,505	)	$	33,463
Foreign currency translation adjustments, net of tax	609			50			1,835			52
Unrealized loss on investment, net of tax	(2,200		)	(2,038		)	(1,669		)	(1,163		)
Unrealized gain (loss) on cash flow hedging instruments, net of tax	23			121			(4		)	(27		)
Other comprehensive income (loss)	(1,568		)	(1,867		)	162			(1,138		)
Comprehensive income (loss)	$	2,802		$	10,425		$	(140,343	)	$	32,325

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

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HURON CONSULTING GROUP INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)



	Common Stock			Treasury Stock					Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income		Stockholders’ Equity
	Shares	Amount		Shares		Amount			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income		Stockholders’ Equity
Balance at December 31, 2016	23,478,016	$	235	(2,420,913	)	$	(113,195	)	$	405,895	$	351,483		$	3,615	$	648,033
Comprehensive income (loss)											(140,505		)	162		(140,343		)
Issuance of common stock in connection with:
Restricted stock awards, net of cancellations	367,278	4		(56,315	)	(3,750		)	3,746							—
Business acquisition	221,558	2							9,558							9,560
Share-based compensation									11,577							11,577
Shares redeemed for employee tax withholdings				(102,179	)	(4,450		)								(4,450		)
Cumulative-effect adjustment from adoption of ASU 2016-09									435		(435		)			—
Balance at September 30, 2017	24,066,852	$	241	(2,579,407	)	$	(121,395	)	$	431,211	$	210,543		$	3,777	$	524,377

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

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HURON CONSULTING GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net income (loss)	$	(140,505	)	$	33,463
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	37,881			34,344
Share-based compensation	11,711			13,145
Amortization of debt discount and issuance costs	7,604			7,171
Goodwill impairment charge	209,600			—
Allowances for doubtful accounts and unbilled services	3,812			7,107
Deferred income taxes	(51,062		)	4,980
Gain on sale of business	(931		)	—
Change in fair value of contingent consideration liabilities	(222		)	494
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in receivables from clients	9,025			9,442
(Increase) decrease in unbilled services	(12,251		)	(21,492		)
(Increase) decrease in current income tax receivable / payable, net	(32		)	(3,039		)
(Increase) decrease in other assets	(1,802		)	12,669
Increase (decrease) in accounts payable and accrued liabilities	1,850			(2,860		)
Increase (decrease) in accrued payroll and related benefits	(21,928		)	(17,707		)
Increase (decrease) in deferred revenues	(318		)	2,028
Net cash provided by operating activities	52,432			79,745
Cash flows from investing activities:
Purchases of property and equipment, net	(20,139		)	(9,372		)
Investment in life insurance policies	(1,826		)	(1,890		)
Distributions from life insurance policies	2,889			—
Purchases of businesses, net of cash acquired	(106,915		)	(69,133		)
Capitalization of internally developed software costs	(938		)	(838		)
Proceeds from note receivable	177			—
Proceeds from sale of business	1,499			—
Net cash used in investing activities	(125,253		)	(81,233		)
Cash flows from financing activities:
Proceeds from exercise of stock options	—			123
Shares redeemed for employee tax withholdings	(4,450		)	(4,837		)
Share repurchases	—			(55,265		)
Proceeds from borrowings under credit facility	241,000			168,000
Repayments of debt	(170,082		)	(156,000		)
Payments for debt issuance costs	(395		)	—
Payments of contingent consideration liabilities	(1,811		)	—
Net cash provided by (used in) financing activities	64,262			(47,979		)
Effect of exchange rate changes on cash	192			133
Net decrease in cash and cash equivalents	(8,367		)	(49,334		)
Cash and cash equivalents at beginning of the period	17,027			58,437
Cash and cash equivalents at end of the period	$	8,660		$	9,103
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Property and equipment expenditures included in accounts payable and accrued expenses	$	4,049		$	2,928
Promissory note assumed for purchase of property and equipment	$	5,113		$	—
Contingent consideration related to business acquisitions	$	15,489		$	8,754
Common stock issued related to a business acquisition	$	9,560		$	—

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

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

1. Description of Business

Huron is a global professional services firm committed to achieving sustainable results in partnership with its clients. We bring a depth of expertise in strategy, technology, operations, advisory services and analytics to drive lasting and measurable results in the healthcare, higher education, life sciences and commercial sectors. Through focus, passion, and collaboration, we provide guidance to support organizations as they contend with the changes transforming their industries and businesses.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements reflect the financial position, results of operations, and cash flows as of and for the three and nine months ended September 30, 2017 and 2016. These financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for Quarterly Reports on Form 10-Q. Accordingly, these financial statements do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements. In the opinion of management, these financial statements reflect all adjustments of a normal, recurring nature necessary for the fair statement of our financial position, results of operations, and cash flows for the interim periods presented in conformity with GAAP. These financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2016 included in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the periods ended March 31, 2017 and June 30, 2017. Our results for any interim period are not necessarily indicative of results for a full year or any other interim period.

3. New Accounting Pronouncements

Recently Adopted

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 of the goodwill impairment test, which required us to determine the implied fair value of goodwill by allocating the reporting unit's fair value to each of its assets and liabilities as if the reporting unit was acquired in a business acquisition. Instead, the updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. We adopted this ASU in the second quarter of 2017 on a prospective basis and applied the new guidance to our interim goodwill impairment tests performed in the second quarter of 2017. Refer to Note 6 “Goodwill and Intangible Assets” for additional information on our interim goodwill impairment tests performed.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, classification of excess tax benefits on the statement of cash flows, and forfeitures. We adopted this guidance in the first quarter of 2017, at which time we began recognizing excess tax benefits and deficiencies as income tax benefit or expense in our consolidated statements of operations on a prospective basis. We recognized $0.1 million and $1.8 million of net excess tax deficiencies as income tax expense in our consolidated statement of operations for the three and nine months ended September 30, 2017, respectively. Refer to Note 13 "Income Taxes" for additional information on our effective tax rate for the three and nine months ended September 30, 2017. Additionally, upon adoption, we began classifying excess tax benefits as an operating activity on the statement of cash flows on a retrospective basis. As a result, we reclassified $0.9 million of excess tax benefits for the first nine months of 2016 from cash flows from financing activities to cash flows from operating activities on our statement of cash flows. We elected to account for share-based award forfeitures as they occur, and applied this accounting change on a modified retrospective basis as a cumulative-effect adjustment to retained earnings of $0.4 million during the first quarter of 2017.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments. ASU 2016-06 clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to perform only the four-step decision sequence in ASC 815-15-25-42 (as amended by the ASU). The entity does not have to separately assess whether the event that triggers its ability to exercise the contingent option is itself indexed only to interest rates or credit risk. We adopted these amendments in the first quarter of 2017 on a

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

modified retrospective basis. The adoption of these amendments did not have any impact on our consolidated financial statements.

Not Yet Adopted

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments to the guidance improve and simplify accounting rules for hedge accounting to better present the economic results of an entity’s risk management activities in its financial statements and improve the disclosures of hedging arrangements. Additionally, ASU 2017-12 simplifies the hedge documentation and effectiveness assessment requirements. The updated guidance is effective for us beginning January 1, 2019. We do not expect this guidance to have a material impact on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-02, Leases, which supersedes ASC Topic 840, Leases, and sets forth the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record on the balance sheet a right-of-use asset and a lease liability, equal to the present value of the remaining lease payments, for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or a straight-line basis over the term of the lease. ASU 2016-02 will be effective for us beginning January 1, 2019, with early adoption permitted. Entities are required to use a modified retrospective transition method for existing leases. We are currently evaluating the potential impact this guidance will have on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments to the guidance enhance the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation, and disclosure. The updated guidance is effective for us beginning January 1, 2018. We do not expect this guidance to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as a new Topic, ASC 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In accordance with the new standard, we will adopt ASU 2014-09 on January 1, 2018. Companies may apply the new guidance using either the full retrospective transition method, which requires restating each prior period presented, or the modified retrospective transition method, under which the new guidance is applied to the current period presented in the financial statements and a cumulative-effect adjustment is recorded as of the date of adoption. We expect to apply the new guidance using the modified retrospective transition method. We are currently evaluating the potential impact this guidance will have on our consolidated financial statements; most notably the impact on our revenue recognition for performance-based fee billing arrangements. Currently, we recognize revenue under performance-based fee billing arrangements once all related performance criteria are met and the amount to be recognized is fixed or determinable. However, ASC 606 will require us to estimate these amounts and recognize a significant portion of the estimated amounts over the term of the engagement. As a result, we expect to recognize revenue under performance-based fee billing arrangements earlier under ASC 606 than we do under current guidance.

4. Discontinued Operations

On December 31, 2015, we sold our Huron Legal segment to Consilio, Inc. ("Consilio"). Huron Legal provided eDiscovery services, consulting services and contract management services related to law department management, information governance and compliance, legal discovery, litigation management, and legal analytics.

The divestiture of the Huron Legal segment represented a strategic shift that had a major effect on our operations and financial results. As such, the operations of our Huron Legal segment have been classified as discontinued operations in our consolidated statements of operations for all periods presented. As of September 30, 2017 and December 31, 2016, no assets or liabilities of the disposed business remained on our consolidated balance sheet.

For the three and nine months ended September 30, 2017, we recognized income from discontinued operations, net of tax, of $0.2 million and $0.7 million, respectively, primarily related to updated lease assumptions for vacated office space directly related to the sale of the Huron Legal segment. For the nine months ended September 30, 2016, we recognized losses from

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

discontinued operations, net of tax, of $1.8 million, primarily related to obligations for former employees, legal fees, and updated lease assumptions for vacated office space directly related to the sale of the Huron Legal segment.

In connection with the sale of Huron Legal, we entered into a transition services agreement ("TSA") with Consilio, under which we provided certain post-closing services, support, and facilities to Consilio to facilitate an orderly transfer of the Huron Legal business operations. Billings under the TSA, which we did not consider to be significant, were recorded as a reduction of the costs to provide the respective services, primarily in selling, general and administrative expenses in the consolidated statements of operations. Services under the TSA ended as of June 30, 2017. We have no continuing involvement with the Huron Legal segment.

5. Acquisitions

ADI Strategies, Inc.

On April 1, 2017, we completed our acquisition of the international assets of ADI Strategies, Inc. ("ADI Strategies") in Dubai and India. We acquired the U.S. assets of ADI Strategies in the second quarter of 2016. ADI Strategies is a leading enterprise performance management, risk management and business intelligence firm. The acquisition strengthens our technology and analytics competencies and expands our global reach. The international results of operations of ADI Strategies have been included in our consolidated financial statements and results of operations of the Business Advisory segment from the date of acquisition.

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.

Pro forma results of operations are not presented for ADI Strategies or Pope Woodhead because these acquisitions were not material in relation to our consolidated financial position or results of operations.

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.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

The acquisition was accounted for using the acquisition method of accounting. Tangible and identifiable intangible assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. The current fair values of assets acquired and liabilities assumed are considered preliminary and are based on the information that was available as of the date of the acquisition. We believe that the information provides a reasonable basis for estimating the preliminary fair values of assets acquired and liabilities assumed, but certain items, such as working capital amounts, may be subject to change as additional information is received. Thus, the provisional measurements of fair value and goodwill are subject to change. We expect to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

The acquisition date fair value of the consideration transferred for Innosight was $113.6 million, which consisted of the following:



Fair value of consideration transferred
Cash	$	90,725
Common stock	9,560
Contingent consideration liability	12,050
Net working capital adjustment	1,272
Total consideration transferred	$	113,607

We funded the cash component of the purchase price with cash on hand and borrowings of $89.0 million under our senior secured credit facility. We issued 221,558 shares of our common stock as part of the consideration transferred, with an acquisition date fair value of $9.6 million based on our common stock's closing price of $43.15 on the date of acquisition. The preliminary contingent consideration liability of $12.1 million represents the acquisition date fair value of the contingent consideration arrangement, pursuant to which we may be required to pay additional consideration to the sellers if specific financial performance targets are met over a four-year term. The maximum amount that may be paid is $35.0 million. See Note 11 "Fair Value of Financial Instruments" for additional information on the valuation of contingent consideration liabilities.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

The following table summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed as of the acquisition date.



	March 1, 2017
Assets acquired:
Accounts receivable	$	7,752
Unbilled services	1,881
Prepaid expenses and other current assets	468
Property and equipment	419
Intangible assets	18,015
Liabilities assumed:
Accounts payable	531
Accrued expenses and other current liabilities	916
Accrued payroll and related benefits	883
Deferred revenues	30
Total identifiable net assets	26,175
Goodwill	87,432
Total purchase price	$	113,607

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the acquisition date.



	Fair Value		Useful Life in Years
Customer relationships	$	9,500	6
Trade name	6,000		6
Customer contracts	1,000		1
Non-compete agreements	1,300		5
Favorable lease contract	215		1
Total intangible assets subject to amortization	$	18,015

The weighted average amortization period for the identifiable intangible assets shown above is 5.6 years. Customer relationships and customer contracts represent the fair values of the underlying relationships and agreements with Innosight customers. The trade name represents the fair value of the brand and name recognition associated with the marketing of Innosight's service offerings. Non-compete agreements represent the value derived from preventing certain Innosight executives from entering into or starting a similar, competing business. The favorable lease contract represents the difference between the fair value and minimum lease obligations under the current outstanding lease. Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed, and largely reflects the expanded market opportunities expected from combining the service offerings of Huron and Innosight, as well as the assembled workforce of Innosight. Goodwill recognized in conjunction with the acquisition of Innosight was recorded in the Business Advisory segment. Goodwill of $87.4 million is expected to be deductible for income tax purposes.

Innosight’s results of operations have been included in our unaudited consolidated statements of operations and results of operations of our Business Advisory segment from the date of acquisition. For the three months ended September 30, 2017, revenues from Innosight were $11.0 million and operating loss was $0.6 million, which included $0.9 million of amortization expense for intangible assets acquired. For the nine months ended September 30, 2017, revenues from Innosight were $27.2 million and operating income was $0.8 million, which included $2.7 million of amortization expense for intangible assets acquired. In connection with the acquisition of Innosight, we incurred $1.7 million of transaction and acquisition-related expenses. Of the $1.7 million of expense, $1.4 million was incurred in the first quarter of 2017 and $0.3 million was incurred in the second quarter in 2017. These costs are recorded in selling, general and administrative expenses.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

The following unaudited supplemental pro forma information summarizes the combined results of operations of Huron and Innosight as though the companies were combined on January 1, 2016.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017			2016
Revenues	$	176,376	$	194,968	$	555,768		$	578,924
Net income (loss) from continuing operations	$	4,170	$	14,184	$	(137,922	)	$	36,558
Net income (loss) from continuing operations per share - basic	$	0.19	$	0.67	$	(6.43	)	$	1.72
Net income (loss) from continuing operations per share - diluted	$	0.19	$	0.65	$	(6.43	)	$	1.69

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 decrease expense for the three months ended September 30, 2017 by less than $0.1 million and include additional expense of $2.8 million for the three months ended September 30, 2016. We have included additional expense of $0.5 million and $8.4 million, for the nine months ended September 30, 2017 and 2016, respectively. Additionally, the historical financial information has been adjusted to give effect to the shares issued as consideration. All of these adjustments are based upon currently available information and certain assumptions. Therefore, the pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had it 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.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

6. Goodwill and Intangible Assets

The table below sets forth the changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2017.



	Healthcare			Education			Business Advisory			Total
Balance as of December 31, 2016:
Goodwill	$	636,802		$	102,906		$	203,137		$	942,845
Accumulated impairment losses	—			—			(142,983		)	(142,983		)
Goodwill, net as of December 31, 2016	636,802			102,906			60,154			799,862
Goodwill recorded in connection with business acquisitions ⁽¹⁾	7			10,252			88,286			98,545
Goodwill impairment charge	(209,600		)	—			—			(209,600		)
Goodwill reallocation	—			(10,794		)	10,794			—
Goodwill allocated to disposal of business ⁽²⁾	—			—			(568		)	(568		)
Foreign currency translation	—			466			670			1,136
Goodwill, net as of September 30, 2017	$	427,209		$	102,830		$	159,336		$	689,375


(1)	Refer to Note 5 "Acquisitions" for additional information on the goodwill recorded in connection with business acquisitions.

(2)

On June 16, 2017, we sold our Life Sciences Compliance and Operations practice ("Life Sciences C&O") to a third-party, and allocated a portion of goodwill within the Life Sciences reporting unit to the disposed business based on the relative fair values of Life Sciences C&O and the remaining reporting unit. The allocated goodwill of $0.6 million was written off and included in the gain on sale of Life Sciences C&O. The sale of Life Sciences C&O did not meet the criteria for reporting separately as discontinued operations. In connection with the sale, we recorded a $0.9 million gain which is included in other income, net in our consolidated statements of operations.

Second Quarter 2017 Goodwill Impairment Charge

Since the first quarter of 2016, the Healthcare segment, which is also a reporting unit, has experienced declining revenues, primarily driven by softness in our revenue cycle offering within our performance improvement solution. This softness is attributable to decreased demand for our services, the winding down of some of our larger projects, and a growing trend toward smaller projects, as well as fewer large integrated projects. In light of these challenges, several initiatives have been undertaken to improve the segment's financial performance, including repositioning our solutions to address the most critical needs of our clients, the expansion of our existing services such as those in our Studer Group, strategy, physician and technology offerings, and workforce reductions to better align resources with market demand. While the initiatives undertaken to improve the financial performance of our Healthcare segment are yielding some positive impacts, hospitals and health systems continue to face regulatory and funding uncertainty; therefore, we remain cautious about near-term growth. As we have previously disclosed in prior quarters, if the financial performance of our Healthcare segment continued to decline and did not meet our expectations, we could be required to perform an interim impairment analysis with respect to our carrying value of goodwill for the Healthcare reporting unit prior to our usual annual test. Based on forecasts prepared in 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 with its carrying value and, in accordance with ASU 2017-04 which we adopted in the second quarter of 2017, recognizing an impairment charge for the amount by which the carrying value exceeded the fair value. To estimate the fair value of the Healthcare reporting unit, we relied on a combination of the income approach and the market approach, utilizing the guideline company method, with a fifty-fifty weighting. Based on the estimated fair value of the Healthcare reporting unit, we recorded a $209.6

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

million non-cash pretax charge in the second quarter of 2017 to reduce the carrying value of goodwill in our Healthcare reporting unit.

In connection with the goodwill impairment test performed on the Healthcare reporting unit, we performed an impairment test on the long-lived assets allocated to the asset groups within the Healthcare reporting unit. Based on the impairment test performed, we concluded that the long-lived assets allocated to the asset groups within the Healthcare reporting unit were not impaired as of June 30, 2017.

Second Quarter 2017 Goodwill Reallocation

Effective June 1, 2017, we reorganized our internal financial reporting structure, which management uses to assess performance and allocate resources, by moving our Life Sciences practice from the Education and Life Sciences segment to the Business Advisory segment. The remaining Education and Life Sciences segment is now referred to as the Education segment. The Life Sciences practice is a separate reporting unit for purposes of goodwill impairment testing. We continue to operate under three reportable segments: Healthcare, Education, and Business Advisory. These three reportable segments are comprised of the following six reporting units for goodwill impairment testing purposes: Healthcare, Education, Business Advisory, Enterprise Solutions and Analytics, Strategy and Innovation, and Life Sciences. The Business Advisory, Enterprise Solutions and Analytics, Strategy and Innovation, and Life Sciences reporting units comprise our Business Advisory segment. See Note 15 "Segment Information" for additional information on our reportable segments.

As a result of the reorganization, we reallocated $10.8 million of the goodwill balance associated with the previous Education and Life Sciences reporting unit to the new Life Sciences reporting unit based on the relative fair values of the Life Sciences reporting unit and the remaining Education reporting unit. The estimated fair values were determined using a combination of the income approach and the market approach, utilizing the guideline company method, with a fifty-fifty weighting.

In conjunction with the goodwill reallocation, we performed a goodwill impairment test for the goodwill balances within our Education reporting unit and Life Sciences reporting unit as of June 1, 2017. Based on the results of the goodwill impairment test, we determined that the fair values of our Education reporting unit and Life Sciences reporting unit exceeded their carrying values. As such, we concluded that there was no indication of goodwill impairment for either reporting unit.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

Intangible Assets

Intangible assets as of September 30, 2017 and December 31, 2016 consisted of the following:



		As of September 30, 2017				As of December 31, 2016
	Useful Life in Years	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer relationships	4 to 13	$	106,174	$	47,325	$	89,279	$	34,827
Trade names	2 to 6	29,016		17,065		22,930		11,652
Customer contracts	1 to 4	27,554		25,919		26,497		21,295
Technology and software	3 to 5	9,340		4,490		8,970		2,667
Non-competition agreements	1 to 5	5,295		2,482		3,685		1,697
Publishing content	3	3,300		2,888		3,300		2,062
Favorable lease contract	3	720		369		720		203
In-process technology	Indefinite	—		—		370		—
Total		$	181,399	$	100,538	$	155,751	$	74,403

Identifiable intangible assets with finite lives are amortized over their estimated useful lives. Customer relationships and customer contracts, as well as certain trade names and technology and software, are amortized on an accelerated basis to correspond to the cash flows expected to be derived from the assets. All other intangible assets with finite lives are amortized on a straight-line basis. In connection with the acquisition of MyRounding Solutions, LLC, we acquired in-process technology which was accounted for as an indefinite-lived intangible asset until the development of the technology was complete, which occurred in the first quarter of 2017. Upon completion, we reclassified the technology to definite-lived technology and software, and began amortizing the asset over a five-year useful life on a straight-line basis.

Intangible asset amortization expense was $8.8 million for the three months ended both September 30, 2017 and 2016. Intangible asset amortization expense was $26.4 million and $24.4 million for the nine months ended September 30, 2017 and 2016, respectively. The table below sets forth the estimated annual amortization expense for the year ending December 31, 2017 and each of the five succeeding years for the definite-lived intangible assets recorded as of September 30, 2017.



Year Ending December 31,	Estimated Amortization Expense
2017	$	34,966
2018	$	23,936
2019	$	17,279
2020	$	12,116
2021	$	8,070
2022	$	6,092

Actual future amortization expense could differ from these estimated amounts as a result of future acquisitions, dispositions, and other factors.

7. Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, excluding unvested restricted common stock. Diluted earnings per share reflects the potential reduction in earnings per share that could occur if securities or other contracts to issue common stock were exercised or converted into common stock under the treasury stock method. Such securities or other contracts include unvested restricted stock awards, outstanding common stock options, convertible senior notes, and outstanding warrants, to the extent dilutive. In periods 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.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

Earnings (loss) per share under the basic and diluted computations are as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017			2016
Net income (loss) from continuing operations	$	4,132	$	12,288	$	(141,195	)	$	35,293
Income (loss) from discontinued operations, net of tax	238		4		690			(1,830		)
Net income (loss)	$	4,370	$	12,292	$	(140,505	)	$	33,463

Weighted average common shares outstanding – basic	21,505		21,076		21,413			21,084
Weighted average common stock equivalents	117		369		—			343
Weighted average common shares outstanding – diluted	21,622		21,445		21,413			21,427

Net earnings per basic share:
Net income (loss) from continuing operations	$	0.19	$	0.58	$	(6.59	)	$	1.67
Income (loss) from discontinued operations, net of tax	0.01		—		0.03			(0.08		)
Net income (loss)	$	0.20	$	0.58	$	(6.56	)	$	1.59

Net earnings per diluted share:
Net income (loss) from continuing operations	$	0.19	$	0.57	$	(6.59	)	$	1.65
Income (loss) from discontinued operations, net of tax	0.01		—		0.03			(0.09		)
Net income (loss)	$	0.20	$	0.57	$	(6.56	)	$	1.56

The number of anti-dilutive securities excluded from the computation of the weighted average common stock equivalents presented above were as follows:



	As of September 30,
	2017	2016
Unvested restricted stock awards	627	5
Outstanding common stock options	194	—
Convertible senior notes	3,129	3,129
Warrants related to the issuance of convertible senior notes	3,129	3,129
Total anti-dilutive securities	7,079	6,263

See Note 8 “Financing Arrangements” for further information on the convertible senior notes and warrants related to the issuance of convertible notes.

As of September 30, 2017, we had a share repurchase program, authorized by our board of directors, pursuant to which we may, from time to time, repurchase up to $125 million of our common stock through October 31, 2017 (the “Share Repurchase Program”). During the fourth quarter of 2017, our board of directors authorized an extension of the Share Repurchase Program through October 31, 2018. The amount and timing of the repurchases will be determined by management and will depend on a variety of factors, including the trading price of our common stock, capacity under our credit facility, general market and business conditions, and applicable legal requirements. No shares were repurchased during the first nine months of 2017. In the first quarter of 2016, we repurchased and retired 982,192 shares for $55.3 million. No shares were repurchased in the second or third quarter of 2016. As of September 30, 2017, $35.1 million remains available for share repurchases.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

8. Financing Arrangements

A summary of the carrying amounts of our debt follows:



	September 30, 2017			December 31, 2016
1.25% convertible senior notes due 2019	$	230,834		$	224,065
Senior secured credit facility	139,000			68,000
Promissory note due 2024	4,991			—
Total long-term debt	$	374,825		$	292,065
Current maturities of debt⁽¹⁾	(497		)	—
Long-term debt, net of current portion	$	374,328		$	292,065


(1)	The current maturities of debt are included as a component of accrued expenses and other current liabilities on our consolidated balance sheets.

Below is a summary of the scheduled remaining principal payments of our debt as of September 30, 2017.



	Principal Payments of Long-Term Debt
2017	$	123
2018	$	501
2019	$	250,515
2020	$	139,529
2021	$	544
Thereafter	$	2,779

Convertible Notes

In September 2014, the Company issued $250 million principal amount of 1.25% convertible senior notes due 2019 (the “Convertible Notes”) in a private offering. The Convertible Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as Trustee (the “Indenture”). The Convertible Notes are senior unsecured obligations of the Company and will pay interest semi-annually on April 1 and October 1 of each year at an annual rate of 1.25%. The Convertible Notes will mature on October 1, 2019, unless earlier repurchased by the Company or converted in accordance with their terms.

Upon conversion, the Convertible Notes will be settled, at our election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. Our current intent and policy is to settle conversions with a combination of cash and shares of common stock with the principal amount of the Convertible Notes paid in cash, in accordance with the settlement provisions of the Indenture.

The initial conversion rate for the Convertible Notes is 12.5170 shares of our common stock per $1,000 principal amount of the Convertible Notes, which is equal to an initial conversion price of approximately $79.89 per share of our common stock. The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest, except in certain limited circumstances described in the Indenture. Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture) the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Convertible Notes in connection with such make-whole fundamental change. Additionally, if the Company undergoes a “fundamental change” (as defined in the Indenture), a holder will have the option to require the Company to repurchase all or a portion of its Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest. As discussed below, the convertible note hedge transactions and warrants, which were entered into in connection with the Convertible Notes, effectively raise the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to July 1, 2019, only under the following circumstances:

•

during any calendar quarter (and only during such calendar quarter) commencing after December 31, 2014 if, for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on, and including, the last trading day of the immediately preceding calendar quarter, the last reported sale price of the Company’s common stock for such trading day is equal to or greater than 130% of the applicable conversion price on such trading day;

•

during the five consecutive business day period immediately following any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which, for each trading day of the measurement period, the “trading price” (as defined in the Indenture) per $1,000 principal amount of the Convertible Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock for such trading day and the applicable conversion rate on such trading day; or


•	upon the occurrence of specified corporate transactions described in the Indenture.

On or after July 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or a portion of its Convertible Notes, regardless of the foregoing circumstances.

We have separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar liability that does not have an associated convertible feature, assuming our non-convertible debt borrowing rate. The carrying value of the equity component representing the conversion option, which is recognized as a debt discount, was determined by deducting the fair value of the liability component from the proceeds of the Convertible Notes. The debt discount is amortized to interest expense using an effective interest rate of 4.751% over the term of the Convertible Notes. As of September 30, 2017, the remaining life of the Convertible Notes is 2.0 years. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.

The transaction costs related to the issuance of the Convertible Notes were separated into liability and equity components based on their relative values, as determined above. Transaction costs attributable to the liability component are recorded as a deduction to the carrying amount of the liability and amortized to interest expense over the term of the Convertible Notes; and transaction costs attributable to the equity component are netted with the equity component of the Convertible Notes in stockholders’ equity. Total debt issuance costs were approximately $7.3 million, of which $6.2 million was allocated to liability issuance costs and $1.1 million was allocated to equity issuance costs.

As of September 30, 2017 and December 31, 2016, the Convertible Notes consisted of the following:



	September 30, 2017			December 31, 2016
Liability component:
Proceeds	$	250,000		$	250,000
Less: debt discount, net of amortization	(16,666		)	(22,520		)
Less: debt issuance costs, net of amortization	(2,500		)	(3,415		)
Net carrying amount	$	230,834		$	224,065
Equity component ⁽¹⁾	$	39,287		$	39,287


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

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

The following table presents the amount of interest expense recognized related to the Convertible Notes for the periods presented.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Contractual interest coupon	$	781	$	781	$	2,344	$	2,344
Amortization of debt discount	1,974		1,883		5,853		5,582
Amortization of debt issuance costs	306		302		915		900
Total interest expense	$	3,061	$	2,966	$	9,112	$	8,826

In connection with the issuance of the Convertible Notes, we entered into convertible note hedge transactions and warrant transactions. The convertible note hedge transactions are intended to reduce the potential future economic dilution associated with the conversion of the Convertible Notes and, combined with the warrants, effectively raise the price at which economic dilution would occur from the initial conversion price of approximately $79.89 to approximately $97.12 per share. For purposes of the computation of diluted earnings per share in accordance with GAAP, dilution will occur when the average share price of our common stock for a given period exceeds the conversion price of the Convertible Notes, which initially is equal to approximately $79.89 per share. The convertible note hedge transactions and warrant transactions are discussed separately below.

•

Convertible Note Hedge Transactions. In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions whereby the Company has call options to purchase a total of approximately 3.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the Convertible Notes in full, at a price of approximately $79.89, which corresponds to the initial conversion price of the Convertible Notes, subject to customary anti-dilution adjustments substantially similar to those in the Convertible Notes. The convertible note hedge transactions are exercisable upon conversion of the Convertible Notes and will expire in 2019 if not earlier exercised. We paid an aggregate amount of $42.1 million for the convertible note hedge transactions, which was recorded as additional paid-in capital on the consolidated balance sheets. The convertible note hedge transactions are separate transactions and are not part of the terms of the Convertible Notes.

•

Warrants. In connection with the issuance of the Convertible Notes, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 3.1 million shares of the Company’s common stock at a strike price of approximately $97.12. The warrants will expire incrementally on 100 different dates from January 6, 2020 to May 28, 2020 and are exercisable at each such expiry date. If the average market value per share of our common stock for the reporting period exceeds the strike price of the warrants, the warrants will have a dilutive effect on our earnings per share. We received aggregate proceeds of $23.6 million from the sale of the warrants, which was recorded as additional paid-in capital on the consolidated balance sheets. The warrants are separate transactions and are not part of the terms of the Convertible Notes or the convertible note hedge transactions.

The Company recorded an initial deferred tax liability of $15.4 million in connection with the debt discount associated with the Convertible Notes and recorded an initial deferred tax asset of $16.5 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are included in deferred income taxes, net on the consolidated balance sheets.

Senior Secured Credit Facility

The Company has a $500 million five-year senior secured revolving credit facility, subject to the terms of a Second Amended and Restated Credit Agreement dated as of March 31, 2015, as amended to date (as amended and modified the "Amended Credit Facility"), that becomes due and payable in full upon maturity on March 31, 2020. The Amended Credit Agreement provides the option to increase the revolving credit facility or establish term loan facilities in an aggregate amount of up to $100 million, subject to customary conditions and the approval of any lender whose commitment would be increased, resulting in a maximum available principal amount under the Amended Credit Agreement of $600 million. The initial borrowings under the Amended Credit Agreement were used to refinance borrowings outstanding under a prior credit agreement, and future borrowings under the Amended Credit Agreement may be used for working capital, capital expenditures, acquisitions of businesses, share repurchases, and general corporate purposes.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

Fees and interest on borrowings vary based on our Consolidated Leverage Ratio (as defined in the Amended Credit Agreement). At our option, borrowings under the Amended Credit Agreement will bear interest at one, two, three or six-month LIBOR or an alternate base rate, in each case plus the applicable margin. The applicable margin will fluctuate between 1.25% per annum and 2.00% per annum, in the case of LIBOR borrowings, or between 0.25% per annum and 1.00% per annum, in the case of base rate loans, based upon our Consolidated Leverage Ratio at such time.

Amounts borrowed under the Amended Credit Agreement may be prepaid at any time without premium or penalty. We are required to prepay the amounts outstanding under the Amended Credit Agreement in certain circumstances, including a requirement to pay all amounts outstanding under the Amended Credit Agreement 90 days prior to the Convertible Indebtedness Maturity Date (as defined in the Amended Credit Agreement) unless (1) the Convertible Indebtedness Maturity Date is waived or extended to a later date, (2) the Company can demonstrate (a) Liquidity (as defined in the Amended Credit Agreement) in an amount at least equal to the principal amount due on the Convertible Indebtedness Maturity Date, and (b) financial covenant compliance after giving effect to such payments and any additional indebtedness incurred on a pro forma basis, or (3) this requirement is waived by the Required Lenders (as defined in the Amended Credit Agreement). In addition, we have the right to permanently reduce or terminate the unused portion of the commitments provided under the Amended Credit Agreement at any time.

The loans and obligations under the Amended Credit Agreement are secured pursuant to a Second Amended and Restated Security Agreement and a Second Amended and Restated Pledge Agreement (the “Pledge Agreement”) with Bank of America, N.A. as collateral agent, pursuant to which the Company and the subsidiary guarantors grant Bank of America, N.A., for the ratable benefit of the lenders under the Amended Credit Agreement, a first-priority lien, subject to permitted liens, on substantially all of the personal property assets of the Company and the subsidiary guarantors, and a pledge of 100% of the stock or other equity interests in all domestic subsidiaries and 65% of the stock or other equity interests in each “material first-tier foreign subsidiary” (as defined in the Pledge Agreement).

The Amended Credit Agreement contains usual and customary representations and warranties; affirmative and negative covenants, which include limitations on liens, investments, additional indebtedness, and restricted payments; and two quarterly financial covenants as follows: (i) a maximum Consolidated Leverage Ratio (defined as the ratio of debt to consolidated EBITDA) ranging from 3.25 to 1.00 to 3.75 to 1.00, depending on the measurement period, and (ii) a minimum Consolidated Interest Coverage Ratio (defined as the ratio of consolidated EBITDA to interest) of 3.50 to 1.00. Consolidated EBITDA for purposes of the financial covenants is calculated on a continuing operations basis and includes adjustments to add back share-based compensation costs, non-cash goodwill impairment charges, certain non-cash restructuring charges, and pro forma historical EBITDA for businesses acquired. At September 30, 2017, we were in compliance with these financial covenants with a Consolidated Leverage Ratio of 3.52 to 1.00 and a Consolidated Interest Coverage Ratio of 12.60 to 1.00.

Borrowings outstanding under the Amended Credit Agreement at September 30, 2017 totaled $139.0 million. These borrowings carried a weighted average interest rate of 3.4%, including the effect of the interest rate swap described in Note 10 “Derivative Instruments and Hedging Activity." Borrowings outstanding under the Amended Credit Agreement at December 31, 2016 were $68.0 million and carried a weighted average interest rate of 2.5%. The borrowing capacity under the revolving credit facility is reduced by any outstanding borrowings under the revolving credit facility and outstanding letters of credit. At September 30, 2017, we had outstanding letters of credit totaling $2.7 million, which are primarily used as security deposits for our office facilities. As of September 30, 2017, the unused borrowing capacity under the revolving credit facility was $358.3 million.

Promissory Note due 2024

On June 30, 2017, in conjunction with our purchase of an aircraft related to the acquisition of Innosight, we assumed, from the sellers of the aircraft, a promissory note with an outstanding principal balance of $5.1 million. The principal balance of the promissory note is subject to scheduled monthly principal payments until the maturity date of March 1, 2024, at which time a final payment of $1.5 million, plus any accrued and unpaid interest, will be due. Under the terms of the promissory note, we will pay interest on the outstanding principal amount at a rate of one-month LIBOR plus 1.97% per annum. The obligations under the promissory note are secured pursuant to a Loan and Aircraft Security Agreement with Banc of America Leasing & Capital, LLC, which grants the lender a first priority security interest in the aircraft. At September 30, 2017, the outstanding principal amount of the promissory note was $5.0 million. As of September 30, 2017, the aircraft had a carrying amount of $6.6 million.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

9. Restructuring Charges

Restructuring charges for the three and nine months ended September 30, 2017 totaled $1.3 million and $5.3 million, respectively. The $1.3 million charge incurred in the third quarter of 2017 primarily related to the accrual of remaining lease obligations, net of estimated sublease income, due to relocating our San Francisco office to a smaller space and consolidating our New York offices in the third quarter of 2017, and accelerated depreciation on leasehold improvements for our San Francisco office. The $5.3 million of restructuring charges incurred in the first nine months of 2017 primarily consisted of $2.5 million related to the accrual of remaining lease obligations, net of estimated sublease income, due to relocating our San Francisco office to a smaller space and consolidating our Chicago and New York offices in the first nine months of 2017, and accelerated depreciation on leasehold improvements for our San Francisco office, $2.0 million related to workforce reductions in our Healthcare segment to better align our resources with market demand, and $0.4 million related to workforce reductions in our corporate operations primarily to adjust our infrastructure to align with the decreased workforce in the Healthcare segment.

Restructuring charges for the three and nine months ended September 30, 2016 totaled $1.0 million and $4.1 million, respectively. The $1.0 million charge incurred in the third quarter of 2016 primarily related to updated lease assumptions of our Washington, D.C. space vacated in the fourth quarter of 2014. The $4.1 million of restructuring charges incurred in the first nine months of 2016 primarily consisted of $1.5 million related to updated assumptions for lease accruals for the Washington, D.C. space vacated in the fourth quarter of 2014, $1.2 million related to workforce reductions in our Healthcare segment to better align resources with market demand, $0.9 million related to workforce reductions in our corporate operations as we adjusted our infrastructure to align with our Huron Legal divestiture, and $0.2 million related to the wind down of our foreign consulting operations based in the Middle East.

The table below sets forth the changes in the carrying amount of our restructuring charge liability by restructuring type for the nine months ended September 30, 2017.



	Employee Costs			Office Space Reductions			Other			Total
Balance as of December 31, 2016	$	5,182		$	5,773		$	24		$	10,979
Additions ⁽¹⁾	2,889			2,445			110			5,444
Payments	(7,226		)	(2,047		)	5			(9,268		)
Adjustments⁽¹⁾	(117		)	(1,087		)	(78		)	(1,282		)
Non-cash items	(46		)	(119		)	(61		)	(226		)
Balance as of September 30, 2017	$	682		$	4,965		$	—		$	5,647


(1)	Additions and adjustments for the nine months ended September 30, 2017 include a restructuring gain of $1.1 million related to updated lease assumptions for vacated office spaces directly related to discontinued operations. Refer to Note 4 "Discontinued Operations" for additional information on our discontinued operations.

As of September 30, 2017, our restructuring charge liability related to office space reductions of $5.0 million represented the present value of remaining lease payments, net of estimated sublease income, primarily for our vacated office spaces in Washington, D.C., Houston, San Francisco, and Chicago. This restructuring charge liability is included as a component of accrued expenses and other current liabilities and deferred compensation and other liabilities. All of the $0.7 million restructuring charge liability related to employee costs at September 30, 2017 is expected to be paid in the next 12 months. The restructuring charge liability related to employee costs is included as a component of accrued payroll and related benefits.

10. Derivative Instruments and Hedging Activity

On April 4, 2013, we entered into a forward amortizing interest rate swap agreement effective March 31, 2014 which ended August 31, 2017. We entered into this derivative instrument to hedge against the interest rate risks of our variable-rate borrowings. The swap had an initial notional amount of $60.0 million and amortized quarterly until April 2016. In April 2016, the notional amount of this interest rate swap increased to $86.0 million and continued to amortize quarterly until it expired in August 2017. Under the terms of the interest rate swap agreement, we received from the counterparty interest on the notional amount based on one-month LIBOR and we paid to the counterparty a fixed rate of 0.985%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

On June 22, 2017, we entered into a forward interest rate swap agreement effective August 31, 2017 and ending August 31, 2022, with a notional amount of $50.0 million. We entered into this derivative instrument to continue to hedge against the interest rate risks of our variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and we pay to the counterparty a fixed rate of 1.900%.

We recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. We have designated these derivative instruments as cash flow hedges. Therefore, changes in the fair value of the derivative instruments are recorded to other comprehensive income (“OCI”) to the extent effective and reclassified into interest expense upon settlement. The ineffective portion of the change in fair value of the derivative instruments is recognized in interest expense. Our interest rate swap agreement was effective during the three and nine months ended September 30, 2017. As of September 30, 2017, it was anticipated that $0.1 million of the losses, net of tax, currently recorded in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

The table below sets forth additional information relating to our interest rate swaps designated as a cash flow hedging instrument as of September 30, 2017 and December 31, 2016.



	Fair Value (Derivative Asset and Liability)
Balance Sheet Location	September 30, 2017		December 31, 2016
Other non-current assets	$	141	$	—
Accrued expenses	$	200	$	54

All of our derivative instruments are transacted under the International Swaps and Derivatives Association (ISDA) master agreements. These agreements permit the net settlement of amounts owed in the event of default and certain other termination events. Although netting is permitted, it is our policy to record all derivative assets and liabilities on a gross basis on our consolidated balance sheet.

We do not use derivative instruments for trading or other speculative purposes. Refer to Note 12 “Other Comprehensive Income (Loss)” for additional information on our derivative instrument.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

11. Fair Value of Financial Instruments

Certain of our assets and liabilities are measured at fair value. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy for inputs used in measuring fair value and requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy consists of three levels based on the objectivity of the inputs as follows:



Level 1 Inputs		Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs		Quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs		Unobservable inputs for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability.

The table below sets forth our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016.



	Level 1		Level 2		Level 3		Total
September 30, 2017
Assets:
Promissory note	$	—	$	—	$	2,311	$	2,311
Convertible debt investment	—		—		31,937		31,937
Deferred compensation assets	—		17,170		—		17,170
Total assets	$	—	$	17,170	$	34,248	$	51,418
Liabilities:
Interest rate swap	$	—	$	59	$	—	$	59
Contingent consideration for business acquisitions	—		—		22,469		22,469
Total liabilities	$	—	$	59	$	22,469	$	22,528
December 31, 2016
Assets:
Promissory note	$	—	$	—	$	2,325	$	2,325
Convertible debt investment	—		—		34,675		34,675
Deferred compensation assets	—		16,408		—		16,408
Total assets	$	—	$	16,408	$	37,000	$	53,408
Liabilities:
Interest rate swap	$	—	$	54	$	—	$	54
Contingent consideration for business acquisitions	—		—		8,827		8,827
Total liabilities	$	—	$	54	$	8,827	$	8,881

Deferred compensation assets: We have a non-qualified deferred compensation plan (the "Plan") for the members of our board of directors and a select group of our employees. The deferred compensation liability is funded by the Plan assets, which consist of life insurance policies maintained within a trust. The cash surrender value of the life insurance policies approximates fair value, and is based on third-party broker statements which provide the fair value of the life insurance policies' underlying investments, which are Level 2 inputs. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The Plan assets are included in other non-current assets on our consolidated balance sheet. Realized and unrealized gains (losses) from the deferred compensation assets are recorded to other income (expense), net in our consolidated statements of operations.

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

Interest rate swaps: The fair values of our interest rate swaps were derived using estimates to settle the interest rate swap agreements, which are based on the net present value of expected future cash flows on each leg of the swaps utilizing market-based inputs and discount rates reflecting the risks involved.

Promissory note: As part of the consideration received for the sale of our Accounting Advisory practice on December 30, 2011, we received a $3.5 million promissory note payable over four years. During the second quarter of 2014, we agreed to amend and restate the note such that principal payments will be paid to us annually based on the amount of excess cash flows earned each year by the maker of the note until the maturity date of December 31, 2018, at which time the remaining principal balance and any accrued interest is due. The fair value of the note is based on the net present value of the projected cash flows using a discount rate of 17%, which accounts for the risks associated with the note. This fair value measurement is based on significant inputs not observable in the market and thus represent Level 3 inputs. As of September 30, 2017, $0.2 million is recorded in prepaid expenses and other current assets and represents the present value of the payments expected to be received in the next 12 months, and the remaining $2.1 million is recorded in other non-current assets.

The table below sets forth the changes in the balance of the promissory note for the nine months ended September 30, 2017.



	Promissory Note
Balance as of December 31, 2016	$	2,325
Interest payments received	(140		)
Principal payment received	(177		)
Change in fair value of promissory note	303
Balance as of September 30, 2017	$	2,311

Convertible debt investment: In 2014 and 2015, we invested $27.9 million, in the form of zero coupon convertible debt, in Shorelight Holdings, LLC (“Shorelight”), the parent company of Shorelight Education, a U.S.-based company that partners with leading nonprofit universities to increase access to and retention of international students, boost institutional growth, and enhance an institution’s global footprint. The notes will mature on July 1, 2020, unless converted earlier.

To determine the appropriate accounting treatment for our investment, we performed a variable interest entity (“VIE”) analysis and concluded that Shorelight does not meet the definition of a VIE. We also reviewed the characteristics of our investment to confirm that the convertible notes are not in-substance common stock that would warrant equity method accounting. After we reviewed all of the terms of the investment, we concluded the appropriate accounting treatment to be that of an available-for-sale debt security.

The investment is carried at fair value with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income. We estimated the fair value of our investment using a Monte Carlo simulation model, cash flow projections discounted at a risk-adjusted rate, and certain assumptions related to equity volatility, default probability, and recovery rate, all of which are Level 3 inputs. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the investment, which would result in different impacts to our consolidated balance sheet and comprehensive income. Actual results may differ from our estimates. The fair value of the convertible debt investment is recorded in long-term investment.

The table below sets forth the changes in the balance of the convertible debt investment for the nine months ended September 30, 2017.



	Convertible Debt Investment
Balance as of December 31, 2016	$	34,675
Change in fair value of convertible debt investment	(2,738		)
Balance as of September 30, 2017	$	31,937

Contingent consideration for business acquisitions: We estimate the fair value of acquisition-related contingent consideration using either a probability-weighted assessment of the specific financial performance targets being achieved or a Monte Carlo simulation model, as appropriate. These fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 inputs. The significant unobservable inputs used in the fair value measurements of our contingent

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

consideration are our measures of the estimated payouts based on internally generated financial projections on a probability-weighted basis and discount rates, which typically reflect a risk-free rate. The fair value of the contingent consideration is reassessed quarterly based on assumptions used in our latest projections and input provided by practice leaders and management. Any change in the fair value estimate is recorded in our consolidated statement of operations for that period. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of our contingent consideration liability, which would result in different impacts to our consolidated balance sheets and consolidated statements of operations. Actual results may differ from our estimates. Refer to Note 5 “Acquisitions” for information on the acquisitions completed in 2017. The table below sets forth the changes in the balance of the contingent consideration for business acquisitions for the nine months ended September 30, 2017.



	Contingent Consideration for Business Acquisitions
Balance as of December 31, 2016	$	8,827
Acquisitions	15,489
Payments	(1,938		)
Remeasurement of contingent consideration for business acquisitions	(222		)
Unrealized loss due to foreign currency translation	313
Balance as of September 30, 2017	$	22,469

Financial assets and liabilities not recorded at fair value are as follows:

Senior Secured Credit Facility

The carrying value of our borrowings outstanding under our senior secured credit facility is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the senior secured credit facility bears interest at variable rates based on current market rates as set forth in the Amended Credit Agreement. Refer to Note 8 “Financing Arrangements” for additional information on our senior secured credit facility.

Promissory Note due 2024

The carrying value of our promissory note due 2024 is stated at cost. Our carrying value approximates fair value, using Level 2 inputs, as the promissory note bears interest at rates based on current market rates as set forth in the terms of the promissory note. Refer to Note 8 “Financing Arrangements” for additional information on our promissory note due 2024.

Convertible Notes

The carrying amount and estimated fair value of the Convertible Notes are as follows:



	September 30, 2017				December 31, 2016
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
1.25% convertible senior notes due 2019	$	230,834	$	233,595	$	224,065	$	245,018

The differences between the $250 million principal amount of the Convertible Notes and the carrying amounts shown above represent the unamortized debt discount and issuance costs. As of September 30, 2017 and December 31, 2016, the carrying value of the equity component of $39.3 million was unchanged from the date of issuance. Refer to Note 8 “Financing Arrangements” for additional information on our Convertible Notes. The estimated fair value of the Convertible Notes was determined based on the quoted bid price of the Convertible Notes in an over-the-counter market, which is a Level 2 input, on the last day of trading for the quarters ended September 30, 2017 and December 31, 2016.

Based on the closing price of our common stock of $34.30 on September 30, 2017, the if-converted value of the Convertible Notes was less than the principal amount.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

Cash and cash equivalents are stated at cost, which approximates fair market value. The carrying values of all other financial instruments not described above reasonably approximate fair market value due to the nature of the financial instruments and the short-term maturity of these items.

12. Other Comprehensive Income (Loss)

The tables below set forth the components of other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2017 and 2016.



	Three Months Ended September 30, 2017									Three Months Ended September 30, 2016
	Before Taxes			Tax (Expense) Benefit			Net of Taxes			Before Taxes			Tax (Expense) Benefit			Net of Taxes
Other comprehensive income (loss):
Foreign currency translation adjustments	$	609		$	—		$	609		$	50		$	—		$	50
Unrealized loss on investment	$	(3,609	)	$	1,409		$	(2,200	)	$	(3,329	)	$	1,291		$	(2,038	)
Unrealized gain (loss) on cash flow hedges:
Change in fair value	$	41		$	(16	)	$	25		$	96		$	(35	)	$	61
Reclassification adjustments into earnings	(3		)	1			(2		)	101			(41		)	60
Net unrealized gain	$	38		$	(15	)	$	23		$	197		$	(76	)	$	121
Other comprehensive income (loss)	$	(2,962	)	$	1,394		$	(1,568	)	$	(3,082	)	$	1,215		$	(1,867	)



	Nine Months Ended September 30, 2017									Nine Months Ended September 30, 2016
	Before Taxes			Tax (Expense) Benefit			Net of Taxes			Before Taxes			Tax (Expense) Benefit			Net of Taxes
Other comprehensive income (loss):
Foreign currency translation adjustments	$	1,835		$	—		$	1,835		$	52		$	—		$	52
Unrealized loss on investment	$	(2,738	)	$	1,069		$	(1,669	)	$	(1,899	)	$	736		$	(1,163	)
Unrealized gain (loss) on cash flow hedges:
Change in fair value	$	(41	)	$	16		$	(25	)	$	(367	)	$	146		$	(221	)
Reclassification adjustments into earnings	36			(15		)	21			323			(129		)	194
Net unrealized loss	$	(5	)	$	1		$	(4	)	$	(44	)	$	17		$	(27	)
Other comprehensive income (loss)	$	(908	)	$	1,070		$	162		$	(1,891	)	$	753		$	(1,138	)

The before tax amounts reclassified from accumulated other comprehensive income related to our cash flow hedges are recorded to interest expense, net of interest income.

Accumulated other comprehensive income, net of tax, includes the following components:



	Foreign Currency Translation			Available-for-Sale Investment			Cash Flow Hedges			Total
Balance, December 31, 2016	$	(453	)	$	4,088		$	(20	)	$	3,615
Current period change	1,835			(1,669		)	(4		)	162
Balance, September 30, 2017	$	1,382		$	2,419		$	(24	)	$	3,777

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HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

13. Income Taxes

For the three months ended September 30, 2017, our effective tax rate was (92.4)% as we recognized income tax benefit from continuing operations of $2.0 million on income from continuing operations of $2.1 million. For the third quarter of 2016, our effective tax rate was 37.2% as we recognized income tax expense from continuing operations of $7.3 million on income from continuing operations of $19.6 million. The effective tax rate for the three months ended September 30, 2017 was more favorable than the statutory rate, inclusive of state income taxes, primarily due to recognizing a $2.7 million tax benefit related to a previously unrecognized tax benefit from our "check-the-box" election made in 2014 to treat one of our wholly-owned foreign subsidiaries as a disregarded entity for U.S federal income tax purposes. This benefit was partially offset by $0.6 million of tax expense recorded in the third quarter of 2017 to correct an error that occurred in the second quarter of 2017. During the third quarter of 2017, we also recorded a $3.1 million adjustment to decrease deferred income taxes, net and increase income tax receivable on our consolidated balance sheet to correct an error that occurred in the second quarter of 2017. These errors have no impact on full year 2017 results, and we concluded that the impact of both errors was not material to the second and third quarter financial statements. The effective tax rate for the three months ended September 30, 2016 was lower than the statutory rate, inclusive of state income taxes, primarily due to non-taxable income, valuation allowance reductions, and certain credits and deductions, partially offset by non-deductible business expenses.

For the nine months ended September 30, 2017, our effective tax rate was 26.1% as we recognized income tax benefit from continuing operations of $49.7 million on a loss from continuing operations of $190.9 million. For the nine months ended September 30, 2016, our effective tax rate was 35.6% as we recognized income tax expense of $19.5 million on income from continuing operations of $54.8 million. The effective tax rate for the nine months ended September 30, 2017 was less favorable than the statutory rate, inclusive of state income taxes, primarily due to the $61.2 million non-deductible portion of the goodwill impairment charge recorded in the second quarter of 2017, as well as $1.8 million of discrete tax expense for share-based compensation related to the adoption of ASU 2016-09 Improvements to Employee Share-Based Payment Accounting. Refer to Note 3 "New Accounting Pronouncements" for additional information on the adoption of ASU 2016-09. These unfavorable discrete items were partially offset by a $2.7 million tax benefit recorded in the third quarter of 2017 related to a previously unrecognized tax benefit from our 2014 "check-the-box" election. The effective tax rate for the nine months ended September 30, 2016 was lower than the statutory rate, inclusive of state income taxes, primarily due to the year-to-date impact of a discrete favorable adjustment to our state tax rate in the second quarter of 2016, non-taxable income, valuation allowance reductions, certain credits and deductions, and a discrete tax benefit related to share-based compensation, partially offset by non-deductible business expenses.

As of September 30, 2017, we had $0.8 million of unrecognized tax benefits which would affect the effective tax rate of continuing operations if recognized.

14. Commitments, Contingencies and Guarantees

Litigation

From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Quarterly Report on Form 10-Q, we are not a party to any litigation or legal proceeding 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 $2.7 million and $4.8 million were outstanding at September 30, 2017 and December 31, 2016, respectively, primarily to support certain office lease obligations.

In connection with certain business acquisitions, we may be required to pay post-closing consideration to the sellers if specific financial performance targets are met over a number of years as specified in the related purchase agreements. As of September 30, 2017 and December 31, 2016, the total estimated fair value of our contingent consideration liabilities was $22.5 million and $8.8 million, respectively.

To the extent permitted by law, our bylaws and articles of incorporation require that we indemnify our officers and directors against judgments, fines and amounts paid in settlement, including attorneys’ fees, incurred in connection with civil or criminal

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

action or proceedings, as it relates to their services to us if such person acted in good faith. Although there is no limit on the amount of indemnification, we may have recourse against our insurance carrier for certain payments made.

15. Segment Information

Segments are defined as components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker, who is our chief executive officer, manages the business under three operating segments, which are our reportable segments: Healthcare, Education, and Business Advisory.

During the second quarter of 2017, we reorganized our internal financial reporting structure, which management uses to assess performance and allocate resources, by moving our Life Sciences practice from the Education and Life Sciences segment to the Business Advisory segment. The remaining Education and Life Sciences segment is now referred to as the Education segment. While our consolidated results have not been impacted, we have restated our historical segment information for consistent presentation.


•	Healthcare

Our Healthcare segment provides advisory services - from strategy setting through implementation - in the areas of organizational and resource alignment, clinical transformation, financial and operational performance, patient and caregiver engagement, and technology implementation and optimization. We serve national and regional hospitals and integrated health systems, academic medical centers, community hospitals, and medical groups. Our solutions help clients evolve and adapt to the rapidly changing healthcare environment and achieve growth, optimize performance, enhance profitability, improve quality and clinical outcomes, and drive physician, patient, and employee engagement across the enterprise.


•	Education

Our Education segment provides management consulting and technology solutions to higher education institutions and academic medical centers. We partner with clients to address challenges relating to business and technology strategy, financial management, operational and organizational effectiveness, research administration, and regulatory compliance. Our institutional strategy, market research, budgeting and financial management, business operations and student lifecycle management solutions align missions with business priorities, improve quality and reduce costs institution-wide. Our technology strategy, enterprise applications, and analytic solutions transform and optimize operations, deliver time and cost savings, and enhance the student experience. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance.


•	Business Advisory

Our Business Advisory segment provides services to middle market and large organizations, not-for-profit organizations, lending institutions, law firms, investment banks, and private equity firms. We assist clients in a broad range of industries and across the spectrum from healthy, well-capitalized companies to organizations in transition as well as creditors, equity owners, and other key constituents. Our Business Advisory professionals resolve complex business issues and enhance client enterprise value through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. Our Enterprise Solutions and Analytics professionals deliver technology and analytic solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our expertise in full-service enterprise performance management (EPM), enterprise resource planning (ERP), business intelligence and analytics, customer relationship management (CRM), and data management services helps clients identify and execute on business and technology strategies to drive results and gain a competitive advantage. Our Strategy and Innovation professionals collaborate with clients across a range of industries to identify new growth opportunities, build new ventures and capabilities, and accelerate organizational change. Our Life Sciences professionals provide strategic

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

solutions to help pharmaceutical, medical device, and biotechnology companies deliver more value to patients, payers, and providers and comply with regulations.

Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative expenses that are incurred directly by the segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include costs for corporate office support, certain office facility costs, costs relating to accounting and finance, human resources, legal, marketing, information technology, and Company-wide business development functions, as well as costs related to overall corporate management.

The table below sets forth information about our operating segments for the three and nine months ended September 30, 2017 and 2016, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Healthcare:
Revenues	$	79,582		$	103,425		$	261,261		$	323,531
Operating income	$	25,778		$	38,824		$	83,580		$	119,229
Segment operating income as a percentage of segment revenues	32.4		%	37.5		%	32.0		%	36.9		%
Education:
Revenues	$	41,422		$	38,621		$	127,629		$	111,816
Operating income	$	7,762		$	10,896		$	31,772		$	31,474
Segment operating income as a percentage of segment revenues	18.7		%	28.2		%	24.9		%	28.1		%
Business Advisory:
Revenues	$	55,372		$	41,354		$	157,753		$	112,801
Operating income	$	12,832		$	8,608		$	34,890		$	23,275
Segment operating income as a percentage of segment revenues	23.2		%	20.8		%	22.1		%	20.6		%
Total Company:
Revenues	$	176,376		$	183,400		$	546,643		$	548,148
Reimbursable expenses	17,982

Huron Consulting Group Inc. - FORM 10-Q - November 1, 2017

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