In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Huron," "Company," "we," "us" and "our" refer toHuron Consulting Group Inc. and its subsidiaries. Statements in this Quarterly Report on Form 10-Q that are not historical in nature, including those concerning the Company's current expectations about its future results, are "forward-looking" statements as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as "may," "should," "expects," "provides," "anticipates," "assumes," "can," "will," "meets," "could," "likely," "intends," "might," "predicts," "seeks," "would," "believes," "estimates," "plans," "continues," "guidance," or "outlook," or similar expressions. These forward-looking statements reflect our current expectations about our future requirements and needs, results, levels of activity, performance, or achievements. Some of the factors that could cause actual results to differ materially from the forward-looking statements contained herein include, without limitation: the impact of the COVID-19 pandemic on the economy, our clients and client demand for our services, and our ability to sell and provide services, including the measures taken by governmental authorities and businesses in response to the pandemic, which may cause or contribute to other risks and uncertainties that we face; failure to achieve expected utilization rates, billing rates, and the number of revenue-generating professionals; inability to expand or adjust our service offerings in response to market demands; our dependence on renewal of client-based services; dependence on new business and retention of current clients and qualified personnel; failure to maintain third-party provider relationships and strategic alliances; inability to license technology to and from third parties; the impairment of goodwill; various factors related to income and other taxes; difficulties in successfully integrating the businesses we acquire and achieving expected benefits from such acquisitions; risks relating to privacy, information security, and related laws and standards; and a general downturn in market conditions. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, among others, those described under Item 1A. "Risk Factors," in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and under Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q, that may cause actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. We disclaim any obligation to update or revise any forward-looking statements as a result of new information or future events, or for any other reason. OVERVIEW Our Business Huron is a global consultancy that collaborates with clients to drive strategic growth, ignite innovation and navigate constant change. Through a combination of strategy, expertise and creativity, we help clients accelerate operational, digital and cultural transformation, enabling the change they need to own their future. By embracing diverse perspectives, encouraging new ideas and challenging the status quo, we create sustainable results for the organizations we serve. We provide professional services through three operating segments: Healthcare, Business Advisory, and Education. • Healthcare
Our Healthcare segment has a depth of expertise in financial and operational improvement, care transformation, culture and organizational excellence, strategy, and technology and analytics. We serve national and regional hospitals, integrated health systems, academic medical centers, community hospitals, and medical groups. Our solutions help clients evolve and adapt to the rapidly changing healthcare environment and achieve growth, optimize performance, enhance profitability, improve quality and clinical outcomes, align leaders, improve organizational culture, and drive physician, patient, and employee engagement across the enterprise to deliver better consumer outcomes. We help organizations transform and innovate their delivery model to focus on patient wellness by improving quality outcomes, minimizing care variation and fundamentally improving patient and population health. Our consultants partner with clients to help build and sustain today's business to invest in the future by reducing complexity, improving operational efficiency and growing market share. We enable the healthcare of the future by identifying, integrating and optimizing technology investments to collect data that transforms care delivery and improves patient outcomes. We also develop future leaders capable of driving meaningful cultural and organizational change and who transform the consumer experience. • Business Advisory
Our Business Advisory segment provides services to large and middle market organizations, lending institutions, law firms, investment banks, private equity firms, and not-for-profit organizations, including higher education and healthcare institutions. We assist clients in a broad range of industries and across the spectrum from healthy, well-capitalized companies to organizations in transition, as well as creditors, equity owners, and other key constituents. Our Enterprise Solutions and Analytics experts advise, deliver, and optimize technology and analytic solutions that enable organizations to manage and optimize their financial performance, operational efficiency, and client or stakeholder experience. Our Business Advisory experts resolve complex business issues and enhance client enterprise value
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through a suite of services including capital advisory, transaction advisory, operational improvement, restructuring and turnaround, valuation, and dispute advisory. Our Strategy and Innovation professionals collaborate with clients across a range of industries to identify new growth opportunities, build new ventures and capabilities, and accelerate organizational change. Our Life Sciences professionals provide strategic solutions to help pharmaceutical, medical device, and biotechnology companies deliver more value to patients, payers, and providers, and comply with regulations. • Education
Our Education segment provides consulting and technology solutions to higher education institutions and academic medical centers. We collaborate with clients to address challenges relating to business and technology strategy, financial and operational excellence, student success, research administration, and regulatory compliance. Our research enterprise solutions assist clients in identifying and implementing institutional research strategy, optimizing clinical research operations, improving financial management and cost reimbursement, improving service to faculty, and mitigating risk compliance. Our technology strategy, enterprise applications, and analytic solutions transform and optimize operations, deliver time and cost savings, and enhance the student experience. Our institutional strategy, budgeting and financial management, and business operations align missions with business priorities, improve quality, and reduce costs institution-wide. Our student solutions improve attraction, retention and graduation rates, increase student satisfaction and help generate quality outcomes. Huron is a Platinum level member of the Oracle PartnerNetwork, an Oracle Cloud Premier Partner withinNorth America , a Gold level consulting partner with Salesforce.com and a Workday Services Partner. Coronavirus (COVID-19) The worldwide spread of coronavirus (COVID-19) in the first quarter of 2020 has created significant volatility, uncertainty and disruption to the global economy. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it will impact our clients, employees and business partners. In response to the pandemic, many state and local governments have issued shelter-in-place mandates; and companies, including Huron, have implemented work from home policies and travel restrictions. While traditionally a majority of the work performed by our revenue-generating professionals occurs at client sites, the nature of the services we provide allows for our revenue-generating professionals to continue to serve clients in a remote work environment. While the COVID-19 pandemic did not have a significant impact on our consolidated revenues in the first quarter of 2020, we expect it to have an unfavorable impact on sales and business development activities and full year 2020 results. However, given the dynamic nature of these circumstances, the full impact of the COVID-19 pandemic on our consolidated operations and overall financial performance is uncertain at this time. In each of our segments, we are working closely with our clients to support them and to provide relevant services to address their needs caused by the COVID-19 pandemic. However, some of the services we provide may be considered by our clients to be more discretionary in nature and the COVID-19 pandemic is expected to have a negative impact on the demand for those services. In addition, conditions in the financial markets could limit our access to further capital resources, if needed, and could increase borrowing costs. In order to support our liquidity during the COVID-19 pandemic, we are proactively taking measures to increase available cash on hand including, but not limited to, borrowing under our senior secured credit facility and reducing discretionary operating and capital spending. To further support our liquidity, we have elected to defer the deposit of our employer portion of social security taxes beginning inApril 2020 and through the end of the year, which we expect to pay in equal installments in the fourth quarters of 2021 and 2022, as provided for under the CARES Act. The services provided by our Strategy and Innovation and Life Sciences reporting units within our Business Advisory segment focus on strategic solutions for healthy, well-capitalized companies to identify new growth opportunities and may be considered by our clients to be more discretionary in nature. As discussed above, the COVID-19 pandemic is expected to have an unfavorable impact on the demand for those services. Based on our internal projections and the preparation of our financial statements for the quarter endedMarch 31, 2020 , and considering the expected decrease in demand due to the COVID-19 pandemic, we believed that the fair value of these two reporting units may no longer exceed their carrying values and performed an interim goodwill impairment test on both reporting units. Based on the estimated fair values of the Strategy and Innovation and Life Sciences reporting units, we recorded non-cash pretax goodwill impairment charges of$49.9 million and$9.9 million , respectively. We did not identify any indicators that would lead us to believe that the fair values of our Healthcare, Education, and Business Advisory reporting units may not exceed their carrying values. See the "Critical Accounting Policies" section below and Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on the charges and evaluations performed. See Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q for additional information on the potential impact the COVID-19 pandemic could have on our business, operations and financial results. How We Generate Revenues A large portion of our revenues is generated by our full-time consultants who provide consulting services to our clients and are billable to our clients based on the number of hours worked. A smaller portion of our revenues is generated by our other professionals, also referred to as full-time equivalents, some of whom work variable schedules as needed by our clients. Full-time equivalent professionals consist of our coaches and their 21
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Table of Contents support staff from our Culture and Organizational Excellence solution, consultants who work variable schedules as needed by our clients, employees who provide managed services in our Healthcare segment, and our employees who provide software support and maintenance services to our clients. We translate the hours that these other professionals work on client engagements into a full-time equivalent measure that we use to manage our business. We refer to our full-time consultants and other professionals collectively as revenue-generating professionals. Revenues generated by our full-time consultants are primarily driven by the number of consultants we employ and their utilization rates, as well as the billing rates we charge our clients. Revenues generated by our other professionals, or full-time equivalents, are largely dependent on the number of consultants we employ, their hours worked, and billing rates charged. Revenues generated by our coaches are largely dependent on the number of coaches we employ and the total value, scope, and terms of the consulting contracts under which they provide services, which are primarily fixed-fee contracts. Revenues generated by our Managed Services solution are dependent on the total value, scope and terms of the related contracts. We generate our revenues from providing professional services under four types of billing arrangements: fixed-fee (including software license revenue); time-and-expense; performance-based; and software support, maintenance and subscriptions. In fixed-fee billing arrangements, we agree to a pre-established fee in exchange for a predetermined set of professional services. We set the fees based on our estimates of the costs and timing for completing the engagements. It is the client's expectation in these engagements that the pre-established fee will not be exceeded except in mutually agreed upon circumstances. We generally recognize revenues under fixed-fee billing arrangements using a proportionate performance approach, which is based on work completed to-date versus our estimates of the total services to be provided under the engagement. Contracts within our Culture and Organizational Excellence solution include fixed-fee partner contracts with multiple performance obligations, which primarily consist of coaching services, as well as speaking engagements, conferences, publications and software products ("Partner Contracts"). Revenues for coaching services and software products are generally recognized on a straight-line basis over the length of the contract. All other revenues under Partner Contracts, including speaking engagements, conferences and publications, are recognized at the time the goods or services are provided. Fixed-fee arrangements also include software licenses for our revenue cycle management software and research administration and compliance software. Licenses for our revenue cycle management software are sold only as a component of our consulting projects, and the services we provide are essential to the functionality of the software. Therefore, revenues from these software licenses are recognized over the term of the related consulting services contract. License revenue from our research administration and compliance software is generally recognized in the month in which the software is delivered. Fixed-fee engagements represented 42.4% and 47.8% of our revenues for the three months endedMarch 31, 2020 and 2019, respectively. Time-and-expense billing arrangements require the client to pay based on the number of hours worked by our revenue-generating professionals at agreed upon rates. Time-and-expense arrangements also include certain speaking engagements, conferences and publications purchased by our clients outside of Partner Contracts within our Culture and Organizational Excellence solution. We recognize revenues under time-and-expense billing arrangements as the related services or publications are provided. Time-and-expense engagements represented 43.1% and 40.8% of our revenues for the three months endedMarch 31, 2020 and 2019, respectively. In performance-based fee billing arrangements, fees are tied to the attainment of contractually defined objectives. We enter into performance-based engagements in essentially two forms. First, we generally earn fees that are directly related to the savings formally acknowledged by the client as a result of adopting our recommendations for improving operational and cost effectiveness in the areas we review. Second, we have performance-based engagements in which we earn a success fee when and if certain predefined outcomes occur. Often, performance-based fees supplement our time-and-expense or fixed-fee engagements. We recognize revenues under performance-based billing arrangements by estimating the amount of variable consideration that is probable of being earned and recognizing that estimate over the length of the contract using a proportionate performance approach. Performance-based fee revenues represented 8.8% and 6.1% of our revenues for the three months endedMarch 31, 2020 and 2019, respectively. The level of performance-based fees earned may vary based on our clients' risk sharing preferences and the mix of services we provide. Clients that have purchased one of our software licenses can pay an annual fee for software support and maintenance. We also generate subscription revenue from our cloud-based analytic tools and solutions. Software support, maintenance and subscription revenues are recognized ratably over the support or subscription period. These fees are generally billed in advance and included in deferred revenues until recognized. Software support, maintenance and subscription revenues represented 5.7% and 5.3% of our revenues for the three months endedMarch 31, 2020 and 2019, respectively. Our quarterly results are impacted principally by our full-time consultants' utilization rate, the bill rates we charge our clients, and the number of our revenue-generating professionals who are available to work. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that results in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. For example, during the third and fourth quarters of the year, vacations taken by our clients can result in the deferral of activity on existing and new engagements, which would negatively affect our utilization rate. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period. 22
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Table of Contents Time-and-expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. Moreover, our clients typically retain us on an engagement-by-engagement basis, rather than under long-term recurring contracts. The volume of work performed for any particular client can vary widely from period to period. Business Strategy, Opportunities and Challenges Our primary strategy is to meet the needs of our clients by providing a balanced portfolio of service offerings and capabilities so that we can adapt quickly and effectively to emerging opportunities in the marketplace. To achieve this, we continue to hire highly qualified professionals and have entered into select acquisitions of complementary businesses. To expand our business, we will remain focused on growing our existing relationships and developing new relationships, executing our managing director compensation plan to attract and retain senior practitioners, continuing to promote and provide an integrated approach to service delivery, broadening the scope of our existing services, and acquiring complementary businesses. We will regularly evaluate the performance of our practices to ensure our investments meet these objectives. Furthermore, we intend to enhance our visibility in the marketplace by refining our overarching messaging and value propositions for the organization as well as each practice. We will continue to focus on reaching our client base through clear, concise, and endorsed messages. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected segment and consolidated operating results and other operating data. Three Months Ended Segment and Consolidated Operating Results March 31, (in thousands, except per share amounts): 2020 2019
Healthcare:
Revenues$ 95,578 $ 93,682 Operating income$ 24,050 $ 27,851
Segment operating income as a percentage of segment revenues 25.2 % 29.7 % Business Advisory: Revenues
$ 64,905 $ 58,806 Operating income$ 9,842 $ 9,581
Segment operating income as a percentage of segment revenues 15.2 % 16.3 % Education: Revenues
$ 62,136 $ 51,957 Operating income$ 13,116 $ 12,618
Segment operating income as a percentage of segment revenues 21.1 % 24.3 %
$ 222,619 $ 204,445 Reimbursable expenses 19,303 18,617 Total revenues and reimbursable expenses$ 241,922 $ 223,062 Statements of Operations reconciliation: Segment operating income$ 47,008 $ 50,050 Items not allocated at the segment level: Other operating expenses 27,146 36,578 Litigation and other gains (150 ) (456 ) Depreciation and amortization 6,047 7,172 Goodwill impairment charges (1) 59,816 - Operating income (loss) (45,851 ) 6,756 Other expense, net (7,637 ) (2,041 )
Income (loss) from continuing operations before taxes (53,488 ) 4,715 Income tax expense (benefit)
(11,215 ) 1,365 Net income (loss) from continuing operations$ (42,273 ) $ 3,350 Earnings (loss) per share from continuing operations: Basic$ (1.94 ) $ 0.15 Diluted$ (1.94 ) $ 0.15 23
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Table of Contents Three Months Ended March 31, Other Operating Data: 2020 2019 Number of full-time billable consultants (at period end) (2): Healthcare 892 836 Business Advisory 916 864 Education 791 649 Total 2,599 2,349 Average number of full-time billable consultants (for the period) (2): Healthcare 897 819 Business Advisory 920 839 Education 778 631 Total 2,595 2,289
Full-time billable consultant utilization rate (3): Healthcare
71.6 % 78.6 % Business Advisory 71.5 % 73.1 % Education 76.2 % 76.4 % Total 72.9 % 75.9 % Full-time billable consultant average billing rate per hour (4): Healthcare$ 228 $ 224 Business Advisory (5)$ 198 $ 200 Education$ 188 $ 204 Total (5)$ 204 $ 210
Revenue per full-time billable consultant (in thousands): Healthcare
$ 73 $ 79 Business Advisory$ 67 $ 68 Education$ 69 $ 73 Total$ 70 $ 73 Average number of full-time equivalents (for the period) (6): Healthcare 278 223 Business Advisory 20 8 Education 60 36 Total 358 267 Revenue per full-time equivalent (in thousands): Healthcare$ 108 $ 129 Business Advisory$ 149 $ 206 Education$ 144 $ 166 Total$ 117 $ 137 (1) The non-cash goodwill impairment charges are not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segments. We do not include the impact of goodwill impairment charges in our evaluation of segment performance. (2) Consists of our full-time professionals who provide consulting services and generate revenues based on the number of hours worked. (3) Utilization rate for our full-time billable consultants is calculated by dividing the number of hours our full-time billable consultants worked on client assignments during a period by the total available working hours for these consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days. (4) Average billing rate per hour for our full-time billable consultants is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period. (5) The Business Advisory segment includes operations of Huron Eurasia India. Absent the impact of Huron Eurasia India, the average billing rate per hour for the Business Advisory segment would have been$224 and$223 for the three months endedMarch 31, 2020 and 2019, respectively.
Absent the impact of Huron Eurasia India, Huron's consolidated average billing
rate per hour would have been
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Table of Contents (6) Consists of coaches and their support staff within our Culture and Organizational Excellence solution, consultants who work variable schedules as needed by our clients, employees who provide managed services in our Healthcare segment, and full-time employees who provide software support and maintenance services to our clients.
Non-GAAP Measures We also assess our results of operations using certain non-GAAP financial measures. These non-GAAP financial measures differ from GAAP because the non-GAAP financial measures we calculate to measure earnings (loss) before interest, taxes, depreciation and amortization ("EBITDA"), adjusted EBITDA, adjusted EBITDA as a percentage of revenues, adjusted net income from continuing operations, and adjusted diluted earnings per share from continuing operations exclude a number of items required by GAAP, each discussed below. These non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance, cash flows, or liquidity prepared in accordance with GAAP. Our non-GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how we define our non-GAAP financial measures. Our management uses the non-GAAP financial measures to gain an understanding of our comparative operating performance, for example when comparing such results with previous periods or forecasts. These non-GAAP financial measures are used by management in their financial and operating decision making because management believes they reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons. Management also uses these non-GAAP financial measures when publicly providing our business outlook, for internal management purposes, and as a basis for evaluating potential acquisitions and dispositions. We believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating Huron's current operating performance and future prospects in the same manner as management does and in comparing in a consistent manner Huron's current financial results with Huron's past financial results. The reconciliations of these financial measures from GAAP to non-GAAP are as follows (in thousands, except per share amounts):
Three Months Ended March 31, 2020 2019 Revenues$ 222,619 $ 204,445 Net income (loss) from continuing operations$ (42,273 ) $ 3,350 Add back: Income tax expense (benefit) (11,215 ) 1,365 Interest expense, net of interest income 2,341 4,258 Depreciation and amortization 7,415 8,289 Earnings (loss) before interest, taxes, depreciation and (43,732 ) 17,262 amortization (EBITDA) Add back: Restructuring and other charges 2,458 1,275 Litigation and other gains (150 ) (456 ) Goodwill impairment charges 59,816 - Loss on sale of business 102 - Foreign currency transaction losses (gains), net 520 (82 ) Adjusted EBITDA$ 19,014 $ 17,999 Adjusted EBITDA as a percentage of revenues 8.5 % 8.8 % 25
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Table of Contents Three Months Ended March 31, 2020 2019 Net income (loss) from continuing operations$ (42,273 ) $ 3,350 Weighted average shares - diluted 21,827 22,311
Diluted earnings (loss) per share from continuing operations
3,209 4,517 Restructuring and other charges 2,458 1,275 Litigation and other gains (150 ) (456 ) Goodwill impairment charges 59,816 - Non-cash interest on convertible notes - 2,120 Loss on sale of business 102 - Tax effect of adjustments (13,409 ) (1,953 ) Total adjustments, net of tax 52,026 5,503 Adjusted net income from continuing operations$ 9,753 $ 8,853 Weighted average shares - diluted 22,329 22,311
Adjusted diluted earnings per share from continuing operations
These non-GAAP financial measures include adjustments for the following items: Amortization of intangible assets: We have excluded the effect of amortization of intangible assets from the calculation of adjusted net income from continuing operations presented above. Amortization of intangible assets is inconsistent in its amount and frequency and is significantly affected by the timing and size of our acquisitions. Restructuring and other charges: We have incurred charges due to the restructuring of various parts of our business. These restructuring charges have primarily consisted of costs associated with office space consolidations, including lease impairment charges and accelerated depreciation on lease-related property and equipment, and severance charges. Additionally, during the first quarter of 2020, we have excluded the effect of a$0.8 million one-time charge related to redundant administrative costs in our corporate operations which is recorded within selling, general and administrative expenses on our consolidated statement of operations. We have excluded the effect of the restructuring and other charges from our non-GAAP measures to permit comparability with periods that were not impacted by these items. Litigation and other gains: We have excluded the effects of the litigation settlement gain recognized in the first quarter of 2020 and the remeasurement gain recognized in the first quarter of 2019 to decrease the estimated fair value of our liabilities for contingent consideration payments related to business acquisitions to permit comparability with periods that were not impacted by these items.Goodwill impairment charges: We have excluded the effect of the goodwill impairment charges recognized in the first quarter of 2020 as these are infrequent events and their exclusion permits comparability with periods that were not impacted by such charges. Non-cash interest on convertible notes: We incurred non-cash interest expense relating to the implied value of the equity conversion component of our Convertible Notes. The value of the equity conversion component was treated as a debt discount and amortized to interest expense over the life of the Convertible Notes using the effective interest rate method. We exclude this non-cash interest expense that does not represent cash interest payments from the calculation of adjusted net income from continuing operations as management believes that this non-cash expense is not indicative of the ongoing performance of our business. Loss on sale of business: We excluded the effect of the loss on sale of a software-based solution within our Business Advisory segment in the first quarter of 2020. Divestitures of businesses are infrequent and are not indicative of the ongoing performance of our business. Foreign currency transaction losses (gains), net: We have excluded the effect of foreign currency transaction losses and gains from the calculation of adjusted EBITDA because the amount of each loss or gain is significantly affected by changes in foreign exchange rates. Tax effect of adjustments: The non-GAAP income tax adjustment reflects the incremental tax impact applicable to the non-GAAP adjustments. Income tax expense, Interest expense, net of interest income, Depreciation and amortization: We have excluded the effects of income tax expense, interest expense, net of interest income, and depreciation and amortization in the calculation of EBITDA as these are customary exclusions as defined by the calculation of EBITDA to arrive at meaningful earnings from core operations excluding the effect of such items. Adjusted weighted average shares - diluted: As we reported a net loss for the first three months of 2020, GAAP diluted weighted average shares outstanding equals the basic weighted average shares outstanding for that period. The non-GAAP adjustments described above resulted in adjusted 26
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Table of Contents net income from continuing operations for the first quarter of 2020. Therefore, we included the dilutive common stock equivalents in the calculation of adjusted diluted weighted average shares outstanding for that period. Three Months EndedMarch 31, 2020 Compared to Three Months EndedMarch 31, 2019 Revenues Revenues increased$18.2 million , or 8.9%, to$222.6 million for the first three months of 2020 from$204.4 million for the first three months of 2019. Of the overall$18.2 million increase in revenues,$12.9 million was attributable to an increase in revenues from our full-time billable consultants and$5.3 million was attributable to our full-time equivalents. The increase in full-time billable consultant revenues was attributable to strengthened demand for services in all of our segments, as discussed below in Segment Results; and reflected an overall increase in the average number of full-time billable consultants, partially offset by overall decreases in the consultant utilization rate and the average billing rate during the first three months of 2020 compared to the same prior year period. The increase in full-time equivalent revenues was attributable to increases in full-time equivalent revenues in all of our segments, as discussed below in Segment Results; and reflected an overall increase in the average number of full-time equivalents, partially offset by an overall decrease in revenue per full-time equivalent. While the COVID-19 pandemic did not have a significant impact on our consolidated revenues in the first quarter of 2020, we expect it to have an unfavorable impact on sales and business development activities and full year 2020 results. Additionally, we expect a decrease in the demand for the services we provide that may be considered by our clients to be more discretionary in nature. However, given the dynamic nature of these circumstances, the full impact of the COVID-19 pandemic on our consolidated revenues is uncertain at this time. Total Direct Costs Our total direct costs, including amortization of intangible assets and software development costs, increased$18.7 million , or 13.4%, to$157.5 million for the three months endedMarch 31, 2020 , from$138.9 million for the three months endedMarch 31, 2019 . The overall$18.7 million increase primarily related to a$15.3 million increase in salaries and related expenses for our revenue-generating professionals, which was largely driven by increased headcount in all our segments; a$2.3 million increase in share-based compensation expense for our revenue-generating professionals; a$1.2 million increase in contractor expenses; and a$0.7 million increase in technology expenses. As a percentage of revenues, our total direct costs increased to 70.8% during the first three months of 2020 compared to 67.9% during the first three months of 2019 primarily due to the increases in salaries and related expenses and share-based compensation for our revenue-generating professionals, both as percentages of revenues, partially offset by a decrease in performance bonus expense for our revenue-generating professionals. Total direct costs for the three months endedMarch 31, 2020 included$1.3 million of amortization expense for internal software development costs and intangible assets, compared to$1.1 million of amortization expense for the same prior year period. Intangible asset amortization included within direct costs for the three months endedMarch 31, 2020 and 2019 related to technology and software, certain customer relationships, and customer contracts acquired in connection with our business acquisitions. See Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information about our intangible assets. Operating Expenses and Other Losses (Gains),Net Selling , general and administrative expenses decreased$7.3 million , or 14.4%, to$43.4 million in the three months endedMarch 31, 2020 , from$50.7 million in the three months endedMarch 31, 2019 . Of the overall$7.3 million decrease,$6.9 million was attributable to the change in the market value of our deferred compensation liability, resulting from a$4.7 million decrease in the market value during the first quarter of 2020, compared to a$2.2 million increase in the market value during the first quarter of 2019. Additional decreases include a$2.3 million decrease in performance bonus expense for our support personnel; a$1.0 million decrease in facilities expense; a$0.7 million decrease in third-party consulting expenses; a$0.4 million decrease in training expenses; and a$0.4 million decrease in recruiting expenses. These decreases were partially offset by a$1.8 million increase in salaries and related expenses for our support personnel; a$1.0 million increase in practice administration and meetings expenses; a$0.8 million increase in share-based compensation expense for our support personnel; and a$0.8 million increase in data hosting and software related expenses. As a percentage of revenues, selling, general and administrative expenses decreased to 19.5% during the first quarter of 2020 compared to 24.8% during the first quarter of 2019. This decrease was primarily attributable to the decreases in the market value of our deferred compensation liability, performance bonus expense for our support personnel, and facilities expenses. Restructuring charges for the first three months of 2020 totaled$1.6 million , compared to$1.3 million for the first three months of 2019. The$1.6 million restructuring charge incurred in the first quarter of 2020 primarily related to a$1.2 million accrual for the termination of a third-party advisor agreement;$0.3 million related to workforce reductions to better align resources with market demand; and$0.1 million related to workforce reductions in our corporate operations. During the first quarter of 2019, we exited a portion of ourLake Oswego, Oregon corporate office resulting in a$0.7 million lease impairment charge on the related operating lease right-of-use asset and leasehold improvements and$0.2 million of accelerated depreciation on furniture and fixtures in that office. Additionally, we recognized a$0.2 million restructuring charge related to workforce reductions in 27
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Table of Contents our corporate operations. See Note 8 "Restructuring Charges" within the notes to our consolidated financial statements for additional information on our restructuring charges. Litigation and other gains totaled$0.2 million for the three months endedMarch 31, 2020 , which consisted of a litigation settlement gain for the resolution of a claim that was settled in the first quarter of 2020. Other gains totaled$0.5 million for the three months endedMarch 31, 2019 , which primarily consisted of a$0.4 million remeasurement gain to decrease the estimated fair value of our liabilities for contingent consideration payments related to business acquisitions. Depreciation and amortization expense decreased by$1.1 million , or 14.8%, to$6.1 million for the three months endedMarch 31, 2020 , from$7.2 million for the three months endedMarch 31, 2019 . The decrease was primarily attributable to a decrease in amortization expense for the trade name acquired in ourStuder Group acquisition that was fully amortized in the fourth quarter of 2019; decreasing amortization expense for customer relationships due to the accelerated basis of amortization in prior periods, including the customer relationships acquired in ourStuder Group acquisition; and customer relationships acquired in other business acquisitions that were fully amortized in prior periods. Intangible asset amortization included within operating expenses for the three months endedMarch 31, 2020 and 2019 primarily related to certain customer relationships, trade names and non-competition agreements acquired in connection with our business acquisitions. See Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information about our intangible assets. During the first quarter of 2020, we recorded$59.8 million of non-cash pretax goodwill impairment charges related to our Strategy and Innovation and Life Sciences reporting units within our Business Advisory segment; primarily related to the expected decline in sales and business development activities and a decrease in the demand for the services these reporting units provide that may be considered by our clients to be more discretionary in nature, as a result of the COVID-19 pandemic. These charges are non-cash in nature and do not affect our liquidity or debt covenants. See the "Critical Accounting Policies" section below and Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on the charges. Operating Income Operating income decreased$52.6 million to a loss of$45.9 million in the first three months of 2020 from operating income of$6.8 million in the first three months of 2019. This decrease is primarily attributable to the$59.8 million of non-cash pretax goodwill impairment charges related to our Business Advisory segment that were recognized in the first quarter of 2020. See the "Critical Accounting Policies" section below and Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on the non-cash goodwill impairment charges. Operating margin, which is defined as operating income expressed as a percentage of revenues, decreased to (20.6)% for the three months endedMarch 31, 2020 , compared to an operating margin of 3.3% for the three months endedMarch 31, 2019 . The decrease in operating margin was primarily attributable to the goodwill impairment charges, as well as the increases in salaries and related expenses and share-based compensation expense for our revenue-generating professionals, as percentages of revenues. These decreases to the operating margin were partially offset by the decreases in the market value of our deferred compensation liability, performance bonus expense for both our support personnel and revenue-generating professionals, intangible asset amortization expense, and facilities expenses. Other Expense, Net Total other expense, net increased by$5.6 million to$7.6 million in the first three months of 2020 from$2.0 million in the first three months of 2019. The increase in total other expense, net was primarily attributable to a$4.7 million loss recognized during the first three months of 2020 for the market value of our investments that are used to fund our deferred compensation liability, compared to a gain of$2.1 million gain during the first three months of 2019. Additionally, total other expense, net includes the recognition of$0.5 million of foreign currency transaction losses in the first three months of 2020 compared to$0.1 million of foreign currency transaction gains recognized in the first three months of 2019. Interest expense, net of interest income decreased$1.9 million to$2.3 million in the first three months of 2020 from$4.3 million in the first three months of 2019, primarily attributable to the maturity of our Convertible Notes onOctober 1, 2019 , partially offset by higher levels of borrowing under our credit facility during the first three months of 2020 compared to the same prior year period. See Note 7 "Financing Arrangements" within the notes to our consolidated financial statements for additional information about our Convertible Notes and credit facility. Income Tax Expense OnMarch 27, 2020 , the President ofthe United States signed into law the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act is an approximately$2 trillion emergency economic stimulus package in response to the COVID-19 outbreak, which among other items, includes income tax provisions relating to net operating loss carryback periods and technical corrections to tax depreciation methods for qualified improvement property. As a result of the enactment of this legislation during the first quarter of 2020, we recorded a tax benefit of$0.8 million related to the remeasurement of a portion of our income tax receivable due to the ability to apply the federal net operating loss incurred in 2018 to prior year income for a refund at a higher tax rate in the carryback period. For the three months endedMarch 31, 2020 , our effective tax rate was 21.0% as we recognized an income tax benefit from continuing operations of$11.2 million on a loss from continuing operations of$53.5 million . The effective tax rate of 21.0% was less favorable than the statutory rate, 28
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Table of Contents inclusive of state income taxes, of 26.0% primarily due to certain nondeductible expense items, non-deductible losses on our investments used to fund our deferred compensation liability, and the nondeductible portion of the goodwill impairment charges recorded during the first quarter of 2020. These unfavorable items were partially offset by a discrete tax benefit for share-based compensation awards that vested during the quarter and the discrete tax benefit for the remeasurement of a portion of our income tax receivable as a result of the enactment of the CARES Act during the first quarter of 2020. For the three months endedMarch 31, 2019 , our effective tax rate was 29.0% as we recognized income tax expense from continuing operations of$1.4 million on income from continuing operations of$4.7 million . The effective tax rate of 29.0% was less favorable than the statutory rate, inclusive of state income taxes, of 26.4% primarily due to foreign losses with no tax benefit and disallowed executive compensation deductions. These unfavorable items were partially offset by a discrete tax benefit for share-based compensation awards that vested during the first quarter of 2019. Net Income from Continuing Operations Net income from continuing operations decreased by$45.6 million to a net loss from continuing operations of$42.3 million for the three months endedMarch 31, 2020 , from net income from continuing operations of$3.4 million for the same prior year period. This decrease is primarily attributable to the$59.8 million of non-cash pretax goodwill impairment charges related to our Business Advisory segment. As a result of the decrease in net income from continuing operations, diluted loss per share from continuing operations for the first three months of 2020 was$1.94 compared to diluted earnings per share from continuing operations of$0.15 for the first three months of 2019. The non-cash goodwill impairment charges had a$2.19 unfavorable impact on diluted earnings per share from continuing operations for the first quarter of 2020. EBITDA and Adjusted EBITDA EBITDA decreased$61.0 million to a loss of$43.7 million for the three months endedMarch 31, 2020 , from earnings of$17.3 million for the three months endedMarch 31, 2019 . Adjusted EBITDA increased$1.0 million to$19.0 million in the first three months of 2020 from$18.0 million in the first three months of 2019. The decrease in EBITDA was primarily attributable to the non-cash goodwill impairment charges of$59.8 million recognized in the first quarter of 2020. The increase in adjusted EBITDA was primarily attributable to the increase in revenues and the decrease in performance bonus expense for our support personnel; largely offset by the increases in salaries and related expenses and share-based compensation expense for our revenue-generating professionals in the first three months of 2020 compared to the same prior year period. Adjusted Net Income from Continuing Operations Adjusted net income from continuing operations increased$0.9 million to$9.8 million in the first three months of 2020 compared to$8.9 million in the first three months of 2019. As a result of the increase in adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations for the first three months of 2020 was$0.44 compared to$0.40 for the first three months of 2019. Segment Results Healthcare Revenues Healthcare segment revenues increased$1.9 million , or 2.0%, to$95.6 million for the first three months of 2020 from$93.7 million for the first three months of 2019. During the three months endedMarch 31, 2020 , revenues from fixed-fee engagements; time-and-expense engagements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 58.4%, 15.4%, 19.8%, and 6.4% of this segment's revenues, respectively, compared to 67.9%, 13.6%, 12.6%, and 5.9% of this segment's revenues, respectively, for the same prior year period. Performance-based fee revenue was$18.9 million during the first three months of 2020, compared to$11.8 million during the first three months of 2019. The level of performance-based fees earned may vary based on our clients' risk sharing preferences and the mix of services we provide. Of the overall$1.9 million increase in revenues,$1.3 million was attributable to an increase in revenues from our full-time equivalents and$0.6 million was attributable to our full-time billable consultants. The increase in revenues attributable to our full-time equivalents reflected an increase in the average number of full-time equivalents, partially offset by a decrease in revenue per full-time equivalent in the first three months of 2020 compared to the same prior year period. The increase in revenues attributable to our full-time billable consultants reflected increases in the average number of full-time billable consultants and the average billing rate, partially offset by a decrease in the consultant utilization rate in the first three months of 2020 compared to the same prior year period. Operating Income Healthcare segment operating income decreased$3.8 million , or 13.6%, to$24.1 million for the three months endedMarch 31, 2020 , from$27.9 million for the three months endedMarch 31, 2019 . The Healthcare segment operating margin decreased to 25.2% for the first three months of 2020 from 29.7% in the same period last year. The decrease in this segment's operating margin was primarily attributable to increases in salaries and 29
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Table of Contents related expenses for our revenue-generating professionals and share-based compensation expense for our revenue generating professionals both as a percentage of revenues, partially offset by a decrease in performance bonus expense for our revenue-generating professionals. Business Advisory Revenues Business Advisory segment revenues increased$6.1 million , or 10.4%, to$64.9 million for the first three months of 2020 from$58.8 million for the first three months of 2019. During the first three months of 2020, revenues from fixed-fee engagements; time-and-expense engagements; performance-based arrangements; and software support, maintenance and subscription arrangements represented 39.1%, 57.9%, 1.0%, and 2.0% of this segment's revenues, respectively, compared to 36.9%, 60.0%, 1.1%, and 2.0% of this segment's revenues, respectively, during the same prior year period. Performance-based fee revenue was$0.6 million for the first three months of 2020, compared to$0.7 million for the first three months of 2019. The level of performance-based fees earned may vary based on our clients' preferences and the mix of services we provide. Of the overall$6.1 million increase in revenues,$4.9 million was attributable to revenues generated by our full-time billable consultants and$1.2 million was attributable to our full-time equivalents. The increase in revenues from our full-time billable consultants was primarily driven by an increase in the average number of full-time billable consultants, partially offset by decreases in the consultant utilization rate and the average billing rate in the first three months of 2020 compared to the same prior year period. The increase in revenues from our full-time equivalents was driven by an increased use of contractors; and reflected an increase in the average number of full-time equivalents, partially offset by a decrease in revenue per full-time equivalent in the first three months of 2020 compared to the same prior year period. Operating Income Business Advisory segment operating income increased by$0.3 million , or 2.7%, to$9.8 million for the three months endedMarch 31, 2020 , from$9.6 million for the three months endedMarch 31, 2019 . The Business Advisory segment operating margin decreased to 15.2% for the first three months of 2020 from 16.3% in the same period last year. The decrease in this segment's operating margin was primarily attributable to a restructuring charge recorded in the first quarter of 2020 for the termination of a third-party advisor agreement, as well as increases in share-based compensation expense for our revenue-generating professionals, contractor expenses, and salaries and related expenses for our revenue-generating professionals, all as percentages of revenues. These decreases to the segment's operating margin were partially offset by decreases in promotion and marketing expenses and signing, retention and other bonus expenses for our revenue-generating professionals. The non-cash goodwill impairment charges related to the Strategy and Innovation and Life Sciences reporting units within the Business Advisory segment, which are discussed above within consolidated results, are not allocated at the segment level because the underlying goodwill asset is reflective of our corporate investment in the segment. We do not include the impact of goodwill impairment charges in our evaluation of segment performance. See the "Critical Accounting Policies" section below and Note 4 "Goodwill and Intangible Assets" within the notes to our consolidated financial statements for additional information on the charges and our goodwill balances. We will continue to evaluate goodwill for impairment during future periods. Any future significant decline in the performance of our Strategy and Innovation reporting unit could result in another non-cash goodwill impairment charge. Education Revenues Education segment revenues increased$10.2 million , or 19.6%, to$62.1 million for the first three months of 2020 from$52.0 million for the first three months of 2019. For the three months endedMarch 31, 2020 , revenues from fixed-fee engagements; time-and-expense engagements; and software support, maintenance and subscription arrangements represented 21.2%, 70.3%, and 8.5% of this segment's revenues, respectively, compared to 23.8%, 68.1%, and 8.1% of this segment's revenues, respectively, during the same prior year period. Of the overall$10.2 million increase in revenues,$7.4 million was attributable to revenues generated by our full-time billable consultants and$2.8 million was attributable to revenues generated by our full-time equivalents. The increase in revenues from our full-time billable consultants reflected an increase in the average number of full-time billable consultants; partially offset by a decrease in the average billing rate in the first three months of 2020 compared to the same prior year period. The increase in revenues from our full-time equivalents was primarily driven by an increased use of contractors and project consultants as well as an increase in software subscriptions and data hosting revenues; and reflected an increase in the average number of full-time equivalents, partially offset by a decrease in revenue per full-time equivalent in the first three months of 2020 compared to the same prior year period. 30
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Operating Income
Education segment operating income increased
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