HURON CONSULTING : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the information under
Part II-Item 6. "Selected Financial Data," and our Consolidated Financial
Statements and related notes appearing under Part II-Item 8. "Financial
Statements and Supplementary Data." The following MD&A contains forward-looking
statements and involves numerous risks and uncertainties, including, without
limitation, those described under Part I-Item 1A. "Risk Factors" and
"Forward-Looking Statements" of this Annual Report on Form 10-K. Actual results
may differ materially from those contained in any forward-looking statements.
The following information summarizes our results of operations for 2020, 2019,
and 2018; and discusses those results of operations for 2020 compared to 2019.
For a discussion of our results of operations for 2019 compared to 2018, refer
to Part II-Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the Annual Report on Form 10-K for the year ended
December 31, 2019, which was filed with the United States Securities and
Exchange Commission on February 26, 2020.
OVERVIEW
Huron is a global consultancy that collaborates with clients to drive strategic
growth, ignite innovation and navigate constant change. Through a combination of
strategy, expertise and creativity, we help clients accelerate operational,
digital and cultural transformation, enabling the change they need to own their
future. By embracing diverse perspectives, encouraging new ideas and challenging
the status quo, Huron creates sustainable results for the organizations it
serves.
We provide our services and manage our business under three operating segments:
Healthcare, Business Advisory, and Education. See Part I-Item 1.
"Business-Overview-Our Services" and Note 19 "Segment Information" within the
notes to our consolidated financial statements for a discussion of our three
segments.
Coronavirus (COVID-19)
The worldwide spread of the COVID-19 pandemic in 2020 has created significant
volatility, uncertainty and disruption to the global economy. This pandemic has
had an unfavorable impact on aspects of our business, operations, and financial
results, and has caused us to significantly change the way we operate. Near the
end of the first quarter of 2020, we suspended almost all business travel and
our employees began working from their homes. While traditionally a majority of
the work performed by our revenue-generating professionals occurred at client
sites, the nature of the services we provide and enhanced available technology
allows our revenue-generating professionals to effectively serve clients in a
remote work environment. As state and local governments ease their restrictions,
we continue to refine our comprehensive plan to return to our offices and client
sites with our people's safety and the needs of our clients guiding how we
implement our phased transition. As of December 31, 2020, our employees continue
to primarily work from their homes.
In each of our operating segments, we are working closely with our clients to
support them and their ongoing business needs and provide relevant services to
address their needs caused by the COVID-19 pandemic. However, as some clients
reprioritized and delayed projects as a result of the pandemic, demand for
certain offerings has been negatively impacted, particularly within our
Healthcare and Education segments. Revenues in the first half of 2020 increased
3.6% compared to the same prior year period, while revenues in the second half
of 2020 declined 10.6% compared to the same prior year period, resulting in a
full year revenue decline of 3.7% in 2020 compared to full year 2019. In
addition to the impact on 2020 revenues, the COVID-19 pandemic negatively
impacted sales and elongated the sales cycle for new opportunities for certain
services, particularly within our Healthcare and Education segments. Given the
uncertainties around the duration of the COVID-19 pandemic, we continue to
remain cautious about revenue growth for the first half of 2021.
The COVID-19 pandemic has strengthened demand for other services we provide,
such as our cloud-based technology and analytics solutions within our Business
Advisory segment and our restructuring and capital advisory solutions provided
to organizations in transition also within our Business Advisory segment.
In order to support our liquidity during the COVID-19 pandemic, we took
proactive measures to increase available cash on hand including, but not limited
to, borrowing under our senior secured credit facility in the first quarter of
2020 and reducing discretionary operating and capital spending. In each quarter
subsequent to the first quarter of 2020, we made repayments on our borrowings to
reduce our total debt outstanding due to our ability to maintain adequate cash
flows from operations and improved clarity around access to capital resources.
To further support our liquidity during the COVID-19 pandemic, we elected to
defer the deposit of our employer portion of social security taxes beginning in
April 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
Coronavirus Aid, Relief, and Economic Security Act ("CARES") Act. See the
"Liquidity and Capital Resources" section below for additional information on
these items.
Fourth Quarter 2020 Restructuring Plan
In the fourth quarter of 2020, we announced a restructuring plan to reduce
operating costs to address the impact of the COVID-19 pandemic on our business.
The restructuring plan, which was substantially complete in the fourth quarter
of 2020, provided for a reduction in certain
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leased office spaces and a reduction in workforce of approximately 125
employees; and resulted in an aggregate restructuring charge, including non-cash
lease impairment charges, of $18.7 million.
The reduction in leased office spaces includes a portion of our principal
executive office in Chicago, Illinois, as well as certain other office space in
the U.S, which resulted in the recognition of $13.2 million of non-cash lease
impairment charges on the related operating lease right-of-use ("ROU") assets
and fixed assets that we intend to sublease, as well as $0.7 million of
accelerated amortization and depreciation on the related operating lease ROU
assets and fixed assets we intend to abandon. The reduction in workforce
resulted in a $4.8 million restructuring charge related to cash employee
severance costs; of which $2.0 million related to our Education segment, $1.2
million related to our Healthcare segment, $1.0 million related to our Business
Advisory segment, and $0.6 million related to our corporate operations.
We do not expect to incur additional significant employee severance costs or
non-cash lease impairment charges in 2021 related to the fourth quarter 2020
restructuring plan. However, any significant decline in the estimated amount or
delayed timing of sublease income used in the calculation of each non-cash lease
impairment charge could result in additional non-cash lease impairment charges
through the end of the lease terms. We expect approximately $2.5 million of
ongoing lease-related costs to be reflected as restructuring charges in 2021. As
a result of the reduction in workforce, we expect to realize annualized savings
of approximately $21.0 million related to employee salaries and related
benefits. As a result of the reduction in leased office space, we expect to
realize annualized savings of approximately $1.0 million in lease-related
expense.
First Quarter 2020 Goodwill Impairment Charges
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, which
may be considered by our clients to be more discretionary in nature, and the
duration of the projects within these practices are typically short-term.
Therefore, at the onset of the the COVID-19 pandemic in the U.S. and due to the
uncertainty caused by the pandemic, we were cautious about near-term results for
these two reporting units. Based on our internal projections and the preparation
of our financial statements for the quarter ended March 31, 2020, and
considering the expected decrease in demand due to the COVID-19 pandemic, during
the first quarter of 2020 we believed it was more likely than not that the fair
value of these two reporting units no longer exceeded 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. The non-cash goodwill impairment
charge related to the Strategy and Innovation reporting unit reduced the
goodwill balance of the reporting unit to $37.5 million as of March 31, 2020.
The non-cash goodwill impairment charge related to the Life Sciences reporting
unit reduced the goodwill balance to zero as of March 31, 2020. During the same
time, 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
would not exceed their carrying values.
Additionally, during the second and third quarters of 2020, we did not identify
any indicators that would lead us to believe that the fair values of our
reporting units would not exceed their carrying values. Pursuant to our policy,
we performed our annual goodwill impairment test as of November 30, 2020 on all
reporting units with goodwill balances and concluded that the fair value of all
reporting units exceeded 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
goodwill impairment tests performed in 2020.
Enterprise Resource Planning System Implementation
In the fourth quarter of 2019, we began the implementation of a new cloud-based
enterprise resource planning ("ERP") system designed to improve the efficiency
of our internal finance, human resources, resource planning, and administrative
operations. In January 2021, we successfully went live with the new ERP system,
and we continue to progress with additional functionality and integrations as
scheduled. The implementation progressed on schedule and has not been
significantly impacted by the COVID-19 pandemic due to the ability of our
implementation team to work and collaborate remotely and the enhanced technology
and cloud-based nature of our new ERP system. We believe our investment in this
new system will position our teams to drive efficiencies and provide more robust
management reporting and data analytics to support future growth and the goals
and vision of the company.
See Part II, Item 1A. "Risk Factors" of this Annual Report on Form 10-K 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 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
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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 41.4%, 45.8%, and 47.4% of our revenues for
the years ended December 31, 2020, 2019, and 2018, 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
43.4%, 39.9%, and 41.2% of our revenues in 2020, 2019, and 2018, 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 9.2%, 8.9%, and
6.1% of our revenues in 2020, 2019, and 2018, 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 and maintenance and
subscription-based revenues represented 6.0%, 5.4%, and 5.3% of our revenues in
2020, 2019, and 2018, 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
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each quarter. We typically have fewer business work days available in the fourth
quarter of the year, which can impact revenues during that period.
Time-and-expense engagements do not provide us with a high degree of
predictability as to performance in future periods. Unexpected changes in the
demand for our services can result in significant variations in utilization and
revenues and present a challenge to optimal hiring and staffing. Moreover, our
clients typically retain us on an engagement-by-engagement basis, rather than
under long-term recurring contracts. The volume of work performed for any
particular client can vary widely from period to period.
Reimbursable Expenses
Reimbursable expenses that are billed to clients, primarily relating to travel
and out-of-pocket expenses incurred in connection with engagements, are included
in total revenues and reimbursable expenses. Under fixed-fee billing
arrangements, we estimate the total amount of reimbursable expenses to be
incurred over the course of the engagement and recognize the estimated amount as
revenue using the proportionate performance approach, which is based on work
completed to-date versus our estimates of the total services to be provided
under the engagement. Under time-and-expense billing arrangements, we recognize
reimbursable expenses as revenue as the related services are provided, using the
right to invoice practical expedient. Reimbursable expenses are recognized as
expenses in the period in which the expense is incurred. Subcontractors that are
billed to clients at cost are also included in reimbursable expenses. When
billings do not specifically identify reimbursable expenses, we allocate the
portion of the billings equivalent to these expenses to reimbursable expenses.
We manage our business on the basis of revenues before reimbursable expenses,
which we believe is the most accurate reflection of our services because it
eliminates the effect of reimbursable expenses that we bill to our clients at
cost.
Total Direct Costs
Our most significant expenses are costs classified as total direct costs. These
total direct costs primarily include salaries, performance bonuses, signing and
retention bonuses, payroll taxes, and benefits for revenue-generating
professionals, as well as technology costs, product and event costs,
commissions, and fees paid to independent contractors that we retain to
supplement our revenue-generating professionals, typically on an as-needed basis
for specific client engagements. Direct costs also include share-based
compensation, which represents the cost of restricted stock and
performance-based share awards granted to our revenue-generating professionals.
Compensation expense for restricted stock awards and performance-based share
awards is recognized ratably using either the straight-line attribution method
or the graded vesting attribution method, as appropriate, over the requisite
service period, which is generally three to four years. Total direct costs also
include amortization of internally developed software costs and intangible
assets primarily related to technology and software, certain customer
relationships, and customer contracts acquired in business combinations.
Operating Expenses and Other Losses (Gains), Net
Our operating expenses include selling, general and administrative expenses,
which consist primarily of salaries, performance bonuses, payroll taxes,
benefits, and share-based compensation for our support personnel. Also included
in selling, general and administrative expenses is rent and other office related
expenses, referred to as facilities expenses; sales and marketing related
expenses; professional fees; recruiting and training expenses; and practice
administration and meetings expenses. Other operating expenses include
restructuring charges, other gains and losses, depreciation and certain
amortization expenses not included in total direct costs.
Segment Results
Segment operating income consists of the revenues generated by a segment, less
the direct costs of revenue and selling, general and administrative expenses
that are incurred directly by the segment. Unallocated costs include corporate
costs related to administrative functions that are performed in a centralized
manner that are not attributable to a particular segment. These administrative
function costs include corporate office support costs, office facility costs,
costs relating to accounting and finance, human resources, legal, marketing,
information technology, and company-wide business development functions, as well
as costs related to overall corporate management.

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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected segment and
consolidated operating results and other operating data. The results of
operations for acquired businesses have been included in our results of
operations since the date of their respective acquisition.
                                                                       Year 

Ended December 31,

                                                              2020               2019               2018
Segment and Consolidated Operating Results (in
thousands):
Healthcare:
Revenues                                                  $ 353,437          $ 399,221          $ 364,763
Operating income                                          $  94,925          $ 125,724          $ 108,060
Segment operating income as a percentage of segment
revenues                                                       26.9  %            31.5  %            29.6  %
Business Advisory:
Revenues                                                  $ 267,361          $ 252,508          $ 236,185
Operating income                                          $  48,046          $  49,695          $  50,625
Segment operating income as a percentage of segment
revenues                                                       18.0  %            19.7  %            21.4  %
Education:
Revenues                                                  $ 223,329          $ 225,028          $ 194,177
Operating income                                          $  47,503          $  55,741          $  48,243
Segment operating income as a percentage of segment
revenues                                                       21.3  %            24.8  %            24.8  %
Total Company:
Revenues                                                  $ 844,127          $ 876,757          $ 795,125
Reimbursable expenses                                        26,887             88,717             82,874
Total revenues and reimbursable expenses                  $ 871,014          $ 965,474          $ 877,999
Statements of Operations reconciliation:
Segment operating income                                  $ 190,474          $ 231,160          $ 206,928
Items not allocated at the segment level:
Other operating expenses                                    135,255            140,285            122,276
Litigation and other gains, net                                (150)            (1,196)            (2,019)
Depreciation and amortization                                24,405             28,365             34,575
Goodwill impairment charges (1)                              59,816                  -                  -
Total operating income (loss)                               (28,852)            63,706             52,096
Other expense, net                                            5,021             11,215             26,875

Income (loss) from continuing operations before taxes (33,873)

     52,491             25,221
Income tax expense (benefit)                                (10,155)            10,512             11,277
Net income (loss) from continuing operations              $ (23,718)         $  41,979          $  13,944
Earnings (loss) per share from continuing operations
Basic                                                     $   (1.08)         $    1.91          $    0.64
Diluted                                                   $   (1.08)         $    1.87          $    0.63


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                                                                        Year Ended December 31,
                                                             2020                  2019               2018
Other Operating Data:
Number of full-time billable consultants (at period end)
(2):
Healthcare                                                    820                    890                813
Business Advisory                                           1,051                    930                813
Education                                                     737                    756                621
Total                                                       2,608                  2,576              2,247
Average number of full-time billable consultants (for
the period) (2):
Healthcare                                                    863                    849                807
Business Advisory                                             962                    892                769
Education                                                     775                    686                589
Total                                                       2,600                  2,427              2,165
Full-time billable consultant utilization rate (3):
Healthcare                                                   69.0   %               79.4  %            81.7  %
Business Advisory                                            72.4   %               72.5  %            73.8  %
Education                                                    70.3   %               76.8  %            76.6  %
Total                                                        70.7   %               76.1  %            77.5  %
Full-time billable consultant average billing rate per
hour (4):
Healthcare                                               $    246               $    231          $     209
Business Advisory (5)                                    $    195               $    201          $     215
Education                                                $    187               $    199          $     202
Total (5)                                                $    208               $    211          $     209
Revenue per full-time billable consultant (in
thousands):
Healthcare                                               $    295               $    331          $     307
Business Advisory                                        $    264               $    273          $     293
Education                                                $    247               $    285          $     289
Total                                                    $    269               $    297          $     297
Average number of full-time equivalents (for the period)
(6):
Healthcare                                                    278                    244                219
Business Advisory                                              30                     14                 22
Education                                                      52                     47                 39
Total                                                         360                    305                280
Revenue per full-time equivalent (in thousands):
Healthcare                                               $    356               $    485          $     536
Business Advisory                                        $    455               $    655          $     484
Education                                                $    618               $    617          $     601
Total                                                    $    402               $    513          $     541


(1)The non-cash goodwill impairment charges are not allocated at the segment
level because the underlying goodwill asset is reflective of our corporate
investment in the segments. We do not include the impact of goodwill impairment
charges in our evaluation of segment performance.
(2)Consists of our full-time professionals who provide consulting services and
generate revenues based on the number of hours worked.
(3)Utilization rate for our full-time billable consultants is calculated by
dividing the number of hours all of our full-time billable consultants worked on
client assignments during a period by the total available working hours for all
of these consultants during the same period, assuming a forty-hour work week,
less paid holidays and vacation days.
(4)Average billing rate per hour for our full-time billable consultants is
calculated by dividing revenues for a period by the number of hours worked on
client assignments during the same period.
(5)The Business Advisory segment includes operations of Huron Eurasia India.
Absent the impact of Huron Eurasia India, the average billing rate per hour for
the Business Advisory segment would have been $213, $228, and $246 for the years
ended December 31, 2020, 2019 and 2018, respectively.
Absent the impact of Huron Eurasia India, Huron's consolidated average billing
rate per hour would have been $215, $220, and $218 for the years ended December
31, 2020, 2019 and 2018, respectively.
(6)Consists of coaches and their support staff within our Culture and
Organizational Excellence solution, consultants who work variable schedules as
needed by our clients, employees who provide managed services in our Healthcare
segment, and full-time employees who provide software support and maintenance
services to our clients.
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Non-GAAP Measures
We also assess our results of operations using certain non-GAAP financial
measures. These non-GAAP financial measures differ from GAAP because the
non-GAAP financial measures we calculate to measure earnings before interest,
taxes, depreciation and amortization ("EBITDA"), adjusted EBITDA, adjusted
EBITDA as a percentage of revenues, adjusted net income from continuing
operations, and adjusted diluted earnings per share from continuing operations
exclude a number of items required by GAAP, each discussed below. These non-GAAP
financial measures should be considered in addition to, and not as a substitute
for or superior to, any measure of performance, cash flows, or liquidity
prepared in accordance with GAAP. Our non-GAAP financial measures may be defined
differently from time to time and may be defined differently than similar terms
used by other companies, and accordingly, care should be exercised in
understanding how we define our non-GAAP financial measures.
Our management uses the non-GAAP financial measures to gain an understanding of
our comparative operating performance, for example when comparing such results
with previous periods or forecasts. These non-GAAP financial measures are used
by management in their financial and operating decision making because
management believes they reflect our ongoing business in a manner that allows
for meaningful period-to-period comparisons. Management also uses these non-GAAP
financial measures when publicly providing our business outlook, for internal
management purposes, and as a basis for evaluating potential acquisitions and
dispositions. We believe that these non-GAAP financial measures provide useful
information to investors and others in understanding and evaluating Huron's
current operating performance and future prospects in the same manner as
management does and in comparing in a consistent manner Huron's current
financial results with Huron's past financial results.
The reconciliations of these financial measures from GAAP to non-GAAP are as
follows (in thousands, except per share amounts):
                                                                              Year Ended December 31,
                                                                   2020                2019                2018
Revenues                                                       $  844,127          $  876,757          $  795,125
Net income (loss) from continuing operations                   $  (23,718)         $   41,979          $   13,944
Add back:
Income tax expense (benefit)                                      (10,155)             10,512              11,277
Interest expense, net of interest income                            9,292              15,648              19,013
Depreciation and amortization                                      29,644              33,740              38,822

Earnings before interest, taxes, depreciation and amortization 5,063

           101,879              83,056

(EBITDA)

Add back:
Restructuring and other charges                                    21,374               1,855               3,657
Litigation and other gains, net                                      (150)             (1,196)             (2,019)
Transaction-related expenses                                        1,132               2,680                   -
Goodwill impairment charges                                        59,816                   -                   -
Unrealized gain on preferred stock investment                      (1,667)                  -                   -
Losses on sales of businesses                                       1,603                   -               5,807
Foreign currency transaction losses (gains), net                      (31)                160                 475
Adjusted EBITDA                                                $   87,140          $  105,378          $   90,976
Adjusted EBITDA as a percentage of revenues                          10.3  %             12.0  %             11.4  %


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                                                                              Year Ended December 31,
                                                                   2020                2019                2018
Net income (loss) from continuing operations                   $  (23,718)         $   41,979          $   13,944
Weighted average shares - diluted                                  21,882              22,507              22,058

Diluted earnings (loss) per share from continuing operations $ (1.08)

        $     1.87          $     0.63
Add back:
Amortization of intangible assets                                  12,696              17,793              23,955
Restructuring and other charges                                    21,374               1,855               3,657
Litigation and other gains, net                                      (150)             (1,196)             (2,019)
Transaction-related expenses                                        1,132               2,680                   -
Goodwill impairment charges                                        59,816                   -                   -
Non-cash interest on convertible notes                                  -               6,436               8,232
Unrealized gain on preferred stock investment                      (1,667)                  -                   -
Losses on sales of businesses                                       1,603                   -               5,807
Tax effect of adjustments                                         (23,199)             (7,200)             (9,487)

Tax expense related to the enactment of Tax Cuts and Jobs Act of 2017

                                                                 -                   -               1,749
Tax benefit related to "check-the-box" election                         -                (736)                  -
Total adjustments, net of tax                                      71,605              19,632              31,894
Adjusted net income from continuing operations                 $   47,887          $   61,611          $   45,838
Adjusted weighted average shares - diluted                         22,299              22,507              22,058

Adjusted diluted earnings per share from continuing operations $ 2.15

$ 2.74 $ 2.08

These non-GAAP financial measures include adjustments for the following items:
Amortization of intangible assets: We have excluded the effect of amortization
of intangible assets from the calculation of adjusted net income from continuing
operations presented above. Amortization of intangibles is inconsistent in its
amount and frequency and is significantly affected by the timing and size of our
acquisitions.
Restructuring and other charges: We have incurred charges due to the
restructuring of various parts of our business, including the restructuring plan
announced in the fourth quarter of 2020 to reduce operating costs to address the
impact of the COVID-19 pandemic on our business. 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, we have excluded
the effect of a $0.8 million one-time charge incurred during the first quarter
of 2020 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 charges and other charges from our non-GAAP measures to permit
comparability with periods that were not impacted by these items.
Litigation and other gains, net: We have excluded the effects of litigation and
other gains, net which primarily consist of net remeasurement gains related to
contingent acquisition liabilities and litigation settlement losses and gains to
permit comparability with periods that were not impacted by these items.
Transaction-related expenses: To permit comparability with prior periods, we
excluded the impact of third-party legal and accounting fees incurred in 2020
related to the acquisitions of ForceIQ, Inc., which closed effective November 1,
2020, and Unico Solution, Inc., which closed effective February 1, 2021. See
Note 3 "Acquisitions" within the notes to our consolidated financial statements
and the "Subsequent Event" section below for additional information on these
acquisitions. We also excluded the impact of third-party legal and accounting
fees incurred in 2019 related to the evaluation of a potential acquisition that
ultimately did not consummate.
Goodwill impairment charges: We 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 excluded 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.
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Unrealized gain on preferred stock investment: We have excluded the effect of an
unrealized gain recognized in 2020 related to the fair value of our preferred
stock investment in Medically Home Group, Inc. ("Medically Home"), which is
included as a component of other income (expense), net, as management believes
that this gain is not indicative of the ongoing performance of our business and
its exclusion permits comparability with prior periods. See Note 13 "Fair Value
of Financial Instruments" within the notes to our consolidated financial
statements for additional information on our preferred stock investment in
Medically Home.
Losses on sales of businesses: We have excluded the effect of non-operating
losses recognized as a result of sales of businesses as they are infrequent,
management believes that these items are not indicative of the ongoing
performance of our business, and their exclusion permits comparability with
periods that were not impacted by such items. The 2020 loss primarily relates to
the sale of our U.K. life sciences drug safety practice within the Business
Advisory segment in the fourth quarter of 2020; and the 2018 loss relates to the
sale of our Middle East practice within the Business Advisory segment in the
second quarter of 2018.
Foreign currency transaction losses (gains), net: We have excluded the effect of
foreign currency transaction losses and gains from the calculation of adjusted
EBITDA because the amount of each loss or gain is significantly affected by
timing and changes in foreign exchange rates.
Tax effect of adjustments: The non-GAAP income tax adjustment reflects the
incremental tax impact applicable to the non-GAAP adjustments.
Tax expense related to the enactment of Tax Cuts and Jobs Act of 2017 ("2017 Tax
Reform"): We have excluded the impact of the 2017 Tax Reform, which was enacted
in the fourth quarter of 2017. The net tax expense recorded in 2018 was due to a
valuation allowance for foreign tax credits and an adjustment to our withholding
tax on outside basis differences due to our change in assertion for permanent
reinvestment, which were partially offset by U.S. federal return to provision
adjustments related to 2017 Tax Reform items on our 2017 corporate tax return.
The exclusion of the 2017 Tax Reform impact permits comparability with periods
that were not impacted by this item.
Tax benefit related to "check-the-box" election: We have excluded the positive
impact of a tax benefit, recorded in the third quarter of 2019, from recognizing
a previously unrecognized tax benefit due to the expiration of statute of
limitations on our "check-the-box" election made in 2015 to treat certain
wholly-owned foreign subsidiaries as disregarded entities for U.S. federal
income tax purposes. The exclusion of this discrete tax benefit permits
comparability with periods that were not impacted by this item. Refer to Note 17
"Income Taxes" within the notes to the consolidated financial statements for
additional information.
Income tax expense, Interest expense, net of interest income, Depreciation and
amortization: We have excluded the effects of income tax expense, interest
expense, net of interest income, and depreciation and amortization in the
calculation of EBITDA as these are customary exclusions as defined by the
calculation of EBITDA to arrive at meaningful earnings from core operations
excluding the effect of such items.
Adjusted weighted average shares - diluted: As we reported a net loss for the
year ended December 31, 2020, GAAP diluted weighted average shares outstanding
equals the basic weighted average shares outstanding for that period. For the
year ended December 31, 2020, the non-GAAP adjustments described above resulted
in adjusted net income from continuing operations. Therefore, we included the
dilutive common stock equivalents in the calculation of adjusted diluted
weighted average shares outstanding for that period.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenues
Revenues decreased $32.6 million, or 3.7%, to $844.1 million for the year ended
December 31, 2020, from $876.8 million for the year ended December 31, 2019.
Revenues in 2020 were negatively impacted by the COVID-19 pandemic as some
clients reprioritized or delayed certain projects, primarily in our Healthcare
and Education segments. Conversely, the COVID-19 pandemic strengthened demand
for other services we provide, such as our cloud-based technology and analytics
solutions within our Business Advisory segment and our restructuring and capital
advisory solutions provided to organizations in transition in our Business
Advisory segment.
Of the overall $32.6 million decrease in revenues, $20.3 million was
attributable to our full-time billable consultants and $12.3 million was
attributable to our full-time equivalents.
The decrease in full-time billable consultant revenues was attributable to
decreased demand for services in our Healthcare and Education segments,
partially offset by strengthened demand for services in our Business Advisory
segment, as discussed below in Segment Results. The overall decrease in
full-time billable consultant revenues reflected overall decreases in the
consultant utilization rate and average billing rate, partially offset by an
overall increase in the average number of full-time billable consultants in 2020
compared to 2019.
The decrease in full-time equivalent revenues was attributable to a decrease in
full-time equivalent revenues in our Healthcare segment, partially offset by
increases in full-time equivalent revenues in our Business Advisory and
Education segments, as discussed below in Segment Results; and reflected an
overall decrease in revenue per full-time equivalent, partially offset by an
overall increase in the average number of full-time equivalents.
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In 2020, the COVID-19 pandemic negatively impacted sales and elongated the sales
cycle for new opportunities for certain services, particularly within our
Healthcare and Education segments where some clients reprioritized or delayed
certain projects. Given the uncertainties around the duration of the COVID-19
pandemic, we continue to remain cautious about revenue growth in the first half
of 2021.
The COVID-19 pandemic has caused the need for many companies to accelerate their
digital transformation to drive operational efficiencies, better engage with
their customers, and make better data-driven decisions. This has resulted in
strong demand for our digital, technology and analytic offerings, particularly
within our Business Advisory segment. Indicative of our expectations for future
growth in this segment, we continue to make investments in these offerings, both
organically and through strategic acquisitions, such as our acquisitions of
ForceIQ in November 2020 and Unico Solutions in February 2021, and new offerings
and capabilities within this segment where we see strategic opportunities.
Total Direct Costs
Direct costs, excluding amortization of intangible assets and software
development costs, increased $16.8 million, or 2.9%, to $592.4 million for the
year ended December 31, 2020 from $575.6 million for the year ended December 31,
2019. The overall $16.8 million increase in direct costs primarily related to a
$27.1 million increase in salaries and related expenses for our
revenue-generating professionals, which was largely driven by increased
headcount in all of our segments and primarily reflected hiring that occurred
prior to the COVID-19 pandemic, as well as a $2.9 million increase in technology
expenses and a $2.3 million increase in share-based compensation expense for our
revenue-generating professionals. These increases were partially offset by an
$8.0 million decrease in performance bonus expense for our revenue-generating
professionals, a $4.5 million decrease in signing, retention and other bonus
expense for our revenue-generating professionals, and a $2.3 million decrease in
product and event costs. As a percentage of revenues, our direct costs increased
to 70.2% during 2020 compared to 65.7% during 2019, primarily due to the
increase in salaries and related expenses for our revenue-generating
professionals, partially offset by the decrease in performance bonus expense for
our revenue-generating professionals, as a percentage of revenues.
Total direct costs included $5.4 million of amortization expense for internal
software development costs and intangible assets for both years ended December
31, 2020 and 2019. Intangible asset amortization included within total direct
costs 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 on our intangible assets.
Operating Expenses and Other Gains, Net
Selling, general and administrative expenses decreased $32.4 million, or 15.9%,
to $170.7 million for the year ended December 31, 2020, compared to $203.1
million for the year ended December 31, 2019. The $32.4 million decrease
primarily related to an $11.9 million decrease in promotion and marketing
expenses, a $5.1 million decrease in performance bonus expense for our support
personnel, a $3.2 million decrease in training expenses, a $3.2 million decrease
in practice administration and meetings expenses, a $2.3 million decrease in
facilities expenses, a $2.2 million decrease in third-party consulting expenses,
a $1.8 million decrease in recruiting expenses, a $1.7 million decrease in
share-based compensation expense for our support personnel, and a $1.1 million
decrease in legal expenses. The decreases in promotion and marketing expenses,
training expenses, practice administration and meetings expenses, and recruiting
expenses primarily related to the cancellation or delay of in-person meetings
and events and business travel due to the COVID-19 pandemic. The decrease in
share-based compensation expense primarily related to a decrease in the expected
funding of performance-based share awards for executive officers. The decrease
in legal expenses was primarily due to third-party transaction-related expenses
related to the evaluation of a potential acquisition in the second quarter of
2019 that ultimately did not consummate. As a percentage of revenues, selling,
general and administrative expenses decreased to 20.2% during 2020 compared to
23.2% during 2019, primarily due to the decreases in promotion and marketing
expenses, performance bonus expense for our support personnel and training
expenses, all as percentages of revenues.
Restructuring charges for the year ended December 31, 2020 totaled $20.5
million, compared to $1.9 million for the year ended December 31, 2019. In the
fourth quarter of 2020, we announced a restructuring plan to reduce operating
costs to address the impact of the COVID-19 pandemic on our business. The
restructuring plan provided for a reduction in certain leased office spaces
which included a portion of our principal executive office in Chicago, Illinois;
the remaining portion of our Lake Oswego, Oregon office; our Boston,
Massachusetts and Detroit, Michigan offices; and portions of our Denver,
Colorado, New York City, New York, and Pensacola, Florida offices. As a result,
we recognized $13.2 million of non-cash lease impairment charges on the related
operating lease right-of-use ("ROU") assets and fixed assets which we intend to
sublease, and $0.7 million of accelerated amortization and depreciation on the
related operating lease ROU assets and fixed assets we intend to abandon. The
non-cash lease impairment charges include an estimate of future sublease income.
Any significant decline in the estimated amount or delayed timing of sublease
income could result in additional non-cash lease impairment charges. See Note 5
"Leases" within the notes to our consolidated financial statements for
additional information on our leases. The restructuring plan announced in the
fourth quarter of 2020 also included a reduction in workforce, which resulted in
a $4.8 million restructuring charge for employee severance costs; of which $2.0
million related to our Education segment, $1.2 million related to our Healthcare
segment, $1.0 million related to our Business Advisory segment, and $0.6 million
related to our corporate operations. As of December 31, 2020, $2.4 million of
the $4.8 million restructuring charge related to employee severance costs
remained outstanding and is expected to be paid in the first quarter of 2021. We
expect approximately $2.5 million of ongoing lease-related costs to be reflected
as restructuring charges in 2021. As a
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result of the reduction in workforce, we expect to realize annualized savings of
approximately $21.0 million related to employee salaries and related benefits.
As a result of the reduction in leased office space, we expect to realize
annualized savings of approximately $1.0 million in lease-related expense.
Additional restructuring charges recognized in 2020 include a $1.2 million
accrual for the termination of a third-party advisor agreement in our Business
Advisory segment and $0.4 million related to workforce reductions completed
prior to the fourth quarter of 2020 to better align resources with market
demand.
During 2019, we exited a portion of our Lake Oswego, Oregon office resulting in
a $0.7 million lease impairment charge on the related operating lease ROU asset
and leasehold improvements and $0.2 million of accelerated depreciation on
furniture and fixtures in that office. Additionally, during 2019, we exited the
remaining portion of our Middleton, Wisconsin office and an office space in
Houston, Texas, resulting in restructuring charges of $0.4 million and $0.1
million, respectively, which primarily related to accelerated depreciation on
related furniture and fixtures in those offices. During the fourth quarter of
2019, we entered into an amendment to the lease of our principal executive
offices in Chicago, Illinois. Among other items, the amendment terminated the
lease with respect to certain leased space which we previously vacated and
currently sublease to a third-party. As a result of the amendment, we recognized
a restructuring gain of $0.4 million. See Note 5 "Leases" within the notes to
our consolidated financial statements for additional information on our leases.
Additional restructuring charges during 2019 included $0.6 million related to
workforce reductions to better align resources with market demand and workforce
reductions in our corporate operations. See Note 11 "Restructuring Charges"
within the notes to our consolidated financial statements for additional
information on our restructuring events.
Litigation and other gains, net totaled a gain of $0.2 million for the year
ended December 31, 2020, which consisted of a litigation settlement gain for the
resolution of a claim that was settled in the first quarter of 2020. Litigation
and other gains, net totaled a net gain of $1.2 million for the year ended
December 31, 2019, which primarily consisted of $1.5 million of remeasurement
gains to decrease the estimated fair value of our liabilities for contingent
consideration payments related to business acquisitions, partially offset by a
$0.4 million litigation loss accrual related to the legal claim that was
subsequently settled during the first quarter of 2020. In connection with
certain business acquisitions, we may be required to pay post-closing
consideration to the sellers if specific financial performance targets are met
over a number of years as specified in the related purchase agreements. See Note
13 "Fair Value of Financial Instruments" within the notes to our consolidated
financial statements for additional information on the fair value of contingent
consideration liabilities.
Depreciation and amortization expense decreased $4.1 million, or 14.4%, to $24.3
million for the year ended December 31, 2020, from $28.4 million for the year
ended December 31, 2019. The decrease was primarily attributable to a decrease
in amortization expense for the trade name acquired in our Studer 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
our Studer 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 years ended
December 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 on 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, increased uncertainty in the backlog and a
decrease in the demand for the services these reporting units provide as a
result of the COVID-19 pandemic. These charges are non-cash in nature and do not
affect our liquidity or debt covenants. The non-cash goodwill impairment charge
related to the Strategy and Innovation reporting unit reduced the goodwill
balance of the reporting unit to $37.5 million as of March 31, 2020. The
non-cash goodwill impairment charge related to the Life Sciences reporting unit
reduced the goodwill balance to zero as of March 31, 2020. Pursuant to our
policy, we performed our annual goodwill impairment test as of November 30, 2020
on all reporting units with goodwill balances and concluded that the fair value
of each reporting unit exceeded its carrying value. 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
goodwill impairment tests performed in 2020.
Operating Income (Loss)
Operating income decreased $92.6 million, to an operating loss of $28.9 million
for the year ended December 31, 2020, from operating income of $63.7 million for
the year ended December 31, 2019. This decrease is primarily attributable to the
$59.8 million non-cash pretax goodwill impairment charges related to our
Business Advisory segment that were recognized in the first quarter of 2020, the
decrease in revenues, the increase in salaries and related expenses for our
revenue-generating professionals, and the increase in restructuring charges;
partially offset by the decrease in selling, general and administrative expenses
as discussed above. 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
(loss) expressed as a percentage of revenues, decreased to (3.4)% in 2020
compared to 7.3% in 2019. The decrease in operating margin was primarily
attributable to the goodwill impairment charges recognized in 2020 and the
increases in salaries and related expenses for our revenue-generating
professionals
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and restructuring charges. These decreases to the operating margin were
partially offset by the decrease in selling, general and administrative
expenses, as a percentage of revenues.
Total Other Expense, Net
Interest expense, net of interest income decreased $6.4 million to $9.3 million
for the year ended December 31, 2020 from $15.6 million for the year ended
December 31, 2019, primarily due to the maturity of our Convertible Notes on
October 1, 2019, partially offset by higher levels of borrowing under our credit
facility in 2020 compared to 2019. See the "Liquidity and Capital Resources"
section below and Note 7 "Financing Arrangements" within the notes to our
consolidated financial statements for additional information on our Convertible
Notes and credit facility.
Other income, net totaled $4.3 million for the year ended December 31, 2020 and
primarily consisted of a $4.1 million net gain related to the increase in the
market value of our investments that are used to fund our deferred compensation
liability; a $1.7 million unrealized gain related to the increase in the fair
value of our preferred stock investment in Medically Home Group, Inc.; and a
$1.5 million loss on sale of business recorded in the fourth quarter of 2020. On
December 30, 2020, we sold our U.K. life sciences drug safety practice that was
part of the Life Sciences reporting unit within our Business Advisory segment to
former employees. The sale did not meet the criteria for reporting separately as
discontinued operations. In 2020, this practice generated $2.3 million of
revenue and was not significant to our consolidated financial statements. See
Note 13 "Fair Value of Financial Instruments" within the notes to our
consolidated financial statements for additional information on our preferred
stock investment in Medically Home Group, Inc. Other income, net totaled $4.4
million for the year ended December 31, 2019 and primarily consisted of a $4.5
million net gain related to the increase in the market value of our investments
that are used to fund our deferred compensation liability.
Income Tax Expense (Benefit)
On March 27, 2020, the President of the United States signed into law the
Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), a nearly $2
trillion emergency economic stimulus package in response to the COVID-19
outbreak, which among other items, includes income tax provisions relating to a
five-year net operating loss carryback period and technical corrections to tax
depreciation methods for qualified improvement property. During 2020, as a
result of the CARES Act, we recognized a $1.5 million tax benefit related to the
remeasurement of a portion of our income tax receivable for the federal net
operating loss incurred in 2018 and the expected federal net operating loss in
2020 that will be carried back to prior year income, both for a refund at the
higher, prior year tax rate.
For the year ended December 31, 2020, our effective tax rate was 30.0% as we
recognized an income tax benefit from continuing operations of $10.2 million on
a loss from continuing operations of $33.9 million. For the year ended
December 31, 2019, our effective tax rate was 20.0% as we recognized income tax
expense from continuing operations of $10.5 million on income from continuing
operations of $52.5 million.
The effective tax rate for 2020 was more favorable than the statutory rate,
inclusive of state income taxes, of 26.5%, primarily due to the tax benefit
related to the CARES Act described above, a discrete tax benefit for share-based
compensation awards that vested primarily in the first quarter of 2020, the
positive impact of certain federal tax credits and a tax benefit related to
non-taxable gains on our investments used to fund our deferred compensation
liability. These favorable items were partially offset by increases in our
valuation allowance primarily due to increases in deferred tax assets recorded
for foreign tax credits, certain nondeductible business expenses and the
nondeductible portion of the goodwill impairment charges recorded during the
first quarter of 2020.
The effective tax rate for 2019 was more favorable than the statutory rate,
inclusive of state income taxes, of 25.9%, primarily due to federal and state
tax credits, a tax benefit related to the change in valuation allowance
primarily due to realizing deferred tax assets recorded for foreign tax credits,
and a tax benefit related to non-taxable gains on our investments used to fund
our deferred compensation liability. These favorable items were partially offset
by additional tax expense related to disallowed executive compensation.
See Note 17 "Income Taxes" within the notes to our consolidated financial
statements for additional information on our income tax expense (benefit).
Net Income (Loss) from Continuing Operations and Earnings (Loss) per Share
Net income from continuing operations decreased by $65.7 million to a net loss
from continuing operations of $23.7 million for the year ended December 31,
2020, from net income from continuing operations of $42.0 million for the year
ended December 31, 2019. This decrease is primarily attributable to the $59.8
million non-cash goodwill impairment charges related to our Business Advisory
segment recognized in the first quarter of 2020; the decrease in revenues; the
increase in salaries and related expenses for our revenue-generating
professionals; and the increase in restructuring charges in 2020 compared to
2019, primarily related to the $18.7 million of restructuring charges recognized
in the fourth quarter of 2020; partially offset by the decrease in selling,
general and administrative expenses in 2020 compared to 2019 and the related tax
impact of these items. Diluted loss per share from continuing operations for the
year ended December 31, 2020 was $1.08 compared to diluted earnings per share
from continuing operations of $1.87 for 2019. The non-cash goodwill impairment
charges and the
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restructuring charges related to the fourth quarter 2020 restructuring plan had
unfavorable impacts on our diluted earnings per share from continuing operations
of $2.07 and $0.63, respectively.
EBITDA and Adjusted EBITDA
EBITDA decreased $96.8 million to $5.1 million for the year ended December 31,
2020, from $101.9 million for the year ended December 31, 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 decrease in revenues,
and the increases in salaries and related expenses for our revenue-generating
professionals and restructuring charges in 2020 compared to 2019; partially
offset by the decrease in selling, general and administrative expenses in 2020
compared to 2019.
Adjusted EBITDA decreased $18.2 million to $87.1 million in 2020 from $105.4
million in 2019. The decrease in adjusted EBITDA was primarily attributable to
the decrease in revenues and increase in salaries and related expenses for our
revenue-generating professionals in 2020 compared to 2019; partially offset by
the decrease in selling, general and administrative expenses, excluding
transaction-related expenses related to the evaluation of acquisitions, in 2020
compared to 2019.
Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share
Adjusted net income from continuing operations decreased $13.7 million to $47.9
million for the year ended December 31, 2020, compared to $61.6 million for the
year ended December 31, 2019. As a result of the decrease in adjusted net income
from continuing operations, adjusted diluted earnings per share from continuing
operations was $2.15 in 2020 compared to $2.74 in 2019.
Segment Results
Healthcare
Revenues
Healthcare segment revenues decreased $45.8 million, or 11.5%, to $353.4 million
for the year ended December 31, 2020, from $399.2 million for the year ended
December 31, 2019, primarily due to the negative impact of the COVID-19 pandemic
on demand for our services within this segment, as some clients reprioritized
and delayed certain projects as a result of the uncertainties surrounding the
pandemic.
For the year ended December 31, 2020, revenues from fixed-fee arrangements;
time-and-expense arrangements; performance-based arrangements; and software
support, maintenance and subscription arrangements represented 57.3%, 16.5%,
19.6%, and 6.6% of this segment's revenues, respectively, compared to 62.5%,
13.8%, 17.8%, and 5.9%, respectively, in 2019. Performance-based fee revenue was
$69.3 million in 2020, compared to $71.1 million in 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 $45.8 million decrease in revenues, $26.3 million was
attributable to a decrease in revenues from our full-time billable consultants
and $19.5 million was attributable to our full-time equivalents. The decrease in
revenues attributable to our full-time billable consultants reflected a decrease
in the consultant utilization rate, partially offset by increases in the average
billing rate and the average number of full-time billable consultants in 2020
compared to 2019. The decrease in revenues attributable to our full-time
equivalents reflected a decrease in revenue per full-time equivalent, partially
offset by an increase in the average number of full-time equivalents in 2020
compared to 2019.
Operating Income
Healthcare segment operating income decreased $30.8 million, or 24.5%, to $94.9
million for the year ended December 31, 2020, from $125.7 million for the year
ended December 31, 2019. The Healthcare segment operating margin, defined as
segment operating income expressed as a percentage of segment revenues,
decreased to 26.9% in 2020 from 31.5% in 2019. The decrease in this segment's
operating margin was primarily attributable to an increase in salaries and
related expenses for our revenue-generating professionals; partially offset by
decreases in performance bonus expense for our revenue-generating professionals,
product and event costs, and contractor expenses, all as percentages of
revenues.
Business Advisory
Revenues
Business Advisory segment revenues increased $14.9 million, or 5.9%, to $267.4
million for the year ended December 31, 2020, from $252.5 million for the year
ended December 31, 2019, primarily related to strengthened demand for our
cloud-based technology and analytics solutions and our restructuring and capital
advisory solutions provided to organizations in transition.
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For the year ended December 31, 2020, revenues from fixed-fee arrangements;
time-and-expense arrangements; performance-based arrangements; and software
support, maintenance and subscription arrangements represented 38.0%, 57.1%,
3.0%, and 1.9% of this segment's revenues, respectively, compared to 39.9%,
55.3%, 2.7%, and 2.1%, respectively, in 2019. Performance-based fee revenue for
the year ended December 31, 2020 was $8.1 million compared to $6.9 million in
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 $14.9 million increase in revenues, $10.4 million was
attributable to an increase in revenues generated by our full-time billable
consultants and $4.5 million was attributable to an increase in revenues
generated by our full-time equivalents. The increase in revenues from our
full-time billable consultants reflected an increase in the average number of
full-time billable consultants, partially offset by a decrease in the average
billing rate in 2020 compared to 2019. 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 2020 compared to
2019.
Operating Income
Business Advisory segment operating income decreased by $1.6 million, or 3.3%,
to $48.0 million for the year ended December 31, 2020, compared to $49.7 million
for the year ended December 31, 2019. The Business Advisory segment operating
margin decreased to 18.0% for 2020 from 19.7% for 2019. The decrease in this
segment's operating margin was partially attributable to a higher percentage of
this segment's revenues derived from our lower margin solutions in 2020 compared
to 2019. Additionally, the decrease in this segment's operating margin was
attributable to overall increases in performance bonus expense for our
revenue-generating professionals, contractor expenses, restructuring charges,
and share-based compensation expense for our revenue-generating professionals,
as percentages of revenues; partially offset by overall decreases in promotion
and marketing expenses and signing, retention and other bonus expense for our
revenue-generating professionals. The restructuring charges within the Business
Advisory segment in 2020 primarily related to the termination of a third-party
advisor agreement.
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 goodwill impairment charges and our goodwill balances.
Education
Revenues
Education segment revenues decreased $1.7 million, or 0.8%, to $223.3 million
for the year ended December 31, 2020, from $225.0 million for the year ended
December 31, 2019. The decrease in revenues was primarily related to the
negative impact of the COVID-19 pandemic on demand for our on-premise technology
consulting solutions, largely offset by an increase in demand for our
cloud-based technology and analytics solutions and strategy and research
consulting solutions in the first half of 2020.
For the year ended December 31, 2020, revenues from fixed-fee arrangements;
time-and-expense arrangements; performance-based arrangements; and software
support, maintenance and subscription arrangements represented 20.1%, 69.6%,
0.3%, and 10.0% of this segment's revenues, respectively. Revenues from
fixed-fee arrangements; time-and-expense arrangements; and software support,
maintenance and subscription arrangements represented 23.0%, 68.8%, and 8.2% of
this segment's revenues, respectively, in 2019.
Of the overall $1.7 million decrease in revenues, $4.4 million was attributable
to a decrease in revenues generated by our full-time billable consultants,
partially offset by a $2.7 million increase in revenues generated by our
full-time equivalents. The decrease in revenues from our full-time billable
consultants reflected decreases in the consultant utilization rate and average
billing rate; partially offset by an increase in the average number of full-time
billable consultants in 2020 compared to 2019. The increase in the average
number of full-time billable consultants primarily related to hiring that
occurred prior to the COVID-19 pandemic. The increase in revenues from our
full-time equivalents was primarily driven by an increase in software
subscriptions and data hosting revenues; and reflected an increase in the
average number of full-time equivalents in 2020 compared to 2019.
Operating Income
Education segment operating income decreased $8.2 million, or 14.8%, to $47.5
million for the year ended December 31, 2020, from $55.7 million for the year
ended December 31, 2019. The Education segment operating margin decreased to
21.3% for 2020 from 24.8% for 2019. The decrease in this segment's operating
margin was primarily attributable to an increase in salaries and related
expenses for our revenue-generating professionals, as well as increases in
restructuring charges and technology expenses. These decreases to the operating
margin were partially offset by decreases in performance bonus expense for our
revenue-generating professionals and promotion and marketing expenses, as
percentages of revenues.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $67.2 million, $11.6 million, and $33.1 million
at December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, our
primary sources of liquidity are cash on hand, cash flows from our U.S.
operations, and borrowing capacity available under our credit facility.
                                                                     Year Ended December 31,
Cash Flows (in thousands):                                2020                 2019                 2018
Net cash provided by operating activities            $   136,738          $   132,220          $   101,658
Net cash used in investing activities                    (42,034)             (35,002)             (18,562)
Net cash used in financing activities                    (39,615)            (118,836)             (66,690)
Effect of exchange rate changes on cash                      484                  115                 (208)
Net increase (decrease) in cash and cash
equivalents                                          $    55,573          $   (21,503)         $    16,198


Operating Activities
Net cash provided by operating activities totaled $136.7 million and $132.2
million for the years ended December 31, 2020 and 2019, respectively. Our
operating assets and liabilities consist primarily of receivables from billed
and unbilled services, accounts payable and accrued expenses, accrued payroll
and related benefits, and deferred revenues. The volume of services rendered and
the related billings and timing of collections on those billings, as well as
payments of our accounts payable and salaries, bonuses, and related benefits to
employees affect these account balances.
The increase in cash provided by operating activities in 2020 compared to 2019
was primarily attributable to a decrease in selling, general and administrative
expenses in 2020 compared to 2019 and the deferral of $12.2 million of our
employer portion of social security taxes as provided for under the CARES Act.
These increases to cash provided by operating activities were partially offset
by a decrease in cash collections from clients, which was driven by a decrease
in revenues, an increase in payments to employees for salaries and related
benefits in 2020 compared to 2019, and an increase in the amount paid for annual
performance bonuses in the first quarter of 2020 compared to the first quarter
of 2019. Of the $12.2 million of social security taxes deferred, we expect to
pay $6.1 million in the fourth quarter of 2021 and the remaining $6.1 million in
the fourth quarter of 2022.
Investing Activities
Net cash used in investing activities was $42.0 million and $35.0 million for
the years ended December 31, 2020 and 2019, respectively.
The use of cash in 2020 primarily consisted of $13.0 million for the purchase of
of an additional convertible debt investment in Shorelight Holdings, LLC in the
first quarter of 2020; $8.7 million for purchases of businesses in the second
half of 2020; $8.3 million for payments related to internally developed
software; $8.1 million for purchases of property and equipment, primarily
related to purchases of computers and related equipment and leasehold
improvements and furniture for certain office spaces; $2.5 million for
contributions to our life insurance policies which fund our deferred
compensation plan; and $1.5 million for payments related to the divestiture of
our U.K. life sciences drug safety practice within the Business Advisory
segment.
The use of cash in 2019 primarily consisted of $13.2 million for purchases of
property and equipment, primarily related to purchases of computers and network
equipment and leasehold improvements for new office spaces in certain locations;
$10.3 million for payments related to internally developed software; $5.0
million for a purchase of preferred stock securities of Medically Home Group,
Inc. in the fourth quarter of 2019; $4.7 million for contributions to our life
insurance policies which fund our deferred compensation plan; and $2.5 million
for the purchase of a business in the third quarter of 2019.
We estimate that cash utilized for purchases of property and equipment and
software development in 2021 will total approximately $15 million to $20
million; primarily consisting of information technology related equipment to
support our corporate infrastructure, leasehold improvements for certain office
locations, and software development costs.
Financing Activities
Net cash used in financing activities was $39.6 million and $118.8 million for
the years ended December 31, 2020 and 2019, respectively.
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During 2020, we borrowed $283.0 million under our credit facility, all of which
was in the first quarter of 2020, including $125.0 million in March 2020 to
maintain excess cash and support liquidity during the period of uncertainty
created by the COVID-19 pandemic, as well as to fund our annual performance
bonus payment. During 2020, we made repayments on our credit facility of $288.0
million due to our ability to maintain adequate cash flows from operations and
improved clarity around access to capital resources during the COVID-19
pandemic, and repayments of $0.6 million on our promissory note due 2024.
Additionally, we repurchased and retired $25.9 million of our common stock under
our share repurchase programs, discussed below, and settled $1.2 million of
share repurchases that were accrued as of December 31, 2019.
During 2019, we borrowed $347.0 million under our credit facility, of which
$217.0 million was used to repay a portion of the $250.0 million
outstanding principal on our Convertible Notes in the fourth quarter of 2019.
The remaining $33.0 million outstanding principal on our
Convertible Notes was repaid with cash on hand. During 2019, we also made
repayments on our credit facility of $192.5 million. Additionally,
we repurchased and retired $14.2 million of our common stock under our share
repurchase program discussed below, of which $1.2
million settled in the first quarter of 2020. During 2019, we paid $10.0 million
to the sellers of certain business acquisitions for achieving
specified financial performance targets in accordance with the related purchase
agreements. Of the total $10.0 million paid, $4.7 million is
classified as a cash outflow from financing activities and represents the amount
paid up to the initial fair value of contingent consideration
liability recorded as of the acquisition date. The remaining $5.3 million is
classified as a cash outflow from operating activities.
Share Repurchase Programs
In November 2020, our board of directors authorized a share repurchase program
(the "2020 Share Repurchase Program") permitting us to repurchase up to
$50 million of our common stock through December 31, 2021. The 2020 Share
Repurchase Program was authorized subsequent to the expiration of our prior
share repurchase program (the "2015 Share Repurchase Program") on October 31,
2020. The 2015 Share Repurchase Program permitted us to repurchase up to $125
million of our common stock through October 31, 2020. The 2020 Share Repurchase
Program and 2015 Share Repurchase Program are collectively known as the "Share
Repurchase Programs." The amount and timing of repurchases under the Share
Repurchase Programs were and will continue to be determined by management and
depend on a variety of factors, including the trading price of our common stock,
capacity under our credit facility, general market and business conditions, and
applicable legal requirements.
In 2020, we repurchased and retired 425,164 shares for $25.9 million under the
Share Repurchase Programs. Additionally, in the first quarter of 2020, we
settled the repurchase of 18,000 shares for $1.2 million that were accrued as of
December 31, 2019. As of December 31, 2020, $45.0 million remained available for
share repurchases under the 2020 Share Repurchase Program.
Financing Arrangements
At December 31, 2020, we had $200.0 million outstanding under our senior secured
credit facility and $3.3 million outstanding under a promissory note, as
discussed below.
Senior Secured Credit Facility
The Company has a $600 million senior secured revolving credit facility, subject
to the terms of a Second Amended and Restated Credit Agreement dated as of March
31, 2015, as amended to date (as amended and modified the "Amended Credit
Agreement"), that becomes due and payable in full upon maturity on September 27,
2024. The Amended Credit Agreement provides the option to increase the revolving
credit facility or establish term loan facilities in an aggregate amount of up
to $150 million, subject to customary conditions and the approval of any lender
whose commitment would be increased, resulting in a maximum available principal
amount under the Amended Credit Agreement of $750 million. Borrowings under the
Amended Credit Agreement may be used for working capital, capital expenditures,
acquisitions of businesses, share repurchases, and general corporate purposes.
Fees and interest on borrowings vary based on our Consolidated Leverage Ratio
(as defined in the Amended Credit Agreement). At our option, borrowings under
the Amended Credit Agreement will bear interest at one, two, three or six-month
LIBOR or an alternate base rate, in each case plus the applicable margin. The
applicable margin will fluctuate between 1.125% per annum and 1.875% per annum,
in the case of LIBOR borrowings, or between 0.125% per annum and 0.875% per
annum, in the case of base rate loans, based upon our Consolidated Leverage
Ratio at such time.
Amounts borrowed under the Amended Credit Agreement may be prepaid at any time
without premium or penalty. We are required to prepay the amounts outstanding
under the Amended Credit Agreement in certain circumstances. In addition, we
have the right to permanently reduce or terminate the unused portion of the
commitments provided under the Amended Credit Agreement at any time.
The Amended Credit Agreement contains usual and customary representations and
warranties; affirmative and negative covenants, which include limitations on
liens, investments, additional indebtedness, and restricted payments; and two
quarterly financial covenants as follows: (i) a maximum Consolidated Leverage
Ratio (defined as the ratio of debt to consolidated EBITDA) of 3.75 to 1.00;
however, the maximum permitted Consolidated Leverage Ratio will increase to 4.00
to 1.00 upon the occurrence of certain Qualified Acquisitions (as defined in the
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Amended Credit Agreement), and (ii) a minimum Consolidated Interest Coverage
Ratio (defined as the ratio of consolidated EBITDA to interest) of 3.50 to 1.00.
Consolidated EBITDA for purposes of the financial covenants is calculated on a
continuing operations basis and includes adjustments to add back non-cash
goodwill impairment charges, share-based compensation costs, certain non-cash
restructuring charges, pro forma historical EBITDA for businesses acquired, and
other specified items in accordance with the Amended Credit Agreement. For
purposes of the Consolidated Leverage Ratio, total debt is on a gross basis and
is not netted against our cash balances. At December 31, 2020 and December 31,
2019, we were in compliance with these financial covenants. Our Consolidated
Leverage Ratio as of December 31, 2020 was 1.94 to 1.00, compared to 1.64 to
1.00 as of December 31, 2019. Our Consolidated Interest Coverage Ratio as of
December 31, 2020 was 12.51 to 1.00, compared to 15.29 to 1.00 as of December
31, 2019. The increase in our Consolidated Leverage Ratio as of December 31,
2020 compared to December 31, 2019 was driven by decreased profitability in 2020
compared to 2019, as discussed in the "Results of Operations" section above.
The Amended Credit Agreement contains restricted payment provisions, including a
potential limit on the amount of dividends we may pay. Pursuant to the terms of
the Amended Credit Agreement, if our Consolidated Leverage Ratio is greater than
3.25, the amount of dividends and other Restricted Payments (as defined in the
Amended Credit Agreement) we may pay is limited to an amount up to $25 million.
Principal borrowings outstanding under the Amended Credit Agreement at
December 31, 2020 and December 31, 2019 totaled $200.0 million and $205.0
million, respectively. These borrowings carried a weighted average interest rate
of 2.5% at December 31, 2020 and 3.0% at December 31, 2019 including the impact
of the interest rate swap described in Note 12 "Derivative Instruments and
Hedging Activity" within the notes to the consolidated financial statements. The
borrowing capacity under the revolving credit facility is reduced by any
outstanding borrowings under the revolving credit facility and outstanding
letters of credit. At December 31, 2020 and 2019, we had outstanding letters of
credit totaling $1.6 million and $1.7 million, respectively, which are primarily
used as security deposits for our office facilities, and the unused borrowing
capacity under the revolving credit facility was $398.4 million and $393.3
million, respectively.
For further information, see Note 7 "Financing Arrangements" within the notes to
the consolidated financial statements. For a discussion of certain risks and
uncertainties related to the Amended Credit Agreement, see Part I-Item 1A. "Risk
Factors."
Promissory Note due 2024
On June 30, 2017, in conjunction with our purchase of an aircraft related to the
acquisition of Innosight, we assumed, from the sellers of the aircraft, a
promissory note with an outstanding principal balance of $5.1 million. The
principal balance of the promissory note is subject to scheduled monthly
principal payments until the maturity date of March 1, 2024, at which time a
final payment of $1.5 million, plus any accrued and unpaid interest, will be
due. Under the terms of the promissory note, we pay interest on the outstanding
principal amount at a rate of one-month LIBOR plus 1.97% per annum. The
obligations under the promissory note are secured pursuant to a Loan and
Aircraft Security Agreement with Banc of America Leasing & Capital, LLC, which
grants the lender a first priority security interest in the aircraft. At
December 31, 2020, the outstanding principal amount of the promissory note was
$3.3 million, and the aircraft had a carrying amount of $4.4 million.
At December 31, 2019, the outstanding principal amount of the promissory note
was $3.9 million, and the aircraft had a carrying amount of $5.1 million.
For further information, see Note 7 "Financing Arrangements" within the notes to
the consolidated financial statements.
Future Needs
Our current primary financing need is to support our operations during the
COVID-19 pandemic. The pandemic has created significant volatility and
uncertainty in the economy, which could limit our access to capital resources
and could increase our borrowing costs. In order to support our liquidity during
the pandemic, we took proactive measures to increase available cash on hand,
including, but not limited to, borrowing under our senior secured credit
facility in the first quarter of 2020 and reducing discretionary operating and
capital expenses. To further support our liquidity, we elected to defer the
deposit of our employer portion of social security taxes beginning in April 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. Our
long-term financing need has been to fund our growth. Our growth strategy is to
expand our service offerings, which may require investments in new hires,
acquisitions of complementary businesses, possible expansion into other
geographic areas, and related capital expenditures. We believe our internally
generated liquidity, together with our available cash, and the borrowing
capacity available under our revolving credit facility will be adequate to
support our current financing needs and long-term growth strategy. Our ability
to secure additional financing, if needed, in the future will depend on several
factors, including our future profitability, the quality of our accounts
receivable and unbilled services, our relative levels of debt and equity, and
the overall condition of the credit markets.
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CONTRACTUAL OBLIGATIONS
The following table represents our significant obligations and commitments as of
December 31, 2020 and the scheduled years of payments (in thousands).
                                                                                             Payments Due by Period
                                                     Total              2021            2022-2023          2024-2025           Thereafter
Long-term bank borrowings-principal and interest
(1)                                               $ 224,441          $  

6,518 $ 13,035 $ 204,888 $ - Promissory note-principal and interest (2)

            3,442               558              1,229              1,655                    -
Operating lease obligations (3)                      81,743            11,572             23,506             22,052               24,613
Purchase obligations (4)                             26,650            15,954              8,399              2,297                    -
Deferred employer payroll taxes (5)                  12,188             6,094              6,094                  -                    -
Deferred compensation (6)                            34,250
Uncertain tax positions (7)                             765
Total contractual obligations                     $ 383,479          $ 40,696          $  52,263          $ 230,892          $    24,613


(1)The interest payments on long-term bank borrowings are estimated based on the
principal amount outstanding and the interest rate in effect as of December 31,
2020. Actual future interest payments will differ due to changes in our
borrowings outstanding and the interest rate on those borrowings, as the
interest rate varies based on the fluctuations in the variable base rates and
the spread we pay over those base rates pursuant to the Amended Credit
Agreement. Refer to "Liquidity and Capital Resources" and Note 7 "Financing
Arrangements" within the notes to our consolidated financial statements for more
information on our outstanding borrowings.
(2)The interest payments on the promissory note are estimated based on the
principal amount outstanding, scheduled principal payments, and the interest
rate in effect as of December 31, 2020. Actual future interest payments may
differ due to changes in the principal amount outstanding and the interest rate
on that principal amount, as the interest rate varies based on the fluctuations
in the one-month LIBOR rate. Refer to "Liquidity and Capital Resources" and Note
7 "Financing Arrangements" within the notes to our consolidated financial
statements for more information on the promissory note.
(3)We lease our facilities under operating lease arrangements expiring on
various dates through 2029, with various renewal options. We lease office
facilities under non-cancelable operating leases that include fixed or minimum
payments plus, in some cases, scheduled base rent increases over the term of the
lease. Refer to Note 5 "Leases" within the notes to our consolidated financial
statements for more information on our operating lease obligations.
(4)Purchase obligations include agreements to purchase goods or services that
are enforceable, are legally binding, and specify all significant terms,
including fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction.
Purchase obligations do not include agreements that are cancelable without
penalty.
(5)As allowed under the provisions of the CARES Act enacted in the first quarter
of 2020, we elected to defer the deposit of our employer portion of social
security tax payments beginning in April 2020 through December 31, 2020. As of
December 31, 2020, we deferred $12.2 million of such payments, which we expect
to pay in equal installments in the fourth quarters of 2021 and 2022.
(6)Included in deferred compensation and other liabilities on our consolidated
balance sheet as of December 31, 2020 is a $34.3 million obligation for deferred
compensation. The specific payment dates for the deferred compensation are
unknown; therefore, the related balances have not been reflected in the
"Payments Due by Period" section of the table. This deferred compensation
liability is funded by corresponding deferred compensation plan assets. Refer to
Note 15 "Employee Benefit and Deferred Compensation Plans" within the notes to
our consolidated financial statements for more information on our deferred
compensation plan.
(7)Our liabilities for uncertain tax positions are classified as non-current and
includes the accrual of potential payment of interest and penalties. We are
unable to reasonably estimate the timing of future payments as it depends on
examinations by taxing authorities; as such, the related balance has not been
reflected in the "Payments Due by Period" section of the table.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any material off-balance sheet arrangements.
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CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). Our significant accounting policies are
discussed in Note 2 "Summary of Significant Accounting Policies" within the
notes to our consolidated financial statements. We regularly review our
financial reporting and disclosure practices and accounting policies to ensure
that our financial reporting and disclosures provide accurate information
relative to the current economic and business environment. The preparation of
financial statements in conformity with GAAP requires management to make
assessments, estimates, and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Critical accounting policies
are those policies that we believe present the most complex or subjective
measurements and have the most potential to impact our financial position and
operating results. While all decisions regarding accounting policies are
important, we believe that there are five accounting policies that could be
considered critical: revenue recognition, allowances for doubtful accounts and
unbilled services, business combinations, carrying values of goodwill and other
intangible assets, and accounting for income taxes.
Revenue Recognition
We generate substantially all of our revenues from providing professional
services to our clients. We also generate revenues from software licenses;
software support and maintenance and subscriptions to our cloud-based analytic
tools and solutions; speaking engagements; conferences; and publications. A
single contract could include one or multiple performance obligations. For those
contracts that have multiple performance obligations, we allocate the total
transaction price to each performance obligation based on its relative
standalone selling price, which is determined based on our overall pricing
objectives, taking into consideration market conditions and other factors.
Revenue is recognized when control of the goods and services provided are
transferred to our customers and in an amount that reflects the consideration we
expect to be entitled to in exchange for those goods and services using the
following steps: 1) identify the contract, 2) identify the performance
obligations, 3) determine the transaction price, 4) allocate the transaction
price to the performance obligations in the contract, and 5) recognize revenue
as or when we satisfy the performance obligations.
We typically satisfy our performance obligations for professional services over
time as the related services are provided. The performance obligations related
to software support and maintenance and subscriptions to our cloud-based
analytic tools and solutions are typically satisfied evenly over the course of
the service period. Other performance obligations, such as certain software
licenses, speaking engagements, conferences, and publications, are satisfied at
a point in time.

We generate our revenues under four types of billing arrangements: fixed-fee
(including software license revenue); time-and-expense; performance-based; and
software support, maintenance and subscriptions.

In fixed-fee billing arrangements, we agree to a pre-established fee in exchange
for a predetermined set of professional services. We set the fees based on our
estimates of the costs and timing for completing the engagements. We generally
recognize revenues under fixed-fee billing arrangements using a proportionate
performance approach, which is based on work completed to-date versus our
estimates of the total services to be provided under the engagement. Contracts
within our Culture and Organizational Excellence solution include fixed-fee
partner contracts with multiple performance obligations, which primarily consist
of coaching services, as well as speaking engagements, conferences, publications
and software products ("Partner Contracts"). Revenues for coaching services and
software products are generally recognized on a straight-line basis over the
length of the contract. All other revenues under Partner Contracts, including
speaking engagements, conferences and publications, are recognized at the time
the goods or services are provided. Estimates of total engagement revenues and
cost of services are monitored regularly during the term of the engagement. If
our estimates indicate a potential loss, such loss is recognized in the period
in which the loss first becomes probable and reasonably estimable.
We also generate revenues from software licenses for our revenue cycle
management software and research administration and compliance software.
Licenses for our revenue cycle management software are sold only as a component
of our consulting projects, and the services we provide are essential to the
functionality of the software. Therefore, revenues from these software licenses
are recognized over the term of the related consulting services contract.
License revenue from our research administration and compliance software is
generally recognized in the month in which the software is delivered.
Time-and-expense billing arrangements require the client to pay based on the
number of hours worked by our revenue-generating professionals at agreed upon
rates. Time-and-expense arrangements also include certain speaking engagements,
conferences, and publications purchased by our clients outside of Partner
Contracts within our Culture and Organizational Excellence solution. We
recognize revenues under time-and-expense arrangements as the related services
or publications are provided, using the right to invoice practical expedient
which allows us to recognize revenue in the amount that we have a right to
invoice based on the number of hours worked and the agreed upon hourly rates or
the value of the speaking engagements, conferences or publications purchased by
our clients.
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In performance-based billing arrangements, fees are tied to the attainment of
contractually defined objectives. We enter into performance-based engagements in
essentially two forms. First, we generally earn fees that are directly related
to the savings formally acknowledged by the client as a result of adopting our
recommendations for improving operational and cost effectiveness in the areas we
review. Second, we have performance-based engagements in which we earn a success
fee when and if certain predefined outcomes occur. We recognize revenue under
performance-based billing arrangements using the following steps: 1) estimate
variable consideration using a probability-weighted assessment of the fees to be
earned, 2) apply a constraint to the estimated variable consideration to limit
the amount that could be reversed when the uncertainty is resolved (the
"constraint"), and 3) recognize revenue of estimated variable consideration, net
of the constraint, based on work completed to-date versus our estimates of the
total services to be provided under the engagement.
Clients that have purchased one of our software licenses can pay an annual fee
for software support and maintenance. We also generate subscription revenue from
our cloud-based analytic tools and solutions. Software support, maintenance and
subscription revenues are recognized ratably over the support or subscription
period. These fees are generally billed in advance and included in deferred
revenues until recognized.
Provisions are recorded for the estimated realization adjustments on all
engagements, including engagements for which fees are subject to review by the
bankruptcy courts.
Expense reimbursements that are billable to clients are included in total
revenues and reimbursable expenses. Under fixed-fee billing arrangements, we
estimate the total amount of reimbursable expenses to be incurred over the
course of the engagement and recognize the estimated amount as revenue using a
proportionate performance approach, which is based on work completed to-date
versus our estimates of the total services to be provided under the engagement.
Under time-and-expense billing arrangements we recognize reimbursable expenses
as revenue as the related services are provided, using the right to invoice
practical expedient. Reimbursable expenses are recognized as expenses in the
period in which the expense is incurred. Subcontractors that are billed to
clients at cost are also included in reimbursable expenses. When billings do not
specifically identify reimbursable expenses, we allocate the portion of the
billings equivalent to these expenses to reimbursable expenses.
Allowances for Doubtful Accounts and Unbilled Services
We maintain allowances for doubtful accounts and for services performed but not
yet billed based on several factors, including the estimated cash realization
from amounts due from clients, an assessment of a client's ability to make
required payments, and the historical percentages of fee adjustments and
write-offs by age of receivables and unbilled services. The allowances are
assessed by management on a regular basis. These estimates may differ from
actual results. If the financial condition of a client deteriorates in the
future, impacting the client's ability to make payments, an increase to our
allowance might be required or our allowance may not be sufficient to cover
actual write-offs.
We record the provision for doubtful accounts and unbilled services as a
reduction in revenue to the extent the provision relates to fee adjustments and
other discretionary pricing adjustments. To the extent the provision relates to
a client's inability to make required payments on accounts receivables, we
record the provision to selling, general and administrative expenses.
Business Combinations
The assets acquired and liabilities assumed in a business combination, including
identifiable intangible assets, are recorded at their estimated fair values as
of the acquisition date. Goodwill is recorded as the excess of the fair value of
consideration transferred, including any contingent consideration, over the fair
value of the net assets acquired. We base the fair values of identifiable
intangible assets on detailed valuations that require management to make
significant judgments, estimates, and assumptions, such as the expected future
cash flows to be derived from the intangible assets, discount rates that reflect
the risk factors associated with future cash flows, and estimates of useful
lives.
We measure and recognize contingent consideration at fair value as of the
acquisition date. We estimate the fair value of contingent consideration based
on either a probability-weighted assessment of the specific financial
performance targets being achieved or a Monte Carlo simulation model, as
appropriate. These fair value measurements require the use of significant
judgments, estimates, and assumptions, including financial performance
projections and discount rates. The fair value of the contingent consideration
is reassessed quarterly based on assumptions used in our latest financial
projections and input provided by practice leaders and management, with any
change in the fair value estimate recorded in earnings in that period. Increases
or decreases in the fair value of contingent consideration liabilities resulting
from changes in the estimates or assumptions could materially impact the
financial statements. See Note 3 "Acquisitions" within the notes to our
consolidated financial statements for additional information on our acquisitions
and Note 13 "Fair Value of Financial Instruments" within the notes to our
consolidated financial statements for additional information on our contingent
consideration liabilities.
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Carrying Values of Goodwill and Other Intangible Assets
We test goodwill for impairment, at the reporting unit level, annually and
whenever events or circumstances make it more likely than not that an impairment
may have occurred. We perform our annual goodwill impairment test as of
November 30 and monitor for interim triggering events on an ongoing basis. A
reporting unit is an operating segment or one level below an operating segment
(referred to as a component) to which goodwill is assigned when initially
recorded. We assign goodwill to reporting units based on our integration plans
and the expected synergies resulting from the acquisition. As of December 31,
2020, we have six reporting units: Healthcare, Education, Business Advisory,
Strategy and Innovation, Enterprise Solutions and Analytics, and Life Sciences.
The Business Advisory, Strategy and Innovation, Enterprise Solutions and
Analytics, and Life Sciences reporting units, make up our Business Advisory
operating segment.
Under GAAP, we have the option to first assess qualitative factors to determine
whether the existence of current events or circumstances would lead to a
determination that it is more likely than not that the fair value of one of our
reporting units is greater than its carrying value. If we determine it is more
likely than not that the fair value of a reporting unit is greater than its
carrying value, no further testing is necessary. However, if we conclude
otherwise, then we are required to perform a quantitative impairment test by
calculating the fair value of the reporting unit and comparing the fair value
with the carrying value of the reporting unit. If the fair value of the
reporting unit is less than its carrying value, a non-cash impairment charge is
recorded in an amount equal to that difference with the loss not to exceed the
total amount of goodwill allocated to the reporting unit.
We have the option to bypass the qualitative assessment for any reporting unit
and proceed directly to performing the quantitative goodwill impairment test.
For reporting units where we perform the quantitative test, we determine the
fair value using a combination of the income approach and the market
approach. For a company such as ours, the income and market approaches will
generally provide the most reliable indications of fair value because the value
of such companies is dependent on their ability to generate earnings.
In the income approach, we utilize a discounted cash flow analysis, which
involves estimating the expected after-tax cash flows that will be generated by
each reporting unit and then discounting those cash flows to present value,
reflecting the relevant risks associated with each reporting unit and the time
value of money. This approach requires the use of significant estimates and
assumptions, including forecasted revenue growth rates, forecasted EBITDA
margins, and discount rates. Our forecasts are based on historical experience,
current backlog, expected market demand, and other industry information.
In the market approach, we utilize the guideline company method, which involves
calculating revenue and EBITDA multiples based on operating data from guideline
publicly traded companies. Multiples derived from guideline companies provide an
indication of how much a knowledgeable investor in the marketplace would be
willing to pay for a company. These multiples are evaluated and adjusted based
on specific characteristics of the reporting units relative to the selected
guideline companies and applied to the reporting units' operating data to arrive
at an indication of value.
The following is a discussion of our goodwill impairment tests performed during
2020.
First Quarter 2020 Goodwill Impairment Test
The worldwide spread of the COVID-19 pandemic in the first quarter of 2020 has
created significant volatility, uncertainty and disruption to the global
economy. From the onset of the COVID-19 pandemic, we closely monitored the
impact it could have on all aspects of our business, including how we expect it
to negatively impact our clients, employees and business partners. While the
COVID-19 pandemic did not have a significant impact on our consolidated revenues
in the first quarter of 2020, we expected it to have an unfavorable impact on
sales, increase uncertainty in the backlog and negatively impact full year 2020
results. 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, which may be considered by our clients to be more discretionary
in nature, and the duration of the projects within these practices are typically
short-term. Therefore, at the onset of the COVID-19 pandemic in the U.S. and due
to the uncertainty caused by the pandemic, we were cautious about near-term
results for these two reporting units. Based on our internal projections and the
preparation of our financial statements for the quarter ended March 31, 2020,
and considering the expected decrease in demand due to the COVID-19 pandemic,
during the first quarter of 2020 we believed it was more likely than not that
the fair value of these two reporting units no longer exceeded their carrying
values and performed an interim impairment test on both reporting units as of
March 31, 2020.
Our goodwill impairment test was performed by comparing the fair value of each
of the Strategy and Innovation and Life Sciences reporting units with its
respective carrying value and recognizing an impairment charge for the amount by
which the carrying value exceeded the fair value. To estimate the fair value of
each reporting unit, we relied on a combination of the income approach and the
market approach, as discussed above, with a fifty-fifty weighting.
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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, in the first quarter of
2020. The $49.9 million non-cash pretax charge related to the Strategy and
Innovation reporting unit reduced the goodwill balance of the reporting unit to
$37.5 million. The $9.9 million non-cash pretax charge related to the Life
Sciences reporting unit reduced the goodwill balance of the reporting unit to
zero.
Concurrently with the goodwill impairment tests performed over the Strategy and
Innovation and Life Sciences reporting units, we evaluated whether any
indicators existed that would lead us to believe that the fair values of our
Healthcare, Education, and Business Advisory reporting units would not exceed
their carrying values. Our Enterprise Solutions and Analytics reporting unit did
not have a goodwill balance as of March 31, 2020. Based on our internal
projections, consideration of the impact of the COVID-19 pandemic on these
reporting units, and review of the amounts by which the fair values of these
reporting units exceeded their carrying values in the most recent quantitative
goodwill impairment analysis performed, we did not identify any indicators that
would lead us to believe that the fair values of these reporting units would not
exceed their carrying values as of March 31, 2020.
2020 Annual Goodwill Impairment Analysis
Pursuant to our policy, we performed our annual goodwill impairment test as of
November 30, 2020 on our five reporting units with goodwill balances:
Healthcare, Education, Business Advisory, Strategy and Innovation, and
Enterprise Solutions and Analytics. We elected to bypass the qualitative
assessment and proceeded directly to the quantitative goodwill impairment test.
For each reporting unit, we reviewed goodwill for impairment by comparing the
fair value of the reporting unit to its carrying value, including goodwill. In
estimating the fair value of the reporting unit, we relied on a combination of
the income approach and the market approach, as discussed above, with a
fifty-fifty weighting. Based on the results of the goodwill impairment test, we
determined the fair value of the Healthcare, Education, Business Advisory,
Strategy and Innovation, and Enterprise Solutions and Analytics reporting units
exceeded their carrying value by 42%, 132%, 584%, 29%, and 146%, respectively.
As such, we concluded that there was no indication of goodwill impairment for
these five reporting units. Further, we determined that neither a 100 basis
point decrease in the estimated long-term growth rate nor a 100 basis point
increase in the discount rate for each reporting unit would have resulted in an
indication of goodwill impairment for any of the reporting units.
Determining the fair value of any reporting unit requires us to make significant
judgments, estimates, and assumptions. While we believe that the estimates and
assumptions underlying our valuation methodology are reasonable, these estimates
and assumptions could have a significant impact on whether or not a non-cash
impairment charge is recognized and also the magnitude of such charge. The
results of an impairment analysis are as of a point in time. There is no
assurance that the actual future earnings or cash flows of our reporting units
will be consistent with our projections. We will continue to monitor any changes
to our assumptions and will evaluate goodwill as deemed warranted during future
periods. Any significant decline in our operations compared to our internal
forecasts could result in additional non-cash goodwill impairment charges, which
could be material.
The carrying value of goodwill for each of our reporting units as of
December 31, 2020 is as follows (in thousands):
                                           Carrying Value
Reporting Unit                               of Goodwill
Healthcare                                $       428,729
Education                                         104,384
Business Advisory                                  16,094
Strategy and Innovation                            37,522
Life Sciences                                           -
Enterprise Solutions and Analytics                  7,508
Total                                     $       594,237


Intangible assets represent purchased assets that lack physical substance but
can be distinguished from goodwill. Our intangible assets, net of accumulated
amortization, totaled $20.5 million at December 31, 2020 and primarily consist
of customer relationships, trade names, technology and software, non-competition
agreements, and customer contracts, all of which were acquired through business
combinations. We evaluate our intangible assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. No impairment charges for intangible assets were recorded in
2020.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for
unrecognized tax benefits reflect management's best assessment of estimated
future taxes to be paid. In determining our provision for income taxes on an
interim basis, we estimate our annual effective tax rate based on information
available at each interim period.
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Deferred tax assets and liabilities are recorded for future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. These
deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
reduced by a valuation allowance when, in management's opinion, it is more
likely than not that some portion or the entire deferred tax asset will not be
realized.
Our tax positions are subject to income tax audits by federal, state, local, and
foreign tax authorities. A tax benefit from an uncertain position may be
recognized in the financial statements only if it is more likely than not that
the position is sustainable, based on its technical merits. We measure the tax
benefit recognized as the largest amount of benefit which is more likely than
not to be realized upon settlement with the taxing authority. The estimate of
the potential outcome of any uncertain tax issue is subject to management's
assessment of relevant risks, facts and circumstances existing at that time.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 "Summary of Significant Accounting Policies" within the notes to
the consolidated financial statements for information on new accounting
pronouncements.
SUBSEQUENT EVENT
On January 7, 2021, we entered into an agreement to acquire Unico Solution, Inc.
("Unico Solutions"), a data strategy and technology consulting firm focused on
helping clients enhance the use of their data to speed business transformation
and accelerate cloud adoption. The acquisition expands our cloud-based
technology offerings within the Business Advisory segment. The results of
operations of Unico Solutions will be included within the Business Advisory
segment from the close date, February 1, 2021. The acquisition of Unico
Solutions is not significant to our consolidated financial statements.

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