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HURON CONSULTING GROUP INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Huron," "Company," "we," "us" and "our" refer to Huron Consulting Group Inc. and its subsidiaries. Statements in this Quarterly Report on Form 10-Q that are not historical in nature, including those concerning the Company's current expectations about its future requirements and needs, are "forward-looking" statements as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as "may," "should," "expects," "provides," "anticipates," "assumes," "can," "will," "meets," "could," "likely," "intends," "might," "predicts," "seeks," "would," "believes," "estimates," "plans" or "continues." These forward-looking statements reflect our current expectations about our future requirements and needs, results, levels of activity, performance, or achievements, including, without limitation, current expectations with respect to, among other factors, utilization rates, billing rates, and the number of revenue-generating professionals; that we are able to expand our service offerings; that we successfully integrate the businesses we acquire; and that existing market conditions continue to trend upward. These statements involve known and unknown risks, uncertainties and other factors, including, among others, those described under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 that may cause actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We disclaim any obligation to update or revise any forward-looking statements as a result of new information or future events, or for any other reason. OVERVIEW Our Business Huron Consulting Group is a leading provider of operational and financial consulting services. We help clients in diverse industries improve performance, transform the enterprise, reduce costs, leverage technology, process and review large amounts of complex data, address regulatory changes, recover from distress, and stimulate growth. Our professionals employ their expertise in finance, operations, strategy, and technology to provide our clients with specialized analyses and customized advice and solutions that are tailored to address each client's particular challenges and opportunities to deliver sustainable and measurable results. We provide consulting services to a wide variety of both financially sound and distressed organizations, including healthcare organizations, leading academic institutions, Fortune 500 companies, governmental entities, and law firms. Huron has worked with more than 425 health systems, hospitals, and academic medical centers; more than 400 corporate general counsel; and more than 350 universities and research institutions. We provide our services through five operating segments: Huron Healthcare, Huron Legal, Huron Education and Life Sciences, Huron Business Advisory, and All Other. • Huron Healthcare Our Huron Healthcare segment provides consulting services to national and regional hospitals and integrated health systems, academic medical centers, community hospitals, and physician practices. We deliver solutions to empower our clients to address challenges in the rapidly-evolving healthcare environment and improve quality, increase revenue, reduce expenses, and enhance patient, physician, and employee satisfaction across the healthcare enterprise. Our people provide a depth of expertise across the healthcare industry, and our culture of collaboration extends to our client engagements, enabling teams to effectively implement successful client projects. • Huron Legal Our Huron Legal segment provides advisory and business services to assist law departments of major global corporations and their associated law firms with cost and risk reduction, organizational design and development, and operational efficiency. These services add value to organizations by helping them enhance client service and reduce the amount spent on legal services. Our expertise focuses on strategic and management consulting, cost management, and technology and information management, including matter management, records management, document review, and discovery services. Included in this segment's offerings is our Integrated Analytics solution, which is designed to deliver an innovative, comprehensive process resulting in more affordable and predictable discovery costs. • Huron Education and Life Sciences Our Huron Education and Life Sciences segment provides management consulting services and software solutions to the higher education, academic medical center, pharmaceutical and medical device, and research industries. We work with our 19 -------------------------------------------------------------------------------- Table of Contents clients to develop and implement performance improvement, technology, and research enterprise solutions to help them address challenges relating to financial management, strategy, operational and organizational effectiveness, research administration, and regulatory compliance. • Huron Business Advisory Our Huron Business Advisory segment provides financial advisory; interim management; operational improvement; capital advisory; valuation; enterprise systems planning, design, and implementation; and enterprise performance management services. We assist clients in a broad range of industries and across the spectrum from healthy, well-capitalized companies to organizations in transition, creditors, owners, investors, and other key constituents in connection with out-of-court restructurings and bankruptcy proceedings. Our professionals consist of certified public accountants, certified insolvency and restructuring advisors, certified turnaround professionals, MBAs, JDs, and chartered financial analysts as well as former chief restructuring officers, chief executive officers, chief financial officers, and professionals with significant board governance experience. • All Other Our All Other segment consists of any line of business not managed by our other four operating segments. These businesses include our public sector consulting practice and our foreign healthcare and strategic consulting operations based in the Middle East. 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, all of whom work variable schedules as needed by our clients. Other professionals include specialized finance and operational consultants and our document review and electronic data discovery groups, as well as full-time employees who provide software support and maintenance services to our clients. Our document review and electronic data discovery groups generate revenues primarily based on number of hours worked and units produced, such as pages reviewed or amount of data processed. We translate the hours that these other professionals work on client engagements into a full-time equivalent measure that we use to manage our business. We refer to our full-time consultants and other professionals collectively as revenue-generating professionals. Revenues generated by our full-time consultants are primarily driven by the number of consultants we employ and their utilization rates, as well as the billing rates we charge our clients. Revenues generated by our other professionals, or full-time equivalents, are largely dependent on the number of consultants we employ, their hours worked, and billing rates charged, as well as the number of pages reviewed and amount of data processed in the case of our document review and electronic data discovery groups, respectively. We generate the majority of our revenues from providing professional services under four types of billing arrangements: time-and-expense, fixed-fee (including software license revenue), performance-based, and support and maintenance for the software we deploy. Time-and-expense billing arrangements require the client to pay based on either the number of hours worked, the number of pages reviewed, or the amount of data processed by our revenue-generating professionals at agreed upon rates. We recognize revenues under time-and-expense billing arrangements as the related services are rendered. Time-and-expense engagements represented 47.2% and 48.6% of our revenues for the three months ended June 30, 2014 and 2013, respectively, and 45.3% and 46.7% of our revenues for the six months ended June 30, 2014 and 2013, respectively. In fixed-fee billing arrangements, we agree to a pre-established fee in exchange for a pre-determined set of professional services, which may include the deployment of our proprietary software. 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. We generate revenues from licensing two types of proprietary software to clients: 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, 20-------------------------------------------------------------------------------- Table of Contents 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 (including software license revenue) represented 40.5% and 37.6% of our revenues for the three months ended June 30, 2014 and 2013, respectively, and 39.3% and 38.9% of our revenues for the six months ended June 30, 2014 and 2013, 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 do not recognize revenues under performance-based billing arrangements until all related performance criteria are met. Performance-based fee revenues represented 9.3% and 10.6% of our revenues for the three months ended June 30, 2014 and 2013, respectively, and 12.4% and 11.1% of our revenues for the six months ended June 30, 2014 and 2013, respectively. Performance-based fee engagements may cause significant variations in quarterly revenues and operating results depending on the timing of achieving the performance-based criteria. Clients that have purchased one of our software licenses can pay an annual fee for software support and maintenance. Annual support and maintenance fee revenue is recognized ratably over the support period, which is generally one year. These fees are billed in advance and included in deferred revenues until recognized. Support and maintenance revenues represented 3.0% and 3.2% of our revenues for the three months ended June 30, 2014 and 2013, respectively, and 3.0% and 3.3% of our revenues for the six months ended June 30, 2014 and 2013, respectively. Our quarterly results are impacted principally by our full-time consultants' utilization rate, the billing rate we charge our clients, the number of our revenue-generating professionals who are available to work, and the amount of performance-based fees recognized, which often vary significantly between quarters. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that results in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. For example, during the third and fourth quarters of the year, vacations taken by our clients can result in the deferral of activity on existing and new engagements, which would negatively affect our utilization rate. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period. Time-and-expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. Moreover, our clients typically retain us on an engagement-by-engagement basis, rather than under long-term recurring contracts. The volume of work performed for any particular client can vary widely from period to period. Business Strategy, Opportunities and Challenges Our primary strategy is to meet the needs of our clients by providing a balanced portfolio of service offerings and capabilities, so that we can adapt quickly and effectively to emerging opportunities in the marketplace. To achieve this, we continue to hire highly qualified professionals and have entered into select acquisitions of complementary businesses. To expand our business, we will remain focused on growing our existing relationships and developing new relationships, execute our managing director compensation plan to attract and retain senior practitioners, continue to promote and provide an integrated approach to service delivery, broaden the scope of our existing services, and acquire complementary businesses. We will regularly evaluate the performance of our practices to ensure our investments meet these objectives. Furthermore, we intend to enhance our visibility in the marketplace by refining our overarching messaging and value propositions for the organization as well as each practice. We will continue to focus on reaching our client base through clear, concise, endorsed messages. 21-------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. 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 four accounting policies that could be considered critical: revenue recognition, allowances for doubtful accounts and unbilled services, carrying values of goodwill and other intangible assets, and valuation of net deferred tax assets. For a detailed discussion of these critical accounting policies, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2013. Below is an update to our critical accounting policy relating to the carrying values of goodwill and other intangible assets. There have been no material changes to our other critical accounting policies during the first six months of 2014. Carrying Values of Goodwill and Other Intangible Assets During the first quarter of 2014, we reorganized our internal operating structure to better align our service offerings and moved our Enterprise Performance Management ("EPM") practice (formerly referred to as Blue Stone International, a business which we acquired during the fourth quarter of 2013) from the Huron Education and Life Sciences segment to the Huron Business Advisory segment. As a result of this change, we reassigned the goodwill balance of the EPM practice, which totaled $16.7 million as of March 31, 2014, from the Huron Education and Life Sciences reporting unit to the EPM reporting unit, which is part of the Huron Business Advisory segment. In conjunction with the goodwill reassignment, we performed an interim impairment test for the goodwill balances within our Huron Education and Life Sciences and EPM reporting units as of March 31, 2014. Our goodwill impairment test was performed using the quantitative two-step process. Based on the results of the first step of the goodwill impairment test, we determined that the fair values of our Huron Education and Life Sciences and EPM reporting units exceeded their carrying values by 46% and 12%, respectively. Since the fair value of each reporting unit exceeded its carrying value, the second step of the goodwill impairment test was not necessary. In estimating the fair value of these two reporting units, we relied on a combination of the income approach and the market approach, utilizing the guideline company method, with a fifty-fifty weighting. For companies providing services similar to those provided by us, the income and market approaches will generally provide the most reliable indications of value because the value of such companies is dependent on their ability to generate earnings. In the income approach, we utilized a discounted cash flow analysis, which involved estimating the expected after-tax cash flows that will be generated by the reporting units and then discounting those cash flows to present value reflecting the relevant risks associated with the reporting units and the time value of money. This approach requires the use of significant estimates and assumptions, including long-term projections of future cash flows, market conditions, discount rates reflecting the risk inherent in future cash flows, revenue growth, perpetual growth rates, and profitability, among others. In estimating future cash flows, we relied on an internally generated seven-year forecast. For periods after the seven-year forecast, we assumed a long-term annual revenue growth rate of 3.5% for the Huron Education and Life Sciences reporting unit and 3.0% for the EPM reporting unit. Our forecast is based on historical experience, current backlog, expected market demand, and other industry information. Our discounted cash flow analysis assumed a weighted average cost of capital ("WACC") discount rate of 13.0% for the Huron Education and Life Sciences reporting unit and 17.0% for the EPM reporting unit. In the market approach, we utilized the guideline company method, which involved calculating valuation multiples based on operating data from guideline publicly traded companies. Multiples derived from guideline companies provide an indication of how much a knowledgeable investor in the marketplace would be willing to pay for a company. These multiples were then adjusted for factors similar to those used in a discounted cash flow analysis and applied to the operating data for our reporting units to arrive at an indication of value. Determining the fair value of a reporting unit requires us to make significant judgments, estimates and assumptions. While we believe that the estimates and assumptions underlying our valuation methodology are reasonable, these estimates and assumptions 22 -------------------------------------------------------------------------------- Table of Contents could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. The results of an impairment analysis are as of a point in time. There is no assurance that the actual future earnings or cash flows of our reporting units will not differ significantly from our projections. We will monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods. Any significant decline in our operations could result in goodwill impairment charges. The table below presents, based on the goodwill impairment test performed as of March 31, 2014, the decrease in the fair value of our Huron Education and Life Sciences and EPM reporting units given a one percent increase in the assumed discount rate or a one percent decrease in the assumed long-term annual revenue growth rate. Huron Education Enterprise and Life Sciences Performance Management Decrease in Percentage by Decrease in Percentage by Fair Value of which Fair Fair Value of which Fair the Reporting Value Exceeds the Reporting Value Exceeds Unit Carrying Unit Carrying (in thousands) Amount (in thousands) Amount Discount rate - increase by 1% $ 9,600 39 % $ 700 9 % Long-term growth rate - decrease by 1% $ 7,900 40 % $ 250 11 % 23 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected segment and consolidated operating results and other operating data. Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative costs 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. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013Segment and Consolidated Operating Results (in thousands): Revenues and reimbursable expenses: Huron Healthcare $ 100,967 $ 78,946 $ 208,515 $ 157,691 Huron Legal 53,296 45,089 108,271 86,033 Huron Education and Life Sciences 37,747 37,134 71,323 72,860 Huron Business Advisory 16,574 9,263 29,956 17,845 All Other 821 (25 ) 2,071 14 Total revenues 209,405 170,407 420,136 334,443 Total reimbursable expenses 21,141 18,123 40,244 33,459 Total revenues and reimbursable expenses $ 230,546 $ 188,530 $ 460,380 $ 367,902 Operating income (loss): Huron Healthcare $ 38,475 $ 29,507 $ 89,695 $ 60,668 Huron Legal 15,790 10,793 28,278 13,731 Huron Education and Life Sciences 11,633 11,547 18,080 20,899 Huron Business Advisory 5,129 3,952 7,684 7,331 All Other (520 ) (244 ) (978 ) (416 ) Total segment operating income 70,507 55,555 142,759 102,213 Operating expenses and gains not allocated to segments 36,484 25,006 66,917 50,321 Total operating income $ 34,023 $ 30,549 $ 75,842 $ 51,892 Other Operating Data (excluding All Other): Number of full-time billable consultants (at period end) (1): Huron Healthcare 1,114 916 1,114 916 Huron Legal 124 145 124 145 Huron Education and Life Sciences 407 434 407 434 Huron Business Advisory 172 63 172 63 Total 1,817 1,558 1,817 1,558 Average number of full-time billable consultants (for the period) (1): Huron Healthcare 1,071 883 1,028 873 Huron Legal 129 149 134 148 Huron Education and Life Sciences 415 438 424 434 Huron Business Advisory 169 62 165 62 Total 1,784 1,532 1,751 1,517 Full-time billable consultant utilization rate (2): Huron Healthcare 81.7 % 84.7 % 80.4 % 85.1 % Huron Legal 68.0 % 60.0 % 66.2 % 56.0 % Huron Education and Life Sciences 71.8 % 65.8 % 70.0 % 67.9 % Huron Business Advisory 75.3 % 82.9 % 72.0 % 83.8 % Total 77.8 % 76.9 % 76.0 % 77.4 % 24 -------------------------------------------------------------------------------- Table of Contents Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Other Operating Data (continued): Full-time billable consultant average billing rate per hour (3): Huron Healthcare $ 229 $ 199 $ 249 $ 202 Huron Legal (5) $ 251 $ 221 $ 241 $ 221 Huron Education and Life Sciences $ 225 $ 223 $ 213 $ 215 Huron Business Advisory $ 257 $ 348 $ 248 $ 339 Total (5) $ 232 $ 213 $ 240 $ 213 Revenue per full-time billable consultant (in thousands): Huron Healthcare $ 88 $ 82 $ 190 $ 167 Huron Legal (5) $ 80 $ 60 $ 146 $ 113 Huron Education and Life Sciences $ 75 $ 70 $ 140 $ 140 Huron Business Advisory $ 94 $ 140 $ 173 $ 276 Total (5) $ 85 $ 79 $ 173 $ 158 Average number of full-time equivalents (for the period) (4): Huron Healthcare 58 54 55 55 Huron Legal 1,048 982 1,229 1,035 Huron Education and Life Sciences 44 48 42 43 Huron Business Advisory 7 3 7 2 Total 1,157 1,087 1,333 1,135 Revenue per full-time equivalents (in thousands): Huron Healthcare $ 115 $ 116 $ 243 $ 219 Huron Legal (5) $ 41 $ 37 $ 72 $ 67 Huron Education and Life Sciences $ 146 $ 132 $ 285 $ 282 Huron Business Advisory $ 104 $ 173 $ 187 $ 324 Total (5) $ 49 $ 45 $ 86 $ 83 (1) Consists of our full-time professionals who provide consulting services and generate revenues based on the number of hours worked. (2) 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. (3) 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. (4) Consists of consultants who work variable schedules as needed by our clients, as well as other professionals who generate revenues primarily based on number of hours worked and units produced, such as pages reviewed and data processed. Also includes full-time employees who provide software support and maintenance services to our clients. (5) During the second quarter of 2014, we revised the methodology we use to allocate revenue between our billable consultants and our full-time equivalents in our Huron Legal segment to better reflect the nature of the work being provided. Operating data for the three and six months ended June 30, 2014, as presented above, reflects this change. Operating data for the Huron Legal segment for the three months ended March 31, 2014 has been revised as follows: full-time billable consultant average billing rate per hour decreased from $259 to $231, revenue per full-time billable consultant decreased from $75 thousand to $67 thousand, and revenue per full-time equivalent was unchanged. The impact on our total Company results was immaterial. 25 -------------------------------------------------------------------------------- Table of Contents 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 Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), 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): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Revenues $ 209,405 $ 170,407 $ 420,136 $ 334,443 Net income from continuing operations $ 19,913 $ 15,814 $ 54,039 $ 27,183 Add back: Income tax expense 12,685 12,877 19,183 21,001 Interest and other expenses 1,425 1,858 2,620 3,708 Depreciation and amortization 7,557 5,551 14,714 10,988 Earnings before interest, taxes, depreciation and amortization (EBITDA) 41,580 36,100 90,556 62,880 Add back: Restructuring charges 1,034 596 1,163 596 Litigation and other gains (440 ) - (440 ) (1,150 ) Adjusted EBITDA $ 42,174 $ 36,696 $ 91,279 $ 62,326 Adjusted EBITDA as a percentage of revenues 20.1 % 21.5 % 21.7 % 18.6 % Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013Net income from continuing operations $ 19,913 $ 15,814 $ 54,039 $ 27,183 Weighted average shares-diluted 23,098 22,760 23,092 22,624 Diluted earnings per share from continuing operations $ 0.86 $ 0.69 $ 2.34 $ 1.20 Add back: Amortization of intangible assets 2,912 1,451 5,430 2,907 Restructuring charges 1,034 596 1,163 596 Litigation and other gains (440 ) - (440 ) (1,150 ) Tax effect (1,402 ) (819 ) (2,461 ) (941 ) Net tax benefit related to "check-the-box" election - - (10,244 ) - Total adjustments, net of tax 2,104 1,228 (6,552 ) 1,412 Adjusted net income from continuing operations $ 22,017 $ 17,042 $ 47,487 $ 28,595 Adjusted diluted earnings per share from continuing operations $ 0.95 $ 0.75 $ 2.06 $ 1.26 26 -------------------------------------------------------------------------------- Table of Contents These non-GAAP financial measures include adjustments for the following items: Restructuring charges: We have incurred charges due to the restructuring of various parts of our business. These restructuring charges have primarily consisted of costs associated with office space consolidations including the accelerated depreciation of certain leasehold improvements, and severance charges. We have excluded the effect of the restructuring charges from our non-GAAP measures as a means to provide comparability with periods that were not impacted by a restructuring charge. Additionally, the amount of each restructuring charge is significantly affected by the timing and size of the restructured business or component of a business. Litigation and other gains: We have excluded the effect of the litigation gain recorded in the first quarter of 2013 and the remeasurement gain recorded in the second quarter of 2014 because their exclusion permits comparability with periods that were not impacted by these 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. Tax effect: The non-GAAP income tax adjustment reflects the incremental tax rate applicable to the non-GAAP adjustments. Net tax benefit related to "check-the-box" election: We have excluded the effect of the net tax benefit from our "check-the-box" election to treat one of our wholly-owned foreign subsidiaries as a disregarded entity for U.S. federal income tax purposes during the first quarter of 2014 because its exclusion permits comparability with periods that were not impacted by this item. Income tax expense, Interest and other expenses, Depreciation and amortization: We have excluded the effects of income tax expense, interest and other expenses, 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. Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 Revenues Revenues increased $39.0 million, or 22.9%, to $209.4 million for the second quarter of 2014 from $170.4 million for the second quarter of 2013. Of the overall $39.0 million increase in revenues, $31.2 million was attributable to our full-time billable consultants, while $7.8 million was attributable to our full-time equivalents. The increase in full-time billable consultant revenues was driven by an increase in the average number of billable consultants and average billing rate, as well as a slight increase in the consultant utilization rate. The increase in revenue from full-time billable consultants primarily reflected strengthened demand for our services in the Huron Healthcare segment and our Huron Legal segment's legal advisory services. The increase in full-time equivalent revenue was primarily attributable to an increase in revenue per full-time equivalent and the average number of full-time equivalents. Revenue attributable to full-time equivalents primarily reflected increased demand for our discovery services in the Huron Legal segment, as well as a slight increase in the use of contractors in the Huron Healthcare segment. Total Direct Costs Our total direct costs increased $22.0 million, or 21.3%, to $125.5 million in the three months ended June 30, 2014, from $103.5 million in the three months ended June 30, 2013. The increase primarily related to a $12.8 million increase in salaries and related expenses for our revenue-generating professionals, a $4.6 million increase in bonus expense for our revenue-generating professionals, a $4.0 million increase in contractor expense, and a $0.5 million increase in intangible asset amortization expense. As a percentage of revenues, our total direct costs decreased to 60.0% during the second quarter of 2014 compared to 60.8% during the second quarter of 2013. This decrease primarily reflected revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals during the second quarter of 2014, as well as a decrease in technology expense, partially offset by increases in bonus expense for our revenue-generating professionals and contractor expense as percentages of revenues. Total direct costs for the three months ended June 30, 2014 included $3.8 million of share-based compensation expense and $1.3 million of amortization expense for intangible assets and software development costs, primarily representing customer-related assets and software acquired in business combinations. Total direct costs for the three months ended June 30, 2013 included $3.3 million of share-based compensation expense and $0.7 million of amortization expense for intangible assets and software 27-------------------------------------------------------------------------------- Table of Contents development costs. The increase in share-based compensation expense was primarily attributable to an increase in the number of performance-based awards that are expected, as of June 30, 2014, to be earned in 2014 based on 2014 performance, compared to those that were expected, as of June 30, 2013, to be earned based on 2013 performance. The increase in amortization expense was primarily related to the amortization of intangible assets from businesses acquired during the fourth quarter of 2013 and the first half of 2014, as well as the initiation of amortization expense for certain software development costs. Operating Expenses and Other Operating Gains Selling, general and administrative expenses increased $12.3 million, or 40.0%, to $43.2 million in the second quarter of 2014 from $30.8 million in the second quarter of 2013. This increase was primarily related to a $5.5 million increase in bonus expense, a $3.4 million increase in salaries and related expenses for our support personnel, a $1.1 million increase in promotion and sponsorship expenses, a $0.7 million increase in facilities and other office related expenses, a $0.3 million increase in practice administration and meetings expense, and a $0.7 million increase in other miscellaneous business expenses. As a percentage of revenues, selling, general and administrative expenses increased to 20.6% during the second quarter of 2014 compared to 18.1% during the second quarter of 2013. This increase primarily reflected an increase in bonus expense as a percentage of revenues. During the second quarter of 2014, we incurred a $1.0 million pretax restructuring charge related to the consolidation of office spaces in Chicago, New York, and London. Of the total $1.0 million charge, $0.6 million related to the accrual of our remaining lease obligations at vacated spaces, net of estimated sublease income, and $0.4 million related to accelerated depreciation of assets disposed of as a result of the space consolidation. The vacated locations in Chicago and New York were acquired as part of business acquisitions during 2013 and 2014. Restructuring expense for the second quarter of 2013 was $0.6 million. This expense related to the consolidation of office space in the Washington, D.C. area that was acquired in the AdamsGrayson acquisition in 2012. During the second quarter of 2014, we determined that the fair value of our contingent consideration liability incurred in connection with a business acquisition had decreased and, as a result, recorded a $0.4 million remeasurement gain. There was no remeasurement gain or loss for the comparable period last year. Depreciation and amortization expense increased by $1.4 million to $6.3 million in the three months ended June 30, 2014, from $4.9 million in the three months ended June 30, 2013. The increase primarily related to the amortization of intangible assets from businesses acquired during the fourth quarter of 2013 and first half of 2014, as well as the depreciation of network equipment and leasehold improvements that were placed into service during the second half of 2013 and first half of 2014. Intangible asset amortization included within operating expenses relates to certain customer relationships, non-competition agreements, trade names, and licenses acquired in connection with our acquisitions. Operating Income Operating income increased $3.5 million, or 11.4%, to $34.0 million in the second quarter of 2014 from $30.5 million in the second quarter of 2013. Operating margin, which is defined as operating income expressed as a percentage of revenues, decreased to 16.2% in the three months ended June 30, 2014, compared to 17.9% in the three months ended June 30, 2013. The decrease in operating margin was primarily attributable to the increase in bonus expense as a percentage of revenue during the second quarter of 2014, as well as an increase in contractor expense as a percentage of revenues, partially offset by revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals and a decrease in technology expenses. Other Expense, Net Other expense, net decreased by $0.4 million, or 23.3%, to $1.4 million in the second quarter of 2014 from $1.9 million in the second quarter of 2013. The decrease in other expense, net was primarily attributable to a $0.3 million increase in other income as a result of improved performance of the investments used to fund our deferred compensation plans, and a $0.1 million decrease in interest expense, net of interest income. Income Tax Expense For the second quarter of 2014, we recognized income tax expense from continuing operations of $12.7 million on income from continuing operations of $32.6 million. For the second quarter of 2013, we recognized income tax expense from continuing operations of $12.9 million on income from continuing operations of $28.7 million. Our effective tax rate for the second quarter of 2014 was 38.9% compared with 44.9% for the same period last year. The effective tax rate for the three months ended June 30, 2014 was lower than the statutory rate, inclusive of state income taxes, due primarily to tax benefits recognized on foreign losses, partially offset by certain non-deductible business expenses. The effective tax rate for the three months ended June 30, 2013 was 28-------------------------------------------------------------------------------- Table of Contents higher than the statutory rate, inclusive of state income taxes, due primarily to the impact of foreign losses with no tax benefit and certain non-deductible business expenses. Net Income from Continuing Operations Net income from continuing operations was $19.9 million for the three months ended June 30, 2014, compared to net income from continuing operations of $15.8 million for the same period last year. The $4.1 million increase in net income from continuing operations was primarily due to the increase in operating income, as well as the decrease in income tax expense, as discussed above. As a result of the increase in net income from continuing operations, diluted earnings per share from continuing operations for the second quarter of 2014 was $0.86 compared to $0.69 for the second quarter of 2013. EBITDA and Adjusted EBITDA EBITDA increased $5.5 million to $41.6 million for the three months ended June 30, 2014, from $36.1 million for the three months ended June 30, 2013. Adjusted EBITDA also increased $5.5 million to $42.2 million in the second quarter of 2014 from $36.7 million in the second quarter of 2013. The increase in EBITDA and Adjusted EBITDA was primarily due to the increase in segment operating income, as discussed below in Segment Results, largely offset by an increase in corporate expenses. Adjusted Net Income from Continuing Operations Adjusted net income from continuing operations increased $5.0 million to $22.0 million in the second quarter of 2014 compared to $17.0 million in the second quarter of 2013. The increase was primarily attributable to the increase in operating income. Segment Results Huron Healthcare Revenues Huron Healthcare segment revenues increased $22.1 million, or 27.9%, to $101.0 million for the second quarter of 2014 from $78.9 million for the second quarter of 2013. Revenues for the second quarter of 2014 included $5.1 million from Vonlay, a business that we acquired in the second quarter of 2014. During the three months ended June 30, 2014, revenues from time-and-expense engagements, fixed-fee engagements, performance-based arrangements, and software support and maintenance arrangements represented 6.0%, 70.2%, 19.2%, and 4.6% of this segment's revenues, respectively, compared to 2.0%, 70.1%, 22.9%, and 5.0%, respectively, for the comparable period in 2013. Of the overall $22.1 million increase in revenues, $21.7 million was attributable to our full-time billable consultants and $0.4 million was attributable to our full-time equivalents. The increase in demand for our services reflected the continued pressures our clients face as the result of evolving business models, rising costs, and declining reimbursements from government and commercial payers. The increase in full-time billable consultant revenues reflected increases in the average number of full-time billable consultants and average billing rate, partially offset by a decrease in the consultant utilization rate. Performance-based fee revenue was $19.4 million during the second quarter of 2014 compared to $18.0 million during the second quarter of 2013. We expect performance-based fees to be greater in the first half of 2014 than in the second half of 2014. The level of performance-based fees earned may vary based on our clients' preferences and the mix of services we provide. Performance-based fee arrangements may cause significant variations in revenues, operating results, and average billing rates due to our level of execution and the timing of achievement of the performance-based criteria. With regard to our full-time equivalents, the Huron Healthcare segment experienced an increase in the average number of full-time equivalents, partially offset by a decrease in revenue per full-time equivalent in the second quarter of 2014 compared to the second quarter of 2013. Operating Income Huron Healthcare segment operating income increased $9.0 million, or 30.4%, to $38.5 million in the three months ended June 30, 2014, from $29.5 million in the three months ended June 30, 2013. The Huron Healthcare segment operating margin, defined as segment operating income expressed as a percentage of segment revenues, increased to 38.1% for the second quarter of 2014 from 37.4% in the same period last year. The increase in this segment's operating margin was primarily attributable to revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals, partially offset by increases in bonus expense for our revenue-generating professionals, technology expense, contractor expense, and intangible asset amortization expense as percentages of revenues. 29-------------------------------------------------------------------------------- Table of Contents Huron Legal Revenues Huron Legal segment revenues increased $8.2 million, or 18.2%, to $53.3 million for the second quarter of 2014 from $45.1 million for the second quarter of 2013. Revenues from time-and-expense engagements and fixed-fee engagements represented 97.2% and 2.8% of this segment's revenues, respectively, during the three months ended June 30, 2014. During the comparable period in 2013, revenues from time-and-expense engagements, fixed-fee engagements, and support and maintenance arrangements represented 95.6%, 4.0%, and 0.4% of this segment's revenues, respectively. Of the overall $8.2 million increase in revenues, $6.9 million was attributable to an increase in revenue generated by our full-time equivalents and $1.3 million was related to our full-time billable consultants. The increase in revenue attributable to our full-time equivalents was the result of an increase in both revenue per full-time equivalent and the average number of full-time equivalents. The increase in full-time billable consultant revenue reflected an increase in the average billing rate and consultant utilization rate, partially offset by a decrease in the average number of full-time billable consultants. Operating Income Huron Legal segment operating income increased by $5.0 million, or 46.3%, to $15.8 million in the three months ended June 30, 2014, from $10.8 million in the three months ended June 30, 2013. Segment operating margin increased to 29.6% for the second quarter of 2014 from 23.9% in the same period last year. The increase in this segment's operating margin was primarily attributable to a decrease in salaries and related expenses for our revenue-generating professionals. Decreases in technology expense, restructuring expense, rent and utility expense for our document review centers, and severance expense also contributed to the increase in operating margin, partially offset by increases in bonus expense for both our revenue-generating professionals and support personnel and contractor expense as percentages of revenues. Huron Education and Life Sciences Revenues Huron Education and Life Sciences segment revenues increased $0.6 million, or 1.7%, to $37.7 million for the second quarter of 2014 from $37.1 million for the second quarter of 2013. Revenues for the second quarter of 2014 included $4.2 million from The Frankel Group Associates, a business that we acquired in the first quarter of 2014. Revenues from time-and-expense engagements, fixed-fee engagements, and software support and maintenance arrangements represented 70.6%, 25.1%, and 4.3% of this segment's revenues, respectively, during the three months ended June 30, 2014, compared to 82.4%, 13.8%, and 3.8%, respectively, for the comparable period in 2013. Of the overall $0.6 million increase in revenues, $0.5 million was attributable to our full-time billable consultants and $0.1 million was related to our full-time equivalents. The increase in revenue from our full-time billable consultants primarily reflected an increase in the consultant utilization rate, as well as a slight increase in the average billing rate, partially offset by a decrease in the average number of full-time billable consultants. Operating Income Huron Education and Life Sciences segment operating income increased $0.1 million to $11.6 million in the three months ended June 30, 2014, from $11.5 million in the three months ended June 30, 2013. The Huron Education and Life Sciences segment operating margin decreased to 30.8% for the second quarter of 2014 from 31.1% in the same period last year. The decrease in this segment's operating margin was primarily attributable to an increase in salaries and related expenses for both our revenue-generating professionals and support personnel as a percentage of revenues, as well as increases in promotion and sponsorship expense, practice administration and meetings expense, and training expense as percentages of revenues, largely offset by decreases in bonus expense for our revenue-generating professionals and contractor expense. Huron Business Advisory Revenues Huron Business Advisory segment revenues increased $7.3 million, or 78.9%, to $16.6 million for the second quarter of 2014 from $9.3 million for the second quarter of 2013. Revenues for the second quarter of 2014 included $7.2 million from our EPM practice (formerly referred to as Blue Stone International, a business that we acquired during the fourth quarter of 2013). Revenues from time-and-expense engagements, fixed-fee engagements, and performance-based arrangements represented 84.7%, 14.3%, and 1.0% of this segment's revenues, respectively, during the second quarter of 2014. During the comparable period in 2013, revenues 30 -------------------------------------------------------------------------------- Table of Contents from time-and-expense engagements and fixed-fee engagements represented 81.2% and 18.8% of this segment's revenues, respectively. Of the overall $7.3 million increase in revenues, $7.1 million was attributable to our full-time billable consultants and $0.2 million was related to our full-time equivalents. The increase in revenue from our full-time billable consultants was driven by an increase in the average number of full-time billable consultants, partially offset by decreases in the average billing rate and consultant utilization rate. Operating Income Huron Business Advisory segment operating income increased by $1.1 million, or 29.8%, to $5.1 million in the three months ended June 30, 2014, compared to $4.0 million in the three months ended June 30, 2013. Segment operating margin decreased to 30.9% for the second quarter of 2014 from 42.7% in the same period last year. The decrease in this segment's operating margin was primarily attributable to an increase in salaries, bonuses, and related expenses for our revenue-generating professionals as a percentage of revenues. Increases in contractor expense, promotion and sponsorship expense, and intangible asset amortization expense, all as percentages of revenues, also contributed to the decrease in the segment's operating margin, partially offset by a decrease in severance expense. 31 -------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 Revenues Revenues increased $85.7 million, or 25.6%, to $420.1 million for the first six months of 2014 from $334.4 million for the first six months of 2013. Of the overall $85.7 million increase in revenues, $64.2 million was attributable to our full-time billable consultants, while $21.5 million was attributable to our full-time equivalents. The increase in full-time billable consultant revenues was driven by an increase in the average number of billable consultants and average billing rate, partially offset by a decrease in the consultant utilization rate. The increase in revenue from full-time billable consultants during the first half of 2014 primarily reflected strengthened demand for our services in the Huron Healthcare segment and our Huron Legal segment's legal advisory services, partially offset by decreased demand for our services in the Huron Education and Life Sciences segment when compared to the first half of 2013. The increase in full-time equivalent revenue was primarily attributable to an increase in the average number of full-time equivalents and revenue per full-time equivalent. Revenue attributable to full-time equivalents primarily reflected increased demand for our discovery services in the Huron Legal segment, as well as increased use of contractors in the Huron Healthcare segment. Total Direct Costs Our total direct costs increased $40.0 million, or 19.0%, to $250.3 million in the six months ended June 30, 2014, from $210.3 million in the six months ended June 30, 2013. The increase primarily related to a $24.8 million increase in salaries and related expenses for our revenue-generating professionals, a $9.1 million increase in contractor expense, a $5.3 million increase in bonus expense for our revenue-generating professionals, and a $1.1 million increase in amortization expense for intangible assets and software development costs, partially offset by a $0.3 million decrease in technology expense and a $0.3 million decrease in rent and utility charges for our document review centers. As a percentage of revenues, our total direct costs decreased to 59.6% during the first half of 2014 compared to 62.9% during the first half of 2013. This decrease primarily reflected revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals during the first half of 2014, as well as the decreases in technology expense and rent and utility charges for our document review centers, partially offset by an increase in contractor expense as a percentage of revenues. Total direct costs for the six months ended June 30, 2014 included $7.8 million of share-based compensation expense and $2.4 million of amortization expense for intangible assets and software development costs, primarily representing customer-related assets and software acquired in business combinations. Total direct costs for the six months ended June 30, 2013 included $6.9 million of share-based compensation expense and $1.3 million of amortization expense for intangible assets and software development costs. The increase in share-based compensation expense was primarily attributable to an increase in the number of performance-based awards that are expected, as of June 30, 2014, to be earned in 2014 based on 2014 performance, compared to those that were expected, as of June 30, 2013, to be earned based on 2013 performance. The increase in amortization expense was primarily related to the amortization of intangible assets from businesses acquired during the fourth quarter of 2013 and the first half of 2014, as well as the initiation of amortization expense for certain software development costs. Operating Expenses and Other Operating Gains Selling, general and administrative expenses increased $17.8 million, or 28.1%, to $80.9 million in the first half of 2014 from $63.1 million in the first half of 2013. This increase was primarily related to a $5.9 million increase in bonus expense, a $5.6 million increase in salaries and related expenses for our support personnel, a $2.0 million increase in promotion and sponsorship expenses, a $1.1 million increase in practice administration and meetings expense, a $0.8 million increase in facilities and other office related expenses, a $0.8 million increase in accounting, tax, and audit fees, and a $0.7 million increase in legal expenses. As a percentage of revenues, selling, general and administrative expenses increased to 19.2% during the first half of 2014 compared to 18.9% during the first half of 2013. This increase primarily reflected an increase in bonus expense as a percentage of revenues, partially offset by revenue growth that outpaced the increases in salaries and related expenses for our support personnel and facilities and other office related expenses and a decrease in severance expense. During the second quarter of 2014, we incurred a $1.0 million pretax restructuring charge related to the consolidation of office spaces in Chicago, New York, and London. Of the total $1.0 million charge, $0.6 million related to the accrual of our remaining lease obligations at vacated spaces, net of estimated sublease income, and $0.4 million related to accelerated depreciation of assets disposed of as a result of the space consolidation. The vacated locations in Chicago and New York were acquired as part of business acquisitions during 2013 and 2014. During the first quarter of 2014, we incurred a $0.1 million pretax restructuring charge related to workforce reductions in our London office to better align our resources with market demand in our Huron Legal 32 -------------------------------------------------------------------------------- Table of Contents segment. Restructuring expense for the first half of 2013 was $0.6 million and related to the consolidation of office space in the Washington, D.C. area that was acquired in the AdamsGrayson acquisition in 2012. During the second quarter of 2014, we determined that the fair value of our contingent consideration liability incurred in connection with a business acquisition had decreased and, as a result, recorded a $0.4 million remeasurement gain. There was no remeasurement gain or loss for the comparable period last year. During the first quarter of 2013, we recorded a $1.2 million settlement gain. As discussed under "Part II - Item 1. Legal Proceedings," and in Note 12 "Commitments, Contingencies and Guarantees," during the second quarter of 2012, we conducted preliminary settlement discussions with the relator in the qui tam action, and as a result, we recorded a charge of $1.2 million in accordance with ASC Topic 450, "Contingencies." On March 8, 2013, the Court granted Huron's motion for summary judgment and dismissed the relator's second amended complaint in its entirety with prejudice. As a result, during the first quarter of 2013, we reversed the charge of $1.2 million recorded during 2012. Depreciation and amortization expense increased by $2.6 million to $12.3 million in the six months ended June 30, 2014, from $9.7 million in the six months ended June 30, 2013. The increase primarily related to the amortization of intangible assets from businesses acquired during the fourth quarter of 2013 and first half of 2014, as well as the depreciation of network equipment and leasehold improvements that were placed into service during the second half of 2013 and first half of 2014. Intangible asset amortization included within operating expenses relates to certain customer relationships, non-competition agreements, trade names, and licenses acquired in connection with our acquisitions. Operating Income Operating income increased $23.9 million, or 46.2%, to $75.8 million in the first half of 2014 from $51.9 million in the first half of 2013. Operating margin, which is defined as operating income expressed as a percentage of revenues, increased to 18.1% in the six months ended June 30, 2014, compared to 15.5% in the six months ended June 30, 2013. The increase in operating margin was primarily attributable to the revenue growth that outpaced the increase in salaries and related expenses for both our revenue-generating professionals and support personnel during the period, as well as decreases in technology expense and rent and utility charges for our document review centers and a decrease in facilities and other office related expenses as a percentage of revenues. These operating margin increases were partially offset by the increases in contractor expense and bonus expense as percentages of revenues. Other Expense, Net Other expense, net decreased by $1.1 million, or 29.3%, to $2.6 million in the first half of 2014 from $3.7 million in the first half of 2013. The decrease was primarily attributable to a $0.6 million, or 16.9%, decrease in interest expense, net of interest income in the first half of 2014, which was the result of a decrease in our borrowing levels combined with lower interest rates, as well as a $0.4 million increase in other income as a result of improved performance of the investments used to fund our deferred compensation plans. Income Tax Expense For the first half of 2014, we recognized income tax expense from continuing operations of $19.2 million on income from continuing operations of $73.2 million. For the first half of 2013, we recognized income tax expense from continuing operations of $21.0 million on income from continuing operations of $48.2 million. Our effective tax rate for the first six months of 2014 was 26.2% compared with 43.6% for the same period last year. The effective tax rate for the six months ended June 30, 2014 was lower than the statutory rate, inclusive of state income taxes, due primarily to the impact of a tax election made in the first quarter of 2014 to classify one of our wholly-owned foreign subsidiaries as a disregarded entity for U.S. federal income tax purposes (commonly referred to as a "check-the-box" election). As a result of this election, we expect to realize an income tax benefit of $13.8 million, of which $2.4 million is unrecognized, resulting in a net recognized tax benefit of $11.4 million during the first quarter of 2014. This recognized benefit was partially offset by $1.2 million in expenses related to the establishment of a valuation allowance for certain foreign tax credits and increased deferred tax liabilities as a result of the aforementioned election. The effective tax rate for the six months ended June 30, 2013 was higher than the statutory rate, inclusive of state income taxes, due primarily to the impact of foreign losses with no tax benefit and certain non-deductible business expenses, partially offset by the impact of the retroactive reinstatement of the federal research and development tax credit, which was enacted during the first quarter of 2013. 33-------------------------------------------------------------------------------- Table of Contents Net Income from Continuing Operations Net income from continuing operations was $54.0 million for the six months ended June 30, 2014, compared to net income from continuing operations of $27.2 million for the same period last year. The $26.8 million increase in net income from continuing operations was primarily due to the increase in operating income, as well as the decrease in income tax expense and other expense, net, as discussed above. As a result of the increase in net income from continuing operations, diluted earnings per share from continuing operations for the first half of 2014 was $2.34 compared to $1.20 for the first half of 2013. EBITDA and Adjusted EBITDA EBITDA increased $27.7 million to $90.6 million for the six months ended June 30, 2014, from $62.9 million for the six months ended June 30, 2013. Adjusted EBITDA increased $29.0 million to $91.3 million in the first half of 2014 from $62.3 million in the first half of 2013. The increase in EBITDA and Adjusted EBITDA was primarily due to the increase in segment operating income, as discussed below in Segment Results, partially offset by an increase in corporate expenses. Adjusted Net Income from Continuing Operations Adjusted net income from continuing operations increased $18.9 million to $47.5 million in the first half of 2014 compared to $28.6 million in the first half of 2013. The increase was primarily attributable to the increase in operating income, partially offset by a higher tax expense when excluding the tax benefit related to our "check-the-box" election. Segment Results Huron Healthcare Revenues Huron Healthcare segment revenues increased $50.8 million, or 32.2%, to $208.5 million for the first half of 2014 from $157.7 million for the first half of 2013. Revenues for the first half of 2014 included $5.1 million from Vonlay, a business that we acquired in the second quarter of 2014. During the six months ended June 30, 2014, revenues from time-and-expense engagements, fixed-fee engagements, performance-based arrangements, and software support and maintenance arrangements represented 3.8%, 67.3%, 24.4%, and 4.5% of this segment's revenues, respectively, compared to 1.6%, 70.3%, 23.1%, and 5.0%, respectively, for the comparable period in 2013. Of the overall $50.8 million increase in revenues, $49.6 million was attributable to our full-time billable consultants and $1.2 million was attributable to our full-time equivalents. The increase in demand for our services reflected the continued pressures our clients face as the result of evolving business models, rising costs, and declining reimbursements from government and commercial payers. The increase in full-time billable consultant revenues reflected increases in the average billing rate and average number of full-time billable consultants, partially offset by a decrease in the consultant utilization rate. Performance-based fee revenue was $50.8 million during the first half of 2014 compared to $36.4 million during the first half of 2013. We expect performance-based fees to be greater in the first half of 2014 than in the second half of 2014. The level of performance-based fees earned may vary based on our clients' preferences and the mix of services we provide. Performance-based fee arrangements may cause significant variations in revenues, operating results, and average billing rates due to our level of execution and the timing of achievement of the performance-based criteria. With regard to our full-time equivalents, during the first six months of 2014, the Huron Healthcare segment experienced an increase in revenue per full-time equivalent, while the average number of full-time equivalents was unchanged compared to the first six months of 2013. Operating Income Huron Healthcare segment operating income increased $29.0 million, or 47.8%, to $89.7 million in the six months ended June 30, 2014, from $60.7 million in the six months ended June 30, 2013. The Huron Healthcare segment operating margin, defined as segment operating income expressed as a percentage of segment revenues, increased to 43.0% for the first half of 2014 from 38.5% in the same period last year. The increase in this segment's operating margin was primarily attributable to revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals, as well as a decrease in salaries and related expenses for our support personnel, partially offset by an increase in technology expense as a percentage of revenues. 34-------------------------------------------------------------------------------- Table of Contents Huron Legal Revenues Huron Legal segment revenues increased $22.3 million, or 25.8%, to $108.3 million for the first half of 2014 from $86.0 million for the first half of 2013. Revenues from time-and-expense engagements, fixed-fee engagements, and support and maintenance arrangements represented 97.5%, 2.4%, and 0.1% of this segment's revenues, respectively, during the six months ended June 30, 2014, compared to 95.0%, 4.7%, and 0.3% of this segment's revenues, respectively, for the comparable period in 2013. Of the overall $22.3 million increase in revenues, $19.4 million was attributable to an increase in revenue generated by our full-time equivalents and $2.9 million was related to our full-time billable consultants. The increase in revenue attributable to our full-time equivalents was the result of an increase in both the average number of full-time equivalents and revenue per full-time equivalent. The increase in full-time billable consultant revenue reflected increases in the consultant utilization rate and average billing rate, partially offset by a decrease in the average number of full-time billable consultants. Operating Income Huron Legal segment operating income increased by $14.5 million, or 105.9%, to $28.3 million in the six months ended June 30, 2014, from $13.7 million in the six months ended June 30, 2013. Segment operating margin increased to 26.1% for the first half of 2014 from 16.0% in the same period last year. The increase in this segment's operating margin was primarily attributable to a decrease in salaries and related expenses for our revenue-generating professionals. Decreases in technology expense, rent and utility expense for our document review centers, restructuring expense, and severance expense also contributed to the increase in operating margin, as well as revenue growth that outpaced the increase in bonus expense for our revenue-generating professionals, partially offset by increases in contractor expense and bonus expense for support personnel as percentages of revenues. Huron Education and Life Sciences Revenues Huron Education and Life Sciences segment revenues decreased $1.5 million, or 2.1%, to $71.3 million for the first six months of 2014 from $72.9 million for the first six months of 2013. Revenues for the first six months of 2014 included $7.1 million from The Frankel Group Associates, a business that we acquired in the first quarter of 2014. Revenues from time-and-expense engagements, fixed-fee engagements, and software support and maintenance arrangements represented 71.2%, 24.4%, and 4.4% of this segment's revenues, respectively, during the first half of 2014, compared to 79.6%, 16.6%, and 3.8%, respectively, for the first half of 2013. Of the overall $1.5 million decrease in revenues, $1.2 million was attributable to our full-time billable consultants and $0.3 million was related to our full-time equivalents. The decrease in revenue from our full-time billable consultants reflected a decrease in the average number of full-time billable consultants and average billing rate, partially offset by an increase in consultant utilization rate. The decrease in revenue attributable to our full-time equivalents reflected a decrease in the average number of full-time equivalents, partially offset by an increase in revenue per full-time equivalent. Operating Income Huron Education and Life Sciences segment operating income decreased $2.8 million, or 13.5%, to $18.1 million in the six months ended June 30, 2014, from $20.9 million in the six months ended June 30, 2013. The Huron Education and Life Sciences segment operating margin decreased to 25.3% for the first half of 2014 from 28.7% in the same period last year. The decrease in this segment's operating margin was primarily attributable to an increase in salaries and related expenses for both our revenue-generating professionals and support personnel, as well as increases in contractor expense, promotion and sponsorship expense, practice administration and meetings expense, and research expense, partially offset by a decrease in bonus expense for our revenue-generating professionals as a percentage of revenues. Huron Business Advisory Revenues Huron Business Advisory segment revenues increased $12.2 million, or 67.9%, to $30.0 million for the first six months of 2014 from $17.8 million for the first six months of 2013. Revenues for the first six months of 2014 included $13.8 million from our EPM practice (formerly referred to as Blue Stone International, a business that we acquired during the fourth quarter of 2013). Revenues from time-and-expense engagements, fixed-fee engagements, and performance-based arrangements represented 84.6%, 35-------------------------------------------------------------------------------- Table of Contents 13.2%, and 2.2% of this segment's revenues, respectively, during the first half of 2014, compared to 79.3%, 17.9%, and 2.8%, respectively, for the comparable period in 2013. Of the overall $12.2 million increase in revenues, $11.5 million was attributable to our full-time billable consultants and $0.6 million was related to our full-time equivalents. The increase in revenue from our full-time billable consultants was driven by an increase in the average number of full-time billable consultants, partially offset by decreases in the average billing rate and consultant utilization rate. The increase in revenue attributable to our full-time equivalents reflected an increase in the average number of full-time equivalents, partially offset by a decrease in revenue per full-time equivalent. Operating Income Huron Business Advisory segment operating income increased by $0.4 million, or 4.8%, to $7.7 million in the six months ended June 30, 2014, compared to $7.3 million in the six months ended June 30, 2013. Segment operating margin decreased to 25.7% for the first half of 2014 from 41.1% in the same period last year. The decrease in this segment's operating margin was primarily attributable to an increase in salaries, bonuses, and related expenses for our revenue-generating professionals as a percentage of revenues. Increases in contractor expense, promotion and sponsorship expense, intangible asset amortization expense, and practice administration and meetings expense, all as percentages of revenues, also contributed to the decrease in the segment's operating margin, partially offset by a decrease in severance expense. 36-------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased $48.9 million, from $58.1 million at December 31, 2013 to $9.2 million at June 30, 2014. Our primary sources of liquidity are cash flows from our U.S. operations and debt capacity available under our credit facility. Six Months Ended June 30, Cash Flows (in thousands): 2014 2013 Net cash provided by operating activities $ 12,199 $ 2,721 Net cash used in investing activities $ (63,293 ) $ (11,694 ) Net cash provided by (used in) financing activities $ 2,148 $ (11,511 ) Net cash provided by operating activities totaled $12.2 million for the six months ended June 30, 2014, and $2.7 million for the same period last year. 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 benefits to employees affect these account balances. The increase in cash provided by operations was primarily attributable to higher net income during the first six months of 2014 when compared with the first six months of 2013, partially offset by an increase in the amount paid for annual performance bonuses during the first quarter of 2014 and an increase in receivables and unbilled services from clients during the first six months of 2014 when compared with the first six months of 2013. Net cash used in investing activities was $63.3 million and $11.7 million for the six months ended June 30, 2014 and 2013, respectively. The use of cash in the first six months of 2014 primarily consisted of $51.4 million for purchases of businesses and $11.4 million for purchases of property and equipment. The use of cash in the first six months of 2013 primarily consisted of purchases of property and equipment totaling $10.2 million. We estimate that the cash utilized for purchases of property and equipment in 2014 will be approximately $30.0 million, primarily consisting of information technology related equipment and leasehold improvements to support the continued growth of our document review and processing services, as well as information technology related equipment to support our corporate infrastructure. Net cash provided by financing activities was $2.1 million for the six months ended June 30, 2014, compared to net cash used in financing activities of $11.5 million for the same period last year. Borrowings made under our credit facility to fund operations during the first six months of 2014 totaled $74.0 million, with repayments during the period totaling $64.0 million. Borrowings made under our credit facility during the first six months of 2013 totaled $66.0 million, with repayments totaling $77.3 million. During the first half of 2014, the Company repurchased and retired $9.5 million of common stock under the February 2014 Share Repurchase Program. Under this program, which was authorized by the Company's board of directors on February 20, 2014, the Company may, from time to time, repurchase up to $50 million of its common stock through February 28, 2015. The amount and timing of the repurchases will be determined by management and will depend on a variety of factors, including the trading price of the Company's common stock, general market and business conditions, and applicable legal requirements. As of June 30, 2014, $40.5 million remains available for share repurchases under the February 2014 Share Repurchase Program. During 2011, the Company and certain of the Company's subsidiaries as guarantors entered into an Amended and Restated Credit Agreement with various financial institutions, as amended by the first, second, third, and fourth amendments to the credit agreement dated as of August 31, 2012, September 25, 2013, February 14, 2014, and June 27, 2014, respectively (as amended and modified, the "2011 Credit Agreement"). The 2011 Credit Agreement consists of a senior secured credit facility in an aggregate principal amount of $450.0 million comprised of a five-year revolving credit facility ("Revolver") under which the Company may borrow from time to time up to $247.5 million and a $202.5 million five-year term loan facility ("Term Loan") that was funded in a single advance on the closing date of the first amendment. The 2011 Credit Agreement provides for the option to increase the revolving credit facility in an aggregate amount of up to $50 million subject to certain requirements as defined in the 2011 Credit Agreement. The proceeds of the senior secured credit facility were used to refinance existing indebtedness and will continue to be used for working capital, capital expenditures, and other corporate purposes. The obligations under the 2011 Credit Agreement are secured pursuant to a Security Agreement with Bank of America, N.A. as Collateral Agent. The Security Agreement grants Bank of America, N.A., for the ratable benefit of the lenders under the 2011 Credit Agreement, a first-priority lien, subject to permitted liens, on substantially all of the personal property assets of the 37-------------------------------------------------------------------------------- Table of Contents Company and the subsidiary guarantors. The Revolver and Term Loan are also secured by a pledge of 100% of the voting stock or other equity interests in our domestic subsidiaries and 65% of the voting stock or other equity interests in our foreign subsidiaries. Fees and interest on borrowings vary based on our total debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio as set forth in the 2011 Credit Agreement. Interest is based on a spread over the London Interbank Offered Rate ("LIBOR") or a spread over the base rate, as selected by the Company. The base rate is the greater of (a) the Federal Funds Rate plus 0.5%, (b) the Prime Rate and (c) except during a Eurodollar Unavailability Period, the Eurodollar Rate plus 1.0%. As of the date of the second amendment to the credit agreement, the Term Loan had a principal amount outstanding of $181.3 million. This principal balance is subject to scheduled quarterly amortization payments that began in 2013. The aggregate annual quarterly amortization payments, expressed as a percentage of the original principal balance, are as follows: 6.9% in 2013, 13.8% in 2014, 15.8% in 2015, 16.6% in 2016, 16.6% in 2017, and 30.3% in 2018, as set forth in the 2011 Credit Agreement. The maturity date for the Term Loan is September 25, 2018, at which time the outstanding principal balance and all accrued interest will be due and payable in full. All outstanding borrowings under the Revolver, as amended, will be due upon expiration of the 2011 Credit Agreement on September 25, 2018. As of June 30, 2014, the Company has made all scheduled quarterly amortization payments as they have come due in accordance with the Term Loan. Under the 2011 Credit Agreement, dividends are restricted to an amount up to $50 million plus 50% of cumulative consolidated net income from the closing date of the 2011 Credit Agreement plus 50% of the net cash proceeds from equity issuances. In addition, certain acquisitions and similar transactions need to be approved by the lenders. The 2011 Credit Agreement contains quarterly financial covenants that require us to maintain a minimum fixed charge coverage ratio of 2.25 to 1.00 and a maximum leverage ratio that varies throughout the term and was 3.00 to 1.00 as of June 30, 2014, as those ratios are defined therein, as well as a minimum net worth greater than $150 million. At June 30, 2014, we were in compliance with these financial covenants with a fixed charge coverage ratio of 4.91 to 1.00, a leverage ratio of 0.97 to 1.00, and net worth greater than $150 million. At December 31, 2013, we were also in compliance with these financial covenants. The borrowing capacity under the 2011 Credit Agreement is reduced by any outstanding letters of credit and payments under the Term Loan. At June 30, 2014, outstanding letters of credit totaled $5.3 million and are primarily used as security deposits for our office facilities. As of June 30, 2014, the unused borrowing capacity under the 2011 Credit Agreement was $219.7 million. Borrowings outstanding under this credit facility at June 30, 2014 totaled $178.8 million. These borrowings carried a weighted average interest rate of 2.2%, including the effect of the interest rate swaps described in Note 8 "Derivative Instruments and Hedging Activity." During the first six months of 2014, the average daily outstanding balance under our credit facility was $173.0 million. Borrowings outstanding at December 31, 2013 were $168.8 million and carried a weighted average interest rate of 2.0%. See "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of certain risks and uncertainties related to the 2011 Credit Agreement. Future Needs Our primary financing need has been to fund our growth. Our growth strategy is to expand our service offerings, which may require investments in new hires, acquisitions of complementary businesses, possible expansion into other geographic areas, and related capital expenditures. We also have cash needs to service our credit facility and repay our Term Loan. We believe our internally generated liquidity, together with the borrowing capacity available under our revolving credit facility and access to external capital resources will be adequate to fund our long-term growth and capital needs arising from cash commitments and debt service obligations. Our ability to secure short-term and long-term financing in the future will depend on several factors, including our future profitability, the quality of our accounts receivable and unbilled services, our relative levels of debt and equity, and the overall condition of the credit markets. CONTRACTUAL OBLIGATIONS For a summary of our commitments to make future payments under contractual obligations, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations" in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes in our contractual obligations since December 31, 2013. OFF-BALANCE SHEET ARRANGEMENTS We have not entered into any off-balance sheet arrangements. 38-------------------------------------------------------------------------------- Table of Contents NEW ACCOUNTING PRONOUNCEMENTS In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This guidance requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification ("ASC") 718, Compensation-Stock Compensation, as it relates to such awards. This guidance is effective for the Company beginning in the first quarter of 2016, with early adoption permitted. The amendments of ASU 2014-12 may be applied either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying the amendments as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. We are currently evaluating the potential effect of adopting this guidance but do not expect adoption to have a material impact on our consolidated financial statements. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as a new Topic, ASC Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for the Company beginning in the first quarter of 2017 and is to be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. We are currently evaluating the potential effect of adopting this guidance on our consolidated financial statements, as well as the transition methods. In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This guidance includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations that has (or will have) a major effect on the entity's operations and financial results should be presented as discontinued operations. Examples include a disposal of a major geographic area, a major line of business, a major equity method investment, or other major parts of an entity. Additionally, the revised guidance requires expanded disclosures in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. This guidance is effective for the Company beginning in the first quarter of 2015. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This guidance requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as either a reduction to a deferred tax asset or separately as a liability depending on the existence, availability and/or use of an operating loss carryforward, a similar tax loss, or a tax credit carryforward. The Company adopted ASU 2013-11 effective January 1, 2014. The adoption of this guidance did not have any effect on the Company's consolidated financial statements. In March 2013, the FASB issued ASU No. 2013-05, Parent's Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity, which amends current accounting guidance on foreign currency matters. This guidance requires that the entire amount of a cumulative translation adjustment related to an entity's investment in a foreign entity should be released when there has been a: (i) sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity, (ii) loss of a controlling financial interest in an investment in a foreign entity, and (iii) step acquisition for a foreign entity. The Company adopted ASU 2013-05 effective January 1, 2014. The adoption of this guidance did not have any effect on the Company's consolidated financial statements. SUBSEQUENT EVENTS On July 2, 2014, we made an investment, in the form of convertible debt, in Shorelight Holdings LLC, the parent company of Shorelight Education, a U.S.-based company that partners with leading nonprofit universities to increase access and retention of international students, boost institutional growth, and enhance an institution's global footprint. 39-------------------------------------------------------------------------------- Table of Contents |