HURN

Huron Consulting Group Inc. - 10-Q Summary (Period Ended June 30, 2009)

Business Context and Reporting Period

Huron Consulting Group Inc. is a leading provider of operational and financial consulting services operating in four segments: Health and Education, Accounting and Financial, Legal, and Corporate Consulting. This report covers the quarterly period ended June 30, 2009. The filing includes a significant restatement of previously issued financial statements for periods ending through March 31, 2009, due to accounting errors regarding acquisition-related payments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 15.6% ($22.4 million) for the quarter and 16.3% ($46.1 million) for the six months compared to 2008. Growth was driven primarily by the Health and Education segment following the July 2008 acquisition of Stockamp & Associates.
• Profitability Improvement: Operating income increased 195.8% for the quarter and 73.4% for the six months. This significant improvement is largely attributable to a reduction in non-cash compensation expense compared to the restated 2008 figures.
• Restatement Impact: The company restated prior periods to record non-cash compensation expense related to "Shareholder Payments" and "Employee Payments" from prior acquisitions. For the six months ended June 30, 2008, this restatement reduced net income by $15.8 million.
• Segment Performance: Health and Education revenues surged 64.4% QoQ. Conversely, Accounting and Financial Consulting revenues declined 35.3% QoQ due to lower demand for variable consultants.

Guidance, Outlook, Risks, and Unusual Items

• Restatement and Governance: The company announced a restatement of financial statements for 2006-2008 and Q1 2009. Consequently, the Board appointed a new Chairman, CEO, CFO, and Chief Accounting Officer. The former CEO and CFO resigned.
• Legal and Regulatory Risks: The SEC has commenced an investigation into the circumstances leading to the restatement. Additionally, six shareholder class action lawsuits have been filed. The company also faces an ongoing SEC inquiry regarding the allocation of chargeable hours.
• Goodwill Impairment Risk: Following the restatement announcement, the company's stock price dropped from $44.35 to $13.69. Management expects to perform a goodwill impairment analysis for the quarter ended September 30, 2009. A potential impairment charge could cause a breach of financial covenants in the company's credit agreement.
• Credit Agreement Covenants: The company has $295 million in outstanding borrowings. Failure to comply with covenants (potentially triggered by a goodwill impairment) could result in default interest rates, inability to borrow further, or immediate repayment requirements.
• Cost Reduction: In response to market conditions, the company initiated a cost reduction program in Q3 2009, estimated to reduce annualized expenses by $30 million, with $4-6 million in restructuring charges expected in the remainder of 2009.
• Unusual Gain: The company recognized a $2.7 million gain in Q2 2009 related to the release of employee non-solicitation agreements and settlement of contractual obligations.

Investor Verification Checklist

• Restatement Details: Verify the full extent of the accounting errors regarding acquisition-related payments and the impact on historical earnings.
• Goodwill Impairment: Monitor the outcome of the goodwill impairment analysis for Q3 2009 and its potential impact on the balance sheet and credit covenants.
• Legal Exposure: Track the progress of the SEC investigation and shareholder class action lawsuits for potential fines, penalties, or damages.
• Credit Facility Status: Confirm the company's compliance with financial covenants under its $460 million credit agreement, particularly if a goodwill charge is recorded.
• Management Stability: Assess the effectiveness of the new senior management team in stabilizing operations and addressing internal control weaknesses.