HURN

Huron Consulting Group Inc. - 2006 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: Huron Consulting Group Inc.
Reporting Period: Fiscal year ended December 31, 2006
Business Overview: An independent provider of financial and operational consulting services. The company operates through two primary segments: Financial Consulting (48.0% of revenue) and Operational Consulting (52.0% of revenue). Services include disputes and investigations, corporate advisory, valuation, interim management, legal business consulting, and strategic sourcing.
Key Developments: The company significantly expanded its workforce to 842 revenue-generating professionals (up from 632 in 2005) through hiring and acquisitions. Major acquisitions in 2006 included MSGalt & Company (Galt), Document Review Consulting Services (DRCS), and Aaxis Technologies. Subsequent to year-end, the company acquired Wellspring Partners and Glass & Associates in January 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 39.3% to $288.6 million, driven by organic growth, increased headcount, and acquisitions (Galt, DRCS, Aaxis). Operational Consulting revenue grew 68.5% to $150.0 million, while Financial Consulting grew 17.2% to $138.5 million.
• Profitability: Net income increased 50.2% to $26.7 million. Operating margin improved to 16.5% from 15.2%.
• Cost Structure: Direct costs increased 38.9% due to higher headcount and independent contractor usage. Selling, general, and administrative (SG&A) expenses rose 29.2% due to support staff additions and facility costs.
• Liquidity: Cash and cash equivalents decreased by $15.2 million to $16.6 million, primarily due to $51.1 million used for business acquisitions and capital expenditures, partially offset by $42.5 million in operating cash flow.
• Debt: The company entered a new $75 million credit facility in June 2006 (amended to $130 million in December 2006). Borrowings outstanding at year-end were $8.0 million, compared to zero in 2005.

Guidance, Outlook, and Risks

• Outlook: Management expects direct costs and operating expenses to continue increasing in 2007 due to new hires, promotions to managing director, and the integration of Wellspring and Glass acquisitions. The company anticipates that cash from operations and borrowings will be adequate to fund growth.
• Segment Reorganization: Effective January 1, 2007, the company reorganized into four operating segments: Legal Financial Consulting, Legal Operational Consulting, Health and Education Consulting, and Corporate Consulting.
• Risks:
  • Client Concentration: The top ten clients represented 31.2% of 2006 revenues. One client accounted for 10.2% of revenues.
  • Engagement Termination: Most engagements can be terminated by clients with little or no notice, creating revenue unpredictability.
  • Talent Retention: Success depends heavily on retaining senior management and revenue-generating professionals in a competitive market.
  • Bankruptcy Exposure: A significant client filed for bankruptcy in 2005. While the court approved retention, fee reductions were negotiated, and challenges to pre-bankruptcy fees remain a contingency.

Investor Verification Checklist

• Verify the integration progress and financial contribution of the January 2007 acquisitions (Wellspring and Glass) in the first quarter 2007 report.
• Monitor the utilization rates of new hires and the impact of the segment reorganization on future reporting.
• Review the status of the client bankruptcy case (Speltz & Weis related) for any potential fee challenges or write-offs.
• Assess the company's ability to maintain billing rates and utilization levels as the workforce expands.
• Track the usage of the $130 million credit facility, particularly regarding funding for future acquisitions and bonus payments.