HURN

Huron Consulting Group Inc. - 10-Q Summary (Period Ended June 30, 2008)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Huron Consulting Group Inc., an independent provider of financial and operational consulting services. The report covers the three and six-month periods ended June 30, 2008. The Company operates through four segments: Health and Education Consulting, Financial Consulting, Legal Consulting, and Corporate Consulting.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 20.7% year-over-year for the six-month period, driven by the acquisition of Callaway Partners (July 2007) and growth in full-time equivalents (contract reviewers and variable consultants).
• Margin Compression: Operating margin declined from 16.5% to 14.4%. This was primarily due to higher total compensation costs as a percentage of revenue and increased share-based compensation, partially offset by lower intangible asset amortization (as certain assets from 2007 acquisitions were fully amortized).
• Segment Performance:
  • Health and Education: Strongest performer with revenue up 32.0% and operating margin expanding to 41.6%.
  • Financial Consulting: Revenue up 6.2%, but operating income dropped 44.1% due to lower utilization rates of full-time consultants following significant hiring in late 2007.
  • Legal Consulting: Revenue up 21.0% driven by demand for document review services.
• Liquidity: Cash provided by operating activities improved to $4.8 million (vs. a $5.2 million use in the prior year), aided by moderating growth in receivables.

Guidance, Outlook, Risks, and Subsequent Events

Subsequent Events (Post-June 30, 2008):

• Acquisition of Stockamp & Associates: On July 8, 2008, the Company acquired Stockamp for approximately $218.5 million ($168.5M cash, $50M stock) to expand its healthcare consulting presence.
• Debt Facility Amendment: Concurrent with the Stockamp acquisition, the Company amended its credit agreement, increasing borrowing capacity to $460 million (comprising a $240M revolver and a new $220M term loan). Total borrowings outstanding as of July 8, 2008, reached $347.0 million.
• Restructuring: In July 2008, the Company initiated workforce reductions, including the elimination of the operational consulting group within Corporate Consulting, estimating $2 million in severance charges to be paid in Q3 2008.

Risks and Contingencies:

• Legal Proceedings: The Company is defending against a lawsuit filed by the SVCMC Litigation Trust (formerly St. Vincents Catholic Medical Centers) alleging breach of fiduciary duties and fraud, seeking at least $200 million in damages. Management believes the claims are without merit.
• Earn-outs: The Company anticipates paying approximately $30 million in additional purchase consideration for prior acquisitions in 2008, excluding potential earn-outs from the Stockamp acquisition.

Key Facts for Investor Verification

• Utilization Rates: Verify the trend in full-time billable consultant utilization rates, which declined significantly in Financial Consulting (from 79.8% to 51.9%) and Legal Consulting (from 77.3% to 60.1%) year-over-year, impacting profitability.
• Debt Servicing: Confirm the impact of the new $220 million term loan and increased interest rates on future cash flows and EBITDA coverage ratios.
• Stockamp Integration: Monitor the integration of Stockamp & Associates and the potential for additional earn-out payments based on performance targets through 2011.
• Legal Exposure: Track the status of the St. Vincents litigation, as a material adverse judgment could significantly impact financial position.
• Restructuring Costs: Verify the actual severance costs incurred in Q3 2008 against the estimated $2 million charge.