HURN

Huron Consulting Group Inc. - 10-Q Summary (Period Ended June 30, 2006)

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 reporting period covers the three and six months ended June 30, 2006. The Company operates through two segments: Financial Consulting and Operational Consulting. As of July 31, 2006, there were 18,020,614 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 33.6% year-over-year for the six-month period, driven by a 34.2% increase in the second quarter. Growth was primarily attributable to an increase in the number of consultants (from 513 to 648 average) and higher average billing rates.
• Acquisitions: The Company acquired MSGalt & Company, LLC ("Galt") on April 3, 2006, for $25.2 million. Galt's results are included in the Operational Consulting segment. This acquisition significantly boosted Operational Consulting revenues, which grew 76.2% in Q2 and 47.8% for the six months.
• Profitability: Net income increased 25.2% to $11.9 million. However, operating margins decreased slightly from 16.8% to 16.1% due to increased direct costs (consultant compensation) and amortization of intangible assets from the Galt acquisition.
• Cash Flow: Operating cash flow turned negative ($2.5 million used) compared to positive cash flow ($3.6 million provided) in the prior year. This was primarily due to the timing of bonus payments and increased receivables. Investing cash outflows nearly doubled to $33.8 million due to the Galt acquisition and capital expenditures.
• Liquidity: Cash and cash equivalents decreased significantly from $31.8 million to $3.4 million. The Company utilized its credit facility, with $6.5 million outstanding at period end, up from zero at year-end 2005.

Guidance, Outlook, and Risks

• Outlook: Management expects to continue hiring additional managing directors and support staff, which will increase direct costs in the near term. The Company intends to fund growth through operating cash flows and borrowings under its new $75 million credit facility.
• Subsequent Events: On July 31, 2006, the Company acquired Aaxis Technologies and Document Review Consulting Services LLC for approximately $24 million, funded by a $22 million draw on the credit facility.
• Risks: The Company faces risks related to the integration of acquired businesses, customer concentration (though no single client exceeded 10% in 2006), and the ability to maintain utilization rates and billing rates. Market risks are limited to variable interest rates on the credit facility.
• Accounting Changes: The Company adopted SFAS No. 123(R) effective January 1, 2006, requiring fair value measurement of share-based compensation, resulting in increased compensation expense recognition.

Key Facts for Investor Verification

• Acquisition Integration: Verify the revenue contribution and integration progress of the MSGalt & Company acquisition, which drove the majority of Q2 growth.
• Cash Burn Rate: Monitor the significant reduction in cash reserves ($28.4 million decrease) and the reliance on the credit facility to fund operations and acquisitions.
• Utilization Rates: Track consultant utilization rates, which dipped in the Financial Consulting segment (74.1% in Q2 vs 80.4% prior year) despite overall revenue growth.
• Debt Covenants: Confirm continued compliance with the new credit agreement covenants (interest coverage, debt-to-EBITDA, net worth) following the subsequent $22 million borrowing.
• Share-Based Compensation: Review the impact of the new SFAS 123(R) standard on future earnings, with $31.6 million of unrecognized compensation cost remaining.