HURN

Huron Consulting Group Inc. - 10-K Summary (Fiscal Year Ended Dec 31, 2004)

Business Context and Reporting Period

This filing covers the fiscal year ended December 31, 2004, for Huron Consulting Group Inc., an independent provider of financial and operational consulting services. Founded in 2002 by former Arthur Andersen partners, the company completed its Initial Public Offering (IPO) on October 13, 2004, listing on the NASDAQ National Market. The firm operates through two primary segments: Financial Consulting (59.8% of revenue) and Operational Consulting (40.2% of revenue). As of year-end, the company employed 612 individuals, including 483 consultants.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 57.2% to $159.6 million, driven by a 33% increase in the average number of consultants, a 10.1% increase in average billing rates, and a 6.1 percentage point increase in utilization rates.
• Profitability Turnaround: The company transitioned from an operating loss of $0.2 million in 2003 to an operating income of $19.7 million in 2004. This was primarily due to revenue growth outpacing the increase in direct costs and operating expenses.
• Segment Performance: Financial Consulting revenue grew 36.6% to $95.5 million with an operating margin of 38.0%. Operational Consulting revenue more than doubled (103.5%) to $64.1 million, with operating margin improving to 33.0%.
• Debt Elimination: Proceeds from the IPO were used to redeem all outstanding 8% preferred stock ($15.1 million) and repay all notes payable to HCG Holdings LLC ($10.7 million), resulting in zero long-term debt at year-end.
• Restructuring Charges: The company incurred $3.5 million in restructuring charges in 2004 related to closing two underperforming offices (Miami and Palo Alto) and eliminating a specific service offering in the Operational Consulting segment.

Guidance, Outlook, and Risks

Outlook and Commentary: Management expects future annual revenue growth rates to moderate compared to the high growth experienced in 2003 and 2004. The company plans to fund future growth through cash generated from operations, IPO proceeds, and its credit facility. Capital expenditures for 2005 are estimated at approximately $8.0 million.

Key Risks and Contingencies:

• Client Concentration: The top ten clients represented 27.8% of 2004 revenues. No single client exceeded 10%. Engagements are typically terminable by clients with little or no notice.
• Utilization and Billing Rates: Profitability is highly dependent on maintaining high consultant utilization and billing rates. New hiring can temporarily depress utilization rates.
• Performance-Based Fees: Approximately 5.1% of revenue was performance-based. These fees are contingent on client outcomes and can cause volatility in quarterly results.
• Accounting Changes: The company is evaluating the impact of SFAS No. 123(R) regarding share-based payments, which will require fair value accounting starting in 2005, potentially increasing reported expenses.
• Key Personnel: The business relies heavily on senior management and managing directors; their departure could materially harm operations.

Investor Verification Checklist

• Verify the sustainability of the 72.2% utilization rate given the aggressive hiring pace.
• Review the composition of the top ten clients to assess concentration risk.
• Monitor the impact of the new SFAS No. 123(R) accounting standard on future net income and EPS.
• Assess the company's ability to maintain billing rates in a competitive market as growth moderates.
• Confirm the status of the $16.3 million in accrued bonuses payable in Q1 2005.