Huron Consulting Group Inc. Form 10-Q For The Period June 30, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended June 30, 2006
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Commission
file number: 000-50976
Huron
Consulting Group Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
01-0666114
|
(State
or other jurisdiction
|
|
(IRS
Employer
|
of
incorporation or organization)
|
|
Identification
Number)
|
550
West Van Buren Street
Chicago,
Illinois
60607
(Address
of principal executive offices)
(Zip
Code)
(312)
583-8700
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
As
of July 31, 2006, 18,020,614 shares of the registrant’s common stock,
par value $0.01 per share, were outstanding.
HURON
CONSULTING GROUP INC.
INDEX
|
|
|
|
|
Page
|
Part
I - Financial Information
|
|
|
|
|
|
|
Item
1.
|
Consolidated
Financial Statements
|
|
|
|
Consolidated
Balance Sheets
|
1
|
|
|
Consolidated
Statements of Income
|
2
|
|
|
Consolidated
Statement of Stockholders’ Equity
|
3
|
|
|
Consolidated
Statements of Cash Flows
|
4
|
|
|
Notes
to Consolidated Financial Statements
|
5
-
13
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations
|
14
- 24
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
24
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
24
|
|
|
|
|
Part
II - Other Information
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
25
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
25
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
25
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
25
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
25
|
|
|
|
|
|
Item
5.
|
Other
Information
|
25
|
|
|
|
|
|
Item
6.
|
Exhibits
|
26
|
|
|
|
|
Signature
|
27
|
PART
I ¾
FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
HURON
CONSULTING GROUP INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share amounts)
(Unaudited)
|
|
June 30,
2006
|
|
December 31,
2005
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,381
|
|
$
|
31,820
|
|
Receivables
from clients, net
|
|
|
38,472
|
|
|
29,164
|
|
Unbilled
services, net
|
|
|
23,242
|
|
|
18,187
|
|
Income
tax receivable
|
|
|
3,092
|
|
|
232
|
|
Deferred
income taxes
|
|
|
14,747
|
|
|
12,553
|
|
Other
current assets
|
|
|
5,211
|
|
|
5,799
|
|
Total
current assets
|
|
|
88,145
|
|
|
97,755
|
|
Property
and equipment, net
|
|
|
23,504
|
|
|
13,162
|
|
Deferred
income taxes
|
|
|
3,951
|
|
|
2,154
|
|
Deposits
and other assets
|
|
|
1,273
|
|
|
1,147
|
|
Intangible
assets, net
|
|
|
3,085
|
|
|
844
|
|
Goodwill
|
|
|
35,501
|
|
|
14,637
|
|
Total
assets
|
|
$
|
155,459
|
|
$
|
129,699
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,944
|
|
$
|
2,671
|
|
Accrued
expenses
|
|
|
9,846
|
|
|
4,357
|
|
Accrued
payroll and related benefits
|
|
|
23,318
|
|
|
32,073
|
|
Income
tax payable
|
|
|
¾
|
|
|
491
|
|
Deferred
revenues
|
|
|
5,180
|
|
|
4,609
|
|
Borrowings
|
|
|
6,500
|
|
|
¾
|
|
Current
portion of notes payable and capital lease obligations
|
|
|
1,141
|
|
|
1,282
|
|
Total
current liabilities
|
|
|
48,929
|
|
|
45,483
|
|
Non-current
liabilities:
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
|
604
|
|
|
274
|
|
Notes
payable and capital lease obligations, net of current
portion
|
|
|
1,132
|
|
|
2,127
|
|
Deferred
lease incentives
|
|
|
10,175
|
|
|
6,283
|
|
Total
non-current liabilities
|
|
|
11,911
|
|
|
8,684
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
Common
stock; $0.01 par value; 500,000,000 shares authorized; 17,720,301
and
17,397,312 shares issued at June 30, 2006 and December 31, 2005,
respectively
|
|
|
177
|
|
|
174
|
|
Treasury
stock, at cost, 294,341 and 148,933 shares at June 30, 2006 and
December 31, 2005, respectively
|
|
|
(6,029
|
)
|
|
(3,061
|
)
|
Additional
paid-in capital
|
|
|
69,084
|
|
|
58,908
|
|
Retained
earnings
|
|
|
31,387
|
|
|
19,511
|
|
Total
stockholders’ equity
|
|
|
94,619
|
|
|
75,532
|
|
Total
liabilities and stockholders equity
|
|
$
|
155,459
|
|
$
|
129,699
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
HURON
CONSULTING GROUP INC.
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three
months ended
June 30,
|
|
Six
months ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues
and reimbursable expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
67,769
|
|
$
|
50,517
|
|
$
|
129,956
|
|
$
|
97,277
|
|
Reimbursable
expenses
|
|
|
6,691
|
|
|
4,691
|
|
|
12,130
|
|
|
9,061
|
|
Total
revenues and reimbursable expenses
|
|
|
74,460
|
|
|
55,208
|
|
|
142,086
|
|
|
106,338
|
|
Direct
costs and reimbursable expenses (exclusive
of depreciation and amortization shown in operating
expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
37,436
|
|
|
28,754
|
|
|
73,426
|
|
|
54,698
|
|
Intangible
assets amortization
|
|
|
1,640
|
|
|
385
|
|
|
1,716
|
|
|
385
|
|
Reimbursable
expenses
|
|
|
6,795
|
|
|
4,704
|
|
|
12,333
|
|
|
9,091
|
|
Total
direct costs and reimbursable expenses
|
|
|
45,871
|
|
|
33,843
|
|
|
87,475
|
|
|
64,174
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
15,713
|
|
|
12,106
|
|
|
30,554
|
|
|
23,829
|
|
Depreciation
and amortization
|
|
|
1,569
|
|
|
1,109
|
|
|
3,077
|
|
|
1,956
|
|
Total
operating expenses
|
|
|
17,282
|
|
|
13,215
|
|
|
33,631
|
|
|
25,785
|
|
Operating
income
|
|
|
11,307
|
|
|
8,150
|
|
|
20,980
|
|
|
16,379
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
(193
|
)
|
|
64
|
|
|
39
|
|
|
229
|
|
Other
income
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
1
|
|
Total
other income (expense)
|
|
|
(193
|
)
|
|
64
|
|
|
39
|
|
|
230
|
|
Income
before provision for income taxes
|
|
|
11,114
|
|
|
8,214
|
|
|
21,019
|
|
|
16,609
|
|
Provision
for income taxes
|
|
|
4,834
|
|
|
3,557
|
|
|
9,143
|
|
|
7,125
|
|
Net
income
|
|
$
|
6,280
|
|
$
|
4,657
|
|
$
|
11,876
|
|
$
|
9,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
$
|
0.30
|
|
$
|
0.73
|
|
$
|
0.61
|
|
Diluted
|
|
$
|
0.36
|
|
$
|
0.28
|
|
$
|
0.69
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in calculating earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,309
|
|
|
15,646
|
|
|
16,194
|
|
|
15,597
|
|
Diluted
|
|
|
17,244
|
|
|
16,773
|
|
|
17,120
|
|
|
16,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
HURON
CONSULTING GROUP INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
(In
thousands, except share amounts)
(Unaudited)
|
|
Common
Stock
|
|
Treasury Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Stockholders’
Equity
|
|
|
|
Shares
|
|
Amount
|
|
Balance
at December 31, 2005
|
|
|
17,397,312
|
|
$
|
174
|
|
$
|
(3,061
|
)
|
$
|
58,908
|
|
$
|
19,511
|
|
$
|
75,532
|
|
Net
income
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
11,876
|
|
|
11,876
|
|
Issuance
of common stock in connection
with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards, net
of cancellations
|
|
|
5,000
|
|
|
¾
|
|
|
(1,954
|
)
|
|
1,954
|
|
|
¾
|
|
|
¾
|
|
Exercise
of stock options
|
|
|
293,429
|
|
|
3
|
|
|
¾
|
|
|
231
|
|
|
¾
|
|
|
234
|
|
Share-based
compensation
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
4,721
|
|
|
¾
|
|
|
4,721
|
|
Shares
redeemed for employee tax withholdings
|
|
|
¾
|
|
|
¾
|
|
|
(1,014
|
)
|
|
¾
|
|
|
¾
|
|
|
(1,014
|
)
|
Income
tax benefit on share-based
compensation
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
3,270
|
|
|
¾
|
|
|
3,270
|
|
Balance
at June 30, 2006
|
|
|
17,695,741
|
|
$
|
177
|
|
$
|
(6,029
|
)
|
$
|
69,084
|
|
$
|
31,387
|
|
$
|
94,619
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
HURON
CONSULTING GROUP INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six
months ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
11,876
|
|
$
|
9,484
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,793
|
|
|
2,341
|
|
Deferred
income taxes
|
|
|
(3,991
|
)
|
|
(2,541
|
)
|
Share-based
compensation
|
|
|
4,721
|
|
|
3,106
|
|
Tax
benefit from share-based compensation
|
|
|
¾
|
|
|
1,369
|
|
Allowances
for doubtful accounts and unbilled services
|
|
|
241
|
|
|
145
|
|
Other
|
|
|
134
|
|
|
¾
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Increase
in receivables from clients
|
|
|
(9,464
|
)
|
|
(2,928
|
)
|
Increase
in unbilled services
|
|
|
(5,140
|
)
|
|
(4,698
|
)
|
Increase
in income tax receivable
|
|
|
(2,860
|
)
|
|
(309
|
)
|
Decrease
in other current assets and other
|
|
|
450
|
|
|
19
|
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
4,894
|
|
|
(1,184
|
)
|
Decrease
in accrued payroll and related benefits
|
|
|
(8,755
|
)
|
|
(1,618
|
)
|
Decrease
in income tax payable
|
|
|
(491
|
)
|
|
(720
|
)
|
Increase
in deferred revenues
|
|
|
1,071
|
|
|
1,088
|
|
Net
cash (used in) provided by operating activities
|
|
|
(2,521
|
)
|
|
3,554
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(13,200
|
)
|
|
(4,285
|
)
|
Purchases
of businesses, net of cash acquired
|
|
|
(20,562
|
)
|
|
(12,366
|
)
|
Net
cash used in investing activities
|
|
|
(33,762
|
)
|
|
(16,651
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
234
|
|
|
104
|
|
Tax
benefit from share-based compensation
|
|
|
3,270
|
|
|
¾
|
|
Shares
redeemed for employee tax withholdings
|
|
|
(1,014
|
)
|
|
¾
|
|
Proceeds
from borrowings under line of credit
|
|
|
35,600
|
|
|
¾
|
|
Repayments
on line of credit
|
|
|
(29,100
|
)
|
|
¾
|
|
Principal
payments of notes payable and capital lease obligations
|
|
|
(1,146
|
)
|
|
¾
|
|
Net
cash provided by financing activities
|
|
|
7,844
|
|
|
104
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(28,439
|
)
|
|
(12,993
|
)
|
Cash
and cash equivalents at beginning of the period
|
|
|
31,820
|
|
|
28,092
|
|
Cash
and cash equivalents at end of the period
|
|
$
|
3,381
|
|
$
|
15,099
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
13,217
|
|
$
|
9,327
|
|
Interest
|
|
$
|
186
|
|
$
|
63
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Liabilities
incurred for purchases of businesses
|
|
$
|
4,613
|
|
$
|
3,000
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in thousands, except per share amounts)
1. |
Description
of Business
|
Huron
Consulting Group Inc. was formed on March 19, 2002. Huron Consulting Group
Inc., together with its indirect wholly-owned operating subsidiaries, Huron
Consulting Services LLC and Speltz & Weis LLC, (collectively, the
“Company”), is an independent provider of financial and operational consulting
services, whose clients include Fortune 500 companies, medium-sized businesses,
leading academic institutions, healthcare organizations and the law firms
that
represent these various organizations.
The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the rules and regulations of the Securities
and
Exchange Commission. In the opinion of management, these financial statements
reflect all adjustments of a normal, recurring nature necessary for the fair
presentation of the Company’s financial position, results of operations and cash
flows for the interim periods presented in conformity with accounting principles
generally accepted in the United States of America. These financial statements
should be read in conjunction with the consolidated financial statements
and
notes thereto for the year ended December 31, 2005 included in the
Company’s annual report on Form 10-K and the Company’s Quarterly Report on
Form 10-Q for the period ended March 31, 2006. The Company’s results for
any interim period are not necessarily indicative of results for a full year
or
any other interim period.
3. |
Share-based
Compensation
|
In
December 2004, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment,” (“SFAS No. 123R”). This statement requires that the
costs of employee share-based payments be measured at fair value on the awards’
grant date and recognized in the financial statements over the requisite
service
period.
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123R
using the modified prospective application transition method. Under this
method,
compensation cost for the portion of awards for which the requisite service
has
not yet been rendered that are outstanding as of the adoption date is recognized
over the remaining service period. The compensation cost for that portion
of
awards is based on the grant-date fair value of those awards as calculated
for
pro forma disclosures under SFAS No. 123, as originally issued. All new
awards and awards that are modified, repurchased, or cancelled after the
adoption date are accounted for under the provisions of SFAS No. 123R.
Prior periods have not been restated under this transition method. The Company
recognizes share-based compensation ratably using the straight-line attribution
method over the requisite service period. In addition, pursuant to SFAS
No. 123R, the Company is required to estimate the amount of expected
forfeitures when calculating share-based compensation, instead of accounting
for
forfeitures as they occur, which was the Company’s practice prior to the
adoption of SFAS No. 123R. As of January 1, 2006, the cumulative
effect of adopting the estimated forfeiture method was not material.
Prior
to
January 1, 2006, the Company accounted for share-based compensation using
the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations and elected the disclosure option of SFAS No. 123 as amended
by
SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and
Disclosure.” SFAS No. 123 requires that companies either recognize compensation
expense for grants of stock, stock options and other equity instruments based
on
fair value, or provide pro forma disclosure of net income and earnings per
share
in the notes to the financial statements. Accordingly, the Company measured
compensation expense for stock options as the excess, if any, of the estimated
fair market value of the Company’s stock at the date of grant over the exercise
price. The following table details the effect on net income and earnings
per
share for the three and six months ended June 30, 2005 had compensation
expense for the stock plans been recorded based on the fair value method
under
SFAS No. 123.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in thousands, except per share amounts)
|
|
Three
Months Ended June 30, 2005
|
|
Six
Months Ended June 30, 2005
|
|
Net
income
|
|
$
|
4,657
|
|
$
|
9,484
|
|
Add:
Total share-based compensation expense included in reported net
income,
net of related tax effects
|
|
|
1,014
|
|
|
1,857
|
|
Deduct:
Total share-based compensation expense determined under the fair
value method for all awards, net of related tax effects
|
|
|
(1,054
|
)
|
|
(1,946
|
)
|
Pro
forma net income
|
|
$
|
4,617
|
|
$
|
9,395
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.30
|
|
$
|
0.61
|
|
Basic
- pro forma
|
|
$
|
0.30
|
|
$
|
0.60
|
|
Diluted
- as reported
|
|
$
|
0.28
|
|
$
|
0.57
|
|
Diluted
- pro forma
|
|
$
|
0.28
|
|
$
|
0.56
|
|
Equity
Incentive Plans
In
2004,
the Company adopted the 2004 Omnibus Stock Plan (the “Omnibus Plan”), which
replaced the Company’s prior share-based compensation plans. The Omnibus Plan
permits the grant of stock options, restricted stock, and other share-based
awards valued in whole or in part by reference to, or otherwise based on,
the
Company’s common stock. Under the Omnibus Plan, as originally adopted, a total
of 2,141,000 shares of common stock were reserved for issuance to eligible
employees, executive officers, independent contractors and outside directors.
The Plan was amended effective as of May 2, 2006 to increase the number of
shares of common stock available for issuance by 2,100,000. As of June 30,
2006, approximately 2,809,000 shares remain available for future
issuance.
The
Compensation Committee of the board of directors has the responsibility of
interpreting the Omnibus Plan and determining all of the terms and conditions
of
share-based awards made under the Omnibus Plan, including when the awards
will
become exercisable or otherwise vest. Subject to acceleration under certain
conditions, the majority of the Company’s stock options and restricted stock
vest annually, pro-rata over 4 years. All stock options have a ten-year
contractual term.
The
weighted average fair values of options granted during the six months ended
June 30, 2006 and 2005 were $15.31 and $19.38, respectively, which were
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions for both periods:
Expected
dividend yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
40
|
%
|
Risk-free
interest rate
|
|
|
5.1
|
%
|
Expected
option life (in years)
|
|
|
4
|
|
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in thousands, except per share amounts)
Stock
option activity for the six months ended June 30, 2006 was as
follows:
|
|
Number
of
Options
(in
thousands)
|
|
Weighted
Average Exercise Price
(in
dollars)
|
|
Weighted
Average Remaining Contractual Term
(in
years)
|
|
Aggregate
Intrinsic Value
(in
millions)
|
|
Outstanding
at January 1, 2006
|
|
|
1,305
|
|
$
|
2.15
|
|
|
|
|
|
|
|
Granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
price = fair market value
|
|
|
8
|
|
$
|
30.29
|
|
|
|
|
|
|
|
Exercised
|
|
|
(294
|
)
|
$
|
0.80
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(67
|
)
|
$
|
3.68
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
952
|
|
$
|
2.71
|
|
|
7.2
|
|
$
|
30.8
|
|
Exercisable
at June 30, 2006
|
|
|
553
|
|
$
|
1.99
|
|
|
6.9
|
|
$
|
18.3
|
|
The
total
intrinsic value of options exercised during the six months ended June 30,
2006 and 2005 was $8.5 million and $2.1 million,
respectively.
Restricted
stock activity for the six months ended June 30, 2006 was as
follows:
|
|
Number
of Shares
(in
thousands)
|
|
Weighted Average Grant-Date Fair
Value
(in
dollars)
|
|
Restricted
stock at January 1, 2006
|
|
|
1,279
|
|
$
|
19.24
|
|
Granted
|
|
|
43
|
|
$
|
32.37
|
|
Vested
|
|
|
(133
|
)
|
$
|
21.29
|
|
Forfeited
|
|
|
(113
|
)
|
$
|
17.81
|
|
Restricted
stock at June 30, 2006
|
|
|
1,076
|
|
$
|
19.67
|
|
The
aggregate fair value of restricted stock that vested during the six months
ended
June 30, 2006 was $3.7 million. There was no restricted stock vesting
during the six months ended June 30, 2005. On
July 1, 2006, the Company granted a total of 504,500 shares of restricted
stock to certain employees. Although these restricted shares were not issued
to
the grantees until July 1, 2006, a grant date was established for
measurement purposes under SFAS No. 123R on February 28, 2006,
the date that the Company’s Compensation Committee approved the award. As such,
the Company began to recognize the expense relating to this award effective
February 28, 2006.
Total
share-based compensation cost recognized for the three months ended
June 30, 2006 and 2005 was $2.5 million and $1.7 million,
respectively, with related income tax benefits of $1.0 million and
$0.7 million, respectively. Total share-based compensation cost recognized
for the six months ended June 30, 2006 and 2005 was $4.7 million and
$3.1 million, respectively, with related income tax benefits of
$1.9 million and $1.3 million, respectively. As of June 30, 2006,
there was $31.6 million of total unrecognized compensation cost related to
nonvested share-based awards. This cost is expected to be recognized over
a
weighted-average period of 3.2 years.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in thousands, except per share amounts)
Acquisition
of MSGalt & Company, LLC
On
April 3, 2006, the Company acquired substantially all of the assets of
MSGalt & Company, LLC (“Galt”), a specialized advisory firm consisting of 25
consultants that designs and implements corporate-wide programs to improve
shareholder returns. The aggregate purchase price of the acquisition was
$25.2 million, which consisted of $20.4 million cash paid at closing,
$0.2 million of transaction costs, and $4.6 million of additional
purchase price earned by Galt during the quarter as certain performance targets
were met. The Company financed this acquisition with cash on hand and borrowings
of $6.5 million under the Company’s bank credit agreement. Additional
purchase consideration may be payable if specific performance targets are
met
over a four-year period. Such amounts will be recorded as an adjustment to
goodwill if payable. Also, additional payments may be made based on the amount
of revenues the Company receives from referrals made by Galt employees over
a
four-year period. Such amounts will be recorded as an expense if payable.
The
acquisition was accounted for under the purchase method of accounting. It
was
consummated on April 3, 2006 and the results of operations of Galt have
been included within the Operational Consulting segment since that
date.
The
identifiable intangible assets that were acquired totaled $4.3 million and
have an estimated weighted average useful life of 20.0 months, which
consisted of customer contracts totaling $1.7 million (3.2 months weighted
average useful life), customer relationships totaling $1.4 million (6.1
months weighted average useful life), and non-competition agreements totaling
$1.2 million (60.0 months weighted average useful life). Amortization
expense relating to customer contracts is classified as a component of total
direct costs on the Company’s consolidated statement of income while
amortization expense relating to customer relationships and non-competition
agreements are classified as a component of operating expenses. Additionally,
the Company recorded $20.9 million of goodwill, which the Company intends
to deduct for income tax purposes.
Acquisition
of Speltz & Weis LLC
On
May 9, 2005, Huron Consulting Group Inc. acquired Speltz & Weis LLC
(“S&W”), a specialized consulting firm that consisted of 26 consultants. The
aggregate purchase price of the acquisition was $17.2 million, which
consisted of $14.0 million cash paid at closing, notes payable totaling
$3.0 million payable in three equal annual installments of
$1.0 million (together with accrued interest at 4% per annum) that began on
May 8, 2006, and $0.2 million of transaction costs. Additional
purchase consideration may be payable based on the performance of S&W over a
three-year period. Such amounts will be recorded as an adjustment to goodwill
if
payable. Also, additional payments may be made based on the amount of revenues
the Company receives from certain referrals made by S&W employees. Such
amounts will be recorded as an expense if payable. The acquisition was accounted
for under the purchase method of accounting. It was consummated on May 9,
2005 and the results of operations of S&W have been included within the
Financial Consulting segment since that date.
The
identifiable intangible assets that were acquired consisted of customer
contracts of $1.9 million (8.4 months weighted average useful life) and
customer relationships of $0.7 million (15.1 months weighted average useful
life). Additionally, the Company recorded $14.6 million of goodwill, which
the Company intends to deduct for income tax purposes.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in thousands, except per share amounts)
Purchase
Price Allocations
The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed at the date of the acquisitions.
|
|
Galt
|
|
S&W
|
|
Assets
Acquired:
|
|
|
April
3,
2006
|
|
|
May
9,
2005
|
|
Current
assets
|
|
$
|
—
|
|
$
|
2,291
|
|
Equipment
|
|
|
11
|
|
|
16
|
|
Intangible
assets
|
|
|
4,300
|
|
|
2,600
|
|
Goodwill
|
|
|
20,864
|
|
|
14,637
|
|
|
|
|
25,175
|
|
|
19,544
|
|
Liabilities
Assumed:
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
—
|
|
|
2,307
|
|
|
|
|
|
|
|
|
|
Net
Assets Acquired
|
|
$
|
25,175
|
|
$
|
17,237
|
|
Pro
Forma Financial Data
The
following unaudited pro forma financial data gives effect to the acquisitions
of
Galt and S&W as if they had been completed at the beginning of the period
presented. The unaudited pro forma financial data are not necessarily indicative
of the operating results that would have been achieved if the acquisition
had
occurred on the dates indicated, nor are they necessarily indicative of future
results.
|
|
Historical
Huron and Historical Galt
|
|
|
|
Three
Months Ended
June 30,
|
|
Six
Months Ended
June 30,
|
|
|
|
2006
Actual
|
|
2005
Pro
forma
|
|
2006
Pro
forma
|
|
2005
Pro
forma
|
|
Revenues,
net of reimbursable expenses
|
|
$
|
67,769
|
|
$
|
54,133
|
|
$
|
134,025
|
|
$
|
103,997
|
|
Operating
income
|
|
$
|
11,307
|
|
$
|
8,907
|
|
$
|
22,700
|
|
$
|
16,652
|
|
Income
before provision for income taxes
|
|
$
|
11,114
|
|
$
|
8,719
|
|
$
|
22,526
|
|
$
|
16,503
|
|
Net
income
|
|
$
|
6,280
|
|
$
|
4,953
|
|
$
|
12,777
|
|
$
|
9,420
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
$
|
0.32
|
|
$
|
0.79
|
|
$
|
0.60
|
|
Diluted
|
|
$
|
0.36
|
|
$
|
0.30
|
|
$
|
0.75
|
|
$
|
0.56
|
|
|
|
Historical
Huron and Historical S&W
|
|
|
|
Three
Months Ended
June 30,
|
|
Six
Months Ended
June 30,
|
|
|
|
2006
Actual
|
|
2005
Pro
forma
|
|
2006
Actual
|
|
2005
Pro
forma
|
|
Revenues,
net of reimbursable expenses
|
|
$
|
67,769
|
|
$
|
52,853
|
|
$
|
129,956
|
|
$
|
105,559
|
|
Operating
income
|
|
$
|
11,307
|
|
$
|
8,212
|
|
$
|
20,980
|
|
$
|
17,248
|
|
Income
before provision for income taxes
|
|
$
|
11,114
|
|
$
|
8,263
|
|
$
|
21,019
|
|
$
|
17,441
|
|
Net
income
|
|
$
|
6,280
|
|
$
|
4,664
|
|
$
|
11,876
|
|
$
|
9,855
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
$
|
0.30
|
|
$
|
0.73
|
|
$
|
0.63
|
|
Diluted
|
|
$
|
0.36
|
|
$
|
0.28
|
|
$
|
0.69
|
|
$
|
0.59
|
|
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in thousands, except per share amounts)
5. |
Goodwill
and Intangible Assets
|
The
changes in the carrying amount of goodwill by segment for the six months
ended
June 30, 2006 were as follows:
|
|
Financial
Consulting
|
|
Operational
Consulting
|
|
Total
|
|
Balance
as of January 1, 2006
|
|
$
|
11,739
|
|
$
|
2,898
|
|
$
|
14,637
|
|
Goodwill
acquired
|
|
|
—
|
|
|
20,864
|
|
|
20,864
|
|
Balance
as of June 30, 2006
|
|
$
|
11,739
|
|
$
|
23,762
|
|
$
|
35,501
|
|
Identifiable
intangible assets with finite lives are amortized over their estimated useful
lives. Intangible assets amortization expense was $1.8 million and
$2.1 million for the three and six months ended June 30, 2006,
respectively. Intangible assets amortization expense was $0.5 million for
both the three and six months ended June 30, 2005. Estimated intangible
assets amortization expense is $3.8 million for 2006, $0.3 million for
each of 2007, 2008, 2009 and 2010 and $0.1 million for 2011. These amounts
are based on intangible assets recorded as of June 30, 2006 and actual
amortization expense could differ from these estimated amounts as a result
of
future acquisitions and other factors. Intangible assets are as
follows:
|
|
June 30,
2006
|
|
December 31,
2005
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Customer
contracts
|
|
$
|
3,600
|
|
$
|
3,516
|
|
$
|
1,900
|
|
$
|
1,848
|
|
Customer
relationships
|
|
|
2,100
|
|
|
638
|
|
|
700
|
|
|
359
|
|
Non-competition
agreements
|
|
|
1,200
|
|
|
65
|
|
|
—
|
|
|
—
|
|
Technology
|
|
|
475
|
|
|
71
|
|
|
475
|
|
|
24
|
|
Total
|
|
$
|
7,375
|
|
$
|
4,290
|
|
$
|
3,075
|
|
$
|
2,231
|
|
6. |
Property
and Equipment
|
Property
and equipment at June 30, 2006 and December 31, 2005 are detailed
below:
|
|
June 30,
|
|
December 31,
|
|
|
|
2006
|
|
2005
|
|
Computers,
related equipment and software
|
|
$
|
11,471
|
|
$
|
9,747
|
|
Furniture
and fixtures
|
|
|
5,979
|
|
|
3,721
|
|
Leasehold
improvements
|
|
|
16,235
|
|
|
6,122
|
|
Assets
under capital lease
|
|
|
409
|
|
|
409
|
|
Assets
under construction
|
|
|
—
|
|
|
1,229
|
|
Property
and equipment
|
|
|
34,094
|
|
|
21,228
|
|
Accumulated
depreciation and amortization
|
|
|
(10,590
|
)
|
|
(8,066
|
)
|
Property
and equipment, net
|
|
$
|
23,504
|
|
$
|
13,162
|
|
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in thousands, except per share amounts)
Basic
earnings per share excludes dilution and is computed by dividing net income
by
the weighted average number of common shares outstanding for the period,
excluding unvested restricted common stock. Diluted earnings per share reflects
the potential reduction in earnings per share that could occur if securities
or
other contracts to issue common stock were exercised or converted into common
stock under the treasury stock method. Earnings per share under the basic
and
diluted computations are as follows:
|
|
Three
Months Ended
June 30,
|
|
Six
Months Ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income
|
|
$
|
6,280
|
|
$
|
4,657
|
|
$
|
11,876
|
|
$
|
9,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
16,309
|
|
|
15,646
|
|
|
16,194
|
|
|
15,597
|
|
Weighted
average common stock equivalents
|
|
|
935
|
|
|
1,127
|
|
|
926
|
|
|
1,128
|
|
Weighted
average common shares outstanding - diluted
|
|
|
17,244
|
|
|
16,773
|
|
|
17,120
|
|
|
16,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.39
|
|
$
|
0.30
|
|
$
|
0.73
|
|
$
|
0.61
|
|
Diluted
earnings per share
|
|
$
|
0.36
|
|
$
|
0.28
|
|
$
|
0.69
|
|
$
|
0.57
|
|
There
were no anti-dilutive securities for the three and six months ended
June 30, 2006 and 2005.
The
Company has a bank credit agreement that originally expired on February 10,
2006. On January 17, 2006, the Company extended the credit agreement for
ninety days to May 10, 2006. On March 28, 2006, the Company further
extended the credit agreement for another sixty days to July 10, 2006, and
also amended certain terms of the original agreement.
On
June 7, 2006, the Company entered into a new credit agreement with various
financial institutions. Under the terms of this new unsecured revolving credit
facility, the Company may borrow up to $75.0 million. Additionally, the
Company may elect to increase the revolver by $25.0 million. Fees and
interest on borrowings vary based on the Company’s total debt to earnings before
interest, taxes, depreciation and amortization (“EBITDA”) ratio as set forth in
the credit agreement and will be based on a spread over LIBOR or a spread
over
the base rate, which is the greater of the Federal Funds Rate plus 0.5% or
the
Prime Rate, as selected by the Company. All outstanding principal is due
upon
expiration of the credit agreement on May 31, 2011. The credit agreement
includes financial covenants that require the Company to maintain certain
interest coverage ratio, total debt to EBITDA ratio and net worth levels.
In
addition, certain acquisitions and similar transactions will need to be approved
by the lenders. The amount outstanding under this credit facility at
June 30, 2006 was $6.5 million and bears interest at 5.7%. The Company
had no borrowings outstanding under the bank credit agreement at December
31,
2005. At both June 30, 2006 and December 31, 2005, the Company was in
compliance with its debt covenants.
9. |
Commitments
and Contingencies
|
Litigation
From
time
to time, the Company is involved in various legal matters arising out of
the
ordinary course of business. Although the outcome of these matters cannot
presently be determined, in the opinion of management, disposition of these
matters will not have a material adverse effect on the financial position
or
results of operations of the Company.
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in thousands, except per share amounts)
Guarantees
Guarantees
in the form of letters of credit totaling $6.2 million and
$6.5 million were outstanding at June 30, 2006 and December 31,
2005, respectively, to support certain office lease obligations.
To
the
extent permitted by law, the Company’s by-laws and articles of incorporation
require that the Company indemnify its officers and directors against judgments,
fines, and amounts paid in settlement, including attorneys’ fees, incurred in
connection with civil or criminal action or proceedings, as it relates to
their
services to the Company if such person acted in good faith. Although there
is no
limit on the amount of indemnification, the Company may have recourse against
its insurance carrier for certain payments made.
Segments
are defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information,” as components of a company in which separate financial
information is available and is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance.
The
Company provides services through two segments: Financial Consulting and
Operational Consulting. The Financial Consulting segment provides services
that
help clients effectively address complex challenges that arise from litigation,
disputes, investigations, regulation, financial distress and other sources
of
significant conflict or change. The Operational Consulting segment provides
services that help clients improve the overall efficiency and effectiveness
of
their operations by enhancing revenue, reducing costs, managing regulatory
compliance and maximizing procurement efficiency.
Segment
operating income consists of the revenues generated by a segment, less the
direct costs of revenue and selling, general and administrative costs that
are
incurred directly by the segment. Unallocated corporate costs include costs
related to administrative functions that are performed in a centralized manner
that are not attributable to a particular segment. These administrative function
costs include costs for corporate office support, all office facility costs,
costs relating to accounting and finance, human resources, legal, marketing,
information technology and company-wide business development functions, as
well
as costs related to overall corporate management.
The
following table presents information about reported segments along with the
items necessary to reconcile the segment information to the totals reported
in
the accompanying consolidated financial statements:
HURON
CONSULTING GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in thousands, except per share amounts)
|
|
Three
Months Ended
June 30,
|
|
Six
Months Ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Financial
Consulting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
31,432
|
|
$
|
29,890
|
|
$
|
66,629
|
|
$
|
54,443
|
|
Operating
income
|
|
$
|
12,648
|
|
$
|
12,457
|
|
$
|
26,094
|
|
$
|
22,444
|
|
Segment
operating income as a percent of segment
revenues
|
|
|
40.2
|
%
|
|
41.7
|
%
|
|
39.2
|
%
|
|
41.2
|
%
|
Operational
Consulting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
36,337
|
|
$
|
20,627
|
|
$
|
63,327
|
|
$
|
42,834
|
|
Operating
income
|
|
$
|
12,801
|
|
$
|
7,237
|
|
$
|
22,730
|
|
$
|
15,988
|
|
Segment
operating income as a percent of segment
revenues
|
|
|
35.2
|
%
|
|
35.1
|
%
|
|
35.9
|
%
|
|
37.3
|
%
|
Total
Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
67,769
|
|
$
|
50,517
|
|
$
|
129,956
|
|
$
|
97,277
|
|
Reimbursable
expenses
|
|
|
6,691
|
|
|
4,691
|
|
|
12,130
|
|
|
9,061
|
|
Total
revenues and reimbursable expenses
|
|
$
|
74,460
|
|
$
|
55,208
|
|
$
|
142,086
|
|
$
|
106,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of operations reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income
|
|
$
|
25,449
|
|
$
|
19,694
|
|
$
|
48,824
|
|
$
|
38,432
|
|
Charges
not allocated at the segment level:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
selling, general and administrative expenses
|
|
|
12,573
|
|
|
10,435
|
|
|
24,767
|
|
|
20,097
|
|
Depreciation
and amortization
|
|
|
1,569
|
|
|
1,109
|
|
|
3,077
|
|
|
1,956
|
|
Other
expense (income)
|
|
|
193
|
|
|
(64
|
)
|
|
(39
|
)
|
|
(230
|
)
|
Income
before provision for income taxes
|
|
$
|
11,114
|
|
$
|
8,214
|
|
$
|
21,019
|
|
$
|
16,609
|
|
No
single
client generated greater than 10.0% of the Company’s consolidated revenues
during the three and six months ended June 30, 2006. At June 30, 2006,
no single client’s total receivables and unbilled services balance represented
greater than 10.0% of the Company’s total receivables and unbilled services
balance.
During
the three and six months ended June 30, 2005, revenues from one client
represented greater than 10.0% of the Company's consolidated revenues as
presented in the table below. This client’s total receivables and unbilled
services balance at June 30, 2005 represented 12.2% of the Company’s total
receivables and unbilled services balance.
|
|
Three
Months
Ended
June 30,
2005
|
|
Six
Months
Ended
June 30,
2005
|
|
Financial
Consulting
|
|
$
|
4,821
|
|
$
|
10,343
|
|
Operational
Consulting
|
|
|
938
|
|
|
1,879
|
|
Total
|
|
$
|
5,759
|
|
$
|
12,222
|
|
Percentage
of Consolidated Revenues
|
|
|
11.4
|
%
|
|
12.6
|
%
|
On
July 31, 2006, the Company acquired Aaxis Technologies and Document Review
Consulting Services LLC to enhance the Company’s service offerings to the office
of the general counsel and law firms. Under the terms of the purchase
agreements, the Company has acquired the two companies, including approximately
$6 million of accounts receivable, for an aggregate purchase price of
approximately $24 million.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In
this
Quarterly Report on Form 10-Q, unless the context otherwise requires, the
terms “Huron,” “Company,” “we,” “us” and “our” refer to Huron Consulting Group
Inc. and its indirect operating subsidiaries, Huron Consulting Services LLC
and
Speltz & Weis LLC.
This
Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are identified
by
words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” or “continues.” These forward-looking statements reflect our
current expectation about our future results, levels of activity, performance
or
achievements, including without limitation, that our business continues to
grow
at the current expectations; that we are able to expand our service offerings
through our existing consultants and new hires; that
we
successfully integrate the businesses we acquire;
and that
existing market conditions do not change from current expectations. These
statements involve known and unknown risks, uncertainties and other factors
that
may cause actual results, levels of activity, performance or achievements
to be
materially different from any future results, levels of activity, performance
or
achievements expressed or implied by these forward-looking statements. Please
see “Risk Factors” in our 2005 annual report on Form 10-K for a complete
description of the material risks we face.
OVERVIEW
Our
History
Huron
was
formed in March 2002 and commenced operations in May 2002. We were founded
by a
core group of experienced financial and operational consultants that consisted
primarily of former Arthur Andersen LLP partners and professionals, with
equity
sponsorship from a group of investors led by Lake Capital Management LLC.
For
purposes of holding their investment in us, these investors formed HCG Holdings
LLC, a Delaware limited liability company. On October 18, 2004, we
completed our initial public offering (“IPO”) and became a publicly traded
company. During the first quarter of 2006, HCG Holdings LLC sold 7,245,000
shares of our common stock in a secondary offering.
On
May 9, 2005, we acquired Speltz & Weis LLC (“S&W”), a specialized
consulting firm that consisted of 26 consultants. With the acquisition of
S&W, the Company provides interim management, organizational renewal and
turnaround services, and other crisis management services to distressed
hospitals and other healthcare facilities. The
results of operations of S&W have been included within the Financial
Consulting segment since the date of acquisition.
On
April 3, 2006, the Company acquired substantially all of the assets of
MSGalt & Company, LLC (“Galt”), a specialized advisory firm consisting of 25
consultants that designs and implements corporate-wide programs to improve
shareholder returns. The results of operations of Galt have been included
within
the Operational Consulting segment since the date of acquisition.
Our
Business
Huron
is
an independent provider of financial and operational consulting services,
with
clients that include Fortune 500 companies, medium-sized businesses, leading
academic institutions, healthcare organizations and the law firms that represent
these various organizations.
We
provide our services through two segments: Financial Consulting and Operational
Consulting. Our Financial Consulting segment provides services that help
clients
effectively address complex challenges that arise from litigation, disputes,
investigations, regulation, financial distress and other sources of significant
conflict or change. Our Operational Consulting segment provides services
that
help clients improve the overall efficiency and effectiveness of their
operations, reduce costs, manage regulatory compliance and maximize procurement
efficiency.
We
derive
all of our revenues through three principal types of billing arrangements
consisting of time and expense, fixed fee and performance-based. We manage
our
business on the basis of revenues before reimbursable expenses. We believe
this
is the most accurate reflection of our consulting services because it eliminates
the effect of reimbursable expenses that we bill to our clients at
cost.
Most
of
our revenues are generated from time and expense engagements. In time and
expense engagements, fees are based on the hours incurred at agreed upon
billing
rates. Time and expense engagements represented approximately 78.6% and 82.8%
of
our revenues in the three and six months ended June 30, 2006,
respectively.
In
fixed
fee engagements, we agree to a pre-established fee in exchange for a
pre-determined set of consulting services. We set the fees based on our
estimates of the costs and timing for completing the fixed fee engagements.
It
is the client’s expectation in these engagements that the pre-established fee
will not be exceeded except in mutually agreed upon circumstances. For the
three
and six months ended June 30, 2006, fixed fee engagements represented
approximately 17.1% and 13.9% of our revenues, respectively.
Performance-based
fee engagements generally tie fees to the attainment of contractually defined
objectives. We enter into performance-based engagements in essentially two
forms. First, we generally earn fees that are directly related to the savings
formally acknowledged by the client as a result of adopting our recommendations
for improving cost effectiveness in the procurement area. Second, we have
performance-based engagements in which we earn a success fee when and if
certain
pre-defined outcomes occur. Often this type of success fee supplements time
and
expense or fixed fee engagements. While performance-based fee revenues
represented only approximately 4.3% and 3.3% of our revenues for the three
and
six months ended June 30, 2006, such revenues in the future may cause
significant variations in quarterly revenues and operating results due to
the
timing of achieving the performance-based criteria.
Business
Strategy, Opportunities and Challenges
Our
primary strategy is to meet the needs of our financial consulting and
operational consulting clients by providing a balanced portfolio of service
offerings and capabilities, so that we can adapt quickly and effectively
to
emerging opportunities in the marketplace. To achieve this, we continue to
hire
highly qualified consultants. Since we commenced operations, we more than
tripled the number of our consultants from 213 on May 31, 2002 to 670 as
of
June 30, 2006. To expand our business, we will remain focused on growing
our existing relationships and developing new relationships, continue to
promote
and provide an integrated approach to service delivery, broaden the scope
of our
existing services, and enter into select acquisitions of complementary
businesses. Additionally, we intend to enhance our visibility in the marketplace
by continuing to build our brand.
CRITICAL
ACCOUNTING POLICIES
Management’s
discussion and analysis of financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America, or GAAP. The preparation of financial statements in conformity with
GAAP requires management to make assessments, estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements,
as
well as the reported amounts of revenues and expenses during the reporting
period. Critical accounting policies are those policies that we believe present
the most complex or subjective measurements and have the most potential to
impact our financial position and operating results. While all decisions
regarding accounting policies are important, we believe that there are five
accounting policies that could be considered critical. These critical accounting
policies include revenue recognition, the allowances for doubtful accounts
and
unbilled services, carrying value of goodwill and other intangible assets,
valuation of net deferred tax assets, and share-based compensation.
Revenue
Recognition
We
recognize revenues in accordance with Staff Accounting Bulletin, or SAB,
No.
101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104,
“Revenue Recognition.” Revenue is recognized when persuasive evidence of an
arrangement exists, the related services are provided, the price is fixed
and
determinable and collectibility is reasonably assured. Our services are
primarily rendered under engagements that require the client to pay on a
time
and expense basis. Fees are based on the hours incurred at agreed-upon rates
and
recognized as services are provided. Revenues related to fixed fee engagements
are recognized based on estimates of services provided versus the total services
to be provided under the engagement. Losses, if any, on fixed fee engagements
are recognized in the period in which the loss first becomes probable and
reasonably estimable. To date, such losses have not been significant. Revenues
related to performance-based engagements are recognized when all
performance-based criteria are met. We also have contracts with clients to
deliver multiple services that are covered under both individual and separate
engagement letters. These arrangements allow for our services to be valued
and
accounted
for on a separate basis. Reimbursable expenses related to time and expense
and
fixed fee engagements are recognized as revenue in the period in which the
expense is incurred. Reimbursable expenses subject to performance-based criteria
are recognized as revenue when all performance criteria are met. Direct costs
incurred on all types of engagements, including performance-based engagements,
are recognized in the period in which incurred.
Differences
between the timing of billings and the recognition of revenue are recorded
as
either unbilled services or deferred revenue. Revenues recognized for services
performed but not yet billed to clients are recorded as unbilled services.
Amounts billed to clients but not yet recognized as revenues are recorded
as
deferred revenue. Client prepayments and retainers that are unearned are
also
classified as deferred revenue and recognized over future periods as earned
in
accordance with the applicable engagement agreement.
Allowances
for Doubtful Accounts and Unbilled Services
We
maintain allowances for doubtful accounts and for services performed but
not yet
billed for estimated losses based on several factors, including the historical
percentages of fee adjustments and write-offs by service group, an assessment
of
a client’s ability to make required payments and the estimated cash realization
from amounts due from clients. The allowances are assessed by management
on a
regular basis. If the financial condition of a client deteriorates in the
future, impacting the client’s ability to make payments, an increase to our
allowance might be required or our allowance may not be sufficient to cover
actual write-offs.
The
provision for doubtful accounts and unbilled services is recorded as a reduction
in revenue to the extent the provision relates to fee adjustments and other
discretionary pricing adjustments. To the extent the provision relates to
a
client’s inability to make required payments, the provision is recorded in
operating expenses.
Carrying
Value of Goodwill and Other Intangible Assets
Goodwill
represents the excess of the cost of an acquired entity over the net of the
amounts assigned to assets acquired and liabilities assumed. Our goodwill
balance as of June 30, 2006 was $35.5 million, which resulted from our
acquisitions of S&W and Galt. Pursuant to the provisions of SFAS
No. 142, “Goodwill and Other Intangible Assets,” we test goodwill for
impairment on April 30 of each year or whenever indications of impairment
arise,
such as loss of key personnel, unanticipated competition, or other unforeseen
developments. Impairment exists when the carrying amount of goodwill exceeds
its
implied fair value, resulting in an impairment charge for this excess. An
impairment test involves considerable management judgment and estimates
regarding future operating results and cash flows. We tested goodwill as
of
April 30, 2006 and determined that no impairment of goodwill existed as of
that date.
Intangible
assets represent purchased assets that lack physical substance but can be
distinguished from goodwill. Our intangible assets balances, net of accumulated
amortization, totaled $3.1 million at June 30, 2006 and consist of
customer relationships, customer contracts and non-competition agreements
relating to our acquisitions, as well as purchased technology. We use valuation
techniques in estimating the initial fair value of acquired intangible assets.
These valuations are primarily based on the present value of the estimated
net
cash flows expected to be derived from the client contracts and relationships,
discounted for assumptions about future customer attrition. We evaluate our
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable.
Therefore, higher or earlier-than-expected customer attrition may result
in
higher future amortization charges or an impairment charge for customer-related
intangible assets.
Valuation
of Net Deferred Tax Assets
We
have
recorded net deferred tax assets as we expect to realize future tax benefits
related to the utilization of these assets. Although we experienced net losses
early in our history, no valuation allowance has been recorded relating to
these
deferred tax assets because we believe that it is more likely than not that
future taxable income will be sufficient to allow us to utilize these assets.
Should we determine in the future that we will not be able to fully utilize
all
or part of these deferred tax assets, we would need to establish a valuation
allowance, which would be recorded as a charge to income in the period the
determination was made. While utilization of these deferred tax assets will
provide future cash flow benefits, they will not have an effect on future
income
tax provisions.
Share-based
Compensation
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards No.
123 (revised 2004), “Share-Based Payment,” which requires that companies
recognize compensation expense for grants of stock, stock options and other
equity instruments based on fair value.
Given
the lack of a public market for our common stock prior to our IPO, we
established an estimated fair value of the common stock as well as the exercise
price for the options to purchase this stock. We estimated the fair value
of our
common stock by evaluating our results of business activities and projections
of
our future results of operations.
RESULTS
OF OPERATIONS
The
following table sets forth selected segment and consolidated operating results
and other operating data for the periods indicated. Segment operating income
consists of the revenues generated by a segment, less the direct costs of
revenue and selling, general and administrative costs that are incurred directly
by the segment. Unallocated corporate costs include costs related to
administrative functions that are performed in a centralized manner that
are not
attributable to a particular segment.
Segment
and Consolidated Operating Results
|
|
Three
Months Ended
June 30,
|
|
Six
Months Ended
June 30,
|
|
(in
thousands):
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues
and reimbursable expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Consulting
|
|
$
|
31,432
|
|
$
|
29,890
|
|
$
|
66,629
|
|
$
|
54,443
|
|
Operational
Consulting
|
|
|
36,337
|
|
|
20,627
|
|
|
63,327
|
|
|
42,834
|
|
Total
revenues
|
|
|
67,769
|
|
|
50,517
|
|
|
129,956
|
|
|
97,277
|
|
Total
reimbursable expenses
|
|
|
6,691
|
|
|
4,691
|
|
|
12,130
|
|
|
9,061
|
|
Total
revenues and reimbursable expenses
|
|
$
|
74,460
|
|
$
|
55,208
|
|
$
|
142,086
|
|
$
|
106,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Consulting
|
|
$
|
12,648
|
|
$
|
12,457
|
|
$
|
26,094
|
|
$
|
22,444
|
|
Operational
Consulting
|
|
|
12,801
|
|
|
7,237
|
|
|
22,730
|
|
|
15,988
|
|
Total
segment operating income
|
|
|
25,449
|
|
|
19,694
|
|
|
48,824
|
|
|
38,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
corporate costs
|
|
|
12,573
|
|
|
10,435
|
|
|
24,767
|
|
|
20,097
|
|
Depreciation
and amortization expense
|
|
|
1,569
|
|
|
1,109
|
|
|
3,077
|
|
|
1,956
|
|
Total
operating expenses
|
|
|
14,142
|
|
|
11,544
|
|
|
27,844
|
|
|
22,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
11,307
|
|
$
|
8,150
|
|
$
|
20,980
|
|
$
|
16,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of consultants (at period end) (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Consulting
|
|
|
300
|
|
|
284
|
|
|
|
|
|
|
|
Operational
Consulting
|
|
|
370
|
|
|
273
|
|
|
|
|
|
|
|
Total
|
|
|
670
|
|
|
557
|
|
|
|
|
|
|
|
Average
number of consultants (for the period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Consulting
|
|
|
300
|
|
|
270
|
|
|
304
|
|
|
270
|
|
Operational
Consulting
|
|
|
355
|
|
|
256
|
|
|
344
|
|
|
243
|
|
Total
|
|
|
655
|
|
|
526
|
|
|
648
|
|
|
513
|
|
Utilization
rate (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Consulting
|
|
|
74.1
|
%
|
|
80.4
|
%
|
|
79.0
|
%
|
|
77.5
|
%
|
Operational
Consulting
|
|
|
78.7
|
%
|
|
71.6
|
%
|
|
75.5
|
%
|
|
75.0
|
%
|
Total
|
|
|
76.7
|
%
|
|
76.1
|
%
|
|
77.1
|
%
|
|
76.3
|
%
|
Average
billing rate per hour (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Consulting
|
|
$
|
294
|
|
$
|
282
|
|
$
|
285
|
|
$
|
278
|
|
Operational
Consulting
|
|
$
|
247
|
|
$
|
223
|
|
$
|
240
|
|
$
|
226
|
|
Total
|
|
$
|
267
|
|
$
|
254
|
|
$
|
261
|
|
$
|
252
|
|
(1) |
Consultants
consist of our billable professionals, excluding interns and
independent
contractors.
|
(2) |
We
calculate the utilization rate for our consultants by dividing
the number
of hours all our consultants worked on client assignments during
a period
by the total available working hours for all of our consultants
during the
same period, assuming a forty-hour work week, less paid holidays
and
vacation days.
|
(3) |
Average
billing rate per hour is calculated by dividing revenues for
a period by
the number of hours worked on client assignments during the same
period.
|
Three
Months Ended June 30, 2006 Compared to Three Months Ended June 30,
2005
Revenues
Revenues
increased $17.3 million, or 34.2%, to $67.8 million for the three months
ended
June 30, 2006 from $50.5 million for the three months ended June 30,
2005. Revenues for the three months ended June 30, 2006 included revenues
generated by Galt since April 3, 2006. Revenues from time and expense
engagements increased $10.1 million, or 23.4%, to $53.2 million for the
second quarter of 2006 from $43.1 million for the second quarter of 2005.
Revenues from fixed fee engagements increased $5.2 million, or 81.3%, to
$11.6 million for the three months ended June 30, 2006 from $6.4 million
for the three months ended June 30, 2005. Revenues from performance-based
engagements increased $2.0 million, or 200.0%, to $3.0 million for the
three months ended June 30, 2006 from $1.0 million for the three months
ended June 30, 2005.
Of
the
overall $17.3 million increase in revenues, $13.8 million was attributable
to an
increase in the number of consultants, $3.1 million was attributable to an
increase in the average billing rate per hour, and $0.4 million was
attributable to an increase in the utilization rate of our
consultants.
The
increases were reflective of growing demand for our services from new and
existing clients. The average number of consultants increased to 655 for
the
three months ended June 30, 2006 from 526 for the three months ended
June 30, 2005, as we added a significant number of consultants in our
Operational Consulting segment. The increase in consultants was also reflective
of our acquisitions. Our average billing rate per hour increased 5.1% to
$267
for the three months ended June 30, 2006 from $254 for the three months
ended June 30, 2005. Average billing rate per hour for any given period is
calculated by dividing revenues for the period by the number of hours worked
on
client assignments during the same period. Our utilization rate increased
slightly to 76.7% for the three months ended June 30, 2006 from 76.1% for
the three months ended June 30, 2005. The utilization rate for any given
period is calculated by dividing the number of hours all our consultants
worked
on client assignments during the period by the total available working hours
for
all of our consultants during the same period, assuming a 40-hour work week,
less paid holidays and vacation days.
Total
Direct Costs
Our
direct costs increased $8.6 million, or 30.2%, to $37.4 million in the
three months ended June 30, 2006 from $28.8 million in the three
months ended June 30, 2005. Approximately $8.1 million of the increase
was attributable to the increase in the average number of consultants described
above, the promotion of nine of our employees to the managing director level
effective January 1, 2006, and their related compensation and benefit
costs. Additionally, share-based compensation expense associated with our
billable professionals increased $0.4 million, or 33.3%, to
$1.6 million in the second quarter of 2006 from $1.2 million in the
second quarter of 2005. We expect to continue to hire additional managing
directors during 2006, as well as hire additional managers, associates and
analysts to expand support for our existing practices and better leverage
our
managing directors and directors. As such, we expect direct costs will continue
to increase in the near term.
Total
direct costs for the three months ended June 30, 2006 and 2005 included
$1.6 million and $0.4 million, respectively, of intangible assets
amortization expense. The increase in 2006 was attributable to the acquisition
of Galt in the second quarter of 2006, in which customer contracts with a
value
of $1.7 million were acquired and are being amortized over 3.2 months.
Operating
Expenses
Selling,
general and administrative expenses increased $3.6 million, or 29.8%, to
$15.7
million in the three months ended June 30, 2006 from $12.1 million in the
three months ended June 30, 2005. This increase was due to
$1.0 million of higher facilities costs attributable to two new leases that
we entered into during the second half of 2005, $0.9 million increase in
training and recruiting costs, and $0.8 million increase in marketing
expenses. The remaining increase in selling, general and administrative costs
in
the three months ended June 30, 2006 compared to
the
same
period last year was due to increases in salaries and share-based compensation
associated with our non-billable professionals.
Depreciation
expense increased $0.4 million, or 40.0%, to $1.4 million in the three
months ended June 30, 2006 from $1.0 million in the three months ended
June 30, 2005 as computers, network equipment, furniture and fixtures, and
leasehold improvements were added to support our increase in employees.
Non-direct intangible assets amortization expense for the three months
ended
June 30, 2006 and 2005 was $0.2 million and $0.1 million,
respectively.
Operating
Income
Operating
income increased $3.1 million, or 38.7%, to $11.3 million for the
three months ended June 30, 2006 from $8.2 million for the three
months ended June 30, 2005. The increase in operating income was primarily
due to the increase in revenues, partially offset by the increases in direct
costs, selling, general and administrative expense and intangible assets
amortization as discussed above. Operating margin, which is defined as
operating
income expressed as a percentage of revenues, increased slightly to 16.7%
in the
three months ended June 30, 2006 from 16.1% in the three months ended
June 30, 2005.
Net
Income
Net
income increased $1.6 million, or 34.9%, to $6.3 million for the three
months ended June 30, 2006 from $4.7 million for the three months
ended June 30, 2005. Diluted earnings per share increased to $0.36 for the
three months ended June 30, 2006 from $0.28 for the comparable period last
year.
Segment
Results
Financial
Consulting
Revenues
Financial
Consulting segment revenues increased $1.5 million, or 5.2%, to $31.4 million
for the three months ended June 30, 2006 from $29.9 million for the three
months ended June 30, 2005. Revenues from time and expense engagements
increased $1.9 million, or 6.7%, to $30.4 million for the three months
ended
June 30, 2006 from $28.5 million for the three months ended
June 30, 2005. Revenues from fixed fee engagements decreased $0.8 million,
or 57.1%, to $0.6 million for the three months ended June 30, 2006
from $1.4 million for the three months ended June 30, 2005. Revenues from
performance-based engagements totaled $0.4 million for the second quarter
of 2006. There were no revenues from performance-based engagements for
the
second
quarter of 2005.
Of
the
overall $1.5 million increase in revenues, $2.5 million was attributable to
an increase in the number of consultants, $1.3 million was attributable to
an increase in the average billing rate per hour, partially offset by a
decrease
of $2.3 million in revenues attributable to a decrease in the utilization
rate of our consultants. The average number of consultants increased to
300 for
the three months ended June 30, 2006 from 270 for the three months ended
June 30, 2005. The average billing rate per hour increased to $294 for the
three months ended June 30, 2006 from $282 for the three months ended
June 30, 2005. The utilization rate for the Financial Consulting segment
decreased to 74.1% for the three months ended June 30, 2006 from 80.4% for
the comparable quarter last year.
Operating
Income
Financial
Consulting segment operating income increased slightly to $12.6 million
in the
three months ended June 30, 2006 from $12.5 million in the three months
ended June 30, 2005. Segment operating margin, defined as segment operating
income expressed as a percentage of segment revenues, decreased to 40.2%
for the
second quarter of 2006 from 41.7% in the same period last year, primarily
due to
the increase in consultants and their related compensation costs, as well
as
lower utilization as described above.
Operational
Consulting
Revenues
Operational
Consulting segment revenues increased $15.7 million, or 76.2%, to $36.3
million
for the three months ended June 30, 2006 from $20.6 million for the three
months ended June 30, 2005. Revenues for the three months ended
June 30, 2006 included revenues generated by Galt since April 3, 2006.
Revenues from time and expense engagements increased $8.1 million, or 55.5%,
to
$22.7 million for the three months ended June 30, 2006 from
$14.6 million for the comparable period last year. Revenues from fixed fee
engagements increased $6.0 million, or 120.0%, to $11.0 million for
the three months ended June 30, 2006 from $5.0 million for the three months
ended June 30, 2005. Revenues from performance-based engagements increased
$1.6 million, or 160.0%, to $2.6 million for the three months ended June
30,
2006 from $1.0 million for the three months ended June 30,
2005.
Of
the
overall $15.7 million increase in revenues, $11.2 million was attributable
to an
increase in the number of consultants and growth in client engagements,
$2.7
million was attributable to an increase in the utilization rate of our
consultants, and $1.8 million was attributable to an increase in the
average billing rate per hour. The average number of consultants increased
to
355 for the three months ended June 30, 2006 from 256 for the three months
ended
June 30, 2005, as we added a significant number of consultants over the
past
year. The increase in consultants also reflects the acquisition of Galt.
The
utilization rate for the Operational Consulting segment increased to 78.7%
for
the three months ended June 30, 2006 from 71.6% for the three months ended
June 30, 2005. The average billing rate per hour increased 10.8% to $247
for the second quarter of 2006 from $223 for the comparable period last
year.
Operating
Income
Operational
Consulting segment operating income increased $5.6 million, or 76.9%, to
$12.8 million for the three months ended June 30, 2006 from
$7.2 million for the three months ended June 30, 2005. Segment
operating margin remained steady at 35.2% for the second quarter of 2006
compared to 35.1% in the same period last year.
Six
Months Ended June 30, 2006 Compared to Six Months Ended June 30,
2005
Revenues
Revenues
increased $32.7 million, or 33.6%, to $130.0 million for the six months
ended
June 30, 2006 from $97.3 million for the six months ended June 30,
2005. Revenues for the six months ended June 30, 2006 included revenues
generated by Galt since April 3, 2006. Revenues from time and expense
engagements increased $26.2 million, or 32.2%, to $107.5 million for the
first
half of 2006 from $81.3 million for the first half of 2005. Revenues from
fixed fee engagements increased $4.1 million, or 29.3%, to $18.1 million
for the six months ended June 30, 2006 from $14.0 million for the six
months ended June 30, 2005. Revenues from performance-based engagements
increased $2.4 million, or 120.0%, to $4.4 million for the six months ended
June 30, 2006 from $2.0 million for the six months ended June 30,
2005.
Of
the
overall $32.7 million increase in revenues, $27.54 million was attributable
to
an increase in the number of consultants, $4.2 million was attributable to
an increase in the average billing rate per hour, and $1.0 million was
attributable to an increase in the utilization rate of our consultants.
These
increases were reflective of growing demand for our services from new and
existing clients. The average number of consultants increased to 648 for
the six
months ended June 30, 2006 from 513 for the six months ended June 30,
2005, as we added a significant number of consultants in our Operational
Consulting segment. The increase in consultants was also reflective of
our
acquisitions. Our average billing rate per hour increased to $261 for the
six
months ended June 30, 2006 from $252 for the six months ended June 30,
2005. Additionally, our utilization rate increased to 77.1% for the six
months
ended June 30, 2006 from 76.3% for the six months ended June 30,
2005.
Total
Direct Costs
Our
direct costs increased $18.7 million, or 34.2%, to $73.4 million in the six
months ended June 30, 2006 from $54.7 million in the six months ended
June 30, 2005. Approximately $16.8 million of the increase was
attributable to the increase in the average number of consultants described
above, the promotion of nine of our employees to the managing director
level
effective January 1, 2006, and their related compensation and benefit
costs. Additionally, share-based compensation expense associated with our
billable professionals increased $1.1 million, or 50.0%, to
$3.3 million in the first half of 2006 from $2.2 million in the first
half of 2005.
Total
direct costs for the six months ended June 30, 2006 and 2005 included
$1.7 million and $0.4 million, respectively, of intangible assets
amortization expense. The increase in 2006 was attributable to the acquisition
of Galt in the second quarter of 2006, in which customer contracts with
a value
of $1.7 million were acquired and are being amortized over 3.2 months.
Operating
Expenses
Selling,
general and administrative expenses increased $6.8 million, or 28.2%, to
$30.6
million in the six months ended June 30, 2006 from $23.8 million in the six
months ended June 30, 2005. Approximately $2.0 million of this
increase was due to higher facilities costs attributable to two new leases
that
we entered into during the second half of 2005. In connection with a secondary
offering that was completed in February 2006, we incurred costs totaling
$0.6 million after tax, or $0.03 per diluted share, during the first
quarter of 2006. These costs were expensed in the period incurred because
we did
not issue securities in the offering. The remaining increase in selling,
general
and administrative costs in the six months ended June 30, 2006 compared to
the same period last year was due to increases in marketing expenses, training
and recruiting costs, as well as salaries and share-based compensation
associated with our non-billable professionals.
Depreciation
expense increased $0.8 million, or 42.1%, to $2.7 million in the six months
ended June 30, 2006 from $1.9 million in the six months ended June 30,
2005 as computers, network equipment, furniture and fixtures, and leasehold
improvements were added to support our increase in employees. Non-direct
intangible assets amortization expense for the six months ended June 30,
2006 and 2005 was $0.3 million and $0.1 million,
respectively.
Operating
Income
Operating
income increased $4.6 million, or 28.1%, to $21.0 million for the six
months ended June 30, 2006 from $16.4 million for the six months ended
June 30, 2005. The increase in operating income was primarily due to the
increase in revenues, partially offset by the increases in direct costs,
selling, general and administrative expense and intangible assets amortization
as discussed above. Operating margin decreased slightly to 16.1% in the
six
months ended June 30, 2006 from 16.8% in the comparable period last
year.
Net
Income
Net
income increased $2.4 million, or 25.2%, to $11.9 million for the six
months ended June 30, 2006 from $9.5 million for the six months ended
June 30, 2005. Diluted earnings per share increased to $0.69 for the six
months ended June 30, 2006 from $0.57 for the comparable period last year.
Segment
Results
Financial
Consulting
Revenues
Financial
Consulting segment revenues increased $12.2 million, or 22.4%, to $66.6
million
for the six months ended June 30, 2006 from $54.4 million for the six
months ended June 30, 2005. Revenues from time and expense engagements
increased $13.0 million, or 25.1%, to $64.7 million for the six months
ended
June 30, 2006 from $51.7 million for the six months ended
June 30, 2005. Revenues from fixed fee engagements decreased $1.2 million,
or 44.4%, to $1.5 million for the six months ended June 30, 2006 from
$2.7 million for the six months ended June 30, 2005. Revenues from
performance-based engagements for the first half of 2006 totaled
$0.4 million and were immaterial for the first half of 2005.
Of
the
overall $12.2 million increase in revenues, $9.7 million was attributable
to an increase in the number of consultants, $1.5 million was attributable
to an increase in the average billing rate per hour, and $1.0 million was
attributable to an increase in the utilization rate of our consultants.
The
average number of consultants increased to 304 for the six months ended
June 30, 2006 from 270 for the six months ended June 30, 2005. The
utilization rate for the Financial Consulting segment increased to 79.0%
for the
six months ended June 30, 2006 from 77.5% for the comparable period last
year. The average billing rate per hour increased to $285 for the six months
ended June 30, 2006 from $278 for the six months ended June 30,
2005.
Operating
Income
Financial
Consulting segment operating income increased $3.7 million, or 16.3%, to
$26.1 million in the six months ended June 30, 2006 from $22.4 million in
the six months ended June 30, 2005. Segment operating margin decreased to
39.2% for the first half of 2006 from 41.2% in the same period last year,
primarily due to the increase in consultants, particularly at the managing
director level, and their related compensation costs.
Operational
Consulting
Revenues
Operational
Consulting segment revenues increased $20.5 million, or 47.8%, to $63.3
million
for the six months ended June 30, 2006 from $42.8 million for the six
months ended June 30, 2005. Revenues for the six months ended June 30,
2006 included revenues generated by Galt since April 3, 2006. Revenues from
time and expense engagements increased $13.2 million, or 44.7%, to $42.7
million
for the six months ended June 30, 2006 from $29.5 million for the
comparable period last year. Revenues from fixed fee engagements increased
$5.3 million, or 46.9%, to $16.6 million for the six months ended June
30, 2006 from $11.3 million for the six months ended June 30, 2005.
Revenues from performance-based engagements increased $2.0 million, or
100.0%,
to $4.0 million for the six months ended June 30, 2006 from $2.0 million
for the six months ended June 30, 2005.
Of
the
overall $20.5 million increase in revenues, $17.8 million was attributable
to an
increase in the number of consultants and growth in client engagements
and
$2.7 million was attributable to an increase in the average billing rate
per hour. The average number of consultants increased to 344 for the
six months
ended June 30, 2006 from 243 for the six months ended June 30, 2005,
as we added
a significant number of consultants over the past year. The increase
in
consultants also reflects the acquisition of Galt. The average billing
rate per
hour increased 6.2% to $240 for the first half of 2006 from $226 for
the
comparable period last year. The utilization rate for the Operational
Consulting
segment increased slightly to 75.5% for the six months ended June 30, 2006
from 75.0% for the six months ended June 30, 2005.
Operating
Income
Operational
Consulting segment operating income increased $6.7 million, or 42.2%, to
$22.7 million for the six months ended June 30, 2006 from
$16.0 million for the six months ended June 30, 2005. Segment
operating margin decreased to 35.9% for the second quarter of 2006 from
37.3% in
the same period last year, primarily due to the amortization of customer
contracts related to the Galt acquisition as described above.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary sources of liquidity are cash flows from operations, existing
cash and
cash equivalents and debt capacity available under our credit facility.
Cash and
cash equivalents, consisting of demand deposits and short-term commercial
paper,
decreased $28.4 million from $31.8 million at December 31, 2005
to $3.4 million at June 30, 2006 primarily due to the acquisition of
Galt and purchases of property and equipment.
Cash
used
in operating activities totaled $2.5 million for the six months ended
June 30, 2006, compared to cash provided by operating activities of
$3.6 million for the same period last year. Our operating assets and
liabilities consist primarily of receivables from billed and unbilled
services,
accounts payable and accrued expenses, and accrued payroll and related
benefits.
The volume of billings and timing of collections and payments affect
these
account balances. Cash used for operations during the six months ended
June 30, 2006 primarily consisted of cash payments for bonuses, payroll and
related benefits that were accrued for at December 31, 2005. Receivables
from
clients and unbilled services increased $14.6 million during the six months
ended June 30, 2006, primarily due to increased revenues generated and
billed.
Cash
used
in investing activities was $33.8 million for the six months ended June 30,
2006 and $16.7 million for the same period last year. The use of cash
in the
first half of 2006 primarily related to the acquisition of Galt and leasehold
improvements at our offices in New York City and Boston. The use of cash
in the
first half of 2005 primarily related to the acquisition of S&W.
We
have a
bank credit agreement that originally expired on February 10, 2006.
On
January 17, 2006, we extended the credit agreement for ninety days to
May 10, 2006. On March 28, 2006, we further extended the credit
agreement for another sixty days to July 10, 2006, and also amended certain
terms of the original agreement.
On
June 7, 2006, we entered into a new credit agreement with various financial
institutions. Under the terms of this new unsecured revolving credit
facility,
we may borrow up to $75.0 million. Additionally, we may elect to increase
the revolver by $25.0 million. Fees and interest on borrowings vary based
on total debt to earnings before interest, taxes, depreciation and
amortization
(“EBITDA”) ratio as set forth in the credit agreement and will be based on a
spread over LIBOR or a spread over the base rate, which is the greater
of the
Federal Funds Rate plus 0.5% or the Prime Rate, as selected by us.
All
outstanding principal is due upon expiration of the credit agreement
on
May 31, 2011. The credit agreement includes financial covenants that
require the maintenance of certain interest coverage ratio, total debt
to EBITDA
ratio and net worth levels. In addition, certain acquisitions and similar
transactions will need to be approved by the lenders.
During
the six months ended June 30, 2006, the average daily outstanding balance
under our credit facility was $4.0 million. The amount outstanding at
June 30, 2006 was $6.5 million and bears interest at 5.7%. We had no
borrowings outstanding under the bank credit agreement at December
31, 2005. At
both June 30, 2006 and December 31, 2005, we were in compliance with
the debt covenants under the credit facilities.
On
July 31, 2006, we acquired Aaxis Technologies and Document Review
Consulting Services LLC for an aggregate purchase price of approximately
$24 million (see “Subsequent Events” below). To fund these acquisitions, we
borrowed $22 million under our credit facility.
Future
Needs
Our
primary financing need has been to fund our growth. Our growth strategy
includes
hiring additional consultants and expanding our service offerings through
existing consultants, new hires or acquisitions. We intend to fund
such growth
with funds generated from operations and borrowings under our credit
agreement.
Because we expect that our future annual growth rate in revenues and
related
percentage increases in working capital balances will moderate, we
believe cash
generated from operations, supplemented as necessary by borrowings
under our
credit facility, will be adequate to fund this growth. Our ability
to secure
short-term and long-term financing in the future will depend on several
factors,
including our future profitability, the quality of our accounts receivable
and
unbilled services, our relative levels of debt and equity and overall
condition
of the credit markets.
CONTRACTUAL
OBLIGATIONS
The
following table represents our obligations and commitments to make
future
payments under contracts, such as lease agreements, and under contingent
commitments as of December 31, 2005 (in thousands).
|
|
Less
than
1
Year
|
|
1
to 3
Years
|
|
4
to 5
Years
|
|
After
5
Years
|
|
Total
|
|
Notes
payable
|
|
$
|
1,000
|
|
$
|
2,000
|
|
$
|
¾
|
|
$
|
¾
|
|
$
|
3,000
|
|
Interest
on notes payable
|
|
|
120
|
|
|
120
|
|
|
¾
|
|
|
¾
|
|
|
240
|
|
Capital
lease obligations
|
|
|
282
|
|
|
127
|
|
|
¾
|
|
|
¾
|
|
|
409
|
|
Operating
lease obligations
|
|
|
7,003
|
|
|
27,010
|
|
|
14,916
|
|
|
25,629
|
|
|
74,558
|
|
Purchase
obligations
|
|
|
997
|
|
|
322
|
|
|
¾
|
|
|
¾
|
|
|
1,319
|
|
Total
contractual obligations
|
|
$
|
9,402
|
|
$
|
29,579
|
|
$
|
14,916
|
|
$
|
25,629
|
|
$
|
79,526
|
|
We
lease
our facilities and certain equipment under operating lease arrangements
expiring
on various dates through 2016, with various renewal options. We lease
office
facilities under noncancelable operating leases that include fixed
or minimum
payments plus, in some cases, scheduled base rent increases over the
term of the
lease. Certain leases provide for monthly payments of real estate taxes,
insurance and other operating expense applicable to the property. Some
of the
leases contain provisions whereby the future rental payments may be
adjusted for
increases in operating expense above the specified amount.
Purchase
obligations include sponsorships, subscriptions to research tools and
other
commitments to purchase services where we cannot cancel or would be
required to
pay a termination fee in the event of cancellation.
As
of
June 30, 2006, we had bank borrowings outstanding under our credit
agreement totaling $6.5 million, which is due upon expiration of the credit
agreement on May 31, 2011.
OFF
BALANCE SHEET ARRANGEMENTS
We
have
not entered into any off-balance sheet arrangements.
SUBSEQUENT
EVENTS
On
July 31, 2006, we acquired Aaxis Technologies and Document Review
Consulting Services LLC to enhance our service offerings to the office
of the
general counsel and law firms. Under the terms of the purchase agreements,
we acquired the two companies, including approximately $6 million of
accounts receivable, for an aggregate purchase price of approximately
$24 million.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
We
are
exposed to market risks related to changes in interest rates and changes
in the
market value of our investments. We do not enter into interest rate
swaps, caps
or collars or other hedging instruments.
Our
exposure to changes in interest rates is limited to borrowings under
our bank
credit agreement, which has variable interest rates tied to the LIBOR,
Federal
Funds rate or prime rate. At June 30, 2006, we had borrowings outstanding
totaling $6.5 million that bear interest at 5.7%. A one percent change in
this interest rate would not have a material effect on our financial
position or
operating results.
At
June 30, 2006, we had notes payable totaling $2.0 million that are
payable in $1.0 million installments in May 2007 and 2008. We are not
exposed to interest rate risks in respect to these notes as they bear
a fixed
interest rate at 4% per annum.
From
time
to time, we invest excess cash in marketable securities. These investments
principally consist of overnight sweep accounts and short-term commercial
paper.
Due to the short maturity of our investments, we have concluded that
we do not
have material market risk exposure.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
Our
management, with the participation of the Company’s Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e)
and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange
Act”)) as of June 30, 2006. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of June 30,
2006, our disclosure controls and procedures were effective in recording,
processing, summarizing and reporting, on a timely basis, information
required
to be disclosed by us in the reports we file or submit under the Exchange
Act
and such information is accumulated and communicated to management
as
appropriate to allow timely decisions regarding required
disclosure.
There
has
been no change in our internal control over financial reporting (as
such term is
defined in Rules 13a-15(f) and 15d-15(f) under the “Exchange Act”) that occurred
during the quarter ended June 30, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II ¾
OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
From
time
to time, the Company is involved in various legal matters arising
out of the
ordinary course of business. Although the outcome of these matters
cannot
presently be determined, in the opinion of management, disposition
of these
matters will not have a material adverse effect on the financial
position or
results of operations of the Company.
See
“Risk
Factors” in the Company’s 2005 annual report on Form 10-K for a complete
description of the material risks it faces. There have been no material
changes
to our business risk factors since December 31, 2005.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
Our
2004
Omnibus Stock Plan permits the netting of common stock upon vesting
of
restricted stock awards to satisfy individual tax withholding requirements.
During the quarter ended June 30, 2006, the Company redeemed such shares as
presented in the table below.
Period
|
|
Total
Number of
Shares
Redeemed
to
Satisfy
Employee
Tax
Withholding
Requirements
|
|
Weighted-
Average
Fair
Market
Value
Per
Share
Redeemed
|
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans
or
Programs
|
|
Maximum
Number
of Shares
that
May Yet Be
Purchased
Under
the
Plans or
Programs
|
|
May 2006
|
|
|
4,342
|
|
$
|
34.43
|
|
|
N/A
|
|
|
N/A
|
|
N/A
- Not
applicable.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
Annual Meeting of Stockholders of Huron Consulting Group Inc. was
held on
May 2, 2006, and a total of 16,649,887 shares were present in person
or by
proxy at the meeting. The shareholders of Huron Consulting Group
Inc. voted on
the following proposals:
Proposal
No. 1 - Election of directors
Name
|
|
Shares
For
|
|
Shares
Withheld
|
Dubose
Ausley
|
|
15,349,806
|
|
1,300,081
|
John
S. Moody
|
|
15,867,761
|
|
782,126
|
Proposal
No. 2 - To approve an amendment to the Company’s 2004 Omnibus Stock
Plan.
Shares
For
|
|
Shares
Against
|
|
Shares
Abstain
|
|
Non-vote
|
9,035,342
|
|
6,405,380
|
|
66,572
|
|
1,142,593
|
ITEM
5. OTHER
INFORMATION
None.
ITEM
6. EXHIBITS
(a) The
following exhibits are filed as part of this Quarterly Report on
Form 10-Q.
Exhibit
Number
|
|
Exhibit
|
|
|
|
10.37
|
|
Senior
Management Agreement, effective as of May 15, 2002, between Huron
Consulting Services LLC (formerly known as Huron Consulting
Group LLC) and
Susan Gallagher.
|
|
|
|
10.38
|
|
First
Amendment to Senior Management Agreement between Huron
Consulting Services
LLC (formerly known as Huron Consulting Group LLC) and
Susan
Gallagher.
|
|
|
|
10.39
|
|
Senior
Management Agreement, effective as of April 1, 2006, between Huron
Consulting Group Inc. and Stanley N. Logan.
|
|
|
|
31.1
|
|
Certification
of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer, pursuant to 18 U.S.C. Section
1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned
thereunto
duly authorized.
|
|
|
Huron
Consulting Group Inc.
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
Date:
|
August 8,
2006
|
|
/s/
Gary L. Burge
|
|
|
|
Gary
L. Burge
|
|
|
|
Vice
President,
|
|
|
|
Chief
Financial Officer and
Treasurer
|
-
27
-