Huron Consulting Group Inc (HURN) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Huron Consulting Group's webcast to discuss results for the second quarter 2009. At this time, all conference call lines are on a listen-only mode. Later, we will conduct our question-and-answer session for conference call participants and instructions will follow at that time. As a reminder, this conference call is being recorded.

Before we begin, I would like to point all of you to the disclosure at the end of the Company's news release for information about any forward-looking statements that may be made or discussed on this call. The news release is posted on Huron's website. Please review that information along with the filings with the SEC for a disclosure of factors that may impact subjects discussed in this morning's webcast.

The Company will be discussing one or more non-GAAP financial measures. Please look at the earnings release and on Huron's website for all of the disclosures required by the SEC, including reconciliation to the most comparable GAAP numbers.

And now I would like to turn the call over to George Massaro, Non-Executive Chairman of the Board of Huron Consulting Group. Mr. Massaro, please go ahead.

Thank you, Operator. Good morning. Thank you for joining us to discuss Huron Consulting Group's second quarter 2009 results. With me on the call today are Jim Roth, our new CEO, and Jim Rojas, our new CFO; David Shade, our President and Chief Operating Officer; and Mary Sawall, our Vice President of Human Resources, are also on the call and available to answer questions.

Before I pass the call over to Jim Roth and Jim Rojas to discuss -- to talk about our earnings and future opportunities for Huron, which is the focus for this call, I wanted to say a few words about the financial restatement.

As you know, we released our restated financial statements on Monday afternoon. The restatement was virtually the same in nature and amount as what was disclosed in our press release on July 31. It relates to four businesses acquired between 2005 and 2007, and affects the Company's financial statements from 2006 through the first quarter of this year. The total impact to earnings over the period is approximately $56 million, substantially the same as our $57 million estimate in our July announcement.

Given the extensive discussion on the 10KA, including the planned remediation actions, I will refrain from making any additional comments on the restatement at this time, but will respond to questions in the Q&A to the extent I can, given the ongoing SEC investigation into the restatement, the SEC inquiry into the allocation of hours, and the private shareholder class action suits filed in respect to the restatement.

I wanted to note that we were able to complete this review and restatement expeditiously. However, it is not completely behind us. The Company and the Board of Directors will continue to cooperate with the SEC in its investigation and its inquiry, and we intend to defend vigorously the private lawsuits.

As Non-Executive Chairman, I plan to devote my energies to working through the restatement-related matters. My objective is to allow our management team to devote all of their attention to our clients, our people and the markets we serve.

I would also like to make a few comments about our management team. You should understand that the Board has been appropriately focused on management depth and succession planning long before this restatement issue arose. Although we did not have the current circumstances in mind, we wanted to be sure we were assessing our practice leaders with an eye towards the future.

In May, David Shade was named President and Chief Operating Officer. The selection of David reflects the significance of our healthcare practice to Huron presently and in the future. David's vast industry knowledge and extensive management experience make him an obvious choice.

When we had the opportunity for Jim Rojas to rejoin us, we took it in order to build bench strength. Obviously, his experience at US Food's Stop & Shop as CFO provides the skills and experience we need today and in the future on the finance side.

Jim Roth has been with Huron since the beginning. His leadership of the Health and Education segment made it very clear to us for some time that he has the skills and business acumen to be CEO. Under Jim's leadership, the Higher Ed business grew from approximately $7 million in 2002 to more than $100 million in 2008. He has also fostered exceptional retention rates in a highly collaborative culture among the professionals who he has worked with him.

I speak on behalf of the Board when I say we have the utmost confidence in our new leadership team -- Jim Roth, Jim Rojas, David Shade and the rest of management. We believe the Company has the right team to lead us forward, and we can assure you that our team is 100% focused on running this business and serving our healthy and growing client base.

I would like to point out before I turn it over to Jim Rojas that a few minutes ago, we posted a summary of our guidance on the website with non-GAAP reconciliation, so you should be aware that that's there and Jim will talk about it in detail.

I'd now like to turn the call over to Jim Rojas to discuss second quarter financial results and 2009 guidance.

Thank you, George, and good morning, everyone. During my discussion of the results, all comparables will relate to the restated financials that are included in the amended Form 10-KA and Form 10-Q's filed with the SEC on Monday.

Adjustments were made to net income, earnings per share, and EBITDA for each of the affected periods. Revenues and operating metrics, as well as total assets, total liabilities, total stockholders equity, net cash flows from operations, and adjusted EBITDA are unaffected for all annual periods. However, adjustments were made for certain balance sheet items due to the reconciliation of our provision for income taxes, but only for quarterly periods.

Revenues for the second quarter of $165.8 million increased almost 16% from the second quarter of 2008. Both Jim Roth and I will provide more color on revenues in a few moments, but on an overall basis, I can tell you that the second quarter revenues did not meet our internal expectations.

Shortfalls from forecast largely came from the Accounting and Financial Consulting, and Corporate Consulting segments. This resulted in an overall negative organic growth rate of approximately 7% when compared to the same quarter last year, if you exclude the growth we received from the Stockamp acquisition in July of 2008. However, if you further exclude the impact of decreased revenue in our Accounting and Financial Consulting segment, our actual organic growth was slightly positive in the second quarter.

The good news is, is that 75% of our business, Health and Education Consulting, and Legal Consulting, met our expectations and performed well in the quarter. Conversely, we need to ensure that we are doing all that we can to drive positive momentum in the remaining 25% of the business.

Both EBITDA and operating income results for the quarter have, of course, been impacted by our non-cash compensation expense adjustments and a one-time other gain. For sake of comparison, I think it is best to take you right to the adjusted EBITDA numbers that we provided in the press release. This calculation excludes the impact of the expenses related to the restatement, share based compensation, non-cash compensation expense, and the one-time other gain.

Adjusted EBITDA increased approximately 11% to $36.5 million from $32.8 million a year ago. Adjusted EBITDA margins were approximately 22% for the quarter compared to 23% a year ago. You will note that we have a high effective tax rate of 50% for the quarter, reflecting a continuation of foreign operating losses that cannot be tax-benefited, as well as the non-cash compensation expenses that also cannot be tax-benefited.

Excluding the impact of the non-cash compensation expense our effective tax rate for the quarter would have been 46%. We believe that these rates will continue through 2009.

Net income for the quarter was $9.6 million or $0.47 per share compared to $1.1 million or $0.06 per share for the same period last year. These results were, of course, impacted by both the non-cash compensation expense adjustments and the one-time other gain during the second quarter of 2009.

Therefore, I would once again direct you to the adjusted net income and adjusted earnings per share calculations that we provided in the press release, which show adjusted net income of $17.1 million for the quarter compared to $19.2 million a year ago, and earnings per share of $0.84 compared to $1.06 a year ago.

Now turning to comments on our business segments. The Health and Education Consulting segment, our largest segment, represented approximately 56% of total Company revenue this quarter. We continue to experience the same momentum we saw in the first quarter, as new assignments and contingent fees were on track with our expectations.

Revenues were $93.2 million for the second quarter of 2009, increasing approximately 64% from $56.7 million in the second quarter of 2008. On an overall basis, we remain very pleased with the continued strength of the Health and Education Consulting segment.

Our Legal Consulting segment, which approached 19% of total Huron revenues for the quarter, showed nice sequential growth, as expected, from the first quarter -- actually over 35%. Legal Consulting posted solid revenues of $31.2 million that increased 2% from $30.5 million in the second quarter of 2008. These results were driven by increased performance from our e-discovery and document review businesses.

Accounting and Financial Consulting, representing approximately 14% of total Huron revenues in the second quarter, continued to experience soft demand for the event-driven services that we provide. We also experienced delays in large assignments, which resulted in June revenues that fell short of our expectations. Accounting and Financial Consulting posted revenues of $22.5 million that were down approximately 35% from $34.8 million a year ago.

In the quarter, we saw that Corporate Consulting, representing approximately 11% of total Company revenues in the quarter, continued to benefit from good demand in the Restructuring and Turnaround practice, while results for strategy, utilities and Japan were softer than originally forecasted.

Revenues for this segment were $18.9 million for the second quarter of 2009, decreasing about 12% from $21.4 million last year. It should be noted that last year's results included revenues from the operational consulting practice, which was closed in the third quarter of 2008.

To recap on revenues -- we've got some work to do to regain momentum in Accounting and Financial Consulting as well as certain practices within Corporate Consulting; but the good news once again is that 75% of our revenue base met our expectations for the quarter.

Jim Roth will provide you with more color and his perspective on the outlook for each of our segments in a moment. However, I will now transition to our guidance.

There are a number of factors that play a role in creating our total Company forecast; and forecasting in the current economic environment, as you well know, is particularly challenging. Additionally, in light of our recent events and continued sluggishness in the market for some of our services, we have experienced delays in the timing and scope of certain assignments, which did not develop as we had anticipated earlier in the year.

As the month of June did not finish particularly strong for us, and as new backlog did not build as expected in July, there was a need for us to update our forecast at a practice level. In the guidance that we are providing and talking about today, we have opted to taking the cautious view, particularly as it relates to the event-driven nature of the Accounting and Financial Consulting, and Legal Consulting's e-discovery and document review businesses.

The high and low end of our revenue guidance range is based on the following factors -- a continued solid performance by Health and Education Consulting that remains in line with revenue forecasts that were prepared at the beginning of the year; Legal Consulting will show flat to modest growth in revenues during the second half of the year compared to second quarter results, as the event-driven document review and e-discovery services continue to be difficult to predict and forecast in the current environment; continued softness in Accounting and Financial Consulting, as similar event-driven market forces that affected our Legal Consulting business also make it difficult to predict and forecast when the market will improve for this practice.

The low end of the range for Accounting and Financial Consulting assumes no growth in revenues from which was recorded in the first half of this year, while the high end of the range would assume a moderate pickup in second-half revenues.

Lastly, no noticeable change in Corporate Consulting revenues, as we do not expect a meaningful improvement in the economy to a point where discretionary spending decisions by our clients will change appreciably.

Let me talk next about our $30 million cost reduction program and impact on our 2009 guidance. As we previously indicated, we have initiated a cost reduction program which is targeted to achieve $30 million in annualized cost savings in an effort to ensure that our cost structure remains aligned with our current level of revenues and market demand.

We are examining costs in all practice and corporate support areas. These cost reductions will allow us to maintain our operating margins and continue to invest in practice areas where we have strong market position. In addition, it will allow us to compensate key personnel adequately in all practices, including those that are actively awaiting for the market demand to return for their services.

Decisions regarding these cost reduction initiatives are largely expected to be completed in the third quarter, with the Company taking a restructuring charge for the related costs, which includes severance. We have assumed that the cost-saving benefits will allow us to provide a reasonably good bonus pool for our best-performing individuals in 2009, and begin to have positive net bottom-line impact in the first quarter of 2010.

Now to summarize the guidance that was included in the reconciliation schedule that was posted on our website this morning. Full-year 2009 revenues before reimbursable expenses in the range of $650 million to $680 million; adjusted EBITDA in a range of $135 million to $151 million; adjusted non-GAAP net income in a range from $58 million to $68 million; and between $2.85 and $3.30 in adjusted non-GAAP earnings per share.

The high and low end of our revenue guidance range was determined by considering our client backlog, the projects we have in the pipeline, and our anticipated conversion of those pipeline opportunities. As provided in the schedule, we have identified several items that need to be considered in reconciling our non-GAAP forecast.

For the non-GAAP forecast, we have excluded an estimated $8 million to $10 million in combined restructuring and restatement-related charges; an estimated $8.3 million of non-cash compensation expense through July 31, as disclosed in our 10-Q; we have also excluded the impact of the one-time other gain. And lastly, we have excluded the amortization of intangible assets and share-based compensation costs.

Let me be clear that this guidance does not include any estimates of a potential goodwill impairment charge; any costs associated with the potential change in our credit agreement nor unanticipated private litigation or SEC investigation-related costs. These exclusions are clearly identified in our reconciliation that we provided this morning.

Please understand that we are dealing with these issues proactively. In terms of a potential goodwill impairment charge, there are several factors that need to be considered in determining an appropriate goodwill valuation. The stock price is just one measure. We will be working as diligently as possible to determine any necessary charge.

Before I turn it to Jim Roth, a topic of interest for many of you has been our debt covenants and financing arrangements. We have had open dialogue and worked closely with our banks over the last couple of weeks. We are in full compliance with the financial covenants under the agreement now that the restatement is complete. If there is a goodwill impairment charge, we are cautiously optimistic that we will have a satisfactory resolution for all parties involved.

Now let me turn it over to Jim Roth.

Thank you, Jim. Good morning. I want to start by saying that I'm honored to take the helm as Huron Consulting Group's new CEO. While I would have preferred different circumstances, I am very aware of the talent that exists within this organization and I am proud to be working with such capable people.

As some of you know, I have a long history with Huron, having been part of the executive team since its inception. Until recently, I was leading the Health and Education practice, which accounts for about 60% of Huron's total revenues. I also spent over 10 years in my career working in a Disputes and Investigations environment. I know our people, our business and our culture extremely well. My passion is in the market, and I fully intend to continue to play a major role in generating revenue for this Company.

George Massaro made a brief introduction of the management team at the beginning of this call. I would like to say a few words as well.

I have worked very closely with Dave Shade since we acquired Wellspring in early 2007. While Dave has stellar management skills, his true value to Huron is in the experience that he brings for having built a first-class healthcare professional services firm from scratch. The knowledge, experience, and credibility that he now brings to the entire Huron portfolio is invaluable.

Dave will continue in his previous role as President and Chief Operating Officer, providing an important level of continuity to the senior management team. Dave and I are of the same ilk, and I am confident that we will be very effective together in our leadership of this Company.

Jim Rojas, our new CFO, was also one of the founders of Huron, and we've worked closely together during our initial days in 2002 as we added administrative structure to manage our rapid growth. Jim got diverted away from Huron for a bit for the reasons that great consultants get diverted -- his clients saw his incredible talent and they wanted him on their side.

At the grocery chain Stop & Shop, Jim's former employer, he was asked to help resolve some difficult corporate issues that had occurred prior to his employment, providing him with some critical and relevant experience for our own current situation. We were able to woo him back to Huron in June of this year.

Jim and I have worked very closely together since July 31, and I am hard-pressed to know anyone that could have delivered more value and focus than Jim, since his promotion three weeks ago. I look forward to having his skills and competencies close at hand as we manage this great Company.

Finally, I want to mention how fortunate I am to be working with the practice leaders of our four segments. Throughout the seven years that I've worked at Huron, I have managed a market-facing segment. Let's make no mistake -- at a company like ours, the action is all in the market.

Each of our practice leaders has the combination of market relevance and leadership that is necessary for success. I have full confidence in their abilities to continue our growth strategy in our core markets. The practice leaders know, and I know, that we are also surrounded by a very talented team of Managing Directors that are with our clients on a daily basis.

We didn't grow from zero to our current revenue level in seven years by sheer luck. We grew because the market recognized the competency of our people. The recognition of that competency continues right through today, and will be particularly evident in the coming months as we work through the aftermath of the recent events.

It has been a busy three weeks since taking on this position. During this time, there have been two primary areas of focus for me -- our clients and our people. Let me start by talking about our clients -- how they have reacted and how I anticipate their reaction to be in the future.

During the past few weeks, I have been actively meeting with and talking to many of our clients to reassure them of Huron's commitment to providing high-quality services and solutions to their business issues. The direct comments, calls, and emails that we have received from our existing and potential clients have been extremely supportive.

We have not gone through the past few weeks unblemished. The primary concerns our clients have expressed relate to our ability to provide continuity of service and continuity of our client service teams. There has been only one case that I am aware of where our work has been canceled.

There have been three to five instances where pending work -- that is, work that was about to be signed but had not yet been finalized -- was deferred until additional information became available. We are working closely with those potential clients to provide them with the information they require in order to get the pending projects back on schedule.

In nearly all of those cases, the potential clients have remained supportive but they simply need more information to proceed. I strongly suspect that the information we released on Monday will fully satisfy their requests and that the projects will move on as planned.

There have been a fair amount of times during the past three weeks where we were asked by our current or prospective clients to call or meet with senior management or Board members to explain the circumstances. In each of these instances, the client came away satisfied with our ability to complete the project as initially anticipated, and our work continued without interruption.

More representative of our experiences -- in fact, the vast majority of our client interactions during the past three weeks regarding this matter -- have resulted in strong, unabated support for Huron and our people. The daily run rate, our daily measure of revenue, has been at anticipated levels and remains consistent with our recently provided guidance.

With a company of our size, you expect to see new work come in every day. Keep in mind that today we have over 700 active clients. Just as before, during the past three weeks, we continue to win new business each day in each of our practice areas.

For example, despite all the speculation in the press, and since we announced the restatement, we have had two new major assignments with large health systems; multiple new disputes assignments, including one national law firm that asked us to assist with an accounting investigation; a large energy company asked us to assist with a review of cost management issues; we continue to start new velocity engagements; several universities provided new work or extended additional work; and we received several new restructuring and turnaround engagements.

The characteristics of our daily engagements in the market have not changed one iota. I feel like I have been leading two lives -- one reading the speculation in the press and the second witnessing the continued steady flow of our business to the more-than 700 clients that we serve.

Despite the recent events, our pace of wins and our daily run rate is supportive of the revenue estimates that we have provided for the rest of the year in today's guidance.

I don't want to leave the impression that everything is perfect -- it is not. Prior to July 31, there was already significant uncertainty in the market given macroeconomic conditions. Now we have the additional challenge of addressing a well-publicized event that had negative implications for our brand and image.

While I can't predict the future, looking at the way our core clients have responded, looking at our backlog and pipeline, and observing the passion that our people have demonstrated to get past this, I am confident that our revenues will grow at a pace that will help us achieve the targets we have forecast today. Our guidance today takes all these factors into consideration.

Now let me talk about our people. There has been a lot of speculation about our people in light of recent events. I'm pleased to say that not a single Managing Director has left, and that no employee has left as a result of the events from three weeks ago. While we would be naive to think that our people aren't receiving calls from headhunters or considering options, we are communicating with our employees every day, making certain they understand Huron's direction and their value to Huron in achieving our goals.

Today, Huron has over 1,500 consultants. Consistent with every professional services firm, we expect that there will be some turnover. Keep in mind that, historically, Huron has had retention rates among the best in the business. We believe that we are taking the right steps to retain our best performers and we will be finalizing those plans in the very near future.

I am also keenly aware of the need to establish consistent and sizable bonus pools for our people. When you pay people well, they stay. When they stay, given the caliber of talent that we have within this organization, our revenues grow. Achieving a goal of consistent and sizable bonus plans for all our employees is one of my main objectives for this Company.

During the past two weeks, I have maintained a candid and open dialogue with employees through conference calls, written company-wide communications, and a large number of individual phone calls and emails. I will continue to be open and honest with our people and our external constituents throughout my tenure in this position.

Now let me turn my attention to our businesses. I strongly believe that all four of our segments have solid growth potential. As many of you know, our Health and Education practice is our largest business segment.

On the healthcare side, hospitals are under increasing financial pressure, due in part to patient's ability to pay, decreases in Medicaid funding, and an increase in the number of uninsured. Additionally, the uncertainty of healthcare reform, as well as challenges in the provider market that have existed for years, continue to be troubling for hospitals into the foreseeable future.

These challenges make for great opportunities for our services. Despite the many challenges facing our hospital clients, the reason they turn to our Wellspring and Stockamp practices is very simple -- we produce results. You can say all you want about competencies and experience, but it is the results that count.

When our healthcare services are put to work, whether in the turnaround of a financially troubled hospital, the improvement of the revenue cycle, or improvements in patient progression and clinical operations, our clearly-demonstrable results are what make our businesses so successful and what generates our strong reputation.

The healthcare practice continued to have very strong results in Q2 and we have a pipeline of new opportunities that is stronger than we have ever experienced with this practice. It is up to us to convert those opportunities into engagements, but given the challenges in the healthcare marketplace, I remain confident that our revenue base in this practice will remain very strong.

Turning to our higher education practice, there are two important events that continue to play out and affect our business. The first event has been widely publicized -- the material reduction in the size of the endowments for many research universities.

Because of the strong reliance on payout from the endowments to support operations, our core clients will continue to have financial challenges impacting their operating results. While that has, in some cases, meant less money for consultants, many clients are now turning to Huron to help evaluate strategic and operating decisions that will enable them to operate in what, for them, is a dramatically changed environment.

A second event has been the increased amount of federal research funding available to colleges and universities as a result of the economic stimulus. As you know, one of our primary businesses is helping clients manage their research programs, given the sudden and significant increase in research spending stemming from the stimulus.

We are helping our clients manage their submission of new proposals and we are helping them administer the grant funding on the new volume of research they receive. Given the strength of our domestic healthcare and education practices, we are continuing to focus on taking those core competencies globally.

While I have been pleasantly surprised at the number of foreign-based institutions that have requested our services, we are also seeing a strong number of US-based hospitals and universities that are seeking assistance as they extend their brand and global presence.

Our Life Sciences practice, which resides within our Health and Education segment, has seen an increase in work stemming primarily from large pharmaceutical companies and medical device companies. The increased activity is resulting from a pick-up in activity among the federal government and state governments on issues relating to compliance, pricing, conflict of interest, and business operations. Our Health and Education segment should continue to see very strong demand.

In our Legal Consulting segment, our strength continues to be our relationships with the General Counsel and the Office of the General Counsel in four foundation industries -- financial services, energy, pharmaceuticals, communications and technology. Each of these industries has two important characteristics -- complexity, and a lot of litigation.

Our Legal Consulting practice has a great niche in providing cost management and information management services for those core clients. We are establishing master service agreements with many of these large clients, enhancing the likelihood for a steady flow of work as their own legal environment remains active.

This segment did not start out strong earlier this year, as many clients withheld spending as the economic crisis was unfolding. However, in the recently completed second quarter, our results picked up significantly, with over a 35% increase compared to Q1. We are confident that our revenues from this segment will continue to be very strong.

If there's one area of the Company that is most affected by the current market and recent events, it is our Disputes and Investigations business within the Accounting and Financial Consulting segment. The Disputes and Investigations business currently accounts for about 7% of our total business.

As we indicated earlier, this practice has had disappointing financial results during the first half of this year. The restatement and ensuing publicity hasn't made matters better; but this business has generated incredible revenues and profits for this Company in prior years. The question we are asking, and many of you are asking, is -- when will the strength of the business return?

Frankly, it is hard to gauge the depth and duration of the slowdown in this business, as many of our competitors are also experiencing similar slowness in their Disputes and Investigation businesses. That said, there have been periodic signs of resuming a more normal pace.

The capability of our people has been, and continues to be, very strong. We are doubling our commitment to stay close to attorneys and other buyers of our services, while closely monitoring the costs and investments in the practice until a recovery in demand for these services becomes more imminent. A solid indication of the strength of our people in the Disputes and Investigations practice is the way that our clients have responded during this restatement period.

I wish I could share with you the number of supportive emails that I have seen from clients, many of them at national law firms and large corporate law departments, demonstrating their clear support for our people and their intention to rely on Huron's services for current and future work. We believe our clients are able to make the distinction between recent events and the quality of services that we provide in the marketplace on a daily basis.

The performance of our Accounting Advisory practice within the AFC segment has been down for the first part of the year, but we are beginning to see signs of improvement. This past week, we started a significant engagement with about 100 people, and we have the prospect for additional similar work later in the year.

Within our Corporate Consulting segment, it should come as no surprise that our Restructuring and Turnaround practice is doing quite well. Its focus on the middle market, where the severity of the economic crisis has been so traumatic, has helped us achieve very strong results in this practice. Irrespective of any improvement in the domestic economy, we expect this business to be strong for years to come.

The other practices within the Corporate Consulting segment -- strategy, utilities and the Japanese market -- have been affected by the reductions in discretionary spending. We are hopeful that a recovering economy will provide increased opportunities for these practices.

Looking ahead over the next few months, our focus will be on two objectives. First, to move past the restatement and continue to position our core businesses to help our clients address the rapidly changing US and global markets; and second, to work closely with senior management and our practice leaders to position Huron to be most effective, irrespective of when and to what degree the economy recovers.

This has been a very tough past couple of weeks. You can't go through an event like this without some scars and pain. We have had our share. But I have been here since day one of this Company's inception. Our entire organization knows exactly what we are up against.

We are often asked to help our clients handle their own very difficult and traumatic events. That experience gives us the professional fortitude and fighting spirit that will help us overcome these events. There is a fighting mentality within our entire Company. It is part of our culture and it is what makes us great consultants.

I am confident that we will emerge from this a better and stronger company for having gone through this difficult period. During the coming months, I will be more specific with our employees about my goals, objectives, and strategies. We have all the right tools in place to succeed -- talented and dedicated employees, a cohesive management team, and support of clients.

Now, I'd like to open the call for questions. Operator?

(Operator Instructions). Tim McHugh, William Blair.

Yes. First, I wanted to touch on something I think you just said now, within the Financial Consulting segment. Can you review kind of what's assumed in your guidance in terms of the impact of the events? And then, did you just say 100 people on an engagement? And how long would that engagement be? I think you only have 250 people in that segment.

We've got -- Tim, it's Jim Roth -- we've got variable people that are working on that engagement that will help us get it up to the 100, at that level.

In terms of the assumptions that we're making, we've taken that and any continuation of that project into consideration in the guidance that we've provided.

Tim, this is Jim Rojas. Also, in the guidance that we provided for Accounting and Financial Consulting, we assume that we would have flat growth for the second half of the year, based on what we saw in the first half of this year.

Okay. And can you give us any -- of that 100 people, is it about half FTE's and half full-time people? Or any sense of that?

Tim, I would say that 75% of the people are the contract people and 25% are full-time employees.

Okay. And then the other segment I wanted to ask about was the Healthcare and Higher Education. You mentioned it met your expectations and you still intend to maintain your full-year expectations for that segment.

Yet it seemed like the utilization rates and headcounts tickdown, you also had that gain from the release of non-solicits -- I think that was offset by some good performance-based fees. Can you just kind of talk about the puts and takes underlying that? Was there some turnover that was offset by good performance in Stockamp? Any more color there would be helpful.

Tim, a couple of factors that you need to take a look at. Jim Roth, in his discussion, had mentioned that in our Higher Education business, that we did have challenges with revenue in the first half of the year. So we did see a decrease in billing rates and utilization. However, we did see strong performance within the Stockamp and within the Wellspring practices.

Yes, Tim, it's Jim Roth. Consistent with what Jim's saying, the Higher Education business did see a slowdown. I think that the impact to our clients in the first half was the most traumatic. As the first half rolled out and the impact of the declining endowments began to hit our clients, there was some pretty traumatic and rapid impacts on their financials. And so they -- I think we were in a period of time where they were pausing and trying to figure out how deep this was going to go.

Obviously, as the markets improved a little bit, their environment helped a little bit as well. But we still are -- and so that business has begun to pick up now again, but that was slower in the first half than we had originally anticipated.

Okay. And then lastly, the restructuring charge -- can you talk about where you would expect to make most of the charges? Are there any practices, even small ones, that you might consider exiting as part of this?

Well, when we're looking at the cost-savings project or program that we announced, I mean, our anticipation right now is that one-third will come from our corporate support areas and two-third will come from the practices. And that really truly is spread across each one of our practices fairly equally.

Andrew Fones, UBS.

You made a comment in your remarks, in your prepared remarks, that one project had been canceled and five were on pause, if you like. I was wondering if you could put that in context, either on kind of a dollar value or a number of projects that you've actually started over the last three weeks. Thanks.

Andrew, I guess -- I mean, first, just to put it in perspective, we have -- we've got about 700 clients, so I think the impact of one client -- and the one that I'm -- I don't recall the exact amount, if that -- if the one that was canceled really had just started. And as is true with many of our clients, the scope emerges as things go forward.

So it was a relatively small project to start with. It had the potential to -- I don't know if we can even estimate what the potential would have been, just because we're not really sure how it would have evolved. But in the scheme of things, it was not material at all.

The other three to five that I referenced in the discussion, I think were just instances where people saw the way that, certainly, some of the press accounts were reacting and they had their own questions. They just wanted to make sure that everything was going to be okay. I mean, when you cut through it, that's really what they wanted to know -- is everything going to be okay? Is the Company going to be okay? Are the people going to be okay?

And I think our ability to talk to them -- to the Boards, the senior management, and let them know that, in fact, yes, things would be okay, I think has been helpful as well. Some of them were at the point where they just needed to have that level of guidance and that level of comfort in order to go back and complete the recommendation to start the project. And that's what we've been doing.

Perhaps another way of asking the question -- could you give me your average project size or the number of projects you typically are assigned to in a year? Thanks.

I'm not sure I know the answer to that, Andrew. We'll have to get back to you on that. I think we typically wouldn't go with the average size because there's such great variability, I'm not sure that it would be material. And again, we've got so many different clients, some of which are going to be $50,000; some could be in seven digits; so it's just -- it's -- yes, it's really hard to tell.

Okay, thanks. And then (multiple speakers) --

I don't think there is -- there was nothing material in my opinion about either the one that was canceled nor the ones where there's been kind of requests for additional information. None of them are going to skew our guidance or our results in any material way.

Okay. I think my understanding was you would do at least several hundred projects a year but I just wanted to try and get some context around the numbers.

So, just kind of moving on. In terms of the employee retention, you've mentioned you've retained a consultant that you're looking at that. I was wondering if you could talk about the proportion of the MD's, that the new plans will apply to potentially, and perhaps how you've thought about the potential impact of increased compensation expense in your guidance. Thanks.

Yes. We're still working on the details of the size and the depth of the retention program. We actually expected to have it done soon. We are not prepared right now to talk about the size, the impact, or the depth of that program yet. We're still working on all the details.

Okay, thanks. And finally, I was wondering if you could tell us when the blackout period will end for employees to be able to buy or sell stock in Huron? And perhaps if you're aware of any kind of management intentions and so forth regarding that. Thanks.

Andrew, this is Jim Rojas. The blackout period ends on Monday. And one thing to mention is that we don't know the intention of what our employees are and haven't talked about them; but just to reiterate that it is Monday.

Thanks. I'll jump back in queue.

Paul Ginocchio, Deutsche Bank.

I'm just wondering the number of Managing Directors or Directors that own equity -- or own options. And I guess what percentage would own options; how many options they are and what you think the average price is? Just to help me understand maybe the retention program. Thank you.

Let me make a comment on the options for a second, because I know that's been a subject of some comments. This Company has not issued options since the IPO in 2004. And that strike price I think at the time was $15.50. We have not issued any options since that date. And furthermore, so all of the stock awards that have been made since those two selected employees have been restricted shares, which to date carry a four-year vesting period.

Okay. And how deep do those restricted shares go in MD's or Directors?

I don't have an answer to that. I can get you that; I just don't know it offhand. (multiple speakers)

Well, I think more than half of the Managing Directors, is my guess, have that, but I can't -- I don't know the balance offhand right now. We can certainly get that for you. And then certainly there are some other Non-Managing Directors that have it as well, but again, we'll have to get you some numbers for that.

Tobey Sommer, SunTrust.

I apologize if I say something you might have already dealt with because I bounced off the call once. In terms of the SEC investigation into chargeable hours, without commenting on the specifics, can you tell us if that has to do with success fees? Or is that normal time and materials-type allocations? Thank you.

This is George Massaro. We can't comment any more than what's in the documents. I think the document is pretty clear in terms of where we stand today.

One of the things that -- the situations we find ourself in is the sort of the how and why's of what's occurred. We really will not be in a position to communicate about -- other than in our -- in the filed documents or a few documents to be filed in the future. That's going to have to be the forum to deal with these types of questions.

If you take a look at the document, I think it makes it pretty clear that it did not affect billing to clients. And that is the critical factor. And it does not result in any change in previous financial statements. So those are the two key takeaways.

Okay. Turning to the debt covenants and goodwill -- could you refresh me on your interest rate on the debt currently? And then maybe in terms of benchmarking over the last -- when you looked at other renegotiations of debt during recent months, what interest rate people might be getting on similar debt balances. Thanks.

This is Jim Rojas. Right now, our interest rate is -- because it does fluctuate with LIBOR, but we're approximately at a 3% rate right now. And we have not gone back to the market yet to understand what current rates are, so I can't comment on that right now. But I will say that our outstanding balances at the end of June 30 was $295 million.

Okay. And then I just wanted to ask a question about turnover and get a sense for what the annualized turnover was in the second quarter, and if you've seen a noticeable difference over the last six weeks? Thanks.

This is Mary Sawall. I'll answer the question about turnover. Through the first half of the year, our voluntary turnover was pretty much tracking with what it had been a year before, annualizing around 12% to 13%.

And we have not seen an appreciable difference in the last six weeks other than the fact that the third quarter is traditionally our highest turnover quarter. People leave to go back to school and things like that. And that is pretty normal -- normal and similar to last year at this point.

Okay. Could you explain the difference between the typical seasonal third quarter level and what it typically is during the balance of the year, just so we can get a sense for what that seasonal uptick is typically like?

Well, if we look at turnover quarter-to-quarter, the first and fourth quarters are generally low turnover quarters. Second quarter ticks up a little bit after bonuses are paid, and third quarter is when people who are going back to school and making career changes, just more frequently tend to decide to leave.

Thank you. I understand the trends, but numerically, could you put a number on what the third quarter trend is typically like?

I don't have that number right now and I'm not sure it would be that relevant, because our headcount as it grows, is -- the numbers go up but the percentages are the same. We're tracking at 12% to 13% annually now, though. And as best we can tell, we're among the best among our peers.

Oh, so you -- okay. I guess, just to ask the question differently -- I understand how the larger numbers translate into larger absolute gross numbers of departures, et cetera, but in percentage terms, allowing for the growth in headcount, could you give us a sense if the third quarter -- what percentage does it typically run at? Does it go up a few points or does it go up 10 points? Typically -- in a seasonal year.

Oh, I'm sorry. I didn't understand. It goes up 1% or 2%; it doesn't go up to 10%; no.

Okay. Thank you very much.

Bill Sutherland, Boenning & Scattergood.

Thanks for taking the question. I'm curious, on the direct costs percentage line going forward. How much of the impact -- how much impact from the two agreements that haven't been renegotiated will have on that until they reach their conclusions?

No -- I think to clarify, there were two agreements that had been renegotiated and two expired.

Oh, two expired. Okay, so the two that were renegotiated, one goes into next year and one goes beyond, I think? So, just -- so, if I could clarify my question, I'm sorry. So, you're saying that through -- after the end of July, those impacts, as far as direct costs percentage, are now behind you?

Yes.

Okay, good.

And that's what we have in our guidance, yes.

Okay. I know you're still working out how you're going to be approaching the incentive packages -- or the employment packages, but are you -- what has been Huron's methodology as far as multi-year deals with your MD's? I guess I'm asking -- is there sort of a typical contract that you've done in the past? And -- so we could just kind of get a sense for that as to what you do in the future.

This is Jim Roth. Our typical contract is an annual salary and bonus, and then we, for certain employees, we give out restricted shares. And as I indicated, those restricted shares would have a four-year equitable vesting period. We typically do not do multi-year agreements.

Okay. I wanted to see if I could ask one -- I realize the restatement -- the issues you don't want to really delve into in the call; this is not about that. But I was trying to clarify one thing that maybe you can do. The redistributions to the ultimate recipients that occurred -- were these made directly to those people by the shareholders involved or by the Company?

I'm sorry, I didn't quite understand the question, because there was a little blip in the --.

Oh, I'm sorry. The redistributions that did end up disproportionately or not appropriately to the ultimate recipients, were they made directly to those people by the shareholders or by the Company?

Original shareholders.

By the original shareholders, okay. And this only involves subsequent earn-outs, right? Not the initial acquisition payment?

I'm not sure I understand that question. But I (multiple speakers) -- just let me say -- I think if you look at the document, you will see that it is -- the details are in there and I really don't want to get into any more of the how's and why's.

Okay. And one last question in terms of trends. I noticed that the headcount had -- the billable headcount numbers were actually down in each of the four segments, which I guess surprised me a little bit based on the growth in a couple. Can you talk about that, just a little color on that? And then how that may pertain to where the headcount is trending? Thanks.

This is Jim Roth. I think the best answer to that is that we have -- we did in the first quarter, we did in the second quarter, and we will continue to kind of look at our business and adjust our headcount and our other expenses to be more in line with our revenues. And so we've been doing that.

As we witnessed some of the challenges of some of our practices we're seeing, we made some headcount reductions throughout the year. That's just part of our process. It's certainly part of our $30 million cost reduction effort that's going on right now as well.

Okay. Actually, if I could slip one more in. The Healthcare and Education practice, with the challenges in education, the first half, you mentioned initially that you think that group should be in line with your original forecast. So you're implying that there's going to be obviously a catch-up here in the second half, at least as pertains to education?

We're making the comment as it relates to the current guidance that we've provided today, that we expect -- again, we've got confidence both in the health and education side, that the guidance figures we provided today are the ones that we will be -- that we're trending towards right now.

Scott Schneeberger, Oppenheimer & Co.

Just kind of following up on the questions along the line of the incremental cash compensation for employee retention. It sounds so -- what I infer from what you've been saying is that's going to be predominantly in restricted shares and more an equity component than a cash component? Is that how you're thinking about things?

I'm not really sure that we're able to determine that yet. I mean, this is -- we're still working through the mechanics of it, the strategy, the size, the depth -- I mean, those are all things that we're looking at right now. We don't expect it to take too long, but we don't have the final design of that retention program yet available.

Okay. But will -- would you anticipate it changing the P&L guidance over the coming weeks as you do finalize that?

No. Any retention program that we're contemplating right now is consistent with the guidance that we've provided today.

Okay, thanks. Someone asked earlier, would you consider perhaps any of your business units exiting any of them? And I'm not sure the question ultimately got answered. You've said that with your restructuring program that it would be -- I don't know if you said equal, but it would be spread across all the business units. Just -- I want to delve in a little deeper there as to are there any places that you're looking to cut back on more than another, perhaps?

I really can't -- I don't want to comment at this point in time. We're still working out our strategies for all the operations, and we'll be doing that really over a relatively short period of time. I'd say within the next two and a half weeks or so, we'll have a much better sense. But at this stage, I'm really not prepared to talk about where and what decisions we would either grow, invest or divest; it's just -- it's way too early for us.

Okay, thanks. A couple of fundamental questions. With regard to Disputes and Investigations, you mentioned there's a lot of softness there. Are you seeing any signs of positive action in that area, just any glimmers of hope in that front?

We have seen signs of positive action and there continues to be some -- as we indicated earlier, there was a large project that started recently. We have seen an uptick. How long it stands for is hard to tell. As you know, the duration -- or I'm sorry, the nature of some of the work in that area is that you can have a very large project, it can stop very quickly but it can also expedite very quickly -- or I'm sorry, extend very quickly. So it's what makes that part of the business more difficult to gauge.

Having said that, we have seen an uptick. I think there's been some recent analyst reports talking about litigators also expecting a similar uptick. So when is it going to come? How deep is it going to come? I think those are things that we're kind of waiting on for awhile.

So I don't know that we have a full answer to that. All I will say, though, as I've said, I've been around -- in and around the Disputes and Investigations business for well over 25 years and I have seen how explosive that kind of business can become.

So, if we have the right people in place and if the outside environment is appropriate, that group has and will continue to have very sizable potential. And I've witnessed this not once, but 15, 20 times over the course of my entire career. So, we are hoping that there will be a turnaround, but we are very comfortable that we've got the right people to do this.

Okay, thanks. And one more, if I could. Velocity -- your contract employees, you'd mentioned an average of 875. This is in the prior guidance, going back for the year -- 875 average for the year. Is that still in the ballpark of what you're looking at? Or are we going to have to come off that a little bit here?

Yes. I think it's in the ballpark.

(Operator Instructions). Sean Jackson, Avondale Partners.

In your remarks you (technical difficulty) guidance did not include any unanticipated litigation or legal costs, which kind of suggests that you do anticipate some legal costs. Can you disclose what's your assumption there?

And also, as importantly, how long do you think meaningful litigation costs and legal costs will continue? How long into, say, 2010?

This is Jim Rojas. I'll take the second part of the question first.

We can't comment nor do we know right now the length or the duration of the litigation. But -- and to your first question of what is anticipated versus unanticipated, as we clearly identified in the Q2 10-K, we had already identified certain consulting and legal expenses associated with the restatement that we identified, and I believe that was about $400,000.

We do have some clarity as to current costs we've incurred, as well as additional consulting and legal fees that will occur for the rest of the year. However, the legal process is dynamic and we don't know what costs that we will incur. So, we have some estimate and some visibility, but not perfect. And that's what we tried to do with our guidance.

Okay. Also, what was the -- I didn't hear this -- what was the organic growth on your Healthcare and Education segment?

We don't comment on the specific numbers -- or we didn't. We will provide a reconciliation on our website that we usually provide, which will give you the numbers to identify it. But it was somewhere between 6% and 7%, was the organic growth for the quarter.

And lastly (multiple speakers) --

But the numbers will be on the schedule that we post on the website.

Lastly, on the financial covenant side of things, the net worth covenants that you have right now, is it the same as what was in the original credit agreements? I think it was '06 or so -- or has that been updated?

You know, just the credit agreement was amended. We don't have a net worth covenant any more. We only have two covenants and that is leverage and fixed charge ratio.

Dan Leben, Robert W. Baird.

Great, thanks. On the bonus accrual side, we know there was the issue last year, where in the fourth quarter, there were some reversals and we saw an uptick in the margins because of that. Should we not expect that this year, given your commentary on focusing on the bonus accruals and paying your people?

We don't anticipate any and we have -- there's a significant amount of focus in terms of our bonus accrual at this point.

Okay, maybe the better way to ask it is kind of the rate that bonuses have been accruing year-to-date, is that enough to satisfy your current thoughts before redoing the comp plans? And if that rate continues in the second half, that would be -- that would get you guys to where you need to be?

We fund our bonuses as we have performance. So, the extent that we're funded bonuses is to the level of the revenue that we had anticipated. So, I mean, we adjust that as we go throughout the year. So we expect that within our guidance, we are adequately incenting our high-performers and that our accruals are appropriate, and estimates are appropriate at this time.

Okay. And then the changes to the comp structure that you're looking at, should we think about these more as something that would roll in, in terms of 2010 compensation plans versus something that would happen more on a one-time basis or adjusting late in the game in 2009?

Yes, I think the impact would be more in 2010. I think that's accurate.

Great. Thanks, guys.

[Adam Koser], Stifel Nicolaus.

First question is, with respect to the SEC investigation into the hours, is there a potential impact with respect to timing of recognizing revenue? And if so, have you taken that into consideration for full-year guidance?

This is George Massaro. The review indicated no impact on the financial statements and had no impact on the guidance.

Okay?

Okay.

This is Jim Rojas. The only other thing I'll add -- and this was clearly in all of our documentation -- is that also, which is very important, is no client billings were impacted either.

Okay, great. All right, and then just moving on to the Health and Education segment. It looked like it was about flat sequentially in '09; it was up 11% sequentially in 2Q '08. You'd mention some caution by research institutions in the first half of this year. So can we assume that conversions in the healthcare practice are tracking as expected?

Yes, I think that's a fair assumption.

Okay. And then finally, just sticking with that segment, based on conversation with your clients in Health and Education, how have they reacted to the recent publicity?

Well, I think it's consistent with what I mentioned earlier. I mean, there was -- I'll just give you a flavor for the calls that I've received. We've had some that were concerned and wanted to know more about it, I mean, particularly those that kind of read some of the commentary. And again, the fundamental question was, are you going to survive?

And equally important were the client teams that are working with us right now, will they be able to continue, particularly on some of our longer-term engagements? And we gave them whatever comfort that we could in order to let them know that we were going to be doing just fine, and we had every intention of having the same client service teams fulfill out the exact same scope of work that we were asked to do.

So, I mean, the bottom line there was we told them we don't expect there to be any changes at all in terms of the Company or our ability to provide the service. But I will have to say that a majority of our clients have commented that they heard it, they read the results, they looked at the information, they looked at all the commentary, and they said, we're 100% behind you. And we've had a lot of those comments as well.

So, I think -- that's more of a reflection of the reputation that we have in our collective businesses, and Healthcare and Education, and at the same time, the extent to which they know the individual people that are providing the services. There's a tremendous amount of strong reputation that's been built up over the years in our core businesses. And I think some of the comments that we've received from clients that have been supportive reflect that strong confidence in our abilities.

Okay, great. Very helpful. And then just one last quick one here. With respect to the project that was canceled and the three to five I think you said were delayed, can you just break that down by segment, where those fell under?

I really can't. The three to five I think were actually across most of the segments. And the one -- I don't recall; I think it was in the restructuring area.

Okay, great. Thanks a lot.

(Operator Instructions). Joseph Foresi, Janney Montgomery Scott.

I'm going to try and fit a couple in, so maybe we'll make it one question from a couple different parts. Just talking in general to the potential areas that could be hurt, given the impact to Huron's reputation, I wonder if you could just categorize this for us -- what services you think may be a potential issue from a reputation standpoint?

Well, as I mentioned in my comments, I think that the area that's going to have the largest potential impact is going to be the Disputes and Investigations business. And you would expect that just because of the nature of the work that they do.

Having said that, I think there's a couple of important things to recall. I mean, number one is -- there are going to be sensitivities in all segments; there's no question about that. But the Disputes and Investigations, where we anticipate there to be the biggest sensitivities, still is only about 7% of our overall revenues.

And there, again, as I mentioned in my prepared remarks, it really is important to recognize the depth of support that we have received in emails and calls from our clients, indicating that people know about the issues and that they are very supportive of our people.

So, although in theory and potentially in practice, that's where we expect the biggest results to -- the biggest impact. I actually have quite a bit of comfort that they are going to get past it. Our clients are going to see past this, and that we're going to get back to a normal business that's more impacted by the external market, particularly the Litigation and Disputes market, that it is going to be about the events of the last couple of weeks.

I mean, there are issues that are in the Disputes and Investigations area where we are seeing some increases in terms of our work effort -- things like tax controversy that are going on; international arbitration; accounting spinoffs -- all of which provide meaningful new opportunities for us for that group.

So, the answer to the question is, that's the group we expect to see the biggest impact in, but I do think that our people and their clients, more importantly, are going to be able to see through this.

So I guess just maybe to ask it a little more directly, I'm sure -- we're kind of wondering -- the group has underperformed. Its size is relatively small and there could be an impact to the reputation. Why stay with the practice at this particular point in time?

Well, again, like we do in every single business, we always weigh the strategy for different businesses and that's exactly what we're doing there. That's no different than any other segment that we're in right now.

We will be making whatever strategic decisions about the business and the collective segments, both for new opportunities, new investments, and also existing services that we provide. That's an ongoing part of our business and that's something that we certainly anticipate doing in the near-term as well.

Okay. And just moving on -- are we to assume that the present guidance assumes some exiting of potentially -- even though you haven't seen it yet -- of Managing Directors or a tail-off in business they're in? Is that already built into the present guidance? Or are you assuming that there isn't any attrition at that level?

This is Jim Rojas. In my prepared remarks on the outlook, we mentioned that we had factored in some of the comments that Jim Roth had made in his remarks about losing a project here or there. And our heads are not in the sand, so -- but we've just anticipated normal attrition currently within our guidance.

Okay. And that's at the Managing Directors' level as well, no spike or any significant changes in [the] attrition there?

Correct. Yes. Well, one thing I should mention is, we are looking at all areas in our cost savings program. And we don't comment on where exactly that cost is going to come from. But I wouldn't assume that if there are changes at that level, that it was not voluntary or involuntary separation.

Okay. And then just lastly, just on the area of growth, we've seen the organic growth rate decelerate here. Typically, you guys have been an acquisitive company. And just given where the debt covenants are and the decelerating growth rate, maybe you could just talk a little bit about how you see growth -- maybe not so much for the back half of this year, but heading into next year and how you kind of would approach that.

We really are not prepared to talk about 2010 yet. That's a process that we're about to embark on right now. So we'll have more to say of that later on in the year; but at this stage, we really can't comment on our guidance for 2010.

Mr. Roth, we have concluded the allotted time for this call. I'd like to turn the conference back over to you.

Thank you. Well, suffice it to say, I'm very optimistic about Huron's future. I've been with this Company since its inception, and I am keenly aware of what our personnel can do and how valuable their professional skills are. I'm supported by a strong leadership team and surrounded by incredibly talented people.

We remain strong in the markets we serve. Our clients are supportive, and we are taking the proper steps to ensure that the future growth and profitability of our business will create a vibrant and lucrative work environment for our employees, and solid long-term value for our shareholders.

We look forward to talking with you again when we report our earnings next quarter. In the interim, thank you for listening.

That concludes today's conference call. Thank you everyone, for your participation. You may now disconnect.