Huron Consulting Group Inc (HURN) 2009 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Huron Consulting Group webcast to discuss results for the third 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 the 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 the 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 the information along with 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 reconciliations to the most comparable GAAP numbers.

Now I would like to turn the conference over to Jim Roth, Chief Executive Officer of Huron Consulting Group. Mr. Roth, please go ahead.

Good morning, thank you for joining us to discuss Huron Consulting Group's third-quarter 2009 results. With me on the call today are Jim Rojas, our CFO, David Shade, our President and COO, and Mary Sawall, our Vice President of Human Resources.

We've been through a challenging third quarter, and I'm pleased to report that we concluded the quarter with strong revenues amidst what was certainly a very difficult period for our company. The recently concluded quarter was the best quarter from a revenue perspective in Huron's history. Given all that went on during the quarter, I think it's fair to say that that is quite an accomplishment.

Many of you are aware of the investigation announced by the SEC and related inquiries as well as the class action and derivative litigation filed subsequent to our restatement announced during the third quarter. We are not aware of any developments in connection with these matters since our last public filing. A full disclosure is included in the 10-Q which will be filed later today.

When I took over this position in late July, George Massaro, our Non-Executive Chairman of the Board, indicated that he would handle the historical issues associated with the financial restatement so that I could focus entirely on managing the company. I have not been, nor will I be, distracted by the recent events. My ability to focus on the business has been a significant benefit to the company that is in part reflected in the financial results that we released today.

I'm going to turn the call over to Jim Rojas to discuss the third quarter financial results and 2009 guidance. After Jim concludes, I will provide commentary on each of the practices, and then Jim, Dave Shade, Mary Sawall, and I will be available to answer questions.

Thank you Jim, and good morning everyone. As we discussed in our last call, there were financial objectives that we needed to complete during the third quarter. First, I'd like to talk about our credit facility. As previously announced, we were able to successfully negotiate an amendment to our current agreement with our bank group that allowed us to exclude certain non-cash charges from our third quarter financial covenant calculations. The amendment included a modest increase of 75 basis points and a reduced borrowing capacity under the revolver of $60 million. We feel that the lowered revolver still gives us a comfortable level of liquidity to meet our working capital and other cash needs.

Second, I'd like to talk about the goodwill impairment. As you saw in our press release, we recorded $106 million non-cash pretax charge for the impairment of goodwill. The need to complete the analysis was triggered by the decline in our stock price, and the impairment reflects the challenges that certain of our practices face given the current economic environment.

The impairment is approximately 20% of the company's total goodwill balance of $506.5 million at the end of the second quarter. The impairment charge was recognized in our accounting and financial consulting, and corporate consulting segments, leaving those two segments with approximately $50 million of goodwill. Goodwill associated with our health and education consulting, and legal consulting segments was not affected.

Lastly, I'd like to stress that the impairment charge is non-cash in nature and does not affect our liquidity.

Jim Roth will discuss the progress we've made with respect to our clients and people in a few moments.

Now I'd like to walk through this quarter's numbers. During my discussion of the results, all comparables will refer to the restated financials and the adjustments which were made to net income, earnings per share, and EBITDA for the affected periods. We have also provided GAAP and non-GAAP EPS and EBITDA reconciliations in our press release this morning.

Revenues for the third quarter of $172.2 million increased 2.1% from the third quarter of 2008 and grew sequentially from a $165.8 million in the second quarter of 2009. And as Jim Roth mentioned, we were very pleased to report that this quarter was the best in Huron's history in terms of revenue.

I will provide more color on revenues in a few moments, but on an overall basis I can tell you that we had a solid quarter positively influenced by better than forecasted levels of contingent fees and continued strong demand in the health and education consulting segment, reflecting the depth of our industry skills to assist clients during these challenging times.

For the sake of comparison, I think it's best to take you right to the adjusted EBITDA numbers that we provided in the press release. This calculation excludes share-based compensation expense, non-cash compensation expense, restructuring charges, nonrecurring expenses related to the restatement, the goodwill impairment charge, and other gain that was recorded in the second quarter of 2009.

We did incur higher than anticipated nonrecurring costs associated with the restatement, as these items are difficult to predict given the fluid nature of the event. The restructuring costs associated with our $30 million cost savings plan, however, were in line with expectations.

Adjusted EBITDA of $38.1 million compared to $40.8 million a year ago. Adjusted EBITDA margins were approximately 22% for the quarter compared to 24% a year ago. The decrease in EBITDA was driven primarily by decreased revenue and margins in accounting and financial consulting and the legal consulting segments and partially offset by improvement in health and education consulting, with corporate consulting remaining flat year over year.

In developing an understanding of our Q3 provision for income taxes, it is important to note that the goodwill impairment charge contributed to a tax benefit of $32.3 million on a pretax loss of $96.3 million, resulting in an effective tax benefit rate of 34% for Q3. This benefit rate has been reduced by the impact of non-cash compensation expense, which is not tax-deductible, and foreign income losses that we're not able to fully tax benefit.

Net loss for the quarter was $64 million or $3.16 per share compared to net income of $2.4 million or $0.12 per share for the same period last year. It is important to note that these results were impacted by the non-cash compensation and other charges previously mentioned.

So looking at the adjusted net income and adjusted earnings per share calculation, you can see adjusted net income of $11.9 million for the quarter compared to $17.0 million a year ago, and earnings per share of $0.59 compared to $0.86 a year ago. And this difference was primarily driven by an increase in our effective tax rate.

Now turning to comments on our business segments. The health and education consulting segment, our largest segment, represented 57% of total company revenue this quarter. We continued to experience the same momentum we saw in the second quarter as the pace of new assignments continued on the trend as earlier in the year.

A positive impact on the quarter's results was the level of contingent fees. We do not anticipate that this level of contingent fee performance will continue through the rest of the year, and that is reflected in the updated revenue guidance we are giving you today.

Health and education consulting revenues were $99.7 million for the third quarter of 2009, increasing approximately 30% from $76.5 million in the third quarter of 2008, and on an overall basis we remain very pleased with the continued strength of the health and education consulting segment.

When assessing our revenues for the quarter, it's important to note that the Stockamp acquisition occurred on July 8 of last year.

Our legal consulting segment, which was 17% of total Huron revenues for the quarter, posted revenues of $29.3 million that compared to $38.1 million in the third quarter of 2008. While we were not able to match last year's e-discovery and document review revenues, those revenues were in line with our forecast for the quarter and exceeded our Q2 2009 revenue. The e-discovery and document review portions of the business met our expectations. However, operational consulting services in the legal segment were mixed and lower than expected.

Accounting and financial consulting, representing 16% of total Huron revenues in the third quarter, posted revenues of $26.8 million compared to $35.1 million a year ago. Reversing an eight-quarter trend, this segment had a sequential increase in revenue. The significant client engagement that we discussed on our Q2 call was a contributor to the increase in revenue from last quarter. We are pleased with the progress in the accounting and financial consulting segment but will continue to face challenges in this difficult environment.

We saw that corporate consulting, representing about 10% of total company revenues in the quarter, continued to benefit from good demand and new wins in the restructuring and turnaround practice. The remaining practices within corporate consulting showed continued weakness, reflecting the current economic environment. Revenues for this segment were $16.4 million for the third quarter of 2009 compared to $18.9 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 continue to be upbeat on health and education consulting. Restructuring and turnaround, e-discovery and document review are meeting our expectations, plus we saw some positives in the accounting and financial consulting segment. But we continue to experience soft demand in our non-healthcare operational consulting practices.

Jim Roth will provide you more color and his perspective on the outlook for each of our segments in a moment. But now turning to the balance sheet.

In the past we have had one of the best DSOs in our peer group. DSO came in at 75 days at the end of the quarter, and we were not satisfied with this level of performance. In the third quarter we weren't as proactive with collections, but the bottom line is that we need to do better.

We are taking a more proactive approach, and we've refocused our efforts on collections. We've already seen improvements in October, and we want to get back to our historical numbers in the fourth quarter.

Now to summarize the guidance that was included in the reconciliation schedule in the press release. We continue to take a realistic view of the economic conditions, particularly in the accounting and financial consulting and corporate consulting segments. We anticipate full-year 2009 revenues before reimbursable expenses in a range of $650 million to $665 million. We tightened the range, given that we have more refined visibility into our revenues and contingent fees.

Adjusted EBITDA in a range of $139 million to $144 million.

Adjusted non-GAAP net income in a range of $58.5 million to $62.5 million and between $2.85 and $3.05 in adjusted non-GAAP earnings-per-share.

As we discussed earlier, there are several items that need to be considered in reconciling to our non-GAAP forecast, and the reconciliation schedule that we provided in our press release this morning will help walk you through the impact of these items.

In closing, when we talked last time we discussed certain third quarter financial priorities for Huron -- renegotiate the credit facility, complete a goodwill impairment analysis, and deliver on the revenues that we committed to. We have achieved these priorities. We are now focused on delivering results in the fourth quarter and completing our planning for 2010.

Now let me turn it back to Jim Roth.

It has been 97 days since we announced our financial restatement. I will take the liberty of calling this my 100-day assessment of how we are doing amidst what has been the most difficult stretch in our company's history. I will provide detailed commentary in a second, but suffice it to say that we have emerged from the restatement aftermath quite well, with solid revenues and a receptive market that is not nearly as impacted as some had anticipated.

It has not been easy, nor am I expecting entirely smooth sailing from here on out. But to the extent there are challenges ahead, those challenges will be reflective of our overall economic conditions and execution of our strategy rather than anything having to do with the financial restatement or its aftermath. Put another way, we are focused on managing our business in the future and will not be distracted by historical events.

Let's start with the most challenging aspects of the third quarter. When the financial restatement was first announced, our people, some of our clients, and the overall market responded with a great deal of shock and not much awe. The press provided some awful headlines including Huron on the brink, and the spectacular blowup of Huron Consulting. Needless to say, press coverage like that makes it somewhat difficult to sell new work. Fortunately, those headlines were widely off the mark, and it became clear early after the announcement that the financial restatement would not have a material impact on our revenues.

Throughout the month of August and somewhat into September, I -- along with many of our managing directors -- spent a fair amount of time meeting with concerned clients and employees. A few of these clients were concerned about whether we would survive and whether we would be able to continue to support ongoing projects or propose new projects. Our people were concerned as to whether clients would abandon us and whether their fellow employees would leave to seek calmer waters.

So what happened? For starters, our clients stayed with us. In fact, not only did they stay with us, but we signed engagements with 73 new first-time clients during the months of August and September. I believe that statistic is far more indicative of the market's reaction than any other speculative statements that were made when the restatement was first announced.

Did our clients have valid concerns? Yes. Although a vast majority of our clients expressed interest in what had occurred, many of those clients' projects proceeded without disruption of any kind. Some clients asked for personal visits or additional information to enable them to get comfort that we would emerge financially sound and that our people would stay. Those conversations took place, questions were answered, and we moved on.

Did we lose any work due to the restatements? Yes, we did lose some work. There was a hospital that asked us not to propose on a pending RFP. There have been a few instances where law firms or the law firms' clients have determined that the pending SEC investigation would present an environment that was too risky for them to comfortably hire Huron. And there are undoubtedly a few circumstances that we are not even aware of where clients opted not to consider hiring us.

Although we lost some work, as would be expected, we also gained 73 new clients. Putting this in perspective, we had a significant net gain in the number of clients during this period, consistent with a normal quarter.

Without question, and as fully anticipated, the most significant impact to the company was and still is being felt in our accounting and financial consulting segment. Similar to many of our direct competitors in the disputes and investigation area, the revenues and profitability in this segment have been deteriorating over the past 18 to 24 months. The restatement announcement did not make it any easier to sell work into the disputes and investigations market.

Last week, recognizing that the most steeply impacted practice would be that of our complex accounting group, we sold a portion of our AFC practice to one of our competitors. The transaction included five managing directors who specialized in complex accounting matters and 16 other employees that largely worked with those managing directors. Our AFC practice continues to focus on rebuilding, and its talented resources are committed to that goal.

I spent the last few minutes talking about the challenges of the third quarter, and now I want to turn your attention to things that went well. And there is a lot to talk about.

First, let's talk about our people. Many predicted that our people would leave. They didn't. Excluding the sale of our complex accounting area, we have had very few people voluntarily leave this company since August 1. Surely you can make the argument that departures will increase after bonuses are paid out, but that rationale has always existed.

Let me be realistic. This has not been easy for our employees, myself included. It is hard to have these events occur without causing some degree of introspection and perhaps some thoughts about greener pastures. But our people have stayed for one fundamental reason. We are the best at what we do, and to go elsewhere would be less collaborative and in many cases present more challenges for our people to be successful.

Do I expect others to leave? Yes, I do. We always have turnover in the consulting business. But I don't expect the departures will be any more than our normal attrition, and in fact it may be less than our normal attrition rate, which has historically compared favorably against our peers.

Now let's talk about our clients. The revenue numbers are reflective of how we have emerged from this restatement crisis. The third quarter was the best revenue quarter Huron has ever had, and I don't think there were too many people that would've predicted that several months ago.

As Jim Rojas indicated when he went over the numbers, due to the size of the contingent fees that we received in Q3, we will almost certainly not replicate the same revenue level in Q4. However, it is worth emphasizing that during a period of time when all kinds of terrible things were contemplated and in a fairly difficult economy, we more than held our own. For that I am incredibly proud of everyone in our company.

Turning now to the practices, I would like to give a brief overview of each of the segments. I will start with our health and education segment, which represented 57% of our third-quarter revenue.

The healthcare component of our health and education segment performed extremely well. Our two healthcare practices, Wellspring and Stockamp, continued to provide results that are reflective of the depth of our service capabilities in the healthcare arena.

Nationally there remains great uncertainty within the healthcare industry about how the emerging healthcare reform will play out among the provider community. One thing is certain, cost pressures among our provider client base will continue for the foreseeable future. The depth and breadth of our personnel who are able to assist hospitals to improve their financial performances is a market differentiator that is one of the critical keys to our success.

As evidence of our strength, Modern Healthcare recently ranked Huron as the second-largest provider of healthcare consulting services.

Our Stockamp practice, which focuses primarily on revenue cycle and patient progression, had a stellar performance driven by significant contingent revenues. Q3 ranked as the most successful quarter in Stockamp history, demonstrating the benefit of achieving the synergies that we had anticipated within the health and education practice.

While contingent fees can provide a real boost to revenue and earnings, the unpredictable nature of the timing and size of contingent fees makes it difficult to extrapolate one quarter's performance to the next. We expect Stockamp to have a strong Q4, but not as strong as Q3, given the uncertain timing of contingent fee revenue.

Our Wellspring practice, which focuses on improving hospital operational performance, also had a very strong quarter. As I indicated earlier, there are considerable financial strains being felt within our core client base, and I expect our performance in this business to remain strong for the remainder of the year as we continue to provide services to help our hospital clients meet their financial objectives.

In addition to the traditional turnaround situations that we have seen during the past several years, we have recently been seeing more performance improvement opportunities. This means that we are seeing slightly more focused implantation engagements following our initial assessments, rather than the larger, more comprehensive turnaround situations that we have often seen in the past. This is indicative of how we are successfully adapting to market conditions. In the short term we may expect to see a greater number of engagements with more moderate scope rather than a smaller number of engagements with a larger scope.

The third component of our health and education segment is our higher education practice. This practice hit a soft patch this year, largely attribute to diminished endowments and dwindling state funding. We continue to see strong performance in the technology services area serving our university clients, including several large, long-term projects that were reaffirmed after we announced our restatement.

The research administration service line remained steady, but we've not experienced the growth that we had anticipated earlier this year. Research funding stemming from the stimulus package continues to be a priority, and we expect that increased research funding for universities will pick up in the near term.

The life sciences advisory practice, which consists of our combined clinical research and pharmaceutical practices, saw consistent growth in Q3. We believe the demand for life science services will continue to increase as proposed compliance legislation becomes more active in various states, along with the enactment of possible federal legislation in early 2010.

Finally, our practice in the Middle East is finishing the year strong. Our strategy for growing our presence in the Middle East is right on target as the demand for our core services in that area of the world remains vibrant, and we are well-positioned to continue above-average growth in the region well into the future.

We remain cautious about the prospects for higher education in the fourth quarter. The economic environment is very challenging. These challenges provide clear opportunities for our services, and we are confident that even the changing higher education market will provide us with solid growth potential.

I will now turn to our legal consulting segment. Legal consulting accounted for 17% of our Q3 revenues. Legal consulting closed Q3 slightly below our expectations. The performance of the segment is partly reflective of ongoing trends in corporate legal departments, where efforts to cut costs remain pervasive.

There is a relentless focus among corporate legal departments to reduce the cost of litigation. On the one hand we are well-positioned to help our clients achieve their internal cost reduction goals, given that discovery and litigation preparedness are essential to managing costs. On the other hand, the litigation trends remain unclear despite some periodic predictions of a slow but steady upturn in 2010.

Our integration of discovery and V3locity continues to effectively address client needs across the spectrum, from collection, processing, review and production. Our work continues to be heavily influenced by our large clients where we have master service agreements, along with matter-specific and broader institutional issues.

Let me now turn to our accounting and financial consulting segment, or AFC. The AFC segment consists of our disputes and investigations practice, and our accounting advisory -- and our accounting advisory practice. This segment represented 16% of our revenues in Q3. AFC experienced an uptick in revenues and delivered the best results that we have seen for this segment since Q3 2008. Each month of the quarter got successfully stronger.

While the litigation market showed some signs of greater activity, we remain very cautious in predicting that the level of activity is going to be meaning -- is going to meaningfully increase in the near future. While there remain some independent assessments that seem to point to increased activity, it is hard to determine whether this is optimistic thinking or the beginning of a legitimate trend.

As we have indicated in prior calls, the cost structure in the AFC practice had not been reduced over the past year, commensurate with its more recent decline in revenue. The managing director headcount in this practice is 32 as of today. We've been working closely with the remaining managing directors to create a more fertile environment that will enable them to stabilize the practice and then grow once the economy improves and the marketplace issues diminish.

Although the environment is not as robust as it once was, I'm very hopeful that we can work with the remaining practice to build upon our competencies in disputes, investigations and business services to re-create a practice that has been wildly successful for this company in the past.

We are focusing our efforts on retaining the remaining personnel in the disputes, investigations and business services groups and have expectations that the creation of a more fertile environment for this practice will enable us to achieve a level of stability such that we can grow the practice in the future at a pace and level of profitability consistent with our other segments.

Finally, I want to discuss our corporate consulting segment. This segment consists of our restructuring and turnaround, utilities, strategy and Japan practices. This segment provided 10% of our Q3 revenue.

Restructuring and turnaround had a very strong Q3. These results reflect a strong market for our core services in this practice. There is a strong pipeline of new employees that lead us to believe that the continued difficult economic environment will provide a steady stream of opportunities for growth in this practice.

The strategy, utilities, and Japan practices were soft in Q3. These practices have struggled in light of downturns in corporate spending. It is too early for us to predict any significant improvements in the economy, so we expect these practices to continue to be soft for the remainder of the fourth quarter.

Having completed our discussion of the segments, I now want to spend a few minutes on some corporate-wide initiatives. In mid-August we announced that we are proceeding with a $30 million cost reduction effort. That effort, which was completed at the end of August, has been fully implemented.

We indicated at the time that the cost savings from that cost reduction effort would be used in part to fund our retention program. The retention program is intended to provide a clear message to our top performers and revenue generators that we were fully committed to their career success at Huron. We are in the process of executing that retention program and expect to have it fully deployed within the next week.

Realistically, I don't think we will be able to determine the true success of the retention program for at least the next several quarters, although I am confident that the program will achieve its intended objectives. However, we recognize that consistent with the normal course of any consulting business, there will be manager director departures in subsequent quarters. It is unreasonable to expect that there would not be any managing director departures over the course of a year, particularly in some of our more challenged practices.

Accordingly, I do not anticipate attempting to reconcile future voluntary departures with our retention initiative. Instead, the results of the retention program along with the results of our normal day-to-day performance in the market will be reflected in our revenue growth, earnings, and traditional turnover statistics.

Before I take questions, I want to make one last comment. Although the SEC investigations continue and the shareholder and derivative lawsuits are working their way towards consolidation, from an operating perspective we have put the financial restatement and its related issues behind us. We could talk about the restatement and the impact it may or may not have on our business forever.

I do not contemplate talking any further about the impact that these issues may or may not have on our future operations and earnings. My rationale is simple. We can't change what has happened, and I won't let the historical issues distract from our efforts in the market. From here on out, our revenues, earnings and performance will stand on their own. I'm very confident that the results will be very good for our people, our clients and our investors.

With that, I would like to open it up to questions. Operator?

(Operator Instructions). Tim McHugh, William Blair & Company.

Congrats on the quarter. First I wanted to ask about the incentive fees for Stockamp. I'm sure there will be a little more detail in the 10-Q but can you give any sort of quantification in terms of what you might consider the abnormal part of it and what that might compare like to Q4, just to get a sense for what the rest of the business is kind of performing at?

When we discuss our contingent fees, we look at the whole health and education segment. So while Stockamp had a significant portion of that, there are other aspects of that segment that contribute. But when you see our Q, you'll see that we had approximately $27 million of contingent fees for the segment in the quarter. And typically in the past we have run closer to $15 million to $17 million. So that can give you some type of estimate as to where we saw incremental fees.

And then on the retention program, you mentioned this is rolling out over the next quarter. Were any of the costs for that reflected in the third quarter? Or should we assume that's an incremental bump in the expense base for Q4? And then also, any more details on what the final form of the plan looks like in terms of how many people? What the strategy underlying it is?

I'll comment on the cost. We are now rolling out that program, so that there were no costs in Q3. You'll see those costs going forward.

In terms of the form and strategy, we've structured it such that we've focused this really on -- we had objectives that we wanted to accomplish with the retention program. We've structured it to accomplish those objectives, primarily focused on keeping our top performers very committed to the company.

That's fair -- you mentioned accounting and financial consulting. Are you at a point now where you've made kind of the strategic decisions on what businesses you want to emphasize and want to keep and which you're going to emphasize less, I guess? At this point are you still in the process of reevaluating what Huron looks like going forward?

We are always looking at what Huron is going to look like going forward, both in terms of adding and decreasing in certain practices. Right now we are very comfortable with where we are at. We are -- AFC certainly has gone through a difficult time, but we remain committed to focusing on that group.

It's certainly a smaller group than it was before. But we have met very closely with the people in that group over the past several months, and are increasingly putting together a plan that is capable of getting us to the point where that can return to levels of profitability consistent with the rest of the company. So we are committed to making that happen at this stage.

To tie that off on AFC, the 32 MDs. How does that compare to maybe three to six months ago? Or a year ago? Just to give us a frame of reference on how many you used to have in that segment?

I don't recall exactly. It's probably in the 45 to 47 range, something like that.

That would be what, about a year ago? Or is that six months ago?

I think probably at the beginning of the year, the beginning of 2009. I think it was 45 at the beginning of 2009.

Thank you.

Jim Janesky, Stifel Nicolaus.

Going back to the contingent fees, you said normally about $15 million to $17 million, and it was $27 million this quarter. Can you talk a bit about in the future, could we expect this type of lumpiness to continue to occur? And -- or will it -- or are you expecting that maybe it will be a little bit smoother over time?

I think by nature the contingent fees are going to be -- first of all, they are very good from our perspective. The challenging part of course is the timing of them and the size of them. And that's entirely dependent upon -- in every case it's a client-specific method. So I think they are always going to be more lumpy than and hard to predict in terms of which quarter and the size they will come into. So I expect that lumpiness to continue for a while.

There've been variations. So I don't know that it's right to assume that there's a 15% -- we've got -- or $15 million in any one segment. I'm not sure I would look at that as a normal thing. It was what it was. But we have contingent fees in all three of the practices within the health and education segment, and the generation of those contingent fees is entirely dependent upon client-specifics at the time. So maybe that's a long way of saying, I think it's going to remain lumpy for a while and hard to predict.

Thanks. And then looking at the financial consulting segment, nice sequential increase, as you mentioned, the first one in quite some time. But then the margins didn't flow through. They went up a little sequentially, but I would expect them to go up a lot more when you had the sequential increase. Can you first comment on where you saw the strength in the third quarter? The sustainability of that strength? And then just a comment on why the margin didn't flow through.

The margin piece, as I indicated earlier, several things have happened. First of all, we acknowledge that over the last two years, really, this practice has gone from being an incredibly profitable practice and, consistent with some of our -- with many of our competitors, the margins and growth rate for these -- for this -- for disputes and investigations, in particular, went down. And I think we've acknowledged that our cost structure did not come down at the same pace that our revenues came down.

We took increased actions during the third quarter that were partly rolled out then, will partly be reflected in the fourth quarter and beyond to address some of the cost issues. So I think that's the part that will be -- hopefully the margins will be returning more towards normal rates into the future here.

In terms of the practices, as you know, this practice is very difficult to predict because of the transactional nature of it. (inaudible - background noise) have a large litigation project going on one day, a dispute, and the next day it gets settled. So it gets to be very hard to predict, and I don't know that any one job dominated so much. We've had some work with some government agencies that has been going quite well in Q3 and I think will continue to Q4. But that too has -- is difficult to protect as well.

So I think we've always seen high levels of unpredictability in what we now call the AFC practice, and we suspect that will continue in the future.

I'm very encouraged that the quarter came out the way it did. I am encouraged by the fact that there were sequential increases - in each month during the quarter, and I think that bodes well for the direction that that practice is now going.

I'll just add one other comment, is that the government work that Jim Roth had mentioned was a larger percentage of the total fees for the quarter. And that typically is at a lower margin. While we are very happy to have it, it is at a lower margin.

Is there -- was there a number of rather very large projects in the quarter? Or was it no difference than your historical number?

We had mentioned on the Q2 call that we were just starting a 100-person project that was continuing through Q3. So that contributed significantly to our revenues for the quarter, I wouldn't say huge percentages, but it is one indication of what was going on.

I think the other thing that encouraged us was that we -- again, despite the fact that we knew this was going to be the most troubled area, we actually did see a fairly steady pace of new jobs in this business -- in this practice during the quarter. And that was helpful, not only from a financial perspective, but also I think it's indicative of the fact that the impact to this practice, although it certainly was not zero is hopefully going to be limited and diminishing as time goes on.

And then on the retention program, you talked about you're focused on top performers. Is the -- has and will the retention program be rolled out through all four of your operating segments? Or are you focused on just a couple?

It will be focused on all four of our operating segments.

Okay, thank you.

Joseph Foresi, Janney Montgomery Scott.

My first question here is, can we just talk about maybe the total number of MDs? Can we get the total maybe to end the quarter and some idea of what it was versus the last quarter?

Yes. We're going to try to get that here in a second. I think a vast majority of the delta -- are you looking for it for company-wide?

Yes, company-wide, would be fine.

I think we ended the quarter with 170.

Okay.

I would say we began the quarter with something about 195. Beginning of the year we started with 195.

Keep in mind that during this period of time, we've had a series of -- we certainly have had some additions come in over the course of the year, but we've also had both voluntary and involuntary departures.

Sure. Maybe you could just provide some color on where you were seeing the departures and maybe where you have been doing -- and it sounds like you're obviously taking costs out of the business as well. So maybe you could just give us some color on where the departures are taking place.

I think the largest share of the departures have been in the AFC practice.

And have those been voluntary or -- the majority been voluntary or involuntary?

They have been both.

And when was the (multiple speakers)

Just to give you a few of the metrics, the 195 number that I referenced, that was at July 31, right before the restatement.

Okay. That's (multiple speakers)

And looking at the numbers, it's a pretty balanced -- in terms of voluntary and involuntary separations.

There's one other thing I want to point out. The $30 million cost reduction effort that we had announced and completed in August certainly had -- a heavy component of that was headcount related. So you've got -- a good portion of that was attributable to factors that resulted from that cost reduction program.

Sure. And just kind of sticking with the AFC, maybe you could talk about -- have you come to any conclusions on what your plans are, the long-term plans for that business? Or are we still sort of -- lets get it back up to where we want it and then reevaluate?

We've spent a lot of time talking about this with our managing directors in the business. Again, to talk about this now you have to have some perspective. This business has been wildly successful for Huron during the course of its seven-year history. And it has had a prolonged turn-down, which again I think it's consistent with many of our competitors. I have seen -- I've been in and around that type of business for probably 25 or 26 years of my career, and I know that it can be wildly successful as well.

We were making changes to the structure and to the approach that we are taking in that business, but I believe it's an important piece of our portfolio, and we are focused on taking the group of people that remain with us today, achieving stability that we are all looking for, and then continuing to grow it, both to create opportunities for our people but also to bring it back to the level of profitability that we know it can achieve.

So right now the course is to stick with the business and grow it then?

Yes it is.

I think you mentioned 73 new clients. Could I get a rough breakdown of sort of where those clients -- what areas those clients were in?

We can't really provide that. It was across the board. I think we were pleased in the level of -- it didn't surprise us, I have to admit. It didn't surprise us that it occurred. That's pretty much consistent with the way we would see a normal quarter coming through. We have new clients join us all the time. And they were mixed probably proportionally with our revenue allocation among the different segments. I don't think there was anything unusual about it all happening in one versus the other. (multiple speakers) to us it was a fairly normal quarter in terms of revenue generation and new client pickup.

One then just one last one on my part. The SEC case, maybe you can bring us up-to-date on sort of any developments in that or any timing on when you are expecting it to be concluded or any changes.

There really have been no -- no news whatsoever since our last filing, and we at this stage don't have any -- anything at all, any expectations about timing. It's really out of our hands entirely.

Okay guys. Nice work.

Scott Schneeberger, Oppenheimer.

First off, specifically in health care, could you guys speak to the visibility in the pipeline? I know we've addressed lumpiness in the success fees, but with regard to your visibility into 2010 specifically, how far out can you see? And how is that pipeline looking?

I think when we look at the Stockamp and Wellspring businesses, we are bullish on '10. The picture is not totally clear yet in terms of what's going to be happening in terms of healthcare reform. And we think overall that with significant regulatory change, that's a positive for our business. And we are expecting growth in '10, and exactly how that plays out I think will be impacted significantly by the pace and the actual form of reform as it comes down, probably in Q1 of '10.

Thanks, that's helpful. Just a question -- I'm under the impression, or was under the impression -- I think it's changing -- that you typically run on a lot of the healthcare business on a calendar year. Is that the right way to think about it? And therefore what kind of surprised me, contingent fees in the third quarter. Could you just address that a little bit deeper?

I'm not sure what you mean by calendar year, but our clients are coming to us pretty continuously throughout the year. And I would say one of the changes that's going on in the healthcare segment is that if you looked over the past couple of years, significant portions of our work would go through an assessment and then very large implementation process. And we're seeing that with some of our clients spreading out a bit more. Still going through the assessment process but potentially going into a three or four phased approach as opposed to a very large phase two, and it makes the timing of the work and the timing of the fees a little bit more unpredictable. But overall, the size of the assignments are similar, but potentially they're going to be stretched out a little bit, depending on the situation we're in.

Thanks again. Now education, a little soft in the first half. It sounds like you're seeing pickup there. Is that trending well into October? And are you happy with the development as you are progressing year-to-date?

In higher education, the market itself has gone through probably more trauma then it's gone through in a century in terms of the rapid decline in endowments and continuing rapid decline in state funding. We think there was -- a lot of our clients were kind of reluctant to take too drastic action during the earlier part of this year as they kind of watched the whole environment play out. I think now that they sense that there are going to have to be some structural changes in the way they operate and the way they conduct their business, they're increasingly looking now to us to help us kind of manage and help them through those strategic and operational changes. So I really expect there to be a vibrant market for us from here on out.

Two more if I could sneak them in. With cost controls -- congratulations on your executing by the end of August on your plan. Are we done there? Or is there more to come? Obviously there's probably a look at that on a constant basis, but just if you could address that. And then I have one more quick one after that.

We don't really have any other major programs planned like that. We are always in the process of reviewing our cost structure, and we'll make periodic changes as we go along. But we don't have anything planned in terms of anything as structured, nor is the magnitude of that at this time.

My final question, to the extent that you're going to answer it -- would you care to address the proceeds from that recent sale, the five managing directors in AFC, and just, again, thoughts on -- might we see some business sales in piecemeal? In total? Or just we have to wait and see?

We don't contemplate anything at this stage. We really can't comment on it. The financial terms of that were not disclosed.

Thanks. Just thought I would try.

Dan Leben.

Just a follow-up on that last question. I know you guys don't want to disclose terms. Can you just talk about what was paid for, how you think about when -- if any of these situations come up when you sell something, it seems that kind of on a headcount basis they're kind of difficult sell. Just help us understand what gets valued in those things and where you can capture some value -- not necessarily putting numbers on it.

I guess all I would say is that it's just like any business. You have a revenue stream that's produced by the assets, and you have a negotiation over what that revenue stream is. So -- and you look at the work force that goes along with it and backlog that the folks had when you sold the practice. So it's just like any other transaction that you look at. Yes, it's more challenging because you're dealing with people and they are your production assets, but it's the same thing in any business.

Great. Just to jump back to the contingent fees, help us understand what kind of the seasonality looked like last year, because third and fourth quarters were both very strong with contingent fees. Help us understand, did something there kind of hit earlier than you would've expected? Or help us think about that.

I think there was a point in time where there perhaps was a little bit more seasonality to the flow of revenues in the healthcare practice. I think that was probably earlier on, maybe even back in 2007 when our practice was much more focused simply on the Wellspring practice.

And two things have occurred. Number one, our healthcare segment has gotten broader, and number two, I think the nature of the work that's flowing through that, as David Shade indicated, has changed as well.

I don't think we really see the seasonality in the healthcare practice that perhaps we once did. It's just that now it's kind of consistent with the rest of our services, and that is, there is just -- there's no obvious seasonality to the flow of revenues.

So I wouldn't read too much into any of that in terms of whether it's something we should start expecting to see more or less in the third and fourth quarters. I think we are seeing it now as much more of a steady flow, a steady flow that will be impacted by periodic upticks in contingent fees.

Great. Last question for me, looking at the headcount metrics in the health and education segment, down about 40 people sequentially. Help us understand how much of that was due to the reclassification of the government business versus actual voluntary and non-voluntary attrition.

In the move that we made from our health and education practice over to our accounting and financial consulting there were 15 people approximately that moved between the segments. And the rest is just sort of the normal turnover that we see within the business.

Including some of the cost reduction efforts that we went through, right.

Okay, great. Thanks.

David Gold, Sidoti.

Just a couple of quick ones. Just curious if you could add a little bit more color on the retention program. There's not much out there as far as I know, and so just more -- sort of what are the components? And -- or is it really just as simple as we are just stepping up compensation, so to speak? And then with that, give some sense of maybe what the margin impact might be.

In terms of the margin impact, it will be reflected in our guidance on a go-forward basis. We are really actually not giving much specificity in terms of the retention program. I think it varies. We are doing what we feel is going to be appropriate and necessary to retain our top performers, and that varies. So we really deliberately have not tried to get into too much detail about what it's going to look like, other than to say that the financial implications of it are certainly included in our go-forward guidance and that the success or lack of success of the retention program will be -- you'll see it in our revenues and turnover and earnings on a go-forward basis. We really are not going to be providing any more detail on the retention program itself.

The only other thing I would add to that is, when we talked about our $30 million cost savings plan, what we said is that we were going to use those dollars for, one, to fund our retention program, for two, to invest in more bonus, and then, three, is to invest in our businesses and growth going forward. So while you might not see a change in margin because of it, we have created dollars to be able to fund those programs.

But presumably on a go-forward basis -- are you saying to me that in the $30 million there is a bucket that we'll use for -- and so it won't be a significant go-forward? Or are you saying to me -- I mean, I would think that on an ongoing basis there'd be costs of that, right? Presumably? To the extent that, I don't know, maybe you're paying signing bonuses in there or giving some restricted stock or whatnot, but you have to amortize it?

This all revolves kind of around our compensation strategy, and it's obviously something we don't necessarily want to have from a competitor perspective out there in any detail. So that's really why we are trying to be cautious about this right now.

Fair. Fair. Just one other way to sort of ask. A couple months have gone by, you've had some pretty good retention, yet still very focused on sort of the retention program of change in the comp. But I guess I'm just trying to sort of gel the two. Why do we deem it so important at this point then if things are sort of going okay?

Well, I'll answer this a couple of ways. Number one, certainly there was a lot of trauma in the company over the last three months. And we are focused less so on the immediate quarter and much more so on retaining our best people for the long-term. That's really the objective of any type of compensation program.

This retention piece that we have right now is simply a part of our overall compensation strategy, and it's aimed at giving us vibrant growth in earnings over the long-term. And if we didn't have it at all, I would tell you that exact same thing exists for our normal compensation strategy. So in our end, we are using it for some very targeted reasons right now, but it is and will remain part of our compensation strategy going forward. And it's really our long-term way of making sure that our top people are here, they are well-compensated, and that they are focused on driving this company's growth in the future.

I'm not trying to be vague about it. It's just -- it's our compensation policy. We just don't want to be too descriptive of that -- for competitive purposes.

That's fair. And then just one other quick one. Lawyers that we've been speaking to -- and actually one or two competitors -- also noted a pickup -- decent pickup in litigation that really started say mid-September and has really carried through to October. I guess you made some sort of like comments there, but is that sort of consistent with the trend that you've seen? Or has it been more sort of staid?

I think I probably read the same things that you do, and we probably hear the same surveys. I don't know. It's probably a little bit like mirrors what's going on in the overall economy, where one day you'll think that people are all predicting that it's going to take off and 2010 will be great, and others that are skeptical. I don't know that we've seen anything that's compelling that leads us to believe that we should have rampant growth in litigation in 2010. I think there are some hopeful signs. Are able or willing to predict that they're going to have a meaningful part in our growth strategy? And that's what we're sorting through right now.

We are cautiously optimistic, but we are not going to get ahead of it, because I don't know if there's anything that we've seen so far that gives us meaningful comfort there's going to be a major change.

Perfect, thank you.

(Operator Instructions). Sean Jackson, Avondale Partners.

Can you talk about how we should think of SG&A expenses going forward considering it looks like a decent sized sequential decline? Are the cost savings that you've undertaken -- you kind of didn't have a full quarter's credit for them in the third. Given the full quarter in the fourth you'll get for it, but offset by any kind of retention type program -- a lot of moving parts. How should we think of SG&A going forward from these levels?

One thing is, we are still putting together what our 2010 numbers are going to be, but if you look at what we think -- what we are seeing from a standpoint of Q4 is somewhere in the range of about 20% to 21%, and like I said in my comments, we are in the midst right now of completing our 2010 planning, and I know you all are eager to understand that, and we will get that out as soon as we are sort of ready through our normal process.

Okay, thanks. Also, do you anticipate any more restatement or restructuring type costs? And if so, what kind of level will they be at in the fourth quarter?

In the guidance that we gave in the press release this morning, we do not believe there's going to be any more restructuring costs. However, based on the fluid nature of the restatement and the continuing expenses that we see, it's somewhere in the $3 million to $4 million range that we will have in the fourth quarter.

Okay, great. And also, the big client engagement in the accounting and financial sector, is that ongoing? Do you anticipate that business to keep going through the fourth quarter? And how long will it last?

We've got several engagements. We don't know how long it will last. We do expect there to be -- it will be ongoing in the fourth quarter. It's like a lot of our other larger jobs that the length and duration is just simply hard to predict.

Okay. (multiple speakers) And last just in the healthcare segment, is there any risk of hospitals putting off decisions maybe just see how the whole healthcare reform is going to play out? Is that a risk that you guys are hearing about? And what are your thoughts on that?

I think we, like many of our clients, are wondering what the impact is going to be. I think it's pretty hard to predict that there will be too many activities that take place within the healthcare arena that are going to end up putting less financial stress on the provider community rather than more.

So our assumption is the pressure is going to continue to grow. Certainly state and Medicaid issues are going to have an impact on that as well. The shifting of the federal responsibilities back down to the state level is also going to have an impact. So we are watching that, I think our clients are watching it as well. It may hit different components of our client base differently, so we are gauging that.

But we still anticipate there to be a very solid need for our services. As Dave Shade indicated earlier, I think what we've typically found also is whenever change occurs, it creates a very good environment for our consulting business. I think almost irrespective of what happens, there's going to be some significant change in 2010 and 2011.

If anything, I think we've seen the sense of urgency accelerate among our clients because there is great uncertainty in terms of how healthcare reform is going to unfold. They know it's going to impact them one way or another from a revenue standpoint, and they're doing everything they can now to further improve their costs so that they will be ready for the revenue impact when it's coming. So if anything, there is an increase in the sense of the urgency among their clients.

Do you see a difference in the sense of urgency between the community hospitals versus say the academical medical centers?

Yes. I think there are three spectrums out there. And I think that as far as the community hospitals are concerned, their situations tend to be a little bit more dire. The sense of urgency is more significant, and they do not have time to wait.

And then I think in the academic medical center environment, their funding patterns, their patient patterns, the economics of those institutions are different, and they tend to buy our services a little bit more selectively. They tend to engage us in a different pattern than a community hospital's situation would or than a system of community hospitals.

But we are seeing the sense of urgency factor is definitely at the community hospital level and the systems of community hospitals.

Okay. All right. Thank you.

I just want to clarify the SG&A comment. When I gave you the number, it was before stock comp, and then you should model in probably about a 2.0% -- 1.5% to 2.0% stock comp number.

Okay, I got you. All right, thanks.

Bill Sutherland, Boenning & Scattergood.

Most of the questions have been asked. But for Jim Rojas, a couple of just model questions. On the effective tax rate for the adjusted EPS, I'm just -- want to make sure I am working out to the right number. What -- do you have that in front of you, Jim?

Yes. When you look at the full year tax rate, it's actually a 23% tax benefit that we are forecasting for the year.

On the effect -- on the adjusted?

That's on actual, and that's on actual net income.

Okay. So wouldn't you do it on an adjusted basis? I'm trying to -- that's actually where I'm trying to get to.

When you do it on an adjusted basis, the number you're looking at for the fourth quarter is somewhere right around a 30% effective tax expense.

Okay.

For the fourth quarter. And it becomes challenging to forecast this year because of flipping from income to loss, and then what then happens with your permanent tax differences and your percentages. So through the overall year we get back to this 23% tax benefit, which is more in line with where we saw our effective tax rate prior to the goodwill loss -- the goodwill impairment charge.

Right. But the 30% is the full year on the adjusted?

That would be on the fourth quarter adjusted. For the full year adjusted, it's probably back to the -- it's full-year adjusted though would be somewhere back to the rate that we had said previous to we had the large adjustments. It's probably still at the 45% to 46% rate.

And then on the amortization rate that you're running now going forward after the impairment?

I'm not -- the amortization of the goodwill for book purposes (multiple speakers) write off that goodwill for tax purposes, you don't get the tax benefit, and you amortize that over whatever the remaining life of the goodwill is.

The top end of the range for revenue for the year was brought down as you tightened the range. Just rank order the -- I guess the things that went into that adjustment?

What went into the adjustment was more visibility into our contingent fees. As to what they were, we had better visibility into what our fourth quarter is. We are already four weeks into it. And based on performance of our practices we feel like tightening the range was the appropriate thing to do.

Did the AFC practice -- I guess that was part of the math, right?

Correct, that goes into our guidance, yes.

And then finally, you began to talk a little bit your thinking for 2010 I guess in terms of the healthcare group. Any other preliminary thoughts, Jim Roth, on the -- on how you're approaching 2010? Thanks.

We are going through the detailed budget reviews with all the segments and practices right now. We are in the midst of that (inaudible). We'll have more of that later on. But we are right in the midst of that right now. So too early to tell for us.

Do you think you can (multiple speakers). Oh, I'm sorry to interrupt you. Go ahead.

No. I was going to say, we'll have -- we will do that in the normal course of our planning for 2010, but we are not -- we are midway through it right now and really not prepared to talk much about 2010 at this stage.

Do you think you might begin to put some indications out there before your fourth quarter report?

Probably not.

Thanks.

Kevane Wong.

A few things. One, looking at the contingency payments in maybe a little bit of a different way, it looks like there's been some -- obviously some changes here over time. Should we look at the year's level of contingency payments, at the $64 million sort of being a reasonable level to look at? I know there's ins and outs for the quarter, but just trying to see if generally this is sort of the new proper level when we look at contingency payments for the year.

I think the hard thing about looking at contingency payments for the year is two things. Number one is the volume of work that we get. Number two is different clients will want to take different perspectives on how much of the total effort they want to be at risk. And so, as I said, the hard part about planning or predicting for contingent fees is that it's so entirely dependent upon an individual client's perspective, ability to pay, and so on.

So we remain very reluctant to try to get involved in trying to sort out what that may be. We certainly see that we would love to be able to do it, and I'm sure you would as well. It's just hard to do. So we really try to stay away from predicting too much how we are going to be -- how much we're going to be getting. It's very, very client-specific.

Got you. Looking at the hiring plans in the year, a little surprised actually on health care how much that comes down. Are we sort of both in -- I may be addressing the health and education segment and the company as a whole. Is this 1400 sort of a level, something we should be looking to sustaining at this point? Is it going to grow? Are there more cuts? How should we look at your hiring plans in '09 and going into '010?

We are basing our hiring plans based on our sense as to where the businesses are going. So the first thing we are doing is we go through, as we're doing right now, with the segment and practice leaders and walking through and understanding where they see the market going for 2010. And once we get a sense of that, it then gives us a chance to go back and put together a strategy for personnel. So that's the process that we go through, and we are not there yet.

But I can give you some insight into what we've modeled for Q4. We ended the quarter at about 1400 consultants, and we are anticipating sort of modest increases as we bring people in over the next couple of months to about 1410 is what we've modeled towards the end of the year.

Got you. That's helpful. Tax rate going forward in 2010, obviously this year had a lot of odd things come in and out. But should that go back to like a normal 45%, 46% tax rate in 2010?

That is our expectation, yes.

Got you. And then lastly, maybe just a little more color on legal consulting. V3locity seems to be doing well, but the consulting part of that obviously took a hit. A lot of the metrics are a bit challenged. Was there anything sort of unusual items that really came out of it? Or was that simply all tough environment? Things are just basically tough and we should sort of look at this as maybe the level to work up from?

Our sense is that it's much more reflective of the tough economy and the spending patterns for corporations and law firms at this point. We don't see anything structural in that area that we are concerned about.

Got you. Okay, cool. Thanks.

We have concluded the allotted time for this call. I'd like to turn the conference back over to you.

Thank you all for joining us today on the call. In closing I want to reiterate how proud I am of the employees of this company. The events of the last three months certainly caught us by surprise. However, our people responded to the highest agree of professionalism, tenacity, and class.

In a very difficult economy while managing through a challenging internal matter, we posted the highest quarterly revenue ever achieved in our company's history. That happened because our clients believe in our superior service, and our people continued to provide the highest degree of professional service.

I am confident that the noise level in the fourth quarter will subside, and our results will reflect the strength of our businesses and our company.

We will speak to you again when we announce Q4 and full-year 2009 results early next year. Thank you.

This concludes today's conference. Thank you everyone for your participation.