Heidrick & Struggles International, Inc. (ticker: HSII, exchange: NASDAQ) News Release - 29-Oct-1999
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Heidrick & Struggles International, Inc. Announces Third Consecutive Quarter of Record Revenue and Earnings
CHICAGO--(BUSINESS WIRE)--Oct. 28, 1999-- Continued Strength of Core Business, Warrant Gain Fund Accelerated
Growth of LeadersOnline
Heidrick & Struggles International, Inc. (Nasdaq:HSII), the world's leading executive search firm, today announced record revenues and earnings for the third quarter and nine months ended September 30, 1999.
On an adjusted basis, revenue in the 1999 third quarter grew 19.0% to $114.9 million, up from $96.6 million in the comparable quarter for 1998. Net income rose 122.6% to $7.4 million. (For an explanation of "adjusted basis," see the Special Notes section below). Results for all periods reflect Heidrick & Struggles' merger with Sullivan & Company, one of America's leading financial services executive search firms. The merger is accounted for using the pooling of interests method of accounting.
Diluted earnings per share in the quarter for the core executive search business were $0.48. Including the losses generated by LeadersOnline, the Company's Internet-based recruiting solution, diluted earnings per share on an adjusted basis were $0.44, an increase of 100.0% over last year's $0.22 and a penny above the analysts' consensus estimate. Revenue for LeadersOnline in the 1999 third quarter was $0.6 million versus $0.1 million in the 1999 second quarter; pre-tax losses in the quarter were $1.2 million.
"We continue to outpace the growth of the industry, as our preeminence in technology and e-commerce searches combined with a first-class reputation in our other industry practices draw clients to our firm," said Patrick S. Pittard, President and Chief Executive Officer. "In fact, confirmed searches increased 21% in the third quarter over last year's same quarter."
On a reported basis, revenue increased 84.6% in the 1999 third quarter over the 1998 comparable period, and net income was 204.0% higher. Diluted earnings per share were $0.32. A pre-tax charge of $2.8 million ($1.9 million after tax) was recorded for costs associated with the Sullivan merger. Of this amount, $2.0 million was for a non-cash charge for accelerated vesting of an employee equity program in place at Sullivan and $0.8 million were transaction costs related to the merger.
At September 30, 1999, Heidrick & Struggles had confirmation letters for 147 searches in which warrants for equity in the client company were included as a portion of the fee in addition to the normal cash fee. The sale of equity obtained in one search resulted in a gain in the third quarter of $0.3 million, net of administrative costs of the warrant program and related consultant bonuses; this amount is included in Other Non-operating Income on the income statement. The extraordinary strength of the executive search business as well as this gain were used to fund higher than planned investments in LeadersOnline. It is the Company's intention to continue to use such gains and operating outperformance to offset accelerated spending on its Internet initiative.
"The response to the more aggressive marketing of our unique LeadersOnline product has been tremendous," Pittard said. "The market for middle management recruiting has been estimated at $30 billion. The segment we are claiming is the quality space for candidates and clients, and the opportunity for us in this arena is enormous, with the proper investment. However, we intend to adhere to our profitability commitments to the Heidrick & Struggles International shareholders. That is why we announced last week that we are examining alternative capital structures for our Internet business--so we can propel its growth beyond current constraints."
On a geographic basis, revenue in the United States rose 25.1% in the quarter over last year's third quarter, with growth in the Technology, Financial Services and Industrial practices driving the increase. European revenue was 2.4% higher; excluding the negative effects of foreign currency translation into the U.S. dollar, revenue grew 9%. Other International revenue increased 52.6%, with strength exhibited in both Latin America and the Asia Pacific region.
Operating income on an adjusted basis was $11.9 million in the 1999 third quarter, an increase of 80.1% over the 1998 third quarter, with the operating margin improving 350 basis points. Salaries and employee benefits as a percent of revenue decreased slightly. The general and administrative expense ratio declined over 300 basis points in the quarter. Benefits from cost control programs, particularly in Europe, and lower than planned depreciation expense were both factors in the improvement.
Nine-Month Results
On an adjusted basis, revenue for the nine months ended September 30, 1999 was $322.6 million, up from $262.7 million in the 1998 similar period, representing a gain of 22.8%. Net income grew 143.7% to $13.9 million. Diluted earnings per share increased 123.7% to $0.85 from last year's $0.38. On a reported basis, revenue rose 79.1%. Net income was $0.1 million, including the $1.9 million after-tax charge for merger costs for the Sullivan transaction, and a $12.4 million non-recurring charge resulting from the modification of the terms of Heidrick & Struggles' acquisition agreement with Mulder & Partner GmbH & Co. KG, including the termination of all employment contingencies.
Special Notes
For ease of comparison, references to "adjusted basis" information above apply to figures that exclude current and prior period non-recurring items, including the $2.8 million pre-tax charge ($1.9 million after tax) for the Sullivan merger costs. Further, "adjusted basis" assumes the merger of Heidrick & Struggles, Inc. ("H&S Inc.") and Heidrick & Struggles International, Inc. ("HSI") occurred on January 1, 1998. The merger, completed on February 26, 1999, combined the operations of H&S Inc., which operated in all regions of the world except Europe, with Europe-based HSI, which previously had been approximately 35% owned by H&S Inc.
About Heidrick & Struggles International
Heidrick & Struggles International is the world's leading executive search firm, specializing in chief executive, board of directors and senior level management assignments. Today, more than 750 Heidrick & Struggles professionals serve a broad range of organizations including Fortune 500 companies, financial institutions, major health care organizations, universities and not-for-profit organizations, leading mid-cap companies, and emerging growth companies from offices in 65 locations throughout North and South America, Europe, the Middle East, Africa and Asia Pacific. For more information about Heidrick & Struggles, visit our web site at www.heidrick.com.
Certain matters discussed in this news release are forward-looking statements that are necessarily dependent upon assumptions, estimates and data that may be incorrect or imprecise, and include known and unknown risks, uncertainties and other important factors that could cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Some of the risks, uncertainties, assumptions and factors that could affect the Company's financial results are included in the Company's recent SEC filings. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. All forward-looking statements in this news release are expressly qualified by these cautionary statements, and the Company expressly disclaims any duty to update such forward-looking statements. -0-
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HEIDRICK & STRUGGLES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME (1)
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
% %
1999 1998 Change 1999 1998 Change
-------- -------- ------ -------- -------- -----
Revenue $114,936 $ 62,278 84.6% $302,583 $168,914 79.1%
-------- -------- ------ -------- -------- -----
Operating expenses:
Salaries and
employee benefits 76,303 42,705 78.7% 201,847 121,585 66.0%
General and
administrative
expenses 26,686 15,663 70.4% 75,121 39,191 91.7%
Nonrecurring
charge and merger
costs(2)(3) 2,800 - - 15,220 - -
-------- -------- ------ -------- -------- -----
Total operating
expenses 105,789 58,368 81.2% 292,188 160,776 81.7%
-------- -------- ------ -------- -------- -----
Operating income 9,147 3,910 133.9% 10,395 8,138 27.7%
-------- -------- ------ -------- -------- -----
Non-operating income
(expense):
Interest income 1,343 523 156.8% 1,939 941 106.1%
Interest expense (361) (235) 53.6% (1,298) (354)266.7%
Other, net 281 307 -8.5% 357 143 149.7%
-------- -------- ------ -------- -------- -----
Net non-
operating
income 1,263 595 112.3% 998 730 36.7%
-------- -------- ------ -------- -------- -----
Equity in net income
(loss) of affiliate - 134 - (630) (772)-18.4%
-------- -------- ------ -------- -------- -----
Income before
income taxes 10,410 4,639 124.4% 10,763 8,096 32.9%
Provision for income
taxes(3) 4,983 2,854 74.6% 10,635 4,533 134.6%
-------- -------- ------ -------- -------- -----
Net income $ 5,427 $ 1,785 204.0% $ 128 $ 3,563 -96.4%
======== ======== ====== ======== ======= ======
Basic earnings per
common share $ 0.33 $ 0.61 -45.9% $ 0.01 $ 1.20 -99.2%
======== ======== ====== ======== ======= ======
Basic weighted
average common
shares outstanding 16,533 2,906 12,624 2,957
======== ======== ====== ======== ======= ======
Diluted earnings per
common share $ 0.32 $ 0.61 -47.5% $ 0.01 $ 1.20 -99.2%
======== ======== ====== ======== ======= ======
Diluted weighted
average common
shares outstanding 16,782 2,906 12,717 2,957
======== ======== ====== ======== ======= ======
(1) Statements have been restated to give retroactive effect to the
merger of HSI and Sullivan & Company on September 1, 1999, which
has been accounted for using the pooling of interests method and,
as a result, the results of operations are presented as if the
combining companies had been consolidated for all periods
presented and as if the shares of additional common stock issued
in connection with the merger had been issued for all periods
presented.
(2) The Company incurred a $12.4 million nonrecurring charge during
the first quarter of 1999 as a result of the modification of the
terms of the Mulder acquisition agreement, including the
termination of all employment contingencies. This nonrecurring
charge represents the write-off of $2.9 million of deferred
compensation assets, the settlement of the remaining cash due of
$4.3 million, and the issuance of 428,452 common shares (worth
$5.2 million) to the previous owners of Mulder.
(3) The Company incurred merger costs of $2.8 million ($1.9 million
after tax) during the third quarter of 1999 as a result of the
merger with Sullivan & Company as discussed in footnote 1 above.
The merger costs consist of (1) a $2.0 million non-cash charge
for accelerated vesting of an employee equity ownership program
in place at Sullivan and (2) $0.8 million of transaction-related
costs, including legal, accounting and advisory fees.
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME, AS ADJUSTED (Excluding
one-time adjustments and assuming completion of the merger
of H&S Inc. and HSI and public company status at January 1, 1998)
(In thousands, except per share data)
(unaudited)
Three Months Ended September 30,
(Adjusted)
--------------------------------
1999(1)(2) 1998(1) % Change
----------------------------
Revenue $ 114,936 $ 96,568 19.0%
--------- --------
Operating expenses:
Salaries and employee benefits(3)(4) 76,303 64,395 18.5%
General and administrative expenses(5) 26,686 25,541 4.5%
--------- --------
Total operating expenses 102,989 89,936 14.5%
--------- --------
Operating income 11,947 6,632 80.1%
--------- --------
Non-operating income (expense):
Interest income 1,343 523 156.8%
Interest expense (361) (298) 21.1%
Other, net 281 294 -4.4%
--------- --------
Net non-operating income 1,263 519 143.4%
--------- --------
Income before income taxes(6) 13,210 7,151 84.7%
Provision for income taxes 5,841 3,841 52.1%
--------- --------
Net income $ 7,369 $ 3,310 122.6%
========= ========
Basic earnings per common share $ 0.45 $ 0.22 104.5%
========= ========
Basic weighted average common
shares outstanding(7) 16,533 14,891 11.0%
========= ========
Diluted earnings per common share $ 0.44 $ 0.22 100.0%
========= ========
Diluted weighted average common
shares outstanding(7)(8) 16,782 15,130 10.9%
========= ========
(1) Amounts assume that the merger of H&S Inc. and HSI had occurred
on January 1, 1998. In addition, statements have been restated to
give retroactive effect to the merger of HSI and Sullivan &
Company on September 1, 1999, which has been accounted for using
the pooling of interests method and, as a result, the results of
operations are presented as if the combining companies had been
consolidated for all periods presented and as if the shares of
additional common stock issued in connection with the merger had
been issued for all periods presented.
(2) Amounts exclude merger costs of $2.8 million ($1.9 million after
tax) for the three months ended September 30, 1999, arising from
the merger of HSI and Sullivan & Company on September 1, 1999.
The merger costs consist of (1) a $2.0 million non-cash charge
for accelerated vesting of an employee equity ownership program
in place at Sullivan and (2) $0.8 million of transaction-related
costs, including legal, accounting and advisory fees. This
transaction was accounted for using the pooling of interests
method.
(3) Amount has been adjusted by $0.7 million for the three months
ended September 30, 1998, to eliminate compensation expense
representing the difference between the amount actually paid to
management for bonuses over the amount that would have been paid
under the Company's GlobalShare plan. The GlobalShare plan will
issue options to managing partners and corporate officers in lieu
of a portion of their annual cash performance bonus. In addition,
amortization of deferred compensation expense of $1.2 million
relating to the acquisition of Mulder has been eliminated from
the three months ended September 30, 1998.
(4) Amount includes $1.6 million of expense for the three months
ended September 30, 1998, arising from costs to build corporate
infrastructure, the Company's global network of consultants at an
accelerated rate and miscellaneous one-time balance sheet
adjustments.
(5) Amount has been adjusted to include amortization related to
acquired intangibles and goodwill arising from the merger of H&S
and HSI of $0.3 million for the three months ended September 30,
1998. Amount also includes merger-related costs and costs to
expand the Company's corporate infrastructure of $2.0 million for
the three months ended September 30, 1998.
(6) Equity in net income of affiliate has been eliminated for the
three months ended September 30, 1998 to reflect 100% ownership
of HSI after the merger.
(7) Amount has been adjusted to give effect to the initial public
offering of 3.7 million shares and issuance of 0.7 million shares
under the Company's GlobalShare plan as of January 1, 1999 and
1998, respectively.
(8) Amount has been adjusted to give effect to the issuance of
options pursuant to the Company's GlobalShare plan equivalent to
0.2 million shares for the three months ended September 30 ,1999
and 1998, respectively, under the treasury stock method.
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Sept.30, Dec. 31, Sept.30,
1999 1998(1) 1998(1)
-------- -------- --------
(unaudited) (unaudited)
Current assets:
Cash and cash equivalents $ 109,529 $ 11,521 $ 38,762
Accounts receivable, net of
allowance for doubtful
accounts 86,207 42,292 45,775
Other receivables 3,349 2,862 1,995
Notes receivable from
affiliate - 1,900 3,648
Prepaid expenses 4,518 1,837 3,155
Prepaid income taxes - 3,063 1,711
Deferred income taxes 15,228 8,871 7,089
-------- -------- --------
Total current assets 218,831 72,346 102,135
-------- -------- --------
Property and equipment, net 50,949 27,054 23,670
-------- -------- --------
Other assets:
Cash and investments
designated for
nonqualified retirement
plans 31,521 13,552 11,860
Investment in Heidrick &
Struggles International,
Inc. - 4,766 5,757
Investments and other assets 5,896 353 353
Deferred income taxes 7,058 2,649 3,458
Goodwill & other intangibles,
net 44,982 8,055 6,123
-------- -------- --------
Total other assets 89,457 29,375 27,551
-------- -------- --------
Total assets $ 359,237 $ 128,775 $ 153,356
========= ========= =========
(1) Amounts have been restated to give retroactive effect to the
merger of HSI and Sullivan & Company as of January 1, 1998.
Sept.30, Dec. 31, Sept.30,
1999 1998(1) 1998(1)
-------- -------- --------
(unaudited) (unaudited)
Current liabilities:
Short-term debt $ - $ 22,000 $ -
Current maturities of
long-term debt 3,893 2,847 1,436
Accounts payable 8,456 3,487 3,810
Accrued expenses-
Salaries and
employee benefits 132,899 27,893 74,345
Other 17,990 8,165 6,286
Income taxes payable 5,997 - -
-------- -------- --------
Total current liabilities 169,235 64,392 85,877
-------- -------- --------
Long-term debt, less
current maturities 1,591 6,350 6,304
-------- -------- --------
Liability for nonqualified
retirement plans 29,341 11,358 11,281
-------- -------- --------
Other long-term liabilities - 2,253 870
-------- -------- --------
Mandatorily redeemable
common stock - 44,422 49,024
-------- -------- --------
Stockholders' equity 159,070 - -
-------- -------- --------
Total liabilities, mandatorily
redeemable common stock and
stockholders' equity $ 359,237 $ 128,775 $ 153,356
========= ========= =========
(1) Amounts have been restated to give retroactive effect to the
merger of HSI and Sullivan & Company as of January 1, 1998.
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