Heidrick & Struggles International, Inc. (ticker: HSII, exchange: NASDAQ) News Release - 25-Apr-2001
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Heidrick & Struggles Reports Growth in 2001 First Quarter Revenue and Earnings
Strength in Europe Offsets Slower U.S. Economy
CHICAGO, April 25 /PRNewswire/ -- Heidrick & Struggles International, Inc. (Nasdaq: HSII), the world's premier executive search and leadership consulting
firm, today announced record revenue and earnings for the 2001 first quarter. Diluted earnings per share were $0.28, excluding $0.18 of net unrealized gains
on a portion of the warrant portfolio, an increase of 56 percent from $0.18 in the 2000 first quarter. Consolidated revenue grew 6 percent to $139.3 million,
up from $131.9 million in the comparable quarter of 2000. Net income, also excluding net unrealized gains on a portion of the warrant portfolio, was
$5.7 million, an increase of 62 percent from $3.5 million in last year's first quarter.
"Even as we navigated through a troubled U.S. economy, we were able to generate revenue and earnings growth," said Patrick S. Pittard, Chairman, President and Chief Executive Officer of Heidrick & Struggles International (HSI Group). "We knew that we faced difficult comparisons with last year's first quarter, but we benefited from our geographic diversification with particularly strong revenue performance in Europe."
Diluted earnings per share in the 2001 first quarter include $0.05 in losses incurred by LeadersOnline. Realized gains from the sale of equity in connection with the warrant program, net of consultants' bonuses and administrative and other costs, contributed $0.01 per share.
On January 1, 2001, HSI Group adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its subsequent amendments. As a result of the adoption, the company is now required to include, in its income statement, unrealized gains or losses from a portion of its warrant portfolio. In the 2001 first quarter, the unrealized gain was $3.7 million after tax, or $0.18 per share on a diluted basis. This amount comprises the original $4.5 million transition adjustment at January 1, 2001, and the unrealized loss of $841,000, representing the decrease in value in the 2001 first quarter.
The 2001 first quarter's consolidated results were affected by a significant increase in bad-debt-related expenses; $10.3 million of expense was recorded in the quarter. The negative effect on earnings of the bad-debt-related expenses was more than offset by $13.0 million, predominantly related to performance-based compensation. Because bad debt write-offs continued at an above average level in the quarter and the weakening of the U.S. economy has heightened the potential for a more difficult collection environment, the company determined it was appropriate to increase substantially its allowance for doubtful accounts. As consultants are not compensated for fees generated that are not collected, a reduction was made to current period and previously recorded bonus accruals. In addition, the 2001 first quarter benefited from decisions taken and performance-related settlements made in the quarter that reduced compensation, benefits, and other amounts that had been accrued previously. Separately, certain disc retionary bonuses, related to achieving planned performance targets, were not accrued during the quarter.
On a reported basis for the 2001 first quarter, which includes the $0.18 in net unrealized gains on a portion of the warrant portfolio, diluted earnings per share were $0.45, an increase of 150 percent from $0.18 in the 2000 first quarter. Net income was $9.3 million, an increase of 165 percent from $3.5 million in last year's first quarter.
2001 First Quarter Performance by Segment
HSI Group adjusted its segment reporting to reflect the current internal management reporting structure, as well as some changes to the allocation of certain costs to operations and corporate expenses. Beginning in the 2001 first quarter, the company broke out revenue and operating income for its Executive Search business in the Americas segment into two regions: North America and Latin America. The North America region includes the U.S. (except Miami) and Canada. The Latin America region includes Mexico and the rest of Latin America, as well as Miami, which serves as our gateway office to the region. Reporting for the International segment remained the same, comprising the Europe region (which includes Africa and the Middle East) and the Asia Pacific region.
Executive Search Results
Revenue for Executive Search grew 4 percent to $134.0 million in the 2001 first quarter, up from $128.7 million in the 2000 first quarter. Operating income was $17.2 million in the 2001 first quarter, essentially flat with $17.4 million a year ago. Although fewer searches were conducted overall, CEO searches remained strong, which resulted in a higher level of fees per search. Confirmed searches decreased 12 percent from the 2000 first quarter, while fees per search rose 18 percent. As of March 31, 2001, the company employed 546 executive search consultants, a 7 percent increase over the consultant headcount of 510 as of Dec. 31, 2000.
Revenue in North America was $70.1 million, a decrease of 6 percent from $74.8 million in the 2000 first quarter. Strength in the Health Care and Professional Services practice groups partially offset a decline in the Financial Services practice. The operating margin declined to 10.4 percent from 17.5 percent in the 2000 first quarter, due to a decrease in revenue, higher base salary costs related to the substantial number of consultants hired over the past 12 months, and a significant increase in the allowance for doubtful accounts, partially offset by the related reduction in bonuses.
In Latin America, revenue decreased 2 percent to $4.3 million in the 2001 first quarter, down from $4.4 million in the 2000 first quarter, as the region felt some of the effects of a weakening U.S. economy. The company has previously indicated that 2001 would be an investment year for Latin America and, as expected, there was an operating loss of $217,000 in the 2001 first quarter, compared to operating income of $115,000 in the comparable quarter last year.
Revenue in Europe increased 25 percent to $51.7 million, compared to $41.4 million in the 2000 first quarter, due to particularly strong performances from the Financial Services and Professional Services practice groups. Excluding the impact of foreign currency translation into the U.S. dollar, revenue increased 35 percent on a local currency basis over the comparable quarter in 2000. The operating margin increased to 18.2 percent from 7.2 percent. This margin improvement, which is not sustainable, reflects superior leverage as a result of strong revenue growth and a decrease in the region's bad debt provision due to recoveries.
In Asia Pacific, revenue was $7.9 million, a decrease of 3 percent from $8.1 million in the 2000 first quarter. Excluding the impact of foreign currency translation into the U.S. dollar, revenue increased 6 percent on a local currency basis over the comparable quarter in 2000. The operating margin declined to 9.3 percent from 14.7 percent in the 2000 first quarter primarily due to office expansions in the region.
LeadersOnline Results
Revenue for LeadersOnline grew 63 percent to $5.2 million in the 2001 first quarter, up from $3.2 million in the 2000 first quarter. LeadersOnline reported an operating loss of $1.7 million versus an operating loss of $4.2 million in the 2000 first quarter. Losses were $0.05 per share compared to $0.14 per share in the 2000 first quarter. The company's goal remains to break even no later than the 2001 third quarter; however, the state of the U.S. economy will be the major factor in our ability to achieve this goal.
Warrant Program
For the 2001 first quarter, the sale of equity obtained in search assignments resulted in a pre-tax gain of $254,000, net of consultants' bonuses and administrative and other costs, or $0.01 per diluted share. This amount is included in Non-Operating Income on the income statement. In addition to its normal cash fees, Heidrick & Struggles receives warrants for equity in connection with searches conducted for pre-public as well as some public firms, and has been expanding the program around the world.
Consolidated Outlook
Because of the uncertainty surrounding the U.S. economy and its impact on our clients' decisions to initiate searches -- other than for CEOs and other critical leadership positions -- revenue and earnings visibility for the 2001second quarter continues to be very limited.
"We have found it challenging to discern any patterns from our revenue in 2001. Some weeks are very strong while others are much less so. This uneven pattern seems to be continuing," said Pittard. "Each month, revenue has progressively improved from the month before, but is not strong enough -- at least at this point -- to put us on pace with last year's second quarter, which saw a nearly 50 percent revenue increase, fueled by early stage, venture-backed, largely dot-com searches."
The company wishes to provide some perspective, however, on possible revenue and earnings relationships. For example, if revenue were in the $150 million to $160 million range for the 2001 second quarter, the company estimates that diluted earnings per share would likely be in the $0.38 to $0.46 range.
With the hiring of 135 consultants and their support staff in the past 12 months, the company has been making investments in its future. This also means that it dramatically increased capacity just prior to the economic slowdown. The fixed costs of the base salaries of the newly hired consultants and support staff, as well as the expense to provide workspace, are significant to the company's cost structure. However, the company's management team is charged not only with the responsibility to meet short-term commitments but also to balance those commitments with the ability to grow longer term, for which these consultants will be pivotal.
Robinson-Humphrey to Offer Block Trade Program in Connection with Lock-up Expiration
The Robinson-Humphrey Company is offering employees and former employees of HSI Group whose shares were subject to a two-year lock-up agreement in connection with the IPO the opportunity to aggregate a portion of their shares with those of other employees and former employees for sale as a block to investors who want to accumulate an equity stake in Heidrick & Struggles International.
"The block trade program will allow shareholders who have been subject to this agreement to diversify their holdings in an organized, responsible fashion," said Pittard. "In the spirit of partnership, we have asked that internal shareholders voluntarily limit their selling to no more than 25 percent of their total holdings during any 12-month period."
Of the company's 19.4 million shares outstanding, 10.3 million are subject to the lock-up agreement. Internal members of the Heidrick & Struggles International Board of Directors, as well as the company's Executive Officers, are not expected to sell any of their shares in the near future. Collectively, this group owns approximately 16 percent of the lock-up shares.
Webcast of Investor Call Available
To review its first quarter earnings results, the company will provide a real-time investor call webcast on Thursday, April 26, at 9:00 a.m. (CDT). The webcast will feature remarks by Don Kilinski, Chief Financial Officer, and Lynn McHugh, Managing Partner of Finance and Investor Relations. The live webcast will be available online at http://www.heidrick.com/ . A replay will be available for up to 30 days following the investor call.
Webcast of Investor Day Presentations Available
The company will provide a real-time webcast of its first-ever Investor Day on Wednesday, May 2 at 10:30 a.m. (CDT). The webcast will feature audio-only presentations by several members of the company's senior management team. The live webcast will be available online at http://www.heidrick.com/ . A replay will be available for up to 14 days following the Investor Day.
About Heidrick & Struggles International, Inc. (HSI Group)
Heidrick & Struggles International, Inc. (HSI Group) is the world's premier provider of executive-level search and leadership consulting services. More than 1,200 Heidrick & Struggles professionals operate from offices in over 75 locations throughout North and South America, Europe, the Middle East, Africa and Asia Pacific. For nearly 50 years, our core business - Heidrick & Struggles Executive Search - has specialized in chief executive, board member and senior-level management assignments for a broad spectrum of clients: multi-national corporations, mid-cap and start-up companies, nonprofit entities, educational institutions, foundations, associations and governmental units. We are expanding our range of complementary services to offer solutions to senior management teams for their human capital needs. LeadersOnline, our Internet-enhanced recruiting business, serves clients who seek the next generation of corporate leaders. We are capitalizing on our access and influence with the highest levels of our
client organizations through Heidrick & Struggles Ventures, our unit responsible for other complementary businesses, alliances and investments. For more information about HSI Group, visit our web site at http://www.heidrick.com/ .
Safe Harbor Statement
This news release contains forward-looking statements. The forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate and management's beliefs and assumptions. Forward-looking statements may be identified by the use of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in the forward-looking statements. Factors that may affect the outcome of the forward-looking statements include, among other things, our ability to attract and retain qualified executive search consultants; a material economic downturn in the United States or Europe, or social or political instability in overseas markets; bad debt write-offs far in excess of allowances for doubtful accounts; continued increased acceptance of online recruiting; losses in our venture capital investments; an inability to control expenses; and delays in the development and/or implementation of new technology and systems. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended March 31,
2001 2000 % Change
Revenue $139,268 $131,936 5.6%
Operating expenses:
Salaries and employee benefits 87,090 92,400 -5.7%
General and administrative expenses 44,329 35,810 23.8%
Total operating expenses 131,419 128,210 2.5%
Operating income 7,849 3,726 110.7%
Non-operating income (expense):
Interest income 2,061 1,517 35.9%
Interest expense (41) (75) -45.3%
Realized gains on investments 254 1,522 -83.3%
Other, net (162) 174 --
Net non-operating income 2,112 3,138 -32.7%
Income before income taxes and
cumulative effect of accounting
change and unrealized loss on
derivative instruments (A) 9,961 6,864 45.1%
Provision for income taxes 4,283 3,349 27.9%
Net income before cumulative effect
of accounting change and unrealized
loss on derivative instruments 5,678 3,515 61.5%
Cumulative effect of accounting
change, net of tax (A) 4,494 -- --
Unrealized loss on derivative
investments, net of tax (A) (841) -- --
Net income $9,331 $3,515 165.5%
Basic earnings per common share $0.48 $0.19 152.6%
Basic weighted average common
shares outstanding 19,374 18,075 7.2%
Diluted earnings per common share $0.45 $0.18 150.0%
Diluted weighted average common
shares outstanding 20,571 19,315 6.5%
Diluted earnings per common share
excluding cumulative effect of
accounting change and unrealized
loss on derivative instruments (A) $0.28 $0.18 55.6%
(A) On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", and its subsequent amendments. As a result the Company recorded a transition adjustment of $4.5 million, net of consultants' bonuses, administrative and other costs, and taxes. In addition, for the three months ended March 31, 2001, the Company recorded an unrealized loss of $0.8 million, net of consultants' bonuses, administrative and other costs, and taxes due to SFAS 133.
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
SEGMENT INFORMATION (A)
(In thousands)
Three Months Ended March 31,
2001 2000
2001 2000 % Change Margin Margin
Revenue:
Americas
North America $70,080 $74,799 -6.3%
Latin America 4,335 4,427 -2.1%
International
Europe 51,744 41,384 25.0%
Asia Pacific 7,883 8,122 -2.9%
Total Executive Search 134,042 128,732 4.1%
LeadersOnline 5,226 3,204 63.1%
Total $139,268 $131,936 5.6%
Operating Income (Loss):
Americas
North America $7,288 $13,086 -44.3% 10.4% 17.5%
Latin America (217) 115 -- -5.0% 2.6%
International
Europe 9,436 2,962 218.6% 18.2% 7.2%
Asia Pacific 734 1,190 -38.3% 9.3% 14.7%
Total Executive Search 17,241 17,353 -0.6% 12.9% 13.5%
LeadersOnline (1,686) (4,186) -59.7% -- --
Corporate (7,706) (9,441) -18.4% -- --
Total $7,849 $3,726 110.7% 5.6% 2.8%
(A) Note, 2000 segments have been restated to reflect 2001 segment
reporting.
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31, March 31,
2001 2000 2000
(unaudited) (unaudited)
Current assets:
Cash and cash equivalents $136,461 $184,836 $133,079
Accounts receivable, net of
allowance for doubtful accounts 97,461 106,334 94,208
Other receivables 5,887 7,357 4,745
Prepaid expenses 16,574 11,783 9,295
Deferred income taxes, net 27,092 26,071 21,107
Total current assets 283,475 336,381 262,434
Property and equipment, net 51,560 52,660 55,282
Other assets:
Cash and investments designated
for nonqualified retirement plans 15,925 16,506 33,532
Investments and other assets 41,990 45,097 25,808
Deferred income taxes, net 4,822 6,792 --
Goodwill and other intangibles, net 64,939 66,208 47,606
Total other assets 127,676 134,603 106,946
Total assets $462,711 $523,644 $424,662
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31, March 31,
2001 2000 2000
(unaudited) (unaudited)
Current liabilities:
Current maturities of long-term debt $1,054 $1,135 $3,039
Accounts payable 11,110 10,051 8,321
Accrued expenses:
Salaries and employee benefits 85,909 160,552 91,637
Other 23,475 27,888 17,450
Income taxes payable 14,384 16,415 10,325
Total current liabilities 135,932 216,041 130,772
Long-term debt, less current maturities 566 610 --
Liability for nonqualified retirement
plans 19,900 19,316 28,500
Other long-term liabilities -- -- 2,205
Stockholders' equity 306,313 287,677 263,185
Total liabilities and
stockholders' equity $462,711 $523,644 $424,662
SOURCE Heidrick & Struggles International, Inc.
Web site: http://www.heidrick.com/
CONTACT: Media, Eric Sodorff, 312-496-1613, esodorff@heidrick.com, or analyst, Barry
Hollingsworth, 312-496-1723, bhollingsworth@h-s.com, both of Heidrick & Struggles
International, Inc.