UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-25837
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-2681268
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
233 South Wacker Drive-Suite 4200
Chicago, Illinois
60606-6303
-------------------
(Address of Principal Executive Offices)
(312) 496-1200
-------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares outstanding of the Company's common stock as of May 10,
2001 was 19,251,051.
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2001
(Unaudited) and December 31, 2000 3
Unaudited Consolidated Statements of Income and Comprehensive
Income for the three months ended March 31, 2001 and 2000 5
Unaudited Consolidated Statement of Stockholders'
Equity for the three months ended March 31, 2001 6
Unaudited Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and 2000 7
Unaudited Notes to Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure of Market Risk 16
PART II. OTHER INFORMATION 17
SIGNATURE 18
2
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
March 31, December 31,
2001 2000
---------- -----------
(unaudited)
Current assets:
Cash and cash equivalents $136,461 $184,836
Accounts receivable, net of allowance for doubtful accounts 97,461 106,334
Other receivables 5,887 7,357
Prepaid expenses 16,574 11,783
Deferred income taxes, net 27,092 26,071
-------- --------
Total current assets 283,475 336,381
-------- --------
Property and equipment, net 51,560 52,660
-------- --------
Other assets:
Cash and investments designated for nonqualified retirement plans 15,925 16,506
Investments and other assets 41,990 45,097
Deferred income taxes, net 4,822 6,792
Goodwill and other intangibles, net 64,939 66,208
-------- --------
Total other assets 127,676 134,603
-------- --------
Total assets $462,711 $523,644
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
March 31, December 31,
2001 2000
----------- ------------
(unaudited)
Current liabilities:
Current maturities of long-term debt $ 1,054 $ 1,135
Accounts payable 11,110 10,051
Accrued expenses:
Salaries and employee benefits 85,909 160,552
Other 23,475 27,888
Income taxes payable 14,384 16,415
-------- --------
Total current liabilities 135,932 216,041
-------- --------
Long-term debt, less current maturities 566 610
-------- --------
Liability for nonqualified retirement plans 19,900 19,316
-------- --------
Stockholders' equity
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued at March 31, 2001 and December 31, 2000 - -
Common stock, $.01 par value, 100,000,000 shares authorized, of which
19,375,821 and 19,373,286 shares were issued at March 31, 2001
and December 31, 2000, respectively 194 194
Treasury stock at cost, 25,000 shares at March 31, 2001 (705) -
Additional paid-in capital 253,931 234,619
Retained earnings 66,193 56,862
Cumulative foreign currency translation adjustment (5,145) (1,879)
Unrealized gain on available-for-sale investments, net of tax 458 3,737
Deferred compensation (8,613) (5,856)
-------- --------
Total stockholders' equity 306,313 287,677
-------- --------
Total liabilities and stockholders' equity $462,711 $523,644
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
------------------------
2001 2000
-------- --------
Revenue $139,268 $131,936
-------- --------
Operating expenses:
Salaries and employee benefits 87,090 92,400
General and administrative expenses 44,329 35,810
-------- --------
Total operating expenses 131,419 128,210
-------- --------
Operating income 7,849 3,726
-------- --------
Non-operating income (expense):
Interest income 2,061 1,517
Interest expense (41) (75)
Realized gains on investments 254 1,522
Unrealized loss on derivative instruments (1,475) -
Other, net (162) 174
-------- --------
Net non-operating income 637 3,138
-------- --------
Income before income taxes and cumulative effect of accounting change 8,486 6,864
Provision for income taxes 3,649 3,349
-------- --------
Net income before cumulative effect of accounting change 4,837 3,515
Cumulative effect of accounting change, net of tax 4,494 -
-------- --------
Net income $ 9,331 $ 3,515
======== ========
Basic earnings per common share:
Income before cumulative effect of accounting change $ 0.25 $ 0.19
Cumulative effect of accounting change 0.23 -
-------- --------
Total basic earnings per common share $ 0.48 $ 0.19
======== ========
Diluted earnings per common share:
Income before cumulative effect of accounting change $ 0.24 $ 0.18
Cumulative effect of accounting change 0.22 -
-------- --------
Total diluted earnings per common share $ 0.45 $ 0.18
======== ========
Weighted average common shares outstanding:
Basic 19,374 18,075
======== ========
Diluted 20,571 19,315
======== ========
Net income $ 9,331 $ 3,515
-------- --------
Other comprehensive income (loss), before income taxes:
Foreign currency translation adjustment (5,729) (1,874)
Unrealized gain on available-for-sale investments 540 4,980
Cumulative effect of accounting change (6,067) -
-------- --------
Total other comprehensive income (loss), before income taxes (11,256) 3,106
Income tax expense (benefit) related to items of other comprehensive income (4,711) 1,372
-------- --------
Other comprehensive income (loss), net of income taxes (6,545) 1,734
-------- --------
Comprehensive income $ 2,786 $ 5,249
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
Accumulated
Other
Compre-
Additional hensive Deferred
Common Treasury Paid-in Retained Income Com-
Stock Stock Capital Earnings (Loss) pensation Total
------ -------- ---------- -------- ----------- --------- --------
Balance as of December 31, 2000 $194 $ - $234,619 $56,862 $ 1,858 $(5,856) $287,677
Treasury and common stock transactions:
Issuance of restricted stock - - 17,565 - - (3,397) 14,168
Amortization of deferred compensation - - - - - 635 635
Forfeitures of restricted stock - - (44) - - 5 (39)
Exercise of stock options - - 25 - - - 25
Repurchases of treasury stock - (705) - - - - (705)
Issuance of stock options - - 1,766 - - - 1,766
Cumulative effect of accounting change, net of tax - - - 4,494 (3,581) - 913
Net income - - - 4,837 - - 4,837
Unrealized gain on available-for-sale investments,
net of tax - - - - 302 - 302
Foreign currency translation adjustments, net
of tax - - - - (3,266) - (3,266)
---- ----- -------- ------- ------- ------- --------
Balance as of March 31, 2001 $194 $(705) $253,931 $66,193 $(4,687) $(8,613) $306,313
==== ===== ======== ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
-------------------------
2001 2000
-------- --------
Cash flows from operating activities
Net income $ 9,331 $ 3,515
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 4,933 3,120
Gain on sale of equity securities, net (254) (1,522)
Deferred income taxes (1,075) (1,808)
Unrealized loss on derivative instruments 1,475 -
Cumulative effect of accounting change, net of tax (4,494) -
Stock-based compensation 635 965
Changes in assets and liabilities:
Trade and other receivables 3,106 (12,733)
Accounts payable 3,976 (1,233)
Accrued expenses (53,839) (185)
Income taxes payable (2,012) 810
Other, net (4,363) (2,729)
-------- --------
Net cash used in operating activities (42,581) (11,800)
-------- --------
Cash flows from investing activities
Acquisitions, net of cash acquired - (1,667)
Purchases of property and equipment (4,291) (5,865)
Proceeds from sales of equity securities, net 254 1,522
Other, net 925 (1,753)
-------- --------
Net cash used in investing activities (3,112) (7,763)
-------- --------
Cash flows from financing activities
Proceeds from stock options exercised 25 -
Proceeds from sales of common stock - 76,359
-------- --------
Net cash provided by financing activities 25 76,359
-------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents (2,707) (565)
-------- --------
Net increase (decrease) in cash and cash equivalents (48,375) 56,231
Cash and cash equivalents:
Beginning of period 184,836 76,848
-------- --------
End of period $136,461 $133,079
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(all tables in thousands, except per share figures)
(unaudited)
1. Interim Financial Data
The accompanying unaudited consolidated financial statements of Heidrick &
Struggles International, Inc. and Subsidiaries (the "Company"), included herein
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses. Actual results could differ from those estimates. In the opinion
of management, the statements reflect all adjustments, which are of a normal
recurring nature, necessary to present fairly the Company's financial position,
results of operations, stockholders' equity and cash flows. Certain prior year
amounts have been reclassified to conform with the 2001 classifications. These
financial statements and notes are to be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included in the Company's
Annual Report to Shareholders on Form 10-K (File No. 0-25837) for the year ended
December 31, 2000, as filed with the Securities and Exchange Commission on March
29, 2001.
2. Derivative Instruments
The Company receives warrants for equity securities in its client companies,
in addition to its cash fee, on some searches. Prior to January 1, 2001, when
the warrants were received, revenue was recorded equal to the estimated fair
market value of the instrument received. Upon a value event, such as an initial
public offering or acquisition, the warrants, and any equity securities arising
from their exercise, were accounted for as available-for-sale investments with
unrealized gains and losses reported as a component of other comprehensive
income. 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. SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. Some of the Company's warrants meet the definition of a derivative
instrument under SFAS 133 and therefore subsequent changes in their fair value
must now be recorded in earnings, rather than as a component of other
comprehensive income. Going forward, each quarter's earnings are anticipated to
be affected by the fluctuations in the fair value of these derivative
instruments. The Company recognized an unrealized loss of $1.5 million in
earnings, net of consultants' bonuses and administrative and other costs, during
the three months ended March 31, 2001, due to changes in the fair value of these
derivative instruments during the period. In addition, the fair value of
warrants received is no longer recorded in revenue upon receipt; instead the
fair value is being recorded as an unrealized gain in non-operating income, net
of consultants' bonuses and administrative and other costs.
During 1999, the Company entered into a collar agreement to hedge the impact
of market value changes of one of its equity securities. Collars consist of the
sale of call options along with a corresponding purchase of put options, with
the effect of establishing the highest and lowest prices at which the securities
will be sold during a certain time period. The collar had been designated and
was effective as a hedge of the equity security. Unrealized gains and losses on
both the equity security and the collar were recorded in equity and other
comprehensive income. When realized, gains and losses on the equity security and
the collar were recorded in income. Beginning in the fourth quarter of 1999, the
Company had the right to put and the counterparty had the right to call a
portion of the shares on a quarterly basis in accordance with an established
schedule. The unrealized pre-tax gain on these hedged shares at March 31, 2000
was $2.6 million. The Company's realized gain on these shares for the three
months ended March 31, 2000 was $917,000. During the third quarter of 2000, the
Company terminated the options and sold the underlying equity security.
8
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Cumulative Effect of Change in Accounting Principle
As a result of the adoption of SFAS 133 on January 1, 2001, the Company
recorded, as a cumulative effect of accounting change, a transition adjustment
to income of $4.5 million, net of consultants' bonuses, administrative and other
costs, and taxes (See Note 2).
4. Basic and Diluted Earnings Per Share
Basic earnings per common share is computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted earnings per
common share reflects the potential dilution that would occur if securities or
other contracts to issue common stock were exercised or converted.
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings per common share ("EPS").
Three Months Ended
March 31,
------------------------
2001 2000
------- -------
Basic EPS
Income available to common stockholders $ 9,331 $ 3,515
Weighted average common shares outstanding 19,374 18,075
------- -------
Basic EPS $ 0.48 $ 0.19
======= =======
Diluted EPS
Income available to common stockholders $ 9,331 $ 3,515
------- -------
Weighted average common shares outstanding 19,374 18,075
Dilutive common shares 1,197 1,240
------- -------
Weighted average diluted common shares
outstanding 20,571 19,315
------- -------
Diluted EPS $ 0.45 $ 0.18
======= =======
9
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Segment Information
The Company adjusted its segment reporting in 2001 to reflect the current
internal management reporting structure, which included some changes in the
allocation of certain costs to operations and corporate expenses. The Company
operates principally through two lines of business: Executive Search and
LeadersOnline. The Company breaks out revenue and operating income in its
Executive Search business into two broad geographic segments: Americas and
International. The Americas segment consists of 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 its gateway office to the region. The International segment
consists of Europe (which includes Africa and the Middle East) and Asia Pacific.
Three Months Ended
March 31,
----------------------
2001 2000
-------- --------
Revenue:
Americas
North America $ 70,080 $ 74,799
Latin America 4,335 4,427
International
Europe 51,744 41,384
Asia Pacific 7,883 8,122
-------- --------
Total Executive Search 134,042 128,732
LeadersOnline 5,226 3,204
-------- --------
Total $139,268 $131,936
======== ========
Operating income (loss):
Americas
North America $ 7,288 $ 13,086
Latin America (217) 115
International
Europe 9,436 2,962
Asia Pacific 734 1,190
-------- --------
Total Executive Search 17,241 17,353
LeadersOnline (1,686) (4,186)
Corporate (7,706) (9,441)
-------- --------
Total $ 7,849 $ 3,726
======== ========
As of As of
March 31, December 31,
2001 2000
-------- ------------
Identifiable assets:
Americas
North America $117,330 $123,468
Latin America 8,843 10,424
International
Europe 126,646 144,230
Asia Pacific 20,715 22,237
-------- --------
Total Executive Search 273,534 300,359
LeadersOnline 3,848 4,805
Corporate 185,329 218,480
-------- --------
Total $462,711 $523,644
======== ========
10
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Public Offering
On February 9, 2000, the Company completed a follow-on public offering under
a Registration Statement on Form S-1 effective February 3, 2000 (File No. 333-
94017) of an aggregate of 3,450,000 shares of common stock at $33.00 per share,
which included 450,000 shares from the exercise of the over-allotment option
granted to certain underwriters of the offering. The Company offered 2,458,306
shares and the selling stockholders offered 991,694 shares. This offering
resulted in net proceeds (after deducting the underwriting discount and offering
expenses) of $76.2 million to the Company and $31.0 million to the selling
stockholders. The Company did not receive any of the proceeds from the sale by
the selling stockholders. The Company has used and will continue to use the net
proceeds from this offering for general corporate purposes including funding
LeadersOnline and other growth initiatives, hiring of additional executive
search consultants, expanding its technology infrastructure and funding
acquisitions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Heidrick & Struggles International, Inc. ("HSI Group") is the world's premier
provider of executive-level search and leadership consulting services. Based on
revenue derived from placing senior-level executives, we are one of the largest
senior-level executive search firms in the world. We provide executive-level
search and leadership consulting services through our global network of offices
to a broad range of clients, including Fortune 500 companies, major non-U.S.
companies, middle market and emerging growth companies, governmental and
not-for-profit organizations, and other leading private and public entities.
Through our Internet-enhanced search business, LeadersOnline, Inc.
("LeadersOnline"), we target the recruitment market for mid-level executives and
professionals. We also provide other human capital management services that
complement our core Executive Search business, including management assessment
and placement of interim executive management.
Prior to 1984, we operated under a single ownership structure. In 1984,
Heidrick & Struggles, Inc. ("H&S") spun off Heidrick & Struggles International,
Inc. ("HSI") to its European partners while retaining a significant equity
interest in it. Between 1984 and February 26, 1999, HSI operated primarily in
Europe, while H&S operated in all other regions of the world. On February 26,
1999, H&S merged with HSI ("the Merger") to reunite the two companies into a
single corporate structure, HSI Group.
We completed several other acquisitions and mergers in the past two years. On
December 29, 2000, we acquired the Russian, Finnish and Baltic executive search
companies of the AMROP worldwide network. On May 1, 2000, we acquired Lynch
Miller Moore O'Hara, Inc., a Chicago-based executive search firm that
specialized in the venture capital and high tech markets. On April 1, 2000, we
acquired TAO International Group, a senior-level executive search firm with
offices in Asia. On March 1, 2000, we completed the acquisition of Argonaut
Search Group, LLC, a San Francisco-based executive search firm that specialized
in the real estate and financial services industries. In December 1999, we
completed the acquisition of Redelinghuys & Partners, a senior-level executive
search firm in the Republic of South Africa. These acquisitions were accounted
for using the purchase method of accounting, with the results of the acquired
companies included in the Consolidated Statements of Income and Comprehensive
Income beginning on the date of the respective acquisition. In September 1999,
we merged with Sullivan & Company ("Sullivan"), an executive search firm that
specialized in the financial services industry. This transaction was accounted
for using the pooling of interests method of accounting.
With offices in 79 locations in 37 countries throughout North and South
America, Europe, the Middle East, Africa and Asia Pacific, we conduct business
using various currencies. Revenue earned in each country is generally matched
with the associated expenses incurred, thereby reducing currency risk to net
earnings. However, because certain assets or liabilities are denominated in non-
U.S. currencies, changes in currency rates may cause fluctuations in the
valuation of such assets or liabilities. For financial information by geographic
segment see Note 5 of our Consolidated Financial Statements.
11
Results of Operations
The following table summarizes the results of our operations as a percentage
of revenue for the three months ended March 31, 2001 and 2000:
Three Months Ended
March 31,
-----------------------
2001 2000
------ ------
Revenue 100.0 % 100.0 %
------ ------
Operating expenses:
Salaries and employee benefits 62.5 70.0
General and administrative expenses 31.8 27.1
------ ------
Total operating expenses 94.3 97.1
------ ------
Operating income 5.7 2.9
------ ------
Non-operating income (expense):
Interest income 1.5 1.1
Interest expense - (0.1)
Realized gains on investments 0.2 1.2
Unrealized loss on derivative instruments (1.1) -
Other, net (0.1) 0.1
------ ------
Net non-operating income 0.5 2.3
------ ------
Income before income taxes and cumulative effect
of accounting change 6.2 5.2
Provision for income taxes 2.6 2.5
------ ------
Net income before cumulative effect of accounting change 3.6 2.7
Cumulative effect of accounting change, net of tax 3.2 -
------ ------
Net income 6.8 % 2.7 %
====== ======
12
The following table sets forth, for the periods indicated, our revenue and
operating income (loss) by segment. We adjusted our segment reporting in 2001 to
reflect the current internal management reporting structure, which included some
changes in the allocation of certain costs to operations and corporate expenses.
We operate principally through two lines of business: Executive Search and
LeadersOnline. We break out revenue and operating income in our Executive Search
business into two broad geographic segments: Americas and International. The
Americas segment consists of 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. The International segment consists of Europe
(which includes Africa and the Middle East) and Asia Pacific.
Three Months Ended
March 31,
--------------------
2001 2000
-------- --------
Revenue:
Americas
North America $ 70,080 $ 74,799
Latin America 4,335 4,427
International
Europe 51,744 41,384
Asia Pacific 7,883 8,122
-------- --------
Total Executive Search 134,042 128,732
LeadersOnline 5,226 3,204
-------- --------
Total $139,268 $131,936
======== ========
Operating income (loss):
Americas
North America $ 7,288 $ 13,086
Latin America (217) 115
International
Europe 9,436 2,962
Asia Pacific 734 1,190
-------- --------
Total Executive Search 17,241 17,353
LeadersOnline (1,686) (4,186)
Corporate (7,706) (9,441)
-------- --------
Total $ 7,849 $ 3,726
======== ========
Three Months Ended March 31, 2001 Compared to the Three Months Ended March 31,
2000
Revenue. Our revenue increased $7.4 million, or 5.6%, to $139.3 million for
the three months ended March 31, 2001 from $131.9 million for the three months
ended March 31, 2000. Excluding the effect of foreign currency translation into
the U.S. dollar, revenue grew over 9%. This increase was due to continued demand
for our services across a number of industries and disciplines, especially
financial services, professional services, industrial and health care. We
believe this increase reflects the strength of our top-tier search work despite
times of economic uncertainty.
Our revenue within Executive Search grew 4.1% to $134.0 million in the 2001
first quarter, up from $128.7 million in the 2000 first quarter. Although fewer
searches were conducted overall, CEO searches remained strong, which resulted in
a higher level of fees per search. Confirmed searches decreased 12% from the
2000 first quarter while fees per search rose 18%.
Revenue in North America was $70.1 million, a decrease of $4.7 million or
6.3%, from $74.8 million in the 2000 first quarter. Strength in the health care
and professional services practices partially offset a decline in the financial
services practice. In Latin America, revenue decreased 2.1% to $4.3 million in
the 2001 first quarter from
13
$4.4 million in the 2000 first quarter, as the region felt some of the effects
of a weakening U.S. economy. The decline in revenue was primarily from our
technology practice. Revenue in Europe increased $10.3 million or 25.0% to $51.7
million from $41.4 million in the 2000 first quarter, due to particularly strong
performance from the financial services and professional services practices.
Excluding the impact of foreign currency translation into the U.S. dollar,
Europe's revenue grew 35.0% on a local currency basis over the comparable
quarter in 2000. In Asia Pacific, revenue was $7.9 million, a decrease of 2.9%
from $8.1 million in the first quarter of 2000. Excluding the impact of foreign
currency translation into the U.S. dollar, revenue grew 6.3% on a local currency
basis over the comparable quarter in 2000.
LeadersOnline generated $5.2 million of revenue in the 2001 first quarter
compared to $3.2 million of revenue in the 2000 first quarter due to increased
demand for our services. During the first quarter of 2001, LeadersOnline entered
into contracts for 90 new searches, with an average fee of $41,000 per
placement, which represents 29% of the average compensation level of $143,000.
LeadersOnline typically charges about one-third of the placed candidate's
salary, although its fees can vary depending on several factors, most important
of which is the number of positions per assignment.
Salaries and employee benefits. Our salaries and employee benefits decreased
$5.3 million, or 5.7%, to $87.1 million for the three months ended March 31,
2001 from $92.4 million for the three months ended March 31, 2000. As a
percentage of revenue, salaries and employee benefits decreased to 62.5% in the
first quarter of 2001 from 70.0% in the first quarter of 2000. This improvement
was primarily due to approximately $13.0 million of expense reductions,
predominantly related to performance-based compensation. Under our variable
compensation structure, consultants do not earn compensation on fees not
collected and we recorded $10.3 million in bad debt related expenses in the
first quarter of 2001. In addition, the reduction was due to several other
performance-related items, including the recoupment of current period and
previously recorded performance-related bonus accruals that were not earned due
to individuals not meeting required performance goals in 2000, and reduced
discretionary compensation, which is based on management meeting certain pre-
determined financial targets in 2001. Partially offsetting the reduction was an
increase in expense due to a greater number of executive search consultants and
support staff. During the first quarter of 2001, we hired 36 executive search
consultants, net of departures, bringing the total to 546 as of March 31, 2001.
The number of consultants at March 31, 2001 represents a 32.8% increase over the
411 consultants we employed at March 31, 2000.
General and administrative expenses. Our general and administrative expenses
increased $8.5 million, or 23.8%, to $44.3 million for the three months ended
March 31, 2001 from $35.8 million for the three months ended March 31, 2000. As
a percentage of revenue, general and administrative expenses increased to 31.8%
in the first quarter of 2001 from 27.1% in the first quarter of 2000. This
percentage increase was due to an increase in bad debt expense, higher
facilities expenses related to the increase in executive search consultants and
support staff over the past year, and an increase in depreciation and
amortization due to office expansions and investments in technology.
Net non-operating income. Our net non-operating income decreased $2.5 million
to $637,000 for the three months ended March 31, 2001 from $3.1 million for the
three months ended March 31, 2000. This decrease was primarily due to a $1.5
million unrealized loss on derivative instruments from a portion of our warrant
portfolio, net of consultants' bonuses and administrative and other costs during
the three months ended March 31, 2001 (See Note 2 in the Notes to Consolidated
Financial Statements). In addition, our realized gains from the sale of equity
obtained as part of our warrant program were $254,000 for the three months ended
March 31, 2001 compared to $1.5 million for the three months ended March 31,
2000. The decrease was partially offset primarily by an increase in interest
income arising from the investment of the net proceeds received from our initial
and follow-on public offerings (See Note 6 in the Notes to Consolidated
Financial Statements) and the cash generated from 2000 operations.
Cumulative effect of change in accounting principle. On January 1, 2001, we
adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," and its subsequent
amendments. As a result, we recorded a transition adjustment of $4.5 million,
net of consultants' bonuses, administrative and other costs, and taxes (See Note
3 in the Notes to Consolidated Financial Statements).
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Pro Forma Results of Operations for the Three Months Ended March 31, 2001
Compared to the Three Months Ended March 31, 2000
The following table provides our pro forma results of operations and such
data as a percentage of revenue for the three months ended March 31, 2001 and
2000. The data excludes the $4.5 million, net of tax, cumulative effect of a
change in an accounting principle and the $1.5 million unrealized loss on
derivative instruments arising from the adoption of SFAS 133 (See Note 2 in the
Notes to Consolidated Financial Statements).
Three Months Ended March 31,
2001 2000
----------------- -----------------
Revenue $139,268 100.0% $131,936 100.0%
-------- ----- -------- -----
Operating expenses:
Salaries and employee benefits 87,090 62.5 92,400 70.0
General and administrative expenses 44,329 31.8 35,810 27.1
-------- ----- -------- -----
Total operating expenses 131,419 94.3 128,210 97.1
-------- ----- -------- -----
Operating income 7,849 5.7 3,726 2.9
-------- ----- -------- -----
Non-operating income (expense):
Interest income 2,061 1.5 1,517 1.1
Interest expense (41) - (75) (0.1)
Realized gains on investments 254 0.2 1,522 1.2
Other, net (162) (0.1) 174 0.1
-------- ----- -------- -----
Net non-operating income 2,112 1.6 3,138 2.3
-------- ----- -------- -----
Income before income taxes 9,961 7.3 6,864 5.2
Provision for income taxes 4,283 3.1 3,349 2.5
-------- ----- -------- -----
Net income $ 5,678 4.2% $ 3,515 2.7%
======== ===== ======== =====
Basic earnings per common share $ 0.29 $ 0.19
======== ========
Basic weighted average common shares outstanding 19,374 18,075
======== ========
Diluted earnings per common share $ 0.28 $ 0.18
======== ========
Diluted weighted average common shares outstanding 20,571 19,315
======== ========
Liquidity and Capital Resources
We periodically evaluate our liquidity requirements, capital needs and
availability of capital resources based on our plans for expansion and other
operating needs. We finance our operations through internally generated funds
and the availability of borrowings under our credit facilities. In addition, we
received $51.8 million from our initial public offering in April 1999 and $76.2
million from our follow-on public offering in February 2000. We pay a portion of
our bonuses in December and the remainder in March. Employee bonuses are accrued
throughout the year and are based on Company performance and the performance of
the respective employee.
We believe that the net proceeds from our common stock offerings, together
with funds expected to be generated from operations and our lines of credit,
will be sufficient to finance our operations for the foreseeable future.
However, if we undertake significant acquisitions or other investment
activities, we may need access to additional sources of debt or equity
financing.
We maintained cash and cash equivalents at March 31, 2001 and 2000 of
$136.5 million and $133.1 million, respectively. For the three months ended
March 31, 2001, cash flows used in operating activities were $42.6 million, due
primarily to the payment of the remaining 2000 bonuses. For the three months
ended March 31, 2000,
15
cash flows used in operating activities were $11.8 million. There was an
increase in working capital partly offset by net income.
On March 1, 2000, we completed our acquisition of Argonaut Search Group, LLC
for $2.5 million in cash and shares of the Company's common stock.
The amount of cash received during the three months ended March 31, 2001 and
2000 as a result of the sale of equity securities received as part of our
warrant program was $254,000 and $1.5 million, net of consultants' bonuses and
administrative and other costs, respectively.
Capital expenditures were $4.3 million and $5.9 million for the three months
ended March 31, 2001 and 2000, respectively. These expenditures were primarily
for office furniture and fixtures, leasehold improvements, and computer
equipment and software.
Cash flows provided by financing activities were $25,000 for the three months
ended March 31, 2001, resulting from the proceeds from stock options exercised.
Cash flows provided by financing activities were $76.4 million for the three
months ended March 31, 2000, resulting from the net proceeds raised in the
follow-on public offering (See Note 6 in our Notes to Consolidated Financial
Statements).
On March 16, 2001, we announced that our Board of Directors had authorized
management to repurchase up to two million shares of our common stock over the
next two years. During the three months ended March 31, 2001, we repurchased
25,000 shares of our common stock, for which, the cash settlement occurred in
April 2001.
We have a $40.0 million reducing revolving credit facility. This facility
will terminate on December 31, 2001 but we expect to replace it with a similar
or larger facility. There were no borrowings outstanding under this line of
credit at March 31, 2001 and 2000, respectively. At our discretion, we may
borrow either U.S. dollars on deposit in the United States or U.S. dollars or
foreign currencies on deposit outside the United States. Non-U.S. borrowings
bear interest at the then-existing LIBOR plus a margin as determined by certain
tests of our financial condition. U.S. borrowings bear interest at the then-
existing prime rate.
The current line of credit has certain financial covenants we must meet
relating to consolidated net worth, liabilities, and debt in relation to cash
flows. At March 31, 2001, we were in compliance with these financial covenants.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Derivative Instruments
We receive warrants for equity securities in our client companies, in
addition to our cash fee, on some searches. Some of these warrants meet the
definition of a derivative instrument under SFAS 133 and therefore subsequent
changes in their fair value must now be recorded in earnings, rather than as a
component of other comprehensive income. As a result of the adoption of SFAS 133
on January 1, 2001, we recorded, as a cumulative effect of accounting change, a
transition adjustment to income of $4.5 million, net of consultants' bonuses,
administrative and other costs, and taxes. Going forward, each quarter's
earnings are anticipated to be affected by the fluctuations in the fair value of
these derivative instruments. We recognized an unrealized loss of $1.5 million
in earnings, net of consultants' bonuses and administrative and other costs,
during the three months ended March 31, 2001, due to changes in the fair value
of these derivative instruments during the period (See Note 2 in the Notes to
Consolidated Financial Statements).
Currency Market Risk
Historically, we have not experienced any significant translation gains or
losses on transactions involving U.S. dollars and other currencies. Revenue
earned in each country is generally matched with the associated expenses
incurred, thereby reducing currency risk to net earnings.
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Forward-Looking Statements
The Management's Discussion and Analysis of Financial Condition and Results
of Operations as well as other sections of this Quarterly Report on Form 10-Q
contain 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 regarding general
economic trends. 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we have been involved in litigation that is incidental to
our business. We currently are not a party to any litigation, the adverse
resolution of which, in management's opinion, would be likely to have a material
adverse effect on our business, financial condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
-------
3.01 Form of Amended and Restated Certificate of Incorporation of the
Registrant (Incorporated by reference to Exhibit 3.02 of this
Registrant's Registration Statement on Form S-4 (File No. 333-
61023))
3.02 Form of Amended and Restated By-laws of the Registrant
(Incorporated by reference to Exhibit 3.03 of this Registrant's
Registration Statement on Form S-4 (File No. 333-61023))
10.09 First Amendment to Amended and Restated Employment Agreement of
Patrick S. Pittard
10.10 First Amendment and Restatement to Employment Agreement of David
C. Anderson
10.11 Employment Agreement of Stephanie Abramson
(b) Reports on Form 8-K
During the first three months of 2001, the registrant filed no reports on
Form 8-K.
17
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: May 15, 2001.
Heidrick & Struggles International, Inc.
(Registrant)
By:/s/ Donald M. Kilinski
--------------------------
Donald M. Kilinski
Chief Financial Officer and Treasurer
18