Heidrick & Struggles Reports Third Quarter 2006 Financial Results
Consolidated net revenue of $124.6 million increased 13.7 percent from $109.6 million in the 2005 third quarter. The positive impact of changes in foreign currency exchange rates in the quarter, primarily in Europe, represented 1.8 percentage points of the growth. Net revenue grew 4.1 percent in the Americas, 23.4 percent in Europe (18.2 percent on a constant currency basis) and 42.8 percent in the Asia Pacific region. The total number of confirmed executive searches increased seven percent from the 2005 third quarter, and decreased seven percent sequentially, compared to the 2006 second quarter. The number of consultants increased to 343 as of September 30, 2006, compared to 335 at June 30, 2006, and 306 at September 30, 2005. Productivity, as measured by annualized revenue per executive search consultant, remained strong at $1.4 million and the average fee per executive search increased to $108,100.
Operating income was $17.6 million, representing an operating margin (measured as a percentage of net revenue) of 14.1 percent. This compares to operating income of $12.9 million in the 2005 third quarter. Excluding restructuring charges in both periods, which management believes more appropriately reflects core operations, operating income in the 2006 third quarter was $17.4 million and the operating margin was 14.0 percent, compared to 2005 third quarter operating income of $14.5 million and an operating margin of 13.3 percent. The year-over-year improvements in operating income and operating margin reflect continued efforts by the company to improve its operating cost structure, as well as the increase in operating leverage inherent in the company’s business model at higher net revenue levels.
Kevin Kelly, chief executive officer, said, “We are pleased with the solid results achieved in the third quarter and for the first nine months of 2006 and believe that we are in a good position to meet our objectives for revenue growth and profitability for 2006. We welcomed the employees of Highland Partners on October 2 and we are actively managing a comprehensive plan for their integration, where the focus is on realizing revenue and operating synergies.”
Net income in the 2006 third quarter was $11.2 million and diluted earnings per share were $0.60, reflecting an effective tax rate of 41.9 percent. Comparisons to third quarter 2005 net income of $30.4 million and diluted earnings per share of $1.58 are not meaningful as those results reflected a significant non-cash tax benefit as a result of reversing a portion of the valuation allowance on certain U.S. deferred tax assets.
Consolidated salaries and employee benefits expense was $83.7 million, an increase of 17.4 percent from $71.3 million in the comparable quarter of 2005. As a percentage of net revenue, salaries and employee benefits were 67.2 percent for the quarter, compared to 65.0 percent in the year-ago period. The increase in compensation-related expenses in the 2006 third quarter is primarily a function of an increase in the number of consultants added during the last year, and also reflects higher bonus accruals based on the year-over- year increase in net revenue levels. Total stock-based compensation expense was $7.1 million during the quarter, including $0.7 million in stock option expense, compared to $3.9 million in last year’s third quarter.
Consolidated general and administrative expenses were $23.5 million, down 0.9 percent from $23.7 million reported in the comparable prior year period. As a percentage of net revenue, consolidated general and administrative expenses declined to 18.9 percent from 21.7 percent in the 2005 third quarter. The improvement reflects a continued focus on cost control, and operating leverage from higher revenue levels.
The company was limited from repurchasing any of its common stock during the third quarter due to the discussions with Hudson Highland Group to acquire Highland Partners. As of September 30, 2006, $40.9 million remains authorized under the current $50 million stock repurchase program authorized in May 2006.
Regional Review for the 2006 Third Quarter
The Americas reported net revenue of $67.9 million, up 4.1 percent over the third quarter of 2005. The Consumer, Financial Services and Industrial groups were the largest contributors to revenue in this region. Operating income of $14.9 million was up 2.8 percent over last year’s third quarter. The 2006 third quarter operating margin was 22.0 percent compared to 22.3 percent last year, primarily reflecting higher fixed compensation cost related to increased consultant hiring in the last year. Consultant headcount in the Americas was 182 at September 30, 2006, an increase of 24 consultants since September 30, 2005.
In Europe, net revenue of $42.3 million increased 23.4 percent from the prior-year quarter, driven by strong performance in the Financial Services, Consumer and Industrial groups. On a constant currency basis, year-over-year net revenue growth in Europe would have been 18.2 percent. Operating income of $5.9 million increased 57.4 percent from last year’s third quarter and the operating margin improved to 13.8 percent from 10.9 percent in last year’s third quarter, reflecting continued cost containment initiatives and higher revenue levels. Consultant headcount in Europe was 121 at September 30, 2006, an increase of 14 consultants since September 30, 2005.
In Asia Pacific, record net revenue of $14.5 million increased 42.8 percent from the prior year quarter, driven by continued strong business across the region with especially strong growth in the Financial Services, Industrial, and Consumer industry groups. Operating income of $4.5 million was up 68.3 percent over last year’s third quarter and the operating margin of 30.7 percent increased from 26.1 percent in last year’s third quarter. Consultant headcount in the Asia Pacific region was 40 at September 30, 2006, compared to 41 consultants at September 30, 2005.
Nine Month Results
For the nine months ended September 30, 2006, net revenue was $346.3 million, an 11.1 percent increase from $311.6 million in the first nine months of 2005. The effect of changes in foreign currency exchange rates on nine-month revenue results was negligible. Operating income in the first nine months of 2006 was $41.5 million, representing an operating margin of 12.0 percent, compared to operating income in the first nine months of 2005 of $11.5 million. Excluding restructuring charges in both periods, operating income for the first nine months of 2006 was $41.9 million and the operating margin was 12.1 percent, compared to operating income of $33.9 million in the 2005 period with a 10.9 percent operating margin. Net income for the first nine months of 2006 was $27.5 million and diluted earnings per share were $1.45, reflecting an effective tax rate of 40.3 percent. For the comparable period of 2005 net income of $32.3 million and diluted earnings per share of $1.62 included $22.4 million in restructuring charges and a non-cash tax benefit resulting from the reversal of a portion of the company’s valuation allowance on certain U.S. deferred tax assets.
2006 Annual Outlook Reflects Acquisition of Highland Partners’ Assets
The company has revised its 2006 annual guidance to reflect the integration of Highland Partners’ operations. For 2006, the company expects net revenue of between $465 million and $475 million, representing growth over 2005 net revenue of between 12.8 percent and 15.2 percent. The company expects the 2006 full-year operating margin to be in the range of 11 percent and 12 percent, reflecting the timing of spending associated with the integration, and the amortization of cash and equity retention bonuses for the former Highland consultants. Net income and earnings per share are expected to reflect a full-year effective tax rate of approximately 40 percent. The quarterly and full-year tax rate estimates can be significantly impacted by country-level results and can vary significantly by reporting period, as well as by discrete items that require immediate recognition in a particular quarter.
Kelly added, “Looking beyond 2006, we are very excited about opportunities for accelerating profitable revenue growth. We have invested in the past year in strategic hiring and in our acquisition of Highland Partners, and we are committed to maximizing our return on those investments, which in turn should enhance our market leadership position around the world. In addition, we will be driven to find innovative ways to build upon our established executive search experience, to expand the distribution of our intellectual capital, to leverage our C-suite relationships through new partnerships, and to enhance our service offerings. Working closely together as one global firm, our common goal is to optimize how we service our clients in helping them to build world-class leadership teams.”
Quarterly Conference Call
About Heidrick & Struggles International, Inc.
Safe Harbor Statement
This press 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,” “projects,” “forecasts,” 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; the condition of the economies in the United States, Europe, or elsewhere; social or political instability in markets where we operate; the impact of foreign currency exchange rate fluctuations; price competition; the ability to forecast, on a quarterly basis, variable compensation accruals that ultimately are determined based on the achievement of annual results; delays or difficulties in integrating the Highland Partners search operations; an inability to achieve the planned cost savings from our cost-reduction initiatives; an inability to sublease or assign unused office space; our ability to realize our tax loss carryforwards; the timing of any deferred tax asset valuation allowance reversals; the mix of profit and loss by country; an impairment of our goodwill and other intangible assets; and delays in the development and/or implementation of new technology and systems. Our reports filed with the U.S. Securities and Exchange Commission also include information on factors that may affect the outcome of forward-looking statements. 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 Operations (In thousands, except per share data) (Unaudited) Three Months Ended September 30, 2006 2005 $ Change % Change Revenue: Revenue before reimbursements (net revenue) $124,636 $109,605 $15,031 13.7% Reimbursements 6,268 4,339 1,929 44.5% Total revenue 130,904 113,944 16,960 14.9% Operating expenses: Salaries and employee benefits 83,697 71,291 12,406 17.4% General and administrative expenses 23,525 23,732 (207) -0.9% Reimbursed expenses 6,268 4,393 1,875 42.7% Restructuring charges (149) 1,580 (1,729) Total operating expenses 113,341 100,996 12,345 12.2% Operating income 17,563 12,948 4,615 35.6% Non-operating income (expense): Interest income 1,412 1,539 Interest expense (18) (18) Net realized and unrealized gains on equity and warrant portfolio 319 426 Other, net (83) 43 Net non-operating income 1,630 1,990 Income before income taxes 19,193 14,938 Provision for (benefit from) income taxes 8,042 (15,458) Net income $11,151 $30,396 Basic earnings per common share $0.64 $1.63 $(0.99) NM Basic weighted average common shares outstanding 17,462 18,694 (1,232) -6.6% Diluted earnings per common share $0.60 $1.58 $(0.98) NM Diluted weighted average common shares outstanding 18,455 19,269 (814) -4.2% Salaries and employee benefits as a percentage of net revenue 67.2% 65.0% 2.2% General and administrative expense as a percentage of net revenue 18.9% 21.7% -2.8% Operating income as a percentage of net revenue 14.1% 11.8% 2.3% Operating income as a percentage of net revenue (excluding restructuring) 14.0% 13.3% 0.7% Effective tax rate 41.9% NM NM Heidrick & Struggles International, Inc. Segment Information (In thousands) Three Months Ended September 30, 2006 2005 Margin Margin 2006 2005 $ Change % Change * * Revenue: Americas $67,855 $65,181 $2,674 4.1% Europe 42,278 34,267 8,011 23.4% Asia Pacific 14,503 10,157 4,346 42.8% Revenue before reimbursements (net revenue) 124,636 109,605 15,031 13.7% Reimbursements 6,268 4,339 1,929 44.5% Total revenue $130,904 $113,944 $16,960 14.9% Operating Income: Americas $14,919 $14,511 $408 2.8% 22.0% 22.3% Europe 5,852 3,718 2,134 57.4% 13.8% 10.9% Asia Pacific 4,456 2,648 1,808 68.3% 30.7% 26.1% Total regions 25,227 20,877 4,350 20.8% 20.2% 19.0% Corporate (7,813) (6,349) (1,464) -23.1% Operating income before restructuring charges 17,414 14,528 2,886 19.9% 14.0% 13.3% Restructuring charges 149 (1,580) 1,729 Operating income $17,563 $12,948 $4,615 * Margin based on revenue before reimbursements (net revenue). Heidrick & Struggles International, Inc. Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) Nine Months Ended September 30, 2006 2005 $ Change % Change Revenue: Revenue before reimbursements (net revenue) $346,290 $311,560 $34,730 11.1% Reimbursements 16,835 15,735 1,100 7.0% Total revenue 363,125 327,295 35,830 10.9% Operating expenses: Salaries and employee benefits 234,841 207,257 27,584 13.3% General and administrative expenses 69,529 70,375 (846) -1.2% Reimbursed expenses 16,835 15,735 1,100 7.0% Restructuring charges 406 22,417 (22,011) Total operating expenses 321,611 315,784 5,827 1.8% Operating income 41,514 11,511 30,003 260.6% Non-operating income (expense): Interest income 4,666 3,960 Interest expense (39) (359) Net realized and unrealized gains on equity and warrant portfolio 434 230 Other, net (534) 1,161 Net non-operating income 4,527 4,992 Income before income taxes 46,041 16,503 Provision for (benefit from) income taxes 18,574 (15,786) Net income $27,467 $32,289 Basic earnings per common share $1.52 $1.70 $(0.18) NM Basic weighted average common shares outstanding 18,024 18,957 (933) -4.9% Diluted earnings per common share $1.45 $1.62 $(0.17) NM Diluted weighted average common shares outstanding 18,957 19,886 (929) -4.7% Salaries and employee benefits as a percentage of net revenue 67.8% 66.5% 1.3% General and administrative expense as a percentage of net revenue 20.1% 22.6% -2.5% Operating income as a percentage of net revenue 12.0% 3.7% 8.3% Operating income as a percentage of net revenue (excluding restructuring) 12.1% 10.9% 1.2% Effective tax rate 40.3% NM NM Heidrick & Struggles International, Inc. Segment Information (In thousands) Nine Months Ended September 30, 2006 2005 Margin Margin 2006 2005 $ Change % Change * * Revenue: Americas $191,766 $179,060 $12,706 7.1% Europe 118,141 102,679 15,462 15.1% Asia Pacific 36,383 29,821 6,562 22.0% Revenue before reimbursements (net revenue) 346,290 311,560 34,730 11.1% Reimbursements 16,835 15,735 1,100 7.0% Total revenue $363,125 $327,295 $35,830 10.9% Operating Income: Americas $40,775 $39,174 $1,601 4.1% 21.3% 21.9% Europe 12,614 5,789 6,825 117.9% 10.7% 5.6% Asia Pacific 9,926 7,389 2,537 34.3% 27.3% 24.8% Total regions 63,315 52,352 10,963 20.9% 18.3% 16.8% Corporate (21,395) (18,424) (2,971) -16.1% Operating income before restructuring charges 41,920 33,928 7,992 23.6% 12.1% 10.9% Restructuring charges (406) (22,417) 22,011 Operating income $41,514 $11,511 $30,003 * Margin based on revenue before reimbursements (net revenue). Heidrick & Struggles International, Inc. Condensed Consolidated Balance Sheets (In thousands) September 30, December 31, 2006 2005 (Unaudited) Current assets: Cash and cash equivalents $137,399 $203,689 Short-term investments 60,000 – Accounts receivable, net of allowance for doubtful accounts 84,570 53,334 Other receivables 5,181 4,463 Prepaid expenses 10,614 8,178 Income taxes recoverable, net 5,777 3,536 Deferred income taxes, net 7,090 8,579 Total current assets 310,631 281,779 Non-current assets: Property and equipment, net 18,413 21,104 Assets designated for retirement and pension plans 29,807 26,727 Investments 3,173 1,839 Other non-current assets 6,465 5,216 Goodwill 47,717 46,655 Other intangible assets, net 5,831 6,239 Deferred income taxes, net 22,001 21,363 Total non-current assets 133,407 129,143 Total assets $444,038 $410,922 Current liabilities: Accounts payable $5,293 $6,019 Accrued salaries and employee benefits 111,516 84,169 Other accrued liabilities 28,996 25,314 Current portion of accrued restructuring charges 3,279 6,313 Total current liabilities 149,084 121,815 Non-current liabilities: Retirement and pension plans 35,442 31,446 Non-current portion of accrued restructuring charges 10,287 12,297 Other non-current liabilities 8,231 7,879 Total non-current liabilities 53,960 51,622 Stockholders’ equity 240,994 237,485 Total liabilities and stockholders’ equity $444,038 $410,922 Heidrick & Struggles International, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited) Three Months Ended September 30, 2006 2005 Cash flows from operating activities: Net income $11,151 $30,396 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,289 2,672 Deferred income taxes 303 (18,512) Net realized and unrealized gains on equity and warrant portfolio (319) (426) Stock-based compensation expense, net 7,100 3,947 Restructuring charges (149) 1,580 Cash paid for restructuring charges (1,006) (8,546) Changes in assets and liabilities: – Trade and other receivables (6,207) 850 Accounts payable 363 (548) Accrued expenses 29,760 27,308 Income taxes recoverable and payable, net 1,069 542 Other assets and liabilities, net (52) (975) Net cash provided by operating activities 44,302 38,288 Cash flows from investing activities: Capital expenditures (2,229) (1,343) Proceeds from sales of equity securities 532 456 Payments to consultants related to sales of equity securities (413) (198) Proceeds from sales of short-term investments 12,501 20,050 Purchases of short-term investments (22,501) (10,050) Other, net 17 71 Net cash provided by (used in) investing activities (12,093) 8,986 Cash flows from financing activities: Proceeds from stock options exercised 1,239 2,590 Purchases of treasury stock (3,924) – Excess tax benefits and accruals related to stock-based compensation 507 – Other (68) – Net cash provided by (used in) financing activities (2,246) 2,590 Effect of foreign currency exchange rates on cash and cash equivalents (2,329) 371 Net increase in cash and cash equivalents 27,634 50,235 Cash and cash equivalents: Beginning of period 109,765 83,676 End of period $137,399 $133,911 Supplemental schedule of noncash financing activities: Total value of treasury stock purchases $- $- Cash paid for treasury stock purchases (3,924) – Change in accrued treasury stock purchases $(3,924) $- Heidrick & Struggles International, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited) Nine Months Ended September 30, 2006 2005 Cash flows from operating activities: Net income $27,467 $32,289 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,361 8,628 Deferred income taxes 850 (16,366) Net realized and unrealized gains on equity and warrant portfolio (434) (230) Stock-based compensation expense, net 18,271 10,074 Restructuring charges 406 22,417 Cash paid for restructuring charges (5,450) (28,625) Changes in assets and liabilities: Trade and other receivables (29,932) (23,680) Accounts payable (849) (5,182) Accrued expenses 25,485 31,188 Income taxes recoverable and payable, net (2,393) (11,485) Other assets and liabilities, net (1,409) (5,043) Net cash provided by operating activities 39,373 13,985 Cash flows from investing activities: Capital expenditures (3,556) (4,468) Proceeds from sales of equity securities 929 1,769 Payments to consultants related to sales of equity securities (625) (18,202) Proceeds from sales of short-term investments 72,500 176,925 Purchases of short-term investments (132,500) (112,600) Other, net 64 112 Net cash provided by (used in) investing activities (63,188) 43,536 Cash flows from financing activities: Proceeds from stock options exercised 4,023 8,050 Purchases of treasury stock (49,460) (27,498) Excess tax benefits and accruals related to stock-based compensation 2,289 – Other 247 – Net cash used in financing activities (42,901) (19,448) Effect of foreign currency exchange rates on cash and cash equivalents 426 (2,590) Net increase (decrease) in cash and cash equivalents (66,290) 35,483 Cash and cash equivalents: Beginning of period 203,689 98,428 End of period $137,399 $133,911
Heidrick & Struggles International, Inc.