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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 June 30, 2002 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 August 7,
2002 was 18,123,570.
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and
December 31, 2001 1
Unaudited Consolidated Statements of Operations for the three
months and six months ended June 30, 2002 and 2001 3
Unaudited Consolidated Statement of Stockholders' Equity and
Comprehensive Income (Loss) for the six months ended June 30, 2002 4
Unaudited Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 5
Unaudited Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 24
PART II. OTHER INFORMATION 25
SIGNATURE 26
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
June 30, December 31,
2002 2001
----------- -----------
(unaudited)
Current assets:
Cash and cash equivalents $ 84,952 $108,732
Accounts receivable, net of allowance for doubtful accounts 71,619 54,241
Other receivables 3,530 5,870
Prepaid expenses 11,807 11,445
Income taxes recoverable 2,675 22,958
Deferred income taxes, net 36,575 36,605
---------- --------
Total current assets 211,158 239,851
---------- --------
Non-current assets:
Property and equipment, net 44,920 54,364
Assets designated for pension plans 19,069 16,624
Investments 6,681 14,836
Other non-current assets 10,198 14,637
Income taxes recoverable 15,536 -
Deferred income taxes, net 7,598 7,089
Goodwill, net 51,829 51,110
Other intangibles, net 11,692 12,595
---------- --------
Total non-current assets 167,523 171,255
---------- --------
Total assets $378,681 $411,106
========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
1
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
Current liabilities:
Current maturities of long-term debt $ 2,618 $ 2,480
Accounts payable 8,469 13,391
Accrued expenses:
Salaries and employee benefits 73,128 101,341
Other 37,710 29,853
------------- -----------
Total current liabilities 121,925 147,065
------------ -----------
Non-current liabilities:
Long-term debt, less current maturities 1,216 1,959
Retirement and pension plans 22,948 19,092
Non-current portion of special charges 16,097 13,282
Other non-current liabilities 259 117
------------ -----------
Total non-current liabilities 40,520 34,450
------------ -----------
Total liabilities 162,445 181,515
------------ -----------
Stockholders' equity
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued at June 30, 2002 and December 31, 2001. - -
Common stock, $.01 par value, 100,000,000 shares authorized, of which
18,126,436 and 18,040,779 shares were issued and outstanding at
June 30, 2002 and December 31, 2001, respectively. 196 195
Treasury stock at cost, 1,439,532 and 1,435,500 shares at June 30, 2002
and December 31, 2001, respectively. (27,540) (27,459)
Additional paid-in capital 261,564 258,699
Retained earnings (accumulated deficit) (7,197) 13,935
Cumulative foreign currency translation adjustment (1,975) (5,881)
Unrealized gain on available-for-sale investments, net of tax 27 9
Deferred compensation (8,839) (9,907)
------------ -----------
Total stockholders' equity 216,236 229,591
------------ -----------
Total liabilities and stockholders' equity $ 378,681 $ 411,106
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
2002 2001 2002 2001
---------- -------- --------- --------
Revenue:
Revenue before reimbursements (net revenue) $ 93,476 $123,171 $185,199 $262,439
Reimbursements 6,834 7,192 13,317 14,264
-------- -------- --------- --------
Total revenue 100,310 130,363 198,516 276,703
-------- -------- --------- --------
Operating expenses:
Salaries and employee benefits 64,273 80,550 133,170 167,640
General and administrative expenses 28,247 41,740 56,060 86,069
Reimbursed expenses 6,834 7,192 13,317 14,264
Special charges - 8,163 23,169 8,163
-------- -------- --------- --------
Total operating expenses 99,354 137,645 225,716 276,136
-------- -------- --------- --------
Operating income (loss) 956 (7,282) (27,200) 567
-------- -------- --------- --------
Non-operating income (expense):
Interest income 383 1,419 911 3,480
Interest expense (37) (38) (88) (79)
Realized gains on investments 47 394 47 648
Net unrealized losses on derivative instruments (1,432) (1,194) (1,289) (2,669)
Write-down of long-term investment (5,000) - (5,000) -
Other, net (144) (264) 107 (426)
-------- -------- --------- --------
Net non-operating income (expense) (6,183) 317 (5,312) 954
-------- -------- --------- --------
Income (loss) before income taxes and cumulative effect of accounting change (5,227) (6,965) (32,512) 1,521
Provision for (benefit from) income taxes (1,830) (2,995) (11,380) 654
-------- -------- --------- --------
Net income (loss) before cumulative effect of accounting change (3,397) (3,970) (21,132) 867
Cumulative effect of accounting change, net of tax - - - 4,494
-------- -------- --------- --------
Net income (loss) $ (3,397) $ (3,970) $ (21,132) $ 5,361
======== ======== ========= ========
Basic earnings (loss) per common share:
Income (loss) before cumulative effect of accounting change $ (0.19) $ (0.21) $ (1.17) $ 0.04
Cumulative effect of accounting change - - - 0.23
-------- -------- --------- --------
Total basic earnings (loss) per common share $ (0.19) $ (0.21) $ (1.17) $ 0.28
======== ======== ======== ========
Diluted earnings (loss) per common share:
Income (loss) before cumulative effect of accounting change $ (0.19) $ (0.21) $ (1.17) $ 0.04
Cumulative effect of accounting change - - - 0.22
-------- -------- --------- --------
Total diluted earnings (loss) per common share $ (0.19) $ (0.21) $ (1.17) $ 0.26
======== ======== ========= ========
Weighted average common shares outstanding:
Basic 18,098 19,244 18,074 19,309
======== ======== ========= ========
Diluted 18,098 19,244 18,074 20,458
======== ======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
Other
Common Stock Compre-
----------------------- Additional hensive Deferred
Shares Treasury Paid-in Retained Income Compen-
Outstanding Amount Stock Capital Earnings (Loss) sation Total
-------------- -------- ---------------------- ----------- ---------- ----------- ---------
Balance as of December 31, 2001 18,041 $ 195 $(27,459) $ 258,699 $ 13,935 $ (5,872) $ (9,907) $ 229,591
Net loss - - - (21,132) - - (21,132)
Other comprehensive loss:
Unrealized loss on available-
for-sale investments, (pretax $28) - - - - 18 - 18
Foreign currency translation
adjustment - - - - 3,906 - 3,906
------ -------- ---------- ------- ------ -------- ---------
Total comprehensive loss - - - (21,132) 3,924 - (17,208)
------ -------- ---------- ------- ------ -------- ---------
Treasury and common stock transactions:
Issuance of common stock 37 1 - 737 - - - 738
Exercise of stock options 34 - - 484 - - - 484
Purchases of treasury stock (4) - (81) - - - - (81)
Compensation related to
performance share plan - - 1,171 - - - 1,171
Issuance of restricted
stock units - - 1,954 - - (1,954) -
Forfeitures of restricted
stock units - - (1,317) - - 488 (829)
Vesting of restricted stock
units 18 - - (164) - - - (164)
Amortization of deferred
compensation - - - - - - 2,534 2,534
------ ------ -------- --------- -------- -------- -------- ---------
Balance as of June 30, 2002 18,126 $ 196 $(27,540) $ 261,564 $ (7,197) $ (1,948) $ (8,839) $ 216,236
======= ====== ======== ========= ======== ======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
--------------------------
2002 2001
----------- ----------
Cash flows from operating activities:
Net income (loss) $ (21,132) $ 5,361
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 7,589 10,439
Realized gains on investments (47) (648)
Deferred income taxes 505 (3,971)
Net unrealized losses on derivative instruments 1,289 2,669
Cumulative effect of accounting change, net of tax - (4,494)
Write-down of long-term investment 5,000 -
Stock-based compensation expense, net 3,789 1,458
Special charges 23,169 8,163
Cash paid for special charges (13,453) (1,538)
Changes in assets and liabilities:
Trade and other receivables (13,306) 10,960
Accounts payable (5,331) 4,008
Accrued expenses (19,733) (45,357)
Income taxes recoverable, current 20,107 -
Income taxes payable - (12,947)
Income taxes recoverable, non-current (15,536) -
Other, net 6,999 (2,025)
---------- ---------
Net cash used in operating activities (20,091) (27,922)
---------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired - (810)
Purchases of property and equipment (3,185) (11,402)
Proceeds from sales of equity securities, net 127 648
Other, net (203) 2,471
---------- ---------
Net cash used in investing activities (3,261) (9,093)
---------- ---------
Cash flows from financing activities:
Proceeds from stock options exercised 484 395
Purchases of treasury stock, net of reissuances (81) (7,320)
Payments of long-term debt (913) (736)
---------- ---------
Net cash used in financing activities (510) (7,661)
---------- ---------
Effect of foreign currency exchange rates on cash
and cash equivalents 82 (6,791)
---------- ---------
Net decrease in cash and cash equivalents (23,780) (51,467)
Cash and cash equivalents:
Beginning of period 108,732 184,836
--------- ---------
End of period $ 84,952 $ 133,369
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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 to the
2002 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 for
the year ended December 31, 2001, as filed with the Securities and Exchange
Commission on March 29, 2002.
2. Recently Issued Financial Accounting Standards
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." This statement establishes a number of rules for the
recognition, measurement and display of long-lived assets which are impaired and
either held for sale or for continuing use within the business. In addition, the
statement broadly expands the definition of a discontinued operation to
individual reporting units or asset groupings for which identifiable cash flows
exist. The recognition of discontinued operations will become more common as a
result of these new guidelines. The Company adopted SFAS No. 144 on January 1,
2002. The Company does not anticipate that adoption of SFAS No. 144 will have a
material impact on its financial condition or results of operations.
In November 2001, the Emerging Issues Task Force reached a consensus on
Issue No. 01-14, "Income Statement Characterization of Reimbursements Received
for 'Out-of-Pocket' Expenses Incurred," (EITF No. 01-14). EITF No. 01-14
establishes that reimbursements received for certain out-of-pocket expenses
should be reported as revenue. The Company adopted this guidance in 2002.
Historically, the Company classified reimbursements of out-of-pocket expenses as
a reduction of operating expenses. The change in presentation has no impact on
the Company's operating income (loss). Prior period information was revised to
reflect the change in presentation.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred and can be measured at fair value rather than at the date of a
commitment to an exit or disposal plan. This Statement also requires companies
to disclose, for each reportable segment, the exit or disposal activity costs
incurred in the period and the cumulative amount incurred, net of any changes in
the liability, with an explanation of the reasons for the changes. Companies
will also be required to disclose the total amount of costs expected to be
incurred in connection with the exit or disposal activity. The new requirements
are effective prospectively for exit and disposal activities initiated after
December 31, 2002. The Company does not anticipate that adoption of SFAS No. 146
will have a material impact on its financial condition or results of operations.
6
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Derivative Instruments
The Company receives warrants for equity securities in its client
companies, in addition to its cash fee, for services rendered on some searches.
Some of the warrants meet the definition of a derivative instrument under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its
subsequent amendments. Upon adoption of SFAS No. 133 on January 1, 2001,
subsequent changes in the fair value of the derivatives are recorded in
earnings. Each quarter's earnings are affected by the fluctuations in the fair
value of these derivative instruments. In the three months ended June 30, 2002
and 2001, respectively, the Company recognized unrealized losses on derivative
instruments of $1.4 million and $1.2 million, net of consultants' bonuses and
administrative and other costs. In the six months ended June 30, 2002 and 2001,
respectively, the Company recognized unrealized losses on derivative instruments
of $1.3 million and $2.7 million, net of consultants' bonuses and administrative
and other costs.
4. Cumulative Effect of Change in Accounting Principle
As a result of the adoption of SFAS No. 133 on January 1, 2001, the
Company recorded, as the cumulative effect of an accounting change, a transition
adjustment to income of $4.5 million, net of consultants' bonuses,
administrative and other costs, and taxes (See Note 3).
5. Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." Under the new rule, goodwill and intangible assets that have
indefinite useful lives are no longer amortized. Rather, these assets are
subject to, at a minimum, an annual assessment for impairment by applying a
fair-value based test. Intangible assets that have finite useful lives continue
to be amortized over their useful lives.
The Company adopted SFAS No. 142 on January 1, 2002. A fair-value based
test was performed and indicated that the fair-value of each reporting unit
exceeded its carrying amount. As a result, no impairment charge was recorded.
Intangible assets continue to be amortized over their estimated useful lives and
have been segregated on a separate line in the Consolidated Balance Sheets. As
of January 1, 2002, the Company no longer amortizes goodwill. Operating results
excluding goodwill amortization are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ---------- ---------
Reported net income (loss) $ (3,397) $ (3,970) $ (21,132) $ 5,361
Addback: Goodwill amortization, net of tax -- 295 -- 615
--------- ---------- ---------- ---------
Adjusted net income (loss) $ (3,397) $ (3,675) $ (21,132) $ 5,976
========= ========== ========== =========
Basic earnings (loss) per common share:
Reported net income (loss) $ (0.19) $ (0.21) $ (1.17) $ 0.28
Goodwill amortization -- 0.02 -- 0.03
--------- ---------- ---------- ---------
Adjusted net income (loss) $ (0.19) $ (0.19) $ (1.17) $ 0.31
========= ========== ========== =========
Diluted earnings (loss) per common share:
Reported net income (loss) $ (0.19) $ (0.21) $ (1.17) $ 0.26
Goodwill amortization -- 0.02 -- 0.03
--------- ---------- ---------- ---------
Adjusted net income (loss) $ (0.19) $ (0.19) $ (1.17) $ 0.29
========= ========== ========== =========
7
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following tables provide the carrying amount of amortizable
intangible assets and the related accumulated amortization at June 30, 2002, the
aggregate amortization expense for the six months ended June 30, 2002 and
estimated amortization expense for each of the next five years.
June 30, 2002
-----------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amortizable Intangible Assets: Amount Amortization Amount
- ------------------------------------------------ -----------------------------------------------
Client relationships $13,512 $ (2,859) $ 10,653
Other intangibles 2,471 (1,432) 1,039
-----------------------------------------------
Total $15,983 $ (4,291) $ 11,692
===============================================
Aggregate Amortization Expense:
- ------------------------------------------------
For the six months ended June 30, 2002 $ 1,036
Estimated Amortization Expense:
- ------------------------------------------------
For the year ending December 31, 2003 $ 1,677
For the year ending December 31, 2004 1,426
For the year ending December 31, 2005 1,193
For the year ending December 31, 2006 1,009
For the year ending December 31, 2007 940
Changes in the carrying amount of goodwill for the six months ended June 30,
2002 are as follows:
North
America Europe Asia Pacific Total
------------- ------------- ---------------- -------------
Balance at December 31, 2001 $ 18,362 $ 31,645 $ 1,103 $ 51,110
Earnout payments - - 218 218
Exchange rate fluctuations - 485 16 501
-------- -------- -------- ---------
Balance at June 30, 2002 $ 18,362 $ 32,130 $ 1,337 $ 51,829
======== ======== ======== =========
8
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Basic and Diluted Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average common shares outstanding for the period. Diluted
earnings (loss) per common share reflects the potential dilution that would
occur if securities or other contracts to issue common stock were exercised or
converted. For the three months ended June 30, 2002 and 2001, there were
approximately 1.0 million and 1.1 million dilutive common shares, respectively,
that were not included in the computation of the diluted loss per common share
because the effect of their inclusion would be antidilutive. For the six months
ended June 30, 2002, there were approximately 0.9 million dilutive common shares
that were not included in the computation of the diluted loss per common share
because the effect of their inclusion would be antidilutive.
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings (loss) per common share.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -------------------------
2002 2001 2002 2001
----------- ---------- ----------- ----------
Basic earnings (loss) per common share:
Income (loss) available to common stockholders $ (3,397) $ (3,970) $(21,132) $ 5,361
Weighted average common shares outstanding 18,098 19,244 18,074 19,309
Basic earnings (loss) per common share $ (0.19) $ (0.21) $ (1.17) $ 0.28
Diluted earnings (loss) per common share:
Income (loss) available to common stockholders $ (3,397) $ (3,970) $(21,132) $ 5,361
Weighted average common shares outstanding 18,098 19,244 18,074 19,309
Dilutive common shares - - - 1,149
-------- -------- -------- --------
Weighted average diluted common shares outstanding 18,098 19,244 18,074 20,458
======== ======== ======== ========
Diluted earnings (loss) per common share $ (0.19) $ (0.21) $ (1.17) $ 0.26
9
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Segment Information
The Company operates its Executive Search and complementary services in
four geographic regions: North America which includes the United States (except
Miami) and Canada; Latin America which includes Mexico and the rest of Latin
America, as well as Miami, which serves as the gateway office to the region;
Europe, which includes the Middle East; and Asia Pacific.
In accordance with EITF No. 01-14, reimbursements of out-of-pocket
expenses are classified as revenue. For segment purposes, reimbursements are
reported separately and therefore are not included in the net revenue by
geographic region. The presentation required by EITF No. 01-14 has no impact on
the operating income (loss) of the geographic regions.
As of January 1, 2002 the Company completed the integration of
LeadersOnline, the Company's mid-level management recruiting service, into the
Executive Search business. As a result, the Company no longer reports
LeadersOnline as a separate segment. As LeadersOnline was North America based,
the net revenue and operating income (loss) has been included as part of the
North America region.
Also, in conjunction with the adoption of SFAS No. 142 on January 1,
2002, all goodwill and intangible assets have been assigned to the appropriate
reporting unit. Goodwill previously included as part of the corporate
identifiable assets has been assigned to the Europe region.
Prior period segment disclosures were revised to reflect these changes.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------------------
2002 2001 2002 2001
--------- ---------- ---------- ---------
Revenue:
North America $ 52,226 $ 72,658 $102,061 $147,964
Latin America 2,575 3,534 5,471 7,869
Europe 32,867 39,544 66,295 91,288
Asia Pacific 5,808 7,435 11,372 15,318
--------- --------- --------- --------
Revenue before reimbursements (net revenue) 93,476 123,171 185,199 262,439
Reimbursements 6,834 7,192 13,317 14,264
--------- --------- --------- --------
Total $100,310 $130,363 $198,516 $276,703
========= ========= ========= ========
Operating Income (Loss):
North America $ 9,607 $ 6,967 $ 12,609 $ 12,569
Latin America (1,224) (378) (1,577) (595)
Europe (300) 1,296 (1,257) 10,732
Asia Pacific 432 909 1,091 1,643
--------- --------- --------- --------
Total regions 8,515 8,794 10,866 24,349
Corporate (7,559) (7,913) (14,897) (15,619)
--------- --------- --------- --------
Operating income (loss) before special charges 956 881 (4,031) 8,730
Special charges - (8,163) (23,169) (8,163)
--------- -------- --------- --------
Total $ 956 $ (7,282) $(27,200) $ 567
========= ========= ========= ========
10
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
June 30, December 31,
2002 2001
----------- -------------
Identifiable Assets:
North America $ 85,380 $ 90,202
Latin America 6,687 8,506
Europe 156,195 159,995
Asia Pacific 22,672 21,346
---------- ----------
Total regions 270,934 280,049
Corporate 107,747 131,057
---------- ----------
Total $378,681 $411,106
========== ==========
8. Special Charges
In June 2001 and October 2001, the Company announced cost reduction
initiatives to better align costs with the expected revenue levels. Through
December 31, 2001, the Company recorded $53.2 million of special charges related
to reductions in its workforce and the consolidation and closing of offices.
During the 2002 first quarter, the Company recorded an additional $23.2 million
of special charges related to these announced initiatives. No special charges
were recorded during the 2002 second quarter, as all plans related to
announcements made in October 2001 were completed by the end of the first
quarter of 2002.
During the second quarter of 2001, the Company announced a reduction of
its workforce and as a result recorded special charges of $8.2 million for
severance and other related costs. As of June 30, 2001, the Company notified 285
employees that they would be part of the reduction in workforce, most of whom
were in the core Executive Search business, including 63 consultants. The
remaining employees were support staff in Executive Search; in LeadersOnline;
and in the corporate departments. Nearly two-thirds of the reduction was in
North America, 20% in Europe, and the rest in Latin America and Asia Pacific.
The reduction impacted all practice groups.
During the fourth quarter of 2001, the Company announced additional
reductions in its workforce and the consolidation and closing of offices. In the
first quarter of 2002, the Company incurred special charges of $23.2 million
related to these announced initiatives. The plans, which were completed during
the 2002 first quarter, affected 166 employees, including 51 executive search
and management search consultants. The remaining employees were search and
corporate support staff. Over two-thirds of the reduction was in North America,
20% was in Europe, and the rest in Latin America and Asia Pacific. The reduction
impacted all practice groups. The 2002 first quarter special charges include
severance and other employee-related costs of $10.4 million and $12.8 million
related to the consolidation and closing of offices. By segment, the special
charges recorded in the first quarter of 2002 are as follows: North America
$13.3 million, Latin America $0.1 million, Europe $7.0 million, Asia Pacific
$0.3 million and Corporate $2.5 million. Approximately $15.2 million of the
$23.2 million of special charges incurred in the 2002 first quarter represents
cash charges.
In the Consolidated Statements of Operations, the charges have been
segregated on a separate line titled, "Special charges." For segment reporting,
the special charges have been segregated and therefore do not impact the
quarter-to-quarter comparisons. The special charges for severance and office
closings were recorded in accordance with Emerging Issues Task Force No. 94-3
and Staff Accounting Bulletin No. 100.
11
Heidrick & Struggles International, and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The table below outlines the special charges recorded in 2001 and for the
six months ended June 30, 2002, along with related cash payments and non-cash
charges.
Severance
and Other
Employee- Other
Related Office Cash
Costs Closings Charges Total
---------- ----------- --------- ---------
Total special charges recorded in 2001 $ 23,740 $ 28,067 $ 1,423 $ 53,230
Cash payments (18,759) (877) (1,156) (20,792)
Non-cash items - (3,908) - (3,908)
--------- ---------- ---------- ---------
Special charges unpaid as of December 31, 2001 4,981 23,282 267 28,530
Total special charges recorded in 2002 10,373 12,796 - 23,169
Cash payments (6,619) (6,567) (267) (13,453)
Non-cash items (2,282) (5,686) - (7,968)
--------- ---------- ---------- ---------
Special charges unpaid as of June 30, 2002 $ 6,453 $ 23,825 $ - $ 30,278
========= ========== ========== =========
9. Business Combinations - Accounted for Using the Purchase Method
During the six months ended June 30, 2001, the Company acquired one
executive search firm for $0.8 million. Results of operations of this business
have been included in the consolidated financial statements from the acquisition
date of June 8, 2001, and are not material to the consolidated financial
statements.
10. Investments
During the second quarter of 2002, the Company wrote down its remaining
investment in ETF Group, incurring a non-cash charge of $5.0 million. ETF Group
is a Europe-based venture capital firm that helps emerging companies expand into
international markets. In the fourth quarter of 2001, the Company wrote down
half of its $10.0 million investment in ETF Group, because the portfolio of
companies had been adversely affected by the downturn in the valuation of
technology start-ups. Due to the continuing decline in the valuation of start-up
technology companies, the Company wrote down the remainder of its investment in
ETF Group in the second quarter of 2002.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. 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; economic weakness in the United States, Europe, or elsewhere;
social or political instability in overseas markets; price competition; bad debt
write-offs far in excess of allowances for doubtful accounts; an inability to
achieve the planned cost savings from our cost reduction initiatives; an
inability to sublease or assign unused office space; 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.
General
Heidrick & Struggles International, Inc. is a premier provider of
executive-level search and leadership consulting services. We help our clients
build leadership teams by facilitating the recruitment, development and
retention of their executive and mid-level management positions. We also provide
other human capital management services, including management assessment,
executive coaching and placement of interim executive management.
On February 26, 1999, Heidrick & Struggles, Inc., which operated primarily
in North America, Latin America and Asia Pacific, merged with and into Heidrick
& Struggles International, Inc. ("HSI"), which operated in Europe (the
"Merger"). The resulting company was named Heidrick & Struggles International,
Inc. In addition to the Merger, our results of operations reflect the operations
of several entities acquired in 1999, 2000 and 2001, accounted for using the
purchase method. The results of these acquired companies are included in the
consolidated financial statements beginning with the date of acquisition. These
acquisitions did not have a material effect on the consolidated financial
statements. In addition, in 1999, we merged with one entity and accounted for
this merger using the pooling-of-interests method.
During 1999 and 2000, the executive search industry experienced a dramatic
increase in demand for its services in all markets based on increased
competition for executive talent, the need for executives with diverse and
global leadership skills, and the proliferation of Internet and e-commerce
businesses. Our rate of growth in net revenue during this period exceeded both
the industry trend and our historical average because of the need for management
at start-up companies, the creation of new e-commerce positions at more
established companies and the growth in the financial services industry. We
responded to these trends by increasing the number of consultants and the number
of offices from which we served our clients. In 2000, we added more than 100
consultants, including consultants experienced in executive search and employees
from other disciplines who were new to the search profession.
The slow down in the United States economy that began early in 2001,
especially in the financial services and technology sectors, followed by a slow
down in other geographic markets, created an environment where the previous
trends began to reverse. Commencing in June 2001, when we anticipated a
reduction in revenue compared to 2000, we took steps to lower our cost base by
reducing our workforce while retaining capacity to meet demand when the economy
recovers. In October 2001, we announced further reductions in our workforce and
consolidated or eliminated office space.
The plans related to these announcements were completed during the 2002
first quarter. We do not anticipate any additional special charges for the
foreseeable future.
13
We operate our Executive Search and complementary services in four
geographic regions: North America which includes the United States (except
Miami) and Canada; Latin America which includes Mexico and the rest of Latin
America, as well as Miami, which serves as our gateway office to the region;
Europe, which includes the Middle East; and Asia Pacific. As of January 1, 2002
we completed the integration of LeadersOnline (now called Management Search),
our mid-level management recruiting service, into our Executive Search business.
As a result, we no longer report LeadersOnline as a separate segment.
We adopted Emerging Issues Task Force Issue No. 01-14 (EITF No. 01-14),
"Income Statement Characterization of Reimbursements Received for
'Out-of-Pocket' Expenses Incurred," in 2002, which requires that reimbursements
of out-of-pocket expenses be reported on a gross basis as revenue and as
operating expenses. Historically, the reimbursements of out-of-pocket expenses
were classified as a reduction of operating expenses. The change in presentation
has no impact on our operating income (loss). For segment purposes, the
reimbursements are reported on a separate line, and therefore do not influence
the segment analysis by geographic region.
Results of Operations
The following table summarizes the results of our operations for the
periods indicated, as a percentage of revenue before reimbursements (net
revenue):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -------------------
2002 2001 2002 2001
---------- -------- -------- --------
Revenue:
Revenue before reimbursements (net revenue) 100.0 % 100.0 % 100.0 % 100.0 %
Reimbursements 7.3 5.8 7.2 5.4
----- ----- ----- -----
Total revenue 107.3 105.8 107.2 105.4
----- ----- ----- -----
Operating expenses:
Salaries and employee benefits 68.8 65.4 71.9 63.9
General and administrative expenses 30.2 33.9 30.3 32.8
Reimbursed expenses 7.3 5.8 7.2 5.4
Special charges - 6.6 12.5 3.1
----- ----- ----- -----
Total operating expenses 106.3 111.8 121.9 105.2
----- ----- ----- -----
Operating income (loss) 1.0 (5.9) (14.7) 0.2
----- ----- ------ -----
Non-operating income (expense):
Interest income 0.4 1.2 0.5 1.3
Interest expense - - - -
Realized gains on investments 0.1 0.3 - 0.2
Net unrealized losses on derivative instruments (1.5) (1.0) (0.7) (1.0)
Write-down of long-term investment (5.3) - (2.7) -
Other, net (0.2) (0.2) 0.1 (0.2)
----- ----- ----- ----
Net non-operating income (expense) (6.6) 0.3 (2.9) 0.4
----- ----- ----- -----
Income (loss) before income taxes and cumulative effect
of accounting change (5.6) (5.7) (17.6) 0.6
Provision for (benefit from) income taxes (2.0) (2.4) (6.1) 0.2
----- ----- ----- -----
Net income (loss) before cumulative effect of accounting change (3.6) (3.2) (11.4) 0.3
Cumulative effect of accounting change, net of tax - - - 1.7
----- ----- ----- -----
Net income (loss) (3.6)% (3.2)% (11.4)% 2.0 %
===== ===== ====== =====
_________
Note: Tables may not equal the sum of individual line items due to rounding.
14
The following table sets forth, for the periods indicated, our revenue
and operating income (loss) by segment. Prior period segment disclosures were
revised to reflect the following changes:
1. As a result of the integration of LeadersOnline into our Executive
Search business, we no longer report our mid-level management recruiting
service as a separate segment. As LeadersOnline was North America based,
the revenue and operating income (loss) has been included as part of the
North America region.
2. Reimbursements received for out-of-pocket expenses are reported as
revenue in accordance with EITF No. 01-14, "Income Statement
Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses
Incurred." For segment purposes, the revenue from reimbursements is
reported on a separate line, and therefore does not affect the
analysis by geographic region. The presentation required by EITF No.
01-14 had no impact on the operating income (loss) of the geographic
regions.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenue:
North America $ 52,226 $ 72,658 $ 102,061 $ 147,964
Latin America 2,575 3,534 5,471 7,869
Europe 32,867 39,544 66,295 91,288
Asia Pacific 5,808 7,435 11,372 15,318
--------- --------- --------- ---------
Revenue before reimbursements (net revenue) 93,476 123,171 185,199 262,439
Reimbursements 6,834 7,192 13,317 14,264
--------- --------- --------- ---------
Total $ 100,310 $ 130,363 $ 198,516 $ 276,703
========= ========= ========= =========
Operating Income (Loss):
North America $ 9,607 $ 6,967 $ 12,609 $ 12,569
Latin America (1,224) (378) (1,577) (595)
Europe (300) 1,296 (1,257) 10,732
Asia Pacific 432 909 1,091 1,643
--------- --------- --------- ---------
Total regions 8,515 8,794 10,866 24,349
Corporate (7,559) (7,913) (14,897) (15,619)
--------- --------- --------- ---------
Operating income before special charges 956 881 (4,031) 8,730
Special charges - (8,163) (23,169) (8,163)
--------- --------- --------- ---------
Total $ 956 $ (7,282) $ (27,200) $ 567
========= ========= ========= =========
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30,
2001
Revenue before reimbursements (net revenue). Consolidated net revenue
decreased $29.7 million, or 24.1%, to $93.5 million for the three months ended
June 30, 2002 from $123.2 million for the three months ended June 30, 2001.
Excluding the effect of exchange rate fluctuations, net revenue would have
declined 25%. The decline was due to decreased demand for our executive search
services across most industries and disciplines, especially the Technology,
Financial Services, and Professional Services practice groups. We believe this
decrease reflects the impact of the continuing global economic slow down. The
number of confirmed executive searches decreased 9% compared to the second
quarter of 2001.
Net revenue in North America was $52.2 million for the three months ended
June 30, 2002, a decrease of $20.5 million, or 28.1%, from $72.7 million in the
second quarter of 2001. Almost all of the practice groups produced lower net
revenue in the second quarter compared to last year. In Latin America, net
revenue was $2.6 million for the three months ended June 30, 2002, a decrease of
$0.9 million, or 27.1%, from $3.5 million in the second quarter of 2001,
reflecting declines across most of the practice groups. Net revenue in Europe
was $32.9 million for the three
15
months ended June 30, 2002, a decrease of $6.6 million, or 16.9%, from $39.5
million in the second quarter of 2001. Excluding the impact of exchange rate
fluctuations, net revenue decreased 20% from the comparable quarter in 2001. All
practice groups experienced declines compared to the 2001 second quarter. In
Asia Pacific, net revenue was $5.8 million for the three months ended June 30,
2002, a decrease of $1.6 million, or 21.9%, from $7.4 million in the second
quarter of 2001. Excluding the impact of exchange rate fluctuations, net revenue
decreased 24% compared to the comparable quarter in 2001. Most practice groups
experienced a decrease in net revenue.
Salaries and employee benefits. Consolidated salaries and employee
benefits expense decreased $16.3 million, or 20.2%, to $64.3 million for the
three months ended June 30, 2002 from $80.6 million for the three months ended
June 30, 2001. The decrease in dollar terms was primarily attributable to lower
fixed costs as a result of the elimination of more than 780 positions or
approximately one-third of our workforce, since June 2001. As a percentage of
net revenue, salaries and employee benefits expense increased to 68.8% in the
second quarter of 2002 from 65.4% in the second quarter of 2001. The increase as
a percentage of net revenue was primarily due to a higher percentage of net
revenue being accrued for performance based compensation for executive search
consultants, management, and support staff and the impact of lower net revenue
against our fixed salaries and employee benefits expense.
General and administrative expenses. Consolidated general and
administrative expenses decreased $13.5 million, or 32.3%, to $28.2 million for
the three months ended June 30, 2002 from $41.7 million for the three months
ended June 30, 2001 due primarily to lower fixed costs resulting from office
consolidations, reduced spending on discretionary items such as marketing,
internal meetings and non-client-related travel, and lower bad debt expense. As
a percentage of net revenue, general and administrative expenses declined to
30.2% in the second quarter of 2002 from 33.9% in the second quarter of 2001.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets," goodwill and those intangible
assets that have indefinite useful lives are no longer amortized. We adopted
SFAS No. 142 on January 1, 2002 and, as a result, we did not record goodwill
amortization for the three months ended June 30, 2002. For the three months
ended June 30, 2001, general and administrative expenses include $0.5 million of
goodwill amortization.
Special charges. No special charges were recorded during the 2002 second
quarter, as all plans related to announcements made in October 2001 were
completed by the end of the first quarter of 2002.
During the second quarter of 2001, we announced a reduction of our
workforce and as a result we incurred special charges of $8.2 million for the
three months ended June 30, 2001, for severance and other related costs. As of
June 30, 2001, 285 employees were notified that they would be part of the
reduction in workforce. This workforce reduction affected all levels of
employees. Most were in our core Executive Search business, including 63
consultants. The remaining employees were support staff in Executive Search; in
LeadersOnline, our mid-level management recruiting service; and in the corporate
departments. Nearly two-thirds of the reduction was in North America, 20% in
Europe, and the rest in Latin America and Asia Pacific. The reduction impacted
all practice groups.
Operating income (loss). The following table summarizes our consolidated
operating income (loss) for the quarters ended June 30, 2002 and 2001,
respectively:
Increase
Three Months Ended (decrease) in
June 30, operating
--------------------------
Consolidated operating income (loss) 2002 2001 income
---------------------------------------------- ---------- ----------- -----------
(in millions)
Total regions $ 8.5 $ 8.8 $ (0.3)
Corporate (7.6) (7.9) 0.3
-------- -------- --------
Operating income before special charges 1.0 0.9 0.1
Special charges - (8.2) 8.2
-------- -------- --------
Consolidated operating income (loss) $ 1.0 $ (7.3) $ 8.3
========= ======== ========
Note: Tables may not equal the sum of individual line items due to
rounding
16
Consolidated operating income was $1.0 million for the three months ended
June 30, 2002, an increase of $8.3 million from an operating loss of $7.3
million for the three months ended June 30, 2001. The increase was driven
primarily by the fact that no special charges were recorded during the second
quarter of 2002. On a regional basis, improvement in the North America operating
income was offset by declines in Latin America, Europe and Asia Pacific.
In North America, operating income increased $2.6 million, or 37.9%, to
$9.6 million for the three months ended June 30, 2002 from $7.0 million for the
three months ended June 30, 2001. The decline of $20.5 million in North
America's net revenue was offset by lower levels of fixed salaries and employee
benefits expense due to the workforce reductions which have occurred since June
2001, and to lower general and administrative expenses, primarily lower bad debt
expense and discretionary spending.
In Latin America, the operating loss increased $0.8 million to $1.2
million for the three months ended June 30, 2002, compared to an operating loss
of $0.4 million for the three months ended June 30, 2001. The increased loss was
due primarily to the costs associated with converting certain wholly-owned
subsidiaries into licensees.
In Europe, the operating loss was $0.3 million for the three months ended
June 30, 2002, a decrease of $1.6 million compared to operating income of $1.3
million for the three months ended June 30, 2001. The decline of $6.6 million in
Europe's net revenue was partially offset by lower salaries and employee
benefits expense. Cost savings in most general and administrative expense
categories were offset by an increase in bad debt expense.
In Asia Pacific, operating income declined $0.5 million, or 52.5%, to
$0.4 million for the three months ended June 30, 2002 compared to operating
income of $0.9 million for the three months ended June 30, 2001. The decline of
$1.6 million in Asia Pacific's net revenue was offset by lower salaries and
employee benefits expense.
Corporate expense declined $0.3 million to $7.6 million for the three
months ended June 30, 2002 from $7.9 million for the three months ended June 30,
2001. Lower discretionary spending, reduced costs associated with corporate
staffing, and the elimination of goodwill amortization were partially offset by
an increase in systems-related spending.
Net non-operating income (expense). Our net non-operating expense for the
three months ended June 30, 2002 was $6.2 million compared to net non-operating
income of $0.3 million for the three months ended June 30, 2001. The following
table presents the components of our net non-operating income (expense) for the
three months ended June 30, 2002 and 2001, respectively:
Increase
(decrease)
Three Months Ended in net
June 30, non-operating
--------------------
Consolidated net non-operating income (expense) 2002 2001 income
------------------------------------------------ -------- -------- ---------
in millions)
Interest income $ 0.4 $ 1.4 $ (1.0)
Interest expense - - -
Realized gains on investments - 0.4 (0.4)
Net unrealized losses on derivative instruments (1.4) (1.2) (0.2)
Write-down of long-term investment (5.0) - (5.0)
Other, net (0.1) (0.3) 0.2
------ ------ ------
Consolidated net non-operating income (expense) $ (6.2) $ 0.3 $ (6.5)
====== ====== ======
----------
Note: Tables may not equal the sum of individual line items due to
rounding.
Interest income declined by $1.0 million, reflecting lower cash balances
available for investment and lower yields on invested balances.
17
Realized gains on investments result from sales of equity obtained as
part of our warrant program. During the three months ended June 30, 2002, we
recognized $47,000 of realized gains, net of consultants' bonuses and
administrative and other costs. During the three months ended June 30, 2001,
realized gains of $0.4 million were recognized.
Unrealized gains and losses on derivative instruments result from the
valuation of a portion of our warrant portfolio in accordance with SFAS No. 133,
(See Note 3 in the Notes to Consolidated Financial Statements). During the three
months ended June 30, 2002, we recognized unrealized losses of $1.4 million, net
of consultants' bonuses and administrative and other costs, due primarily to
lower valuations of technology sector holdings in the warrant portfolio. During
the comparable period in 2001, we recognized unrealized losses of $1.2 million,
net of consultants' bonuses and administrative and other costs.
The write-down of the long-term investment in the second quarter of 2002
results from the write-down of the remainder of our investment in ETF Group. ETF
Group is a Europe-based venture capital firm that helps emerging companies
expand into international markets. In the fourth quarter of 2001 we wrote down
half of our $10.0 million investment in ETF Group, because the portfolio of
companies had been adversely affected by the downturn in the valuation of
technology start-ups. Due to the continuing decline in the valuation of start-up
technology companies, we wrote down the remainder of our investment in ETF
Group, incurring a non-cash charge of $5.0 million in the second quarter of
2002.
Income taxes. For the three months ended June 30, 2002, the tax benefit
reflected a rate of 35%, compared to a rate of 43% for the three months ended
June 30, 2001. During the three months ended June 30, 2002, we had a pretax loss
of $5.2 million compared to a pretax loss of $7.0 million for the three months
ended June 30, 2001. The effective tax rate decreased as a result of certain tax
losses incurred in foreign jurisdictions that have not been benefited due to
uncertainty of recovery.
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
Revenue before reimbursements (net revenue). Consolidated net revenue
decreased $77.2 million, or 29.4%, to $185.2 million for the six months ended
June 30, 2002 compared to $262.4 million for the six months ended June 30, 2001.
The decline was due to decreased demand for our executive search services across
most industries and disciplines, especially the Technology, Financial Services,
and Industrial practice groups. The number of confirmed executive searches in
the six months ended June 30, 2002 decreased 23% from the six months ended June
30, 2001. We believe this decrease reflects the impact of the continuing global
economic slow down.
Net revenue in North America was $102.1 million in the six months ended
June 30, 2002, a decrease of $45.9 million, or 31.0%, from $148.0 million in the
six months ended June 30, 2001. Almost all of the practices produced lower net
revenue in the first six months of 2002 compared to the prior year. In Latin
America, net revenue decreased $2.4 million, or 30.5%, to $5.5 million in the
six months ended June 30, 2002 from $7.9 million in the six months ended June
30, 2001, as the region felt the effects of a weakening U.S. economy. Most of
the practices reported declines, although the Industrial practice reported an
increase. Net revenue in Europe decreased $25.0 million, or 27.4%, to $66.3
million for the six months ended June 30, 2002 from $91.3 million in the six
months ended June 30, 2001, reflecting decreases across all industry practice
groups. The impact of exchange rate fluctuations on Europe's net revenue was
minimal. In Asia Pacific, net revenue was $11.4 million for the six months ended
June 30, 2002, a decrease of $3.9 million, or 25.8%, from $15.3 million in the
six months ended June 30, 2001. Excluding the impact of exchange rate
fluctuations, net revenue decreased 25% from the comparable period in 2001.
Salaries and employee benefits. Consolidated salaries and employee
benefits expense decreased $34.4 million, or 20.6%, to $133.2 million for the
six months ended June 30, 2002 from $167.6 million for the six months ended June
30, 2001. The decrease in dollar terms was primarily attributable to lower fixed
costs as a result of the elimination of more than 780 positions from our
workforce since June 2001. As a percentage of net revenue, salaries and employee
benefits expense increased to 71.9% for the six months ended June 30, 2002 from
63.9% for the comparable period of 2001. This increase as a percentage of net
revenue was primarily due to a higher percentage of net revenue being accrued
for performance based compensation for executive search consultants, management
and support staff and the impact of lower net revenue against our fixed salaries
and employee benefits expense.
18
During 2001, a downward adjustment to the anticipated target payouts to
executive search consultants, management and support staff, and the impact of
higher bad debt-related expenses were factors in the lower accrual amounts,
which resulted in a reduction of salaries and employee benefits expense as a
percentage of net revenue. 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 the recoupment of previously recorded
performance-related bonus accruals that were not earned due to individuals not
meeting required performance goals in 2000.
General and administrative expenses. Consolidated general and
administrative expenses decreased $30.0 million, or 34.9%, to $56.1 million for
the six months ended June 30, 2002 from $86.1 million for the six months ended
June 30, 2001. This decrease was due to lower bad debt expense, lower
discretionary spending, and cost savings from the consolidation and closing of
offices. As a percentage of net revenue, general and administrative expenses
decreased to 30.3% in the six months ended June 30, 2002 from 32.8% in the six
months ended June 30, 2001, primarily because of better alignment of the fixed
component of our cost structure with substantially lower net revenue.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
we did not record goodwill amortization for the six months ended June 30, 2002.
For the six months ended June 30, 2001, general and administrative expenses
included $1.1 million of goodwill amortization.
Special charges. In June 2001 and October 2001, we announced cost
reduction initiatives to better align costs with the expected net revenue
levels. Through December 31, 2001, we recorded $53.2 million of special charges
related to reductions in headcount and the consolidation and closing of offices.
During the 2002 first quarter, we recorded an additional $23.2 million of
special charges related to these announced initiatives.
During the second quarter of 2001, we announced a reduction of our
workforce. As a result of this workforce reduction, we incurred special charges
of $8.2 million in the second quarter of 2001, for severance and other related
costs. As of June 30, 2001, we notified 285 employees that they would be part of
the reduction in workforce. This workforce reduction affected all levels of
employees. Most were in the core Executive Search business, including 63
consultants. The remaining employees were support staff in Executive Search; in
LeadersOnline; and in the corporate departments. Nearly two-thirds of the
reduction was in North America, 20% in Europe, and the rest in Latin America and
Asia Pacific. The reduction impacted all practice groups.
During the fourth quarter of 2001, we announced additional reductions in
our workforce and the consolidation and closing of offices. In the first quarter
of 2002, we incurred special charges of $23.2 million related to these announced
initiatives. The plans which were completed during the 2002 first quarter
affected 166 employees, including 51 executive search and management search
consultants. The remaining employees were search and corporate support staff.
Over two-thirds of the reduction was in North America, 20% were in Europe, and
the rest in Latin America and Asia Pacific. The reduction impacted all practice
groups. The 2002 first quarter special charges include severance and other
employee-related costs of $10.4 million and $12.8 million related to the
consolidation and closing of offices. Approximately $15.2 million of the $23.2
million of special charges incurred in the 2002 first quarter represents cash
charges.
19
Operating income (loss). The following table summarizes our consolidated
operating income (loss) for the six months ended June 30, 2002 and 2001,
respectively:
Increase
Six Months Ended (decrease) in
June 30, operating
----------------------
Consolidated operating income (loss) 2002 2001 income
--------------------------------------------- --------- --------- -------------
(in millions)
Total regions $ 10.9 $ 24.3 $ (13.4)
Corporate (14.9) (15.6) 0.7
------- ------- -------
Operating income (loss) before special charges (4.0) 8.7 (12.7)
Special charges (23.2) (8.2) (15.0)
------- ------- -------
Consolidated operating income (loss) $ (27.2) $ 0.6 $ (27.8)
======= ======= =======
Note: Tables may not equal the sum of individual line items due to
rounding
Our consolidated operating loss was $27.2 million for the six months
ended June 30, 2002, a decrease of $27.8 million from $0.6 million of
consolidated operating income for the six months ended June 30, 2001. The
decline in operating income was primarily due to the special charges recognized
in the first quarter of 2002. Excluding the special charges, operating income
declined $12.7 million to an operating loss of $4.0 million for the six months
ended June 30, 2002 from operating income of $8.7 million for the six months
ended June 30, 2001. The decline in operating income was driven primarily by the
$77.2 million decline in net revenue, partially offset by reductions in salaries
and employee benefits expense and general and administrative expenses resulting
from reductions in our workforce, office consolidations, and reduced spending on
discretionary items.
In North America, operating income for the six months ended June 30, 2002
was $12.6 million, approximately equal to the operating income in the comparable
period of 2001. The decline of $45.9 million in North America's net revenue was
offset by lower levels of fixed salaries and employee benefits expense, as well
as lower discretionary spending, bad debt expense, and office-related expenses.
The cost savings are attributable to the reductions in workforce, and the
consolidation and closing of offices which have occurred since June 2001.
In Latin America, the operating loss increased $1.0 million, to $1.6
million for the six months ended June 30, 2002, compared to an operating loss of
$0.6 million for the six months ended June 30, 2001. The increase in the
operating loss was attributable to a decline of $2.4 million in Latin America's
net revenue and costs related to converting certain wholly-subsidiaries into
licensees during the second quarter of 2002.
In Europe, the operating loss was $1.3 million for the six months ended
June 30, 2002, compared to operating income of $10.7 million for the six months
ended June 30, 2001. The decline of $12.0 million was attributable to a $25.0
million decline in Europe's net revenue, partially offset by lower salaries and
employee benefits expense reflecting the workforce reductions which have
occurred since June 2001. Cost savings in most general and administrative
expense categories were offset by an increase in bad debt expense. In the six
months ended June 30, 2001, Europe's operating income had benefited from a
reduction in its allowance for doubtful accounts.
In Asia Pacific, our operating income for the six months ended June 30,
2002 was $1.1 million compared to operating income of $1.6 million for the six
months ended June 30, 2001. The decline of $4.0 million in Asia Pacific's net
revenue was partially offset by lower salaries and employee benefits expense.
Corporate expense declined $0.7 million, to $14.9 million for the six
months ended June 30, 2002 from $15.6 million for the six months ended June 30,
2001 as lower discretionary spending, reduced costs associated with corporate
staffing, and the elimination of goodwill amortization were partially offset by
an increase in systems-related spending.
20
Net non-operating income (expense). Consolidated net non-operating
expense for the six months ended June 30, 2002 was $5.3 million compared to net
non-operating income of $1.0 million for the six months ended June 30, 2001. The
following table presents the components of our net non-operating income
(expense) for the six months ended June 30, 2002 and 2001, respectively:
Increase
(decrease)
Six Months Ended in net
June 30, non-operating
--------------------------
Consolidated net non-operating income (expense) 2002 2001 income
-------------------------------------------------- ------------ ------------ -------------
(in millions)
Interest income $ 0.9 $ 3.5 $ (2.6)
Interest expense (0.1) (0.1) -
Realized gains on investments - 0.6 (0.6)
Net unrealized losses on derivative instruments (1.3) (2.7) 1.4
Write-down of long-term investment (5.0) - (5.0)
Other, net 0.1 (0.4) 0.5
---------- --------- ---------
Consolidated net non-operating income (expense) $ (5.3) $ 1.0 $ (6.3)
========== ========= =========
Note: Tables may not equal the sum of individual line items due to
rounding
The decline in net non-operating income is attributable to lower interest
income due to lower cash balances available for investment and lower returns on
the invested cash, fewer realized gains on sales of warrants, and the write-down
of the remainder of our investment in ETF Group. The decline was partially
offset by lower net unrealized losses on derivative instruments, net of
consultants' bonuses and administrative and other costs, from a portion of our
warrant portfolio. (See Note 3 in the Notes to Consolidated Financial
Statements).
Cumulative effect of change in accounting principle. On January 1, 2001
we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and its subsequent amendments. As a result, we recorded as the
cumulative effect of a change in accounting principle, a transition adjustment
to income of $4.5 million, net of consultants' bonuses, administrative and other
costs, and taxes. (See Note 4 in the Notes to Consolidated Financial
Statements).
Income taxes. For the six months ended June 30, 2002 the tax benefit
reflected a rate of 35%. For the six months ended June 30, 2001, the effective
tax rate was 43%. During the six months ended June 30, 2002, we had a pretax
loss of $32.5 million compared to income before taxes and the cumulative effect
of the accounting change of $1.5 million for the six months ended June 30, 2001.
The effective tax rate decreased as a result of certain tax losses incurred in
foreign jurisdictions that have not been benefited due to uncertainty of
recovery.
Liquidity and Capital Resources
General. We continually evaluate our liquidity requirements, capital
needs and availability of capital resources based on our operating needs.
Historically, we have financed our operations with cash on hand and funds
generated by operations, together with the net proceeds of our initial public
offering in April 1999 and follow-on public offering in February 2000.
We believe that the funds expected to be generated from operations and
funds available under our line of credit will be sufficient to finance our
operations for the foreseeable future, as well as to finance the cash payments
associated with our special charges. We historically have paid a portion of our
bonuses in December and the remainder in March. Employee bonuses are accrued
throughout the year and are based on our performance and the performance of the
individual employee. Our ability to undertake acquisitions may depend, in part,
on access to additional funds.
We do not have material off-balance sheet arrangements, special purpose
entities, trading activities of non-exchange traded contracts, or transactions
with related parties except as related to our investment in Silicon
21
Valley Internet Capital (See Note 9 in the Notes to Consolidated Financial
Statements included in our Annual Report to Shareholders on Form 10-K for the
year ended December 31, 2001, as filed with the Securities and Exchange
Commission on March 29, 2002).
Some deferred compensation arrangements with certain employees are
structured as forgivable loans. The forgivable loans are accounted for as
deferred compensation, and are therefore amortized to compensation expense over
the forgiveness period. At June 30, 2002, we had $4.6 million of deferred
compensation structured as forgivable loans. The terms of deferred compensation
arrangements structured as forgivable loans and granted to executive officers,
are included in these employees' employment agreements as filed with the
Securities and Exchange Commission.
Line of credit. In December 2001 we replaced our $40.0 million revolving
credit facility which expired on December 31, 2001, with a new $50.0 million
revolving credit facility. The new facility will expire on December 28, 2004.
There were no borrowings outstanding under either line of credit at June 30,
2002 or December 31, 2001.
Under the new facility we may borrow U.S. dollars, euros, or other major
currencies, as agreed with the banks. Borrowings under this facility bear
interest at the existing ABR (Alternate Base Rate) or LIBOR, plus a margin as
determined by certain tests of our financial condition. The new facility has
certain financial covenants we must meet relating to consolidated EBITDA
(defined as earnings before interest expense, taxes, depreciation and
amortization and designated special charges); fixed charge coverage (defined as
the ratio of EBITDA to interest expense and capital expenditures); leverage
(defined as the ratio of total indebtedness to EBITDA); tangible net worth;
working capital; and capital expenditures. In addition, the new facility limits
our ability to pay dividends, make acquisitions and incur additional debt. At
June 30, 2002 and December 31, 2001 we were in compliance with these financial
covenants, and no event of default existed.
Cash and cash equivalents. Cash and cash equivalents at June 30, 2002 and
2001 were $85.0 million and $133.4 million, respectively. The amount of cash and
cash equivalents at December 31, 2001 was $108.7 million.
Cash used in operating activities. For the six months ended June 30,
2002, cash used in operating activities was $20.1 million, reflecting the
payment of bonuses in March 2002, payments related to our special charges and
our net loss, partially offset by the refund of approximately $20 million of
estimated income taxes paid during 2001 and refunds of income taxes paid in
prior years arising from net operating losses carried back to prior years.
For the six months ended June 30, 2001, cash used in operating activities
was $27.9 million, due primarily to the payment of the remaining 2000 bonuses in
March 2001.
Cash used in investing activities. Cash used in investing activities was
$3.3 million for the six months ended June 30, 2002 and $9.1 million for the six
months ended June 30, 2001. This decrease between the periods was primarily due
to a lower level of investments in office furniture and fixtures, leasehold
improvements, and computer equipment. Capital expenditures were $3.2 million and
$11.4 million for the six months ended June 30, 2002 and 2001, respectively.
During the first half of 2001, we acquired an executive search firm in
Turkey for $0.8 million.
During the six months ended June 30, 2002 and 2001, the amount of cash
received from the sale of equity securities received as part of our warrant
program was $0.1 million and $0.6 million, respectively, net of consultants'
bonuses and administrative and other costs.
Cash used in financing activities. Cash used in financing activities for
the six months ended June 30, 2002 was $0.5 million, resulting primarily from
payments on debt related to acquisitions. Cash used in financing activities was
$7.7 million for the six months ended June 30, 2001, resulting primarily from
purchases of treasury stock.
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 six months ended June 30, 2002 we
repurchased 4,032 shares of common stock. During the six months ended June 30,
2001, we repurchased 477,500 shares of common stock, for which some of the cash
settlement occurred in July 2001. As of June 30, 2002, approximately 560,000
shares may be repurchased under this authorization.
22
Significant Accounting Policies
The preparation of our consolidated financial statements requires
management to make certain estimates and assumptions required under generally
accepted accounting principles which may differ from the actual results. The
more significant areas requiring management estimates include revenue
recognition, accruals for compensation and employee benefits expense, allowance
for doubtful accounts, allowance for deferred tax assets and investment
valuations. See Note 1 in the Notes to Consolidated Financial Statements
included in our Annual Report to Shareholders on Form 10-K for the year ended
December 31, 2001, as filed with the Securities and Exchange Commission on March
29, 2002.
Recently Issued Financial Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets." Under this statement, goodwill
and intangible assets that have indefinite useful lives are no longer amortized.
Rather, these assets are subject to, at a minimum, an annual assessment for
impairment by applying a fair-value based test. Intangible assets that have
finite useful lives continue to be amortized over their useful lives. On January
1, 2002, we adopted SFAS No. 142. No impairment charge was recorded upon
adoption of SFAS No. 142.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." This statement establishes a number of rules for the
recognition, measurement and display of long-lived assets which are impaired and
either held for sale or for continuing use within the business. In addition, the
statement broadly expands the definition of a discontinued operation to
individual reporting units or asset groupings for which identifiable cash flows
exist. The recognition of discontinued operations will become more common as a
result of these new guidelines. We adopted SFAS No. 144 on January 1, 2002. We
do not anticipate that adoption of SFAS No. 144 will have a material impact on
our financial condition or results of operations.
In November 2001, the Emerging Issues Task Force reached a consensus on
Issue No. 01-14, "Income Statement Characterization of Reimbursements Received
for `Out-of-Pocket' Expenses Incurred" (EITF No. 01-14). EITF No. 01-14
establishes that reimbursements received for certain out-of-pocket expenses
should be reported as revenue. Historically, we classified reimbursements of
out-of-pocket expenses as a reduction of operating expenses. We adopted this
guidance in 2002. The change in presentation has no impact on our operating
income (loss).
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred and can be measured at fair value rather than at the date of a
commitment to an exit or disposal plan. This Statement also requires companies
to disclose, for each reportable segment, the exit or disposal activity costs
incurred in the period and the cumulative amount incurred, net of any changes in
the liability, with an explanation of the reasons for the changes. Companies
will also be required to disclose the total amount of costs expected to be
incurred in connection with the exit or disposal activity. The new requirements
are effective prospectively for exit and disposal activities initiated after
December 31, 2002. We do not anticipate that adoption of SFAS No. 146 will have
a material impact on our financial condition or results of operations.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Derivative Instruments. We receive warrants for equity securities in our
client companies, in addition to our cash fee, for services rendered on some
searches. Some of the warrants meet the definition of a derivative instrument
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and its subsequent amendments. Upon adoption of SFAS No. 133 on
January 1, 2001, subsequent changes in the fair value of the derivatives are
recorded in earnings. Each quarter's earnings are affected by the fluctuations
in the fair value of these derivative instruments. We had no other derivative
instruments at June 30, 2002.
Currency Market Risk. With our operations primarily in North America, Latin
America, Europe, 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 earnings. However, because certain
assets and liabilities are denominated in currencies other than the U.S. dollar,
changes in currency rates may cause fluctuations in the valuation of such assets
and liabilities. For financial information by geographic region, see Note 7 in
the Notes to Consolidated Financial Statements. Historically, we have not
experienced significant gains or losses on transactions involving U.S. dollars
and other currencies. As the local currency of our subsidiaries has been
designated as the functional currency, we are affected by the effect of
translating the foreign currency financial statements into U.S. dollars.
Euro Conversion. On January 1, 1999, the currency exchange rates of twelve
countries (Germany, France, the Netherlands, Austria, Italy, Spain, Finland,
Ireland, Belgium, Portugal, Greece, and Luxembourg) were fixed among one another
and each country adopted the euro as its currency. The euro bills and coinage
were introduced on January 1, 2002. In conjunction with the conversion process
to the euro, we took steps to convert our information technology systems to
handle the new currency, and prepared for maintaining accounting, tax, and other
business records in the new currency. Currently, the introduction and use of the
euro has not had a material effect on our consolidated financial condition, cash
flows, or results of operations.
24
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 4. Submission of Matters to a Vote of Securities
At our Annual Meeting of Stockholders held on June 6, 2002 in Chicago,
Illinois, our stockholders voted on the following matters:
1. The election of three directors, Messrs. Robert E. Knowling, Jr., Philip A.
Laskawy and Gerard R. Roche, to serve for a term of three years or until
their successors have been elected and qualified. The nominees to the Board
of Directors were elected.
Number of Number of Votes
--------- ---------------
Name of Nominee Votes For Withheld
--------------- --------- --------
Robert E. Knowling, Jr. 14,294,679 531,947
Philip A. Laskawy 14,482,982 343,644
Gerard R. Roche 14,453,956 372,670
2. Adoption of a proposal to amend and restate the 1998 Heidrick & Struggles
GlobalShare Program I and the 1998 Heidrick & Struggles GlobalShare
Program II. The amendment and restatement were approved.
Number of Votes For 11,248,271
Number of Votes Against 3,565,035
Number of Votes Withheld 0
Number of Broker Non-Votes 0
Number of Abstentions 13,320
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))
10.16 Employment Agreement dated January 1, 2002 between Heidrick &
Struggles International, Inc. and Piers Marmion
10.17 Employment Agreement dated January 1, 2002 between Heidrick &
Struggles, Inc. and Knox J. Millar
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
25
(b) Reports on Form 8-K
On April 17, 2002, we filed a report under Item 4 on Form 8-K concerning a
change in the Registrant's Certifying Accountant from Arthur Andersen LLP to
KPMG LLP.
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: August 14, 2002.
Heidrick & Struggles International, Inc.
(Registrant)
By: /s/ Kevin J. Smith
---------------------------------
Kevin J. Smith
Chief Financial Officer
26