Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (02-04-08 04:51 AM)

The Daily Magic Formula Stock for 02/02/2008 is Heidrick & Struggles International Inc. According to the Magic Formula Investing Web Site, the ebit yield is 24% and the EBIT ROIC is
>100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Heidrick & Struggles International, Inc. (“Heidrick & Struggles”) is a leading provider of executive search and leadership consulting services. We help our clients build leadership teams by facilitating the recruitment, management and deployment of senior executives for their executive management and board positions. Focusing on top-level services offers us several advantages that include access to and influence with key decision makers, increased potential for recurring search consulting engagements, higher fees per search, enhanced brand visibility, and global footprint, which create added barriers to entry for potential competitors. Working at the top of client organizations also allows us to attract and retain high-caliber consultants.



In addition to executive search, we provide a range of leadership consulting services to clients. These services include succession planning, top team effectiveness, executive assessment, talent management, executive development, and M&A human capital effectiveness.



Heidrick & Struggles has been in the executive search business for more than 50 years. We provide our services to a broad range of clients through the expertise of more than 388 consultants located in major cities around the world. For many of our clients, our global access to and knowledge of regional and functional markets and candidate talent is an important differentiator of our business. We provide our executive search services on a retained basis, recruiting senior executives whose first year base salary and bonus averages $300,000 on a worldwide basis. Our clients include the following:


• Fortune 1000 companies


• Major non-U.S. companies


• Middle market and emerging growth companies


• Governmental, higher education and not-for-profit organizations


• Other leading private and public entities



The executive search industry is highly fragmented, consisting of several thousand executive search firms worldwide. Based on trade publication reports, we estimate that fewer than 10 executive search firms/alliances generated more than $100 million in worldwide revenue during 2006. Executive search firms are generally separated into two broad categories: retained and contingency. Retained executive search firms fulfill their clients’ senior leadership needs by identifying potentially qualified candidates and assisting clients in evaluating and assessing these candidates for positions typically with annual cash compensation of $150,000 and above. Retained executive search firms generally are compensated for their services regardless of whether the client employs a candidate identified by the search firm and are generally retained on an exclusive basis. In contrast, contingency search firms usually focus primarily on positions with annual cash compensation of less than $150,000 and are compensated only upon successfully placing a recommended candidate. Retained executive search firms normally charge a fee for their services equal to approximately one-third of the first year’s total compensation for the position being filled.



We are a retained executive search firm. Our search process typically consists of the following steps:


• Analyze the client’s needs in order to understand its organizational structure, relationships and culture; determine the required set of skills for the position; define the required experience; and identify the other characteristics desired of the successful candidate


• Select, contact, interview and evaluate candidates on the basis of experience and potential cultural fit with the client organization


• Present confidential written reports on the candidates who potentially fit the position specification


• Schedule a mutually convenient meeting between the client and each candidate

• Complete references on the final candidate selected by the client


• Assist the client in structuring the compensation package and supporting the successful candidate’s integration into the client team



In October of 2006, we completed the acquisition of substantially all of the assets of Highland Partners, a leading retained executive search boutique and a division of Hudson Highland Group, Inc., through an asset purchase funded from existing cash for $36.0 million including $1.2 million of capitalized acquisition costs. Hudson Highland Group will also be eligible to receive earnout payments of up to $15.0 million based on the acquired consultants achieving certain revenue metrics in 2007 and 2008. The total purchase price, including the $36.6 million paid at closing and the 2007 and 2008 earnout payments will not exceed $51.6 million. All 48 of the Highland Partners consultants who were offered employment by us have accepted and joined our Company.



Available Information



We maintain an Internet website at http://www.heidrick.com . Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available free of charge on this site as soon as reasonably practicable after the reports are filed with or furnished to the Securities and Exchange Commission. We also post news releases on our financial results, investor presentations and other documents containing additional information related to our company on this site. Our Internet website and the information contained in or accessible from our website are for informational purposes only and are not incorporated into this annual report on Form 10-K.



Organization



Our organizational structure, which is arranged by geography and industry/functional practices, is designed to enable us to better understand our clients’ cultures, operations, business strategies, industries and regional markets for executive talent.



Geographic Structure . We provide senior-level executive search and leadership consulting services to our clients worldwide through a network of more than 60 offices in 26 countries. Major locations are staffed with consultants, research associates, administrative assistants and other support staff. Administrative functions are centralized where possible, although certain support and research functions are situated regionally because of variations in local requirements.



Our worldwide network also includes affiliate relationships in six countries. We have no financial investment in these affiliates but receive licensing fees from them for the use of our name and our databases. Licensing fees were $1.0 million and $0.3 million for the years ended December 31, 2006 and 2005, respectively.

While those broad industry groups are useful for tracking purposes, we know that understanding the unique needs of each client—in terms of such factors as competitive landscape, business strategy and operations—is integral to providing quality service. Thus, our functional and industry practice structure is designed to reflect the needs of our clients and our enhanced focus on certain market sectors. Certain practices are organized globally, while others have a regional or local focus, as follows:



Our Global Industry Practices are: Business & Professional Services; Consumer; Financial Services; Industrial; Life Sciences; Private Equity & Venture Capital; and Technology.



Other Practices with a regional or local focus are: Diversity Services; Education/Nonprofit; Interim Executives.



Certain markets have a significant concentration of companies within particular industry sectors. For example, our Financial Services practice has its largest concentration of consultants in New York and London, two of the world’s largest financial centers. Each industry practice is managed by a Practice Managing Partner who facilitates the respective group’s marketing activities.



Functional Practices . Our executive search consultants also specialize in searches for specific “C-level” functional positions, which are roles that generally report directly to the chief executive officer. These include chief financial officers, chief information officers, chief legal officers, chief marketing officers and chief human resources officers. Our functional specialists maintain continuous awareness of candidate talent.



Our Global Functional Practices are: CEO & Board of Directors; Chief Information Officer; Chief Marketing Officer; Financial Officers; Human Resources; Legal; Real Estate; Research & Development; and Supply Chain.



Executive search consultants from each of our Client Services groups may work from any one of our offices around the world. For example, an executive search for a chief financial officer of an industrial company located in the United Kingdom may involve a consultant in the United Kingdom with an existing relationship with the client, another executive search consultant in the United States with expertise in our Industrial practice and a third executive search consultant with expertise in chief financial officer recruiting. This same industrial client may also engage us to perform skill-based assessments for each of its senior managers, which could require the expertise of a professional trained in this service.



Information by Geographic Segment



Americas. As of December 31, 2006, we had 218 executive search consultants operating in our Americas segment, which includes the United States, Canada, Mexico and Latin America, principally Argentina, Brazil and Chile. Our Americas segment generated approximately 56% of our worldwide net revenue in 2006. The largest offices in this segment in terms of net revenue are located in New York, Chicago and Atlanta.



Europe. As of December 31, 2006, we had 125 executive search consultants operating in 13 European countries. Our European segment generated approximately 34% of our worldwide net revenue in 2006. The United Kingdom, Germany and France produced the highest levels of net revenue in this segment.



Asia Pacific . As of December 31, 2006, we had 45 executive search consultants in operating the Asia Pacific segment. This segment generated approximately 10% of our worldwide net revenue in 2006. China (including Hong Kong), Australia and Japan produced the highest levels of net revenue in this segment.



For financial information relating to each geographic segment, see Note 19, Segment Information , in the Notes to Consolidated Financial Statements.



Seasonality



While there is no discernible seasonality in our business, revenue and operating income have historically varied by quarter and are hard to predict from quarter to quarter. Although as a percentage of total annual net

revenue, the first quarter is typically the lowest. On average, the variance between the highest and lowest amount of quarterly net revenue, as expressed as a percentage of annual net revenue, is approximately two percentage points.



Clients and Marketing



Our consultants market the firm’s executive search services through two principal means: targeted client calling and industry networking with clients and referral sources. These efforts are supported by proprietary databases, which provide our consultants with information as to contacts made by their colleagues with particular referral sources, candidates and clients. In addition, we benefit from a significant number of referrals generated by our reputation for high quality service and successfully completed assignments, as well as repeat business resulting from our ongoing client relationships.



Either by agreement with clients or for client relationship purposes, executive search firms generally refrain from recruiting employees of a client, and possibly other entities affiliated with that client, for a specified period of time typically not more than one year from the commencement of a search. We seek to mitigate any adverse effects of these off-limits arrangements by strengthening our long-term relationships, allowing us to communicate our belief to prospective clients that we can conduct searches without these off-limits arrangements impeding the quality of our work.



No single client accounted for more than 3% of our net revenue in 2006, 2005 or 2004.



Information Management Systems



We rely on technology to support our consultants and staff in the search process. Our technology infrastructure consists of internally developed databases containing candidate profiles and client records, coupled with online services and industry reference sources. We use technology to manage and share information on current and potential clients and candidates, to communicate to both internal and external constituencies and to support administrative functions.



Professional Staff and Employees



Our executive search professionals are generally categorized either as consultants or associates. Associates assist consultants by conducting research, making initial contact with candidates in some instances and performing other search-related functions. As of December 31, 2006, we had 1,550 full-time equivalent employees, of whom 388 were executive search consultants, 407 were associates and 755 were other search, support and corporate staff.



In each of the past five years, no single consultant accounted for a material portion of our net revenue. We recruit our consultants both from other executive search firms or consultants new to search who have worked in industries represented by our practices. In the latter case, these are often seasoned executives with extensive contacts and outstanding reputations who are entering the search profession as a second career, and who we train in our techniques and methodologies. We are not a party to any collective bargaining agreement, and we consider relations with our employees to be good.



Competition



The executive search industry is highly competitive. While we face competition to some degree from all firms in the industry, we believe our most direct competition comes from four established global retained executive search firms that conduct searches primarily for the most senior-level positions within an organization. In particular, our competitors include Egon Zehnder International, Korn/Ferry International, Russell Reynolds

Associates, Inc. and Spencer Stuart & Associates. To a lesser extent, we also face competition from smaller boutique or specialty firms that specialize in certain regional markets or industry segments. Each firm with which we compete is also a competitor in the marketplace for effective consultants. The Association of Executive Search Consultants (AESC) estimated the market size for the executive recruiting industry was $8.7 billion worldwide in 2006. Combined, the revenues of our Company and our top four competitors represent approximately 27% of this market.



Overall, the search industry has relatively few barriers to entry. Higher barriers exist, however, for global retained executive search firms like ours that focus primarily on conducting searches for senior-level positions. At this level, clients rely more heavily on a search firm’s reputation, global access and the experience level of its consultants. We believe that the segment of executive search in which we compete is more quality-sensitive than price-sensitive. As a result, we compete on the level of service we offer, reflected by our client services specialties and, ultimately, by the quality of our search results. We believe that our emphasis on senior-level executive search, the depth of experience of our search consultants and our global presence enable us to compete favorably with other executive search firms.



Competition in our leadership consulting services is highly fragmented, with no universally recognized market leaders.


CEO BACKGROUND

L. Kevin Kelly was elected our Chief Executive Officer and a Director in September 2006. Previously, Mr. Kelly was President, Europe/Middle East/Africa and Asia Pacific from March 2005 to September 2006, Regional Managing Partner, Asia Pacific from September 2002 to March 2005, and Office Managing Partner, Tokyo from February 2002 to September 2002. He joined us in 1997.



K. Steven Blake has been our General Counsel and Secretary since joining us in July 2005 and was named Executive Vice President in January 2007. Previously, Mr. Blake was General Counsel of Aquion Partners, LP from 2001 to 2005. From 1998 to 2001, Mr. Blake was Associate General Counsel for General Electric Capital Corporation.



Charles G. Davis has been our Regional Managing Partner, Asia Pacific since September 2006, Office Managing Partner, Sydney since January 2006, and Managing Partner of our Chief Information Officer Practice in Asia Pacific since October 2002. Previously, Mr. Davis was Managing Partner of our Technology and Business & Professional Services Practice in Asia Pacific from April 1999 to December 2005. He joined us in 1998.



Michael Franzino has been our Chairman, Global Markets since September 2005 and Co-Head of Target Accounts since January 2004. Previously, Mr. Franzino was Managing Partner of our Financial Services Practice from October 2001 to December 2006 and Office Managing Partner, New York—Wall Street from January 2003 to December 2004. He joined us in 1999.



John T.W. Hawkins has been our Regional Managing Partner, Americas since joining us in January 2007. Previously, Mr. Hawkins was Executive Vice President-Corporate Development and External Affairs at MedPointe Pharmaceuticals from 2000 to 2007. Prior to that, between 1990 and 2000, he held numerous leadership roles at Russell Reynolds Associates, including Managing Director and Leader of both the Global Health Care Sector and the Global Board of Directors/CEO Practice.



Eileen A. Kamerick has been our Chief Financial Officer since joining us in June 2004. Ms. Kamerick was named Chief Administrative Officer in December 2006 and Executive Vice President in January 2007. Previously, she was Chief Financial Officer and Executive Vice President of Bcom3 Group, Inc. from 2001 to 2003 and Chief Financial Officer and Executive Vice President at United Stationers, Inc. from 2000 to 2001.



David C. Peters has been our Regional Managing Partner, Europe/Middle East/Africa since September 2006. Previously, Mr. Peters was Office Managing Partner, London from October 2003 to November 2006, Area Managing Partner, UK/Middle East/Africa from July 2004 to March 2005, and Head of our Interim Practice from November 2002 to June 2005. He joined us in 2000.

MANAGEMENT DISCUSSION FROM LATEST 10K

Our Business



We are a leading provider of executive search and leadership consulting services. We help our clients build leadership teams by facilitating the recruitment, management and deployment of senior executives for their executive management and board positions. Focusing on top-level services offers us several advantages that include access to and influence with key decision makers, increased potential for recurring search consulting engagements, higher fees per search, enhanced brand visibility, and global footprint, which create added barriers to entry for potential competitors. Working at the top of client organizations also allows us to attract and retain high-caliber consultants.



In addition to executive search, we provide a range of leadership consulting services to clients. These services include succession planning, top team effectiveness, executive assessment, talent management, executive development, and M&A human capital effectiveness.



We provide our services to a broad range of clients through the expertise of more than 388 consultants located in 26 countries throughout the world. Our executive search services are provided on a retained basis. Revenue before reimbursements of out-of-pocket expenses (“net revenue”) consists of retainers and indirect expenses billed to clients. Typically, we are paid a retainer for our executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled. In addition, if the actual compensation of a placed candidate exceeds the estimated compensation, we often are authorized to bill the client for one-third of the excess. Indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search.



Key Performance Indicators



We manage and assess Heidrick & Struggles’ performance through various means, with the primary financial and operational measures including net revenue growth, operating income, operating margin, consultant headcount, new search confirmation trends, consultant productivity, and average fee per executive search.

Revenue growth is driven by a combination of additional consultants, an increase in executive searches, higher productivity levels and higher average fees per search or service. With the exception of compensation expense, incremental increases in revenue do not necessarily result in proportionate increases in costs, particularly operating and administrative expenses, thus potentially improving operating margins.



The number of consultants, confirmation trends, number of searches completed, productivity levels and the average fee per search will vary from quarter to quarter, affecting revenue growth and operating margin.



Our Compensation Model



Our compensation model closely aligns the interests of our consultants, our Company and our shareholders. Consultants are rewarded for individual performance based on a system that directly ties compensation to the amount of net revenue for which the consultant is responsible. Each quarter, we review and update the expected annual performance and compensation accruals for our consultants. At the group and company level, variable compensation is based on our performance against company-wide and regional profitability targets approved by the Human Resources and Compensation Committee of the Board of Directors and recorded based on the performance of the respective region and the Company as a whole. As a result, the variable portion of compensation expense may fluctuate significantly from quarter to quarter.



In the second quarter of 2005, we adopted a new compensation policy for consultants and management. Under this policy, a portion of consultant and management bonuses are paid in the form of restricted stock units that vest ratably over a three-year period from the date of grant. The amount paid in the form of restricted stock units varies between 10% and 20% (plus a premium of 10% on the shares received) depending on the employee’s position. In 2006, the amount paid in the form of restricted stock units increased from 10% to 15% for many employees. The restricted stock units are issued in the quarter following the year in which the performance portion of the awards is earned. Compensation expense related to awards requiring satisfaction of both service and performance conditions is recognized using a graded vesting attribution method over the requisite service period which for 2006, began January 1, 2006 and continues through the final vesting date, which is generally three years from the date of grant. This change in policy was made to better align consultant’s and management’s interest with those of the shareholder. In addition, the change will result in increased share ownership for consultants and management.



2006 Overview



In the third quarter of 2006, our Board of Directors elected L. Kevin Kelly as Chief Executive Officer and appointed him as a director of the Company. Mr. Kelly has held various positions within the Company since 1997, most recently as President of Europe/Middle East/Africa (EMEA) and Asia Pacific. The prior Chairman and CEO, Thomas J. Friel, who previously announced in June 2006 his intention to transition out of the CEO role, has become non-executive Chairman of the Board.



In January of 2007, John Hawkins joined Heidrick & Struggles as Regional Managing Partner of the Americas, with responsibility for the firm’s U.S., Canadian and Latin American operations. Mr. Hawkins joins Heidrick & Struggles from MedPointe Inc., a New Jersey-based specialty pharmaceuticals company that he co-founded through the 2001 leveraged buyout of Carter-Wallace, Inc., a NYSE-listed multinational consumer/health care concern. At MedPointe, he served as Executive Vice President of Corporate Development and External Affairs and also was a member of both the Executive and Management Committees. Prior to that, he held numerous leadership roles at Russell Reynolds Associates, including Managing Director and Leader of both the Global Health Care Sector and the Global Board of Directors/CEO practice.



David Peters assumed the role of Regional Managing Partner of EMEA and Gerry Davis assumed the role of Regional Managing Partner of Asia Pacific. In conjunction with the appointment of these two regional managing partners, Jeff R. Scherb, who as Chief Technology and Operations Officer, was assisting Mr. Kelly in running both EMEA and Asia Pacific, retired from the Company at year end.



In October of 2006, we completed the acquisition of substantially all of the assets of Highland Partners, a leading retained executive search boutique and a division of Hudson Highland Group, Inc., through an asset purchase funded from existing cash for $36.0 million including $1.2 million of capitalized acquisition costs. Hudson Highland Group will also be eligible to receive earnout payments of up to $15.0 million based on the acquired consultants achieving certain revenue metrics in 2007 and 2008. The total purchase price, including the $36.6 million paid at closing and the 2007 and 2008 earnout payments will not exceed $51.6 million. All 48 of the Highland Partners consultants who were offered employment by us have accepted and joined our Company.



Consolidated net revenue increased 16.1%, or $66.2 million in 2006, compared to 2005. Net revenue includes $13.7 million associated with former Highland Partners’ consultants. Double-digit increases were reported in 2006 in the Americas, Europe and Asia Pacific. The Financial Services, Consumer, and Industrial groups were the largest contributors to year-over-year revenue growth. Consultant productivity measured by revenue per executive search consultant, remained at $1.3 million for the year ended December 31, 2006, consistent with the year ended December 31, 2005.



Operating income as a percentage of net revenue increased to 10.5% in 2006 from 5.2% in 2005 primarily as a result of lower restructuring charges in 2006.



We ended the year with a strong cash and short-term investment balance of $220.8 million, an increase of $17.1 million, compared to $203.7 million at December 31, 2005. The increase in year-over-year ending cash and short-term investment balances primarily reflects the decision in early 2006 to consolidate the two bonus payments made to consultants into one payment to be paid in the first quarter following the year in which the bonus is earned, along with increased cash flows from operations. This increase was partially offset by the cash used to acquire substantially all of the assets of Highland Partners and repurchases of our common stock.



2007 Outlook



For 2007, we expect to achieve net revenue of between $560 million and $580 million, representing growth over 2006 net revenue of between 17% and 21%. We are targeting to achieve a 2007 full-year operating margin of 13%. Net income and earnings per share are expected to reflect a full-year effective tax rate of between 42% and 48% primarily due to certain one-time costs associated with tax planning initiatives. In addition, 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. We will continue to pursue additional means by which to lower this rate estimate.

Results of Operations



We operate our executive search and leadership consulting services in three geographic regions: the Americas, Europe, and Asia Pacific.



For segment purposes, reimbursements of out-of-pocket expenses classified as revenue are reported separately and therefore are not included in the net revenue by geographic region. We believe that analyzing trends in revenue before reimbursements (net revenue) and analyzing operating expenses as a percentage of net revenue more appropriately reflects our core operations.

2006 Compared to 2005



Total revenue. Consolidated total revenue increased $69.1 million, or 16.0%, to $502.0 million in 2006 from $432.9 million in 2005. The increase in total revenue was due primarily to the increase in revenue before reimbursements (net revenue).



Revenue before reimbursements (net revenue) . Consolidated net revenue increased $66.2 million, or 16.1%, to $478.5 million in 2006 from $412.3 million in 2005. Net revenue in 2006 includes $13.7 million associated with former Highland Partners’ consultants since October 2, 2006. Net revenue increased across all regions in 2006. The Financial Services, Consumer, and Industrial industry groups contributed to the increase in net revenue in 2006 as compared to 2005. In 2006, the number of confirmed executive searches increased 9.1% to 4,447 from 4,077 in 2005. We believe this increase reflects the impact of moderate economic improvement in the global economy, our success in winning business and our acquisition of Highland Partners. The positive impact of exchange rate fluctuations resulted in an increase in revenue in 2006 of less than one percentage point year over year.



Net revenue in the Americas was $265.4 million in 2006, an increase of $26.8 million, or 11.2%, from $238.6 million in 2005. Net revenue in 2006 includes $10.9 million associated with former Highland Partners’ consultants since the acquisition date of October 2, 2006. The Financial Services, Consumer and Industrial groups were the largest contributors to revenue in 2006. The positive impact of exchange rate fluctuations in Canada and Latin America contributed to less than one percentage point of revenue growth in 2006. Net revenue in Europe was $163.6 million in 2006, an increase of $29.3 million, or 21.9%, from $134.3 million in 2005. Net revenue in 2006 includes $2.3 million associated with former Highland Partners’ consultants since October 2, 2006. The increase in net revenue over 2005 was driven by strong results in the Financial Services, Consumer, Health Care and Industrial groups. The positive impact of exchange rate fluctuations resulted in an increase in net revenue of 1.5 percentage points in 2006. In Asia Pacific, net revenue was $49.5 million in 2006, an increase of $10.0 million, or 25.4%, from $39.5 million in 2005. Net revenue in 2006 includes $0.5 million associated with former Highland Partners’ consultants since October 2, 2006. The negative impact of exchange rate fluctuations resulted in a decrease in revenue of less than one percentage point year over year. Most industry groups experienced significant net revenue growth in 2006 as compared to the prior year.



Salaries and employee benefits . Consolidated salaries and employee benefits expense increased $54.8 million, or 20.0%, to $328.7 million in 2006 from $273.9 million in 2005. Fixed salaries and employee benefits increased $40.7 million and performance-related compensation expense increased $14.1 million. Fixed salaries and employee benefits expense includes stock-based compensation expense earned under prior year equity awards requiring satisfaction of both service and performance conditions.



During the third quarter of 2006, we revised our policy relating to the vesting of certain restricted stock units upon the eligible retirement of employees that hold such awards. This policy revision constitutes a modification of those equity awards. According to the Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), we are required to recognize the original grant date fair value compensation cost over an accelerated service period (through the earliest date each equity award holder is eligible to retire) for those awards affected by the modification. During 2006, we recorded an additional $2.7 million of non-cash compensation expense related to the accelerated vesting of these restricted stock unit awards.



Fixed salaries and employee benefits expense increased $40.7 million in 2006 compared to 2005, of which $6.7 million is associated with former Highland Partners’ consultants. The remaining increase was primarily attributable to a 10% increase in headcount year over year, a $8.0 million increase in stock-based compensation expense and $5.3 million of severance costs associated with a realignment of management responsibilities for the new CEO’s senior team and a realignment of management in Germany. Of the increase in stock-based compensation, $5.3 million relates to an increase in the number of outstanding restricted stock units and more accelerated vesting of the units as compared to the prior year, and $2.7 million related to stock option expense now recorded in earnings under a new accounting standard.

Performance-related compensation expense increased $14.1 million, of which $4.9 million is associated with former Highland Partners’ consultants. The remaining increase is primarily the result of the increase in the number of consultants added during the last year and increased net revenue. The accelerated vesting of certain restricted stock unit awards in 2006 increased performance-based compensation expense by $1.3 million. Also, in 2006, the amount of certain consultant and management bonuses paid in the form of restricted stock units increased from an average of 10% to 15%. Compensation expense related to restricted stock units is recognized over a longer period (the service period of the equity award) as compared to cash compensation which is expensed entirely in the period in which the related services are performed. Therefore, as a result of increasing the amount of bonuses paid in the form of restricted stock units, compensation expense decreased $3.3 million in 2006 as compared to 2005.



The negative impact of exchange rates on consolidated salaries and employee benefits was less than one percentage point year over year.



General and administrative expenses . Consolidated general and administrative expenses increased $5.0 million, or 5.3%, to $99.4 million in 2006 from $94.4 million in 2005. Of this increase, $3.0 million is associated with former Highland Partners’ consultants. The remaining increase of $2.0 million is related to operating expenses associated with higher net revenue levels and higher discretionary spending including $0.9 million in travel costs, $0.8 million related to marketing and business development activities and $1.3 million in fees for professional services, partially offset by lower depreciation and premise-related costs of $0.5 million. Also, 2005 included a $0.5 million favorable settlement of an insurance claim.

The increase in the consolidated operating income was primarily due to improved net revenue and profitability in the geographic regions and decreased restructuring charges, partially offset by increased operating expenses.



In the Americas, operating income increased to $53.9 million in 2006 from $50.4 million in 2005. Of this $3.5 million increase in operating income, $1.7 million is associated with former Highland Partners’ consultants. The remaining increase in operating income of $1.8 million is the result of year over year increased net revenue of $15.9 million offset by higher salaries and benefits expense of $16.3 million, and lower general and administrative expenses of $2.2 million. The increase in salaries and employee benefit expense is primarily as a result of a 27.2% increase in headcount over last year and $1.9 million related to the accelerated vesting of certain restricted stock unit awards. The decrease in general and administrative expense of $2.2 million is a result of lower discretionary spending of $1.0 million, premise-related costs of $0.8 million and bad debt expense of $0.4 million.



In Europe, operating income increased $7.2 million in 2006, to $14.9 million, from $7.7 million in 2005. Although the former Highland Partners consultants added $2.3 million of net revenue in 2006, the impact on operating income was negligible. Excluding the results associated with former Highland Partners’ consultants, the increase in net revenue of $27.0 million was offset by increases in salaries and benefits expense of $18.1 million and general and administrative expenses of $1.7 million. The increase in salaries and employee benefits is primarily a result of a 7.8% increase in headcount over last year and $2.9 million in severance costs associated with a realignment of management in Germany.



In Asia Pacific, operating income was $13.3 million, an increase of $2.9 million, compared to $10.4 million in 2005. The increase in net revenue of $10.0 million was offset by an increase of $5.7 million of salaries and employee benefits expense and $1.3 million of general and administrative expenses.



Corporate expenses increased $7.2 million in 2006, to $31.6 million from $24.4 million in 2005. Of this increase, $2.4 million relates to costs associated with former Highland Partners’ consultants, the majority of which relate to integration costs and fees incurred under a transitional service agreement with the former owner. The remaining increase of $4.8 million was primarily the result of increased fixed salaries and employee benefits expense of $2.0 million due to increased headcount and increased stock-based compensation expense related to restricted stock unit awards. Also included in 2006 is $1.1 million of severance, $0.8 million of stock option expense now recorded in earnings under a new accounting standard and $0.5 million related to the accelerated vesting of certain restricted stock unit awards. In addition, general and administrative expenses increased $0.4 million year over year.



Restructuring charges were $0.4 million and $22.5 million in 2006 and 2005, respectively. Cash outlays in 2006 related to restructuring charges accrued at December 31, 2005 were $7.1 million. The remaining accrued restructuring charges of $12.7 million at December 31, 2006 are expected to be paid over the remaining lease terms of vacated properties.



Net non-operating income . Net non-operating income was $5.2 million in 2006, compared to $7.0 million in 2005.



Net interest income in 2006 increased $0.7 million to $6.3 million primarily due to higher cash balances and higher investment returns on the invested cash.



During 2006, we recognized $0.6 million of realized gains and $0.1 million of unrealized losses, net of the consultants’ share of the gains (losses) and other costs, related to our equity and warrant portfolio. During 2005, we recognized $1.0 million of realized gains and $1.0 million of unrealized losses, net of the consultants’ share of the gains (losses) and other costs, related to our equity and warrant portfolio.



Net other non-operating expense was $1.6 million in 2006, compared to net other non-operating income of $1.4 million in 2005. Other non-operating income (expense) consists primarily of exchange gains and losses on intercompany balances which are denominated in currencies other than the functional currency and are not considered permanent in nature.



Income taxes. In 2006, we reported income before taxes of $55.3 million and recorded an income tax provision of $21.0 million. The effective tax rate for 2006 was 38.0%. This rate reflects a net benefit of $1.6 million from the correction of prior year misstatements associated with refund opportunities for past taxes paid in the U.S. taxing jurisdiction.



In 2005, we reported income before taxes of $28.5 million and recorded an income tax benefit of $10.7 million. An income tax benefit was recorded despite reporting income before taxes because the valuation allowance was reduced throughout the year as tax deductions related to deferred tax assets were used to reduce current taxable income, significantly reducing federal and state income tax provision. Also, the total annual effective tax benefit rate was substantially impacted by additional discrete reversals of portions of the tax valuation allowance established in 2003 against net deferred tax assets. In recent years, we began generating pre-tax book income on a consistent basis and expect to continue to do so. Under SFAS No. 109, “Accounting for Income Taxes,” a company must continually evaluate the need for a valuation allowance and reduce the allowance when it is more likely than not that some or all of the associated benefits of the deferred tax assets will be utilized. In 2005, we concluded it was more likely than not that a majority of our U.S. deferred tax assets would be recoverable and, as a result, reversed $24.6 million of the valuation allowance on our U.S. deferred tax assets.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Our Business

We are a leading provider of executive search and leadership consulting services. We help our clients build leadership teams by facilitating the recruitment, management and deployment of senior executives for their executive management and board positions. Focusing on top-level services offers us several advantages that include access to, and influence with, key decision makers, increased potential for recurring search consulting engagements, higher fees per search, enhanced brand visibility, and leveraged global footprint, which create added barriers to entry for potential competitors. Working at the top of client organizations also allows us to attract and retain high-caliber consultants.

In addition to executive search, we provide a range of leadership consulting services to clients. These services include succession planning, top team effectiveness, executive assessment, talent management, executive development, and M&A human capital effectiveness.

We provide our services to a broad range of clients through the expertise of 393 consultants located in 29 countries throughout the world. Our executive search services are provided on a retained basis. Revenue before reimbursements of out-of-pocket expenses (“net revenue”) consists of retainers and indirect expenses billed to clients. Typically, we are paid a retainer for our executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled. In addition, if the actual compensation of a placed candidate exceeds the estimated compensation, we often are authorized to bill the client for one-third of the excess. Indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search. For leadership consulting services, we are paid an agreed upon fee on a project basis.

Key Performance Indicators

We manage and assess Heidrick & Struggles’ performance through various means, with the primary financial and operational measures including net revenue growth, operating income, operating margin, consultant headcount, new search confirmation trends, consultant productivity measured as revenue per consultant, and average fee per executive search.

Revenue growth is driven by a combination of additional consultants, an increase in executive searches, higher productivity levels and higher average fees per search or service. With the exception of compensation expense, incremental increases in revenue do not necessarily result in proportionate increases in costs, particularly operating and administrative expenses, thus potentially improving operating margins.

The number of consultants, confirmation trends, number of searches completed, productivity levels and the average fee per search will vary from quarter to quarter, affecting revenue growth and operating margin.

Our Compensation Model

Our compensation model closely aligns the interests of our consultants, our Company and our shareholders. Consultants are rewarded for individual performance based on a system that directly ties compensation to the amount of net revenue for which the consultant is responsible. Each quarter, we review and update the expected annual performance and compensation accruals for our consultants. At the group and company level, variable compensation is based, and thus recorded, on our performance against revenue and profitability targets approved by the Human Resources and Compensation Committee of the Board of Directors. As a result, the variable portion of compensation expense may fluctuate significantly from quarter to quarter.

Recent Developments

In September of 2007, our Board of Directors approved the initiation of a quarterly cash dividend payment in the amount of $0.13 per share. On an annual basis, the cash dividend is expected to be $0.52 per share. The first quarterly dividend payment will be made on November 16, 2007 to shareholders of record as of November 2, 2007.

In September of 2007, we announced the appointment of Gary E. Knell to our Board of Directors. Mr. Knell is President and Chief Executive Officer of Sesame Workshop.

On October 7, 2007, Douglas C. Yearley, who as served as a member of our Board of Directors for the past four years, passed away at age 71.

2007 Outlook

In our press release dated October 30, 2007, we increased our 2007 full-year guidance for net revenue to between $600 million and $610 million, an increase from our previous guidance of between $580 million and $595 million provided in July 2007. This updated guidance represents growth in net revenue over 2006 levels of approximately 25 percent to 27 percent. We continue to target a 2007 full-year operating margin of approximately 13 percent.

Following the non-cash tax benefit in the 2007 second quarter related to the reversal of a valuation allowance against certain foreign tax credits, net income and earnings per share are expected to reflect a full-year effective tax rate of between 35 percent and 42 percent, which includes an effective tax rate of 28.9 percent for the first nine months of 2007 and an unusually high fourth quarter tax rate of approximately 70 percent. The 2007 fourth quarter tax rate is a result of a one-time charge related to our plan to incorporate our UK Branch in the 2007 fourth quarter. 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.

Results of Operations

We operate our executive search and leadership consulting services in three geographic regions: the Americas, Europe, and Asia Pacific.

For segment purposes, reimbursements of out-of-pocket expenses classified as revenue are reported separately and therefore are not included in the net revenue by geographic region. We believe that analyzing trends in revenue before reimbursements (net revenue) and analyzing operating expenses as a percentage of net revenue more appropriately reflect our core operations.

Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006

Total revenue . Consolidated total revenue increased $38.7 million, or 29.6%, to $169.6 million in 2007 from $130.9 million in 2006. The increase in total revenue was due primarily to the increase in revenue before reimbursements (net revenue).

Revenue before reimbursements (net revenue) . Consolidated net revenue increased $38.3 million, or 30.7%, to $162.9 million for the three months ended September 30, 2007 from $124.6 million for the three months ended September 30, 2006. The third quarter of 2007 net revenue includes approximately $16 million associated with former Highland Partners’ consultants that joined the Company as part of the acquisition in October of 2006. Strong results from the Financial Services, Industrial and Professional Services industry groups contributed to the year-over-year growth. The number of confirmed executive searches increased 13.6% compared to the third quarter of 2006. The number of executive search consultants increased to 393 as of September 30, 2007, compared to 388 as of December 31, 2006 and 343 as of September 30, 2006. Productivity, as measured by annualized revenue per executive search consultant, increased to $1.6 million from $1.4 million in the 2006 third quarter and the average fee per executive search was $125,500, compared to $108,100 in the 2006 third quarter. The positive impact of exchange rate fluctuations, in Europe and Asia Pacific, resulted in an increase in net revenue of approximately 4 percentage points in the third quarter of 2007 compared to the third quarter of 2006.

Net revenue in the Americas was $82.0 million for the three months ended September 30, 2007, an increase of $14.1 million, or 20.8%, from $67.9 million in the third quarter of 2006. The Professional Services, Health Care/Life Sciences and Technology industry groups realized the largest year-over-year net revenue growth in the third quarter of 2007. The positive impact of exchange rate fluctuations contributed less than one percentage point of revenue growth in the 2007 third quarter. Net revenue in Europe was $58.4 million for the three months ended September 30, 2007, an increase of $16.1 million, or 38.2%, from $42.3 million in the third quarter of 2006. The year-over-year revenue growth in the third quarter of 2007 was driven by strong performance in the Financial Services, Industrial, Professional Services and Health Care/Life Sciences industry groups. The positive impact of exchange rate fluctuations resulted in an increase in net revenue of approximately 9 percentage points in the third quarter of 2007. In Asia Pacific, net revenue was $22.5 million for the three months ended September 30, 2007, an increase of $8.0 million, or 55.0%, from $14.5 million in the third quarter of 2006. The positive impact of exchange rate fluctuations resulted in an increase in net revenue of approximately 8 percentage points in the 2007 third quarter. Business was strong across the region with significant revenue contribution from the Financial Services, Industrial and Heath Care/Life Sciences industry groups.

Salaries and employee benefits . Consolidated salaries and employee benefits expense increased $22.9 million, or 27.4%, to $106.6 million for the three months ended September 30, 2007 from $83.7 million for the three months ended September 30, 2006. Fixed salaries and employee benefits expense increased $10.8 million and performance-related compensation expense increased $12.1 million compared to the same quarter in 2006.

The increase in fixed salaries and employee benefits expense of $10.8 million is primarily attributable to a 15% increase in consultant headcount since the 2006 third quarter. Fixed stock-based compensation expense was higher by $0.2 million in the 2007 third quarter as compared to the 2006 third quarter. Performance-related compensation expense increased $12.1 million as a result of higher net revenue levels and the increase in the number of consultants hired during the last year. Excluding a negative impact of $3.3 million due to exchange rate fluctuations, which management believes provides a better comparison of operational performance, consolidated salaries and employee benefits increased approximately 23% compared to the same quarter in 2006.

During the 2006 third quarter, we revised our policy relating to the vesting of certain restricted stock units upon the eligible retirement of employees that hold such awards. According to Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), this policy revision constituted a modification of those equity awards. As a result, we were required to recognize the original grant date fair value compensation costs over an accelerated service period (i.e., through the earliest date each equity award holder is eligible to retire) for those awards affected by the modification. During the 2006 third quarter, we recorded an additional $1.2 million of compensation expense related to this modification.

As a percentage of net revenue, salaries and employee benefits expense was 65.4% in the third quarter of 2007, compared to 67.2% in the third quarter of 2006.

General and administrative expenses . Consolidated general and administrative expenses increased $7.3 million, or 31.1%, to $30.8 million for the three months ended September 30, 2007 from $23.5 million for the three months ended September 30, 2006. Of this increase, $0.8 million is associated with our acquisition of Highland Partners, including the amortization of intangible assets and costs related to the transitional services agreement. Fees for professional services increased $3.1 million of which $2.1 million relates to certain consulting assignments in Europe which required third party expertise and $1.0 million of legal costs incurred for litigation related to our hiring of some key consultants in the Asia Pacific region (See Note 13, Commitments and Contingencies, for a discussion of the lawsuit to which the Asia Pacific legal charges relate). In the Americas, one of the remaining two principal consultants from our 2000 acquisition of the executive search company, Lynch Miller Moore O’Hara, Inc., retired from the Company triggering the review of the remaining client relationship intangible asset and resulted in $1.0 million of expense in the third quarter of 2007.

The remaining increase of $2.4 million is related to operating expenses associated with higher net revenue levels and higher discretionary spending. Premise-related costs increased by $2.2 million due to new offices and new lease agreements for existing offices, and other operating and infrastructure expenses increased by $0.2 million compared to the 2006 third quarter. Excluding a negative impact of $1.7 million due to exchange rate fluctuations, which management believes provides a better comparison of operational performance, consolidated general and administrative expenses increased approximately 24% compared to the same quarter in 2006.

As a percentage of net revenue, general and administrative expenses were 18.9% in both the third quarter of 2007 and 2006.

Restructuring Charges. In the third quarter of 2007, there were no restructuring charges taken. In the third quarter of 2006, we revised estimates of previously announced restructuring initiatives and reversed $0.1 million of previously recorded restructuring charges, primarily related to the final determination of certain severance accruals and the refinement of cost estimates concerning certain sublet properties.

Operating income . Our consolidated operating income was $25.5 million for the three months ended September 30, 2007 compared to operating income of $17.6 million for the three months ended September 30, 2006.

The increase in operating income of $7.9 million was primarily due to an increase in net revenue of $38.3 million, offset by an increase in salaries and employee benefits expense of $22.9 million and an increase in general and administrative expenses of $7.3 million. The third quarter of 2006 also includes a reversal of $0.1 million of restructuring charges while no such charges were recorded in the third quarter of 2007.

In the Americas, operating income for the three months ended September 30, 2007 increased $2.3 million to $17.2 million from $14.9 million for the three months ended September 30, 2006. The increase is the result of the increase in net revenue of $14.1 million, offset by increases in salaries and employee benefits expense of $9.5 million and general and administrative expenses of $2.3 million. The increase in salaries and employee benefits expense is primarily a result of a 10.9% increase in headcount over the prior year. The increase in general and administrative expenses is due in part to the impairment of intangible assets related to the acquisition of the executive search firm, Lynch Miller Moore O’Hara, Inc., of $1.0 million in the third quarter of 2007. The remaining increase of $1.3 million is primarily related to increased premise-related costs of $0.6 million due to new offices and new lease agreements for existing offices and $0.3 million associated with our acquisition of Highland Partners, including the amortization of intangible assets.

In Europe, operating income for the three months ended September 30, 2007 increased $4.9 million to $10.8 million from $5.9 million for the three months ended September 30, 2006. The increase is the result of the increase in net revenue of $16.1 million, offset by increases in salaries and employee benefits expense of $8.1 million and general and administrative expenses of $3.1 million. The increase in salaries and employee benefits expense is primarily a result of a 12.2% increase in headcount over the prior year. The increase in general and administrative expenses is primarily due to additional professional services fees of $2.4 million of which $2.1 million relates to certain consulting assignments which required third party expertise.

In Asia Pacific, operating income for the three months ended September 30, 2007 was $4.9 million, an increase of $0.4 million, compared to operating income of $4.5 million for the three months ended September 30, 2006. The increase is the result of the increase in net revenue of $8.0 million, offset by increases of $5.6 million in salaries and employee benefits expense and $2.0 million of general and administrative expenses. The increase in general and administrative expenses is primarily due to legal costs in the 2007 third quarter of $1.0 million incurred for litigation related to our hiring of some key consultants in the region.

Corporate expenses for the three months ended September 30, 2007 were $7.5 million compared to $7.8 million for the three months ended September 30, 2006. The decrease of $0.3 million is a result of a decrease of $0.3 million in salaries and employee benefits expense. General and administrative expenses remained consistent at $3.9 million for the three months ended September 30, 2007 and 2006.

Net non-operating income . Net non-operating income was $1.2 million for the three months ended September 30, 2007, compared to $1.6 million for the three months ended September 30, 2006.

Net interest income in the third quarter of 2007 was $2.1 million compared to $1.4 million for the three months ended September 30, 2006. Net interest income is higher than the prior year due to higher interest rates and higher cash and short-term investment balances.

During the three months ended September 30, 2007, we recognized $0.1 million of realized gains and $0.1 million of unrealized losses, net of the consultants’ share of the gains (losses) and other costs, related to our equity and warrant portfolio. During the three months ended September 30, 2006, we recognized $0.4 million of realized gains and $0.1 million of unrealized losses, net of the consultant’s share of the gains (losses) and other costs, related to our equity and warrant portfolio. Net other non-operating expense was $0.9 million for the three months ended September 30, 2007, compared to $0.1 million for the three months ended September 30, 2006. During the third quarter of 2007, we became aware of certain revaluation amounts included in various balance sheet accounts, primarily in the Asia Pacific region, that were not properly stated in prior years. As a result of adjusting these revaluation amounts, we recorded an exchange loss of $0.8 million in the third quarter of 2007. Other non-operating income (expense) consists primarily of foreign currency transaction gains and losses, including those related to intercompany balances not considered permanent in nature, which are denominated in currencies other than the functional currency.

Income taxes. In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate based on expected annual income by jurisdiction, statutory tax rates, and tax planning opportunities available in the various jurisdictions in which we operate. The impact of significant discrete items is separately recognized in the quarter in which they occur.

In the third quarter of 2007, we reported income before taxes of $26.6 million and recorded an income tax provision of $10.5 million. Our effective tax rate for the third quarter of 2007 was 39.4%.

In the third quarter of 2006, we reported income before taxes of $19.2 million and recorded an income tax provision of $8.0 million resulting in an effective tax rate of 41.9%.

SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

2399 Views