Heidrick & Struggles Reports 2019 Third Quarter and Nine Month Results

CHICAGO, Oct. 28, 2019 /PRNewswire/ -- Heidrick & Struggles International, Inc. (Nasdaq: HSII), today announced financial results for its third quarter and nine months ended September 30, 2019.

Highlights:

• Q3 net revenue of $182.2 million
• Q3 operating margin of 7.9%; adjusted operating margin* of 10.2%
• Q3 diluted EPS of $0.51; adjusted diluted EPS* of $0.70
• Completed Latin American acquisition, expanding search consultant headcount by 13; forecasted to be EPS accretive in Q4

* Adjusted for a one-time restructuring charge of $4.1 million, as referenced in the "Supplemental Financial Information Non-GAAP Measures" section.

"We are pleased to be keeping pace with last year's record revenue, despite some geographic variability," stated Heidrick & Struggles' President and Chief Executive Officer, Krishnan Rajagopalan.  "Moreover, strong focus on our business operations has generated increases in year-to-date operating income, operating margin, net income and earnings per share, all on an adjusted basis. Cross collaboration between Executive Search and Heidrick Consulting continues to bear fruit as evidenced by Heidrick Consulting's third quarter revenue growth both sequentially and year-over-year.  We are also very excited about our acquisition in Brazil, which gives us a strong platform to grow throughout Latin America, where we see great opportunities for both Executive Search and Heidrick Consulting." 

Mr. Rajagopalan concluded, "Looking ahead, we are advancing important long-term initiatives that we expect will broaden our capabilities and drive growth in the years to come, while enhancing our data analytics as we focus on delivering a fully integrated premium offering to our clients.  Importantly, our market position and cash flow remain strong.  We believe this strategically positions our company to capitalize on a variety of opportunities, which we expect will create future value for our shareholders."

2019 Third Quarter Results
On September 23, 2019, the Company acquired 2GET, one of the leading search firms in Brazil.  This transaction provides the Company with a strong platform for Latin America growth.  As a result, the Company recorded a restructuring charge of $4.1 million in the quarter in connection with related employee, facility and legal costs associated with the transition away from its legacy Brazil operations.  The acquisition of 2GET, coupled with the transition away from the Company's legacy operations, is expected to be accretive to earnings per share.       

Consolidated net revenue (revenue before reimbursements) of $182.2 million declined 2.9%, or $5.4 million, from $187.6 million in the 2018 third quarter.  Excluding the impact of exchange rate fluctuations, consolidated net revenue declined 1.6%, or $2.9 million.

Executive Search net revenue of $166.5 million declined 3.2%, or $5.6 million, from $172.1 million in the 2018 third quarter.  Excluding the impact of exchange rate fluctuations, Executive Search net revenue declined 2.0%, or $3.4 million.  Net revenue increased 2.2% in the Americas (2.3% increase on a constant currency basis), decreased 7.0% in Europe (2.6% decrease on a constant currency basis) and decreased 18.9% in Asia Pacific (17.4% decrease on a constant currency basis).  Growth in the Consumer Markets and Global Technology & Services practices was offset by declines in the other three industry practices.

There were 380 Executive Search consultants at September 30, 2019 compared to 346 at September 30, 2018 and 371 at June 30, 2019.  Thirteen consultants were added in the 2019 third quarter following the Company's acquisition of 2GET in Brazil.  Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.8 million compared to $2.0 million in the 2018 third quarter.  The average revenue per executive search was $133,500 compared to $133,700 in the 2018 third quarter, while the number of confirmed searches declined 3.1% compared to the 2018 third quarter.

Heidrick Consulting net revenue increased 1.0%, or $0.1 million, to $15.7 million from $15.5 million in the 2018 third quarter.  Excluding the impact of exchange rate fluctuations which negatively impacted results by 2.0%, or $0.3 million, Heidrick Consulting net revenue increased 3.1%, or $0.5 million.  There were 71 Heidrick Consulting consultants at September 30, 2019 compared to 66 at September 30, 2018 and 68 at June 30, 2019. 

Consolidated salaries and benefits expense declined 2.6%, or $3.5 million, to $130.5 million from $133.9 million in the 2018 third quarter.  Fixed compensation expense decreased $0.6 million and variable compensation expense declined $2.8 million, mostly related to lower revenue in the quarter.  Salaries and benefits expense were 71.6% of net revenue for the quarter compared to 71.4% for the 2018 third quarter. 

General and administrative expenses were $33.1 million, the same as in the 2018 third quarter.  As a percentage of net revenue, general and administrative expenses were 18.2% compared to 17.6% in the 2018 third quarter.

Including the previously mentioned restructuring charges, operating income was $14.5 million compared to $20.6 million in the 2018 third quarter.  Operating margin was 7.9% in the 2019 third quarter compared to 11.0% in the 2018 third quarter.  Excluding restructuring charges, adjusted operating income was $18.6 million and adjusted operating margin was 10.2%.    

Net income in the 2019 third quarter was $9.9 million and diluted earnings per share was $0.51 with an effective tax rate of 32.9%.  This compares to net income of $16.5 million and diluted earnings per share of $0.85 with an effective tax rate of 29.0% in last year's third quarter.  Excluding restructuring charges, adjusted net income was $13.7 million and adjusted diluted earnings per share was $0.70.  The full-year projected tax rate is in the low 30% range excluding any one-time items.

Adjusted EBITDA in the 2019 third quarter was $23.9 million compared to $26.4 million in the 2018 third quarter.  Adjusted EBITDA margin was 13.1% compared to 14.1% in the 2018 third quarter.  The declines in adjusted EBITDA and adjusted EBITDA margin were primarily driven by lower revenue in the quarter.    

Net cash provided by operating activities was $86.5 million in the 2019 third quarter, compared to $84.2 million in the 2018 third quarter.  Cash and marketable securities at September 30, 2019 were $218.9 million, compared to $279.9 million at December 31, 2018, and $164.2 million at September 30, 2018.  The company's cash position typically builds throughout the year as bonuses are accrued, and which are mostly paid out in the first quarter. 

2019 Nine Months Results
For the nine months ended September 30, 2019, consolidated net revenue of $526.9 million decreased 0.7%, or $3.8 million, from $530.7 million in the first nine months of 2018.  Excluding the impact of exchange rate fluctuations, consolidated net revenue increased 1.2% or $6.5 million. 

Operating income for the first nine months of 2019 was $49.2 million compared to $52.2 million in the same period of 2018.  Operating margin was 9.3% compared to 9.8% in the first nine months of 2018.  Excluding restructuring charges of $4.1 million in the 2019 third quarter, adjusted operating income was $53.3 million and adjusted operating margin was 10.1%.

Net income for the first nine months of 2019 was $36.3 million and diluted earnings per share was $1.86, with an effective tax rate of 31.7%.  This compares to net income of $38.1 million and diluted earnings per share of $1.96 in the first nine months of 2018, with an effective tax rate of 30.1%.  Excluding restructuring charges of $4.1 million in the 2019 third quarter, adjusted net income was $40.0 million and adjusted diluted earnings per share was $2.05. 

Adjusted EBITDA for the first nine months of 2019 increased to $68.6 million and Adjusted EBITDA margin improved to 13.0%, compared to Adjusted EBITDA of $68.4 million and Adjusted EBITDA margin of 12.9% for the same period in 2018.

2019 Fourth Quarter Outlook 
The company expects 2019 fourth quarter consolidated net revenue of between $170 million and $180 million.  The outlook is based on the average currency rates in September 2019 and reflects, among other factors, management's assumptions for the anticipated volume of new Executive Search confirmations, Heidrick Consulting assignments, the current backlog, consultant productivity, consultant retention, and the seasonality of the Company's business.  

Dividend
The Board of Directors has declared a 2019 fourth quarter cash dividend of $0.15 per share payable on November 22, 2019 to shareholders of record at the close of business on November 8, 2019.  

Quarterly Conference Call
Executives of Heidrick & Struggles will host a conference call to review its 2019 third quarter financial results today, October 28 at 5:00 pm Eastern Time. Participants may access the company's call and supporting slides through its website at www.heidrick.com or by dialing (647)689-6618, conference ID# 1358548.  For those unable to participate on the live call, a webcast and copy of the slides will be archived at www.heidrick.com and available for up to 30 days following the investor call.

About Heidrick & Struggles International, Inc.
Heidrick & Struggles (Nasdaq: HSII) serves the senior-level talent and leadership needs of the world's top organizations as a trusted advisor across executive search, leadership assessment and development, organization and team effectiveness, and culture shaping services. Heidrick & Struggles pioneered the profession of executive search more than 65 years ago. Today, the firm provides integrated leadership solutions to help our clients change the world, one leadership team at a time. ® www.heidrick.com

Non-GAAP Financial Measures
To supplement the financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), Heidrick & Struggles presents certain non-GAAP financial measures. A "non-GAAP financial measure" is defined as a numerical measure of a company's financial performance that excludes or includes amounts different than the most directly comparable measure calculated and presented in accordance with GAAP in the statements of comprehensive income, balance sheets or statements of cash flow of the company. Pursuant to the requirements of Regulation G, this earnings release contains the most directly comparable GAAP financial measure to the non-GAAP financial measure.

The non-GAAP financial measures used within this earnings release are Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Diluted Earnings Per Share.  These measures are presented because management uses this information to monitor and evaluate financial results and trends. Management believes this information is also useful for investors. Reconciliations of these non-GAAP financial measures with the most directly comparable measures calculated and presented in accordance with GAAP are provided as schedules attached to this release.

• Adjusted operating income refers to operating income excluding restructuring charges.
• Adjusted operating margin refers to adjusted operating income as a percentage of net revenue in the same period.
• Adjusted Net Income and Adjusted Diluted Earnings per Share reflect the exclusion of restructuring charges, net of tax.
• Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, equity- settled stock compensation expense, earnout accretion expense related to acquisitions, restructuring charges, and other non-operating income (expense).
• Adjusted EBITDA margin refers to Adjusted EBITDA as a percentage of net revenue in the same period.

Safe Harbor Statement
This press release contains forward-looking statements. The forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate and management's beliefs and assumptions. Forward-looking statements may be identified by the use of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "projects," "forecasts," and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in the forward-looking statements. Factors that may affect the outcome of the forward-looking statements include, among other things, leadership changes, our ability to attract, integrate, develop, manage and retain qualified consultants and senior leaders; our ability to prevent our consultants from taking our clients with them to another firm; our ability to maintain our professional reputation and brand name; the fact that our net revenue may be affected by adverse economic conditions; our clients' ability to restrict us from recruiting their employees; the aggressive competition we face; our heavy reliance on information management systems; the fact that we face the risk of liability in the services we perform; the fact that data security, data privacy and data protection laws and other evolving regulations and cross-border data transfer restrictions may limit the use of our services and adversely affect our business; social, political, regulatory and legal risks in markets where we operate; the impact of foreign currency exchange rate fluctuations; the fact that we may not be able to align our cost structure with net revenue; unfavorable tax law changes and tax authority rulings; our ability to realize our tax losses; the timing of the establishment or reversal of valuation allowance on deferred tax assets; any impairment of our goodwill, other intangible assets and other long-lived assets; our ability to execute and integrate future acquisitions; the fact that we have anti-takeover provisions that make an acquisition of us difficult and expensive; our ability to access additional credit; and the increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks that could pose a risk to our systems, networks, solutions, services and data. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  For more information on the factors that could affect the outcome of forward-looking statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2018, under Risk Factors in Item 1A and our quarterly filings with the SEC. We caution the reader that the list of factors may not be exhaustive. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Contacts:
Investors & Analysts:
Suzanne Rosenberg - Vice President, Investor Relations
+1 212 551 0554, [email protected]

Media:
Nina Chang – Vice President, Corporate Communications
+1 212 551 1634, [email protected]

SOURCE Heidrick & Struggles International, Inc.