Heidrick & Struggles Reports Third Quarter 2017 Financial Results

CHICAGO, Oct. 26, 2017 /PRNewswire/ -- Heidrick & Struggles International, Inc. (Nasdaq: HSII), a premier provider of senior-level executive search, leadership consulting and culture shaping services globally, today announced financial results for its third quarter ended September 30, 2017.

"We are pleased with the continued strong performance of our Executive Search business in the third quarter," said Krishnan Rajagopalan, Heidrick & Struggles President and Chief Executive Officer. "Almost all of our financial and key performance metrics improved in the third quarter.  We also made progress integrating our Leadership Consulting and Culture Shaping operations into a single business, Heidrick Consulting." 

Consolidated net revenue (revenue before reimbursements) increased 11.3 percent, or $16.3 million, to $159.8 million from $143.5 million in the 2016 third quarter.  Excluding the impact of exchange rate fluctuations which positively impacted results by $1.1 million, or 0.8 percent, consolidated net revenue increased 10.6 percent or $15.2 million.

Executive Search net revenue increased 14.1 percent year over year, or $17.9 million, to $144.1 million from $126.3 million in the 2016 third quarter.  Excluding the impact of exchange rate fluctuations, revenue increased 13.3 percent or $16.8 million. Net revenue increased 16.7 percent in the Americas region and 22.1 percent in Europe (18.9 percent on a constant currency basis), but declined 4.2 percent in Asia Pacific.  All of the industry practices contributed to growth in the third quarter.

There were 351 Executive Search consultants at September 30, 2017 compared to 334 at September 30, 2016.  Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.6 million in the 2017 third quarter, the same as in the 2016 third quarter. The number of confirmed searches in the 2017 third quarter increased 4.0 percent compared to the 2016 third quarter and the average revenue per executive search was $128,000 compared to $116,600 in the 2016 third quarter. 

Leadership Consulting net revenue increased 1.6 percent, or $0.2 million, to $8.8 million from $8.6 million in the 2016 third quarter.  There were 18 Leadership Consulting consultants at September 30, 2017 compared to 22 at September 30, 2016.  

Culture Shaping net revenue declined 19.8 percent, or $1.7 million, to $6.9 million from $8.6 million in the 2016 third quarter.  An increase in consulting revenue was offset by a decline in revenue from enterprise license agreements.  There were 17 Culture Shaping consultants at September 30, 2017, the same as at September 30, 2016.

Consolidated salaries and employee benefits expense in the 2017 third quarter increased 13.8 percent, or $13.2 million, to $108.5 million from $95.4 million in the 2016 third quarter.  Fixed compensation expense increased $1.4 million, mostly reflecting compensation related to the acquisitions made in 2016 and new hires, mostly in Search.  Variable compensation expense increased $11.8 million, primarily reflecting higher bonus accruals for Search consultant performance. Salaries and employee benefits expense was 67.9 percent of net revenue for the quarter compared to 66.4 percent in the 2016 third quarter. 

General and administrative expenses increased 3.0 percent, or $1.1 million, to $37.2 million from $36.2 million in the 2016 third quarter.  The increase reflects $3.6 million of expense related to the firm's global consultants' meeting in July and approximately $1.0 million in office occupancy costs, largely offset by savings in other run rate expenses as well as lower than expected acquisition related costs. As a percentage of net revenue, general and administrative expenses were 23.3 percent compared to 25.2 percent in the 2016 third quarter.

Operating income in the 2017 third quarter increased 16.8 percent, or $2.0 million, to $14.0 million.  The operating margin was 8.8 percent.  This compares to operating income of $12.0 million and operating margin of 8.4 percent in the 2016 third quarter.  Adjusted EBITDA⁽¹⁾  in the 2017 third quarter increased $0.5 million to $18.0 million from $17.5 million in the 2016 third quarter.  The Adjusted EBITDA margin⁽¹⁾ (Adjusted EBITDA as a percentage of net revenue) in the 2017 third quarter was 11.2 percent compared to 12.2 percent in the 2016 third quarter.  

Net income in the 2017 third quarter increased 17.7 percent to $8.2 million and diluted earnings per share was $0.43, based on an effective tax rate of 42.7 percent in the quarter and a full-year projected tax rate of approximately 8 percent.  The third quarter tax rate primarily reflects the inability to recognize losses in certain jurisdictions.  The full-year projected tax rate for 2017 mostly reflects the deferred tax benefit on the long-lived assets and goodwill impairment.  In the 2016 third quarter, net income was $6.9 million and diluted earnings per share was $0.37 based on an effective tax rate of 44.0 percent in the quarter.

Net cash provided by operating activities in the 2017 third quarter was $50.2 million, compared to $35.9 million in the 2016 third quarter.  Cash and cash equivalents at September 30, 2017 were $105.7 million compared to $165.0 million at December 31, 2016, and $100.0 million at September 30, 2016. 

Nine Months Results
For the nine months ended September 30, 2017 consolidated net revenue increased 7.0 percent, or $29.5 million, to $452.0 million from $422.6 million in the first nine months of 2016.  Excluding the impact of exchange rate fluctuations which negatively impacted results by $4.9 million, or 1.2 percent, consolidated net revenue increased 8.1 percent or $34.4 million.

Executive Search net revenue increased 8.2 percent, or $30.4 million, to $403.1 million from $372.7 million in the first nine months of 2016.  Excluding the impact of exchange rate fluctuations which negatively impacted results by $3.2 million, or 0.9 percent, executive search net revenue increased 9.0 percent or $33.6 million.  Net revenue increased 7.8 percent in the Americas, 14.9 percent in Europe (approximately 19.4 percent on a constant currency basis), and 1.2 percent in Asia (approximately 1.0 percent on a constant currency basis).    All of the industry practices contributed to growth in the first nine months except the Global Technology & Services practice. Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.5 million for the first nine months of 2017, compared to $1.6 million for the first nine months of 2016.  The number of executive searches confirmed in the first nine months of 2017 increased 4.5 percent and the average revenue per executive search was $116,300 compared to $112,300 for the same period in 2016.   

Leadership Consulting net revenue increased 29.2 percent, or $6.8 million, to $30.0 million from $23.2 million in the first nine months of 2016.  Excluding the impact of exchange rate fluctuations, Leadership Consulting revenue increased 35.2 percent or $8.2 million. The year-over-year increase reflects organic growth as well as contribution from the acquisitions of Decision Strategies International (DSI) in February 2016 and Philosophy IB in September 2016. 

Culture Shaping net revenue declined 29.1 percent, or $7.8 million, to $18.9 million from $26.7 million in the first nine months of 2016.  Excluding the impact of exchange rate fluctuations, Culture Shaping revenue declined 27.9 percent or $7.4 million.  The decline in revenue reflected lower consulting revenue and a decline in enterprise license agreements.

The operating loss for the first nine months of 2017 was $7.8 million and the operating margin was negative 1.7 percent compared to operating income of $27.6 million in the first nine months of 2016 and operating margin of 6.5 percent.  Adjusted EBITDA⁽¹⁾  for the first nine months of 2017 was $46.9 million and Adjusted EBITDA margin was 10.4 percent, compared to Adjusted EBITDA of $46.4 million and Adjusted EBITDA margin of 11.0 percent for the same period of 2016.

Two one-time items contributed to the reported decline in operating income in the first nine months of 2017.  In the first quarter, the company reached a settlement with Her Majesty's Revenue & Customs ("HMRC") in the United Kingdom regarding HMRC's challenge of the tax treatment of certain contributions made to Employee Benefits Trusts ("EBT") between 2002 and 2008.  This settlement resulted in $1.5 million of salaries & employee benefits expense.  In the second quarter, the company recorded a non-cash impairment charge of $39.2 million to write off the carrying value of the intangible assets and goodwill related to its Culture Shaping business.  Absent these two items in the first nine months of 2017, the adjusted operating income⁽²⁾ would have been $32.9 million and the adjusted operating margin⁽²⁾ was 7.3 percent.

In the first nine months of 2016, there were also two one-time items that impacted operating income. In the first quarter of 2016, following the acquisitions of Co Company and Decision Strategies International (DSI), the company realigned its Leadership Consulting business which resulted in approximately $2.1 million of non-recurring expenses, primarily in Europe.  Additionally, the company invested $5.2 million in the first nine months of 2016 in new and existing leadership and client service talent for its Culture Shaping business. 

Net loss for the first nine months of 2017 was $9.4 million and the diluted loss per share was $0.50, reflecting an effective tax rate of 8.7 percent.  Net income for the first nine months of 2016 was $14.9 million and diluted earnings per share were $0.79, reflecting an effective tax rate of 47.0 percent. The tax rate for the first nine months of 2017 reflects the deferred tax benefit on the long-lived assets and goodwill impairment as well as the impact of the net $3.7 million settlement with the HMRC and the non-deductibility of the settlement, as well as other discrete items in the first nine months of the year.  Excluding the EBT settlement and the impairment charge, adjusted net income⁽³⁾ would have been $18.1 million and adjusted diluted earnings per share⁽³⁾ would have been $0.95 based on an effective tax rate of 44.7 percent.   

2017 Fourth Quarter Outlook
The company is forecasting fourth quarter 2017 consolidated net revenue of between $150 million and $160 million. This forecast is based on the average currency rates in September 2017 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 its business.

"Our quarterly results have historically been quite variable, but results for first nine months of 2017 reflect a clearer picture of our performance.  Executive Search revenue increased 8.2 percent, Leadership Consulting revenue increased 29.2 percent, and our adjusted operating margin, as defined above, improved to 7.3 percent for the first nine months of 2017 (GAAP operating margin was negative 1.7 percent.)   We have stabilized the Culture Shaping business and are building a scalable foundation for Heidrick Consulting while driving to achieve operational efficiencies and a better trajectory of profitable growth.   We see good opportunities to grow Executive Search by focusing on growth markets and healthy economies where we should have a larger presence, like our acquisition in Copenhagen."

Quarterly Conference Call
Executives of Heidrick & Struggles will host a conference call to review its third quarter 2017 results today, October 26, at 4:00 pm Central Time. Participants may access the company's call and supporting slides through its website at www.heidrick.com.  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 executive talent and leadership needs of the world's top organizations as a premier provider of leadership consulting, culture shaping and senior-level executive search services. Heidrick & Struggles pioneered the profession of executive search more than 60 years ago. Today, the firm serves as a trusted advisor, providing integrated leadership solutions and helping its clients change the world, one leadership team at a time. www.heidrick.com.

Non-GAAP Financial Measures
This earnings release contains 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 EBITDA, Adjusted EBITDA margin, Adjusted operating income and Adjusted operating margin, and Adjusted diluted earnings per share  ⁽¹⁾Adjusted EBITDA  refers to earnings before interest, taxes, depreciation, intangible amortization, stock-based compensation expense, compensation expense associated with Senn Delaney retention awards, earnout accretion expense related to acquisitions, restructuring charges, goodwill impairment, and other non-operating income (expense).  Adjusted EBITDA margin refers to Adjusted EBITDA (as explained above) as a percentage of net revenue in the same period.  A reconciliation of Adjusted EBITDA to Net Income is provided on the last page of this release.  ⁽²⁾ Adjusted operating income refers to operating income for the first nine months of 2017 that excludes $1.5 million of expense associated with a settlement with the HMRC related to the taxation of a legacy U.K. benefit trust obligation in the 2017 first quarter and a $39.2 million impairment charge in the 2017 second quarter.  Adjusted operating margin refers to Adjusted operating income (as explained above) as a percentage of net revenue in the same period. ⁽³⁾Adjusted net income and adjusted diluted earnings per share reflect the exclusion of a cash settlement with the HMRC related to the taxation of a legacy U.K. benefit trust obligation in the 2017 first quarter, and the exclusion of the $39.2 million impairment charge in the 2017 second quarter.  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.

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, manage and retain qualified consultants and senior leaders; our ability to develop and maintain strong, long-term relationships with our clients; declines in the global economy and our ability to execute successfully through business cycles; the timing, speed or robustness of any future economic recovery; social or political instability in markets where we operate; the impact of the U.K. referendum to leave the European Union (Brexit); the impact of foreign currency exchange rate fluctuations; unfavorable tax law changes and tax authority rulings; price competition; the ability to forecast, on a quarterly basis, variable compensation accruals that ultimately are determined based on the achievement of annual results; our ability to utilize our tax losses; the timing of the establishment or reversal of valuation allowances on deferred tax assets; the mix of profit and loss by country; our reliance on information management systems; any impairment of our goodwill and other intangible assets; and the ability to align our cost structure and headcount with net revenue. 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, 2016, 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.

Press Release Contacts:
H&S Investors & Analysts Contact:
Julie Creed - Vice President, Investor Relations & Real Estate
1 312 496 1774, [email protected]

H&S Media Contact:
Jon Harmon - Vice President, Corporate Communications, Marketing
1 312 496 1593, [email protected]

SOURCE Heidrick & Struggles