Heidrick & Struggles Reports Strong 2018 Second Quarter Results

CHICAGO, July 30, 2018 /PRNewswire/ -- Heidrick & Struggles International, Inc. (Nasdaq: HSII), a premier provider of executive search, leadership assessment and development, organization and team effectiveness, and culture shaping services globally, today announced financial results for its second quarter ended June 30, 2018.

Driven by strong results in Executive Search, consolidated net revenue (revenue before reimbursements) in the 2018 second quarter increased 20.3%, or $30.8 million, to a quarterly record of $183.1 million from $152.2 million in the 2017 second quarter.  Excluding the impact of exchange rate fluctuations which positively impacted results by $2.8 million, or 1.6%, consolidated net revenue increased 18.4% or $28.0 million. 

On January 1, 2018, the company adopted ASC 606, Revenue from Contracts with Customers, and applied the modified retrospective method, which involves recognizing the cumulative effect of applying the guidance at the date of initial application with no restatement of the comparative periods presented. This adoption reduced consolidated net revenue in the 2018 second quarter by $1.0 million compared to the historical method of revenue recognition.  Additional information about the impact of the adoption of ASC 606 is provided at the end of the release.

Executive Search net revenue increased 23.8% year over year, or $32.0 million, to $166.5 million from $134.5 million in the 2017 second quarter.  All three regions contributed to this growth with net revenue increasing 23.6% in the Americas, 22.9% in Europe and 25.6% in the Asia Pacific region.  The Global Technology & Services, Financial Services, Consumer Markets and Industrial practices were key drivers of growth with billings up 52%, 30%, 31% and 19% respectively, compared to the 2017 second quarter.

There were 349 Executive Search consultants at June 30, 2018 compared to 355 at June 30, 2017 and 349 at March 31, 2018.  Productivity, as measured by annualized Executive Search net revenue per consultant, was a record $1.9 million in the 2018 second quarter compared to $1.5 million in the 2017 second quarter. The number of confirmed searches in the 2018 second quarter increased 22.7% compared to the 2017 second quarter, and the average revenue per executive search was $119,400 compared to $118,300 in the 2017 second quarter. 

In the 2018 second quarter, Heidrick Consulting net revenue increased 16.3% sequentially to $16.6 million compared to the 2018 first quarter.  A year-over-decline of 6.3%, or $1.1 million, from $17.7 million in the 2017 second quarter largely reflects the impact of new revenue recognition accounting on enterprise license agreements, which increased deferred revenue compared to prior quarters by approximately $0.8 million.  With the integration of Leadership Consulting and Culture Shaping complete in early 2018, the company returned to strategic hiring and there were 31 Heidrick Consulting Partners at June 30, 2018, compared to 28 at March 31, 2018. 

Consolidated salaries and employee benefits expense in the 2018 second quarter increased 23.5%, or $24.3 million, to $127.7 million from $103.4 million in the 2017 second quarter.  Fixed compensation expense increased $6.2 million largely reflecting higher costs for talent acquisition and retention, base salaries and payroll taxes.  Variable compensation expense increased $18.1 million, primarily reflecting higher bonus accruals for Executive Search consultant performance. Salaries and employee benefits expense was 69.7% of net revenue for the quarter compared to 67.9% in the 2017 second quarter. 

General and administrative expenses declined 3.1%, or $1.2 million, to $36.9 million from $38.1 million in the 2017 second quarter.   Savings were achieved in a number of expense categories, with the largest being a decline in external third-party consultants to perform client work and lower intangible amortization due to intangible asset impairment in the prior year.  Savings were partially offset by an increase in professional services fees and expenses associated with three regional meetings in the quarter.  As a percentage of net revenue, general and administrative expenses were 20.2% compared to 25.0% in the 2017 second quarter.

Operating income in the 2018 second quarter increased to $18.5 million and the operating margin (operating income as a percentage of net revenue) improved to 10.1%.   This compares to an operating loss in the 2017 second quarter of $28.4 million that included an impairment charge of $39.2 million to write off the carrying value of the intangible assets and goodwill related to the company's culture shaping business.  Excluding the impairment charge, operating income in the 2017 second quarter would have been $10.7 million and the operating margin would have been 7.1%.   Adjusted EBITDA in the 2018 second quarter increased $6.9 million to $23.6 million compared to $16.7 million in the 2017 second quarter.  The Adjusted EBITDA margin (Adjusted EBITDA as a percentage of net revenue) in the 2018 second quarter was 12.9% compared to 10.9% in the 2017 second quarter.  The improvements in operating income and adjusted EBITDA were primarily driven by the increase in revenue from Executive Search.

In the 2018 second quarter, net income was $11.5 million and diluted earnings per share was $0.59 with an effective tax rate of 37.7% in the quarter and a full-year projected tax rate in the mid-30% range.   This compares to a net loss of $18.2 million in the 2017 second quarter and diluted loss per share of $0.97 that mostly reflected the impact of the impairment charge of $39.2 million.

Net cash provided by operating activities in the 2018 second quarter was $30.5 million, compared to $24.3 million in the 2017 second quarter.  Reflecting the payment of bonuses and the repayment of $12 million that was outstanding under our Credit Agreement, cash and cash equivalents at June 30, 2018 were $85.8 million compared to $207.5 million at December 31, 2017, and $58.2 million at June 30, 2017. 

Six Months Results
For the six months ended June 30, 2018 consolidated net revenue of $343.1 million increased 17.4%, or $50.9 million, from $292.2 million in the first six months of 2017.  Excluding the impact of exchange rate fluctuations which positively impacted results by $8.3 million, or 2.5%, consolidated net revenue increased 14.6% or $42.6 million.  The company's adoption of ASC 606 on January 1, 2018, increased consolidated net revenue in the first six months of 2018 by $1.5 million compared to the historical method of revenue recognition. 

Executive Search net revenue in the first six months of 2018 increased 20.6%, or $53.3 million, to $312.3 million from $259.0 million in the first six months of 2017.  Excluding the impact of exchange rate fluctuations which positively impacted results by $7.4 million, or 2.4%, consolidated net revenue increased $45.9 million or 17.7%.  Net revenue increased 18.0% in the Americas, 29.1% (approximately 18.1% on a constant currency basis) in Europe, and 19.1% (approximately 16.5% on a constant currency basis) in the Asia Pacific region.    All of the industry practices contributed to growth in the first six months except the Healthcare and Life Sciences practice. Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.8 million for the first six months of 2018 compared to $1.5 million in the first six months of 2017.  The number of executive searches confirmed in the first six months of 2018 increased 13.5% and the average revenue per executive search was $117,600 compared to $110,600 for the same period in 2017. 

Following a significant integration and restructuring process, the Leadership Consulting and Culture Shaping businesses were combined into one business, Heidrick Consulting, effective January 1, 2018.  Heidrick Consulting net revenue declined 7.2%, or $2.4 million, to $30.8 million from $33.2 million in the first six months of 2017.  Excluding the impact of exchange rate fluctuations, Heidrick Consulting revenue declined 10.0% or $3.3 million.  The year-over-year decline largely reflects the impact of new revenue recognition accounting on enterprise license agreements, which increased deferred revenue compared to prior quarters by approximately $1.8 million. 

Operating income for the first six months of 2018 increased to $31.6 million and the operating margin (operating income as a percentage of net revenue) improved to 9.2%.  This compares to an operating loss of $21.8 million for the first six months of 2017, which reflected two unusual items.  In the 2017 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 2017 second quarter, the company recorded a non-cash impairment charge of $39.2 million to write off the carrying value of intangible assets and goodwill related to its Culture Shaping business.

Adjusted EBITDA⁽¹⁾  for the first six months of 2018 increased to $42.0 million and Adjusted EBITDA margin was 12.2%, compared to Adjusted EBITDA of $29.0 million and Adjusted EBITDA margin of 9.9% for the same period of 2017.

Net income for the first six months of 2018 was $21.6 million and the diluted earnings per share was $1.12, reflecting an effective tax rate of 30.9%.  Net loss for the first six months of 2017 was $17.6 million and diluted loss per share was $0.94, reflecting an effective tax rate of 28.4%. 

2018 Outlook
The company is forecasting 2018 third quarter consolidated net revenue of between $170.0 million and $180.0 million. This forecast is based on the average currency rates in June 2018 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.  

Rajagopalan added, "Our outlook for the market demand for executive search and leadership advisory services continues to be positive, and we are well positioned to create shareholder value by executing on our 2018 initiatives.   We will continue to identify and deliver the very best leaders to our clients around the world using our proprietary suite of assessment tools, and then help unlock the power of those leaders, and the teams and organizations they work in, to fast track their success."

Impact of Adoption of ASC 606
On January 1, 2018, the company adopted ASC 606, Revenue from Contracts with Customers, and applied the modified retrospective method, which involves recognizing the cumulative effect of applying the guidance at the date of initial application with no restatement of the comparative periods presented. This adoption reduced consolidated net revenue in the 2018 second quarter by $1.0 million compared to the historical method of revenue recognition.  For the first six months of 2018, the adoption of ASC 606 increased revenue by $1.5 million.  The new guidance primarily impacts the company's revenue recognition methodology for executive search upticks and for enterprise licenses to use its culture shaping proprietary tools, referred to as enterprise agreements.  The company now estimates uptick revenue and recognizes this revenue over the life of the executive search as opposed to recognition upon the placement of a candidate.  Enterprise agreements are now recognized over a longer term due to certain renewal options included in the contract.  The following is a summary of the impact on 2018 second quarter revenue by segment:

• Executive Search- The adoption of the new revenue recognition standard reduced revenue in the 2018 second quarter by approximately $0.2 million, reflecting a $0.2 million increase in the Americas, a $0.7 million reduction in Europe, and a $0.3 million increase in Asia Pacific.
• Heidrick Consulting-- The adoption of the new revenue recognition standard reduced enterprise revenue in the 2018 second quarter by approximately $0.8 million.

For the year ending December 31, 2018, the company anticipates that the change in revenue recognition will not be material to consolidated net revenue, subject to variability in the number, timing and value of Executive Search confirmations as well as enterprise license agreements.

Dividend
The Board of Directors has declared the second quarter cash dividend of $0.13 per share payable on August 24, 2018 to shareholders of record at the close of business on August 10, 2018. 

Quarterly Conference Call
Executives of Heidrick & Struggles will host a conference call to review its 2018 second quarter financial results today, July 30, 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 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 60 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 and Adjusted EBITDA margin. 

• Adjusted operating income refers to operating income in the 2017 second quarter that excludes impairment charges 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.
• Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, stock-based compensation expense, earnout accretion expense related to acquisitions, 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 schedule of this release.

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, 2017, 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, Real Estate & Investor Relations
1 312 496 1774, jcreed@heidrick.com

H&S Media Contact:
Jon Harmon - Vice President, Corporate Communications
1 312 496 1593, jharmon@heidrick.com

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SOURCE Heidrick & Struggles International, Inc.