Heidrick & Struggles Reports Strong 2018 Third Quarter and Year-to-Date Results

CHICAGO, Oct. 29, 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 third quarter ended September 30, 2018.

Third Quarter Results
Driven by strong results in Executive Search, consolidated net revenue (revenue before reimbursements) increased 17.4%, or $27.8 million, to a quarterly record of $187.6 million from $159.8 million in the 2017 third quarter.  Excluding the impact of exchange rate fluctuations which negatively impacted results by $1.8 million, or 1.0%, consolidated net revenue increased 18.5% or $29.6 million. 

Executive Search net revenue increased 19.4% year over year, or $27.9 million, to $172.1 million from $144.1 million in the 2017 third quarter.  All three regions contributed to this growth with net revenue increasing 20.7% in the Americas, 10.2% in Europe and 28.5% in Asia Pacific.  Every industry practice also contributed to year-over-year growth, with the largest increases in billings in Financial Services, up 23%, and Industrial, up 31%.   

There were 346 Executive Search consultants at September 30, 2018 compared to 351 at September 30, 2017 and 349 at June 30, 2018.  Productivity, as measured by annualized Executive Search net revenue per consultant, was a record $2.0 million in the 2018 third quarter compared to $1.6 million in the 2017 third quarter. The number of confirmed searches in the 2018 third quarter increased 14.3% compared to the 2017 third quarter, and the average revenue per executive search was $133,700 compared to $128,000 in the 2017 third quarter. 

Heidrick Consulting net revenue decreased 1.0%, or $0.2 million, to $15.5 million from $15.7 million in the 2017 third quarter. The decline largely reflects the impact of the new revenue recognition accounting on enterprise license agreements, which increased deferred revenue thereby reducing net revenue in the quarter by approximately $0.9 million.  There were 30 Heidrick Consulting Partners at September 30, 2018 compared to 27 at September 30, 2017 and 31 at June 30, 2018. 

Consolidated salaries and employee benefits expense in the 2018 third quarter increased 23.4%, or $25.4 million, to $133.9 million from $108.5 million in the 2017 third quarter.  Fixed compensation expense increased $9.3 million largely reflecting higher costs for talent acquisition and retention.  Variable compensation expense increased $16.1 million, primarily reflecting higher bonus accruals for Executive Search consultant performance. Salaries and employee benefits expense was 71.4% of net revenue for the quarter compared to 67.9% in the 2017 third quarter. 

General and administrative expenses declined 11.2%, or $4.2 million, to $33.1 million from $37.2 million in the 2017 third quarter.   Savings were achieved in a number of expense categories, but lower internal travel expense, a reduction in the use of external third-party consultants, lower IT communications costs, and lower bad debt expense were the primary drivers of the decline in G&A expense.  As a percentage of net revenue, general and administrative expenses were 17.6% compared to 23.3% in the 2017 third quarter.

Operating income in the 2018 third quarter increased 46.8%, or $6.6 million, to $20.6 million from $14.0 million in the 2017 third quarter.  The operating margin (operating income as a percentage of net revenue) improved to 11.0% compared to operating margin of 8.8% in the same quarter of 2017.   Adjusted EBITDA in the 2018 third quarter increased $8.5 million to $26.4 million from $18.0 million in the 2017 third quarter.  The Adjusted EBITDA margin (Adjusted EBITDA as a percentage of net revenue) in the 2018 third quarter was 14.1% compared to 11.2% in the 2017 third quarter.  The improvements in operating income and Adjusted EBITDA were primarily driven by the increase in revenue from Executive Search.

In the 2018 third quarter, net income more than doubled to $16.5 million and diluted earnings per share was $0.85 with an effective tax rate of 29.0% in the quarter and a full-year projected tax rate in the low 30% range.   This compares to net income of $8.2 million in the 2017 third quarter and diluted earnings per share of $0.43, with an effective tax rate of 42.7%.

Net cash provided by operating activities in the 2018 third quarter was $84.2 million, compared to $50.2 million in the 2017 third quarter.  Cash and cash equivalents at September 30, 2018 were $164.2 million compared to $207.5 million at December 31, 2017, and $105.7 million at September 30, 2017. 

Nine Months Results
For the nine months ended September 30, 2018 consolidated net revenue of $530.7 million increased 17.4%, or $78.7 million, from $452.0 million in the first nine months of 2017.  Excluding the impact of exchange rate fluctuations which positively impacted results by $6.5 million, or 1.2%, consolidated net revenue increased 16.0% or $72.2 million.  The company's adoption of ASC 606 on January 1, 2018, increased consolidated net revenue in the first nine months of 2018 by $1.3 million compared to the historical method of revenue recognition. 

Executive Search net revenue increased 20.2%, or $81.2 million, to $484.4 million from $403.1 million in the first nine months of 2017.  Excluding the impact of exchange rate fluctuations which positively impacted results by $5.6 million, or 1.2%, consolidated net revenue increased $75.6 million or 18.8%.  Net revenue increased 18.9% in the Americas, 22.0% in Europe (approximately 15.6% on a constant currency basis), and 22.3% in the Asia Pacific region (approximately 22.0% on a constant currency basis).    All of the industry practices contributed to growth in the first nine months of 2018. Productivity was $1.8 million per executive search consultant for the first nine months of 2018 compared to $1.5 million in the first nine months of 2017.  The number of executive searches confirmed in the first nine months of 2018 increased 13.7% and the average revenue per executive search was $122,800 compared to $116,300 for the same period in 2017. 

Heidrick Consulting net revenue declined 5.2%, or $2.5 million, to $46.3 million, from $48.9 million in the first nine months of 2017.  Excluding the impact of exchange rate fluctuations, Heidrick Consulting revenue declined 7.0% or $3.4 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, thereby reducing net revenue by approximately $2.7 million. 

Operating income increased to $52.2 million and the operating margin improved to 9.8%.  This compares to an operating loss of $7.8 million for the first nine 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.  Also 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 nine months of 2018 increased to $68.4 million and Adjusted EBITDA margin was 12.9%, compared to Adjusted EBITDA of $46.9 million and Adjusted EBITDA margin of 10.4% for the same period of 2017.

Net income for the first nine months of 2018 was $38.1 million and diluted earnings per share was $1.96, with an effective tax rate of 30.1%.  Net loss for the first nine months of 2017 was $9.4 million and diluted loss per share was $0.50, with an effective tax rate of 8.7%. 

New Credit Facility
Taking advantage of favorable market conditions to lower costs and extend the term of its credit facility, the company executed a new Credit Agreement on October 26, 2018 led by Bank of America Merrill Lynch and SunTrust Robinson Humphrey, Inc., supported further by HSBC Bank.  This Agreement provides for a senior unsecured revolving credit facility in an aggregate amount of $175 million, with an optional increase up to $250 million in aggregate principal amount, subject to the lenders' approval and provided the company is in compliance with certain conditions of the Agreement.  Prior to this Agreement, the company had a $100 million revolving credit facility, with an optional increase up to $150 million.  The new credit facility, expiring in October 2023, provides the company increased liquidity at a lower cost.

2018 Outlook
The company is forecasting 2018 fourth quarter consolidated net revenue of between $170 million and $180 million. This forecast is based on the average currency rates in September 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.  There will always be quarter-to-quarter variability that is difficult to predict given the nature of our business and global footprint, but we are on track to deliver a record year in net revenue and are well positioned to create shareholder value by executing on our 2018 initiatives."

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 third quarter by $0.1 million compared to the historical method of revenue recognition.  For the first nine months of 2018, the adoption of ASC 606 increased revenue by $1.3 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 third quarter revenue by segment:

• Executive Search- The adoption of the new revenue recognition standard increased revenue in the 2018 third quarter by approximately $0.7 million, reflecting a $0.5 million reduction in the Americas, a $0.2 million increase in Europe, and a $1.1 million increase in Asia Pacific.
• Heidrick Consulting-- The adoption of the new revenue recognition standard reduced enterprise revenue in the 2018 third quarter by approximately $0.9 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 third quarter cash dividend of $0.13 per share payable on November 23, 2018 to shareholders of record at the close of business on November 9, 2018. 

Quarterly Conference Call
Executives of Heidrick & Struggles will host a conference call to review its 2018 third quarter financial results today, October 29, 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 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 EBITDA and Adjusted EBITDA margin.  A reconciliation of Adjusted EBITDA to Net Income is provided on the last schedule of this release. 

• Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, stock-based compensation expense, earnout accretion expense related to acquisitions, restructuring and impairment charges, and other non-operating income (expense).
• Adjusted EBITDA margin refers to Adjusted EBITDA as a percentage of net revenue in the same period.

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:
Nina Chang – Vice President, Corporate Communications
+1 212 551 1634, nchang@heidrick.com

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