Heidrick & Struggles Reports Fourth Quarter and 2013 Financial Results

CHICAGO, Feb. 25, 2014 (GLOBE NEWSWIRE) -- Heidrick & Struggles International, Inc. (Nasdaq:HSII), the premier professional services firm focused on serving the leadership needs of top organizations globally, today announced financial results for its fourth quarter and year ended December 31, 2013.

Highlights:

• Fourth quarter net revenue increased 13.6% (approximately 15% on a constant currency basis) to $118.0 million from $103.9 million in the 2012 fourth quarter.
• Adjusted EBITDA⁽¹⁾ in the fourth quarter improved to $7.4 million and Adjusted EBITDA margin⁽¹⁾ was 6.3%, compared to Adjusted EBITDA of $2.3 million and Adjusted EBITDA margin of 2.2% in the 2012 fourth quarter.
• For the year, net revenue of $462.0 million increased 4.1% (approximately 5% on a constant currency basis) from $443.8 million in 2012.
• Adjusted EBITDA for 2013 improved to $39.7 million and Adjusted EBITDA margin was 8.6%, compared to Adjusted EBITDA of $35.1 million and Adjusted EBITDA margin of 7.9% in 2012.
• Consultant productivity, as measured by net revenue per consultant, increased to $1.5 million in the fourth quarter and to $1.4 million for the year.

Tracy R. Wolstencroft, Heidrick & Struggles' President and Chief Executive Officer said, "Our fourth quarter and full-year 2013 results reflect year-over-year improvements in revenue, adjusted EBITDA margin and productivity. The need for talent and leadership has never been greater, especially in a global economy that is growing increasingly more complex. With the caliber of this firm's brand, people and relationships, I see opportunities to create increasing value for our clients, our shareholders and our colleagues."

⁽¹⁾ Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, stock-based compensation expense, compensation expense associated with Senn Delaney retention awards, Senn Delaney earnout accretion, restructuring charges, and other non-operating income (expense). Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures (see attached reconciliation.)

2013 Fourth Quarter Results

The company regularly reviews its operating segments to determine which segments are material according to specific reporting criteria. As of December 31, 2013 Senn Delaney, the culture-shaping firm acquired on December 31, 2012, now meets the materiality threshold and is required to be separately reported. Therefore, the company will report its results by four segments. Executive Search, including Leadership Consulting, will continue to be reported by the three geographic regions. The fourth segment is comprised of the company's Culture Shaping services across the globe, provided by Senn Delaney.

Consolidated net revenue was $118.0 million in the fourth quarter, up 13.6 percent (approximately 15 percent on a constant currency basis) from $103.9 million in the 2012 fourth quarter. Exchange rate fluctuations negatively impacted net revenue by $1.1 million. Year over year, net revenue increased 10.4 percent in the Americas and 7.7 percent in Europe (approximately 5 percent on a constant currency basis), but declined 3.9 percent in Asia Pacific (an increase of approximately 2 percent on a constant currency basis). Revenue from Culture Shaping services was on plan at $7.2 million.

The company ended the fourth quarter with 293 Executive Search and Leadership Consulting consultants compared to 331 at December 31, 2012. Productivity, as measured by annualized net revenue per consultant, increased to $1.5 million compared to $1.2 million in the 2012 fourth quarter. Specific to Executive Search, the company's primary business, the number of confirmed executive searches in the quarter increased 3.5 percent compared to the 2012 fourth quarter. The average revenue per executive search increased to $118,800 compared to $117,600 in the 2012 fourth quarter. Executive Search revenue was driven by growth in the Consumer Markets, Industrial and Global Technology & Services practices. 

Salaries and employee benefits expense in the 2013 fourth quarter increased 13.6 percent, or $9.9 million, to $83.3 million from $73.3 million in the 2012 fourth quarter. Variable compensation expense increased $11.9 million, primarily related to consultant and company performance. Fixed compensation expense declined $2.0 million as decreases in guarantee and sign-on bonus expense and lower headcount were partially offset by the addition of Senn Delaney. Salaries and employee benefits expense was 70.6 percent of net revenue for the quarter, the same as in the 2012 fourth quarter. 

General and administrative expenses increased 8.5 percent, or $2.6 million, to $33.6 million from $31.0 million in the 2012 fourth quarter.  The addition of Senn Delaney represented $3.0 million in the quarter, including $1.4 million related to the amortization of the acquired intangible assets and $0.5 million associated with the accretion of expected earnout payments. The 2012 fourth quarter included $1.7 million of costs related to the company's acquisition of Senn Delaney.  Excluding Senn Delaney related expenses in both years, general and administrative expenses increased $1.3 million. As a percentage of net revenue, general and administrative expenses were 28.5 percent, compared to 29.8 percent in the 2012 fourth quarter. 

Following the acquisition of Senn Delaney on December 31, 2012, the company began providing Adjusted EBITDA and Adjusted EBITDA margin comparisons, non-GAAP financial measures which management believes more appropriately reflect core operations. Adjusted EBITDA in the 2013 fourth quarter was $7.4 million and Adjusted EBITDA margin was 6.3 percent, compared to Adjusted EBITDA of $2.3 million and Adjusted EBITDA margin of 2.2 percent in the 2012 fourth quarter. 

Operating income in the fourth quarter was $1.1 million and operating margin (operating income as a percentage of net revenue) was 0.9 percent, compared to an operating loss of $0.5 million in the 2012 fourth quarter. 

The company reported net income in the 2013 fourth quarter of $1.5 million and diluted earnings per share of $0.08. The effective tax benefit in the quarter was 115 percent, primarily reflecting the release of a valuation allowance. In the 2012 fourth quarter, the net loss was $0.4 million and diluted loss per share was $0.02 based on an effective quarterly tax rate of 264 percent that primarily reflected losses incurred in certain jurisdictions that could not be benefited for tax purposes due to valuation allowances.

Net cash provided by operating activities in the 2013 fourth quarter was $55.9 million, compared to $55.7 million in the 2012 fourth quarter. Cash and cash equivalents at December, 2013 were $181.6 million ($146.1 million net of debt), compared to $132.8 million at September 30, 2013 ($95.8 million net of debt), and $117.6 million at December 31, 2012.  

2013 Results

For the year ended December 31, 2013 consolidated net revenue of $462.0 million increased 4.1 percent (approximately 5 percent on a constant currency basis) from $443.8 million in 2012.  Exchange rate fluctuations negatively impacted net revenue by $4.3 million.  Net revenue increased 0.9 percent in the Americas, decreased 9.0 percent in Europe, and was flat in Asia Pacific (increased approximately 4 percent on a constant currency basis). Revenue from Culture Shaping services was $24.8 million in 2013.

The average number of Executive Search and Leadership Consulting consultants in 2013 was 317 compared to 342 in 2012. Productivity, as measured by annualized net revenue per consultant, improved to $1.4 million compared to $1.3 million in 2012. Specific to Executive Search, the number of confirmed executive searches in 2013 was 3,567 compared to 3,585 in 2012 and the average revenue per search was $113,400 compared to $113,700 in 2012.

Salaries and employee benefits expense was $319.5 million in 2013, up $10.0 million or 3.2 percent compared to 2012. The increase included $16.6 million of costs related to Senn Delaney, $3.0 million of expense related to a separation agreement with the company's former chief executive officer, and an increase of $11.7 million in variable compensation expense. Those increases were partially offset by a reduction of $21.3 million in fixed compensation related to lower headcount, lower sign-on and minimum guarantee expense and lower amortization of retention related bonus payments.   Salaries and employee benefits expense was 69.2 percent of net revenue 2013, compared to 69.7 percent in 2012. 

General and administrative expense was $126.9 million in 2013, up $13.1 million or 11.5 percent compared to 2012. The increase was primarily related to $12.5 million of expenses related to Senn Delaney, but also reflects an increase in expenses related to the company's proprietary database, unbillable travel, and hiring fees. The year-over-year increase was partially offset by the absence of Senn Delaney acquisition related costs of $1.4 million incurred in 2012.  General and administrative expenses were 27.5 percent of net revenue 2013, compared to 25.6 percent in 2012.

Adjusted EBITDA for 2013 was $39.7 million and Adjusted EBITDA margin was 8.6 percent, compared to Adjusted EBITDA of $35.1 million and Adjusted EBITDA margin of 7.9 percent in 2012. 

Operating income in 2013 was $15.6 million and operating margin was 3.4 percent compared to operating income of $19.6 million and operating margin of 4.4 percent in 2012.  Net income in 2013 was $6.3 million and diluted earnings per share were $0.35, reflecting an effective tax rate of 52.6 percent, compared to net income of $6.2 million in 2012 and diluted earnings per share of $0.34, reflecting an effective tax rate of 69.2 percent. The effective tax rates in both years are higher than the statutory rate primarily due to losses incurred in certain jurisdictions that cannot be benefitted for tax purposes due to valuation allowances.

Segment Review

For segment purposes, reimbursements of out-of-pocket expenses classified as revenue and restructuring charges are reported separately and, therefore, are not included in the results of the four segments. The company believes that analyzing trends in revenue before reimbursements (net revenue) and operating income (loss) more appropriately reflect the company's core operations. 

2013 fourth quarter net revenue in the Americas increased $6.0 million, or 10.4 percent, to $63.8 million year over year. Improvements in consultant productivity and average revenue per executive search, as well as revenue growth in the Consumer Markets, Industrial and Global Technology & Services Search practices drove the increase in revenue, partially offset by declines in the Financial Services and Healthcare & Life Sciences practices and lower consultant headcount.  The fourth quarter operating margin improved to 24.8 percent compared to 21.5 percent in the 2012 fourth quarter mostly reflecting the increase in net revenue. For the year, net revenue in the Americas increased $2.3 million, or 0.9 percent, driven by an increase in consultant productivity, average revenue per search and revenue growth in the Financial Services, Healthcare & Life Sciences and Global Technology & Services Search practices. Operating margin improved to 27.1 percent compared to 24.2 percent in 2012, reflecting the increase in net revenue and a reduction in salaries & employee benefits expense, partially offset by an increase in general and administrative expenses.

Net revenue in Europe increased $1.8 million, or 7.7 percent year over year in the 2013 fourth quarter (approximately 5 percent on a constant currency basis). Exchange rate fluctuations positively impacted year-over-year fourth quarter net revenue by $0.6 million. Fourth quarter revenue growth in the Industrial Search practice and Leadership Consulting as well as an improvement in consultant productivity were partially offset by a revenue decline in the Financial Services practice. Europe reported an operating loss in the fourth quarter of $1.8 million compared to operating income of $0.1 million in the 2012 fourth quarter, reflecting an increase in salaries and employee benefits expense and general and administrative expenses. Net revenue for the year declined $8.9 million or 9.0 percent, as a result of declines in all of the Search practices, except Healthcare & Life Sciences, and in Leadership Consulting services. Europe reported an operating loss of $7.1 million compared to operating income of $3.0 million in 2012, reflecting the decline in net revenue without a corresponding decrease in salaries and employee benefits expense, and an increase in general and administrative expenses. 

Asia Pacific net revenue declined $0.9 million, or 3.9 percent, to $22.0 million in the 2013 fourth quarter (a year-over-year increase of approximately 2 percent on a constant currency basis). Exchange rate fluctuations negatively impacted year-over-year fourth quarter net revenue by $1.4 million. Growth in the Global Technology & Services Search practice was offset by revenue declines in the other practices. The operating loss in Asia Pacific was $0.5 million compared to $0.1 million in the 2012 fourth quarter primarily reflecting the decline in net revenue. For the year, net revenue of $90.4 million in Asia Pacific was unchanged from 2012 (an annual increase of approximately 4 percent on a constant currency basis), but the operating margin improved to 6.0 percent compared to 4.2 percent in 2012 primarily reflecting lower salaries and employee benefits expense.

Culture Shaping revenue in the 2013 fourth quarter was $7.2 million, of which $6.1 million was from the Americas and $1.1 million from Europe. The fourth quarter operating loss was $0.5 million which included $2.5 million related to retention awards, intangible amortization and earnout accretion for Senn Delaney. For the year, Culture Shaping revenue was $24.8 million, of which $21.3 million was from the Americas and $3.5 million from Europe. The operating loss in 2013 was $4.3 million, including $2.3 million related to retention awards, $5.4 million of intangible amortization, and $2.1 million related to earnout accretion for Senn Delaney. 

Global Operations Support decreased 7.4 percent or $1.0 million to $11.9 million in the 2013 fourth quarter compared to the 2012 fourth quarter which included $1.7 million related to costs associated with the company's acquisition of Senn Delaney. For the year, Global Operations Support was $48.1 million, essentially flat compared to $47.9 million in 2012.

2014 First Quarter Outlook

The company is forecasting 2014 first quarter consolidated net revenue of between $110 million and $120 million. Among other factors, this forecast reflects assumptions for the anticipated volume of new Executive Search confirmations, Leadership Consulting assignments, expectations for Culture Shaping services, the current backlog, consultant productivity, consultant retention, the seasonality of its business, the global economic climate and no change in future currency rates.

Wolstencroft added, "I have met or talked to hundreds of people at Heidrick & Struggles in my first three weeks as CEO. What I've learned to date has reinforced my belief that there is a considerable amount of strength within the company and potential for growth.  My initial focus will be on attracting and retaining exceptional talent as well as fostering collaboration and teamwork across our global platform. Achieving profitable long-term growth will be driven by our ability to deliver unparalleled expertise and service to our clients."

Quarterly Conference Call

Executives of Heidrick & Struggles will host a conference call to review the fourth quarter and 2013 results today, February 25, at 9 a.m. Central Time. Participants may access the company's call and supporting slides through the internet 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 International, Inc., (Nasdaq:HSII) is the premier provider of senior-level Executive Search, Culture Shaping and Leadership Consulting services.  For 60 years, we have focused on quality service and built strong leadership teams through our relationships with clients and individuals worldwide. Today, Heidrick & Struggles leadership experts operate from principal business centers in North America, Latin America, Europe and Asia Pacific. For more information about Heidrick & Struggles, please visit 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/(loss), 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 near the non-GAAP financial measure.

The non-GAAP financial measures used within this earnings release are Adjusted EBITDA and Adjusted EBITDA margin. Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, stock-based compensation expense, compensation expense associated with Senn Delaney retention awards, Senn Delaney earnout accretion expense, restructuring charges, 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.

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, our ability to attract, integrate, manage and retain qualified executive search consultants; our ability to develop and maintain strong, long-term relationships with our clients; further 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 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 realize our tax losses; the timing of the establishment or reversal of valuation allowance on deferred tax assets; the mix of profit and loss by country; our reliance on information management systems; any further 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, 2012, under Risk Factors in Item 1A. 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.