Press Release

CHICAGO, Feb. 26, 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 fourth quarter and fiscal year ended December 31, 2017.

"Our record net revenue in 2017 was driven by the growth of Executive Search in all three regions and by Leadership Consulting," said Krishnan Rajagopalan, Heidrick & Struggles President and Chief Executive Officer. "We also made significant strides in lowering the run rate of our general and administrative and business support expenses. These actions allow us to shift the focus of our capital to investments that support the growth of our businesses, including technology, while helping the firm achieve improved operating margins on a more sustained basis."

2017 Fourth Quarter Results
Consolidated net revenue (revenue before reimbursements) increased 6.0 percent, or $9.6 million, to $169.4 million from $159.8 million in the 2016 fourth quarter. Excluding the impact of exchange rate fluctuations which positively impacted results by $3.6 million, or 2.1 percent, consolidated net revenue increased 3.8 percent or $6.0 million.

Executive Search net revenue increased 10.6 percent year over year, or $14.2 million, to $148.9 million from $134.7 million in the 2016 fourth quarter. Excluding the impact of exchange rate fluctuations, revenue increased 8.3 percent or $11.2 million. All three regions contributed to growth in Search. Net revenue increased 10.3 percent in the Americas region, 16.1 percent in Europe (7.8 percent on a constant currency basis), and 3.9 percent in Asia Pacific (2.5 percent on a constant currency basis). The four largest industry practices—Financial Services, Industrial, Global Technology & Services, and Consumer Markets— all contributed to growth in the fourth quarter.

There were 346 Executive Search consultants at December 31, 2017 compared to 335 at December 31, 2016. Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.7 million in the 2017 fourth quarter compared to $1.6 million in the 2016 fourth quarter. The number of confirmed searches in the 2017 fourth quarter increased 4.5 percent compared to the 2016 fourth quarter and the average revenue per executive search was $132,800 compared to $126,300 in the 2016 fourth quarter. 

Leadership Consulting net revenue declined 27.9 percent, or $4.3 million, to $11.3 million from $15.6 million in the 2016 fourth quarter. Excluding the impact of exchange rate fluctuations, Leadership Consulting revenue declined 30.5 percent or $4.8 million. The year-over-year decline mostly reflects the timing of large projects and the resulting quarterly variability of results.  There were 19 Leadership Consulting consultants at December 31, 2017 compared to 22 at December 31, 2016.  

Culture Shaping net revenue declined 3.5 percent, or $0.3 million, to $9.2 million from $9.5 million in the 2016 fourth quarter. Excluding the impact of exchange rate fluctuations, Culture Shaping revenue declined 4.7 percent or $0.4 million. There were 17 Culture Shaping consultants at December 31, 2017, the same as at December 31, 2016.

Consolidated salaries and employee benefits expense in the 2017 fourth quarter increased 11.6 percent, or $13.0 million, to $125.1 million from $112.1 million in the 2016 fourth quarter. Fixed compensation expense declined $0.5 million and variable compensation expense increased $13.5 million, primarily reflecting higher bonus accruals for Search consultant performance. Salaries and employee benefits expense was 73.8 percent of net revenue for the quarter compared to 70.1 percent in the 2016 fourth quarter. 

General and administrative expenses declined 10.6 percent, or $4.2 million, to $35.9 million from $40.1 million in the 2016 fourth quarter. Savings were achieved in a number of run rate expenses, but the primary drivers of the decline were lower intangible amortization and accretion expense related to acquisitions and lower professional services fees. As a percentage of net revenue, general and administrative expenses were 21.2 percent compared to 25.1 percent in the 2016 fourth quarter.

In the fourth quarter, the company recorded a non-cash impairment charge of $11.6 million to write off the carrying value of the intangible assets and goodwill related to its Leadership Consulting business.  The uncertainty around the pace and timing of growth in profitability in this segment as the company invests in talent and service offerings were among the factors resulting in the impairment.  This non-cash impairment charge does not impact the company's normal business operations, cash flow from operating activities, free cash flow, liquidity, or availability under its credit facilities. In January 2018, Leadership Consulting was combined with Culture Shaping to create Heidrick Consulting, a comprehensive offering of the firm's advisory services. 

Also in the fourth quarter, the company recorded restructuring charges of $15.7 million related to strategic actions taken to reduce overall costs and improve operational efficiencies. The charges consist of employee-related costs, including severance, associated with a global workforce reduction of approximately 14 percent, professional services fees, and expenses associated with consolidating or closing three of its offices, one in each region.

Reflecting the impairment and restructuring charges, the company reported an operating loss in the 2017 fourth quarter of $18.8 million. This compares to operating income of $7.7 million and operating margin of 4.8 percent in the 2016 fourth quarter. Excluding impairment and restructuring charges totaling $27.2 million, adjusted operating income in the 2017 fourth quarter would have been $8.5 million and the adjusted operating margin would have been 5.0 percent.   Adjusted EBITDA in the 2017 fourth quarter declined $1.7 million, to $13.2 million compared to $14.9 million in the 2016 fourth quarter.  The Adjusted EBITDA margin (Adjusted EBITDA as a percentage of net revenue) in the 2017 fourth quarter was 7.8 percent compared to 9.3 percent in the 2016 fourth quarter. 

In the 2017 fourth quarter, the net loss was $39.2 million and basic and diluted loss per share was $2.09.  Despite the loss, the company had tax expense of $20.1 million, representing an effective tax rate of negative 105.4 percent. The tax rate was mostly impacted by charges resulting from the enactment into law of the U.S. Tax Cuts and Jobs Act (TCJA) in December 2017. These charges included $14.5 million related to the write-down of the value of the company's U.S. deferred tax assets as a result of the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent and a charge of $9.2 million to establish a valuation allowance for its foreign tax credit carry forward because provisions in the new legislation will likely restrict their use going forward. Excluding the impairment and restructuring charges and the two tax-related charges, adjusted net income would have been $2.8 million and adjusted diluted earnings per share would have been $0.15 based on an effective tax rate of 65.9 percent. In the 2016 fourth quarter, the company reported net income of $0.5 million and diluted earnings per share of $0.03 based on an effective tax rate of 94.9 percent that mostly reflected the company's repatriation of dividends from foreign operations to the U.S.

Net cash provided by operating activities in the 2017 fourth quarter was $103.0 million, compared to $73.8 million in the 2016 fourth quarter. Cash and cash equivalents at December 31, 2017 were $207.5 million compared to $165.0 million at December 31, 2016, and $105.7 million at September 30, 2017. 

2017 Results
For the fiscal year ended December 31, 2017, consolidated net revenue increased 6.7 percent, or $39.0 million, to a record $621.4 million from $582.4 million in 2016. Excluding the impact of exchange rate fluctuations which negatively impacted results by $1.4 million, or 0.2 percent, consolidated net revenue increased 6.9 percent or $40.4 million.

Executive Search net revenue increased 8.8 percent, or $44.7 million, to $552.0 million from $507.4 million in 2016. Net revenue increased 8.5 percent in the Americas (approximately 8.3 percent on a constant currency basis), 15.3 percent in Europe (approximately 16.2 percent on a constant currency basis), and 1.9 percent in Asia (approximately 1.4 percent on a constant currency basis). All of the industry practices contributed to growth in 2017. Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.6 million in 2017, the same as in 2016.  The number of executive searches confirmed in 2017 increased 4.5 percent and the average revenue per executive search increased to $120,300 from $117,700 in 2016.   

Leadership Consulting net revenue increased 6.2 percent, or $2.4 million, to $41.2 million from $38.8 million in 2016. Excluding the impact of exchange rate fluctuations, Leadership Consulting revenue increased 8.8 percent or $3.4 million. The year-over-year increase reflects contribution from the acquisitions of Decision Strategies International (DSI) in February 2016 and Philosophy IB in September 2016. 

Culture Shaping net revenue declined 22.3 percent, or $8.1 million, to $28.1 million from $36.2 million in 2016. Excluding the impact of exchange rate fluctuations, Culture Shaping revenue declined 21.7 percent or $7.9 million. The decline in revenue reflected lower consulting revenue and a decline in enterprise license agreements.

The operating loss in 2017 was $26.5 million and the operating margin was negative 4.3 percent compared to operating income of $35.2 million in 2016 and operating margin of 6.0 percent. Adjusted EBITDA in 2017 was $60.1 million and Adjusted EBITDA margin was 9.7 percent, compared to Adjusted EBITDA of $61.2 million and Adjusted EBITDA margin of 10.5 percent in 2016.

Four unusual items contributed to the reported decline in operating income in 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.  And in the fourth quarter, as described earlier in this release, the company recorded a non-cash impairment charge of $11.6 million related to its Leadership Consulting business and a restructuring charge of $15.7 million.   Absent these four items in 2017, adjusted operating income would have been $41.4 million and the adjusted operating margin would have been 6.7 percent compared to operating income of $35.2 million in 2016 and operating margin of 6.0 percent.   

In 2016, there were two unusual 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 $6.7 million in 2016 in new and existing leadership and client service talent for its Culture Shaping business. 

The net loss in 2017 was $48.6 million and the diluted loss per share was $2.60. Despite the loss, the company had tax expense of $19.2 million, representing an effective tax rate of negative 65.3 percent.  The effective tax rate in 2017 was mostly impacted by the tax reform legislation discussed earlier in the release, losses incurred that could not be benefitted for tax purposes and the impact of the non-deductibility of the EBT settlement, as well as other discrete items.  Excluding the EBT settlement, the impairment and restructuring charges, and the impact of the tax change legislation, adjusted net income would have been $20.9 million and adjusted diluted earnings per share would have been $1.09 based on an effective tax rate of 48.9 percent.   Net income in 2016 was $15.4 million and diluted earnings per share were $0.81, reflecting an effective tax rate of 59.2 percent.  The company anticipates that the effective tax rate in 2018 will decrease to between 38 percent and 40 percent primarily as a result of the U.S. corporate income tax rate reduction.

Net cash provided by operating activities in 2017 was $67.0 million, compared to $24.8 million in 2016.  

2018 Outlook
The company is forecasting first quarter 2018 consolidated net revenue of between $150 million and $160 million. This forecast is based on the average currency rates in December 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. Beginning January 1, 2018, the Leadership Consulting and Culture Shaping businesses were combined and will be reported as one segment, Heidrick Consulting. 

Rajagopalan added, "Market demand for executive search and leadership advisory services remains strong and we intend to improve on the record revenue we achieved in 2017. The strategic actions that we have taken position us to execute our plan to drive profitable growth and operating excellence. The launch of Heidrick Consulting earlier this month directly complements our core Executive Search business as we help clients successfully navigate volatile and fast-changing markets."

Quarterly Conference Call
Executives of Heidrick & Struggles will host a conference call to review its fourth quarter and fiscal 2017 results today, February 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 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 EBITDA, Adjusted EBITDA margin, Adjusted operating income and Adjusted operating margin, Adjusted net income and Adjusted diluted earnings per share. 

• 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 and intangible asset 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 schedule of this release.
• Adjusted operating income refers to operating income excludes the 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, impairment charges in the 2017 second quarter, impairment charge in the 2017 fourth quarter, and restructuring charges in the 2017 fourth quarter.
• Adjusted operating margin refers to Adjusted operating income (as explained above) as a percentage of net revenue in the same period.
• 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, impairment charges in the 2017 second quarter and 2017 fourth quarter, restructuring charges in the 2017 fourth quarter and the impact of the tax change legislation (U.S. Tax Cuts and Jobs Act) in the 2017 fourth quarter.
• A reconciliation of Adjusted operating income, Adjusted operating margin, Adjusted net income and Adjusted diluted earnings per share with the most directly comparable measure calculated and presented in accordance with GAAP is provided in the third 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, 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, 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