Press Release

CHICAGO, Feb. 25, 2019 /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 year ended December 31, 2018.

2018 Fourth Quarter Financial Achievements and Highlights

• Net revenue of $185.3 million increased 9.4% compared to 2017 fourth quarter
• Executive Search net revenue grew 13.2% to $168.5 million, with all three regions contributing to the increase
• Highest fourth quarter operating income in 11 years of $16.7 million
• Net income increased to $11.2 million and diluted EPS was $0.58 with an effective tax rate of 30.0%
• Raised first quarter cash dividend 15% to $0.15 per share from $0.13 per share

2018 Financial Achievements and Highlights

• Record net revenue of $716.0 million increased 15.2% compared to 2017
• Executive Search net revenue of $652.9 million grew 18.3%, with all three regions contributing to the increase
• Executive Search consultant productivity and average revenue per executive search reach historical highs
• General and administrative expenses reduced by $6.5 million to $140.8 million, and as a percent of net revenue the lowest since 2007 at 19.7%
• Operating income grew to $68.9 million and operating margin of 9.6%, both the highest since 2007
• Net income of $49.3 million and diluted EPS of $2.52 were both the highest in over a decade, with an effective tax rate of 30.1%

"We achieved another strong quarter that contributed to our second consecutive year of record net revenue as we execute on our plan to drive profitable growth and operating excellence," stated Heidrick & Struggles' President and Chief Executive Officer, Krishnan Rajagopalan.  "The launch of Heidrick Consulting in 2018 perfectly complements our Executive Search business and enhances our ability to help clients navigate volatile and fast-changing markets. Our fourth quarter and 2018 results reflect the tremendous efforts and contributions of our employees globally and I extend my sincere appreciation."

Rajagopalan added, "The new year has started well and our outlook for the executive search and leadership advisory markets is positive.  Heidrick & Struggles continues to effectively introduce new data-driven, tech-enabled platforms and offer an expanded range of executive talent and human capital solutions to help our clients accelerate their performance.  Our announcement last month of an exclusive agreement with Business Talent Group (BTG), for example, allows us to offer our clients seamless access to BTG's pool of top-tier independent professionals for specialized project-based work.   Our own digital transformation – driving and leveraging our propriety IP-based solutions and data – will continue to distinguish Heidrick & Struggles in the market, as will our commitment to building and fostering a diverse talent landscape.  We help our clients change the world, one leadership team at a time."

2018 Fourth Quarter Results
Driven by strong results in Executive Search, consolidated net revenue (revenue before reimbursements) increased 9.4%, or $15.9 million, to $185.3 million from $169.4 million in the 2017 fourth quarter.  Excluding the impact of exchange rate fluctuations which negatively impacted results by $2.6 million, or 1.4%, consolidated net revenue increased 10.9% or $18.5 million.  The company's adoption of ASC 606 on January 1, 2018, increased consolidated net revenue by $2.9 million compared to the historical method of revenue recognition. 

Executive Search net revenue increased 13.2% year over year, or $19.6 million, to $168.5 million from $148.9 million in the 2017 fourth quarter.  All three regions contributed to this growth with net revenue increasing 20.2% in the Americas, 0.3% in Europe and 4.7% in Asia Pacific.  Every industry practice also contributed, except the Financial Services practice which declined 1.0%.

There were 353 Executive Search consultants at December 31, 2018 compared to 346 at December 31, 2017 and 346 at September 30, 2018.  Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.9 million compared to $1.7 million in the 2017 fourth quarter. The number of confirmed searches increased 5.9% compared to the 2017 fourth quarter, and the average revenue per executive search was $142,000 compared to $132,800 in the 2017 fourth quarter. 

Heidrick Consulting net revenue decreased 18.0%, or $3.7 million, to $16.8 million from $20.5 million in the 2017 fourth quarter. The decline reflects the impact of new revenue recognition accounting on enterprise license agreements, which increased deferred revenue thereby reducing net revenue in the quarter by approximately $1.1 million, as well as the company's realignment initiatives within this segment.  There were 66 Heidrick Consulting consultants at December 31, 2018 compared to 64 at December 31, 2017 and 66 at September 30, 2018.

Consolidated salaries and employee benefits expense increased 6.6%, or $8.3 million, to $133.3 million from $125.1 million in the 2017 fourth quarter.  Fixed compensation expense increased $7.4 million, largely reflecting higher costs for talent acquisition and retention of consultants.  Variable compensation expense increased $0.9 million, primarily reflecting higher bonus accruals for Executive Search consultant performance. Salaries and employee benefits expense improved to 72.0% of net revenue for the quarter compared to 73.8% in the 2017 fourth quarter. 

General and administrative expenses declined 1.6%, or $0.6 million, to $35.3 million from $35.9 million in the 2017 fourth quarter.   Savings were achieved in a number of expense categories, but lower internal travel expense and lower office occupancy costs were two of the largest drivers of the decline.  As a percentage of net revenue, general and administrative expenses improved to 19.0% compared to 21.2% in the 2017 fourth quarter.

Operating income increased to $16.7 million from a loss of $18.8 million in the 2017 fourth quarter.  The operating margin improved to 9.0%.  Excluding impairment and restructuring charges totaling $27.2 million in the 2017 fourth quarter, adjusted operating income would have been $8.5 million and the adjusted operating margin would have been 5.0 percent.  In the 2017 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 former Leadership Consulting business, and recorded restructuring charges of $15.7 million related to strategic actions taken to reduce overall costs and improve operational efficiencies.

Adjusted EBITDA in the 2018 fourth quarter increased $9.1 million or 68.7% to $22.2 million from $13.2 million in the 2017 fourth quarter.  The Adjusted EBITDA margin was 12.0% compared to 7.8% in the 2017 fourth quarter.  The improvements in operating income and Adjusted EBITDA were primarily driven by the increase in revenue from Executive Search.

Net income increased to $11.2 million and diluted earnings per share was $0.58 with an effective tax rate of 30.0% in the quarter.   A net loss in the 2017 fourth quarter of $39.2 million and diluted loss per share of $2.09 reflected the impairment and restructuring charges and two tax-related charges related to the Tax Cuts & Jobs Act.

Net cash provided by operating activities was $125.8 million, compared to $103.0 million in the 2017 fourth quarter.  Cash and cash equivalents at December 31, 2018 were $279.9 million compared to $207.5 million at December 31, 2017, and $164.2 million at September 30, 2018.  The company's cash position typically builds throughout the year as bonuses are accrued, mostly to be paid out in the first quarter. 

2018 Results
Consolidated net revenue of $716.0 million increased 15.2%, or $94.6 million, from $621.4 million in 2017.  Excluding the impact of exchange rate fluctuations which positively impacted results by $4.0 million, or 0.6%, consolidated net revenue increased 14.6% or $90.7 million.  The company's adoption of ASC 606 on January 1, 2018, increased consolidated net revenue in 2018 by $4.2 million compared to the historical method of revenue recognition. 

Executive Search net revenue increased 18.3%, or $100.8 million, to $652.9 million from $552.0 million in 2017.  Excluding the impact of exchange rate fluctuations which positively impacted results by $3.3 million, or 0.5%, consolidated net revenue increased $97.6 million or 17.7%.  Net revenue increased 19.3% in the Americas, 16.0% in Europe (approximately 12.2% on a constant currency basis), and 17.7% in the Asia Pacific region (approximately 18.5% on a constant currency basis).  All of the industry practices contributed to growth in 2018. Productivity was a record $1.9 million per executive search consultant compared to $1.6 million in 2017.  The number of confirmed executive searches increased 11.8% and the average revenue per executive search was a record $127,300 compared to $120,300 in 2017. 

Heidrick Consulting net revenue declined 9.0%, or $6.2 million, to $63.1 million, from $69.4 million in 2017.  Excluding the impact of exchange rate fluctuations, Heidrick Consulting revenue declined 10.0% or $6.9 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 $3.8 million, as well as the company's realignment initiatives within this segment. 

Consolidated salaries and employee benefits expense increased 16.6%, or $72.1 million, to $506.3 million from $434.2 million in the 2017.  Fixed compensation expense increased $24.9 million largely reflecting higher costs for talent acquisition and retention of consultants.  Variable compensation expense increased $47.2 million, primarily reflecting higher bonus accruals for Executive Search consultant performance.

Salaries and employee benefits expense was 70.7% of net revenue in 2018 compared to 69.9% in 2017.  General and administrative expenses in 2018 declined 4.4%, or $6.5 million, to $140.8 million from $147.3 million in 2017.  Savings were achieved in a number of expense categories, but a reduction in the use of external third-party consultants to perform client work, lower internal travel expense and lower intangible amortization due to intangible asset impairment recorded in the prior year were three of the largest drivers of the decline in G&A expense.  As a percentage of net revenue, general and administrative expenses were 19.7% compared to 23.7% in 2017.

Operating income increased to $68.9 million and the operating margin improved to 9.6%.  This compares to an operating loss in 2017 of $26.5 million that reflected four unusual items during the year.   Absent these four items, adjusted operating income in 2007 would have been $41.4 million and the adjusted operating margin would have been 6.7%.  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 the intangible assets and goodwill related to its former Culture Shaping business.  And in the 2017 fourth quarter, the company recorded a non-cash impairment charge of $11.6 million related to its former Leadership Consulting business and a restructuring charge of $15.7 million.  

Adjusted EBITDA  increased $30.6 million or 50.9% to $90.7 million with an Adjusted EBITDA margin of 12.7%, compared to Adjusted EBITDA of $60.1 million and an Adjusted EBITDA margin of 9.7% in 2017.

Net income increased to $49.3 million and diluted earnings per share was $2.52, with an effective tax rate of 30.1%.  The net loss in 2017 was $48.6 million and the diluted loss per share was $2.60, primarily reflecting the restructuring and impairment charges.  Despite the loss in 2017, the company had tax expense of $19.2 million, largely driven by the Tax Cuts & Jobs Act, reflecting an effective tax rate of negative 65.3 percent.

Net cash provided by operating activities was $102.9 million, compared to $67.0 million in 2017.  

Dividend
The Board of Directors has declared a 2019 first quarter cash dividend increase of 15% to $0.15 per share payable on March 22, 2019 to shareholders of record at the close of business on March 8, 2019.   For the last 11 years, Heidrick & Struggles has paid a quarterly cash dividend of $0.13 per share.    

2019 First Quarter Outlook
"Heidrick & Struggles is committed to investing for growth and returning excess cash to our shareholders," said Mark Harris, Chief Financial Officer. "By generating strong adjusted free cash flow, we have the flexibility to do both.  Our announcement today of an increase to the quarterly cash dividend reflects our positive outlook for the business and demonstrates the confidence we have in our ability to generate strong cash flow over the long-term.  We also remain committed to a well-balanced capital allocation strategy, and have $21.7 million remaining under our current share buyback authorization."

The company expects 2019 first quarter consolidated net revenue of between $165 million and $175 million. This outlook is based on the average currency rates in December 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.  

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 increased consolidated net revenue in the 2018 fourth quarter by $2.9 million and increased 2018 consolidated net revenue by $4.2 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 fourth quarter and 2018 revenue by segment:

• Executive Search- The adoption of the new revenue recognition standard increased revenue in the 2018 fourth quarter by approximately $4.0 million, reflecting a $2.6 million increase in the Americas, a $0.3 million increase in Europe, and a $1.0 million increase in Asia Pacific. For 2018, the adoption of the new revenue recognition standard increased revenue by approximately $8.0 million, reflecting a $4.1 million increase in the Americas, a $1.0 million increase in Europe, and a $3.0 million increase in Asia Pacific.
• Heidrick Consulting-- The adoption of the new revenue recognition standard reduced enterprise revenue by $1.1 million in the 2018 fourth quarter and by $3.8 million in 2018.

Quarterly Conference Call
Executives of Heidrick & Struggles will host a conference call to review its fourth quarter and 2018 financial results today, February 25 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, Adjusted operating income and Adjusted operating margin.  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. Reconciliations of these non-GAAP financial measures with the most directly comparable measures calculated and presented in accordance with GAAP are provided as schedules attached to this release.

• Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, equity- settled stock 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.
• Adjusted operating income refers to operating income excluding 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.

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, develop, manage and retain qualified consultants and senior leaders; our ability to prevent our consultants from taking our clients with them to another firm; our ability to maintain our professional reputation and brand name; the fact that our net revenue may be affected by adverse economic conditions; our clients' ability to restrict us from recruiting their employees; the aggressive competition we face; our heavy reliance on information management systems; the fact that we face the risk of liability in the services we perform; the fact that data security, data privacy and data protection laws and other evolving regulations and cross-border data transfer restrictions may limit the use of our services and adversely affect our business; social, political, regulatory and legal risks in markets where we operate; the impact of foreign currency exchange rate fluctuations; the fact that we may not be able to align our cost structure with net revenue; unfavorable tax law changes and tax authority rulings; our ability to realize our tax losses; the timing of the establishment or reversal of valuation allowance on deferred tax assets; any impairment of our goodwill, other intangible assets and other long-lived assets; our ability to execute and integrate future acquisitions; the fact that we have anti-takeover provisions that make an acquisition of us difficult and expensive; our ability to access additional credit; and the increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks that could pose a risk to our systems, networks, solutions, services and data. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  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, 2018, 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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