Heidrick & Struggles Announces Strong Fourth Quarter and Record 2018 Results

Board of Directors approves 15% increase in first quarter cash dividend

Feb 25, 2019

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.

Heidrick & Struggles Logo (PRNewsFoto/Heidrick & Struggles) (PRNewsfoto/Heidrick & Struggles)

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

Heidrick & Struggles International, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share amounts)

(Unaudited)


















Three Months Ended






December 31,






2018


2017


$ Change


% Change

Revenue








Revenue before reimbursements (net revenue)

$185,305


$169,380


$  15,925


9.4%

Reimbursements

5,662


4,916


746


15.2%

Total revenue

190,967


174,296


16,671


9.6%









Operating expenses








Salaries and employee benefits

133,328


125,060


8,268


6.6%

General and administrative expenses

35,285


35,862


(577)


-1.6%

Impairment charges

-


11,564


(11,564)


-100.0%

Restructuring charges

-


15,666


(15,666)


-100.0%

Reimbursed expenses

5,662


4,916


746


15.2%

Total operating expenses

174,275


193,068


(18,793)


-9.7%









Operating income (loss)

16,692


(18,772)


35,464


188.9%









Non-operating expense








Interest, net

645


190





Other, net

(1,355)


(507)





Net non-operating expense

(710)


(317)













Income (loss) before taxes

15,982


(19,089)













Provision for income taxes

4,787


20,119













Net income (loss)

11,195


(39,208)













Other comprehensive income (loss)

(57)


2,356













Comprehensive income (loss)

$  11,138


$ (36,852)













Basic weighted average common shares outstanding

18,954


18,781





Diluted weighted average common shares outstanding

19,404


18,781













Basic net income (loss) per common share

$     0.59


$    (2.09)





Diluted net income (loss) per common share

$     0.58


$    (2.09)













Salaries and employee benefits as a % of net revenue

72.0%


73.8%





General and administrative expenses as a % of net revenue

19.0%


21.2%





Operating income (loss) as a percentage of net income

9.0%


(11.1%)





 

Heidrick & Struggles International, Inc.

Segment Information

(In thousands)

(Unaudited)


























Three Months Ended December 31,


2018


2017


$ Change


% Change


2018
Margin*


2017
Margin*

Revenue












Executive Search












Americas

$109,768


$  91,351


$  18,417


20.2%





Europe

34,929


34,812


117


0.3%





Asia Pacific

23,816


22,743


1,073


4.7%





Total Executive Search

168,513


148,906


19,607


13.2%





Heidrick Consulting

16,792


20,474


(3,682)


(18.0%)





Revenue before reimbursements (net revenue)

185,305


169,380


15,925


9.4%





Reimbursements

5,662


4,916


746


15.2%





Total revenue

$190,967


$174,296


$  16,671


9.6%

















Operating income (loss)












Executive Search












Americas (1)

$  26,892


$  14,379


$  12,513


87.0%


24.5%


15.7%

Europe (2)

(604)


(4,194)


3,590


85.6%


(1.7%)


(12.0%)

Asia Pacific (3)

2,391


(3,429)


5,820


169.7%


10.0%


(15.1%)

Total Executive Search

28,679


6,756


21,923


324.5%


17.0%


4.5%

Heidrick Consulting (4)

(2,631)


(12,519)


9,888


79.0%


(15.7%)


(61.1%)

Total segments

26,048


(5,763)


31,811


552.0%


14.1%


(3.4%)

Global Operations Support (5)

(9,356)


(13,009)


3,653


28.1%


(5.0%)


(7.7%)

Total operating income (loss)

$  16,692


$ (18,772)


$  35,464


188.9%


9.0%


(11.1%)


 *  Margin based on revenue before reimbursements (net revenue)

(1) Operating income for the Americas includes $0.8 million of restructuring charges in 2017.

(2) Operating loss for Europe includes $4.0 million of restructuring charges in 2017.

(3) Operating loss for Asia Pacific includes $2.0 million of restructuring charges in 2017.

(4) Operating loss for Heidrick Consulting includes $11.6 million of impairment charges and $3.4 million of restructuring charges in 2017.

(5) Operating loss for Global Operations Support includes $5.5 million of restructuring charges in 2017.

 

Heidrick & Struggles International, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share amounts)

(Unaudited)


















Year Ended






December 31,






2018


2017


$ Change


% Change

Revenue








Revenue before reimbursements (net revenue)

$716,023


$621,400


$  94,623


15.2%

Reimbursements

19,632


18,656


976


5.2%

Total revenue

735,655


640,056


95,599


14.9%









Operating expenses








Salaries and employee benefits

506,349


434,219


72,130


16.6%

General and administrative expenses

140,817


147,316


(6,499)


(4.4%)

Impairment charges

-


50,722


(50,722)


(100.0%)

Restructuring charges

-


15,666


(15,666)


(100.0%)

Reimbursed expenses

19,632


18,656


976


5.2%

Total operating expenses

666,798


666,579


219


0.0%









Operating income (loss)

68,857


(26,523)


95,380


359.6%









Non-operating income (expense)








Interest, net

1,141


385





Other, net

494


(3,280)





Net non-operating income (expense)

1,635


(2,895)













Income (loss) before taxes

70,492


(29,418)













Provision for income taxes

21,197


19,217













Net income (loss)

49,295


(48,635)













Other comprehensive income (loss)

(3,164)


9,993













Comprehensive income (loss)

$  46,131


$ (38,642)













Basic weighted average common shares outstanding

18,917


18,735





Diluted weighted average common shares outstanding

19,532


18,735













Basic net income (loss) per common share

$     2.61


$    (2.60)





Diluted net income (loss) per common share

$     2.52


$    (2.60)













Salaries and employee benefits as a % of net revenue

70.7%


69.9%





General and administrative expenses as a % of net revenue

19.7%


23.7%





Operating income (loss) as a percentage of net income

9.6%


(4.3%)





 

Heidrick & Struggles International, Inc.

Segment Information

(In thousands)

(Unaudited)


























Year Ended December 31,


2018


2017


$ Change


% Change


2018
Margin*


2017
Margin*

Revenue












Executive Search












Americas

$405,267


$339,793


$  65,474


19.3%





Europe

145,348


125,346


20,002


16.0%





Asia Pacific

102,276


86,905


15,371


17.7%





Total Executive Search

652,891


552,044


100,847


18.3%





Heidrick Consulting

63,132


69,356


(6,224)


(9.0%)





Revenue before reimbursements (net revenue)

716,023


621,400


94,623


15.2%





Reimbursements

19,632


18,656


976


5.2%





Total revenue

$735,655


$640,056


$  95,599


14.9%

















Operating income (loss)












Executive Search












Americas (1)

$  96,880


$  75,337


$  21,543


28.6%


23.9%


22.2%

Europe (2)

5,849


13


5,836


NM


4.0%


0.0%

Asia Pacific (3)

15,999


537


15,462


NM


15.6%


0.6%

Total Executive Search

118,728


75,887


42,841


56.5%


18.2%


13.7%

Heidrick Consulting (4)

(13,619)


(62,368)


48,749


78.2%


(21.6%)


(89.9%)

Total segments

105,109


13,519


91,590


NM


14.7%


2.2%

Global Operations Support (5)

(36,252)


(40,042)


3,790


9.5%


(5.1%)


(6.4%)

Total operating income (loss)

$  68,857


$ (26,523)


$  95,380


NM


9.6%


(4.3%)


 *  Margin based on revenue before reimbursements (net revenue)

(1) Operating income for the Americas includes $0.8 million of restructuring charges in 2017.

(2) Operating income for Europe includes $4.0 million of restructuring charges in 2017.

(3) Operating income for Asia Pacific includes $2.0 million of restructuring charges in 2017.

(4) Operating loss for Heidrick Consulting includes $50.7 million of impairment charges and $3.4 million of restructuring charges in 2017.

(5) Operating loss for Global Operations Support includes $5.5 million of restructuring charges in 2017.

 

Heidrick & Struggles International, Inc.

Condensed Consolidated Balance Sheets

(In thousands)










December 31,
2018


December 31,
2017


(Unaudited)



Current assets




Cash and cash equivalents

$ 279,906


$       207,534

Accounts receivable, net

114,977


98,700

Prepaid expenses

22,766


22,003

Other current assets

29,598


11,620

Income taxes recoverable

3,620


3,933

Total current assets

450,867


343,790





Non-current assets




Property and equipment, net

33,871


39,514

Assets designated for retirement and pension plans

15,035


17,130

Investments

19,442


21,319

Other non-current assets

22,276


8,999

Goodwill

122,092


118,892

Other intangible assets, net

2,216


2,158

Deferred income taxes

34,830


35,402

Total non-current assets

249,762


243,414





Total assets

$ 700,629


$       587,204





Current liabilities




Accounts payable

$     9,166


$          9,824

Accrued salaries and employee benefits

227,653


177,426

Deferred revenue, net

40,673


31,272

Other current liabilities

33,219


40,346

Income taxes payable

8,240


6,924

Total current liabilities

318,951


265,792





Non-current liabilities




Accrued salaries and employee benefits

57,234


40,308

Retirement and pension plans

39,865


44,802

Other non-current liabilities

17,423


23,597

Total non-current liabilities

114,522


108,707





Stockholders' equity

267,156


212,705





Total liabilities and stockholders' equity

$ 700,629


$       587,204

 

Heidrick & Struggles International, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)






Three Months Ended


December 31,


2018


2017

Cash flows - operating activities




Net income (loss)

$  11,195


$ (39,208)

Adjustments to reconcile net income to net cash used in operating activities:




Depreciation and amortization

2,964


3,504

Deferred income taxes

(3,058)


13,650

Stock-based compensation expense

2,184


1,020

Accretion expense related to earnout payments

322


202

Impairment charges

-


11,564

Changes in assets and liabilities, net of effects of acquisitions:




Accounts receivable

43,298


30,721

Accounts payable

235


1,425

Accrued expenses

67,692


56,373

Restructuring accrual

(784)


13,025

Deferred revenue

(2,084)


(4,051)

Income taxes payable, net

2,760


3,425

Retirement and pension assets and liabilities

(473)


267

Prepaid expenses

2,523


2,428

Other assets and liabilities, net

(987)


8,626

Net cash provided by operating activities

125,787


102,971





Cash flows - investing activities




Acquisition of business

36


-

Capital expenditures

(1,021)


(861)

Purchases of available for sale investments

(155)


(152)

Proceeds from sale of available for sale investments

105


133

Net cash used in investing activities

(1,035)


(880)





Cash flows - financing activities




Debt issuance costs

(981)


-

Cash dividends paid

(2,608)


(2,435)

Acquisition earnout payments

(3,592)


-

Net cash used in financing activities

(7,181)


(2,435)





Effect of exchange rate fluctuations on cash, cash equivalents and restricted cash

(2,123)


2,168





Net increase (decrease) in cash, cash equivalents, and restricted cash

115,448


101,824

Cash, cash equivalents, and restricted cash at beginning of period

164,814


106,338

Cash, cash equivalents, and restricted cash at end of period

$280,262


$208,162

 

Heidrick & Struggles International, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)






Year Ended


December 31,


2018


2017

Cash flows - operating activities




Net income (loss)

$  49,295


$ (48,635)

Adjustments to reconcile net income to net cash used in operating activities:




Depreciation and amortization

12,522


14,774

Deferred income taxes

(3,496)


(1,690)

Stock-based compensation expense

8,947


4,935

Accretion expense related to earnout payments

1,285


1,038

Impairment charges

-


50,722

Changes in assets and liabilities, net of effects of acquisitions:




Accounts receivable

(16,759)


(1,882)

Accounts payable

(526)


1,474

Accrued expenses

71,526


18,330

Restructuring accrual

(11,617)


13,025

Deferred revenue

(1,899)


2,010

Income taxes payable, net

757


3,381

Retirement and pension assets and liabilities

(1,492)


3,065

Prepaid expenses

(893)


797

Other assets and liabilities, net

(4,748)


5,626

Net cash provided by operating activities

102,902


66,970





Cash flows - investing activities




Acquisition of business

(3,083)


(364)

Capital expenditures

(5,960)


(14,022)

Purchases of available for sale investments

(2,201)


(2,269)

Proceeds from sale of available for sale investments

2,995


1,404

Net cash used in investing activities

(8,249)


(15,251)





Cash flows - financing activities




Proceeds from line of credit

20,000


40,000

Payments on line of credit

(20,000)


(40,000)

Debt issuance costs

(981)


-

Cash dividends paid

(10,181)


(10,111)

Payment of employee tax withholdings on equity transactions

(2,234)


(2,392)

Acquisition earnout payments

(3,592)


(4,557)

Net cash used in financing activities

(16,988)


(17,060)





Effect of exchange rate fluctuations on cash, cash equivalents and restricted cash

(5,565)


7,933





Net increase in cash, cash equivalents, and restricted cash

72,100


42,592

Cash, cash equivalents, and restricted cash at beginning of period

208,162


165,570

Cash, cash equivalents, and restricted cash at end of period

$280,262


$208,162

 

Heidrick & Struggles International, Inc.

Reconciliation of Net Income (Loss) and Operating Income (Loss) (GAAP) to Adjusted EBITDA (Non-GAAP)

(In thousands)

(Unaudited)


















Three Months Ended


Year Ended


December 31,


December 31,


2018


2017


2018


2017









Revenue before reimbursements (net revenue)

$185,305


$169,380


$716,023


$621,400









Net income (loss)

11,195


(39,208)


49,295


(48,635)

Interest, net

(645)


(190)


(1,141)


(385)

Other, net

1,355


507


(494)


3,280

Provision for income taxes

4,787


20,119


21,197


19,217

Operating income (loss)

16,692


(18,772)


68,857


(26,523)









Adjustments








Salaries and employee benefits








Stock-based compensation expense

2,630


1,020


8,385


4,597

General and administrative expenses








Depreciation

2,688


3,038


11,025


10,417

Intangible amortization

276


466


1,496


4,357

Earnout accretion

(43)


202


920


854

Impairment charges

-


11,564


-


50,722

Restructuring charges

-


15,666




15,666

Total adjustments

5,551


31,956


21,826


86,613









Adjusted EBITDA

$  22,243


$  13,184


$  90,683


$  60,090

Adjusted EBITDA Margin

12.0%


7.8%


12.7%


9.7%

 

 Heidrick & Struggles International, Inc. 

 Reconciliation of Operating Income (Loss) and Adjusted Operating Income (Non-GAAP) 

 (In thousands) 

  (Unaudited) 
















 Three Months Ended 


 Year Ended 




 December 31, 


 December 31, 




2017


2017







 Revenue before reimbursements (net revenue) 

$                    169,380


$     621,400







 Operating income (loss) 

(18,772)


(26,523)







 Adjustments 





 U.K. EBT settlement (1) 

-


1,501


 Impairment charges (2) 

11,564


50,722


 Restructuring charges (3) 

15,666


15,666



 Total adjustments 

27,230


67,889







 Adjusted operating income 

$                        8,458


$       41,366







Operating income (loss) as a % of net revenue

-11.1%


-4.3%

Adjusted operating income as a % of net revenue

5.0%


6.7%



















 Heidrick & Struggles International, Inc. 

 Reconciliation of Net Income (Loss) and Adjusted Net Income (Non-GAAP) 

 (In thousands, except per share amounts) 

  (Unaudited) 
















 Three Months Ended 


 Year Ended 




 December 31, 


 December 31, 




2017


2017







 Net income (loss) 

$                     (39,208)


$      (48,635)







 Adjustments 





 U.K. EBT settlement (1) 

-


3,880


 Impairment charges (2) 

11,564


50,722


 Restructuring charges (3) 

15,666


15,666



 Tax effect on above adjustments 

(8,977)


(24,491)


 2017 Tax Reform Act (4) 

23,732


23,732



 Total adjustments 

41,985


69,509







 Adjusted net income  

$                        2,777


$       20,874







Basic weighted average common shares outstanding

18,781


18,735

Dilutive common shares

344


406

Diluted weighted average common shares outstanding

19,125


19,141







Basic net income (loss) per common share

$                        (2.09)


$          (2.60)

Diluted net income (loss) per common share

$                        (2.09)


$          (2.60)







Adjusted basic net income per common share

$                         0.15


$           1.11

Adjusted diluted net income per common share

$                         0.15


$           1.09


Explanation of Non-GAAP adjustments


(1) On March 31, 2017, the Company reached a settlement with Her Majesty's Revenue and Customs ("HMRC") in the United Kingdom regarding HMRC's challenge of the tax treatment of certain of the Company's contributions in the United Kingdom to an Employee Benefits Trust between 2002 and 2008. The Company has recorded $1.5 million related to the Pay as You Earn tax and Class 1 National Insurance Contributions and the respective beneficiary reimbursements as a component of Salaries and employee benefitsin the Condensed Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2017. Inheritance tax and interest expense of $2.4 million incurred as a result of the settlement is recorded as a component of Other, netin the Condensed Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2017.

(2) Includes $11.6 million of goodwill and intangible asset impairment related to our Leadership Consulting operating segment for the three months ended December 31, 2017. Includes $11.6 million and $39.2 million of goodwill and intangible asset impairment related to our Leadership Consulting and Culture Shaping operating segments, respectively, for the year ended December 31, 2017. In 2018, the Company completed its integration of its Leadership Consulting and Culture Shaping businesses into one combined service offering, Heidrick Consulting.

(3) In 2017, the Company recorded restructuring charges of $15.7 million in connection with initiatives to reduce overall costs and improve operational efficiencies. These charges consist of $13.1 million of employee-related costs, including severance associated with reductions in our workforce, $2.3 million of other professional and consulting fees and $0.3 million of expenses associated with closing three office locations.

(4) Represents the impact of the "Tax Cuts and Jobs Act" enacted on December 22, 2017.

 

SOURCE Heidrick & Struggles


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