Heidrick & Struggles International, Inc. (Nasdaq: HSII), a premier provider of senior-level executive search, leadership consulting and culture shaping services globally, announced financial results for its fourth quarter and fiscal year ended December 31, 2016.

"We finished 2016 with solid fourth quarter results that reflect a return on the strategic investments we have made in the business over the last year," said Tracy Wolstencroft, Heidrick & Struggles President and Chief Executive Officer. "Executive Search net revenue increased 6.3 percent in the fourth quarter, with gains in all three regions. Our Leadership Consulting business has grown increasingly more significant in our portfolio of advisory services as well as to our financial results. Five of our top 10 clients in 2016 utilized Heidrick & Struggles for both Executive Search and Leadership Consulting. Leadership Consulting revenue was $15.6 million in the fourth quarter and the operating margin was 28.3 percent."

Fourth Quarter 2016 Results

Consolidated net revenue (revenue before reimbursements) increased 10.6 percent, or $15.3 million, to $159.8 million from $144.5 million in the 2015 fourth quarter, and increased $20.3 million or 14.0 percent in constant currency.

Reflecting the growing contribution to the company's business operations and financial performance, the company started reporting its Leadership Consulting business as a separate segment in the fourth quarter. Prior to the fourth quarter, Executive Search and Leadership Consulting had been reported as one business line. Executive Search is being reported by three regional segments, and the reporting of Culture Shaping remains unchanged.

Executive Search net revenue increased 6.3 percent year over year, or $8.0 million, to $134.7 million from $126.7 million in the 2015 fourth quarter. Excluding the impact of exchange rate fluctuations revenue increased $10.8 million or 8.6 percent. All three regions contributed to fourth quarter year-over-year revenue growth in Executive Search, with Americas up 2.7 percent, Europe up 13.4 percent (25.2 percent on a constant currency basis), and Asia Pacific up 11.6 percent (10.3 percent on a constant currency basis). All industry practice groups contributed to the year-over-year growth except Global Technology & Services. There were 335 Executive Search consultants at year-end compared to 307 at December 31, 2015. Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.6 million in the 2016 fourth quarter, the same as in the 2015 fourth quarter. The number of confirmed searches in the 2016 fourth quarter increased 11.3 percent compared to the 2015 fourth quarter and the average revenue per executive search was $126,300 compared to $132,200 in the 2015 fourth quarter.

Leadership Consulting net revenue increased 117 percent, or $8.4 million, to $15.6 million from $7.2 million in the 2015 fourth quarter. Excluding the impact of exchange rate fluctuations which negatively impacted Leadership Consulting revenue by $1.7 million, revenue increased $10.1 million or 140 percent. The year-over-year increase mostly reflects the acquisitions of Co Company in October 2015, Decision Strategies International (DSI) in February 2016 and Philosophy IB in September 2016. There were 22 Leadership Consulting consultants at year-end compared to 27 at December 31, 2015. The reduction reflects a change, effective January 1, 2016, in the definition of a consultant in this segment to Partners only and a subsequent reclassification of several Principal consultants.

Culture Shaping net revenue declined 10.4 percent, or $1.1 million, to $9.5 million from $10.7 million in the 2015 fourth quarter. Excluding the impact of exchange rate fluctuations which negatively impacted Culture Shaping revenue by $0.4 million, revenue declined $0.7 million or 6.2 percent. The decline in revenue reflected lower consulting revenue in the quarter, partially offset by an increase in enterprise agreements. There were 17 Culture Shaping consultants at year-end compared to 12 at December 31, 2015.

Consolidated salaries and employee benefits expense in the 2016 fourth quarter increased 7.3 percent, or $7.6 million, to $112.1 million from $104.5 million in the 2015 fourth quarter. Fixed compensation expense increased $7.0 million, mostly reflecting compensation related to three acquisitions and new hires across all businesses over the last year, and variable compensation expense increased $0.6 million related to higher bonus accruals. The composition of salaries and employee benefits, between fixed and variable expense, reflects investments the company made in 2016 including a large increase in new consultants with higher fixed compensation who have yet to reach full productivity. Salaries and employee benefits expense was 70.1 percent of net revenue for the quarter compared to 72.3 percent in the 2015 fourth quarter.

General and administrative expenses increased 15.4 percent, or $5.3 million, to $40.1 million from $34.8 million in the 2015 fourth quarter. More than half of this increase, or $3.6 million, reflects costs associated with ongoing general and administrative expenses related to the acquisitions of Co Company, DSI, JCA Group and Philosophy IB, including the expense of third-party consultants and contractors to execute work for leadership consulting services. As a percentage of net revenue, general and administrative expenses were 25.1 percent compared to 24.1 percent in the 2015 fourth quarter.

Operating income in the 2016 fourth quarter increased 45.0 percent to $7.7 million and operating margin of 4.8 percent. This compares to operating income of $5.3 million and operating margin of 3.7 percent in the 2015 fourth quarter. Adjusted EBITDA(2) in the 2016 fourth quarter increased 30.8 percent, or $3.5 million, to $14.9 million compared to $11.4 million in the 2015 fourth quarter. The Adjusted EBITDA margin (Adjusted EBITDA as a percentage of net revenue) in the 2016 fourth quarter was 9.3 percent compared to 7.9 percent in the 2015 fourth quarter. The improvements in operating income and adjusted EBITDA were driven by the Leadership Consulting segment.

Net income in the 2016 fourth quarter was $0.5 million and diluted earnings per share was $0.03, based on an effective tax rate in the quarter of 94.9 percent. In the fourth quarter, the company repatriated dividends from foreign operations to the United States. This resulted in additional book tax expense which will be offset by utilizing foreign tax credits. The company also recorded several other non-recurring tax items which also contributed to the high effective tax rate. Adjusting for these one-time tax items, the company's tax rate would have been 54% in the 2016 fourth quarter and the adjusted earnings per share would have been $0.23. In the 2015 fourth quarter, the company reported net income of $1.3 million and diluted earnings per share of $0.07 based on an effective tax rate of 73.6 percent in the quarter.

Net cash provided by operating activities in the 2016 fourth quarter was $73.8 million, compared to $77.6 million in the 2015 fourth quarter. Mostly reflecting the three acquisitions made in 2016, cash and cash equivalents at December 31, 2016 were $165.0 million compared to $190.5 million at December 31, 2015.

Fiscal 2016 Results

For the twelve months ended December 31, 2016 consolidated net revenue increased 9.6 percent, or $51.3 million, to $582.4 million from $531.1 million in 2015 and increased $62.6 million or 11.8 percent in constant currency.

Executive Search net revenue increased 6.6 percent, or $31.6 million, to $507.4 million from $475.8 million in 2015. Excluding the impact of exchange rate fluctuations net revenue increased $39.4 million or 8.3 percent. 2016 revenue growth in Europe of 18.0 percent (approximately 25.3 percent on a constant currency basis) and in Americas of 6.3 percent (approximately 6.7 percent on a constant currency basis) was partially offset by a decline in Asia Pacific of 4.2 percent (approximately 4.1 percent on a constant currency basis). All industry practice groups contributed to the year-over-year growth. The number of confirmed executive searches was 4,310, an increase of 7.1 percent compared to 2015. The average revenue per executive search was $117,700 compared to $118,200 in 2015. Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.6 million in 2016, the same as in 2015.

Leadership consulting net revenue increased 103.8 percent, or $19.8 million, to $38.8 million from $19.0 million in 2015. Excluding the impact of exchange rate fluctuations which negatively impacted Leadership Consulting revenue by $2.7 million, revenue increased $22.5 million or 118 percent. The year-over-year increase mostly reflects the acquisitions of Co Company in October 2015, Decision Strategies International (DSI) in February 2016 and Philosophy IB in September 2016.

Culture Shaping net revenue was essentially unchanged in 2016 at $36.2 million compared to $36.3 million in 2015. Excluding the impact of exchange rate fluctuations which negatively impacted Culture Shaping revenue by $0.9 million, revenue increased $0.8 million or 2.2 percent. A decline in consulting engagements in 2016 was mostly offset by an increase in enterprise agreements.

Operating income in 2016 increased 3.4 percent, or $1.2 million, to $35.2 million, and operating margin (operating income as a percentage of net revenue) was 6.0 percent. This compares to operating income of $34.1 million and operating margin of 6.4 percent in 2015. There were two unusual items that impacted operating income in 2016. Following the acquisitions of Co Company in the 2015 fourth quarter and Decision Strategies International (DSI) in the 2016 first quarter, the company took the opportunity to reposition its Leadership Consulting business for future growth. The integration of these acquisitions with the company's legacy business and the realignment of resources around its strategic leadership service offering resulted in approximately $2.1 million of non-recurring expenses in the 2016 first quarter, 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.

Adjusted EBITDA(2) in 2016 increased 9.6 percent, or $5.4 million, to $61.2 million compared to $55.8 million in 2015. The Adjusted EBITDA margin (Adjusted EBITDA as a percentage of net revenue) in 2016 was 10.5 percent, the same as in 2015. The year-over-year increase in Adjusted EBITDA largely reflects the increase in net revenue, partially offset by an increase in general and administrative expenses, mostly related to the acquisitions, and an increase in salaries and employee benefits expense.

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. Excluding the repatriation of dividends and other non-recurring discrete tax items in the fourth quarter, the company's effective tax rate would have been 48 percent in 2016 and adjusted diluted earnings per share was $1.03. Net income in 2015 was $17.1 million and diluted earnings per share were $0.92, reflecting an effective tax rate of 45.7 percent. The effective tax rates in 2016 and 2015 were also higher than the statutory rates because of losses incurred that could not be benefitted for tax purposes due to valuation allowances in certain jurisdictions.

2017 Outlook

The company is forecasting first quarter 2017 consolidated net revenue of between $140 million and $150 million. This forecast is based on the average currency rates in December 2016 and reflects, among other factors, management's assumptions for the anticipated volume of new Executive Search confirmations, Leadership Consulting assignments and Culture Shaping services, the current backlog, consultant productivity, consultant retention, and the seasonality of its business.

Wolstencroft added, "We are pleased with what the firm achieved in 2016, both operationally and financially. We strategically invested in the growth of all three of our businesses through a combination of acquisitions and new hires, while maintaining profitability. Our clients' need for visionary leadership, differentiating talent and thriving culture truly has never been greater, and Heidrick & Struggles' brand and impact has never been stronger. We are well positioned to continue our momentum in 2017 on both the top and bottom lines."

Quarterly Conference Call

Executives of Heidrick & Struggles will host a conference call to review its fourth quarter and 2016 results today, February 27, 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.

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SOURCE: Heidrick & Struggles