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 second quarter ended June 30, 2017.

  • Net revenue of $152.2 million increased 2.3%, or 4.1% on a constant currency basis.
  • Executive Search net revenue increased 2.9%, or 4.3% on a constant currency basis.
  • Leadership Consulting net revenue of $11.4 million increased 35.3%, or 43.9% in constant currency, partially offsetting a decline in Culture Shaping net revenue of 35.7%, or 34.0% in constant currency.
  • Leadership Consulting and Culture Shaping will be combined to create Heidrick Consulting, bringing to clients a more cohesive suite of leadership offerings to accelerate performance.
  • The intangible assets and goodwill associated with Culture Shaping were written off, resulting in a non-cash charge of $39.2 million.

"Our 2017 second quarter results reflect solid performance in our core business, Executive Search, and strong growth in Leadership Consulting," said Krishnan Rajagopalan, Heidrick & StrugglesPresident and Chief Executive Officer. "Going forward, we will integrate our Leadership Consultingand Culture Shaping operations into a single business, Heidrick Consulting, which will provide a comprehensive service offering that will help our clients accelerate their performance. We have built a scalable foundation for Heidrick Consulting through the development and acquisition of relevant tools and intellectual property, and are now in a position to drive operational efficiencies and move to a better trajectory of profitable growth." 

Consolidated net revenue (revenue before reimbursements) increased 2.3 percent, or $3.4 million, to $152.2 million from $148.9 million in the 2016 second quarter. Excluding the impact of exchange rate fluctuations which negatively impacted results by $2.7 million, or 1.8 percent, consolidated net revenue increased $6.1 million or 4.1 percent.

Executive Search net revenue increased 2.9 percent year over year, or $3.8 million, to $134.5 millionfrom $130.7 million in the 2016 second quarter. Excluding the impact of exchange rate fluctuations, revenue increased $5.7 million or 4.3 percent. Net revenue increased 2.0 percent in the Americasregion and 10.2 percent in Europe (16.4 percent on a constant currency basis), but declined 2.6 percent in Asia Pacific (2.2 percent on a constant currency basis). Growth in the Industrial, Education & Social Enterprise, Healthcare & Life Sciences, and Financial Services industry practices was partially offset by declines in the Global Technology & Services and Consumer Markets practices.

There were 355 Executive Search consultants at June 30, 2017 compared to 316 at June 30, 2016. Mostly reflecting the large number of promotions in the first quarter, productivity, as measured by annualized Executive Search net revenue per consultant, was $1.5 million in the 2017 second quarter compared to $1.7 million in the 2016 second quarter. The number of confirmed searches in the 2017 second quarter increased 1.5 percent compared to the 2016 second quarter and the average revenue per executive search was $118,300 compared to $116,700 in the 2016 second quarter.  

Leadership Consulting net revenue increased 35.3 percent, or $3.0 million, to $11.4 million from $8.5 million in the 2016 second quarter. Excluding the impact of exchange rate fluctuations, Leadership Consulting revenue increased 43.9 percent or $3.7 million. The year-over-year increase reflects organic growth as well as contribution from the acquisition of Philosophy IB in September 2016. There were 18 Leadership Consulting consultants at June 30, 2017 compared to 20 at June 30, 2016.  

Culture Shaping net revenue declined 35.7 percent, or $3.5 million, to $6.2 million from $9.7 millionin the 2016 second quarter. Excluding the impact of exchange rate fluctuations, Culture Shaping revenue declined $3.3 million or 34.0 percent. The decline in revenue reflects lower consulting revenue and a decline in enterprise agreements. There were 17 Culture Shaping consultants at June 30, 2017 compared to 17 at June 30, 2016.

Consolidated salaries and employee benefits expense in the 2017 second quarter increased 1.8 percent, or $1.8 million, to $103.4 million from $101.5 million in the 2016 second quarter. Fixed compensation expense increased $3.8 million, mostly reflecting compensation related to the acquisitions made in 2016 and new hires, primarily in Search. Variable compensation expense decreased $1.9 million. 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 67.9 percent of net revenue for the quarter compared to 68.2 percent in the 2016 second quarter. 

General and administrative expenses increased 6.9 percent, or $2.5 million, to $38.1 millionfrom $35.6 million in the 2016 second quarter. The increase reflects higher bad debt expense incurred in the quarter, as well as an increase in professional services related to litigation and audit fees during the period. An increase in occupancy costs and the inclusion of G&A from acquisitions made late last year were offset by savings in run rate expenses. As a percentage of net revenue, general and administrative expenses were 25.0 percent compared to 23.9 percent in the 2016 second quarter.

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.  The long-lived asset and goodwill impairment was triggered by the current performance of this business and uncertainty around the timing of improving performance. 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. Going forward, Culture Shaping will be combined with Leadership Consulting to create Heidrick Consulting, a comprehensive offering of the firm's advisory services. 

Reflecting the impairment charge, the company reported an operating loss in the 2017 second quarter of $28.4 million. This compares to operating income of $11.7 million and operating margin of 7.9 percent in the 2016 second quarter. Excluding the impairment charge, operating income in the 2017 second quarter would have been $10.7 million and the operating margin would have been 7.1 percent.  Adjusted EBITDA(1)  in the 2017 second quarter declined $1.5 million, to $16.6 millioncompared to $18.1 million in the 2016 second quarter. The Adjusted EBITDA margin(1) (Adjusted EBITDA as a percentage of net revenue) in the 2017 second quarter was 10.9 percent compared to 12.2 percent in the 2016 second quarter.  

The net loss in the 2017 second quarter was $18.2 million and basic and diluted loss per share was $0.97, based on an effective tax rate of 36.4 percent in the quarter. This tax rate reflects the deferred tax benefit on the long-lived assets and goodwill impairment and the inability to recognize losses in certain jurisdictions. Excluding the impairment charge, adjusted net income(2)  would have been $6.3 million and adjusted diluted earnings per share(2) would have been $0.33 based on an effective tax rate of 40.0 percent. In the 2016 second quarter, the company reported net income of $6.7 million and diluted earnings per share of $0.35 based on an effective tax rate of 43.5 percent in the quarter.

Net cash provided by operating activities in the 2017 second quarter was $24.3 million, compared to $34.2 million in the 2016 second quarter. Reflecting the payment of bonuses and the repayment of $25.0 million that was outstanding under our Credit Agreement, cash and cash equivalents at June 30, 2017 were $58.2 million compared to $165.0 million at December 31, 2016, and $85.4 million at June 30, 2016. 

Six Months Results

For the six months ended June 30, 2017 consolidated net revenue of $292.2 million increased 4.7 percent, or $13.2 million, from $279.1 million in the first six months of 2016. Excluding the impact of exchange rate fluctuations which negatively impacted results by $5.4 million, or 1.9 percent, consolidated net revenue increased $18.6 million or 6.7 percent.

Executive Search net revenue increased 5.1 percent, or $12.6 million, to $259.0 million from $246.4 million in the first six months of 2016. Excluding the impact of exchange rate fluctuations which negatively impacted results by $3.6 million, or 1.5 percent, consolidated net revenue increased $16.2 million or 6.6 percent. Net revenue increased 3.4 percent in the Americas, 11.0 percent (approximately 18.4 percent on a constant currency basis) in Europe, and 4.1 percent (approximately 4.0 percent on a constant currency basis) in Asia Pacific. All of the industry practices contributed to growth in the first six months except the Global Technology & Services practice. Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.5 million for the first six months of 2017 compared to $1.6 million in the first six months of 2016. The number of executive searches confirmed in the first six months of 2017 increased 4.7 percent and the average revenue per executive search was $110,600 compared to $110,200 for the same period in 2016. 

Leadership Consulting net revenue increased 45.5 percent, or $6.6 million, to $21.2 million from $14.6 million in the first six months of 2016. Excluding the impact of exchange rate fluctuations, Leadership Consulting revenue increased 55.6 percent or $8.1 million. The year-over-year increase reflects organic growth as well as contribution from the acquisitions of Decision Strategies International (DSI) in February 2016 and Philosophy IB in September 2016. There were 18 Leadership Consulting consultants at June 30, 2017 compared to 20 at June 30, 2016.  

Culture Shaping net revenue declined 33.5 percent, or $6.0 million, to $12.0 million from $18.0 million in the first six months of 2016. Excluding the impact of exchange rate fluctuations, Culture Shaping revenue declined $5.7 million or 31.7 percent. The decline in revenue reflected lower consulting revenue and a decline in enterprise agreements. There were 17 Culture Shaping consultants at June 30, 2017 compared to 17 at June 30, 2016.

The operating loss for the first six months of 2017 was $21.8 million compared to operating income of $15.6 million and operating margin of 5.6 percent for the first six months of 2016. Two unusual items contributed to the reported decline in operating income in the first six months of 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 millionof salaries & employee benefits expense. In the second quarter, as noted above, the company recorded a non-cash impairment charge of $39.2 million in the second quarter to write off the carrying value of intangible assets and goodwill related to its Culture Shaping business.

Two unusual items impacted operating income in the first six months of 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 realign its Leadership Consultingbusiness which resulted in approximately $2.1 million of non-recurring expenses in the 2016 first quarter, primarily in Europe.  Additionally, the company invested $3.8 million in the first six months of 2016 in new and existing leadership and client service talent for its Culture Shaping business. 

Adjusted EBITDA(1)  for the first six months of 2017 was $29.0 million and Adjusted EBITDA margin was 9.9 percent, compared to Adjusted EBITDA of $28.9 million and Adjusted EBITDA margin of 10.4 percent for the same period of 2016.

Net loss for the first six months of 2017 was $17.6 million and the diluted loss per share was $0.94, reflecting an effective tax rate of 28.4 percent. Net income for the first six months of 2016 was $8.0 million and diluted earnings per share were $0.43, reflecting an effective tax rate of 49.4 percent. The tax rate for the first six months of 2017 reflects the deferred tax benefit on the long-lived assets and goodwill impairment as well as the impact of the net $3.7 million settlement with the HMRC and the non-deductibility of the settlement, as well as other discrete items in the first six months of the year. Excluding the EBT settlement and the impairment charge, adjusted diluted earnings per share(2)would have been $0.52 based on an effective tax rate of 46.2 percent.   

2017 Third Quarter Outlook 

The company is forecasting third quarter 2017 consolidated net revenue of between $148 million and $158 million. This forecast is based on the average currency rates in June 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.

"As a trusted advisor to our clients, we will increasingly combine distinctive, data-driven talent, leadership and culture solutions to accelerate the performance of the world's most influential organizations. We will continue to develop Heidrick Consulting to deliver exceptional and relevant advisory services as a full complement to our Executive Search business," Rajagopalan said. "We firmly believe our clients, our employees and our shareholders also will benefit from the operational efficiency of our integrated services. We see great opportunity ahead and are focused on positioning the firm for sustainable, profitable growth."

SOURCE: Heidrick & Struggles