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 millionin the 2016 fourth quarter. Excluding the impact of exchange rate fluctuations, Leadership Consultingrevenue 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 millioncompared 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 millionin 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 Kingdomregarding 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."

SOURCE: PR