Heidrick & Struggles International, Inc. (Nasdaq: HSII), a premier provider of senior-level executive searchleadership consulting and culture shaping services globally, announced financial results for its first quarter ended March 31, 2017.

Krishnan Rajagopalan, Heidrick & Struggles Acting President and Chief Executive Officer, said, "We are pleased with first quarter growth in revenue and profitability. Our Executive Search business showed solid results and has an improved backlog going into the second quarter. We continue to invest in consultant talent to drive future growth.  Leadership Consulting continues to grow in size and significance, though it will show quarter to quarter variability in results as it continues to scale.  Culture Shaping started off the year slower than we had expected, but our team remains confident in the growth potential for culture-related offerings.  The year-over-year improvements in operating income and Adjusted EBITDA(2) reflect the increase in revenue without a corresponding increase in expenses."

Consolidated net revenue (revenue before reimbursements) increased 7.5 percent, or $9.8 million, to $140.0 million from $130.2 million in the 2016 first quarter, and increased 9.6 percent, or $12.5 million, in constant currency.

Executive Search net revenue increased 7.6 percent year over year, or $8.8 million, to $124.5 million from $115.7 million in the 2016 first quarter. Excluding the impact of exchange rate fluctuations revenue increased $10.6 million or 9.1 percent. All three regions contributed to first quarter year-over-year revenue growth in Executive Search, with Americas up 5.1 percent, Europe up 12.0 percent (21.0 percent on a constant currency basis), and Asia Pacific up 11.9 percent (11.0 percent on a constant currency basis). The Industrial, Healthcare & Life Sciences and Consumer industry practice groups were the primary drivers of the year-over-year growth.  Reflecting the company's well-established development and training program, 28 people were promoted to consultants as Principals effective January 1, 2017 and six were promoted from Principal to Partner. There were 363 Executive Search consultants at March 31, 2017 compared to 313 at March 31, 2016.  Mostly reflecting the large number of promotions in the quarter, productivity, as measured by annualized Executive Search net revenue per consultant, was $1.4 million in the 2017 first quarter compared to $1.5 million in the 2016 first quarter. The number of confirmed searches in the 2017 first quarter increased 7.8 percent compared to the 2016 first quarter and the average revenue per executive search was $103,300 compared to $103,600 in the 2016 first quarter. 

Leadership Consulting net revenue increased 59.6 percent, or $3.7 million, to $9.8 million from $6.1 million in the 2016 first quarter.  Excluding the impact of exchange rate fluctuations, which negatively impacted Leadership Consulting revenue by $0.7 million, revenue increased $4.4 million or 71.8 percent. The year-over-year increase mostly reflects the acquisitions of Decision Strategies International (DSI) in February 2016 and Philosophy IB in September 2016. There were 20 Leadership Consulting consultants at March 31, 2017 compared to 19 at March 31, 2016.  

Culture Shaping net revenue declined 31.0 percent, or $2.5 million, to $5.8 million from $8.3 million in the 2016 first quarter.  Excluding the impact of exchange rate fluctuations, which negatively impacted Culture Shaping revenue by $0.2 million, revenue declined $2.4 million or 29.0 percent. The decline in revenue reflected lower consulting revenue and a decline in enterprise agreements as a result of a slower than expected start to the year. There were 18 Culture Shaping consultants at March 31, 2017 compared to 17 at March 31, 2016.

On March 31, 2017, 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. The net impact recorded in the 2017 first quarter was $3.7 million, less than HMRC's proposed adjustment of $4.8 million as valued on December 31, 2016.  HMRC had challenged that the contributions made to the Trusts should have been subject to Pay As You Earn Tax and Class 1 National Insurance Contributions in the United Kingdom.  Heidrick & Struggles, among other companies, was first notified by HMRC of its challenge in 2010 and had been appealing since, as documented in the company's filings with the SEC. 

Consolidated salaries and employee benefits expense in the 2017 first quarter increased 6.7 percent, or $6.1 million, to $97.2 million from $91.1 million in the 2016 first quarter.  Fixed compensation expense increased $6.4 million, mostly reflecting compensation related to the acquisitions made in 2016 and new hires, primarily in Search. The increase also reflects $1.5 million related to the settlement with the HMRC as noted above. Variable compensation expense decreased $0.3 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 69.5 percent of net revenue for the quarter compared to 70.0 percent in the 2016 first quarter. 

General and administrative expenses increased 2.6 percent, or $0.9 million, to $36.1 million from $35.2 million in the 2016 first quarter.  Most of this increase reflects costs associated with ongoing general and administrative expenses related to the acquisitions made in 2016, 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 25.8 percent compared to 27.0 percent in the 2016 first quarter.

Operating income in the 2017 first quarter increased 71.6 percent to $6.6 million and operating margin was 4.7 percent.  This compares to operating income of $3.9 million and operating margin of 3.0 percent in the 2016 first quarter.  Adjusted EBITDA(2)  in the 2017 first quarter increased 14.0 percent, or $1.5 million, to $12.3 million compared to $10.8 million in the 2016 first quarter.  The Adjusted EBITDA margin (Adjusted EBITDA as a percentage of net revenue) in the 2017 first quarter was 8.8 percent compared to 8.3 percent in the 2016 first quarter.  The improvements in operating income and adjusted EBITDA were primarily driven by the increase in revenue from Executive Search and Leadership Consulting.

Net income in the 2017 first quarter declined $0.7 million to $0.7 million and diluted earnings per share was $0.03, based on an effective tax rate of 84.1 percent in the quarter and a full-year projected tax rate of approximately 44 percent.  The decline in net income largely reflects the net $3.7 million settlement with the HMRC described above and the non-deductibility of the settlement, as well as other discrete items in the first quarter.  Excluding the settlement, diluted earnings per share would have been $0.19 based on an effective tax rate of 54.1 percent.  In the 2016 first 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 66.8 percent in the quarter.

Net cash used by operating activities in the 2017 first quarter, which includes annual bonus payments, was $110.5 million, compared to $119.2 million in the 2016 first quarter.   Following the payment of bonuses, cash and cash equivalents at March 31, 2017 were $68.3 million ($43.3 million net of debt) compared to $165.0 million at December 31, 2016, and $62.0 million at March 31, 2016.

2017 Second Quarter Outlook

The company is forecasting second quarter 2017 consolidated net revenue of between $153 million and $163 million. This forecast is based on the average currency rates in March 2017 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.

Rajagopalan added, "Heidrick's brand, influence and position in the global marketplace have never been stronger.  Leveraging our current platform, we intend to expand our impact in Executive Search and to strengthen and grow our Leadership Consulting and Culture Shaping service offerings."

Quarterly Conference Call

Executives of Heidrick & Struggles will host a conference call to review its first quarter 2017 results today, April 24, 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.

SOURCE: Heidrick & Struggles