Heidrick & Struggles Announces First Quarter 2020 Results

- Net Revenue In-Line with Record Prior Year -

- Operating Income and Margin Increase Over Prior Year -

- Ended the Quarter with $322 Million of Liquidity -

- Declares $0.15 Per Share Cash Dividend -

Apr 27, 2020

CHICAGO, April 27, 2020 /PRNewswire/ -- Heidrick & Struggles International, Inc. (Nasdaq: HSII), today announced financial results for its first quarter ended March 31, 2020.

First Quarter Highlights:

  • Net revenue of $171.5 million was in-line with record year-ago results of $171.6 million
  • Operating income grew 10.7% to $18.2 million compared to $16.4 million in 2019
  • Adjusted EBITDA grew 14.6% over prior year period to $23.6 million
  • Operating margin expanded 100 basis points to 10.6% compared to 9.6% in last year's first quarter
  • Adjusted EBITDA margin expanded 180 basis points to 13.8% over prior year period
  • General and administrative expense, as a percent of net revenue, improved 120 basis points to 18.8% from 20.0% in the prior year period

"We generated revenue in the upper half of our guidance range and effectively managed expenses, driving strong operating income growth of 11%. Our team continued to deliver solid results, despite the onset of the COVID-19 pandemic and typical seasonality at the end of the prior quarter," stated Heidrick & Struggles' President and Chief Executive Officer, Krishnan Rajagopalan.  "We expect to successfully navigate through the current adverse global conditions by leveraging our strong balance sheet, our market-leading position and our cycle-tested team of professionals.  Specifically, our teams continue to leverage our proven and distinctive, data-driven and technology-enabled talent and leadership solutions to proactively and seamlessly address our clients' needs.  Our focus on the top leaders of organizations yields many positive underlying demand characteristics, particularly during times of stress.  In today's operating environment of constant change and uncertainty, leaders have the ability to accelerate their business performance and transform with agility.  As always, we are committed to supporting our clients as their trusted global advisor."

2020 First Quarter Results

Consolidated net revenue (revenue before reimbursements) of $171.5 million in the quarter was consistent with $171.6 million in the 2019 first quarter.  Excluding the impact of exchange rate fluctuations which impacted results by 1.1%, consolidated net revenue grew $1.8 million.  Net revenue growth was due to Heidrick Consulting and the Americas, partially offset by Asia Pacific and Europe. 

Executive Search net revenue decreased 1.8% year-over-year, to $155.5 million from $158.3 million in the 2019 first quarter.  Excluding the impact of exchange rate fluctuations of $1.8 million, or 1.2%, Executive Search net revenue declined $1.0 million.  Net revenue increased 1.0% in the Americas (or 1.4% on a constant currency basis) while net revenue decreased 1.4% in Europe (increased 0.8% on a constant currency basis) and 13.3% in Asia Pacific (decreased 10.5% on a constant currency basis).  Growth in the Consumer Markets industry practice was offset by declines in the other industry practices.

There were 396 Executive Search consultants at March 31, 2020 compared to 370 at March 31, 2019 and 380 at December 31, 2019.  Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.6 million compared to $1.7 million in the 2019 first quarter. The number of confirmed searches increased 2.4% compared to the 2019 first quarter, and the average revenue per executive search was $118,600 compared to $123,700 in the 2019 first quarter, primarily reflecting a decrease in the Americas region, including the Company's expanded presence in Brazil. 

Heidrick Consulting net revenue increased 20.6%, or $2.7 million, to $16.0 million from $13.3 million in the 2019 first quarter.  Excluding a slight negative impact from exchange rate fluctuations of 0.5%, Heidrick Consulting net revenue increased 21.2% or $2.8 million. The revenue growth was primarily attributable to one large consulting engagement.  There were 70 Heidrick Consulting consultants at March 31, 2020 compared to 67 at March 31, 2019 and 71 at December 31, 2019. 

Consolidated salaries and benefits expense increased by 0.2%, or $0.3 million, to $121.1 million from $120.8 million in the 2019 first quarter.  Fixed compensation expense improved by $0.4 million due to the deferred compensation plan, and talent acquisition and retention costs, partially offset by increases in base salaries and payroll taxes, stock compensation, retirement and benefits, and separation expenses.  Variable compensation increased $0.6 million due to contingent compensation for the 2Get acquisition. Salaries and benefits expense was 70.6% of net revenue for the quarter compared to 70.4% in the 2019 first quarter. 

The Company has a deferred compensation plan that allows participants to defer a percentage of their compensation into various investment vehicles.  Market fluctuations in these investment vehicles impact both the Company's liabilities and assets under the plan.  The financial impact of changes in the liability to plan participants is reflected within salaries and benefits. There is an offsetting impact related to changes in asset values recorded in other income.  During the 2020 first quarter, the Company's income statement was negatively impacted by $3.9 million due to the deferred compensation plan. 

General and administrative expenses improved by 6.2%, or $2.1 million, to $32.2 million from $34.4 million in the 2019 first quarter, primarily due to travel and entertainment, taxes and licenses and office occupancy.  As a percentage of net revenue, general and administrative expenses were 18.8% compared to 20.0% in the 2019 first quarter.

Operating income grew 10.7%, or $1.8 million, to $18.2 million from $16.4 million in the 2019 first quarter, and operating margin improved to 10.6% from 9.6%.   Adjusted EBITDA in the 2020 first quarter grew 14.6%, or $3.0 million, to $23.6 million from $20.6 million in the 2019 first quarter.  Adjusted EBITDA margin was 13.8% compared to 12.0% in the 2019 first quarter. 

Net income was $8.7 million, and diluted earnings per share was $0.44 with an effective tax rate of 39.8% in the quarter. This compares to net income of $12.1 million and diluted earnings per share of $0.62 with an effective tax rate of 35.9% in last year's first quarter.

As previously communicated, in March 2020 the Company drew down $100.0 million of the $175.0 million available under its revolving credit facility. Borrowings under the revolving credit facility are scheduled to mature on October 26, 2023.  The Company elected to draw down a portion of the available funds from its revolving credit facility as a precautionary measure to increase its cash position and further enhance its financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. The draw-down proceeds from the revolving credit facility are currently being held on the Company's balance sheet and may be used for acquisitions, working capital, capital expenditures, and for other general purposes.

Net cash used by operating activities was $165.6 million in the 2020 first quarter compared to $155.3 million in the 2019 first quarter, primarily reflecting annual bonus payments.  Cash and cash equivalents at March 31, 2020 were $251.0 million, compared to $332.9 million at December 31, 2019, and $114.4 million at March 31, 2019.  The company's cash position typically builds throughout the year as bonuses are accrued, mostly to be paid out in the first quarter. 

2020 Second Quarter Outlook

Given the continued uncertainty due to the COVID-19 pandemic, the Company believes it is prudent to refrain from providing financial guidance for the 2020 second quarter at this time.

Dividend

The Board of Directors has declared a 2020 second quarter cash dividend of $0.15 per share payable on May 22, 2020 to shareholders of record at the close of business on May 8, 2020.  

Quarterly Conference Call

Heidrick & Struggles will host a conference call to review its 2020 first quarter results today, April 27 at 5:00 pm Eastern Time. Participants may access the company's call and supporting slides through its website at www.heidrick.com or by dialing (825) 312-2375, conference ID# 1171969.  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 more than 65 years ago. Today, the firm provides integrated leadership solutions to help our clients change the world, one leadership team at a time.¬ģ¬†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, adjusted EBITDA margin and impacts of foreign currency on current period results using prior period translation rates.  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, contingent compensation related to acquisitions, restructuring charges, and other non-operating income (expense). 

Adjusted EBITDA margin refers to adjusted EBITDA as a percentage of net revenue in the same period. 

The company evaluates its results of operations on both an as reported and a constant currency basis.  The constant currency presentation is a non-GAAP financial measure, which excludes the impact of fluctuations in foreign currency exchange rates.  The company believes providing constant currency information provides valuable supplemental information regarding its results of operations, consistent with how it evaluates its performance.  The company calculates constant currency percentages by converting its financial results in a local currency for a period using the average exchange rate for the prior period to which it is comparing.  This calculation may differ from similarly-titled measures used by other companies.

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, the impacts, direct and indirect, of the COVID‚Äź19 pandemic on our business, our consultants and employees, and the overall economy; 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 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.

Contacts:

Investors & Analysts:
Suzanne Rosenberg - Vice President, Investor Relations
+1 212 551 0554, srosenberg@heidrick.com

Media:
Nina Chang ‚Äď Vice President, Corporate Communications
+1 212 551 1634, nchang@heidrick.com

 

Heidrick & Struggles International, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except per share amounts)

(Unaudited)










Three Months Ended






March 31,






2020


2019


$ Change


% Change

Revenue








Revenue before reimbursements (net revenue)

$ 171,481


$ 171,594


$      (113)


(0.1%)

Reimbursements

3,366


4,680


(1,314)


(28.1%)

Total revenue

174,847


176,274


(1,427)


(0.8%)









Operating expenses








Salaries and benefits

121,089


120,818


271


0.2%

General and administrative expenses

32,240


34,385


(2,145)


(6.2%)

Reimbursed expenses

3,366


4,680


(1,314)


(28.1%)

Total operating expenses

156,695


159,883


(3,188)


(2.0%)

Operating income

18,152


16,391


1,761


10.7%









Non-operating income (expense)








Interest, net

679


808





Other, net

(4,435)


1,643





Net non-operating income (expense)

(3,756)


2,451













Income before income taxes

14,396


18,842





Provision for income taxes

5,730


6,755





Net income

8,666


12,087





Other comprehensive income (loss), net of tax

(3,746)


320





Comprehensive income

$     4,920


$   12,407













Basic weighted average common shares outstanding

19,192


19,003





Diluted weighted average common shares outstanding

19,776


19,504













Basic net income per common share

$       0.45


$       0.64





Diluted net income per common share

$       0.44


$       0.62













Salaries and benefits as a % of net revenue

70.6%


70.4%





General and administrative expense as a % of net revenue

18.8%


20.0%





Operating income as a % of net revenue

10.6%


9.6%





 

Heidrick & Struggles International, Inc.

Segment Information

(In thousands)

(Unaudited)
















Three Months Ended March 31,











2020


2019



2020


2019


$ Change


% Change


Margin *


Margin *

Revenue












    Executive Search













Americas

$ 100,301


$   99,305


$       996


1.0%






Europe

33,082


33,553


(471)


(1.4%)






Asia Pacific

22,070


25,447


(3,377)


(13.3%)






      Total Executive Search

155,453


158,305


(2,852)


(1.8%)





    Heidrick Consulting

16,028


13,289


2,739


20.6%






      Revenue before reimbursements (net revenue)

171,481


171,594


(113)


(0.1%)






Reimbursements

3,366


4,680


(1,314)


(28.1%)






      Total revenue

$ 174,847


$ 176,274


$   (1,427)


(0.8%)


















Operating income (loss)












    Executive Search













Americas

$   25,732


$   22,449


$    3,283


14.6%


25.7%


22.6%


Europe

3,049


2,165


884


40.8%


9.2%


6.5%


Asia Pacific

2,502


4,906


(2,404)


(49.0%)


11.3%


19.3%


      Total Executive Search

31,283


29,520


1,763


6.0%


20.1%


18.6%

     Heidrick Consulting

(4,092)


(4,827)


735


15.2%


(25.5%)


(36.3%)


      Total segments

27,191


24,693


2,498


10.1%


15.9%


14.4%


Global Operations Support

(9,039)


(8,302)


(737)


(8.9%)


(5.3%)


(4.8%)


      Total operating income

$   18,152


$   16,391


$    1,761


10.7%


10.6%


9.6%





 *   Margin based on revenue before reimbursements (net revenue).

 

Heidrick & Struggles International, Inc.

Consolidated Balance Sheets

(In thousands)












March 31,


December 31,





2020


2019





(Unaudited)



Current assets






Cash and cash equivalents


$    251,000


$         271,719


Marketable securities


-


61,153


Accounts receivable, net


131,371


109,163


Prepaid expenses


26,505


20,185


Other current assets


32,133


27,848


Income taxes recoverable


4,400


4,414



Total current assets


445,409


494,482








Non-current assets






Property and equipment, net


28,450


28,650


Operating lease right-of-use assets


98,943


99,391


Assets designated for retirement and pension plans


13,756


13,978


Investments


23,516


25,409


Other non-current assets


25,181


20,434


Goodwill


123,422


126,831


Other intangible assets, net


1,554


1,935


Deferred income taxes


32,299


33,063



Total non-current assets


347,121


349,691








Total assets


$    792,530


$         844,173








Current liabilities






Accounts payable


$       11,088


$             8,633


Accrued salaries and benefits


97,875


234,306


Deferred revenue


41,433


41,267


Operating lease liabilities


29,818


30,955


Other current liabilities


19,534


26,253


Income taxes payable


8,198


3,928



Total current liabilities


207,946


345,342








Non-current liabilities






Non-current debt


100,000


-


Accrued salaries and benefits


46,823


59,662


Retirement and pension plans


43,851


46,032


Operating lease liabilities


77,594


79,388


Other non-current liabilities


4,551


4,634



Total non-current liabilities


272,819


189,716








Stockholders' equity


311,765


309,115








Total liabilities and stockholders' equity


$    792,530


$         844,173

 

Heidrick & Struggles International, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)














 Three Months Ended 






 March 31, 






2020


2019









Cash flows - operating activities





Net income

$     8,666


$   12,087


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






Depreciation and amortization

2,337


2,734



Deferred income taxes

110


336



Stock-based compensation expense

2,614


1,343



Accretion expense related to earnout payments

-


160



Gain on marketable securities

(111)


-



Loss on disposal of property and equipment

1


-



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







Accounts receivable

(24,656)


(20,167)




Accounts payable

1,897


99




Accrued expenses

(147,265)


(146,222)




Restructuring accrual

(138)


(681)




Deferred revenue

837


(1,586)




Income taxes payable, net

4,082


2,496




Retirement and pension assets and liabilities

2,033


1,550




Prepaid expenses

(6,566)


(6,499)




Other assets and liabilities, net

(9,441)


(923)





Net cash used in operating activities

(165,600)


(155,273)









Cash flows - investing activities





Capital expenditures

(1,753)


(898)


Purchases of available for sale investments 

(2,125)


(1,678)


Proceeds from sale of available for sale investments

61,395


113





Net cash provided by (used in) investing activities

57,517


(2,463)









Cash flows - financing activities





Proceeds from line of credit

100,000


-


Cash dividends paid 

(3,002)


(2,935)


Payment of employee tax withholdings on equity transactions

(1,550)


(4,552)


Acquisition earnout payments

(2,788)


(407)





Net cash provided by (used in) financing activities

92,660


(7,894)









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

(5,296)


130









Net decrease in cash, cash equivalents, and restricted cash

(20,719)


(165,500)

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

271,719


280,262

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

$ 251,000


$ 114,762

 

 Heidrick & Struggles International, Inc. 

 Reconciliation of Net Income and Operating Income to 

 Adjusted EBITDA (Non-GAAP) 

 (In thousands) 

  (Unaudited) 












 Three Months Ended 





 March 31, 





2020


2019








 Revenue before reimbursements (net revenue) 

$ 171,481


$ 171,594








 Net income 

8,666


12,087


 Interest, net 

(679)


(808)


 Other, net 

4,435


(1,643)


 Provision for income taxes 

5,730


6,755

 Operating income 

18,152


16,391








 Adjustments 





 Salaries and benefits 






 Stock-based compensation expense 

2,602


1,343


 General and administrative expenses 






 Depreciation 

2,129


2,494



 Intangible amortization 

208


240



 Earnout accretion 

-


160



 Acquisition contingent compensation 

558


-




 Total adjustments 

5,497


4,237








 Adjusted EBITDA 

$   23,649


$   20,628

 Adjusted EBITDA Margin 

13.8%


12.0%

 

SOURCE Heidrick & Struggles