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Heidrick & Struggles Reports Third Quarter 2011 Financial Results

Heidrick & Struggles Reports Third Quarter 2011 Financial Results

Heidrick & Struggles International, Inc. (Nasdaq:HSII), the leadership advisory firm providing executive search and leadership consulting services worldwide, today announced financial results for its third quarter ended September 30, 2011.

Third quarter 2011 Year-over-year Highlights

  --  Net revenue of $142.2 million increased 12.8%, approximately 8% on a constant currency basis

  --  Impairment charge of $26.4 million taken to write off remaining goodwill and intangible assets of European business

  --  Operating income improved to $13.7 million and the operating margin

    improved to 9.7%, excluding the impairment charge (1)

  --  General and administrative expenses declined $3.7 million or 11.5%

  --  2011 net revenue and operating margin, excluding impairment and

    restructuring charges, are still on track to be within ranges issued in

    guidance

 

Commenting on the third quarter results, Chief Executive Officer L. Kevin Kelly said, "Our third quarter operating results, excluding impairment charges, showed sound improvement, especially at the margin where we are finally starting to see the impact of our cost savings initiatives. The expected savings from our previously announced restructuring plan, starting in the fourth quarter, will further strengthen our financial position and our ability to deliver improving results to shareholders."

(1) These represent non-GAAP financial measures because the impairment charge is excluded. Including the impairment charge, the operating loss was $12.6 million for the 2011 third quarter.

Consolidated net revenue of $142.2 million increased 12.8 percent (approximately 8 percent on a constant currency basis) from $ 126.1 million in the 2010 third quarter. Exchange rate fluctuations positively impacted net revenue by $5.7 million. Year over year, net revenue increased 15.4 percent in the Americas and 35.6 percent in Europe (approximately 25 percent on a constant currency basis), and declined 13.0 percent in Asia Pacific (a decline of approximately 20 percent on a constant currency basis). The Consumer, Industrial, and Life Sciences practices achieved the largest revenue gains, although their growth was partially offset by the Financial Services practice, which was down compared to last year. Net revenue from Leadership Consulting Services increased 30.6 percent to $12.9 million and represented 9.1 percent of consolidated net revenue in the quarter.

The number of executive search and leadership consulting consultants at September 30, 2011 was 386, compared to 343 at September 30, 2010, and 386 at June 30, 2011. The number of executive search confirmations in the quarter increased 8.0 percent compared to the 2010 third quarter, and, consistent with historical seasonality, declined 9.6 percent compared to the 2011 second quarter. Productivity, as measured by annualized net revenue per consultant, was $1.5 million, the same as in the 2010 third quarter and the 2011 second quarter. The average revenue per executive search increased to $117,600 compared to $114,200 in the 2010 third quarter and $107,400 in the 2011 second quarter.

Salaries and employee benefits increased 12.9 percent to $99.7 million, from $88.3 million in the comparable quarter of 2010. The increase reflects an increase in fixed compensation associated with a 10 percent increase in headcount compared to last year, as well as an increase in the variable component of compensation associated with the increase in net revenue. Salaries and employee benefits were 70.1 percent of net revenue for the quarter, compared to 70.0 percent in the 2010 third quarter.

General and administrative expenses declined 11.5 percent to $28.8 million, from $32.5 million in the 2010 third quarter, as a result of a number of expense reductions. As a percentage of net revenue, consolidated general and administrative expenses were 20.2 percent, compared to 25.8 percent in the 2010 third quarter.

In the third quarter, the company recorded a non-cash impairment charge in the amount of $26.4 million to write off the entire carrying value of the goodwill and intangible assets related to its European business. The company's planned restructuring initiatives in the fourth quarter, which are primarily related to Europe, (part of company-wide restructuring plan announced October 11, 2011) and the current volatility associated with the economic outlook for Europe, including political and economic uncertainty in that region, prompted the company to perform interim goodwill impairment testing. This resulted in the determination that the goodwill and intangible assets were impaired. This non-cash 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.

The company reported an operating loss of $12.6 million, driven by the goodwill impairment charge. Excluding the impairment charge of $26.4 million, which management believes more appropriately reflects core operations, operating income was $13.7 million and the operating margin was 9.7 percent. This compares favorably to operating income of $4.4 million and an operating margin of 3.5 percent in the 2010 third quarter.

The net loss was $32.4 million and the net loss per share was $1.82 based on a negative tax rate in the quarter of 129.2 percent. The higher than expected tax rate in the quarter was primarily a result of income that was reduced by the goodwill impairment charge without any tax benefit, establishment of valuation allowances that increased tax expense, and an inability to recognize losses in certain jurisdictions at this time. In the 2010 third quarter, net income was $1.2 million and diluted earnings per share were $0.07, which reflected an effective tax rate of 77.5 percent.

Net cash provided by operating activities in the quarter was $51.0 million, compared to $31.4 million in the 2010 third quarter. Cash and cash equivalents at September 30, 2011 were $135.5 million compared to $122.8 million at September 30, 2010, and $103.1 million at June 30, 2011.

Regional Review

For segment purposes, reimbursements of out-of-pocket expenses classified as revenue, restructuring charges, impairment charges, and other operating income are reported separately and, therefore are not included in the results of each geographic region. The company believes that analyzing trends in net revenue (before reimbursements) and operating income (loss) excluding restructuring charges, impairment charges, and other operating income more appropriately reflects the company's core operations.

  $ in millions     3Q 11     3Q 10     Change     2Q 11     Change

                   --------  ---------  --------  ---------  --------

  Americas

  Net revenue       $ 76.9     $ 66.6   $ 10.3     $ 76.7     $ 0.1

  Operating

    income           $ 17.9     $ 11.9     $ 6.0     $ 18.7   $ (0.9)

  Consultants          176       155       21       178       (2)

  Europe

  Net revenue       $ 37.8     $ 27.9     $ 9.9     $ 34.5     $ 3.3

  Operating

    income (loss)     $ 2.4   $ (1.4)     $ 3.9   $ (2.4)     $ 4.8

  Consultants           126       113       13       128       (2)

  Asia Pacific

  Net revenue       $ 27.5     $ 31.7   $ (4.1)     $ 31.5   $ (4.0)

  Operating

    income             $ 2.8     $ 7.8   $ (5.0)     $ 4.9   $ (2.1)

  Consultants           84         75         9         80         4

  Global Operations

  Support           $ (9.3)   $ (13.0)     $ 3.6   $ (10.9)     $ 1.6

 

                    --------  -------------------  -------------------

  Total operating

  income (loss)       $ 13.7     $ 5.3     $ 8.4     $ 10.3     $ 3.4

                           

  Totals and subtotals may not equal the sum of individual line items

  due to rounding.

Net revenue in the Americas increased 15.4 percent year over year and 0.2 percent compared to the 2011 second quarter. The Consumer and Financial Services practices were the largest drivers of year-over-year growth. Third quarter operating income increased 50.6 percent year-over-year, and the operating margin was 23.3 percent.

Net revenue in Europe increased 35.6 percent year over year (approximately 25 percent on a constant currency basis) and increased 9.5 percent sequentially (approximately 11 percent on a constant currency basis). Exchange rate fluctuations positively impacted year-over-year net revenue by $2.9 million. The Industrial Practice was the key driver of the reported year-over-year and sequential growth in this region, but the Life Sciences practice was also an important contributor to year-over-year and sequential growth. Operating income was $2.4 million and the operating margin was 6.4 percent compared to an operating loss of $1.4 million in the 2010 third quarter.

The Asia Pacific region reported a 13.0 percent year-over-year decline in third quarter net revenue (a decline of approximately 20 percent on a constant currency basis) and a 12.7 percent decline sequentially (approximately 13 percent on a constant currency basis). Exchange rate fluctuations positively impacted year-over-year net revenue by $2.3 million. Net revenue was negatively impacted by year-over-year and sequential declines in the Financial Services and Industrial practices. Operating income declined 64.3 percent compared to the 2010 third quarter and the operating margin was 10.1 percent primarily reflecting higher base compensation and payroll taxes associated with an investment in new hires. Employee headcount was increased 17 percent in this region over the last year and includes consultants who have yet to reach expected productivity levels.

Expenses related to Global Operations Support declined 27.8 percent, or $3.6 million, compared to the 2010 third quarter. A decline in general and administrative expenses, primarily related to professional fees, was the largest driver of the decline.

Nine Months Results

For the nine months ended September 30, 2011 consolidated net revenue of $400.6 million increased 9.5 percent (approximately 5 percent on a constant currency basis) from $365.9 million in the first nine months of 2010. Exchange rate fluctuations positively impacted net revenue by $15.8 million. Productivity, as measured by annualized net revenue per consultant, was $1.4 million, the same as the first nine months of 2010. The number of executive searches confirmed in the first nine months of 2011 increased 6.2 percent compared to the first nine months of 2010. The average revenue per executive search was $108,800 compared to $106,900 for the same period in 2010. The reported operating loss for the first nine months was $6.4 million, reflecting an impairment charge of $26.4 million in the 2011 third quarter. Excluding this impairment charge, which management believes more appropriately reflects core operations, operating income would have been $20.0 million and the operating margin would have been 5.0 percent. This compares to operating income of $8.2 million for the first nine months of 2010 and an operating margin of 2.2 percent. The reported net loss for the first nine months of 2011 was $29.6 million and the loss per share was $1.67 reflecting a negative tax rate of 227.9 percent. The higher than expected tax rate for the first nine months was primarily a result of income that was reduced by the goodwill impairment charge without any tax benefit, establishment of valuation allowances that increased tax expense, and an inability to recognize losses in certain jurisdictions at this time. The reported net income for the first nine months of 2010 was $2.3 million and diluted earnings per share were $0.13, reflecting an effective tax rate of 67.5 percent.

2011 Outlook

Based on year-to-date results, including the improvement achieved in operating results in the third quarter, the company's outlook for net revenue and operating margin (excluding third quarter impairment charges and fourth quarter restructuring charges) remain within the guidance provided throughout 2011. 2011 net revenue is expected to be between $525 million and $540 million, and the operating margin, excluding impairment and restructuring charges, is expected to be at the lower end of its range of 6 percent to 8 percent.

Kelly added, "With the exception of impairment and restructuring charges, our 2011 operating results remain in line with expectations, showing good improvement over the same period of 2010. Our outstanding search and leadership consulting teams have the capacity for driving higher revenue and we have an improving cost structure to achieve higher operating margins. We are looking forward to capitalizing on our strengths, especially if economic conditions improve in 2012."

Quarterly Conference Call

Executives of Heidrick & Struggles will host a conference call to review the third quarter 2011 results today, October 25, at 9:00 am Central Time. Participants may access the company's call and supporting slides through the internet 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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