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Heidrick & Struggles Announces Q3 Numbers

Heidrick & Struggles Announces Q3 Numbers

Heidrick & Struggles International, Inc, the leadership advisory firm providing executive search and leadership consulting services worldwide, today announced financial results for its third quarter ended September 30, 2012.

"The improvements we've made to our cost structure have resulted in an increase in our year-to-date operating margin despite the revenue challenges we continue to face in the macroeconomic environment," said L. Kevin Kelly, Chief Executive Officer. "We believe we are winning a strong share of the C-suite and Board level searches, but clients are still safeguarding their resources related to expansion and growth until the environment becomes more stable, affecting the pace of new hiring decisions. We are steadfastly serving clients with our search and leadership consulting expertise and continue to focus on evolving our business model to foster growth and enhanced profitability."

Consolidated net revenue was $117.3 million in the third quarter, down 17.5 percent from $142.2 million in the 2011 third quarter, or approximately 15 percent on a constant currency basis. Exchange rate fluctuations negatively impacted net revenue by $3.1 million. Year over year, net revenue declined 5.8 percent in the Americas, 43.0 percent in Europe (approximately 38 percent on a constant currency basis), and 15.2 percent in Asia Pacific (approximately 12 percent on a constant currency basis). All industry practices except the Education & Social Enterprise practice contributed to the decline. Net revenue from Leadership Consulting was $8.9 million, down 31.3 percent from the prior year quarter, and represented 7.6 percent of total net revenue. Americas and Europe contributed to the $4.0 million decline almost equally.

The number of executive search and leadership consulting consultants at September 30, 2012 was 332, compared to 386 at September 30, 2011, and 340 at June 30, 2012. The year-over-year decrease reflects a global workforce reduction in the 2011 fourth quarter, and turnover in 2012. The number of executive search confirmations in the quarter declined 20.2 percent compared to the 2011 third quarter, and declined 5.4 percent compared to the 2012 second quarter. Productivity, as measured by annualized net revenue per consultant, was $1.4 million, compared to $1.5 million in the 2011 third quarter and $1.3 million in the 2012 second quarter. Average revenue per executive search was $123,700 compared to $117,600 in the 2011 third quarter and $114,800 in the 2012 second quarter.

Salaries and employee benefits decreased 20.1 percent, or $20.1 million, to $79.6 million from $99.7 million in the 2011 third quarter. Fixed compensation expense decreased $9.1 million, mostly reflecting a reduction in worldwide headcount of approximately 9 percent compared to the 2011 third quarter. Variable compensation expense decreased $11.0 million, primarily reflecting lower bonus accruals in the quarter related to lower net revenue. Salaries and employee benefits were 67.9 percent of net revenue for the quarter, compared to 70.1 percent in the 2011 third quarter.

General and administrative expenses decreased 4.5 percent, or $1.3 million, to $27.5 million from $28.8 million in the 2011 third quarter. The two largest contributors of the decline, a reduction in travel and entertainment related expenses and premise related costs, were partially offset by $2.5 million of expense related to a global Partners' meeting held in July. As a percentage of net revenue, consolidated general and administrative expenses were 23.4 percent, compared to 20.2 percent in the 2011 third quarter.

Operating income in the 2012 third quarter was $10.2 million and operating margin (operating income as a percentage of net revenue) was 8.7 percent compared to an operating loss of $12.6 million in the 2011 third quarter. In the 2011 third quarter, the company recorded non-cash impairment charges in the amount of $26.4 million, substantially all of which was to write off the entire carrying value of the goodwill and intangible assets related to its European business. Excluding the impairment charges of $26.4 million in the 2011 third quarter, which management believes more appropriately reflects core operations, operating income was $13.7 million and operating margin was 9.7 percent.

Net income was $4.1 million and diluted earnings per share were $0.23. The effective tax rate in the quarter of 59.0 percent, which is based on a full year projected tax rate of approximately 67 percent, is higher than the statutory rate because of losses incurred that are not benefitted for tax purposes due to valuation allowances in certain jurisdictions. In the 2011 third quarter, the net loss was $32.4 million and the net loss per share was $1.82 based on a tax rate in the quarter of 129.2 percent. The 2011 third quarter tax rate primarily reflected 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.

Net cash provided by operating activities in the quarter was $33.8 million, compared to $51.0 million in the 2011 third quarter. Cash and cash equivalents at September 30, 2012 were $127.1 million, compared to $96.9 million at June 30, 2012, and $135.5 million at September 30, 2011.

Regional Review

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

$ in millions

3Q 12

3Q 11

Change

2Q 12

Change

Americas

Net revenue

$ 72.4

$ 76.9

$ (4.4)

$ 65.3

$ 7.1

Operating income

$ 21.3

$ 17.9

$ 3.4

$ 15.4

$ 5.9

Consultants

156

176

(22)

157

(1)

Europe

Net revenue

$ 21.5

$ 37.8

$ (16.2)

$ 27.1

$ (5.6)

Operating income

$ 0.5

$ 2.4

$ (1.9)

$ 1.1

$ (0.6)

Consultants

91

126

(37)

98

(7)

Asia Pacific

Net revenue

$ 23.4

$ 27.5

$ (4.2)

$ 23.6

$ (0.2)

Operating income

$ 1.5

$ 2.8

$ (1.3)

$ 2.2

$ (0.7)

Consultants

85

84

5

85

0

Global Operations Support

$ (13.0)

$ (9.3)

$ (3.7)

$ (11.5)

$ (1.6)

Restructuring charges

$ --

$ --

$ --

$ (0.5)

$ 0.5

Impairment charges

$ --

$ (26.4)

$ 26.4

$ --

$ --

Total operating income

$ 10.2

$ (12.6)

$ 22.8

$ 6.7

$ 3.4

Totals and subtotals may not equal the sum of individual line items due to rounding.

Net revenue in the Americas declined 5.8 percent year over year. Declines in the Financial Services, Life Sciences, and Global Technology & Services practices, and in Leadership Consulting were partially offset by growth in the Industrial practice. Third quarter operating margin was 29.4 percent compared to 23.3 percent in the 2011 third quarter mainly as a result of reductions in salaries and employee benefits expense and general and administrative expenses, partially offset by the decline in net revenue. Compared to the 2012 second quarter, net revenue increased 10.9 percent, driven largely by improvement in the Industrial and Consumer Markets practices. Operating income increased 38.2 percent sequentially, mostly reflecting the increase in net revenue.

Primarily reflecting continued weakness in most economies throughout Europe, net revenue in this region declined 43.0 percent in the third quarter (approximately 38 percent on a constant currency basis). Exchange rate fluctuations negatively impacted year-over-year third quarter net revenue by $1.7 million. All industry practices and Leadership Consulting were down compared to the prior year. Total headcount in this region declined approximately 21 percent year over year, primarily as a result of the company's 2011 fourth quarter restructuring initiatives which focused on improving profitability in this region. The reduction in headcount contributed to the year-over-year decline in revenue, but also resulted in lower salaries and employee benefits expense. Despite the decline in revenue, an improved cost structure in this region resulted in an operating margin of 2.2 percent. Compared to the 2012 second quarter, net revenue declined 20.7 percent, driven by declines in the Industrial and Consumer Markets practices. Operating income declined 56.8 percent mostly reflecting the sequential decline in net revenue.

Asia Pacific net revenue declined 15.2 percent in the third quarter (approximately 12 percent on a constant currency basis), mainly reflecting declines in the Consumer Markets and Financial Services practices. Exchange rate fluctuations negatively impacted year-over-year third quarter net revenue by $0.8 million. The region reported operating margin of 6.2 percent compared to 10.1 percent in the prior year quarter, mostly reflecting the decline in net revenue partially offset by lower salaries and employee benefits expense. Compared to the 2012 second quarter, net revenue was essentially flat. Increases in the Financial Services and Industrial practices and in Leadership Consulting were offset by declines in the other four industry practices. Operating income declined 33.6 percent primarily reflecting start-up costs associated with the recruitment of a consultant team in Dubai at the end of the 2012 second quarter.

Global Operations Support was $13.0 million in the third quarter, up $3.7 million compared to the 2011 third quarter. A majority of the increase, $2.5 million, related to a global Partners' meeting in the quarter.

Nine Months Results

For the nine months ended September 30, 2012 consolidated net revenue of $339.9 million declined 15.2 percent (approximately 13 percent on a constant currency basis) from $400.6 million in the first nine months of 2011. Exchange rate fluctuations negatively impacted net revenue by $7.6 million. Productivity, as measured by annualized net revenue per consultant, was $1.3 million compared to $1.4 million for the first nine months of 2011. The number of executive searches confirmed in the first nine months of 2012 declined 18.0 percent compared to the first nine months of 2011. The average revenue per executive search was $112,600 compared to $108,800 for the same period in 2011.

Operating income for the first nine months was $20.1 million and operating margin was 5.9 percent. In the 2012 first and second quarters, the company recorded restructuring charges of $0.8 million related to initiatives the company took in the 2011 fourth quarter to reduce overall costs and improve operational efficiencies. Excluding restructuring charges, which management believes more appropriately reflects core operations, operating income for the first nine months of 2012 was $20.9 million and operating margin was 6.2 percent. For the same period of 2011 the company reported an operating loss of $6.4 million which included impairment charges of $26.4 million. Excluding impairment charges, which management believes more appropriately reflects core operations, operating income for the first nine months of 2011 was $20.0 million and operating margin was 5.0 percent.

Net income for the first nine months of 2012 was $6.6 million and diluted earnings per share were $0.37, reflecting an effective tax rate of 66.8 percent. This compares to a net loss for the first nine months of 2011 of $29.6 million and a loss per share of $1.67, reflecting a tax rate of 227.9 percent that was primarily due to the establishment of valuation allowances on several of the European entities, non-recognition of tax benefits related to the corresponding losses for those entities, and non-recognition of tax benefits related to goodwill impairment.

2012 Outlook

The company is forecasting 2012 fourth quarter net revenue of between $105 million and $115 million based on its assumptions for the anticipated volume of new executive search and leadership consulting projects, the current backlog, consultant productivity, consultant retention, the seasonality of its business, the uncertainty in the global economic climate, and no change in future currency rates.

Added Kelly, "Continued macroeconomic uncertainty makes it all the more essential for us to execute on our long-term goal of becoming the world's premier Leadership Advisory Company, the source for all global talent needs. Armed with the best global network of consultant teams in the business, we continue to focus on the top-tier layer of executive search while diversifying our business with a deeper suite of leadership talent advisory services. We are also leveraging our brand equity to cultivate new clients, add new consultants, and establish new practice sub sector specialties."

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