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Heidrick & Struggles Reports Fourth Quarter and 2012 Financial Results

Heidrick & Struggles Reports Fourth Quarter and 2012 Financial Results

Heidrick & Struggles International, Inc. a premier provider of Executive Search and Leadership Consulting services worldwide, has announced financial results for its fourth quarter and year ended December 31, 2012.

"Challenging economic conditions and lower confirmations resulted in 2012 financial results that fell short of our expectations, particularly with respect to net revenue," said L. Kevin Kelly, Chief Executive Officer. "However, we are pleased with the improvements we made to our cost structure, which helped offset the impact of the revenue decline on operating margin. We ended 2012 with the acquisition of Senn Delaney, the leading culture-shaping consulting firm. This a significant milestone in our long-term growth strategy to build the premier professional services firm focused on serving the leadership needs of the world's top organizations."

2012 Fourth Quarter Results

Consolidated net revenue was $103.9 million in the fourth quarter, down 18.3 percent from $127.2 million in the 2011 fourth quarter. Year over year, net revenue declined 16.7 percent in the Americas, 29.2 percent in Europe and 8.3 percent in Asia Pacific. All industry practices contributed to the decline. Net revenue from Leadership Consulting declined 34.9 percent or $4.1 million, mostly in the Americas, to $7.6 million and represented 7.3 percent of total net revenue.

The company ended the year with 331 Executive Search and Leadership Consulting consultants compared to 347 at December 31, 2011. The number of executive search confirmations in the quarter declined 9.1 percent compared to the 2011 fourth quarter, and productivity, as measured by annualized net revenue per consultant, was $1.2 million compared to $1.4 million in the same period of 2011. Average revenue per executive search was $117,600 compared to $128,300 in the 2011 fourth quarter.

Salaries and employee benefits decreased 13.8 percent, or $11.8 million, to $73.3 million from $85.1 million in the 2011 fourth quarter. Fixed compensation expense decreased $5.1 million, primarily reflecting a reduction in worldwide headcount of approximately 4 percent compared to the 2011 fourth quarter. Variable compensation expense decreased $6.7 million, primarily reflecting lower bonus accruals in the quarter due to lower net revenue. Salaries and employee benefits were 70.6 percent of net revenue for the quarter, compared to 66.9 percent in the 2011 fourth quarter.

General and administrative expenses increased 2.6 percent, or $0.8 million, to $31.0 million from $30.2 million in the 2011 fourth quarter. However, the 2012 fourth quarter included $1.7 million of costs related to the company's acquisition of Senn Delaney, which closed on December 31, 2012. Excluding these costs, which is a non-GAAP measure that management believes more appropriately reflects core operations, general and administrative expenses would have declined 3.2 percent or $1.0 million. As a percentage of net revenue, reported general and administrative expenses were 29.8 percent, compared to 23.8 percent in the 2011 fourth quarter.

The operating loss in the 2012 fourth quarter was $0.5 million compared to an operating loss of $4.5 million in the 2011 fourth quarter. Excluding $1.7 million of costs related to the acquisition of Senn Delaney, a non-GAAP measure that management believes more appropriately reflects core operations, 2012 fourth quarter operating income would have been $1.3 million and operating margin would have been 1.2 percent. In the 2011 fourth quarter, the company recorded restructuring charges of $16.3 million related to initiatives the company took to reduce costs and improve operational efficiencies. Excluding restructuring charges of $16.3 million in the 2011 fourth quarter, which management believes more appropriately reflects core operations, operating income would have been $11.8 million and operating margin would have been 9.3 percent.

The company reported a net loss in the 2012 fourth quarter of $0.4 million and a net loss per share of $0.02. The effective tax rate in the quarter of 264.1 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 fourth quarter, the net loss was $4.1 million and the net loss per share was $0.23 based on a tax rate in the quarter of 28.7 percent.

Net cash provided by operating activities in the quarter was $55.7 million, compared to $55.4 million in the 2011 fourth quarter. Cash and cash equivalents at December 31, 2012 were $117.6 million, compared to $127.1 million at September 30, 2012, and $185.4 million at December 31, 2011. Cash and cash equivalents at December 31, 2012 reflect cash payments of $60.0 million related to the acquisition of Senn Delaney, including the purchase price of $53.5 million and $6.5 million for a retention escrow.

On January 31, 2013, the company amended its credit agreement to add a committed term loan facility of $40.0 million in order to finance a portion of the initial payments made to acquire Senn Delaney. The term loan will be amortized over a five-year period pursuant to which the company will make 15 quarterly payments of $1.5 million each through December 31, 2016, four quarterly payments of $2 million each in 2017, and a final payment of the remaining outstanding balance of the term loan on January 31, 2018. The other material terms of the credit agreement were not amended. Given current market conditions, the company was able to finance the term loan facility at near historically low market rates.

2012 Results

For the year ended December 31, 2012 consolidated net revenue of $443.8 million declined 15.9 percent (approximately 14 percent on a constant currency basis) from $527.8 million in 2011. Exchange rate fluctuations negatively impacted net revenue by $7.7 million. Net revenue decreased 11.2 percent in the Americas region, 25.4 percent in Europe (approximately 22 percent on a constant currency basis), and 16.8 percent in Asia Pacific (approximately 16 percent on a constant currency basis). Each industry practice, with the exception of Education & Social Enterprise, contributed to the decline in net revenue. Net revenue from Leadership Consulting Services declined 20.5 percent to $36.1 million, and represented 8.1 percent of total net revenue in 2012.

The number of executive searches confirmed in 2012 was 3,585, down 16.1 percent compared to 4,274 in 2011. The average number of Executive Search and Leadership Consulting consultants in 2012 was 342 compared to 376 in 2011, and productivity, as measured by 2012 net revenue per average consultants, was $1.3 million compared to $1.4 million in 2011. The average revenue per executive search was $113,700 compared to $112,900 for the same period in 2011.

Operating income in 2012 was $19.6 million and operating margin was 4.4 percent. Excluding $1.7 million of costs related to the acquisition of Senn Delaney and $0.8 million of restructuring adjustments recorded in 2012, a non-GAAP measure which management believes more appropriately reflects core operations, operating income for 2012 would have been $22.2 million and operating margin would have been 5.0 percent. The operating loss in 2011 of $10.9 million included impairment charges of $26.4 million and restructuring charges of $16.3 million. Excluding these charges, which management believes more appropriately reflects core operations, operating income for 2011 would have been $31.8 million and operating margin would have been 6.0 percent.

Net income for 2012 was $6.2 million and diluted earnings per share were $0.34, reflecting an effective tax rate of 69.2 percent. The major drivers of the 2012 tax rate were the inability to recognize current tax benefits on losses in certain jurisdictions. The net loss in 2011 was $33.7 million and the loss per share was $1.90, reflecting a negative tax rate of 128.2 percent. The tax rate for 2011 was primarily a result of income that was reduced by the impairment charges without any tax benefit, the establishment of valuation allowances that increased tax expense, and an inability to recognize current tax benefits on losses in certain jurisdictions.

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 (loss) excluding restructuring and impairment charges more appropriately reflect the company's core operations.

Net revenue in the Americas declined $11.6 million or 16.7 percent year over year in the fourth quarter, driven by declines in the Consumer Markets, Life Sciences and Industrial practices, and in Leadership Consulting. Fourth quarter operating margin was 21.5 percent compared to 23.6 percent in the 2011 fourth quarter. Reductions in salaries and employee benefits expense and general and administrative expenses were offset by the decline in net revenue. For the year, net revenue declined $32.1 million or 11.2 percent driven by declines in Consumer Markets, Financial Services, Life Sciences and Global Technology and Services practices, and in Leadership Consulting. Operating income increased 1.6 percent and the operating margin improved to 24.2 percent, compared to 21.2 percent, reflecting reductions in salaries and employee benefits expense and general and administrative expenses, partially offset by the decline in net revenue.

Net revenue in Europe declined $9.6 million or 29.2 percent year over year in the fourth quarter. All industry practices and Leadership Consulting were down compared to the prior year. Operating margin in the 2012 fourth quarter was 0.3 percent compared to 9.9 percent in the 2011 fourth quarter, primarily reflecting the decline in net revenue. In 2012, net revenue declined $33.7 million or 25.4 percent (approximately 22 percent on a constant currency basis). Exchange rate fluctuations negatively impacted 2012 net revenue by $5.0 million. All industry practices and Leadership Consulting contributed to the decline. Total headcount in this region was approximately 12 percent lower than at December 31, 2011 which contributed to the decline in net revenue but also resulted in lower salaries and employee benefits expense. Lower operating expenses more than offset the decline in net revenue and resulted in a $1.8 million increase in operating income, and operating margin that improved to 3.1 percent from 0.9 percent.

Asia Pacific net revenue declined $2.1 million or 8.3 percent in the fourth quarter, reflecting declines in the Consumer Markets, Financial Services, Life Sciences, and Global Technology & Services practices. The region reported an operating loss of $0.1 million in the quarter which primarily reflected the decline in net revenue, but also an increase in fixed compensation expense related to a year-over-year increase in headcount of approximately 7 percent and an increase in general and administrative expenses. 2012 net revenue declined 16.8 percent (approximately 16 percent on a constant currency basis) compared to 2011 driven by the Consumer Markets, Financial Services, and Industrial Practices. Exchange rate fluctuations negatively impacted 2012 net revenue by $1.2 million. Operating income declined 70.8 percent and the operating margin was 4.2 percent compared to 12.0 percent in 2011, primarily reflecting the decline in net revenue, partially offset by a decrease in variable compensation expense.

Global Operations Support was $12.8 million in the fourth quarter, up 21.5 percent or $2.3 million compared to the 2011 fourth quarter. A majority of the increase, $1.7 million, related to costs associated with the company's acquisition of Senn Delaney. In 2012, Global Operations Support increased 11.3 percent or $4.9 million, mostly reflecting $2.5 million related to a global Partners' meeting in the 2012 third quarter, and $1.7 million to costs associated with the company's acquisition of Senn Delaney.

2013 Outlook

The company is forecasting 2013 first quarter net revenue of between $100 million and $110 million based on its assumptions for the anticipated volume of new Executive Search confirmations and Leadership Consulting assignments, 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.

"Restoring growth in our core Executive Search business is our foremost priority. We have increased our recruiting and professional development efforts, while reinforcing a culture of performance accountability, in order to attract and retain the best talent in the industry and increase productivity. Although we have made good progress on controlling costs, we continue to seek additional savings through process enhancements and efficiencies," Kelly said. "With the addition of culture shaping to our service platform, we are excited about the opportunities to expand our relationships with C-suite and board-level executives. As we celebrate our 60th anniversary, we are fully committed to growing our business and positioning Heidrick & Struggles for the next six decades."

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