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Heidrick & Struggles Reports Second Quarter 2013 Financial Results

Heidrick & Struggles Reports Second Quarter 2013 Financial Results

Heidrick & Struggles International, Inc. the premier professional services firm focused on serving the leadership needs of top organizations globally, today announced financial results for its second quarter ended June 30, 2013.

Consolidated net revenue was $122.0 million in the second quarter, up 5.1 percent or $6.0 million from $116.1 million in the 2012 second quarter. Year over year, net revenue increased 11.4 percent in the Americas and increased 6.5 percent in Asia Pacific (approximately 9 percent on a constant currency basis), but declined 11.1 percent in Europe (approximately 13 percent on a constant currency basis). Growth in the Financial Services and Global Technology & Services Executive Search practices was partially offset by declines in the Education & Social Enterprise and Industrial practices. Net revenue from Leadership Consulting was $9.1 million, a decline of 5.9 percent from the 2012 second quarter, and revenue from Senn Delaney, the culture-shaping firm acquired on December 31, 2012, was $5.4 million.

"Improving conditions for Executive Search in the Americas and in Asia Pacific had a positive impact on our second quarter results while Europe remains in a challenging economic environment," said Jory Marino, Interim Chief Executive Officer. "Our year-over-year revenue comparisons also reflect the value that Senn Delaney brings to Heidrick & Struggles and reinforce the need to continue to broaden our leadership talent capabilities. We are especially pleased with a 19 percent sequential increase in revenue compared to the 2013 first quarter that was driven by growth in all regions, including the majority of our Executive Search practices and Leadership Consulting. The year-over-year and sequential revenue growth is particularly encouraging considering the smaller consultant base. Recruitment of senior-level consultants with established client relationships, retaining high performing consultants, and managing underperforming consultants will remain a key area of emphasis."

Excluding Senn Delaney, the company ended the second quarter with 315 Executive Search and Leadership Consulting consultants compared to 340 at June 30, 2012, reflecting both voluntary turnover and the company's performance management initiatives. The number of executive search confirmations in the quarter increased 6.7 percent compared to the 2012 second quarter, and the average revenue per executive search decreased to $108,800 compared to $114,800 in the 2012 second quarter. Excluding Senn Delaney, productivity, as measured by annualized net revenue per consultant, was $1.5 million, compared to $1.3 million in the 2012 second quarter.

Salaries and employee benefits increased 4.0 percent, or $3.2 million, to $83.1 million from $79.9 million in the 2012 second quarter. Variable compensation expense increased $2.4 million, primarily reflecting consultant performance.  Fixed compensation expense increased $0.8 million.  Excluding Senn Delaney, fixed compensation expense would have declined $2.6 million primarily due to decreases in guarantee and sign-on bonus expense, and lower consultant headcount. Salaries and employee benefits were 68.1 percent of net revenue for the quarter, compared to 68.8 percent in the 2012 second quarter.

General and administrative expenses increased 14.7 percent, or $4.3 million, to $33.2 million from $29.0 million in the 2012 second quarter. The addition of Senn Delaney represented $2.9 million of the increase, including $1.4 million related to the amortization of the acquired intangible assets and $0.5 million associated with the accretion of the earnout payment. A significant portion of the remaining $1.4 million increase included expenses associated with regional consultant meetings held in the Americas and Europe during the second quarter. As a percentage of net revenue, general and administrative expenses were 27.2 percent, compared to 25.0 percent in the 2012 second quarter.

As a result of the acquisition of Senn Delaney on December 31, 2012, the company began providing Adjusted EBITDA and Adjusted EBITDA margin comparisons, non-GAAP financial measures which management believes more appropriately reflect core operations. Adjusted EBITDA in the 2013 second quarter was $11.9 million and Adjusted EBITDA margin was 9.7 percent, compared to Adjusted EBITDA of $11.2 million and Adjusted EBITDA margin of 9.7 percent in the 2012 second quarter.

Net revenue in the Americas increased $7.5 million, or 11.4 percent year over year, to $72.8 million in the second quarter. The addition of Senn Delaney, representing $4.6 million, as well as increases in the Financial Services and Global Technology & Services search practices were the primary drivers of the growth for this region, partially offset by declines in the Industrial practice and Leadership Consulting. The America's operating margin improved to 24.8 percent compared to 23.6 percent in the 2012 second quarter as a result of the increase in net revenue, partially offset by an increase in salaries and employee benefits expense and general and administrative expenses, mostly related to Senn Delaney.

Net revenue in Europe declined $3.0 million, or 11.1 percent year over year, to $24.1 million in the second quarter (approximately 13 percent on a constant currency basis). Exchange rate fluctuations positively impacted year-over-year second quarter net revenue by $0.6 million. Senn Delaney represented $0.8 million of the 2013 second quarter revenue in this region. Revenue from Leadership Consulting and all search practices, except Consumer Markets and Life Sciences, declined compared to the prior year. The operating loss in Europe of $2.5 million, compared to operating income of $1.1 million in the 2012 second quarter, reflects the decline in net revenue and an increase in general and administrative expenses, partially offset by a decrease in salaries and employee benefits expense. 

Asia Pacific net revenue increased $1.5 million, or 6.5 percent, to $25.1 million in the second quarter (approximately 9 percent on a constant currency basis). Exchange rate fluctuations negatively impacted year-over-year second quarter net revenue by $0.5 million. Revenue growth in this region was driven by the Financial Services and Industrial search practices, as well as by Leadership Consulting. The operating margin in Asia Pacific improved to 11.7 percent compared to 9.3 percent in the 2012 second quarter reflecting an improvement in revenue, partially offset by an increase in salaries and employee benefits expense and in general and administrative expenses.

Global Operations Support was $12.8 million in the second quarter, an increase of $1.3 million compared to the 2012 second quarter that mostly reflects an increase in general and administrative expenses related to operating and infrastructure costs.

Six Months Results

For the six months ended June 30, 2013 consolidated net revenue of $225.0 million increased 1.1 percent from $222.6 million in the first six months of 2012. Net revenue increased 10.3 percent in the Americas and increased 1.7 percent in Asia Pacific (approximately 3 percent on a constant currency basis), but declined 20.4 percent in Europe. Revenue from Senn Delaney, acquired on December 31, 2012 was $11.0 million for the first six months of 2013, of which $9.6 million was in the Americas and $1.4 million in Europe.

Productivity, as measured by annualized net revenue per consultant excluding Senn Delaney, was $1.3 million for both the first six months of 2013 and 2012. The number of executive searches confirmed in the first six months of 2013 was essentially the same as in first six months of 2012. The average revenue per executive search was $106,000 compared to $107,400 for the same period in 2012.  Operating income for the first six months of 2013 was $6.1 million and operating margin was 2.7 percent compared to operating income of $9.9 million and operating margin of 4.5 percent for the first six months of 2012. Net income for the first six months of 2013 was $0.7 million and diluted earnings per share were $0.04, reflecting an effective tax rate of 86.0 percent. Net income for the first six months of 2012 was $2.5 million and diluted earnings per share were $0.14, reflecting an effective tax rate of 74.6 percent.

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