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Heidrick & Struggles report Q3 results

"Our third quarter results showed progress in certain areas, but we are capable of more," said Jory Marino, Interim Chief Executive Officer. "We are committed to providing clients with unparalleled expertise and service in order to help them build winning leadership teams. As part of this commitment, we will provide our employees with the best platform from which to work and build a career. By staying focused on these initiatives, we believe we can deliver the long-term growth and financial results that all our stakeholders expect."

Excluding Senn Delaney, the company ended the third quarter with 308 Executive Search and Leadership Consulting consultants compared to 332 at September 30, 2012. Partly reflecting lower consultant headcount, the number of executive search confirmations in the quarter decreased 5.3 percent compared to the 2012 third quarter. The average revenue per executive search increased to $124,500 compared to $123,700 in the 2012 third quarter. Excluding Senn Delaney, productivity, as measured by annualized net revenue per consultant, was $1.4 million, the same as in the 2012 third quarter.

Salaries and employee benefits expense increased 2.6 percent, or $2.0 million, to $81.7 million from $79.6 million in the 2012 third quarter. Included in the 2013 third quarter is $3.0 million of expense related to a separation agreement with the company's former chief executive officer. The $2.0 million year-over-year increase reflected an increase in variable compensation expense of $3.2 million, primarily related to consultant performance, and a decline in fixed compensation expense of $1.2 million, driven by decreases in guarantee and sign-on bonus expense and lower headcount, partially offset by the severance expense and the addition of Senn Delaney. Salaries and employee benefits expense was 68.6 percent of net revenue for the quarter, compared to 67.9 percent in the 2012 third quarter.

General and administrative expenses increased 5.3 percent, or $1.5 million, to $29.0 million from $27.5 million in the 2012 third quarter. The addition of Senn Delaney represented $3.3 million in the quarter, including $1.4 million related to the amortization of the acquired intangible assets and $0.5 million associated with the accretion of the expected earnout payments. The 2012 third quarter included $2.5 million of expenses related to a global Partners' meeting. As a percentage of net revenue, general and administrative expenses were 24.3 percent, compared to 23.4 percent in the 2012 third 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 third quarter was $13.8 million and Adjusted EBITDA margin was 11.6 percent, compared to Adjusted EBITDA of $14.1 million and Adjusted EBITDA margin of 12.1 percent in the 2012 third quarter.

The following table reconciles Operating Income to Adjusted EBITDA(1)

Three Months Ended

September 30,

$ in millions

2013

2012

Operating Income

 $ 8.4

 $ 10.2

Adjustments

Salaries and employee benefits

Stock-based compensation amortization

0.3

1.3

Senn Delaney retention awards

0.6

 -- 

General and administrative expenses

Depreciation

2.6

2.5

Intangible amortization

1.5

0.2

Senn Delaney earnout accretion

0.5

 -- 

Total Adjustments

5.4

4.0

Adujsted EBITDA(1)

 $ 13.8

 $ 14.1

Adjusted EBITDA Margin(1)

11.6%

12.1%

(Adjusted EBITDA as % of net revenue)

Regional Review

For segment purposes, reimbursements of out-of-pocket expenses classified as revenue and restructuring 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) more appropriately reflect the company's core operations.

$ in millions

3Q 13

3Q 12

Change

2Q 13

Change

Americas

Net revenue

 $ 71.1

 $ 72.4

 $ (1.4)

 $ 72.8

 $ (1.7)

Operating income

 $ 19.3

 $ 21.3

 $ (2.0)

 $ 18.1

 $ 1.2

Consultants

137

156

(19)

139

(2)

Europe

Net revenue

 $ 24.4

 $ 21.5

 $ 2.8

 $ 24.1

 $ 0.3

Operating income/(loss)

 $ 0.1

 $ 0.5

 $ (0.4)

 $ (2.5)

 $ 2.5

Consultants

87

91

(4)

89

(2)

Asia Pacific

Net revenue

 $ 23.5

 $ 23.4

 $ 0.2

 $ 25.1

 $ (1.6)

Operating income

 $ 2.3

 $ 1.5

 $ 0.9

 $ 2.9

 $ (0.6)

Consultants

84

85

(1)

87

(3)

Global Operations Support

 $ (13.3)

 $ (13.0)

 $ (0.3)

 $ (12.8)

 $ (0.5)

Operating income

 $ 8.4

 $ 10.2

 $ (1.8)

 $ 5.7

 $ 2.6

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

Net revenue in the Americas decreased $1.4 million, or 1.9 percent year over year, to $71.1 million in the third quarter. The addition of Senn Delaney, representing $5.6 million, improved consultant productivity, and increases in the Life Sciences and Global Technology & Services Search practices were offset by declines in the other industry Search practices and Leadership Consulting, and lower consultant headcount.  The America's operating margin was 27.1 percent compared to 29.4 percent in the 2012 third quarter largely as a result of an increase in general and administrative expenses, mostly related to Senn Delaney, partially offset by a decline in salaries and employee benefits expense. 

Net revenue in Europe increased $2.8 million, or 13.2 percent year over year, to $24.4 million in the third quarter (approximately 12 percent on a constant currency basis). Exchange rate fluctuations positively impacted year-over-year third quarter net revenue by $0.2 million. Senn Delaney represented $1.0 million of the 2013 third quarter revenue in this region. Revenue from Leadership Consulting and all Search practices, except Education & Social Enterprise and Global Technology & Services, increased compared to the prior year. The operating margin in Europe was 0.2 percent compared to 2.2 percent in the 2012 third quarter, reflecting the increase in net revenue, offset by increases in general and administrative expenses and salaries and employee benefits expense.  

Asia Pacific net revenue increased $0.2 million, or 0.8 percent, to $23.5 million in the third quarter (approximately 7 percent on a constant currency basis). Exchange rate fluctuations negatively impacted year-over-year third quarter net revenue by $1.5 million. Revenue growth in this region was driven by the Consumer Markets and Industrial Search practices, as well as by Leadership Consulting. The operating margin in Asia Pacific improved to 9.8 percent compared to 6.2 percent in the 2012 third quarter reflecting an improvement in revenue and a decrease in salaries and employee benefits expense, partially offset by an increase in general and administrative expenses. 

Global Operations Support was $13.3 million in the third quarter, an increase of $0.3 million compared to $13.0 million in the 2012 third quarter. Included in the 2013 third quarter is $3.0 million of expense related to a separation agreement with the company's former chief executive officer. Included in the 2012 third quarter was $2.5 million of expenses related to a global Partners' meeting.  

Nine Months Results

For the nine months ended September 30, 2013 consolidated net revenue of $344.0 million increased 1.2 percent from $339.9 million in the first nine months of 2012.  Net revenue increased 5.8 percent in the Americas and increased 1.4 percent in Asia Pacific (approximately 5 percent on a constant currency basis), but declined 10.9 percent in Europe (currency had minimal impact). Revenue from Senn Delaney, acquired on December 31, 2012 was $17.6 million for the first nine months of 2013, of which $15.1 million was in the Americas and $2.5 million in Europe.

Productivity, as measured by annualized net revenue per consultant excluding Senn Delaney, was $1.4 million for the first nine months of 2013, compared to $1.3 million for the same period of 2012. There were 1.7 percent fewer executive searches confirmed in the first nine months of 2013 compared to the first nine months of 2012 and the average revenue per executive search was $111,700 compared to $112,600 for the same period in 2012.  

Adjusted EBITDA for the first nine months of 2013 was $32.3 million and Adjusted EBITDA margin was 9.4 percent, compared to Adjusted EBITDA of $32.8 million and Adjusted EBITDA margin of 9.6 percent for the first nine months of 2012. 

The following table reconciles Operating Income to Adjusted EBITDA(1)

Nine Months Ended

September 30,

$ in millions

2013

2012

Operating Income

 $ 14.5

 $ 20.1

Adjustments

Salaries and employee benefits

Stock-based compensation amortization

2.5

3.9

Senn Delaney retention awards

1.8

--

General and administrative expenses

Depreciation

7.7

7.4

Intangible amortization

4.3

0.5

Senn Delaney earnout accretion

1.6

--

Restructuring charges

--

0.8

Total Adjustments

17.8

12.7

Adujsted EBITDA(1)

 $ 32.3

 $ 32.8

Adjusted EBITDA Margin(1)

9.4%

9.7%

(Adjusted EBITDA as % of net revenue)

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

Operating income for the first nine months of 2013 was $14.5 million and operating margin was 4.2 percent compared to operating income of $20.1 million and operating margin of 5.9 percent for the first nine months of 2012. Net income for the first nine months of 2013 was $4.8 million and diluted earnings per share were $0.27, reflecting an effective tax rate of 61.8 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. 

2013 Fourth Quarter Outlook

The company is forecasting 2013 fourth-quarter consolidated net revenue of between $100 million and $110 million. Among other factors, this forecast reflects assumptions for the anticipated volume of new Executive Search confirmations, Leadership Consulting assignments, expectations for Senn Delaney, the current backlog, consultant productivity, consultant retention, the seasonality of its business, the global economic climate and no change in future currency rates.

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