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Heidrick & Struggles reports net revenue of 11.5% in Q2 2014 results

Consolidated net revenue (revenue before reimbursements) increased 11.5 percent, or$14.0 million, to $136.1 million from $122.0 million in the 2013 second quarter.

Executive Search and Leadership Consulting net revenue increased 8.7 percent year over year, or $10.1 million, to $126.7 million. The increase was driven by a 34.0 percent increase in Europe (approximately 25 percent on a constant currency basis), and a 3.4 percent increase in the Americas. Revenue from Asia Pacific in the 2014 second quarter was essentially unchanged compared to the prior year quarter (increased approximately 2 percent on a constant currency basis). From a global practices perspective, the Consumer Markets, Financial Services and Global Technology & Services industry practices, three of the firm's four largest, were the primary drivers of year-over-year growth.

Net revenue from Culture Shaping services increased 71.9 percent, or $3.9 million, to $9.4 million from $5.4 million in the 2013 second quarter. Exchange rate fluctuations positively impacted net revenue by $0.1 million, or about 2 percent. Reported results in the 2013 second quarter excluded $1.5 million of pre-acquisition deferred revenue that the company was unable to recognize related to Senn Delaney as a result of purchase accounting.

The company ended the second quarter with 311 Executive Search and Leadership Consulting consultants compared to 303 at March 31, 2014 and 315 at June 30, 2013. Productivity, as measured by annualized net revenue per consultant, increased to $1.6 million compared to $1.5 million in the 2013 second quarter. Specific to Executive Search, the company's primary business, the number of confirmed searches increased 3.5 percent compared to the 2013 second quarter and the average revenue per executive search grew to $117,400 from $108,800 in the 2013 second quarter.

"Our second quarter results reflect year-over-year and sequential improvements in almost all of our operating segments and key metrics," said Tracy R. Wolstencroft, Heidrick & Struggles' President and Chief Executive Officer. "We are encouraged by the progress and by the continued growth in our consultant base since the beginning of the year. At the same time, we recognize there is still much work to be done to deliver a fully integrated service platform to our clients and to improve our financial performance."

Salaries and employee benefits expense in the second quarter increased 10.9 percent, or$9.1 million, to $92.1 million from $83.1 million in the 2013 second quarter. Variable compensation expense increased $9.5 million, primarily related to improved consultant performance reflected in higher net revenue, and fixed compensation expense decreased $0.5 million. Salaries and employee benefits expense was 67.7 percent of net revenue for the quarter, compared to 68.1 percent in the 2013 second quarter.

General and administrative expenses declined 5.4 percent, or $1.8 million, to $31.4 million from $33.2 million in the 2013 second quarter. The decrease was primarily driven by lower professional services fees. As a percentage of net revenue, general and administrative expenses were 23.1 percent compared to 27.2 percent in the 2013 second quarter.

Adjusted EBITDA(1) in the 2014 second quarter improved to $18.9 million compared to$11.9 million in the 2013 second quarter. The Adjusted EBITDA margin in the 2014 second quarter was 13.9 percent compared 9.7 percent in the 2013 second quarter. The year-over-year improvements mostly reflect the increase in net revenue and a decline in general and administrative expenses, partially offset by the increase in salaries and employee benefits expense.

Operating income in the second quarter increased by $6.8 million to $12.5 million and operating margin (operating income as a percentage of net revenue) improved to 9.2 percent, compared to operating income of $5.7 million and operating margin of 4.7 percent in the 2013 second quarter.

Net income in the 2014 second quarter was $3.8 million and diluted earnings per share were $0.21, based on an effective tax rate of 70.3 percent in the quarter and a full-year projected tax rate of approximately 73 percent. The second quarter tax rate partially reflects a valuation allowance established in Asia Pacific as well as the current forecasted mix of income by country. Net income in the 2013 second quarter was $1.9 million and diluted earnings per share were $0.11, based on an effective quarterly tax rate of 61.7 percent. In addition to the valuation allowance established in the 2014 second quarter, the effective tax rates in both years are higher than the statutory rate because of losses incurred that could not be benefitted for tax purposes due to valuation allowances in certain jurisdictions.

Net cash provided by operating activities in the 2014 second quarter was $29.6 million, compared to $20.6 million in the 2013 second quarter. Cash and cash equivalents at June 30, 2014 were $123.4 million ($90.9 million net of debt), compared to $99.7 million at June 30, 2013 ($61.2 million net of debt), and $101.4 million at March 31, 2014 ($67.4 million net of debt).  

(1) Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, stock-based compensation expense, compensation expense associated with Senn Delaney retention awards, earnout accretion expense related to acquisitions, restructuring charges, and other non-operating income (expense). Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures which the company believes are useful to management and meaningful to investors because they provide insight into the ongoing operating results of the company's core business. A reconciliation to the most directly comparable GAAP measures are provided on the last page of the financial statements in this release.

Six Months Results

For the six months ended June 30, 2014 consolidated net revenue of $247.2 million increased 9.9 percent from $225.0 million in the first six months of 2013. 

Executive Search and Leadership Consulting net revenue increased 8.1 percent year over year, or $17.3 million, to $231.3 million, driven by a 37.8 percent increase in Europe(approximately 30 percent on a constant currency basis). Revenue in the Americas increased 0.5 percent and revenue in Asia Pacific increased 2.0 percent (approximately 6 percent on a constant currency basis). From a global practices perspective, the Consumer Markets, Financial Services and Global Technology & Services industry groups were the primary drivers of year-over-year growth.

Net revenue from Culture Shaping services increased 44.0 percent, or $4.9 million, to$15.9 million from $11.0 million in the first six months of 2013. Exchange rate fluctuations positively impacted net revenue by $0.1 million, or about 1 percent. Reported results in the first six months of 2013 excluded $3.6 million of pre-acquisition deferred revenue that the company was unable to recognize related to Senn Delaney as a result of purchase accounting.

Productivity, as measured by annualized Executive Search and Leadership Consulting net revenue per consultant, was $1.5 million for the first six months of 2014 compared to $1.3 million for the same period of 2013. The number of executive searches confirmed in the first six months of 2014 increased 6.0 percent and the average revenue per executive search was $109,500 compared to $106,000 for the same period in 2013. 

Adjusted EBITDA(1)  for the first six months of 2014 improved to $24.8 million and Adjusted EBITDA margin was 10.1 percent, compared to Adjusted EBITDA of $18.5 million and Adjusted EBITDA margin of 8.2 percent for the same period of 2013. Operating income for the first six months of 2014 improved to $13.3 million and operating margin was 5.4 percent compared to operating income of $6.1 million and operating margin of 2.7 percent for the first six months of 2013.

Net income for the first six months of 2014 was $3.0 million and diluted earnings per share were $0.17, reflecting an effective tax rate of 77.0 percent. 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. In addition to the valuation allowance established in the 2014 second quarter, the effective tax rates in both years are higher than the statutory rate because of losses incurred that could not be benefitted for tax purposes due to valuation allowances in certain jurisdictions.

2014 Third Quarter Outlook

The company is forecasting 2014 third quarter consolidated net revenue of between$123 million and $133 million. Among other factors, this forecast reflects assumptions for the anticipated volume of new Executive Search confirmations, Leadership Consulting assignments, expectations for Culture Shaping services, the current backlog, consultant productivity, consultant retention, the seasonality of its business, the global economic climate and for no change in future currency rates. 

Wolstencroft added, "Our year-to-date results provide a stable foundation to pursue our growth strategy as a fully integrated leadership solutions provider. We are committed to investing in our people and in our client relationships in order to grow revenue and enhance shareholder value."

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