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Heidrick & Struggles reports a Q3 consolidated net revenue increase of 5.8%

Consolidated net revenue (revenue before reimbursements) increased 5.8 percent, or $6.8 million, to $125.8 million from $119.0 million in the 2013 third quarter.  The positive impact of exchange rate fluctuations resulted in $1.3 million of the increase, or about 1 percent of the growth.

Executive Search and Leadership Consulting net revenue increased 2.7 percent year over year, or $3.1 million, to $115.5 million. The improvement was driven by performance in Europe, where revenue increased 16.4 percent, or $3.8 million (approximately 12 percent on a constant currency basis).  Net revenue declined by $0.5 million in the Americas and by $0.2 million in Asia Pacific.  From a global practices perspective, the Financial Services, Industrial, 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 57.4 percent, or $3.8 million, to $10.3 million from $6.6 million in the 2013 third quarter. The improvement in net revenue primarily reflects the stage of the project execution for several large clients.

The company ended the third quarter with 311 Executive Search and Leadership Consulting consultants, the same as at June 30, 2014, and compared to 308 at September 30, 2013.  Productivity, as measured by annualized net revenue per consultant, increased to $1.5 million compared to $1.4 million in the 2013 third quarter.  Specific to Executive Search, the company's primary business, the number of confirmed searches increased 8.1 percent compared to the 2013 third quarter and the average revenue per executive search was $122,200 compared to$124,500 in the 2013 third quarter.

"Our third quarter results reflect steady progress in stabilizing and rebuilding our business," said Tracy R. Wolstencroft, Heidrick & Struggles' President and Chief Executive Officer.  "During the quarter, we advanced several initiatives that support our vision to provide integrated leadership solutions to the world's leading organizations.  We began working on our largest integrated Search, Leadership Consulting and Culture Shaping services assignment to date and we rolled out two recently developed tools that add to our data and analytical capabilities and enhance the judgment we provide our clients making human capital decisions.  Although our results are trending in the right direction, we need to accelerate improvements, with revenue growth being the most important deliverable."

Salaries and employee benefits expense in the third quarter increased 2.9 percent, or $2.4 million, to $84.0 million from $81.7 million in the 2013 third quarter.  Variable compensation expense increased $3.1 million, primarily related to improved performance reflected in higher net revenue. Fixed compensation expense decreased $0.7 million, reflecting the absence of severance expense recognized for an executive departure in the 2013 third quarter, partially offset by an increase in base salaries and employee benefits expense. Salaries and employee benefits expense was 66.8 percent of net revenue for the quarter, compared to 68.6 percent in the 2013 third quarter.

General and administrative expenses increased 11.3 percent, or $3.3 million, to $32.2 millionfrom $29.0 million in the 2013 third quarter.  The increase reflects $1.8 million of expenses associated with the global partners' meeting held in the third quarter, as well as approximately$1.0 million for professional services, hiring and staffing fees. As a percentage of net revenue, general and administrative expenses were 25.6 percent compared to 24.3 percent in the 2013 third quarter.

Adjusted EBITDA(1)  in the 2014 third quarter improved to $15.0 million compared to $13.8 million in the 2013 third quarter.  The Adjusted EBITDA margin (Adjusted EBITDA as a percentage of net revenue) in the 2014 third quarter was 11.9 percent, compared to 11.6 percent in the 2013 third quarter.  The year-over-year improvement in Adjusted EBITDA mostly reflects higher net revenue, partially offset by the increase in salaries and employee benefits expense and general and administrative expenses.

Operating income in the third quarter increased by $1.2 million to $9.6 million and operating margin (operating income as a percentage of net revenue) improved to 7.6 percent, compared to operating income of $8.4 million and operating margin of 7.0 percent in the 2013 third quarter.

Net income in the 2014 third quarter was $3.0 million and diluted earnings per share were $0.16, based on an effective tax rate of 66.4 percent in the quarter and a full-year projected tax rate of approximately 75 percent.  The third quarter tax rate reflects a valuation allowance established in Asia Pacific as well as the current forecasted mix of income by country.  Net income in the 2013 third quarter was $4.1 million and diluted earnings per share were $0.23, based on an effective quarterly tax rate of 45.4 percent.  In addition to the valuation allowance established in the 2014 third 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 third quarter was $43.0 million, compared to $36.6 million in the 2013 third quarter. Cash and cash equivalents at September 30, 2014 were$159.5 million ($128.5 million net of debt), compared to $132.8 million at September 30, 2013($95.8 million net of debt) and $123.4 million at June 30, 2014 ($90.9 million net of debt). 

(1) Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, stock-based compensation expense, compensation expense associated withSenn 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.

Nine Months Results

For the nine months ended September 30, 2014 consolidated net revenue of $373.0 millionincreased 8.4 percent from $344.0 million in the first nine months of 2013. The impact of exchange rate fluctuations was less than 1 percent.

Executive Search and Leadership Consulting net revenue increased 6.3 percent year over year, or $20.4 million, to $346.8 million, driven by a 30.1 percent increase in Europe (approximately 24 percent on a constant currency basis).  Compared to the first nine months of 2013, revenue in the Americas was essentially the same and revenue in Asia Pacific increased 1.0 percent (approximately 3 percent on a constant currency basis).  From a global practices perspective, the Consumer Markets, Financial Services and Global Technology & Services industry groups were the drivers of year-over-year growth.

Net revenue from Culture Shaping services increased 49.0 percent, or $8.6 million, to $26.2 million from $17.6 million in the first nine months of 2013.  Reported results in the first nine months of 2013 excluded $3.9 million of pre-acquisition deferred revenue related to Senn Delaney that the company was unable to recognize 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 nine months of 2014 compared to $1.4 million for the same period of 2013.  Specific to Executive Search, the company's primary business, the number of confirmed searches in the first nine months of 2014 increased 6.6 percent and the average revenue per executive search was $113,400 compared to $111,700 for the same period in 2013. 

Adjusted EBITDA(1)  for the first nine months of 2014 improved to $39.4 million and Adjusted EBITDA margin was 10.6 percent, compared to Adjusted EBITDA of $32.3 million and Adjusted EBITDA margin of 9.4 percent for the same period of 2013. Operating income for the first nine months of 2014 improved to $22.8 million and operating margin was 6.1 percent compared to operating income of $14.5 million and operating margin of 4.2 percent for the first nine months of 2013.

Net income for the first nine months of 2014 was $6.0 million and diluted earnings per share were $0.33, reflecting an effective tax rate of 72.8 percent.  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.  In addition to valuation allowances established in the 2014 second and third quarters, 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 Fourth Quarter Outlook

The company is forecasting 2014 fourth quarter consolidated net revenue of between $112 million and $123 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 reflect improvement in many of our operating and business metrics.  We have also made good progress in advancing our growth strategy as a fully integrated leadership solutions provider.  By leveraging the foundation that we have established this year, focusing on collaboration and innovation to help our clients address their leadership needs, and investing in our people and service offerings we can deliver the long-term value our shareholders expect."

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