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Heidrick & Struggles Reports a solid quarter

Consolidated net revenue (revenue before reimbursements) increased 10.0%, or $12.6 million, to $138.4 million from $125.8 million in the 2014 third quarter.  Excluding the impact of exchange rate fluctuations which negatively impacted results by $7.3 million, or 5.8%, consolidated net revenue increased $19.9 million or 15.8%.

Executive Search and Leadership Consulting net revenue increased 11.9% year over year, or $13.7 million, to $129.2 million. Excluding the impact of exchange rate fluctuations which negatively impacted results by $7.2 million, or 6.2%, net revenue in this business increased $20.9 million or 18.1%.  The increase was driven by a 20.4% year-over-year increase in the Americas and a 7.4% increase in Asia Pacific. Revenue in Europe declined 4.6% compared to last year's third quarter, but increased 7.5 % on a constant currency basis.  From a global practices perspective, the Global Technology & Services, Healthcare & Life Sciences, and Financial Services practices were the primary drivers of year-over-year growth in this business.

Net revenue from Culture Shaping services declined 11.2 %, or $1.1 million, to $9.2 million from $10.3 million in the 2014 third quarter, a record revenue quarter for the business. The quarter-to-quarter variability of results largely reflects the timing of project executions.  The impact of exchange rate fluctuations negatively impacted results by $0.2 million or 1.5 %.

"Solid revenue growth in the third quarter, up 15.8 % in constant currency, drove good improvements in adjusted EBITDA(1) , operating income and net income," said Tracy R. Wolstencroft, Heidrick & Struggles' President and Chief Executive Officer.  "It is gratifying to see the positive results of the concerted focus we have made to hire and retain the highest quality consultants in the business.  We will continue to focus our initiatives and gauge our progress on our four priorities--talent, clients, diversified solutions and operations—in order to drive long-term shareholder value."   

The company ended the third quarter with 334 Executive Search and Leadership Consulting consultants compared to 311 at September 30, 2014 and 325 at June 30, 2015.  Productivity, as measured by annualized Executive Search and Leadership Consulting net revenue per consultant, was $1.6 million in the 2015 third quarter, compared to $1.5 million in the 2014 third quarter.  Specific to Executive Search, the company's largest business, the number of confirmed searches in the 2015 third quarter increased 12.8 % compared to the 2014 third quarter. The average revenue per executive search was $121,200, or $127,800 on a constant currency basis, compared to $122,200 in the 2014 third quarter.

Salaries and employee benefits expense in the 2015 third quarter increased 13.9 %, or$11.7 million, to $95.7 million from $84.0 million in the 2014 third quarter.  Variable compensation expense increased $8.3 million primarily related to higher bonus accruals for consultant performance.  Fixed compensation expense increased $3.4 million, largely reflecting the year-over-year increase in headcount, primarily in the Americas, partially offset by the impact of foreign exchange rate fluctuations.  Salaries and employee benefits expense was 69.2 % of net revenue for the quarter, compared to 66.8 % in the 2014 third quarter. 

General and administrative expenses declined 7.6 %, or $2.4 million, to $29.8 million from$32.2 million in the 2014 third quarter.  The decrease reflects the impact of foreign exchange rate fluctuations and lower expenses, including hiring fees and internal meeting costs. As a %age of net revenue, general and administrative expenses were 21.5 % compared to 25.6 % in the 2014 third quarter.

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

Adjusted EBITDA(1)  in the 2015 third quarter increased 20.9 %, or $3.2 million, to $18.2 million compared to $15.0 million in the 2014 third quarter.  The Adjusted EBITDA margin (Adjusted EBITDA as a %age of net revenue) in the 2015 third quarter was 13.1 %, compared to 11.9 % in the 2014 third quarter.

Operating income in the 2015 third quarter increased 35.3 % year over year, or $3.3 million, to $12.9 million, and operating margin (operating income as a %age of net revenue) was 9.3 %.  This compares to operating income of $9.6 million and operating margin of 7.6 % in the 2014 third quarter.  The year-over-year improvements in Adjusted EBITDA and operating income reflect higher net revenue and a decrease in general and administrative expenses, partially offset by the increase in salaries and employee benefits expense. 

Net income in the 2015 third quarter increased to $7.5 million and diluted earnings per share were $0.40, based on an effective tax rate of 32.7 % in the quarter and a full-year projected tax rate of approximately 42 %.  In the 2014 third quarter, the company reported net income of $3.0 million and diluted earnings per share of $0.16 based on an effective tax rate of 66.4 % in the quarter and a full-year projected tax rate of approximately 75 % that reflected valuation allowances established in the 2014 second and third quarters.

Net cash provided by operating activities in the 2015 third quarter was $43.1 million, compared to $43.0 million in the 2014 third quarter.  Cash and cash equivalents at September 30, 2015were $129.0 million compared to $159.5 million at September 30, 2014 ($128.5 million net of debt) and $119.9 million ($93.4 million net of debt) at June 30, 2015.  On September 30, 2015, the company repaid in full the outstanding debt of $26.5 million on its revolving credit facility.   The company has a senior unsecured revolving credit facility in an aggregate amount of $100 million, with an optional increase in the credit facility up to $150 million.

Nine Months Results

For the nine months ended September 30, 2015 consolidated net revenue of $386.6 millionincreased 3.6 %, or $13.6 million, from $373.0 million in the first nine months of 2014.  Excluding the impact of exchange rate fluctuations which negatively impacted results by $19.1 million, or 5.1 %, consolidated net revenue increased $32.7 million or 8.8 %.

Executive Search and Leadership Consulting net revenue increased $14.1 million, or 4.1 %, to $361.0 million from $346.8 million in the first nine months of 2014.  Excluding the impact of exchange rate fluctuations which negatively impacted results by $18.8 million, or 5.4 %, net revenue in this business increased $32.9 million or 9.5 %.  Revenue growth in theAmericas of 13.2 % (approximately 14.7 % on a constant currency basis) and in Asia Pacific of 5.1 % (approximately 13.6 % on a constant currency basis) was partially offset by a decline in Europe of 17.7 % (approximately 5.7 % on a constant currency basis).    From a global practices perspective, the Healthcare & Life Sciences, Financial Services, and Global Technology & Services practices drove year-over-year growth.

Net revenue from Culture Shaping services declined 2.0 %, or $0.5 million, to $25.7 millionfrom $26.2 million in the first nine months of 2014.  Exchange rate fluctuations negatively impacted net revenue by $0.3 million, or about 1.3 %. 

Productivity, as measured by annualized Executive Search and Leadership Consulting net revenue per consultant, was $1.5 million for the first nine months of 2015, the same as the first nine months of 2014.  The number of executive searches confirmed in the first nine months of 2015 increased 5.7 % and the average revenue per executive search was $111,200compared to $113,400 for the same period in 2014, reflecting the negative impact of currency rate fluctuations. 

Adjusted EBITDA(1)  for the first nine months of 2015 improved to $44.5 million and Adjusted EBITDA margin was 11.5 %, compared to Adjusted EBITDA of $39.4 million and Adjusted EBITDA margin of 10.6 % for the same period of 2014. Operating income for the first nine months of 2015 improved to $28.8 million and operating margin was 7.4 % compared to operating income of $22.8 million and operating margin of 6.1 % for the first nine months of 2014.

Net income for the first nine months of 2015 was $15.9 million and diluted earnings per share were $0.85, reflecting an effective tax rate of 40.7 %.  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 %.  In addition to the valuation allowances established in the 2014 second and third quarters, the effective tax rate in 2014 was higher than the statutory rate because of losses incurred that could not be benefitted for tax purposes due to valuation allowances in certain jurisdictions.

Fourth Quarter 2015 Outlook

The company is forecasting fourth quarter 2015 consolidated net revenue of between $128 million and $138 million. This forecast is based on the average currency rates in September 2015 and reflects, among other factors, management's assumptions for the anticipated volume of new Executive Search confirmations, Leadership Consulting assignments and Culture Shaping services, the current backlog, consultant productivity, consultant retention, and the seasonality of its business.

Wolstencroft added, "We began the fourth quarter with the acquisition of Co Company, aLondon-based advisory boutique specializing in leadership and organizational development services.  With this acquisition we added consultant expertise, new service offerings, and scalable tools and methodologies. Additionally, Colin Price was appointed to lead Heidrick & Struggles' Leadership Consulting practice globally, with a clear directive to grow and scale the business to increase our impact with clients.  We are committed to serving clients as trusted advisors at the highest levels of an organization. We will continue to invest with purpose in capabilities that address client demand to improve our financial results and deliver the long-term value our shareholders expect. "

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