Heidrick & Struggles Reports Fourth Quarter & 2015 Financial Results

Highlights:

• Fourth quarter net revenue (revenue before reimbursements) increased 19.2% to $144.5 million from $121.3 million in the 2014 fourth quarter. Net revenue increased 23.4% on a constant currency basis.
• Adjusted EBITDA⁽¹⁾ in the fourth quarter improved to $11.4 million and Adjusted EBITDA margin⁽¹⁾ was 7.9%, compared to Adjusted EBITDA of $9.5 million and Adjusted EBITDA margin of 7.9% in the 2014 fourth quarter.
• For the year, net revenue of $531.1 million increased 7.5% from $494.3 million in 2014. Net revenue in 2015 increased 12.3% on a constant currency basis.
• Adjusted EBITDA in 2015 improved to $55.8 million and Adjusted EBITDA margin was 10.5%, compared to Adjusted EBITDA of $48.9 million and Adjusted EBITDA margin of 9.9% in 2014.
• The number of Executive Search and Leadership Consulting consultants was 334 at December 31, 2015 compared to 307 at December 31, 2014. 
• Specific to Executive Search and Leadership Consulting, consultant productivity, as measured by net revenue per consultant, was $1.6 million in the fourth quarter and $1.5 million for the year.
• Invested in the growth of its Leadership Consulting business with new leadership together with the acquisition of Co Company.

"Our fourth quarter and 2015 results reflect a second year of year-over-year growth in net revenue, profitability, and consultant headcount," said Tracy Wolstencroft, Heidrick & Struggles' President and Chief Executive Officer.  "The results show continued progress on our four priorities –our talent, clients, diversified solutions and internal operations.   In 2015, Heidrick & Struggles attracted and retained exceptional consultant talent across our global platform, delivered valuable leadership expertise and service to our clients, improved revenue growth and profitability, and increased shareholder value."

⁽¹⁾ Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, stock-based compensation expense, compensation expense associated with Senn Delaney retention awards, earn-out accretion expense related to acquisitions, restructuring charges, and other non-operating income (expense).  Adjusted EBITDA margin refers to adjusted EBITDA as a percentage of net revenue.  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.

2015 Fourth Quarter Results

Consolidated net revenue (revenue before reimbursements) increased 19.2 percent, or $23.2 million, to $144.5 million from $121.3 million in the 2014 fourth quarter.  Excluding the impact of exchange rate fluctuations which negatively impacted results by $5.1 million, or 4.2 percent, consolidated net revenue increased $28.4 million or 23.4 percent.

Executive Search and Leadership Consulting net revenue increased 18.8 percent year over year, or $21.2 million, to $133.9 million from $112.7 million in the 2014 fourth quarter.  Excluding the impact of exchange rate fluctuations which negatively impacted results by $5.0 million, or 4.4 percent, net revenue in this business increased $26.2 million or 23.2 percent.  All regions contributed to fourth quarter revenue growth in this business with Americas up 20.8 percent (22.2 percent on a constant currency basis), Europe up 27.0 percent (37.2 percent on a constant currency basis), and Asia Pacific up 2.2 percent (9.9 percent 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 fourth quarter year-over-year growth in this business.

Net revenue from Culture Shaping services increased 24.7 percent, or $2.2 million, to $10.7 million from $8.5 million in the 2014 fourth quarter. The year-over-year increase largely reflects the timing of project executions.  The impact of exchange rate fluctuations negatively impacted results by $0.1 million or 1.2 percent.

The company ended the fourth quarter and 2015 with 334 Executive Search and Leadership Consulting consultants compared to 307 at December 31, 2014 and 334 at September 30, 2015.  Productivity, as measured by annualized Executive Search and Leadership Consulting net revenue per consultant, was $1.6 million in the 2015 fourth quarter, compared to $1.4 million in the 2014 fourth quarter.  Specific to Executive Search, the company's largest business, the number of confirmed searches in the 2015 fourth quarter increased 12.7 percent compared to the 2014 fourth quarter. The average revenue per executive search was $128,600, or $133,500 on a constant currency basis, compared to $124,800 in the 2014 fourth quarter.

Salaries and employee benefits expense in the 2015 fourth quarter increased 22.4 percent, or $19.1 million, to $104.5 million from $85.4 million in the 2014 fourth quarter.  Variable compensation expense increased $10.0 million primarily related to higher bonus accruals for consultant performance.  Fixed compensation expense increased $9.1 million, largely reflecting higher minimum guarantees and sign-on bonuses for 2015 consultant hires, an increase in headcount, and higher stock-based compensation expense.  Salaries and employee benefits expense was 72.3 percent of net revenue for the quarter, compared to 70.4 percent in the 2014 fourth quarter. 

General and administrative expenses increased 8.3 percent, or $2.7 million, to $34.8 million from $32.1 million in the 2014 fourth quarter.  The increase primarily reflects higher professional services fees related mostly to non-recurring projects. As a percentage of net revenue, general and administrative expenses were 24.1 percent compared to 26.5 percent in the 2014 fourth quarter.

Adjusted EBITDA in the 2015 fourth quarter increased 19.0 percent, or $1.9 million, to $11.4 million compared to $9.5 million in the 2014 fourth quarter.  The Adjusted EBITDA margin (Adjusted EBITDA as a percentage of net revenue) in the 2015 fourth quarter was 7.9 percent, the same as in the 2014 fourth quarter.

Operating income in the 2015 fourth quarter increased 38.9 percent year over year, or $1.5 million, to $5.3 million, and operating margin (operating income as a percentage of net revenue) was 3.7 percent.  This compares to operating income of $3.8 million and operating margin of 3.1 percent in the 2014 fourth quarter.  The year-over-year improvements in Adjusted EBITDA and operating income reflect higher net revenue, partially offset by the increases in salaries and employee benefits and general and administrative expenses. 

Net income in the 2015 fourth quarter increased to $1.3 million and diluted earnings per share were $0.07, based on an effective tax rate of 73.6 percent in the quarter.   In the 2014 fourth quarter, the company reported net income of $0.8 million and diluted earnings per share of $0.04 based on an effective tax rate of 62.2 percent in the quarter.

Net cash provided by operating activities in the 2015 fourth quarter was $77.6 million, compared to $58.8 million in the 2014 fourth quarter.   Cash and cash equivalents at December 31, 2015 were $190.5 million compared to $211.4 million at December 31, 2014 ($181.9 million net of debt).  On September 30, 2015, the company repaid in full the outstanding debt of $26.5 million on its revolving credit facility.

2015 Results

For the fiscal year ended December 31, 2015 consolidated net revenue of $531.1 million increased 7.5 percent, or $36.8 million, from $494.3 million in 2014.  Excluding the impact of exchange rate fluctuations which negatively impacted results by $24.2 million, or 4.9 percent, consolidated net revenue increased $61.0 million or 12.3 percent.

Executive Search and Leadership Consulting 2015 net revenue increased $35.3 million, or 7.7 percent, to $494.8 million from $459.5 million in 2014.  Excluding the impact of exchange rate fluctuations which negatively impacted results by $23.7 million, or 5.2 percent, net revenue in this business increased $59.0 million or 12.8 percent.  Revenue growth in the Americas of 15.2 percent (approximately 16.6 percent on a constant currency basis) and in Asia Pacific of 4.5 percent (approximately 12.7 percent on a constant currency basis) was partially offset by a decline in Europe of 7.7 percent (approximately 3.9 percent growth 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 increased 4.5 percent in 2015, or $1.5 million, to $36.3 million from $34.8 million in 2014.  Exchange rate fluctuations negatively impacted net revenue by $0.4 million, or about 1.2 percent. 

Productivity, as measured by annualized Executive Search and Leadership Consulting net revenue per consultant, was $1.5 million in 2015, the same as in 2014.  The number of executive searches confirmed in 2015 was 4,024, an increase of 7.3 percent compared to 2014.  The average revenue per executive search was $115,300, or $120,800 on a constant currency basis, compared to $116,000 for the same period in 2014, reflecting the negative impact of currency rate fluctuations. 

Adjusted EBITDA in 2015 improved to $55.8 million and Adjusted EBITDA margin was 10.5 percent, compared to Adjusted EBITDA of $48.9 million and Adjusted EBITDA margin of 9.9 percent in 2014. Operating income in 2015 improved to $34.1 million and operating margin was 6.4 percent compared to operating income of $26.7 million and operating margin of 5.4 percent in 2014.

Net income in 2015 was $17.1 million and diluted earnings per share were $0.92 reflecting an effective tax rate of 45.7 percent.  Net income in 2014 was $6.8 million and diluted earnings per share were $0.37, reflecting an effective tax rate of 71.9 percent.  In addition to valuation allowances established in 2014 that negatively impacted the 2014 tax rate, the effective tax rates in both years were higher than the statutory rate primarily because of losses incurred that could not be benefitted for tax purposes.

First Quarter 2016 Outlook

The company is forecasting first quarter 2016 consolidated net revenue of between $120 million and $130 million. This forecast is based on the average currency rates in January 2016 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, "I want to thank all of our employees for their contributions to last year's results.  We begin 2016 with a strong foundation of global professionals and distinctive service offerings from which to serve our clients as trusted advisors, accelerating performance at the leader, leadership team, and organizational levels of an organization.  To grow and strengthen our business around the world, and provide greater return to our shareholders, we must continue to attract, develop and retain the very best professionals, increase the depth and breadth of our service capabilities and further improve our internal operations."