Heidrick & Struggles International Inc (Nasdaq: HSII) today announced financial results for its second quarter ended June 30 2020

Highlights:

• Net revenue of $1456 million
• Operating loss of $240 million and operating margin of (165%) reflect a non-cash impairment charge of $330 million
• Adjusted operating income of $90 million and adjusted operating margin of 62%
• Adjusted EBITDA of $124 million and adjusted EBITDA margin of 85%
• Liquidity of $3603 million at quarter-end
• Implementing restructuring plan in 2020 third quarter to optimize future growth and profitability
• Expect annual cost savings of $30 million to $40 million

I'm very pleased with the way our people have risen to the occasion and the resilience they have demonstrated in serving the needs of our clients throughout these unprecedented times Our second quarter results underscore continued demand for our services even in a challenging environment as the 'new normal' begins to emerge stated Heidrick & Struggles' President and Chief Executive Officer Krishnan Rajagopalan We are encouraged by the growth in confirmations in June across all regions in Executive Search and Heidrick Consulting and this trend has continued into July Additionally we are adjusting our cost structure and improving efficiencies to address the ongoing pressure on the global economy while further promoting our long-term ability to capitalize on our industry-leading platform strong balance sheet and compelling growth opportunities While the environment is volatile and much uncertainty remains about the duration and impact of the pandemic our focus is steadfast on creating shareholder value through serving our clients as a trusted global advisor especially during these unprecedented times

2020 Second Quarter Results

Consolidated net revenue (revenue before reimbursements) was $1456 million in the quarter compared to $1731 million in the 2019 second quarter  Excluding the impact of exchange rate fluctuations which impacted results by 14% consolidated net revenue declined $255 million  The reduction in net revenue was primarily due to the impact of the pandemic on a global basis 

Executive Search net revenue was $1342 million compared to $1585 million in the 2019 second quarter  Excluding the impact of exchange rate fluctuations of $20 million or 14% Executive Search net revenue declined $224 million  Net revenue decreased 156% in the Americas (decreased 150% on a constant currency basis) decreased 136% in Europe (decreased 114% on a constant currency basis) and decreased 172% in Asia Pacific (decreased 147% on a constant currency basis)  Growth in the Healthcare & Life Sciences and Social Impact industry practices was offset by reductions in the other industry practices

There were 394 Executive Search consultants at June 30 2020 compared to 371 at June 30 2019 and 396 at March 31 2020  Productivity as measured by annualized Executive Search net revenue per consultant was $14 million compared to $17 million in the 2019 second quarter The average revenue per executive search increased 139% to $141500 compared to $124200 in the 2019 second quarter while the number of confirmed searches decreased 257% compared the year-ago period

Heidrick Consulting net revenue was $114 million compared to $146 million in the 2019 second quarter  Excluding the impact from exchange rate fluctuations of 10% Heidrick Consulting net revenue decreased $30 million  There were 68 Heidrick Consulting consultants at June 30 2020 compared to 68 at June 30 2019 and 70 at March 31 2020 

Consolidated salaries and benefits expense decreased by 132% or $159 million to $1047 million from $1206 million in the 2019 second quarter Fixed compensation expense decreased by $22 million primarily due to lower talent acquisition and retention costs stock compensation and other benefit expenses such as retirement partially offset by increases in the deferred compensation plan and base salaries and payroll taxes  Variable compensation decreased $138 million due to lower revenue in the quarter Salaries and benefits expense was 719% of net revenue for the quarter compared to 697% in the 2019 second quarter 

General and administrative expenses decreased by 65% or $22 million to $320 million from $342 million in the 2019 second quarter primarily due to travel and entertainment office occupancy and the use of external third-party consultants partially offset by an increase in bad debt  As a percentage of net revenue general and administrative expenses were 220% compared to 197% in the 2019 second quarter

In the second quarter the company recorded a non-cash impairment charge of $330 million to adjust the carrying value of goodwill to fair value for its Asia Pacific and Europe operations This non-cash impairment charge does not impact the company's normal business operations cash flow from operating activities free cash flow liquidity or availability under its credit facilities

Including the non-cash impairment charge operating loss was $240 million compared to operating income of $184 million in the 2019 second quarter and operating margin was (165)% compared to 106%   Excluding the non-cash impairment charge adjusted operating income in the 2020 second quarter was $90 million and the adjusted operating margin was 62%  Adjusted EBITDA in the 2020 second quarter was $124 million compared to $240 million in the 2019 second quarter  Adjusted EBITDA margin was 85% compared to 139% in the 2019 second quarter 

Net loss was $257 million and diluted loss per share was $133 with an effective tax rate of (211)% in the quarter This compares to net income of $143 million and diluted earnings per share of $073 with an effective tax rate of 267% in last year's second quarter Excluding the impairment charge adjusted net income was $72 million and adjusted diluted earnings per share was $037 based on an adjusted effective tax rate of 383%

Net cash provided by operating activities increased 22% to $408 million in the 2020 second quarter compared to $334 million in the 2019 second quarter  Cash cash equivalents and marketable securities at June 30 2020 were $2878 million compared to $3329 million at December 31 2019 and $1440 million at June 30 2019  The company's cash position typically builds throughout the year as bonuses are accrued mostly to be paid out in the first quarter 

2020 Six Months Results

For the six months ended June 30 2020 consolidated net revenue was $3171 million compared to $3447 million in the first six months of 2019  Excluding the impact of exchange rate fluctuations which negatively impacted results by 12% or $40 million consolidated net revenue decreased 69% or $237 million 

Executive Search net revenue in the first six months of 2020 was $2896 million from $3169 million in the first six months of 2019  Excluding the impact of exchange rate fluctuations which negatively impacted results by 13% or $38 million net revenue decreased $235 million  Net revenue decreased 73% in the Americas (or 68% on a constant currency basis) decreased 76% in Europe (decreased 54% on a constant currency basis) and was down 151% in Asia Pacific (decreased 125% on a constant currency basis)  Growth in the Healthcare & Life Sciences practice was offset by declines in the other industry practices  Productivity was $15 million for the first six months of 2020 compared to $17 million in the first six months of 2019  The average revenue per executive search increased to $128400 in the first six months of 2020 from $123900 the same period in 2019 while the number of executive searches confirmed declined 117%

Heidrick Consulting net revenue in the first six months of 2020 declined 14% or $04 million to $275 million from $279 million in the first six months of 2019  Excluding the impact of exchange rate fluctuations Heidrick Consulting revenue declined 07% or $02 million

Operating loss for the first six months of 2020 was $58 million compared to operating income of $347 million in the same period of 2019  The operating margin was (18)% compared to 101% in the first six months of 2019  Excluding the non-cash impairment charge recorded in the 2020 second quarter adjusted operating income for the first six months of 2020 was $271 million and the adjusted operating margin was 86%  Adjusted EBITDA for the first six months of 2020 was $361 million and adjusted EBITDA margin was 114% compared to adjusted EBITDA of $447 million and adjusted EBITDA margin of 130% for the same period in 2019

Net loss for the first six months of 2020 was $171 million and diluted loss per share was $089 with an effective tax rate of (1490)%  This compares to net income of $264 million and diluted earnings per share of $135 in the first six months of 2019 with an effective tax rate of 312%  Excluding the impairment charge adjusted net income was $159 million and adjusted diluted earnings per share was $081 based on an adjusted effective tax rate of 391%

2020 Third Quarter Outlook

Given the continued uncertainty due to the COVID-19 pandemic the Company is not providing financial guidance for the 2020 third quarter

Restructuring

In the third quarter the Company is implementing a restructuring plan to optimize future growth and profitability The expected annual cost savings from the restructuring ranges from $30 million to $40 million  The primary components of the restructuring include a workforce reduction; a reduction of the firm's real estate expenses professional fees and the future elimination of certain deferred compensation programs In connection with this restructuring plan the Company expects to record pre-tax charges of approximately $30 million to $40 million in the 2020 third quarter

Dividend

The Board of Directors has declared a 2020 third quarter cash dividend of $015 per share payable on August 21 2020 to shareholders of record at the close of business on August 7 2020  

Quarterly Conference Call

Heidrick & Struggles will host a conference call to review its 2020 second quarter results today July 27 at 5:00 pm Eastern Time Participants may access the company's call and supporting slides through its website at wwwheidrickcom or by dialing (866) 211-4120 conference ID# 4242978  For those unable to participate on the live call a webcast and copy of the slides will be archived at wwwheidrickcom and available for up to 30 days following the investor call

About Heidrick & Struggles International Inc

Heidrick & Struggles (Nasdaq: HSII) serves the senior-level talent and leadership needs of the world's top organizations as a trusted advisor across executive search leadership assessment and development organization and team effectiveness and culture shaping services Heidrick & Struggles pioneered the profession of executive search more than 65 years ago Today the firm provides integrated leadership solutions to help our clients change the world one leadership team at a time® wwwheidrickcom

Non-GAAP Financial Measures

To supplement the financial results presented in accordance with generally accepted accounting principles in the United States (GAAP) Heidrick & Struggles presents certain non-GAAP financial measures A non-GAAP financial measure is defined as a numerical measure of a company's financial performance that excludes or includes amounts different than the most directly comparable measure calculated and presented in accordance with GAAP in the statements of comprehensive income balance sheets or statements of cash flow of the company Pursuant to the requirements of Regulation G this earnings release contains the most directly comparable GAAP financial measure to the non-GAAP financial measure

The non-GAAP financial measures used within this earnings release are adjusted operating income adjusted operating income margin adjusted net income adjusted basic and diluted earnings per share adjusted effective tax rate adjusted EBITDA adjusted EBITDA margin and impacts of foreign currency on current period results using prior period translation rates  These measures are presented because management uses this information to monitor and evaluate financial results and trends Management believes this information is also useful for investors Reconciliations of these non-GAAP financial measures with the most directly comparable measures calculated and presented in accordance with GAAP are provided as schedules attached to this release

Adjusted operating income reflects the exclusion of impairment charges for the three and six months ended June 30 2020

Adjusted operating income margin refers to adjusted operating income as a percentage of net revenue in the same period

Adjusted net income and adjusted diluted earnings per share reflect the exclusion of impairment charges for the three and six month periods ended June 30 2020

Adjusted effective tax rate reflects the exclusion of impairment charges for the three and six months ended June 30 2020

A reconciliation of adjusted operating income adjusted operating margin adjusted net income adjusted basic and diluted earnings per share and adjusted effective tax rate with the most directly comparable measure calculated and presented in accordance with GAAP is provided in this release

Adjusted EBITDA refers to earnings before interest taxes depreciation intangible amortization equity- settled stock compensation expense earnout accretion expense related to acquisitions contingent compensation related to acquisitions restructuring charges and other non-operating income (expense) 

Adjusted EBITDA margin refers to adjusted EBITDA as a percentage of net revenue in the same period 

The company evaluates its results of operations on both an as reported and a constant currency basis  The constant currency presentation is a non-GAAP financial measure which excludes the impact of fluctuations in foreign currency exchange rates The company believes providing constant currency information provides valuable supplemental information regarding its results of operations consistent with how it evaluates its performance  The company calculates constant currency percentages by converting its financial results in a local currency for a period using the average exchange rate for the prior period to which it is comparing  This calculation may differ from similarly-titled measures used by other companies

Safe Harbor Statement

This press release contains forward-looking statements The forward-looking statements are based on current expectations estimates forecasts and projections about the industry in which we operate and management's beliefs and assumptions Forward-looking statements may be identified by the use of words such as expects anticipates intends plans believes seeks estimates projects forecasts and similar expressions Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks uncertainties and assumptions that are difficult to predict Actual outcomes and results may differ materially from what is expressed forecasted or implied in the forward-looking statements Factors that may affect the outcome of the forward-looking statements include among other things the impacts direct and indirect of the COVID–19 pandemic on our business our consultants and employees and the overall economy; leadership changes our ability to attract integrate develop manage and retain qualified consultants and senior leaders; our ability to prevent our consultants from taking our clients with them to another firm; our ability to maintain our professional reputation and brand name; the fact that our net revenue may be affected by adverse economic conditions; our clients' ability to restrict us from recruiting their employees; the aggressive competition we face; our heavy reliance on information management systems; the fact that we face the risk of liability in the services we perform; the fact that data security data privacy and data protection laws and other evolving regulations and cross-border data transfer restrictions may limit the use of our services and adversely affect our business; social political regulatory and legal risks in markets where we operate; the impact of foreign currency exchange rate fluctuations; the fact that we may not be able to align our cost structure with net revenue; unfavorable tax law changes and tax authority rulings; our ability to realize our tax losses; the timing of the establishment or reversal of valuation allowance on deferred tax assets; any impairment of our goodwill other intangible assets and other long-lived assets; our ability to execute and integrate future acquisitions; the fact that we have anti-takeover provisions that make an acquisition of us difficult and expensive; our ability to access additional credit; and the increased cybersecurity requirements vulnerabilities threats and more sophisticated and targeted cyber-related attacks that could pose a risk to our systems networks solutions services and data We undertake no obligation to update publicly any forward-looking statements whether as a result of new information future events or otherwise  For more information on the factors that could affect the outcome of forward-looking statements refer to our Annual Report on Form 10-K under Risk Factors in Item 1A and our quarterly filings with the SEC We caution the reader that the list of factors may not be exhaustive We undertake no obligation to update publicly any forward-looking statements whether as a result of new information future events or otherwise

Contacts:

Investors & Analysts:
Suzanne Rosenberg - Vice President Investor Relations
+1 212 551 0554 [email protected]

Media:
Nina Chang – Vice President Corporate Communications
+1 212 551 1634 [email protected]