Heidrick & Struggles Posts Record Quarterly Results
Today Heidrick & Struggles International, Inc. (Nasdaq: HSII) announced financial results for its second quarter ended June 30, 2022.
Second Quarter Highlights:
Net revenue reached a record $298.7 million, an increase of 14.9% versus the prior year period
Operating income increased to $33.9 million, 18.0% higher than the prior year period
Net income and adjusted net income were $24.1 million; diluted and adjusted diluted earnings per share were $1.19; year-to-date diluted earnings per share reached a record $2.08
Adjusted EBITDA was $36.8 million and adjusted EBITDA margin was 12.3%
Cash and cash equivalents was $336.6 million, 41.5% higher than at June 30, 2021
"Our firm generated all-time high quarterly revenue and delivered another very strong margin performance," stated Heidrick & Struggles' President and Chief Executive Officer, Krishnan Rajagopalan. "As companies adopt revolutionary new ways of working and make stronger than ever commitments to DE&I, purpose and sustainability, our firm is transforming and building a virtuous cycle of leadership offerings, including new digital leadership solutions, that address our clients' evolving and most critical needs. Each of these offerings drives interconnectivity through our One Heidrick approach, while leveraging our unique assets – Executive Search, On-Demand Talent, Heidrick Consulting. Our differentiated strategy is working, and we are already starting to benefit from an increasingly diversified business with expanding cross-collaboration opportunities that drive our clients' success and create long-term shareholder value."
2022 Second Quarter Results
Record consolidated net revenue of $298.7 million grew by $38.7 million, or 14.9%, compared to prior record consolidated net revenue of $260.0 million in the 2021 second quarter. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 3.3%, or $8.5 million, consolidated net revenue increased 18.2%, or $47.2 million. Net revenue growth was driven by the Americas and Europe in Executive Search, as well as growth across Heidrick Consulting and On-Demand Talent.
Executive Search net revenue of $253.9 million increased by $29.8 million, or 13.3%, compared to net revenue of $224.1 million in the 2021 second quarter. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 3.3%, or $7.3 million, net revenue increased 16.6%, or $37.1 million. Net revenue increased 19.4% in the Americas (up 19.3% on a constant currency basis), increased 7.2% in Europe (up 20.2% on a constant currency basis), and decreased 6.5% in Asia Pacific (down 1.4% on a constant currency basis). All industry practices exhibited growth compared to the prior year, except for Healthcare & Life Sciences.
The Company had 388 Executive Search consultants at June 30, 2022, compared to 369 at June 30, 2021. Productivity, as measured by annualized Executive Search net revenue per consultant, was $2.6 million up from $2.4 million in the 2021 second quarter. Average revenue per executive search was approximately $152,600, up from $132,700 a year earlier. The number of confirmed searches decreased 1.5% compared to the year-ago period.
On-Demand Talent net revenue of $22.4 million increased by $3.6 million, or 19.4%, compared to net revenue of $18.7 million in the 2021 second quarter. This was generated by an increase in average project size reflecting strategic initiatives to expand and penetrate key accounts, along with an increase in project extensions.
Heidrick Consulting net revenue of $22.4 million increased by $5.3 million, or 31.0%, compared to net revenue of $17.1 million in the 2021 second quarter. The Company had 66 Heidrick Consulting consultants at June 30, 2022, compared to 65 at June 30, 2021.
Consolidated salaries and benefits were $207.7 million compared to $186.1 million in the 2021 second quarter. Year-over-year, fixed compensation expense decreased $6.6 million due to the deferred compensation plan, stock compensation, and talent acquisition and retention costs, partially offset by an increase in base salaries and payroll taxes. Variable compensation increased $28.3 million year-over-year due to an increase in production. Salaries and benefits expense was 69.5% of net revenue for the quarter, compared to 71.6% in the 2021 second quarter.
General and administrative expenses were $35.2 million compared to $27.4 million in the 2021 second quarter. The increase was primarily due to internal travel expense, specifically the Company's global consultants' conference, and professional, IT and hiring fees, partially offset by a decrease in taxes and licenses. As a percentage of net revenue, general and administrative expenses were 11.8% compared to 10.5% in the 2021 second quarter.
The Company's cost of services was $17.4 million, or 5.8% of net revenue for the quarter, compared to $14.7 million, or 5.6% of net revenue in the 2021 second quarter, primarily related to On-Demand Talent and an increase in the volume of consulting engagements.
Research and development, a new category of expense that captures expenses associated with new digital product development efforts, was $4.5 million, or 1.5% of net revenue for the quarter. Consistent with all investments, research and development is subject to the Company's return on investment criteria.
Operating income was $33.9 million, or 18.0% higher than $28.7 million in the 2021 second quarter. Operating income margin was 11.3% up from 11.0% in the 2021 second quarter. Year-ago results included a $3.2 million restructuring charge related to the timing of office closures associated with the Company's real estate strategy. Excluding this charge, adjusted operating income in the 2021 second quarter was $31.9 million and adjusted operating income margin was 12.3%.
Net income was $24.1 million and diluted earnings per share was $1.19, with an effective tax rate of 30.9%. This compares to net income of $20.8 million and diluted earnings per share of $1.03, with an effective tax rate of 34.6%, in the 2021 second quarter. Excluding the aforementioned restructuring charge in the 2021 second quarter, adjusted net income was $22.9 million and adjusted diluted earnings per share was $1.14, with an effective tax rate of 34.5%.
Adjusted EBITDA was $36.8 million compared to $39.2 million in the 2021 second quarter. Adjusted EBITDA margin was 12.3%, compared to 15.1% in the 2021 second quarter.
Net cash used in operating activities was $179.5 million, compared to net cash used in operating activities of $52.3 million in the 2021 second quarter. Cash and cash equivalents at June 30, 2022 was $336.6 million, compared to $545.2 million at December 31, 2021 and $237.8 million at June 30, 2021. The Company's cash position typically builds throughout the year as employee bonuses are accrued, mostly to be paid out in the first quarter. There was no debt on the balance sheet at June 30, 2022, providing the Company financial flexibility.
2022 Six Months Results
For the six months ended June 30, 2022, consolidated net revenue was $582.6 million compared to $453.6 million in the first six months of 2021. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 2.7%, or $12.3 million, consolidated net revenue increased 31.1%, or $141.2 million, compared to the prior year period.
Executive Search net revenue in the first six months of 2022 increased 23.0%, or $92.7 million, to $496.5 million from $403.8 million in the first six months of 2021. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 2.7%, or $10.8 million, net revenue increased 25.6%, or $103.5 million. Net revenue increased 28.3% in the Americas (increased 28.2% on a constant currency basis), increased 18.6% in Europe (increased 28.9% on a constant currency basis), and increased 4.7% in Asia Pacific (increased 9.2% on a constant currency basis). All industry practices exhibited growth over the prior year, except for Healthcare & Life Sciences. Productivity was $2.6 million for the first six months of 2022 compared to $2.2 million in the first six months of 2021. The average revenue per executive search was $137,100 in the first six months of 2022 compared to $123,100 the same period in 2021, while confirmations increased 10.5%.
On-Demand Talent net revenue in the first six months of 2022 was $45.7 million compared to $18.7 million in the same period of 2021. The increase in net revenue was primarily due to the timing of the acquisition in the prior year and an increase in the average project size.
Heidrick Consulting net revenue in the first six months of 2022 increased 29.5%, or $9.2 million, to $40.4 million from $31.2 million in the first six months of 2021. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 4.5%, or $1.4 million, Heidrick Consulting revenue increased 34.0%, or $10.6 million, compared to the prior year period.
Operating income for the first six months of 2022 was $64.1 million compared to operating income of $48.3 million in the same period of 2021. The operating income margin was 11.0% compared to 10.7% in the first six months of 2021. Excluding the restructuring charge recorded in the 2021 year-to-date period, adjusted operating income was $55.4 million and adjusted operating income margin was 12.2%.
Net income for the first six months of 2022 was $42.6 million and diluted earnings per share was $2.08, with an effective tax rate of 32.2%. This compares to net income of $35.6 million and diluted earnings per share of $1.76 in the first six months of 2021. Excluding the restructuring charge recorded in the 2021 year-to-date period, adjusted net income was $40.3 million and adjusted diluted earnings per share was $2.00. The adjusted effective tax rate was 34.6% in the 2021 year-to-date period.
Adjusted EBITDA for the first six months of 2022 was $72.5 million and adjusted EBITDA margin was 12.4%, compared to adjusted EBITDA of $69.0 million and adjusted EBITDA margin of 15.2% for the same period in 2021.
The Board of Directors declared a 2022 third quarter cash dividend of $0.15 per share payable on August 19, 2022, to shareholders of record at the close of business on August 5, 2022.
2022 Third Quarter Outlook
The Company expects 2022 third quarter consolidated net revenue of between $260 million and $270 million, while acknowledging that some continued fluidity in external factors such as foreign conflicts, inflation, the interest rate and foreign exchange rate environments may impact quarterly results. In addition, this outlook is based on the average currency rates in June 2022 and reflects, among other factors, management's assumptions for the anticipated volume of new Executive Search confirmations, On-Demand Talent projects, and Heidrick Consulting assignments, consultant productivity, consultant retention, and the seasonality of the business, along with the current backlog.
Quarterly Webcast and Conference Call
Heidrick & Struggles will host a conference call to review its second quarter results today, July 25, 2022 at 5:00 pm Eastern Time. Participants may access the Company's call and supporting slides through its website at www.heidrick.com or by dialing (888) 440-4091 or (646) 960-0846, conference ID# 6106012. For those unable to participate on the live call, a webcast and copy of the slides will be archived at www.heidrick.com and available for up to 30 days following the investor call.
About Heidrick & Struggles International, Inc.
Heidrick & Struggles (Nasdaq: HSII) is a premier provider of global leadership advisory and on-demand talent solutions, serving the senior-level talent and consulting needs of the world's top organizations. In our role as trusted leadership advisors, we partner with our clients to develop future-ready leaders and organizations, bringing together our services and offerings in executive search, diversity and inclusion, leadership assessment and development, organization and team acceleration, culture shaping and on-demand, independent talent solutions. Heidrick & Struggles pioneered the profession of executive search more than 65 years ago. Today, the firm provides integrated talent and human capital solutions to help our clients change the world, one leadership team at a time. ® www.heidrick.com
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.
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 consolidated and segment net revenue excluding the impact of exchange rate fluctuations. 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 to evaluate the comparability of financial information presented. Reconciliations of these non-GAAP financial measures to 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 restructuring charges.
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 restructuring charges, net of tax.
Adjusted effective tax rate reflects the exclusion of restructuring charges, net of tax.
Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, equity-settled stock compensation expense, earnout accretion, contingent compensation related to acquisitions, deferred compensation plan income and expense, 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.
Safe Harbor Statement
This press release contains forward-looking statements within the meaning of the federal securities laws, including statements regarding guidance for the third quarter of 2022. 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," "outlook," "projects," "forecasts," and similar expressions. Forward-looking statements are not guarantees of future performance, rely on a number of assumptions, and involve certain known and unknown risks and uncertainties that are difficult to predict, many of which are beyond our control. Factors that may cause actual outcomes and results to differ materially from what is expressed, forecasted, or implied in the forward-looking statements include, among other things, the impacts, direct and indirect, of the COVID-19 pandemic (including the emergence of variant strains) on our business, our consultants and employees, and the overall economy; the impact on the global or a regional economy due to the outbreak or escalation of hostilities or war; 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 is 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; any challenges to the classification of our on-demand talent as independent contractors; 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 caution the reader that the list of factors may not be exhaustive. For more information on these risks, uncertainties and other factors, refer to our Annual Report on Form 10-K for the year ended December 31, 2021, under the heading "Risk Factors" in Item 1A, as updated in Part II of our subsequent Quarterly Reports on Form 10-Q, and other filings with the Securities and Exchange Commission. The forward-looking statements contained in this press release speak only as of the date of this press release. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.