Heidrick & Struggles Reports 2012 Second Quarter Financial Results
Heidrick & Struggles International, the leadership advisory firm providing executive search and leadership consulting services worldwide, announced financial results for its second quarter ended June 30, 2012.
2012 Second Quarter Summary
• Net revenue of $116.1 million declined 18.7 percent year over year.
• Salaries and employee benefits expense decreased $19.4 million or 19.5 percent.
• General and administrative expenses declined by $4.3 million or 13.0 percent.
• Operating margin was 5.8 percent compared to 7.2 percent in the 2011 second quarter.
• Latitude, the company's proprietary system under development for the last two years, went live on June 25 providing employees access to state-of-the-art technology, enhanced connectivity, and the opportunity for increased productivity.
• The company strengthened its presence in the Middle East with the addition of three senior partners, and their teams, and now has the scale and expertise to address its clients' growing talent needs in the region.
"Although revenue improved compared to the first quarter, confirmation trends fell short of our expectations and second quarter results were disappointing," said L. Kevin Kelly, Chief Executive Officer. "Search confirmations were adversely impacted by increasing uncertainty about the pace of global economic recovery, including the euro-zone financial crisis, as well as continued weakness in hiring trends and investment spending generally. Higher than expected consultant turnover also impacted the quarter. Despite the economic environment, we remain focused on serving our clients at the top of their organizations and on achieving higher operating margin through the improvements we've made to our cost structure over the last year."
Consolidated net revenue was $116.1 million in the second quarter, down 18.7 percent from $142.8 million in the 2011 second quarter, or approximately 16 percent on a constant currency basis. Exchange rate fluctuations negatively impacted net revenue by $3.8 million. Year over year, net revenue declined 14.9 percent in the Americas, 21.3 percent in Europe (approximately 13 percent on a constant currency basis), and 25.2 percent in Asia Pacific (approximately 24 percent on a constant currency basis). All industry practices except the Education & Social Enterprise practice contributed to the decline. Net revenue from Leadership Consulting Services was $9.6 million, a decline of 21.7 percent from the 2011 second quarter, and represented 8.3 percent of total net revenue.
The number of executive search and leadership consulting consultants at June 30, 2012 was 340, compared to 386 at June 30, 2011, and 343 at March 31, 2012. The year-over-year comparison primarily reflects a global workforce reduction in the 2011 fourth quarter. The number of executive search confirmations in the quarter declined 23.8 percent compared to the 2011 second quarter, and declined 3.7 percent compared to the 2012 first quarter. Productivity, as measured by annualized net revenue per consultant, was $1.3 million, compared to $1.5 million in the 2011 second quarter and $1.2 million in the 2012 first quarter. Average revenue per executive search was $114,800 compared to $107,400 in the 2011 second quarter and $100,300 in the 2012 first quarter.
Salaries and employee benefits decreased 19.5 percent, or $19.4 million, to $79.9 million from $99.2 million in the 2011 second quarter. Fixed compensation expense decreased $11.5 million, mostly reflecting a reduction in worldwide headcount of approximately 10 percent compared to the 2011 second quarter. Variable compensation expense decreased $7.9 million, primarily reflecting lower bonus accruals in the quarter related to lower net revenue. Salaries and employee benefits were 68.8 percent of net revenue for the quarter, compared to 69.5 percent in the 2011 second quarter.
General and administrative expenses decreased 13.0 percent, or $4.3 million, to $29.0 million from $33.3 million in the 2011 second quarter. The decline was a result of a number of expense reductions, the two largest being travel and entertainment expenses and premise related costs. As a percentage of net revenue, consolidated general and administrative expenses were 25.0 percent, compared to 23.3 percent in the 2011 second quarter.
Restructuring charges of $0.5 million recorded in the 2012 second quarter reflect adjustments to estimates that related to initiatives the company took in the 2011 fourth quarter to reduce overall costs and improve operational efficiencies. Operating income was $6.7 million and operating margin was 5.8 percent. Excluding the restructuring charges of $0.5 million, which management believes more appropriately reflects core operations, operating income was $7.2 million and operating margin was 6.2 percent compared to operating income of $10.3 million and operating margin of 7.2 percent in the 2011 second quarter. The declines reflect lower net revenue, partially offset by reductions in salaries and employee benefits and general and administrative expenses.
Net income was $1.9 million and diluted earnings per share were $0.10. The effective tax rate in the quarter of 66.3 percent is mainly due to losses not benefitted for tax purposes and is based on a full year projected tax rate of approximately 57 percent. In the 2011 second quarter, net income was $7.4 million and diluted earnings per share were $0.41, which reflected an effective tax rate of 32.5 percent.
Net cash provided by operating activities in the quarter was $22.2 million, compared to $17.6 million in the 2011 second quarter. Cash and cash equivalents at June 30, 2012 were $96.9 million, compared to $82.6 million at March 31, 2012, and $103.1 million at June 30, 2011.