UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20162019
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-25837
HEIDRICK & STRUGGLES
INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
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| Delaware | | 36-2681268 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
233 South Wacker Drive, Suite 4900, Chicago, Illinois 60606-6303
(Address of principal executive offices) (Zip Code)
(312) 496-1200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | | Trading Symbol | | Name of Each Exchange On Which Registered |
Common Stock, $.01$0.01 par value | | The HSII | | Nasdaq Stock Market LLC (Nasdaq Global Stock Market) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K Yes x No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitiondefinitions of “large accelerated filer,” “accelerated filer” andfiler," “smaller reporting company”company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | | ¨ | | Accelerated filer | x |
| Non-Accelerated filer | | ¨ (Do not check if a smaller reporting company) | | Smaller reporting company | ¨ |
| Emerging growth company | | ¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the registrant’s Common Stock held by non-affiliates (excludes shares held by executive officers, directors and beneficial owners of 10% or more of the registrant’s outstanding Common Stock) on June 30, 201628, 2019 was approximately $313,583,642$484,944,428 based upon the closing market price of $16.88$29.97 on that date of a share of Common Stock as reported on the Nasdaq Global Stock Market. As of March 10, 2017,February 21, 2020, there were 18,670,90119,170,352 shares of the Company’sregistrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 25, 2017,28, 2020, are incorporated by reference into Part III of this Form 10-K.
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS
Overview
Heidrick & Struggles International, Inc. (“Heidrick & Struggles”) is a leadership advisory firm providing executive search leadershipand consulting and culture shaping services to businesses and business leaders worldwide. When we use the terms “Heidrick & Struggles,” “The“the Company,” “we,” “us” and “our,” in this Form 10-K, we mean Heidrick & Struggles International, Inc. a Delaware corporation, and its consolidated subsidiaries. We provide our services to a broad range of clients through the expertise of over 300450 consultants located in major cities around the world. Heidrick & Struggles and its predecessors have been a leadership advisor for more than 60 years. Heidrick & Struggles was formed as a Delaware corporation in 1999 when two of our predecessors merged to form Heidrick & Struggles.
Our service offerings include the following:
Executive Search. We partner with respected organizations globally to build and sustain the best leadership teams in the world, with a specialized focus on the placement of top-level senior executives. We believe focusing on top-level senior executives provides the opportunity for several competitive advantages including access to and influence with key decision makers, increased potential for recurring search and consulting engagements, higher fees per search, enhanced brand visibility, and a leveraged global footprint. Working at the top of client organizations also facilitates the attraction and retention of high-caliber consultants who desire to serve top industry executives and their leadership needs. Our executive search services derive revenue through the fees generated for each search engagement, which generally are based on the annual compensation for the placed executive. We provide our executive search services primarily on a retained basis, recruiting senior executives whose first yearfirst-year base salary and bonus averaged approximately $340,000$396,000 in 20162019 on a worldwide basis.
The executive search industry is highly fragmented, consisting of several thousand executive search firms worldwide. Executive search firms are generally separated into two broad categories: retained search and contingency search. Retained executive search firms fulfill their clients’ senior leadership needs by identifying potentially qualified candidates and assisting clients in evaluating and assessing these candidates. Retained executive search firms generally are compensated for their services regardless of whether the client employs a candidate identified by the search firm and are generally retained on an exclusive basis. Typically, retained executive search firms are paid a retainer for their services equal to approximately one-third of the estimated first year compensation for the position to be filled. In addition, if the actual compensation of a placed candidate exceeds the estimated compensation, executive search firms often are authorized to bill the client for one-third of the excess. In contrast, contingency search firms are compensated only upon successfully placing a recommended candidate.
We are a retained executive search firm. Our search process typically consists of the following steps:
Analyzing the client’s business needs in order to understand its organizational structure, relationships and culture;culture, advising the client as to the required set of skills and experiences for the position;position, and identifying with the client the other characteristics desired of the successful candidatecandidate;
Selecting, contacting, interviewing and evaluating candidates on the basis of experience and potential cultural fit with the client organizationorganization;
Presenting confidential written reports on the candidates who potentially fit the position specificationspecification;
Scheduling a mutually convenient meeting between the client and each candidatecandidate;
Completing referencesreference checks on the final candidate selected by the clientclient; and
Assisting the client in structuring compensation packages and supporting the successful candidate’s integration into the client team
On August 4, 2016, we acquired JCA Group Limited ("JCA"), a UK-based provider of executive search, succession planning and coaching services.team.
LeadershipHeidrick Consulting. In 2018, we combined our Leadership Consulting and Culture Shaping businesses to create Heidrick Consulting, a comprehensive offering of the firm's leadership advisory services. Our leadership consulting services include succession planning, executiveleadership assessment and topdevelopment, executive coaching and on-boarding, succession planning, team and board effectiveness.effectiveness, organizational performance acceleration, workforce planning and culture shaping. Our leadership consulting services generate revenue primarily through the professional fees generated
primarily through the professional fees generated for each engagement which are generally based on the size of the project and scope of services. On September 1, 2016, we acquired Philosophy IB, LLP ("Philosophy IB"), a leadership, organizational development and management consulting firm. On February 29, 2016, we acquired Decision Strategies International, Inc. ("DSI"), which specializes in advising organizations and institutions on strategic planning and decision making in certain operating environments, leadership development and talent strategy. On October 1, 2015, we acquired Co Company Limited, an organizational development consulting firm.
Culture Shaping. Our culture shaping business uses its proprietary technology to analyze and interpret organizational cultures and drivers, and partner with clients to administer methods that develop alignment on leadership teams and desired organizational outcomes. Chief executive officers seek our guidance through our culture shaping services to create thriving organizational cultures in a variety of business situations, including:
Shaping the culture to support new strategies and structures
Aligning executive teams when there are new leaders and/or new roles
Integrating cultures following mergers and acquisitions
Helping minimize cultural barriers to change when implementing major organizational systems or processes
Creating greater organizational agility to meet the challenges of a changing marketplace.
On December 31, 2012 we acquired Senn-Delaney LeadershipHeidrick Consulting Group, LLC ("Senn Delaney"), a global leader of corporate culture shaping.
Our culture shaping services generate revenue through a combination of professional service and license fees related to the engagement. Culture Shaping is currentlyrepresented less than 10% of our net revenue.revenue in 2019.
Client base. Base
For many of our clients, our global access to and knowledge of regional and functional markets and candidate talent is an important differentiator of our business. Our clients generally fall into one of the following categories:
Fortune 1000 companiescompanies;
Major U.S. and non-U.S. companiescompanies;
Middle market and emerging growth companiescompanies;
Governmental, higher education and not-for-profit organizationsorganizations; and
Other leading private and public entitiesentities.
Available Information
We maintain an Internet website at http://www.heidrick.com. We make available free of charge through the investor relations section of our website annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934 (Exchange Act)("Exchange Act"), as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). Also posted on our website, and available in print upon request of any shareholder to our Investor Relations Officer, are our certificate of incorporation and by-laws, charters for our Audit and Finance Committee, Human Resources and Compensation Committee and Nominating and Board Corporate Governance Committee, our Policy Regarding Director Independence Determinations, our Policy on Reporting of Concerns Regarding Accounting and Other Matters, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics governing our directors, officers and employees. Within the time period required by the SEC, we will post on our website any amendment to the Code of Business Conduct and Ethics and any waiver applicable to any executive officer, director or senior financial officer.
In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors, as well as disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast or by similar means from time to time.
Our Investor Relations Officer can be contacted at Heidrick & Struggles International, Inc., 233 South Wacker Drive, Suite 4900, Chicago, Illinois, 60606, Attn: Investor Relations Officer, telephone: 312-496-1200,
e-mail: InvestorRelations@heidrick.com.
Organization
Our organizational structure, which is arranged by geography, service offering and industry and functional practices, is designed to enable us to better understand our clients’ cultures, operations, business strategies, industries and regional markets for leadership talent.
Geographic Structure. We provide senior-level executive search leadershipand consulting and culture shaping services to our clients worldwide through a network of 4754 offices in 2528 countries. Each office size varies; however, major locations are staffed with consultants, research associates, administrative assistants and other support staff. Administrative functions are centralized where possible, although certain support and research functions are situated regionally because of variations in local requirements. We face risks associated with managing global operations, social and political instability, legal and regulatory requirements, potential adverse tax consequences and currency fluctuations in our international operations. Examples of such risks include difficulties in managing global operations, social and political instability, regulations and potential adverse tax consequences. For a more complete description of the risks associated with our business please see the Section in this Form 10-K entitled “Risk“Item 1A - Risk Factors”.
OurIn addition to our wholly owned subsidiaries, our worldwide network includes affiliate relationships in Finland, South Africa Turkey and Portugal.Turkey. We have no financial investment in these affiliates but receive licensing fees from them for the use of our name and our databases. Licensing fees are less than 1% of our net revenue.
Information by Geography.Segment Information. We operate our executive searchExecutive Search services in three geographic regions:regions, each of which is reported as a separate reporting segment: the Americas (which includes the countries in North and South America); Europe (which includes the continents of Europe and Africa); and Asia Pacific (which includes Asia and the region generally known as the Middle East). Our leadership consultingHeidrick Consulting reporting segment operates globally and our culture shaping segment operates in the Americas and Europe.globally.
Americas Executive Search. As of December 31, 2016,2019, we had 158200 consultants in our Americas segment. The largest offices in this segment, as defined by net revenue, are located in New York, Chicago, and Boston.
Europe Executive Search. As of December 31, 2016,2019, we had 95107 consultants in our EuropeanEurope segment. The largest countries in this segment, as defined by net revenue, are the United Kingdom, France, and Germany.
Asia Pacific Executive Search. As of December 31, 2016,2019, we had 8273 consultants in our Asia Pacific segment. The largest countries in this segment, as defined by net revenue, are China (including Hong Kong), Australia, and Singapore.Dubai.
LeadershipHeidrick Consulting. As of December 31, 2016,2019, we had 2271 consultants in our LeadershipHeidrick Consulting segment. The largest countries in this segment, as defined by net revenue, are the United Kingdom, United States, and Singapore.
Culture Shaping. As of December 31, 2016, we had 17 consultants in our Culture Shaping segment. The culture shaping consultants are primarily based in Huntington Beach, CA and approximately 81% of the net revenue is generated in the United States.Kingdom, and Dubai.
The relative percentages of net revenue attributable to each segment were as follows:
| | | | | Year Ended
December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Executive Search | | | | | | | | | | | | |
| Americas | | 53 | % | | 55 | % | | 51 | % | | 58 | % | | 57 | % | | 55 | % |
| Europe | | 19 | % | | 17 | % | | 21 | % | | 19 | % | | 20 | % | | 20 | % |
| Asia Pacific | | 15 | % | | 17 | % | | 17 | % | | 14 | % | | 14 | % | | 14 | % |
| Leadership Consulting | | 7 | % | | 4 | % | | 4 | % | |
| Culture Shaping | | 6 | % | | 7 | % | | 7 | % | |
| Heidrick Consulting | | | 9 | % | | 9 | % | | 11 | % |
For financial information relating to each segment, see Note 16,18, Segment Information, in the Notes to Consolidated Financial Statements.
Global Industry Practices. Our executive search and leadership consulting businesses operate in six broad industry groupspractices listed below. These industry categoriespractices and their relative sizes, as measured by billings for 2016, 20152019, 2018 and 2014,2017, are as follows:
| | | | | Percentage of
Billings | | Percentage of Billings |
| Global Industry Practices | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Financial Services | | 28 | % | | 27 | % | | 26 | % | | 26 | % | | 28 | % | | 27 | % |
| Industrial | | 21 |
| | 21 |
| | 23 |
| | 21 |
| | 21 |
| | 18 |
|
| Global Technology & Services | | 21 |
| | 22 |
| | 21 |
| | 21 |
| | 20 |
| | 22 |
|
| Consumer Markets | | 17 |
| | 16 |
| | 18 |
| | 17 |
| | 16 |
| | 17 |
|
| Healthcare & Life Sciences | | 11 |
| | 10 |
| | 8 |
| | 12 |
| | 11 |
| | 12 |
|
| Education, Non-Profit & Social Enterprise | | 2 |
| | 4 |
| | 4 |
| | 3 |
| | 4 |
| | 4 |
|
| | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Within each broad industry grouppractice are a number of industry sub-sectors. Consultants often specialize in one or more sub sectorssub-sectors to provide clients with market intelligence and candidate knowledge specific to their industry. For example, within the Financial Services sector, our business is diversified amongst a number of industry sub sectorssub-sectors including Asset & Wealth Management, Consumer & Commercial Finance, Commodities, Corporate and Transaction Banking, Global Markets, Hedge Fund, Infrastructure, Investment Banking, Insurance, Private Equity Investment Professionals and Real Estate.
We service our clients with global industry interests and needs through unified global executive search teams who specialize in industry practices. This go-to-market strategy allows us to leverage our global diversity and market intelligence and is designed to provide better client service. Each client is served by one global account team, which we believe is a key differentiator from our competition.
Global Functional Practices. Our executive searchExecutive Search consultants also specialize in searches for specific “C-level” functional positions, which are roles that generally report directly to the chief executive officer.
Our Global Functional Practices include Chief Executive Officer & Board of Directors; Human Resources Officers;Officers, Financial Officers; Information and Technology Officers;Officers, Legal, Risk, Compliance & Government Affairs;Affairs, Marketing, Sales and Strategy Officers and Supply Chain and Operations.
Our team of executive searchExecutive Search consultants may service clients from any one of our offices around the world. For example, an executive search for a chief financial officer of an industrial company located in the United Kingdom may involve aan executive search consultant in the United Kingdom with an existing relationship with the client, another executive search consultant in the United States with expertise in our Industrial practice and a third executive search consultant with expertise in recruiting chief financial officers. This same industrial client may also engage us to perform skill-based assessments for each of its senior managers, which could require the expertise of one of our leadership advisory consultants trained in this service.
Seasonality
There is no discernible seasonality in our business, although as a percentage of total annual net revenue, the first quarter is typically generates less revenue than the lowest.other three quarters. Revenue and operating income have historically varied by quarter and are hard to predict from quarter to quarter. In addition, the volatility in the global economy and business cycles can impact our quarterly revenue and operating income.
Clients and Marketing
Our consultants market the firm’s executive search leadershipand consulting and culture shaping services through two principal means: targeted client calling and industry networking with clients and referral sources. These efforts are supported by proprietary databases, which provide our consultants with information as to contacts made by their colleagues with particular referral sources, candidates and clients. In addition, we benefit from a significant number of referrals generated by our reputation for high quality service and successfully completed assignments, as well as repeat business resulting from our ongoing client relationships.
In support of client calling and networking, the practice teams as well as individual consultants also author and publish articles and white papers on a variety of leadership and talent topics and trends around the world. Our consultants often present research findings and talent insights at notable conferences and events as well. Our insights are sometimes acknowledged by major media outlets and trade journalists. These efforts aid in the marketing of our services as well.
Either by agreement with the clients or to maintain strong client relationships, we may refrain from recruiting employees of a client, or possibly other entities affiliated with that client, for a specified period of time but typically not more than one year from the commencement of a search. We seek to mitigate any adverse effects of these off-limits arrangements by strengthening our long-term relationships, allowing us to communicate our belief to prospective clients that we can conduct searches without theseeffectively notwithstanding certain off-limits arrangements impeding the quality of our work.arrangements.
No single client accounted for more than 1%2% of our net revenue in 2016, 20152019, and no more than 3% in 2018 or 2014.2017. As a percentage of total revenue, our top ten clients in aggregate accounted for approximately 7% in 2016, 20152019, 6% in 2018, and 2014.7% in 2017.
Information Management Systems
We rely on technology to support our consultants and staff in the search process. Our technology infrastructure consists of internally developed databases containing candidate profiles and client records, coupled with online services, industry reference sources, and Leadership Signature, an internally developed assessment tool. We use technology to manage and share information on current and potential clients and candidates, to communicate to both internal and external constituencies and to support administrative functions.
Our culture shapingconsulting business’ proprietary Web-based system, SD Connect™Culture Connect, is integral to the culture-shaping process. This technology platform enables our consultants to administer, analyze and interpret online Corporate Culture Profiles™ (CCP) surveys to develop clarity around team and organizational need and desired outcomes. In addition, we gather data using our online Culture Impact Survey™ (CIS) to determine which culture-shaping concepts are being utilized by individuals and the team as a whole.
Professional Staff and Employees
Our professionals are generally categorized either as consultants or associates. Associates assist consultants by providing research support, coordinating candidate contact and performing other engagement-related functions. As of December 31, 2016,2019, we had head counta headcount of 1,814,1,780, consisting of 374451 consultants with 335 consultants(380 related to executive search, 22 consultantsExecutive Search and 71 related to leadership consulting and 17 consultants related to culture shaping, 538Heidrick Consulting), 591 associates and 902738 other search, support and Global Operations Support staff.
We promote our associates to consultants during the annual consultant promotion process, and we recruit our consultants from other executive search or human capital firms, or in the case of executive search,Executive Search, consultants new to search who have worked in industries or functions represented by our practices. In the latter case, these are often seasoned executives with extensive contacts and outstanding reputations who are entering the search profession as a second career and whom we train in our techniques and methodologies. Our culture shapingHeidrick Consulting consultants are recruited for their executive business experience as well as their skills in consulting and leadership advisory and often are former clients who are familiar with our culture shapingconsulting methodology. We are not a party to any U.S. basedU.S.-based collective bargaining agreement, and we consider relations with our employees to be good.
Competition
The executive search industry is highly competitive. While we face competition to some degree from all firms in the industry, we believe our most direct competition comes from four established global retained executive search firms that conduct searches primarily for the most senior-level positions within an organization. In particular, our competitors include Egon Zehnder International, Korn Ferry, International, Russell Reynolds Associates, Inc. and Spencer Stuart & Associates.Stuart. To a lesser extent, we also face competition from smaller boutique firms that specialize in certain regional markets or industry segments and Internet-based firms. Each firm with which we compete is also a competitor in the marketplace for effective search consultants.
Overall, the search industry has relatively few barriers to entry; however, there are higher barriers to entry to compete with global retained executive search firms that can provide leadership consulting services at the senior executive level. At this level, clients rely more heavily on a search firm’s reputation, global access and the experience level of its consultants. We believe that the segment of executive search in which we compete is more quality-sensitive than price-sensitive. As a result, we compete on the level of service we offer, reflected by our client services specialties and, ultimately, by the quality of our search results. We believe that our emphasis on senior-level executive search, the depth of experience of our search consultants and our global presence enable us to compete favorably with other executive search firms.
Competition in the leadership consulting services and culture shaping markets in which we operate is highly fragmented, with no universally recognized market leaders.
Regulation
We are subject to the U.S. securities laws and general corporate and commercial laws and regulations of the locations which we serve. These include regulations regarding anti-bribery, privacy and data protection, intellectual property, data security, data retention, personal information, economic or other trade prohibitions or sanctions. In particular, we are subject to federal, state, and foreign laws regarding privacy and protection of people's data. In the U.S., California has adopted the California Consumer Privacy Act of 2018 (“CCPA”), which became effective January 1, 2020 and which provides a new private right of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices and allow consumers to opt out of certain data sharing with third parties. In addition, several other U.S. states are considering adopting laws and regulations imposing obligations regarding the handling of personal data. Foreign data protection, privacy, and other laws and regulations can be more restrictive than those in the United States. Most notably, certain aspects of our business are subject to the European Union's General Data Protection Regulation ("GDPR") which became effective on May 25, 2018. We have a GDPR compliance program to facilitate our ongoing efforts to comply with GDPR regulations. U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to change.
EXECUTIVE OFFICERS
Below is the name, age, present title, principal occupation and certain biographical information for each of our executive officers as of the date of this report. All of our executive officers have been appointed by and serve at the pleasure of our board of directors. There are no family relationships between any executive officer or director.
Tracy R. Wolstencroft (58) Mr. Wolstencroft has been our President and Chief Executive Officer since February 3, 2014, and a director since February 6, 2014. From 1994 until his retirement in 2010, Mr. Wolstencroft served as a partner for Goldman Sachs & Co. (“Goldman”), concluding a twenty-five year career with the firm. During his service to Goldman, Mr. Wolstencroft served on the Firmwide Partnership Committee, the Investment Banking Operating Committee, and the Asia Management Committee. During his career, he led a wide range of businesses in the United States and abroad, including Investment Banking Services, Environmental Markets, Latin America, Public Sector and Infrastructure Banking, and Fixed Income Capital Markets. While living in Asia from 1998 to 2002, Mr. Wolstencroft was President of GS Singapore, co-head of investment banking in Japan, head of Asia financial institutions, and a leader of the firm’s strategy in China. Mr. Wolstencroft also served as an Advisory Director for Goldman and as Chairman of the firm’s Clean Technology and Renewables business. He currently serves as a Trustee of the Brookings Institution, the National Geographic Society and the International Rescue Committee.
Richard W. Pehlke (63) Mr. Pehlke has been our Executive Vice President and Chief Financial Officer since August 2011 after serving as interim Chief Financial Officer since May 2011. Previously, Mr. Pehlke was Executive Vice President and Chief Financial Officer at Grubb & Ellis Company, a commercial real estate firm, from 2007 to 2010. During his extensive career, he also has held senior financial positions in the business services, telecommunications, financial services, food and consumer products and executive search and staffing industries. Mr. Pehlke currently serves on the board of directors of Ideal Industries.
Stephen W. Beard (45) Mr. Beard has been our Executive Vice President, General Counsel and Chief Administrative Officer since January 1, 2013. During his more than 10 years with the Company he has served in several senior leadership capacities, including serving as our General Counsel and Corporate Secretary (2011 to 2013) and Deputy General Counsel and Chief Compliance Officer (2008 to 2011).
Colin Price (58) Mr. Price has been our Executive Vice President and Managing Partner - Leadership Consulting since December 2015 and a member of our Executive Committee on January 1, 2016. Previously, Mr. Price served as Chairman of Co Company Limited, an organizational development consulting firm acquired by Heidrick & Struggles in 2015. He previously was a Director in McKinsey & Company's London office and led McKinsey's Global Organisation Practice (1999 through July 2014.)
Krishnan Rajagopalan (56) Mr. Rajagopalan has been our Executive Vice President and Managing Partner - Executive Search since January 2016. Previously, he served as Head of Global Practices beginning in April 2014 and was appointed an Executive Vice President on January 1, 2015. Mr. Rajagopalan has served in other leadership roles including Global Practice Managing Partner, Technology and Services (2010 to 2014) and Global Practice Managing Partner, Business/Professional Services (2007 to 2010). Mr. Rajagopalan joined the firm in 2001 in executive search.
Richard W. Greene (53) Mr. Greene has been our Executive Vice President and Chief Human Resources Officer since January 1, 2015. Previously, Mr. Greene was the global Head of Talent Management and a global segment HR executive at Bunge, an agribusiness and food production company (2011 to 2014). Mr. Greene previously managed Heidrick & Struggles’ Leadership Consulting and Human Resources practices in the Americas (2006 to 2011).
Michael Marino (65) Mr. Marino has served as the the President and Chief Executive Officer, Senn Delaney and Executive Vice President and Managing Partner - Culture Shaping since January 1, 2017. Mr. Marino has served on the leadership team at Senn Delaney for more than twenty years.
ITEM 1A. RISK FACTORS
In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating our business because such factors may have a material impact on our business, operating results, cash flows and financial condition. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties thatof which we are unaware, of, or that we currently believe are not material, may also become important factors that adversely affect our business.
We depend on attracting, integrating, developing, managing, and retaining qualified consultants and senior leaders.
Our success depends upon our ability to attract, integrate, develop, manage and retain quality consultants with the skills and experience necessary to fulfill our clients’ needs and achieve our operational and financial goals. Our ability to hire and retain qualified consultants could be impaired by any diminution of our reputation, disparity in compensation relative to our competitors, modifications to our total compensation philosophy or competitor hiring programs. If we cannot attract, hire, develop and retain qualified consultants, our business, financial condition and results of operations may suffer. Our future success also depends upon our ability to complete the integration of newly-hiredintegrate newly hired consultants successfully into our operations and to manage the performance of our consultants.
Failure to successfully integrate newly-hirednewly hired consultants or to manage the performance of our consultants could affect our profitability by causing operating inefficiencies that could increase operating expenses and reduce operating income. There is also a risk that unanticipated turnover in senior leadership coupled with an inadequate succession plan stallscould stall company activity, interruptsinterrupt strategic vision or lowerslower productive output which may adversely impactaffect our business, financial condition and results of operations.
We may not be able to prevent our consultants from taking our clients with them to another firm.
Our success depends upon our ability to develop and maintain strong, long-term relationships with our clients. Although we work on building these relationships between our firm and our clients, in many cases one or two consultants have primary responsibility for a client relationship. When a consultant leaves one executive search firm and joins another, clients who have established relationships with the departing consultant may move their business to the consultant’s new employer. We may also lose clients if the departing consultant has widespread name recognition or a reputation as a specialist in executing searches in a specific industry or management function. If we fail to retain important client relationships when a consultant departs our firm, our business, financial condition and results of operations may be adversely affected.
Our success depends on our ability to maintain our professional reputation and brand name.
We depend on our overall professional reputation and brand name recognition to secure new engagements and hire qualified consultants. Our success also depends on the individual reputations of our consultants. We obtain many of our new engagements from existing clients or from referrals by those clients. A client who is dissatisfied with our work can adversely affect our ability to secure new engagements. If any factor, including poor performance, hurts our reputation we may experience difficulties in competing successfully for both new engagements and qualified consultants. Failure to maintain our professional reputation and brand name could seriously harmadversely affect our business, financial condition and results of operations.
Our net revenue may be affected by adverse economic conditions.
Demand for our services is affected by global economic conditions and the general level of economic activity in the geographic regions in which we operate. During periods of slowed economic activity many companies hire fewer permanent employees, and our business, financial condition and results of operations canmay be adversely affected. If unfavorable changes in economic conditions occur, our business, financial condition and results of operations could suffer.
Because our clients may restrict us from recruiting their employees, we may be unable to fill or obtain new executive search assignments.
Clients frequently require us to refrain from recruiting certain of their employees when conducting executive searches on behalf of other clients. These restrictions generally remain in effect for no more than one year following the commencement of an engagement. However, the specific duration and scope of the off-limits arrangements depend on the length of the client relationship, the frequency with which the client engages us to perform searches, the number of assignments we have performed for the client and the potential for future business with the client.
Client restrictions on recruiting their employees could hinder us from fulfilling executive searches. Additionally, if a prospective client believes that we are overly restricted by these off-limits arrangements from recruiting the employees of our existing clients, these prospective clients may not engage us to perform their executive searches. As a result, our business, financial condition and results of operations may suffer.
We face aggressive competition.
The global executive search industry is highly competitive and fragmented. We compete with other large global executive search firms, smaller specialty firms and, more recently with Internet-based firms and social media. Specialty firms canmay focus on regional or functional markets or on particular industries.industries to a greater extent than we do. Some of our competitors may possess greater resources, greater name recognition and longer operating histories than we do in particular markets or practice areas, or be willing to reduce their fees or agree to alternative pricing practices in order to attract clients and increase market share. Our competitors may be further along in the development and design of technological solutions to meet client requirements.
There are limited barriers to entry into the search industry and new search firms continue to enter the market. Many executiveExecutive search firms that have a smaller client base than we do may be subject to fewer off-limits arrangements. In addition, our clients or prospective clients may decide to perform executive searches using in-house personnel. Also, as internet-basedInternet-based firms continue to evolve, they may develop offerings similar to or more expansive than ours, thereby increasing competition for our services or more broadly causing market disruption indisrupting the executive search industry. WeAs a result, we may not be able to continue to compete effectively with existing or potential competitors and we may not be able to implement our leadership strategy effectively. Our inability to meet these competitive challenges could have an adverse impacteffect on our business, financial condition and results of operations.
We rely heavily on information management systems.
Our success depends upon our ability to store, retrieve, process and manage substantial amounts of information. To achieve our goals, we must continue to improve and upgrade our information management systems. We may be unable to license, design and implement, in a cost-effective and timely manner, improved information systems that allow us to compete effectively. In addition, business process reengineering efforts may result in a change in software platforms and programs. Such efforts may result in an acceleration of depreciation expense over the shortened expected remaining life of the software and present transitional problems. Problems or issues with our proprietary search system or other factors may result in interruptions or loss in our information processing capabilities which may causeadversely affect our business, financial condition and results of operations to suffer.operations.
We face the risk of liability in the services we perform.
We are exposed to potential claims with respect to the executive search process. A client could assert a claim for violations of off-limits arrangements, breaches of confidentiality agreements or professional malpractice. The growth and development of our culture shaping and other leadership advisoryconsulting services brings with it the potential for new types of claims. In addition, candidates and client employees could assert claims against us. Possible claims include failure to maintain the confidentiality of the candidate’s employment search or for discrimination or other violations of the employment laws or malpractice. In various countries, we are subject to data protection laws impacting the processing of candidate information. We maintain professional liability insurance in amounts and coverage that we believe are adequate; however, we cannot guarantee that our insurance will cover all claims or that coverage will always be available. Significant uninsured liabilities could have a negative impact on our business, financial condition and results of operations.
Data security, data privacy and data protection laws, such as GDPR and CCPA , and other evolving regulations and cross-border data transfer restrictions, may limit the use of our services and adversely affect our business.
We are or may become subject to a variety of laws and regulations in the European Union (including GDPR), United States (including CCPA) and abroad regarding data privacy, protection and security. As these laws continue to evolve, we may be required to make changes to, or eliminate altogether of, our services, solutions and/or products so as to enable the Company and/or our clients to meet the new legal requirements, including by taking on more onerous obligations in our contracts, limiting or eliminating our storage, transfer and processing of data and, in some cases, limiting or eliminating our service and/or solution offerings in certain locations. Changes in these laws may also increase our potential exposure through significantly higher potential penalties for non-compliance or limitations on the use or transfer of data. The costs of compliance with, and other burdens imposed by, such laws and regulations and client demands in this area may limit the use of, or demand for, our services, solutions and/or products, make it more difficult and costly to meet client expectations, or lead to significant fines, penalties or liabilities for noncompliance, any of which could adversely affect our business, financial condition and results of operations.
In addition, due to the uncertainty and potentially conflicting interpretations of these laws, it is possible that such laws and regulations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us to comply with applicable laws or satisfactorily protect personal information could result in governmental enforcement actions, litigation, or negative publicity, any of which could inhibit sales of our services, solutions and/or products.
Our multinational operations may be adversely affected by social, political, regulatory, legal and economic, and public health risks.
We generate substantial revenue outside the United States. We offer our services through a global network of offices in 25 countries around the world. Our ability to effectively serve our clients is dependent upon our ability to successfully leverage our operating model across all of theseour existing and any future locations, maintain effective management controls over all of our locations to ensure, among other things, compliance with applicable laws, rules and regulations, and instill our core values in all of our personnel at each of these and any future locations. We are exposed to the risk of changes in social, political, legal and economic conditions inherent in our operations, which could have a significant impact on our business, financial condition and results of operations. In addition, we conduct business in countries where the legal systems, local laws and trade practices are unsettled and evolving. Commercial laws in these countries are sometimes vague, arbitrary and inconsistently applied. Under these circumstances, it is difficult for us to determine at all times the exact requirements of such local laws. If we fail to comply with local laws, our business, financial condition and results of operations could suffer. In addition, the global nature of our operations poses challenges to our management, and financial and accounting systems. Failure to meet these challenges could seriously harmadversely affect our business, financial condition and results of operations.
We could also be adversely affected by a public health epidemic, including the recent outbreak of coronavirus in China. Consequences of the coronavirus outbreak have included disruptions or restrictions on our ability to travel and temporary closures our China offices. Our business, financial condition and results of operations could suffer to the extent that the coronavirus outbreak harms the Chinese economy in general.
A significant currency fluctuation between the U.S. dollar and other currencies could adversely impact our operating income.
With our operations in the Americas, Europe and Asia Pacific, we conduct business using various currencies. In 2016,2019, approximately 41%40% of our net revenue was generated outside the United States. As we typically transact business in the local currency of our subsidiaries, our profitability may be impacted by the translation of foreign currency financial statements into U.S. dollars. Significant long-term fluctuations in relative currency values, in particular an increase in the value of the U.S. dollar against foreign currencies, could have an adverse effect on our profitabilitybusiness, financial condition and financial condition.results of operations.
We may not be able to align our cost structure with net revenue.
We must ensure that our costs and workforce continue to be in proportion to demand for our services. Failure to align our cost structure and headcount with net revenue could adversely affect our business, financial condition and results of operations.
Unfavorable tax law changes and tax authority rulings may adversely affect results.
We are subject to income taxes in the United States and in various foreign jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings among countries with differing statutory tax rates, or changes in the valuation allowance of deferred tax assets or tax laws. The amount of income taxes and other taxes are subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from amounts recorded, future financial results may include unfavorable tax adjustments.
We may not be able to generate sufficient profits to realize the benefit of our net deferred tax assets.
We establish valuation allowances against deferred tax assets when there is insufficient evidence that we will be able to realize the benefit of these deferred tax assets. We reassess our ability to realize deferred tax assets as facts and circumstances dictate. If after future assessments of our ability to realize the deferred tax assets we determine that a lesser or greater allowance is required, we record a reduction or increase to the income tax expense and the valuation allowance in the period of such determination. The uncertainty surrounding the future realization of our net deferred tax assets could adversely impact our financial condition and results of operations.
We may experience impairment of our goodwill, other intangible assets and other long-lived assets.
In accordance with generally accepted accounting principles, we perform assessments of the carrying value of our goodwill at least annually, and we review our goodwill, other intangible assets and other long-lived assets for impairment whenever events occur or circumstances indicate that a carrying amount of these assets may not be recoverable. These events and circumstances include a significant change in business climate, attrition of key personnel, changes in financial condition or results of operations, a prolonged decline in our stock price and market capitalization, competition, and other factors. In performing these assessments, we must make assumptions regarding the estimated fair value of our goodwill and other intangible assets. These assumptions include estimates of future market growth and trends, forecasted revenue and costs, capital investments, discount rates, and other variables. If the fair market value of one of our reporting units or other long termlong-term assets is less than the carrying amount of the related assets, we would be required to record an impairment charge. Due to continual changes in market and general business conditions, we cannot predict whether, and to what extent, our goodwill and long-lived intangible assets may be impaired in future periods. Any resulting impairment loss could have an adverse impact on our business, financial condition and results of operations.
Our ability to execute and integrate future acquisitions, if any, could negatively affect our business and profitability.
Our future success may depend in part on our ability to complete the integration of acquisition targets successfully into our operations. The process of executing and integrating an acquired business may subject us to a number of risks, including:
diversion of management attention;
failure to successfully further develop the acquired business;
amortization of intangible assets, adversely affecting our reported results of operations;
inability to retain and/or integrate the management, key personnel and other employees of the acquired business;
inability to properly integrate businesses resulting in operating inefficiencies;
inability to establish uniform standards, disclosure controls and procedures, internal control over financial reporting and other systems, procedures and policies in a timely manner;
inability to retain the acquired company’s clients;
exposure to legal claims for activities of the acquired business prior to acquisition; and
inability to generate revenues to offset any new liabilities assumed and expenses associated with an acquired business.
If our acquisitions are not successfully executed and integrated, our business, financial condition and results of operations, as well as our professional reputation, could be adversely affected.
We have anti-takeover provisions that make an acquisition of us difficult and expensive.
Anti-takeover provisions in our Certificate of Incorporation, our Bylaws and the Delaware laws make it difficult and expensive for someone to acquire us in a transaction which is not approved by our Board of Directors. Some of the provisions in our Certificate of Incorporation and Bylaws include:
limitations on the removal of directorsdirectors;
limitations on stockholder actionsactions; and
the ability to issue one or more series of preferred stock by action of our Board of DirectorsDirectors.
These provisions could discourage an acquisition attempt or other transaction in which stockholders could receive a premium over the currentthen-current market price for the common stock.
Our ability to access additional credit could be limited.
Banks can be expected to strictly enforce the terms of our credit agreement. Although we are currently in compliance with the financial covenants of our revolving credit facility, a deterioration of economic conditions may negatively impact our business resulting in our failure to comply with these covenants, which could limit our ability to borrow funds under our credit facility or from other borrowing facilities in the future. In such circumstances, we may not be able to secure alternative financing or may only be able to do so at significantly higher costs.
Increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks could pose a risk to our systems, networks, solutions, services and data.
Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted cyber-related attacks pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. We have a program in place to detect and respond to data security incidents. However, we remain potentially vulnerable to additional known or unknown threats. We also have access to sensitive, confidential or personal data or information that is subject to privacy and security laws, regulations and client-imposed controls. Despite our efforts to protect sensitive, confidentialsuch information or personal data or information,systems, we may be vulnerable to security breaches, ransomware, theft, lost data, employee errors and/or malfeasance that could potentially lead to the compromising of sensitive, confidential or personal data or information, improper use of our systems or networks, unauthorized access, use, disclosure, modification or destruction of information. In addition, a cyber-related attack could result in other negative consequences, including damage to our reputation or competitiveness, remediation or increased protection costs, litigation or regulatory action which could result in a negative impact to our results of operations.
The expansion of social media platforms presents new risks and challenges that can cause damage to our brand and reputation.
There has been a marked increase in the use of social media platforms, including weblogs (or blogs), social media websites and other forms of Internet-based communications, which allow individuals access to a broad audience of consumers and other interested persons. The inappropriate and/or unauthorized use of such media vehicles by our clients or employees could increase our costs, cause damage to our brand, lead to litigation or result in information leakage, including the improper collection and/or dissemination of personally identifiable information of candidates and clients. In addition, negative or inaccurate posts or comments about us on any social networking platforms could damage our reputation, brand image and goodwill.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Chicago, Illinois. We have leased office space in 4751 cities in 25 countries around the world. All of our offices are leased. We do not own any real estate. The aggregate square footage of office space under lease was 465,715460,263 square feet as of December 31, 2016.2019. Our office leases call for future minimum lease payments of approximately $164.2$120.6 million and have terms that expire between 20172020 and 2026,2030, exclusive of renewal options that we can exercise. Approximately 7,000 square feet of office space has been sublet to third parties.
Our office space by geographic segment as of December 31, 20162019 is as follows:
|
| | |
| | Square
Footage |
| Americas | 251,139259,661 |
|
| Europe | 111,337 |
|
| Asia Pacific | 111,429 |
|
Europe | 103,14789,265 |
|
| Total | 465,715460,263 |
|
ITEM 3. LEGAL PROCEEDINGS
We have contingent liabilities from various pending claims and litigation matters arising in the ordinary course of our business, some of which involve claims for damages that may be substantial in amount. Some of these matters are covered by insurance. Based upon information currently available, we believe the ultimate resolution of such claims and litigation including the “UK Employee Benefits Trust” matter discussed below, will not have a material adverse effect on our financial condition, results of operations or liquidity.
UK Employee Benefits Trust
On January 27, 2010, HM Revenue & Customs (“HMRC”) in the United Kingdom notified us that it was challenging the tax treatment of certain of our contributions in the United Kingdom to an Employee Benefits Trust between 2002 and 2008. HMRC alleges that these contributions should have been subject to Pay As You Earn tax and Class 1 National Insurance Contributions in the United Kingdom; and HMRC is proposing an adjustment to our payroll tax liability for the affected years. The aggregate amount of HMRC’s proposed adjustment is approximately £3.9 million (equivalent to $4.8 million at December 31, 2016). We have appealed the proposed adjustment. At this time, we believe that the likelihood of an unfavorable outcome with respect to the proposed adjustment is not probable and the potential amount of any loss cannot be reasonably estimated. We also believe that the amount of a final adjustment, if any, would not be material to our financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant’sour Common EquityStock
Our common stock, $0.01 par value, is listed on the Nasdaq Global Stock Marketmarket under the symbol “HSII.” The following table sets forth the high and low stock price per share of the common stock for the periods indicated, as reported on the Nasdaq Global Stock Market.
|
| | | | | | | | |
| Year Ended December 31, 2016 | | High | | Low |
| First Quarter | | $ | 26.91 |
| | $ | 22.22 |
|
| Second Quarter | | 24.69 |
| | 16.36 |
|
| Third Quarter | | 21.15 |
| | 16.73 |
|
| Fourth Quarter | | 24.50 |
| | 17.55 |
|
|
| | | | | | | | |
| Year Ended December 31, 2015 | | | | |
| First Quarter | | $ | 24.78 |
| | $ | 22.16 |
|
| Second Quarter | | 26.59 |
| | 23.13 |
|
| Third Quarter | | 26.26 |
| | 19.16 |
|
| Fourth Quarter | | 29.77 |
| | 19.43 |
|
Performance Graph
We have presented below a graph which compares the cumulative total stockholder return on our common shares with the cumulative total stockholder return of the Standard & Poor’s SmallCap 600 Index and the Standard & Poor’s Composite 1500 Human Resource and Employment Services Index. The S&P Composite 1500 Human Resource & Employment Services Index includes 11 companies in related businesses, including Heidrick & Struggles. Cumulative total return for each of the periods shown in the performance graph is measured assuming an initial investment of $100 on December 31, 2011.2014.
The stock price performance depicted in this graph is not necessarily indicative of future price performance. This graph will not be deemed to be filed as part of this Form 10-K, and will not be deemed to be incorporated by reference by any general statement incorporating this Form 10-K into any filing by us under the Securities Act of 1933 or the Securities Exchange Act, of 1934, except to the extent we specifically incorporate this information by reference.
* Assuming $100 invested on 12/31/1114 in HSII or index, including reinvestment of dividends.
Prepared by: Zacks Investment Research, Inc.
Copyright: Standard and Poor’s, Inc.
Dividends
SinceFrom September 2007 through December 2018, we have paid a quarterly cash dividend of $0.13 per share as approved by our Board of Directors. Beginning with the dividend paid on March 22, 2019, we began paying a quarterly cash dividend of $0.15 per share as approved by our Board of Directors. In 2016,2019, the total cash dividend paid was $0.52$0.60 per share.
The following table outlines the record date, payment date and amount of quarterly cash dividends paid during 2015 and 2016:
|
| | | | | | |
Quarter | | Record Date | | Payment Date | | Dividends
(in millions) |
Q1 2015 | | February 6, 2015 | | February 20, 2015 | | $2.4 |
Q2 2015 | | May 1, 2015 | | May 15, 2015 | | 2.4 |
Q3 2015 | | August 7, 2015 | | August 21, 2015 | | 2.4 |
Q4 2015 | | November 6, 2015 | | November 20, 2015 | | 2.4 |
Q1 2016 | | February 5, 2016 | | February 19, 2016 | | 2.4 |
Q2 2016 | | May 6, 2016 | | May 20, 2016 | | 2.4 |
Q3 2016 | | August 5, 2016 | | August 19, 2016 | | 2.4 |
Q4 2016 | | November 4, 2016 | | November 18, 2016 | | 2.4 |
In December 2016,February 2020, our Board of Directors declaredapproved a quarterly dividend of $0.13$0.15 per share on our common stock which waswill be paid on February 17, 2017March 20, 2020 to shareholders of record as of February 3, 2017. Cash dividends payable of $2.4 million related to the fourth quarter 2016 cash dividend, which was paid in the first quarter of 2017, is accrued in the Consolidated Balance Sheets as of December 31, 2016. Cash dividends payable of $2.4 million related to the fourth quarter 2015 cash dividend, was paid in the first quarter of 2016.March 6, 2020.
In connection with the quarterly cash dividend, we also pay a dividend equivalent on outstanding restricted stock units. The amounts related to the dividend equivalent payments for restricted stock units are accrued over the vesting period and paid upon vesting. In 20162019 and 20152018, we paid $0.3$0.4 million and $0.2 million, respectively, in dividend equivalent payments.
Issuer Purchases of Equity Securities
On February 11, 2008, we announced that our Board of Directors authorized management to repurchase shares of our common stock with an aggregate purchase price of up to $50 million. We intendmay from time to time and as business conditions warrant to purchase shares of our common stock on the open market or in negotiated or block trades. No time limit has been set for completion of this program. We did not repurchase any shares of our common stock in 2016.2019. The most recent purchase of shares of common stock occurred during the year ended December 31, 2012. As of December 31, 2016 and December 31, 2015,2019, we have purchased 1,038,670 shares of our common stock for a total of $28.3 million and $21.7 million remains available for future purchases under the authorization. For further information
Unregistered Sales of Equity Securities
During the year ended December 31, 2019, we issued 38,553 shares of our share repurchase activity, see “Management’s Discussion and Analysiscommon stock as partial consideration for our acquisition of Financial Condition and Results2GET Holdings Limited as described in Note 8, Acquisitions. The shares were issued in reliance on Section 4(a)(2) of Operations – Liquidity and Capital Resources.”the Securities Act of 1933 as a transaction not involving any public offering.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below havehas been derived from our audited consolidated financial statements. The data as of December 31, 20162019 and 20152018, and for the years ended December 31, 2016, 20152019, 2018 and 2014 are2017, is derived from the audited current and historical consolidated financial statements, which are included elsewhere in this Form 10-K. Other than noted below, the data as of December 31, 2014, 20132017, 2016 and 20122015, and for the years ended December 31, 20132016 and 20122015, are derived from audited historical consolidated financial statements, which are not included in this report. The data set forth is qualified in its entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”Operations”, the audited consolidated financial statements, the notes thereto, and the other financial data and statistical information included in this Form 10-K.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | |
| | | (in thousands, except per share and other operating data) | |
| Statements of Operations Data: | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | |
| Revenue before reimbursements (net revenue) | | $ | 582,390 |
| | $ | 531,139 |
| | $ | 494,292 |
| | $ | 461,995 |
| | $ | 443,777 |
| |
| Reimbursements | | 18,516 |
| | 17,172 |
| | 18,947 |
| | 18,998 |
| | 21,304 |
| |
| Total revenue | | 600,906 |
| | 548,311 |
| | 513,239 |
| | 480,993 |
| | 465,081 |
| |
| Operating expenses: | | | | | | | | | | | |
| Salaries and employee benefits | | 400,070 |
| | 369,385 |
| | 337,448 |
| | 319,499 |
| | 309,502 |
| |
| General and administrative expenses | | 147,087 |
| | 127,692 |
| | 130,191 |
| | 126,931 |
| | 113,826 |
| |
| Reimbursed expenses | | 18,516 |
| | 17,172 |
| | 18,947 |
| | 18,998 |
| | 21,304 |
| |
| Restructuring charges | | — |
| | — |
| | — |
| | — |
| | 810 |
| (2) |
| Total operating expenses | | 565,673 |
| | 514,249 |
| | 486,586 |
| | 465,428 |
| | 445,442 |
| |
| Operating income | | 35,233 |
| | 34,062 |
| | 26,653 |
| | 15,565 |
| | 19,639 |
| |
| Non-operating (expense) income: | | | | | | | | | | | |
| Interest, net | | 244 |
| | (122 | ) | | (358 | ) | | (175 | ) | | 1,118 |
| |
| Other, net | | 2,289 |
| | (2,386 | ) | | (2,108 | ) | | (2,002 | ) | | (495 | ) | |
| Net non-operating (expense) income | | 2,533 |
| | (2,508 | ) | | (2,466 | ) | | (2,177 | ) | | 623 |
| |
| Income before income taxes | | 37,766 |
| | 31,554 |
| | 24,187 |
| | 13,388 |
| | 20,262 |
| |
| Provision for income taxes | | 22,353 |
| | 14,422 |
| | 17,390 |
| | 7,041 |
| | 14,022 |
| |
| Net income | | $ | 15,413 |
| | $ | 17,132 |
| | $ | 6,797 |
| | $ | 6,347 |
| | $ | 6,240 |
| |
| Basic weighted average common shares outstanding | | 18,540 |
| | 18,334 |
| | 18,210 |
| | 18,077 |
| | 17,971 |
| |
| Diluted weighted average common shares outstanding | | 18,939 |
| | 18,715 |
| | 18,432 |
| | 18,232 |
| | 18,120 |
| |
| Basic earnings per common share | | $ | 0.83 |
| | $ | 0.93 |
| | $ | 0.37 |
| | $ | 0.35 |
| | $ | 0.35 |
| |
| Diluted earnings per common share | | $ | 0.81 |
| | $ | 0.92 |
| | $ | 0.37 |
| | $ | 0.35 |
| | $ | 0.34 |
| |
| Cash dividends paid per share | | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.39 |
| | $ | 0.65 |
| |
| Balance Sheet Data (at end of period): | | | | | | | | | | | |
Working capital (1) | | $ | 77,838 |
| | $ | 79,533 |
| | $ | 112,387 |
| | $ | 107,177 |
| | $ | 66,030 |
| |
| Total assets (1) | | 581,502 |
| | 572,718 |
| | 568,621 |
| | 552,937 |
| | 494,890 |
| |
| Long-term debt, less current maturities | | — |
| | — |
| | 23,500 |
| | 29,500 |
| | — |
| |
| Stockholders’ equity | | 258,590 |
| | 254,802 |
| | 244,664 |
| | 247,873 |
| | 248,347 |
| |
| Other Operating Data: | | | | | | | | | | | |
| Average number of consultants during the period | | 347 |
| | 326 |
| | 313 |
| | 341 |
| | 342 |
| |
Notes to Selected Financial Data: |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | (in thousands, except per share and other operating data) |
| Statements of Operations Data: | | | | | | | | | | |
| Revenue: | | | | | | | | | | |
| Revenue before reimbursements (net revenue) | | $ | 706,924 |
| | $ | 716,023 |
| | $ | 621,400 |
| | $ | 582,390 |
| | $ | 531,139 |
|
| Reimbursements | | 18,690 |
| | 19,632 |
| | 18,656 |
| | 18,516 |
| | 17,172 |
|
| Total revenue | | 725,614 |
| | 735,655 |
| | 640,056 |
| | 600,906 |
| | 548,311 |
|
| Operating expenses: | | | | | | | | | | |
| Salaries and benefits | | 501,791 |
| | 506,349 |
| | 434,219 |
| | 400,070 |
| | 369,385 |
|
| General and administrative expenses | | 137,492 |
| | 140,817 |
| | 147,316 |
| | 147,087 |
| | 127,692 |
|
| Impairment charges (1) | | — |
| | — |
| | 50,722 |
| | — |
| | — |
|
| Restructuring charges (2) | | 4,130 |
| | — |
| | 15,666 |
| | — |
| | — |
|
| Reimbursed expenses | | 18,690 |
| | 19,632 |
| | 18,656 |
| | 18,516 |
| | 17,172 |
|
| Total operating expenses | | 662,103 |
| | 666,798 |
| | 666,579 |
| | 565,673 |
| | 514,249 |
|
| Operating income (loss) | | 63,511 |
| | 68,857 |
| | (26,523 | ) | | 35,233 |
| | 34,062 |
|
| Non-operating income (expense): | | | | | | | | | | |
| Interest, net | | 2,880 |
| | 1,141 |
| | 385 |
| | 244 |
| | (122 | ) |
| Other, net | | 2,898 |
| | 494 |
| | (3,280 | ) | | 2,289 |
| | (2,386 | ) |
| Net non-operating income (expense) | | 5,778 |
| | 1,635 |
| | (2,895 | ) | | 2,533 |
| | (2,508 | ) |
| Income (loss) before income taxes | | 69,289 |
| | 70,492 |
| | (29,418 | ) | | 37,766 |
| | 31,554 |
|
| Provision for income taxes | | 22,420 |
| | 21,197 |
| | 19,217 |
| | 22,353 |
| | 14,422 |
|
| Net income (loss) | | $ | 46,869 |
| | $ | 49,295 |
| | $ | (48,635 | ) | | $ | 15,413 |
| | $ | 17,132 |
|
| Basic weighted average common shares outstanding | | 19,103 |
| | 18,917 |
| | 18,735 |
| | 18,540 |
| | 18,334 |
|
| Diluted weighted average common shares outstanding | | 19,551 |
| | 19,532 |
| | 18,735 |
| | 18,939 |
| | 18,715 |
|
| Basic net income (loss) per common share | | $ | 2.45 |
| | $ | 2.61 |
| | $ | (2.60 | ) | | $ | 0.83 |
| | $ | 0.93 |
|
| Diluted net income (loss) per common share | | $ | 2.40 |
| | $ | 2.52 |
| | $ | (2.60 | ) | | $ | 0.81 |
| | $ | 0.92 |
|
| Cash dividends paid per share | | $ | 0.60 |
| | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.52 |
|
| Balance Sheet Data (at end of period): | | | | | | | | | | |
| Working capital (3) | | $ | 149,140 |
| | $ | 131,916 |
| | $ | 77,998 |
| | $ | 77,838 |
| | $ | 79,533 |
|
| Total assets (3) | | 844,173 |
| | 700,629 |
| | 587,204 |
| | 581,502 |
| | 572,718 |
|
| Long-term debt, less current maturities | | — |
| | — |
| | — |
| | — |
| | — |
|
| Stockholders’ equity | | 309,115 |
| | 267,156 |
| | 212,705 |
| | 258,590 |
| | 254,802 |
|
| |
| (1) | Includes impairment charges of $50.7 million related to Heidrick Consulting in 2017 (See Note 9, Goodwill and Other Intangible Assets). |
| |
| (2) | Includes restructuring charges of $4.1 million and $15.7 million in 2019 and 2017, respectively. The 2019 charges primarily consist of employee-related costs associated with severance arrangements. The 2017 charges consist of $13.1 million of employee-related costs associated with severance arrangements, $2.3 million in professional fees and other expenses and $0.3 million in real estate related expenses (See Note 15, Restructuring). |
| |
| (3) | As adjusted for the adoption of ASU No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes.in 2015. |
| |
(2) | In 2012, we recorded restructuring charges of $0.8 million in Europe related to adjustments associated with our 2011 restructuring plan. These charges consist of $1.1 million of employee-related costs associated with severance arrangements, partially offset by $0.3 million of adjustments to premise-related costs. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as other sections of this annual report on Form 10-K contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements are not historical facts, but instead represent only our beliefs, assumptions, expectations, estimates, forecasts and projections regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed under the Section heading “Risk Factors” in Part I, Item 1A of this Form 10-K.
Factors that may affect the outcome of the forward-looking statements include, among other things, leadership changes, our ability to attract, integrate, develop, manage and retain qualified consultants and senior leaders; our ability to develop and maintain strong, long-term relationshipsprevent our consultants from taking our clients with our clients; fluctuations in the global and local economies andthem to another firm; our ability to execute successfullymaintain our strategies;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, or political, instabilityregulatory and legal risks in markets where we operate, the impact of the U.K. referendum to leave the European Union (Brexit);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; price competition; the ability to forecast, on a quarterly basis, variable compensation accruals that ultimately are determined based on the achievement of annual results; our ability to realize our tax losses; the timing of the establishment or reversal of valuation allowance on deferred tax assets; the mix of profit and loss by country; our ability to integrate future acquisitions; our reliance on information management systems; 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 abilityincreased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks that could pose a risk to align our cost structuresystems, networks, solutions, services and headcount with net revenue.data. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for years 2019 and 2018. for the discussion of changes from 2017 to 2018 and other financial information related to 2017, refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2018. This document was filed with the SEC on February 26, 2019.
Executive Overview
Our Business
We are a leadership advisory firm providing executive search leadershipand consulting and culture shaping services. We help our clients build leadership teams by facilitating the recruitment, management and development of senior executives. We believe focusing on top-level services offers us several advantages that include access to and influence with key decision makers, increased potential for recurring search consulting engagements, higher fees per search, enhanced brand visibility and a leveraged global footprint, which create added barriers to entry for potential competitors. Working at the top of client organizations also allows us to attract and retain high-caliber consultants. On August 4, 2016, we acquired JCA Group Limited, a UK-based provider of executive search, succession planning and coaching services.
In addition to executive search, we provide leadership consulting expertise and culture shaping services including executive leadership assessment;assessment, leadership, team and board development;development, succession planning;planning, talent strategy;strategy, people performance;performance, inter-team collaboration;collaboration, culture shaping and organizational transformation. On September 1, 2016, we acquired Philosophy IB, LLP, a leadership, organizational development and management consulting firm. On August 4, 2016, we acquired JCA Group Limited, a UK-based provider of executive search, succession planning and coaching services. On February 29, 2016, we acquired Decision Strategies International, Inc., which specializes in advising organizations and institutions on strategic planning and decision making in certain operating environments, leadership development and talent strategy. On October 1, 2015, we acquired Co Company Limited, an organizational development consulting firm.
In the fourth quarter of 2016, we restructured our operating segments. Given the significant growth of the Company's Leadership Consulting service line, our chief operating decision maker began to regularly assess performance and make resource allocation decisions separately for Executive Search and Leadership Consulting. Therefore, we now report Executive Search and Leadership Consulting as separate operating segments. We currently operate our executive search business in the Americas; Europe (which includes Africa); and Asia Pacific (which includes the Middle East) and operate our leadership consulting and culture shaping businesses as separate segments. Previously reported operating segment results for the years ended December 31, 2015 and 2014 have been recast to conform to the new operating segment structure.
We provide our services to a broad range of clients through the expertise of over 300450 consultants located in major cities around the world. Our executive search services are provided on a retained basis. Revenue before reimbursements of out-of-pocket expenses (“net revenue”) consists of retainers and indirect expenses billed to clients. Typically, we are paid a retainer for
our executive search services equal to approximately one-third of the estimated first yearfirst-year compensation for the position to be filled. In addition, if the actual compensation of a placed candidate exceeds the estimated compensation, we often are authorized to bill the client for one-third of the excess. Indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search.
Key Performance Indicators
We manage and assess Heidrick & Struggles’our performance through various means, with the primary financial and operational measures including net revenue, operating income, operating margin, Adjusted EBITDA (non-GAAP), and Adjusted EBITDA margin (non-GAAP). Executive Search and LeadershipHeidrick Consulting performance is also measured using consultant headcount. Specific to Executive Search, confirmation trends, consultant productivity and average revenue per search are used to measure performance.
Revenue is driven by market conditions and a combination of the number of executive search engagements and leadership consulting and culture shaping projects and the average revenue per search or project. With the exception of compensation expense, incremental increases in revenue do not necessarily result in proportionate increases in costs, particularly operating and administrative expenses, thus potentially improvingcreating the potential to improve operating margins.
The number of consultants, confirmation trends, number of searches or projects completed, productivity levels and the average revenue per search or project will vary from quarter to quarter, affecting net revenue and operating margin.
Our Compensation Model
At the Executive Search consultant level, there are fixed and variable components of compensation. Individuals are rewarded for their performance based on a system that directly ties a portion of their compensation to the amount of net revenue for which they are responsible. A portion of the reward may be based upon individual performance against a series of non-financial measures. Credit towards the variable portion of an executive search consultant’s compensation is earned by generating net revenue for winning and executing work. Each quarter, we review and update the expected annual performance of all Executive Search consultants and accrue variable compensation accordingly. The amount of variable compensation that is accrued for each Executive Search consultant is based on a tiered payout model. Overall Company performance determines the amount available for total variable compensation. The more net revenue that is generated by the consultant, the higher the percentage credited towards the consultant’s variable compensation and thus accrued by our Company as expense.
At the Heidrick Consulting consultant level, there are also fixed and variable components of compensation. Overall compensation is determined based on the total economic contribution of the Heidrick Consulting segment to the business as a whole. Individual consultant compensation can vary and is derived from credits earned for delivering client work plus credits earned for contributions of intellectual and human capital, client relationship development and consulting practice development. Each quarter, we review and update the expected annual performance of all Heidrick Consulting consultants and accrue variable compensation accordingly.
The mix of individual consultants who generate the revenue in Executive Search and economic contributions in Heidrick Consulting can significantly affect the total amount of compensation expense recorded, which directly impacts operating margin. As a result, the variable portion of the compensation expense may fluctuate significantly from quarter to quarter. The total variable compensation is discretionary and is based on Company-wide financial targets approved by the Human Resources and Compensation Committee of the Board of Directors.
A portion of our Executive Search consultants’ and management cash bonuses is deferred and paid over a three-year vesting period. The compensation expense related to the amounts being deferred is recognized on a graded vesting attribution method over the requisite service period. This service period begins on January 1 of the respective fiscal year and continues through the deferral date, which coincides with our bonus payments in the first quarter of the following year, and for an additional three yearthree-year vesting period. The deferrals are recorded in Accrued salaries and employee benefits in the Consolidated Balance Sheets.
20162019 Overview
Consolidated net revenue was $582.4$706.9 million for the year ended December 31, 2016, an increase2019, a decrease of $51.2$9.1 million, or 9.6%1.3%, compared to 2018. Executive Search net revenue was $646.4 million in 2019, a decrease of $6.5 million compared to 2018. The decrease in Executive Search net revenue was the result of declines in Europe and Asia Pacific, partially offset by growth in the Americas. Our acquisition of 2Get in September 2019 also contributed to Executive Search net revenue. The number of Executive Search consultants was 380 as of December 31, 2015. Consultant2019, compared to 353 as of December 31, 2018. Executive Search productivity, as measured by annualized net executive search and leadership consultingExecutive Search revenue per consultant, was $1.6$1.7 million and $1.5$1.9 million for the years ended December 31, 20162019 and 2015. Average2018, respectively. The number of confirmed searches decreased 4.6% in 2019 compared to 2018. The average revenue per executive search increased to $132,000 in 2019 compared to $127,300 in 2018. Heidrick Consulting net revenue decreased $2.6 million, or 4.1%, to $60.6 million in 2019, from $63.1 million in 2018. The number of Heidrick Consulting consultants was $117,700 for the year ended71 as of December 31, 20162019, compared to $115,300 for the year ended66 as of December 31, 2015.2018.
Operating income as a percentage of net revenue was 6.0%9.0% in 20162019, compared to 6.4%9.6% in 2015. Operating2018. The change in operating income was driven by an increaseprimarily due to a decrease in net revenue of $51.2$9.1 million and $4.1 million of restructuring charges in 2019, partially offset by an increasedecreases in salaries and employee benefits expense of $30.7 million and an increase in general and administrative expense of $19.4 million.$4.6 million and $3.3 million, respectively. Salaries and employee benefits expense as a percentage of net revenue was 68.7%71.0% in 20162019 and 69.5%70.7% in 2015.2018. General and administrative expense as a percentage of net revenue was 25.3%19.4% in 20162019 and 24.0%19.7% in 2015.
We ended the year with combined cash, and cash equivalents, and marketable securities of $165.0$332.9 million, a decreasean increase of $25.4$53.0 million compared to $190.5$279.9 million at December 31, 2015.2018. The decrease isincrease was primarily due to bonus payments, payments for the DSI, Philosophy and JCA acquisitions, capital expenditures, tax extension payments,strong cash dividend payments and earnout payments,inflows from operations partially offset by cash collections.acquisition spend and larger bonus payments year-over-year. We pay the majority of bonuses in the first quarter following the year in which they were earned. Employee bonuses are accrued throughout the year and are based on the Company’s performance and the performance of the individual employee. We expect to pay approximately $128.0$205.0 million in bonuses related to 20162019 performance in March and April 2017.2020. In February 2017,January 2020, we paid approximately $12.0$17.1 million in cash bonuses deferred infrom prior years.
20172020 Outlook
We are currently forecasting 20172020 first quarter net revenue of between $140$165 million and $150$175 million. Our 20172020 first quarter guidance is based upon, among other things, management’s assumptions for the anticipated volume of new executive search confirmations and leadership consulting and culture shaping projects, the current backlog, consultant productivity, consultant retention, the seasonality of our business and average currency rates from December 2016.2019.
Our 20172020 first quarter guidance is subject to a number of risks and uncertainties, including those disclosed under "Item 1A - Risk Factors (See Item 1A. Risk Factors)Factors" and Management’sin this "Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K.Operations". As such, actual results could vary from these projections.
Results of Operations
The following table summarizes, for the periods indicated, the results of operations (in thousands)thousands, except per share data):
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Revenue | | | | | | | | | | | | |
| Revenue before reimbursements (net revenue) | | $ | 582,390 |
| | $ | 531,139 |
| | $ | 494,292 |
| | $ | 706,924 |
| | $ | 716,023 |
| | $ | 621,400 |
|
| Reimbursements | | 18,516 |
| | 17,172 |
| | 18,947 |
| | 18,690 |
| | 19,632 |
| | 18,656 |
|
| Total revenue | | 600,906 |
| | 548,311 |
| | 513,239 |
| | 725,614 |
| | 735,655 |
| | 640,056 |
|
| Operating Expenses | | | | | | | | | | | | |
| Salaries and employee benefits | | 400,070 |
| | 369,385 |
| | 337,448 |
| |
| General and administrative | | 147,087 |
| | 127,692 |
| | 130,191 |
| |
| Salaries and benefits | | | 501,791 |
| | 506,349 |
| | 434,219 |
|
| General and administrative expenses | | | 137,492 |
| | 140,817 |
| | 147,316 |
|
| Impairment charges (1) | | | — |
| | — |
| | 50,722 |
|
| Restructuring charges (2) | | | 4,130 |
| | — |
| | 15,666 |
|
| Reimbursed expenses | | 18,516 |
| | 17,172 |
| | 18,947 |
| | 18,690 |
| | 19,632 |
| | 18,656 |
|
| Total operating expenses | | 565,673 |
| | 514,249 |
| | 486,586 |
| | 662,103 |
| | 666,798 |
| | 666,579 |
|
| Operating income | | 35,233 |
| | 34,062 |
| | 26,653 |
| |
| Operating income (loss) | | | 63,511 |
| | 68,857 |
| | (26,523 | ) |
| Non-operating income (expense) | | | | | | | | | | | | |
| Interest, net | | 244 |
| | (122 | ) | | (358 | ) | | 2,880 |
| | 1,141 |
| | 385 |
|
| Other, net | | 2,289 |
| | (2,386 | ) | | (2,108 | ) | | 2,898 |
| | 494 |
| | (3,280 | ) |
| Net non-operating income (expense) | | 2,533 |
| | (2,508 | ) | | (2,466 | ) | | 5,778 |
| | 1,635 |
| | (2,895 | ) |
| Income before taxes | | 37,766 |
| | 31,554 |
| | 24,187 |
| |
| Income (loss) before taxes | | | 69,289 |
| | 70,492 |
| | (29,418 | ) |
| Provision for income taxes | | 22,353 |
| | 14,422 |
| | 17,390 |
| | 22,420 |
| | 21,197 |
| | 19,217 |
|
| Net income | | $ | 15,413 |
| | $ | 17,132 |
| | $ | 6,797 |
| |
| Net income (loss) | | | $ | 46,869 |
| | $ | 49,295 |
| | $ | (48,635 | ) |
| Basic weighted average common shares outstanding | | 18,540 |
| | 18,334 |
| | 18,210 |
| | 19,103 |
| | 18,917 |
| | 18,735 |
|
| Diluted weighted average common shares outstanding | | 19,038 |
| | 18,715 |
| | 18,432 |
| | 19,551 |
| | 19,532 |
| | 18,735 |
|
| Basic net income per common share | | $ | 0.83 |
| | $ | 0.93 |
| | $ | 0.37 |
| |
| Diluted net income per common share | | $ | 0.81 |
| | $ | 0.92 |
| | $ | 0.37 |
| |
| Basic net income (loss) per common share | | | $ | 2.45 |
| | $ | 2.61 |
| | $ | (2.60 | ) |
| Diluted net income (loss) per common share | | | $ | 2.40 |
| | $ | 2.52 |
| | $ | (2.60 | ) |
| Cash dividends paid per share | | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.60 |
| | $ | 0.52 |
| | $ | 0.52 |
|
| |
| (1) | Includes impairment charges of $50.7 million related to Heidrick Consulting in 2017 (See Note 9, Goodwill and Other Intangible Assets). |
| |
| (2) | Includes restructuring charges of $4.1 million in 2019 and $15.7 million in 2017. The 2019 charges consist primarily of employee-related costs associated with severance arrangements. The 2017 charges consist of $13.1 million of employee-related costs associated with severance arrangements, $2.3 million in professional fees and other expenses and $0.3 million in real estate related expenses (See Note 15, Restructuring). |
The following table summarizes, for the periods indicated, our results of operations as a percentage of revenue before reimbursements (net revenue):
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Revenue: | | | | | | | | | | | | |
| Revenue before reimbursements (net revenue) | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Reimbursements | | 3.2 |
| | 3.2 |
| | 3.8 |
| | 2.6 |
| | 2.7 |
| | 3.0 |
|
| Total revenue | | 103.2 |
| | 103.2 |
| | 103.8 |
| | 102.6 |
| | 102.7 |
| | 103.0 |
|
| Operating expenses: | | | | | | | | | | | |
|
| Salaries and employee benefits | | 68.7 |
| | 69.5 |
| | 68.3 |
| |
| Salaries and benefits | | | 71.0 |
| | 70.7 |
| | 69.9 |
|
| General and administrative expenses | | 25.3 |
| | 24.0 |
| | 26.3 |
| | 19.4 |
| | 19.7 |
| | 23.7 |
|
| Impairment charges | | | — |
| | — |
| | 8.2 |
|
| Restructuring charges | | | 0.6 |
| | — |
| | 2.5 |
|
| Reimbursed expenses | | 3.2 |
| | 3.2 |
| | 3.8 |
| | 2.6 |
| | 2.7 |
| | 3.0 |
|
| Total operating expenses | | 97.1 |
| | 96.8 |
| | 98.4 |
| | 93.7 |
| | 93.1 |
| | 107.3 |
|
| Operating income | | 6.0 |
| | 6.4 |
| | 5.4 |
| |
| Non-operating expense | | | | | | | |
| Operating income (loss) | | | 9.0 |
| | 9.6 |
| | (4.3 | ) |
| Non-operating income (expense) | | | | |
| |
|
| Interest, net | | — | % | | — | % | | — | % | | 0.4 |
| | 0.2 |
| | 0.1 |
|
| Other, net | | 0.4 |
| | (0.4 | ) | | (0.4 | ) | | 0.4 |
| | 0.1 |
| | (0.5 | ) |
| Net non-operating expense | | 0.4 |
| | (0.5 | ) | | (0.5 | ) | |
| Income before income taxes | | 6.5 |
| | 5.9 |
| | 4.9 |
| |
| Net non-operating income (expense) | | | 0.8 |
| | 0.2 |
| | (0.5 | ) |
| Income (loss) before income taxes | | | 9.8 |
| | 9.8 |
| | (4.7 | ) |
| Provision for income taxes | | 3.8 |
| | 2.7 |
| | 3.5 |
| | 3.2 |
| | 3.0 |
| | 3.1 |
|
| Net income | | 2.6 | % | | 3.2 | % | | 1.4 | % | |
| Net income (loss) | | | 6.6 | % | | 6.9 | % | | (7.8 | )% |
Note: Totals and subtotals may not equal the sum of individual line items due to rounding.
We operate our executive search services in the Americas; Europe (which includes Africa); and Asia Pacific (which includes the Middle East) and operate our leadership consulting and culture shaping businesses as separate segments (See Note 16, Segment Information).
We operate our Executive Search business in the Americas, Europe (which includes Africa) and Asia Pacific (which includes the Middle East), and we operate our Heidrick Consulting business globally (See Note 18, Segment Information).
The following table sets forth, for the periods indicated, our revenue and operating income by segment (in thousands):
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Revenue: | | | | | | | | | | | | |
| Executive Search | | | | | | | | | | | | |
| Americas | | $ | 313,292 |
| | $ | 294,606 |
| | $ | 253,718 |
| | $ | 415,455 |
| | $ | 405,267 |
| | $ | 339,793 |
|
| Europe | | 108,754 |
| | 92,135 |
| | 103,416 |
| | 135,070 |
| | 145,348 |
| | 125,346 |
|
| Asia Pacific | | 85,319 |
| | 89,026 |
| | 83,537 |
| | 95,827 |
| | 102,276 |
| | 86,905 |
|
| Total Executive Search | | 507,365 |
| | 475,767 |
| | 440,671 |
| | 646,352 |
| | 652,891 |
| | 552,044 |
|
| Leadership Consulting | | 38,806 |
| | 19,045 |
| | 18,870 |
| |
| Culture Shaping | | 36,219 |
| | 36,327 |
| | 34,751 |
| |
| Heidrick Consulting | | | 60,572 |
| | 63,132 |
| | 69,356 |
|
| Revenue before reimbursements (net revenue) | | 582,390 |
| | 531,139 |
| | 494,292 |
| | 706,924 |
| | 716,023 |
| | 621,400 |
|
| Reimbursements | | 18,516 |
| | 17,172 |
| | 18,947 |
| | 18,690 |
| | 19,632 |
| | 18,656 |
|
| Total | | $ | 600,906 |
| | $ | 548,311 |
| | $ | 513,239 |
| |
| Total revenue | | | $ | 725,614 |
| | $ | 735,655 |
| | $ | 640,056 |
|
| | | | | | | | |
| Operating income (loss): | | | | | | | | | | | | |
| Executive Search | | | | | | | | | | | | |
Americas | | $ | 73,857 |
| | $ | 68,043 |
| | $ | 57,370 |
| | $ | 100,833 |
| | $ | 96,880 |
| | $ | 75,337 |
|
Europe | | 6,851 |
| | 3,644 |
| | 6,013 |
| | 3,026 |
| | 5,849 |
| | 13 |
|
Asia Pacific | | 4,799 |
| | 5,909 |
| | 4,348 |
| | 13,590 |
| | 15,999 |
| | 537 |
|
| Total Executive Search | | 85,507 |
| | 77,596 |
| | 67,731 |
| | 117,449 |
| | 118,728 |
| | 75,887 |
|
| Leadership Consulting | | (1,495 | ) | | (1,847 | ) | | (357 | ) | |
| Culture Shaping | | (1,558 | ) | | 4,913 |
| | 4,621 |
| |
| Total Segments | | 82,454 |
| | 80,662 |
| | 71,995 |
| |
| Global Operations Support | | (47,221 | ) | | (46,600 | ) | | (45,342 | ) | |
| Total | | $ | 35,233 |
| | $ | 34,062 |
| | $ | 26,653 |
| |
| Heidrick Consulting (4) | | | (18,499 | ) | | (13,619 | ) | | (62,368 | ) |
| Total segments | | | 98,950 |
| | 105,109 |
| | 13,519 |
|
| Global Operations Support (5) | | | (35,439 | ) | | (36,252 | ) | | (40,042 | ) |
| Total operating income (loss) | | | $ | 63,511 |
| | $ | 68,857 |
| | $ | (26,523 | ) |
| |
| (1) | Operating income for the Americas includes $4.1 million and $0.8 million of restructuring charges in 2019 and 2017, respectively. |
| |
| (2) | Operating income for Europe includes $4.0 million of restructuring charges in 2017. |
| |
| (3) | Operating income for Asia Pacific includes $2.0 million of restructuring charges in 2017. |
| |
| (4) | Operating loss for Heidrick Consulting includes less than $0.1 million of restructuring charges in 2019, and $50.7 million of impairment charges and $3.4 million of restructuring charges in 2017. |
| |
| (5) | Operating loss for Global Operations Support includes less than $0.1 million and $5.5 million of restructuring charges in 2019 and 2017, respectively. |
Year Endedended December 31, 20162019 compared to year ended December 31, 20152018
Total revenue. Consolidated total revenue increased $52.6decreased $10.0 million, or 9.6%1.4%, to $600.9$725.6 million in 20162019 from $548.3$735.7 million in 2015.2018. The increasedecrease in total revenue was primarily due to the increasedecrease in revenue before reimbursements (net revenue).
Revenue before reimbursements (net revenue). Consolidated net revenue increased $51.2decreased $9.1 million, or 9.6%1.3%, to $582.4$706.9 million in 20162019 from $531.1$716.0 million in 2015.2018. Foreign exchange rate fluctuations decreased revenuerates negatively impacted results by $11.4$11.3 million, or 2.1%1.6%. Executive Search net revenue was $507.4$646.4 million in 2016, an increase2019, a decrease of $31.6$6.5 million compared to 2015.2018. The increasedecrease in Executive Search net revenue was the result of declines in both Europe and Asia Pacific, partially offset by growth in the Americas and Europe. LeadershipAmericas. Heidrick Consulting net revenue increased $19.8decreased $2.6 million, or 103.8%4.1%, to $38.8$60.6 million in 20162019 from $19.0$63.1 million in 2015. The increase in Leadership Consulting net revenue was primarily the result of the Co Company, DSI and Philosophy IB acquisitions. Culture Shaping net revenue was $36.2 million in 2016, a decrease of $0.1 million compared to 2015.2018.
The number of Executive Search and LeadershipHeidrick Consulting consultants was 335380 and 22,71, respectively, as of December 31, 20162019, compared to 308353 and 26,66, respectively, as of December 31, 2015.2018. Specific to Executive Search, which is our largest business, productivity as measured by annualized net Executive Search revenue per consultant was $1.6$1.7 million and $1.5$1.9 million for the years ended December 31, 20162019 and 2015,2018, respectively. The number of confirmed searches increased 7.1%decreased 4.6% compared to 2015.2018. The average revenue per executive search increased to $117,700$132,000 in 2019 compared to $127,300 in 2018.
Salaries and benefits. Consolidated salaries and benefits expense decreased $4.6 million, or 0.9%, to $501.8 million in 2019 from $506.3 million in 2018. The decrease was due to lower variable compensation of $17.5 million, partially offset by higher fixed compensation of $12.9 million. Variable compensation decreased due to lower consultant productivity compared to the prior year. Included in variable compensation for the year ended December 31, 2016 compared to $115,3002019 is $0.6 million of contingent compensation for the year ended December 31, 2015.
Salariesformer owners of 2GET, which is based on the achievement of certain revenue and employee benefits. Consolidated salaries and employee benefits expense increased $30.7 million or 8.3%, to $400.1 million in 2016EBITDA milestones for the period from $369.4 million in 2015. The increase was due to higher fixed compensation of $31.7 million partially offset by lower variable compensation of $1.0 million.acquisition through 2023. Fixed compensation increased due to higherthe deferred compensation related to our four recent acquisitions, new hires over the last year with incentivesplan, stock compensation, base salaries and minimum guarantees that are part of the consultant hiring process, $6.7 million of investmentspayroll taxes, and retirement and benefits, partially offset by declines in newtalent acquisition and existing partners in our Culture Shaping businessretention costs and severance related to the repositioning of the Leadership Consulting business. As a result of higher fixed compensation expense
and an increase in the use of third-party consultants, whose costs are included in General and administrative expenses, variable compensation decreased $1.0 million reflecting the overall profitability of the business.
separation. Foreign exchange rate fluctuations decreased totalpositively impacted salaries and employee benefits expenses by $6.2$8.2 million, or 1.7%1.6%.
In 2016,2019, we had an average of 1,7161,680 employees, compared to an average of 1,5631,610 employees in 2015. As a percentage of net revenue, salaries and employee benefits expense was 68.7% in 2016, compared to 69.5% in 2015.
General and administrative expenses. Consolidated general and administrative expenses increased $19.4 million, or 15.2%, to $147.1 million for the year ended December 31, 2016 from $127.7 million for the year ended December 31, 2015. More than half of the increase was due to ongoing general and administrative expenses related to our four recent acquisitions including the use of third-party consultants in these businesses to execute work. The increase in general and administrative expenses also reflects the repositioning of our Leadership Consulting business of $1.5 million, higher professional service fees supporting technology implementation and training and development fees, higher unbilled travel and business development expense, and an increase in technology subscription costs reflecting additional headcount throughout the business for cloud-based services.
Foreign exchange rate fluctuations decreased total general and administrative expenses by $3.2 million or 2.5%.2018.
As a percentage of net revenue, general and administrative expenses were 25.3% in 2016, compared to 24.0% in 2015.
Operating income. Our consolidated operating income was $35.2 million in 2016 compared to $34.1 million in 2015. The impacts of foreign exchange rate fluctuations reduced operating income by $1.9 million.
Net non-operating income (expense). Net non-operating income was $2.5 million for 2016, an increase of $5.0 million from net non-operating expense of $2.5 million in 2015.
Net interest income was $0.2 million in 2016, a $0.3 million increase from net interest expense of $0.1 million in 2015. Interest expense decreased $0.3 million due the repayment of outstanding debt in the third quarter of 2015, which had been outstanding during the year ended December 31, 2015.
Other, net was income of $2.3 million in 2016 and expense of $2.4 million in 2015. Other, net increased due to lower net losses on available for sale securities compared to the prior year and decreased losses on the disposal of fixed assets.
Income taxes. See Note 15, Income Taxes.
Executive Search
Americas
The Americas segment reported net revenue of $313.3 million in 2016, an increase of 6.3% from $294.6 million in 2015. The increase in net revenue was due to an increase average revenue per search in addition to an increase in consultant headcount. All practice groups contributed to the increased net revenue with the exception of the Financial Services practice group. The number of consultants was 158 as of December 31, 2016, compared to 146 as of December 31, 2015.
Salaries and employee benefits expense increased $10.9 million from 2015. Fixed compensation increased $11.3 million primarily due to higher base salaries and payroll taxes of $4.2 million, higher minimum guarantee and sign-on bonuses of $1.4 million, higher retirement and benefits and increased deferred compensation due to market fluctuations. Variable compensation decreased $0.4 million primarily due to lower bonus accruals.
General and administrative expenses increased $2.0 million primarily due to professional service fees, office occupancy expenses and internal travel costs.
Operating income was $73.9 million in 2016, an increase of $5.8 million compared to $68.0 million in 2015.
Europe
Europe reported net revenue of $108.7 million in 2016, an increase of 18.0% from $92.1 million in 2015. The increase in net revenue was driven by a 24.7% increase in the number of executive search confirmations as compared to the prior year and an increase in consultant headcount. Our acquisition of JCA Group in August 2016 also contributed to the year-over-year
growth in net revenue. Foreign exchange rate fluctuations decreased revenue by $6.7 million or 7.3%. All industry practice groups contributed to net revenue growth except for the Education, Nonprofit & Social Enterprise practice group. The number of consultants was 95 as of December 31, 2016 as compared to 78 as of December 31, 2015.
Salaries and employee benefits expense increased $10.7 million from 2015. Fixed compensation increased $9.2 million due to higher base salaries and payroll taxes of $5.3 million primarily from merit increases, additional headcount related to the JCA Group acquisition and higher minimum guarantees of $3.5 million. Variable compensation increased $1.5 million due to higher bonus accruals for consultant performance.
General and administrative expense increased $2.7 million from 2015 due to higher internal travel costs, amortization and accretion related to the JCA group acquisition and higher professional service fees, partially offset by lower office occupancy costs.
The Europe segment reported operating income of $6.9 million in 2016, an increase of $3.3 million compared to $3.6 million in 2015.
Asia Pacific
Asia Pacific reported net revenue of $85.3 million in 2016, a decrease of 4.2% compared to $89.0 million in 2015. The decrease in net revenue was due to lower average revenue per search and lower consultant headcount. The Consumer Markets and Financial Services practice groups increased net revenue, which was offset by decreases in the Global Technology & Services, Healthcare & Life Sciences, Industrial and Education and Social Enterprise practice groups. The number of consultants was 82 as of December 31, 2016, compared to 84 as of December 31, 2015.
Salaries and employee benefits expense decreased $3.0 million. The decrease in salaries and employee benefits expense is due to lower variable compensation of $4.8 million from lower bonus accruals for consultant performance partially offset by an increase in fixed compensation of $1.8 million as a result of headcount increases and the timing of merit increases.
General and administrative expenses increased $0.4 million primarily due to higher office occupancy expenses and internal travel costs.
The Asia Pacific segment reported operating income of $4.8 million in 2016, a decrease of $1.1 million compared to 2015.
Leadership Consulting
The Leadership Consulting segment reported net revenue of $38.8 million in 2016, an increase of 103.8% compared to $19.0 million in 2015. The increase in net revenue was primarily driven by our DSI and Philosophy IB acquisitions in addition to a full year of results for Co Company, which was acquired in October 2015. Foreign exchange rate fluctuations decreased net revenues by $2.7 million or 14.2%. There were 22 Leadership Consulting consultants at December 31, 2016 compared to 26 at December 31, 2015.
Salaries and employee benefits expense increased $6.0 million compared to the prior year. Fixed compensation increased $4.9 million due to additional headcount related to the DSI and Philosophy IB acquisitions in addition to a full year of expense for Co Company. Variable compensation increased $1.1 million as compared to the prior year.
General and administrative expenses increased $13.4 million primarily as a result of ongoing general and administrative expenses related to our recent acquisitions of DSI, Philosophy and Co Company and their use of third-party consultants to execute work, $1.5 million of costs associated with repositioning of our Leadership Consulting business and higher office occupancy costs.
The Leadership Consulting segment reported an operating loss of $1.5 million in 2016, an improvement of $0.3 million compared to an operating loss of $1.8 million in 2015.
Culture Shaping
The Culture Shaping segment reported net revenue of $36.2 million in 2016, a decrease of 0.3% compared to $36.3 million in 2015. Net revenue decreased due to a decline in the volume of client work.
Salaries and employee benefits expense increased $4.6 million due to $6.7 million of investments in new and existing consultants.
General and administrative expenses increased $1.8 million primarily due to third-party external consultant costs and professional service fees.
The Culture Shaping segment reported an operating loss of $1.6 million in 2016, a decrease of $6.5 million compared to $4.9 million of operating income in 2015.
Global Operations Support
Global Operations Support expenses in 2016 increased $0.6 million or 1.3% to $47.2 million from $46.6 million in 2015.
Salaries and employee benefits expense increased $1.4 million due to additional stock-based compensation expense related to meeting the vesting requirements of the performance share awards for the chief executive officer, higher retirement and benefits expense and higher separation costs.
General and administrative expense decreased $0.8 million due to decreaseswas 71.0% in internal travel costs, office occupancy expenses and professional service fees that were partially offset by increased taxes and licenses, hiring fees and temporary labor costs.
Year ended December 31, 20152019 compared to year ended December 31, 2014
Total revenue. Consolidated total revenue increased $35.1 million, or 6.8%, to $548.3 million70.7% in 2015 from $513.2 million in 2014. The increase in total revenue was primarily due to the increase in revenue before reimbursements (net revenue).
Revenue before reimbursements (net revenue). Consolidated net revenue increased $36.8 million or 7.5%, to $531.1 million in 2015 from $494.3 million in 2014. Foreign exchange rate fluctuations decreased revenue by $24.2 million, or 4.9%. Executive Search net revenue was $475.8 million in 2015, an increase of $35.1 million compared to 2014. The increase in Executive Search net revenue was the result of strong growth in all practice groups. Leadership Consulting net revenue increased $0.1 million, or 0.9%, to $19.0 million in 2015 from $18.9 million in 2014. Culture Shaping net revenue was $36.3 million in 2015, an increase of $1.6 million compared to 2014.
The number of Executive Search and Leadership Consulting consultants was 308 and 26, respectively, as of December 31, 2015 compared to 286 and 21, respectively, as of December 31, 2014. Specific to Executive Search, our largest business, productivity as measured by annualized net Executive Search revenue per consultant was $1.5 million for each of the years ended December 31, 2015 and 2014. The number of confirmed searches increased 7.3% compared to 2014. The average revenue per executive search decreased to $115,300 for the year ended December 31, 2015 compared to $116,000 for the year ended December 31, 2015.
Salaries and employee benefits. Consolidated salaries and employee benefits expense increased $32.0 million or 9.5%, to $369.4 million in 2015 from $337.4 million in 2014. Variable compensation increased $18.0 million due to increased production, partially offset by foreign exchange rate fluctuations of $4.5 million. Fixed compensation increased $13.9 million due to higher average headcount and minimum guarantees for new consultant hires. The increase in fixed compensation was partially offset by foreign exchange rate fluctuations of $12.4 million and lower severance costs. Foreign exchange rate fluctuations decreased total salaries and employee benefits by $16.9 million or 5.0%.
In 2015, we had an average of 1,538 employees, compared to an average of 1,477 employees in 2014. As a percentage of net revenue, salaries and employee benefits expense was 69.5% in 2015, compared to 68.3% in 2014.2018.
General and administrative expenses. Consolidated general and administrative expenses decreased $2.5$3.3 million, or 1.9%2.4%, to $127.7$137.5 million for the year ended December 31, 2015in 2019 from $130.2$140.8 million for the year ended December 31, 2014.in 2018. The decrease was primarily due to the impact of foreign exchange rates of $5.0 million, lowerdecreases in professional fees, intangible amortization, resource library fees, and accretion expense of $1.2 million and the 2014 state franchise tax matter of $1.3 million, which occurred in 2014 and did not reoccur in 2015. These decreases wereoffice occupancy expenses, partially offset by increases in bad debt, the use of external third-party consultants, and taxes and licenses. Foreign exchange rate fluctuations positively impacted general and administrative expenses related to Co Company, higher IT-related costs of $1.4by $2.1 million, higher legal fees of $1.1 million and higher training costs.or 1.5%.
As a percentage of net revenue, general and administrative expenses were 24.0%19.4% in 2015,2019 compared to 26.3%19.7% in 2014.2018.
Restructuring charges. The Company incurred approximately $4.1 million in restructuring charges during the year ended December 31, 2019 in connection with initiatives to integrate the Company's legacy Brazil operations into the 2GET business operation. The expenses are primarily employee-related including the elimination of duplicative positions in the Company's legacy Brazil operations. There were no similar restructuring charges during the year ended December 31, 2018.
Operating income. Our consolidatedConsolidated operating income was $34.1$63.5 million in 20152019, including restructuring charges of $4.1 million, compared to $26.7$68.9 million in 2014. The impacts of foreign2018. Foreign exchange rate fluctuations reducednegatively impacted operating income by $2.2$1.1 million or 1.6%. Excluding the impact of restructuring charges in 2019, operating income decreased $1.2 million from $68.9 million to $67.6 million.
Net non-operating expenseincome (expense). Net non-operating expenseincome was $2.5$5.8 million for 2015 and 2014.in 2019 compared to $1.6 million in 2018.
Net interest expenseincome was $0.1 million and $0.4$2.9 million in 2015 and 2014, respectively. Interest expense2019, a $1.7 million increase from $1.1 million in 2018. The increase was primarily due to interest earned on marketable securities, which are primarily comprised of $0.5 million associated with the Term Loan was partially offset by interest income of $0.4 million for the year ended December 31, 2015.Interest expense of $0.9 million associated with the Term Loan was partially offset by interest income of $0.5 million for the year ended December 31, 2014.U.S. Treasury bills.
Other, net expense was $2.4 million and $2.1income of $2.9 million in 2015 and 2014. For2019 compared to $0.5 million in 2018. The increase was primarily the year ended December 31, 2015, net other non-operating expense consists primarilyresult of $1.2 million exchange losses from balances which are denominated in non-functional currencies and are not considered permanent in nature, $0.8 million of lossesgains on disposals of fixed assets and $0.6 million of minority interest. For the year ended December 31, 2014, net other non-operating expense consisted primarily of exchange losses from balances which were denominated in non-functional currencies and not considered permanent in nature.
deferred compensation plan assets.
Income taxes. See Note 1516, Income Taxes.
Executive Search
Americas
The Americas segment reported net revenue of $294.6$415.5 million in 2015,2019, an increase of 16.1%2.5% from $253.7$405.3 million in 2014.2018. The increase in net revenue was due to higher confirmations and higherdriven by an increase in average revenue per executive search. The Financial Services, Healthcare & Life Sciences, Global Technology & Services and IndustrialAll industry practice groups contributed to the increased net revenue partially offsetwith the exception of the Education and Social Enterprises, and Financial Services practice groups. Foreign exchange fluctuations negatively impacted net revenue by $0.8 million, or 0.2%. There were 200 Executive Search consultants in the Consumer Markets practice group. The number of consultants was 146Americas as of December 31, 2015,2019, compared to 140179 as of December 31, 2014.2018.
Salaries and employee benefits expense increased $27.3decreased $0.1 million from 2014.2018. Fixed compensation increased $15.0 million due to higher average headcount and minimum guarantees for new consultants hires. Variable compensation increased $12.3$14.8 million, primarily due to higher production.base salaries and payroll taxes, the deferred compensation plan, stock compensation, and retirement and benefits, partially offset by a decrease in talent acquisition and retention costs. Variable compensation decreased $14.9 million primarily due to the mix of consultant productivity. Included in variable compensation for the year ended December 31, 2019 is $0.6 million of contingent compensation for the former owners of 2GET, which is based on the achievement of certain revenue and EBITDA milestones for the period from acquisition through 2023.
General and administrative expenses increased $2.9$2.2 million, primarilyor 4.8%, from 2018 due to higher IT-related costsincreases in bad debt, internal travel, taxes and licenses, office occupancy expenses, and professional fees, partially offset by decreases in research tool expenses and the use of $1.0external third-party consultants.
The Americas segment incurred approximately $4.1 million regional conferencein restructuring charges during the year ended December 31, 2019 in connection with initiatives to integrate the Company's legacy Brazil operations into the 2GET business operation. The expenses are primarily employee-related including the elimination of $0.7 million, and higher other professional service fees.duplicative positions in the Company's legacy Brazil operations. There were no similar restructuring charges during the year ended December 31, 2018.
Operating income was $68.0$100.8 million in 2015,2019, an increase of $10.6$3.9 million, compared to $57.4$96.9 million in 2014.
2018. Excluding the impact of restructuring charges in 2019, operating income increased $8.1 million from $96.9 million in 2018 to $104.9 million in 2019.
Europe
Europe reported net revenue of $92.1$135.1 million in 2015,2019, a decrease of 10.9%7.1% from $103.4$145.3 million in 2014. The decrease in revenue was due to foreign exchange rate fluctuations which decreased revenue by $11.2 million, or 10.8%.2018. The decrease in net revenue was across alldue to a 5.1% decrease in the number of executive search confirmations. All industry practice groups exceptcontributed to the decline in revenue with the exception of the Global Technology &and Services practice group. The number ofForeign exchange rate fluctuations negatively impacted net revenue by $6.8 million, or 4.8%. There were 107 Executive Search consultants was 78in Europe as of December 31, 2015 and 892019, compared to 101 as of December 31, 2014.2018.
Salaries and employee benefits expense decreased $4.9$4.2 million, or 4.0%, from 20142018. Fixed compensation decreased $0.2 million, primarily due to the impact of foreign exchange rate fluctuations of $7.7 million. Fixeddecreases in base salaries and payroll taxes and retirement and benefits, partially offset by increases in talent acquisition and retention costs, and stock compensation. Variable compensation decreased $2.2$4.0 million due to foreign exchange impacts, partially offset by higher average headcount and minimum guarantees for newa decline in consultant hires. Variable compensation decreased $2.7 million due foreign exchange fluctuations.productivity.
General and administrative expenseexpenses decreased $4.0$3.3 million, or 9.5% from 20142018, primarily due to a $2.3 million benefit of foreign currency fluctuations, lower hiringdecreases in professional fees, intangible amortization, internal travel, and bad debt expense and the non-recurring benefit from 2014 related to the value added tax charge of $0.5 million, partially offset $0.6 million of costs associated with the regional conference in 2015.office occupancy expenses.
The Europe segment reported operating income of $3.6$3.0 million in 2015, a decrease of $2.4 million2019 compared to $6.0$5.8 million in 2014.
Asia Pacific
Asia Pacific reported net revenue of $89.0$95.8 million in 2015, an increase2019, a decrease of 6.6%6.3% compared to $83.5$102.3 million in 2014.2018. The increase in net revenue was partially offset by the impact of foreign exchange rate fluctuations which lowered net revenue by $7.0 million in 2015. The increasedecrease in net revenue was due to highera 12.3% decrease in the number of executive search confirmations, partially offset by an increase in average revenue per Executive Search. Theexecutive search. All industry practice groups contributed to the decline in revenue with the exception of the Global Technology & Services, Healthcare & Life Sciences and Financial Services practice groups increasedgroup. Foreign exchange rate fluctuations negatively impacted net revenue partially offset by the Consumer Markets practice group. The number of$2.7 million, or 2.7%. There were 73 Executive Search consultants was 84in Asia Pacific as of both December 31, 2015, compared to 78 as of December 31, 2014.2019 and 2018.
Salaries and employee benefits expense increased $4.6 million. Variabledecreased $3.3 million, or 5.0%, from 2018. Fixed compensation increased $5.8decreased $3.7 million due to higher production. Fixed compensation decreased $1.1 million due to foreign exchange rate fluctuationsdecreases in base salaries and lower separationpayroll taxes, and talent acquisition and retention costs, partially offset by increases in retirement and benefits, and stock compensation. Variable compensation increased $0.4 million due to the costmix of higher headcount and minimum guarantees for new consultant hires.productivity.
General and administrative expenses decreased $0.7 million, or 3.5%, from 2018 primarily due to the benefit of foreign currency fluctuations of $1.1 million,a decrease in office occupancy expenses, partially offset by $0.5 million of costs associated with the regional conferenceincreases in 2015.bad debt and internal travel.
The Asia Pacific segment reported operating income of $5.9$13.6 million in 2015, an increase2019, a decrease of $1.6$2.4 million compared to 2014.$16.0 million in 2018.
LeadershipHeidrick Consulting
The LeadershipHeidrick Consulting segment reported net revenue of $19.0$60.6 million in 2015, an increase2019, a decrease of 0.9%4.1% compared to $18.9$63.1 million in 2014.2018. The increasedecrease in net revenue was primarily driven by our acquisition of Co Companydue to a decrease in October 2015.revenue per consulting engagement. Foreign exchange rate fluctuations decreased net revenuesnegatively impacted results by $1.9$1.1 million, or 9.8%1.7%. There were 26 Leadership71 Heidrick Consulting consultants atas of December 31, 20152019, compared to 21 at66 as of December 31, 2014.2018.
Salaries and employee benefits expense increased $0.3$4.0 million, compared to the prior year.or 7.5%, from 2018. Fixed compensation decreased $1.3increased $1.8 million, primarily due to increases in base salaries and payroll taxes, and retirement and benefits, partially offset by a decrease in talent acquisition and retention costs. Variable compensation increased $2.2 million due to foreign exchange rate fluctuations, partially offset by additional headcount related to the Co Company acquisition and higher minimum guarantees. Variable compensation increased $1.6 million as compared to the prior year.cross collaboration bonuses.
General and administrative expenses increased $1.3decreased $1.7 million, or 7.0%, from 2018, primarily as a resultdue to decreases in professional fees, information technology, and earnout accretion, partially offset by increases in the use of ongoing generalexternal third-party consultants and administrative expenses related to the acquisition of Co Company in October 2015.internal travel.
The LeadershipHeidrick Consulting segment reported an operating loss of $1.8$18.5 million in 2015,2019, an decreaseincrease of $1.4$4.9 million compared to an operating loss of $0.4$13.6 million in 2015. The impacts of foreign exchange rate fluctuations reduced operating income by $0.5 million.
Culture Shaping
The Culture Shaping segment reported net revenue of $36.3 million in 2015, an increase of 4.5% compared to $34.8 million in 2014. Net revenue increased due to additional projects. Net revenue in 2014 excluded $0.4 million of pre-acquisition deferred revenue that we were unable to recognize as a result of purchase accounting.
Salaries and employee benefits expense increased $2.2 million due to higher average headcount and variable compensation.
General and administrative expenses decreased $0.9 million due to lower amortization and accretion expense of $1.4 million, partially offset by internal meeting costs.
The Culture Shaping segment reported operating income of $4.9 million in 2015, a increase of $0.3 million compared to $4.6 million in 2014.2018.
Global Operations Support
Global Operations Support expenses in 2015 increased $1.3decreased $0.8 million, or 2.8%2.3%, to $46.6$35.4 million from $45.3$36.3 million in 2014.2018.
Salaries and employee benefits expense increased $2.4 million. The increaseexpenses decreased $0.9 million, or 4.4%, due to decreases in management bonuses, separation, and stock compensation, partially offset by increases in base salaries and employee benefits expense was due to increases in fixed compensation of $2.2 million from higher support staff headcountpayroll taxes and from higher stock-based compensation expense, which increased due to higher performance share unit compensationretirement and a prior year forfeiture of equity awards.
General and administrative expense decreased $1.1 million. The decrease in general and administrative expense was primarilyexpenses increased $0.1 million due to increases in information technology, the prior year expense for the global partner meetinguse of $1.8 millionexternal third-party consultants, and the state franchise tax matter of $1.3 million,taxes and licenses, partially offset by higher legal costs of $1.3 milliondecreases in internal travel, professional fees, and higher training costs of $1.1office occupancy expenses.
Global Operations Support incurred less than $0.1 million in 2015.restructuring charges during the year ended December 31, 2019. There were no similar restructuring charges during the year ended December 31, 2018.
Liquidity and Capital Resources
General. We continually evaluate our liquidity requirements, capital needs and availability of capital resources based on our operating needs. We believe that our available cash balances together with the funds expected to be generated from operations and funds available under our committed revolving credit facility will be sufficient to finance our operations for the foreseeable future, as well as to finance the cash payments associated with our cash dividends and stock repurchase program.
We pay the non-deferred portion of annual bonuses in the first quarter following the year in which they are earned. Employee bonuses are accrued throughout the year and are based on our performance and the performance of the individual employee.
Lines of Credit. On June 30, 2015,October 26, 2018, we entered into a new Credit Agreement (the "2018 Credit Agreement") to replace the Second Amended and Restated Credit Agreement (the “Restated"Restated Credit Agreement”Agreement") (See Note 10, Lineexecuted on June 30, 2015. The 2018 Credit Agreement provides us with a senior unsecured revolving line of credit with an aggregate commitment of $175 million, which includes a sublimit of $25 million for letters of credit, and a $10 million swingline loan sublimit. The agreement also includes a $75 million expansion feature. The 2018 Credit Agreement will mature in October 2023. Borrowings under the 2018 Credit Agreement bear interest at our election of the Alternate Base Rate (as defined in the Notes2018 Credit Agreement) or Adjusted LIBOR (as defined in the 2018 Credit Agreement) plus a spread as determined by our leverage ratio.
Borrowings under the 2018 Credit Agreement may be used for working capital, capital expenditures, Permitted Acquisitions (as defined in the 2018 Credit Agreement) and for other general purposes. The obligations under the 2018 Credit Agreement are guaranteed by certain of our subsidiaries.
We capitalized approximately $1.0 million of loan acquisition costs related to Consolidated Financial Statements), and replaced our revolving facility andthe 2018 Credit Agreement, which will be amortized over the remaining term facility (“Existing Facility”) withof the agreement.
Before October 26, 2018, we were party to the Restated Credit Agreement. The Restated Credit Agreement provided a single senior unsecured revolving line of credit. The Restated Credit Agreement hascredit with an aggregate commitment of up to $100 million, which includesincluded a sublimit of $25 million for letters of credit, and a $50 million expansion feature. On the amendment date, an aggregate of $26.5 million of term loans
outstandingBorrowings under the Existing Facility remainedRestated Credit Agreement bore interest at our election of the existing Alternate Base Rate (as defined in the Restated Credit Agreement) or the Adjusted LIBOR Rate (as defined in the Restated Credit Agreement) plus a spread as determined by our leverage ratio.
During the three months ended March 31, 2018, we borrowed $20 million under the Restated Credit Agreement and elected the Adjusted LIBOR Rate. We subsequently repaid $8 million during the three months ended March 31, 2018 and $12 million during the three months ended June 30, 2018.
As of December 31, 2019, and 2018, we had no outstanding as revolving borrowings under the Replacement Facility. On September 30, 2015, the Company repaid the full outstanding $26.5 million balance of the revolver, in order to reduce the Company's interest expense.
There were no other borrowings made during the years ended 20162018 Credit Agreement and 2015. During 2016 and 2015 we were in compliance with the financial and other covenants under the Restated2018 Credit Agreement respectively, and no event of default existed.
Cash, cash equivalents, and cash equivalents.marketable securities. Cash, and cash equivalents and marketable securities at December 31, 20162019 were $165.0$332.9 million, a decreasean increase of $25.4$53.0 million compared to $190.5$279.9 million at December 31, 2015.2018. The $165.0$332.9 million of cash, and cash equivalents, and marketable securities at December 31, 20162019 includes $76.7$131.6 million held by our foreign subsidiaries. A portionThe foreign cash balance of the $76.7$131.6 million is considered permanently reinvested in these foreign subsidiaries. If these funds were required to satisfy obligations in the U.S.,United States, the repatriation of these funds could cause us to incur additional U.S. income taxes or foreign withholding taxes. Any additional taxes could be offset, in part or in whole, by foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated. We expect to pay approximately $128.0$205.0 million in variable compensation related to 20162019 performance in March and April 2017.2020. In February 2017,January 2020, we paid approximately $12.0$17.1 million in variable compensation that was deferred in prior years.
Cash flows provided by operating activities. In 2016,For the year ended December 31, 2019, cash provided by operating activities was $24.8$78.6 million, primarily reflecting depreciation and amortization expense of $16.4 million, net income net of $15.4non-cash charges of $69.2 million, stock based compensation expensea decrease in accounts receivable of $6.4$6.9 million, an increase in net retirement and pension plan liabilities of $3.3 million and an increase in accrued expenses of $2.4 million. The increase in accrued expenses primarily reflects approximately $205.0 million of current year bonus accruals, partially offset by $202.0 million of bonus payments for 2018 made in early 2019.
Cash provided by operating activities for the year ended December 31, 2018, was $102.9 million, primarily reflecting net retirement and pension plan liabilityincome net of $4.2non-cash charges of $68.6 million, an increase in accrued expenses of $71.5 million, partially offset by an increase in accounts receivable of $14.4 million, a change in other assets and liabilities of $3.0$16.8 million and an increase in prepaid expensesrestructuring payments of $2.3$11.6 million.
In 2015, cash provided by operating activities was $57.6 million, principally reflecting an The increase in accrued expenses primarily reflects approximately $202.0 million of $37.2 million, higher net income of $17.1 million and depreciation and amortization expense of $13.7 million,bonus accruals, partially offset by an increase in accounts receivable of $8.7 million. The accrued expense increase reflects approximately $113$148.0 million of bonus payments for 2014 and prior year cash deferrals partially offset by 2015 bonus accruals of $148 million. The accounts receivable increase reflects higher revenue2017 made in the fourth quarter of 2015 compared to the fourth quarter of 2014.
In 2014, cash provided by operating activities was $56.8 million, principally reflecting an increase in accrued expenses of $30.0 million, net income of $6.8 million and a valuation adjustment to our German pension plan, partially offset by a decrease in other assets and liabilities of $8.2 million. The accrued expense increase reflects approximately $108 million of bonus accruals for 2014 partially offset by bonus payments of $86 million.early 2018.
Cash flows used in investing activities. CashFor the year ended December 31, 2019, cash used in investing activities was $27.8 million for the year ended December 31, 2016 primarily due to the acquisitions of JCA Group, DSI and Philosophy IB. This use of cash was partially offset by a
reduction in restricted cash of $7.2$69.3 million, primarily due to a releasepurchases of fundsmarketable securities and investments of $130.4 million, the acquisition of 2GET for $3.5 million, and capital expenditures of $3.4 million, partially offset by proceeds from the retention bonuses paid to certain key executives related tomaturity and sales of marketable securities and investments of $68.0 million. The decrease in capital expenditures is primarily the Senn Delaney acquisition.result of reduced office build-outs.
Cash used in investing activities for the year ended December 31, 2018, was $27.5$8.2 million, in 2015 primarily due to capital expenditures of $16.4$6.0 million, the acquisition in January 2018 of Co CompanyAmrop A/S ("Amrop") for $10.3$3.1 million and net purchases of available for sale securities of $0.8$2.2 million, partially offset by proceeds from the sale of available for sale securities of $3.0 million. Capital expenditures primarily related to office build outs or renovations for eight offices, of which $4.3 million was reimbursed as tenant improvement allowances and reflected as an operating activity. OurThe increase in capital expenditures consist mostlyis primarily the result of office build outsbuild-outs and investments in technology.
Cash used in investing activities was $3.3 million in 2014 primarily due to capital expenditures of $3.4 million.a global information technology update.
Cash flows used in financing activities. For the year ended December 31, 2019, cash used in financing activities was $18.2 million, primarily due to cash dividend payments of $11.8 million, payment of employee tax withholdings on equity transactions of $4.6 million, and earnout payments related to the Scambler MacGregor and DSI acquisitions of $1.9 million.
Cash used in financing activities in 2016for the year ended December 31, 2018, was $20.1$17.0 million due to cash dividend payments of $10.0$10.2 million, earnout payments forrelated to the Senn Delaney, Scambler MacGregor and Co Company acquisitionsJCA Group acquisition of $6.8$3.6 million $0.4 million and $0.2 million, respectively, and the payment of employee tax withholdings on equity transactions of $2.7$2.2 million.
Cash used in financing activities in 2015 was $46.3 Gross proceeds and payments on the Company's line of credit were each $20.0 million primarily due to debt repayments of $29.5 million, quarterly cash dividend payments to shareholders of $10.0 million and earnout payments of $5.5 million related toduring the Senn Delaney and Scambler MacGregor acquisitions.
Cash used in financing activities in 2014 was $19.7 million primarily due quarterly cash dividend payments to shareholders of $9.9 million, debt repayments of $6.0 million, an earnout payment of $3.4 million related to the Senn Delaney acquisition and employee tax withholdings on equity transactions of $0.4 million.year ended December 31, 2018.
On February 11, 2008, we announced that our Board of Directors authorized management to repurchase shares of our common stock with an aggregate total amount up to $50 million. We intendmay from time to time and as business conditions warrant to purchase shares of our common stock on the open market or in negotiated or block trades. No time limit has been set for completion of this program. We did not repurchase any shares of our common stock in 2016.2019. The most recent purchase of shares of common stock occurred during the year ended December 31, 2012. As of December 31, 2016 and December 31, 2015,2019, we have purchased 1,038,670 shares of our common stock for a total of $28.3 million and $21.7 million remains available for future purchases under the authorization. Unless terminated or extended earlier by resolution of the boardBoard of directors,Directors, the program will expire when the amount authorized for repurchases has been spent.
Off-Balance Sheet Arrangements.Off-balance sheet arrangements. We do not have material off-balance sheet arrangements, special purpose entities, trading activities of non-exchange traded contracts or transactions with related parties.
Contractual obligations. The following table presents our known contractual obligations as of December 31, 20162019, and the expected timing of cash payments related to these contractual obligations (in millions):
| | | | | Payments due for the years ended December 31, | | Payments due for the years ended December 31, |
| | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
| Contractual obligations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating lease obligations | | $ | 31.4 |
| | $ | 30.7 |
| | $ | 29.1 |
| | $ | 21.1 |
| | $ | 17.4 |
| | $ | 36.7 |
| | $ | 166.4 |
| | $ | 30.2 |
| | $ | 27.2 |
| | $ | 23.6 |
| | $ | 20.6 |
| | $ | 10.0 |
| | $ | 9.0 |
| | $ | 120.6 |
|
| Asset retirement obligations (1) | | 0.2 |
| | 0.2 |
| | 0.1 |
| | 0.2 |
| | — |
| | 1.9 |
| | 2.6 |
| | 0.6 |
| | 0.9 |
| | 0.1 |
| | 0.5 |
| | 0.8 |
| | 0.1 |
| | 3.0 |
|
| Total | | $ | 31.6 |
| | $ | 30.9 |
| | $ | 29.2 |
| | $ | 21.3 |
| | $ | 17.4 |
| | $ | 38.6 |
| | $ | 169.0 |
| | $ | 30.8 |
| | $ | 28.1 |
| | $ | 23.7 |
| | $ | 21.1 |
| | $ | 10.8 |
| | $ | 9.1 |
| | $ | 123.6 |
|
| |
(1) | Represents the fair value of the obligation associated with the retirement of tangible long-lived assets, primarily related to our obligation at the end of the lease term to return office space to the landlord in its original condition. |
(1) Represents the fair value of the obligation associated with the retirement of tangible long-lived assets primarily related to our obligation at the end of the lease term to return office space to the landlord in its original condition.
In addition to the contractual obligations included in the above table, we have liabilities related to certain employee benefit plans. These liabilities are recorded in our Consolidated Balance Sheet at December 31, 2016.2019. The obligations related to these employee benefit plans are described in Note 11,12, Employee Benefit Plans, and Note 12,13, Pension Plan and Life Insurance Contract, in the Notes to Consolidated Financial Statements. As the timing of cash disbursements related to these employee benefit plans is uncertain, we have not included these obligations in the above table. The table excludes our liability for uncertain tax positions including accrued interest and penalties, which totaled $1.0$0.2 million as of December 31, 2016,2019, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.
Application of Critical Accounting Policies and Estimates
General. Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared using accounting principles generally accepted in the United States of America. Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies and Note 3, Revenue, in the Notes to Consolidated Financial Statements. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. If actual amounts are ultimately different from previous estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, ifthere are different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, that could materially impact the financial statements. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.
Revenue recognition. Revenue before reimbursementsIn our Executive Search segment, revenue is recognized as we satisfy our performance obligations by transferring a good or service to a client. Generally, each of out-of-pocket expenses (“net revenue”) consists of retainers and indirect expenses billed to clients. For each assignment, we and our client enter into a contract that outlines the general terms and conditions of the assignment. Typically, we are paid a retainer for our executive search servicescontracts contain one performance obligation which is the process of identifying potentially qualified candidates for a specific client position. In most contracts, the transaction price includes both fixed and variable consideration. Fixed compensation is comprised of a retainer, equal to approximately one-third of the estimated first year compensation for the position to be filled. In addition, generally, if the actual compensation offilled, and indirect expenses, equal to a placed candidate exceeds the estimated compensation, we often are authorized to bill the client for one-third of the excess. Indirect expenses are calculated as aspecified percentage of the retainer, with certain dollar limits per search. Weas defined in the contract. The Company generally bill ourbills its clients for ourits retainer and indirect expenses in one-third increments over a three-month period commencing in the month of a client’s acceptance of the contract. If actual compensation of a placed candidate exceeds the original compensation estimate, the Company is often authorized to bill the client for one-third of the excess compensation. The Company refers to this additional billing as uptick revenue. In most contracts, variable consideration is comprised of uptick revenue and direct expenses. The Company bills its clients for uptick revenue upon completion of the executive search, and direct expenses are billed as incurred.
NetAs required under Accounting Standards Update ("ASU") No. 2014-09, the Company estimates uptick revenue at contract inception, based on a portfolio approach, utilizing the expected value method based on a historical analysis of uptick revenue realized in the Company’s geographic regions and industry practices, and initially records a contract’s uptick revenue in an amount that is probable not to result in a significant reversal of cumulative revenue recognized when the actual amount of uptick revenue for that contract is known. Differences between the estimated and actual amounts of variable consideration are recorded when
known. The Company does not estimate revenue for direct expenses as it is not materially different than recognizing revenue as direct expenses are incurred.
Revenue from our executive search engagement performance obligation is recognized when earnedover time as our clients simultaneously receive and realizable and therefore whenconsume the following criteria have been met: (a) persuasive evidence of an arrangement exists, (b) services have been rendered, (c)benefits provided by the fee to our client is fixed or determinable, and (d) collectability is reasonably assured. Taxes collectedCompany's performance. Revenue from clients and remitted to governmental authorities are presented on a net basis. Typically, net revenue from standard executive search engagements is recognized over the expected average period of performance, in proportion to the estimated personnel time incurred to fulfill our obligations under the arrangements. Net revenue in excessexecutive search contract. Revenue is generally recognized over a period of approximately six months.
Our executive search contracts contain a replacement guarantee which provides for an additional search to be completed, free of charge except for expense reimbursements, should the retainer, resulting from actual compensationcandidate presented by the Company be hired by the client and subsequently terminated by the client for performance reasons within a specified period of time. The replacement guarantee is an assurance warranty, which is not a performance obligation under the placed candidate exceeding the estimated compensation, is recognized upon completionterms of the executive search whencontract, as the amountCompany does not provide any services under the terms of the additional fee is known.guarantee that transfer benefits to the client in excess of assuring that the identified candidate complies with the agreed-upon specifications. The Company accounts for the replacement guarantee under the relevant warranty guidance in ASC 460 - Guarantees.
NetIn our Heidrick Consulting segment, revenue associatedis recognized as we satisfy our performance obligations by transferring a good or service to a client. Heidrick Consulting enters into contracts with clients that outline the general terms and conditions of the assignment to provide succession planning, executive assessment, top team and board effectiveness and culture shaping programs. The consideration the Company expects to receive under each contract is generally fixed. Most of our consulting contracts contain one performance obligation, which is the overall process of providing the consulting service requested by the client. The majority of our consulting revenue is recognized proportionallyover time utilizing both input and output methods. Contracts that contain coaching sessions, training sessions or the completion of assessments are recognized using the output method as serviceseach session or assessment is delivered to the client. Contracts that contain general consulting work are performed. Net revenue associatedrecognized using the input method utilizing a measure of progress that is based on time incurred on the project.
The Company enters into enterprise agreements with licensesclients to use ourprovide a license for online access, via the Company's Culture Connect platform, to training and other proprietary material related to the Company's culture shaping proprietaryprograms. The consideration the Company expects to receive under the terms of an enterprise agreement is comprised of a single fixed fee. Our enterprise agreements contain multiple performance obligations, the delivery of materials via Culture Connect and material rights related to options to renew enterprise agreements at a significant discount. The Company allocates the transaction price to the performance obligations in the contract on a stand-alone selling price basis. The stand-alone selling price for the initial term of the enterprise agreement is typicallyoutlined in the contract and is equal to the price paid by the client for the agreement over the initial term of the contract. The stand-alone selling price for the options to renew, or material right, are not directly observable and must be estimated. This estimate is required to reflect the discount the client would obtain when exercising the option to renew, adjusted for the likelihood that the option will be exercised. The Company estimates the likelihood of renewal using a historical analysis of client renewals. Access to Culture Connect represents a right to access the Company’s intellectual property that the client simultaneously receives and consumes as the Company performs under the agreement, and therefore the Company recognizes revenue over time. Given the continuous nature of this commitment, the Company utilizes straight-line ratable revenue recognition over the estimated subscription period as the Company's clients will receive and consume the benefits from Culture Connect equally throughout the contract period. Revenue related to client renewals of enterprise agreements is recognized over the term of the arrangement.renewal, which is generally twelve months. Enterprise agreements do not comprise a significant portion of the Company's revenue.
Depending on the terms of that agreement, net revenue from certain leadership consulting and non-standard executive search engagements is either recognized proportionally as services are performed or in accordance with the completionEach of the engagement deliverables.Company's contracts has an expected duration of one year or less.Accordingly, the Company has elected to utilize the available practical expedient related to the disclosure of the transaction price allocated to the remaining performance obligations under its contracts. The Company has also elected the available practical expedients related to adjusting for the effects of a significant financing component and the capitalization of contract acquisition costs. The Company charges and collects from its clients, sales tax and value added taxes as required by certain jurisdictions. The Company has made an accounting policy election to exclude these items from the transaction price in its contracts.
Income taxes. Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment. As a global company, we calculate and provide for income taxes in each of the tax jurisdictions in which we operate. This involves estimating current tax exposures in each jurisdiction as well as making judgments regarding the recoverability of deferred tax assets. Tax exposures can involve complex issues and may require an extended period to resolve. Changes in the geographic mix or estimated level of annual income before taxes can affect the overall effective tax rate.
We apply an estimated annual effective tax rate to our cumulative quarterly operating results to determine the provision for income tax expense. In the event there are significant unusual or infrequent items recognized in our quarterly operating results, the tax attributable to that item is recorded in the interim period in which it occurs.
The recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefits associated with temporary differences, net operating loss carryforwards and tax credits will be utilized. We assess the recoverability of the deferred tax assets on an ongoing basis. In making this assessment, we consider all positive and negative evidence, and all
evidence, and all potential sources of taxable income including scheduled reversals of deferred tax liabilities, tax-planning strategies, projected future taxable income and recent financial performance.
Deferred taxes have been recorded for U.S. income taxes and foreign withholding taxes related to undistributed foreign earnings that are not permanently reinvested. Annually, we assess material changes in estimates of cash, working capital and long-term investment requirements in order to determine whether these earnings should be distributed. If so, an additional provision for taxes may apply, which could materially affect our future effective tax rate.
Goodwill and other intangible assets. We review goodwill for impairment annually. We also review goodwill and long-lived assets;assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that it is more-likely-than-not that the fair value has fallen below the carrying amount of an asset. We review factors such as a significant change in business climate, attrition of key personnel, changes in financial condition or results of operations, a prolonged decline in our stock price and market capitalization, competition, and other factors to determine if an impairment test is necessary. Our annual impairment test begins with a qualitative assessment to determine whether it is necessary to perform the first step of the two-step,a fair value basedvalue-based goodwill impairment test. The qualitative assessment includes evaluating whether events and circumstances indicate that it is more-likely-than-not that fair values of reporting units are greater than the carrying values. If the qualitative factors do not indicate that it is more-likely-than-not that the fair values of the reporting units are greater than the carrying values, then we perform step 1 of the two-stepfair value test.
The first step comparesCompany operates four reporting units: Americas, Europe (which includes Africa), Asia Pacific (which includes the Middle East) and Heidrick Consulting. The goodwill impairment test is completed by comparing the fair value of a reporting unit with its carrying amount, including goodwill.amount. The second step measures the impairment charge and is performed only if the carrying amount of a reporting unit exceeds its fair value as determined in step one. To measure the amount of the impairment loss, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
The impairment test is considered for each of the Company’s reporting units that have goodwill as defined in the accounting standard for goodwill and intangible assets. The Company has historically operated four reporting units: the Americas; Europe, which includes Africa; Asia Pacific, which includes the Middle East; and Culture Shaping. During the fourth quarter of 2016, the Company revised its reporting unit structure based on the manner in which the Company's chief operating decision maker allocates resources and assesses performance. Under the revised reporting unit structure, the Company operates five reporting units: Americas Executive Search; Europe Executive Search, which includes Africa; Asia Pacific Executive Search, which includes the Middle East; Leadership Consulting; and Culture Shaping. As a result of the change in reporting units, the Company conducted it's annual impairment evaluation for both the former and revised reporting unit structures as required by the accounting standard for goodwill and intangible assets.
During the first step, the fair value of each of ourthe Company’s reporting units is determined using a discounted cash flow methodology.
The discounted cash flow approach is dependent on a number of factors including estimates of future market growth and trends, forecasted revenue and costs, capital investments, appropriate discount rates, certain assumptions to allocate shared costs, assets and liabilities, historical and projected performance of our reporting units, the outlook for the executive search industry and the macroeconomic conditions affecting each of our reporting units. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. The fair value of our reporting units is also impacted by our overall market capitalization and may be impacted by volatility in our stock price and assumed control premium, among other factors. As a result, actual future results may differ from those estimates and may result in a future impairment charge. These assumptions are updated annually, at a minimum, to reflect information concerning our reportable segments. The Company continues to monitor potential triggering events including changes in the business climate in which it operates, the Company’s market capitalization compared to its book value, and the Company’s recent operating performance. Any changes in these factors could result in an impairment charge. An impairment charge is recognized for the amount by which the carrying value of a reporting unit exceeds its carrying amount; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit.
Additionally, we review long-lived assets, such as property, equipment, and purchased intangibles subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge, equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset, is recognized.
We believe that the accounting estimate related to goodwill and other intangible asset impairment is a critical accounting estimate because the assumptions used are highly susceptible to changes in the operating results and cash flows of our reportable segments.
Recently Adopted Financial Accounting Standards
In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation: Improvements to Employee Share-Based PaymentOn January 1, 2019, we adopted Accounting, which is intended to simplify several aspects of the accounting for share-based payment transactions including the income tax accounting, classification of awards as either equity or liabilities, the accounting for forfeitures and classification on the statement of cash flows. The standard is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company early adopted this standard during the fourth quarter of 2016. The adoption of this standard reduced tax expense by approximately $0.7 million for the year ended December 31, 2016.
Recent Financial Accounting Standards
In November 2016, the Financial Accounting Standards Board ("FASB") issued accounting Standards Update ("ASU") No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents,2016-02, Leases, ASU No. 2018-10, Codification Improvements to Topic 842 (Leases) and amounts generally described as restricted cash or restricted cash equivalents. Therefore amounts generally described as restricted cash should be included with cash and cash equivalents when recording the beginning of period and end of period total amounts shown on the statement of cash flows.ASU No. 2018-11, Targeted Improvements to Topic 842 (Leases). The Company currently does not include restricted cash amounts in the beginning and ending cash amounts and will change the presentation of the cash flow statement to include restricted cash in the beginning and ending cash totals. The standard is effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted.The Company has not yet determined when it will adopt this guidance. The impact of this change is not expected to be significant to the classification of these activities on the Consolidated Statement of Cash Flows.
In August 2016, the Financial Accounting Standards Board ("FASB") issued accounting Standards Update ("ASU") No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, whichguidance is intended to reduce diversity in practice as to how certain cash receiptsincrease transparency and cash payments should be presented and classified. The standard is effectivecomparability among companies for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company has evaluated the standard and noted the guidanceleasing transactions, including a requirement for contingent consideration payments made after a business combination are applicable to the Condensed Consolidated Statements of Cash Flows. The Company currently classifies all contingent consideration payments as financing activities. The impact of this change is not expected to be significant to the classification of these activities on the Consolidated Statements of Cash Flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases, intended to improve financial reporting about leasing transactions. The new guidance will require entitiescompanies that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations created by those leases. The guidance also provides for disclosures that allow the users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
We adopted the guidance using the modified retrospective method without restatement of comparative periods. As such, periods prior to the date of adoption are presented in accordance with ASC 840 - Leases. We utilized the available practical expedient that allowed for companies to not reassess whether existing contracts contain a lease under the new definition of a lease,
lease classification for existing leases and whether previously capitalized initial direct costs would qualify for capitalization under the new guidance.
The adoption of this guidance had a material impact on the Condensed Consolidated Balance Sheet as of December 31, 2019 due to disclose keythe recognition of equal right-of-use assets and lease liabilities for our portfolio of operating leases. The right-of-use asset balance was then adjusted by the reclassification of pre-existing prepaid and accrued rent balances from other line items within the Condensed Consolidated Balance Sheet. The adoption had an immaterial impact on the Condensed Consolidated Statement of Comprehensive Income and Condensed Consolidated Statement of Cash Flows for the year ended December 31, 2019. The adoption had no impact on the Condensed Consolidated Statement of Changes in Stockholders' Equity for the year ended December 31, 2019.
Additional information aboutand disclosures required by the leasing arrangements.new standard are contained in Note 6, Leases.
On January 1, 2019, we adopted ASU 2016-02No. 2018-02, Income Statement - Reporting Comprehensive Income, which is intended to improve the usefulness of information reported as a result of the Tax Cuts and Jobs Act. The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The adoption of this guidance did not have an impact on our consolidated financial statements for the year ended December 31, 2019.
Recent Financial Accounting Standards
In December 2019, the Financial Accounting Standards Board ("FASB"), issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The guidance simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification ("ASC") 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years, and interim and annual periods within those fiscal years, beginning after December 15, 2018 with early2021. Early adoption is permitted. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.
In JanuaryJune 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition andNo. 2016-13, Measurement of Credit Losses on Financial Assets and Financial Liabilities, which addressesInstruments. The guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain aspects of recognition, measurement, presentation and disclosuretypes of financial instruments, including the recognition of unrealized changes in fair value within net income.trade receivables. The standard is effective for annual reporting periodsfiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The ASU requires that an entity recognizes revenue to depict the transfer of promised goods or services to customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for these goods or services. The effective date has been deferred for one year to the interim and annual reporting periods beginning after December 15, 2017. The guidance permits the use of either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or (ii) a retrospective approach with the cumulative effect upon initial adoption recognized at the date of adoption.2019. The Company will adopt thethis guidance onin its fiscal year beginning January 1, 2018 and will apply the modified retrospective method.
2020. The Companyadoption of this guidance is performing its evaluation of ASU No. 2014-09. The Company is paidnot anticipated to have a retainer for its executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled. If the actual compensation of a placed candidate exceeds the estimated compensation, the Company is often authorized to bill the client for one-third of the excess. The Company currently recognizes revenue associated with the difference between the estimatedmaterial impact on our consolidated financial statements.
compensation and actual compensation at the time this amount is determinable. Under ASU 2014-09, the difference between estimated compensation and actual compensation is considered variable consideration. The Company will be required to estimate the amount of variable consideration for its executive search services at the time the contract is executed and recognize this variable consideration as the Company delivers services to the client. The Company is still evaluating the financial impact of this change. The Company is currently evaluating the impact of this accounting guidance for its other revenue streams. The effect is not known or reasonably estimable at this time.
Quarterly Financial Information (Unaudited)
The following table sets forth certain financial information for each quarter of 20162019 and 2015.2018. The information is derived from our quarterly consolidated financial statements which are unaudited but which, in the opinion of management, have been prepared on the same basis as the audited annual consolidated financial statements included in this document. The consolidated financial data shown below should be read in conjunction with the consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
| | | | | Quarter Ended | | Quarter Ended |
| | | 2016 | | 2015 | | 2019 | | 2018 |
| | | Mar. 31 | | Jun. 30 | | Sept. 30 | | Dec. 31 | | Mar. 31 | | Jun. 30 | | Sept. 30 | | Dec. 31 | | Mar. 31 | | Jun. 30 | | Sept. 30 | | Dec. 31 | | Mar. 31 | | Jun. 30 | | Sept. 30 | | Dec. 31 |
| Revenue before reimbursements (net revenue) | | $ | 130,189 |
| | $ | 148,861 |
| | $ | 143,519 |
| | $ | 159,821 |
| | $ | 115,153 |
| | $ | 133,045 |
| | $ | 138,421 |
| | $ | 144,520 |
| | $ | 171,594 |
| | $ | 173,122 |
| | $ | 182,174 |
| | $ | 180,034 |
| | $ | 160,071 |
| | $ | 183,059 |
| | $ | 187,588 |
| | $ | 185,305 |
|
Operating income | | 3,868 |
| | 11,694 |
| | 12,006 |
| | 7,665 |
| | 6,672 |
| | 9,172 |
| | 12,933 |
| | 5,285 |
| | 16,391 |
| | 18,353 |
| | 14,472 |
| | 14,295 |
| | 13,121 |
| | 18,461 |
| | 20,583 |
| | 16,692 |
|
| Income before income taxes | | 3,989 |
| | 11,781 |
| | 12,388 |
| | 9,608 |
| | 6,526 |
| | 9,118 |
| | 11,137 |
| | 4,773 |
| | 18,842 |
| | 19,473 |
| | 14,827 |
| | 16,147 |
| | 12,912 |
| | 18,411 |
| | 23,187 |
| | 15,982 |
|
| Provision for income taxes | | 2,664 |
| | 5,126 |
| | 5,448 |
| | 9,115 |
| | 3,100 |
| | 4,162 |
| | 3,647 |
| | 3,513 |
| | 6,755 |
| | 5,193 |
| | 4,880 |
| | 5,592 |
| | 2,744 |
| | 6,948 |
| | 6,718 |
| | 4,787 |
|
| Net income | | $ | 1,325 |
| | $ | 6,655 |
| | $ | 6,940 |
| | $ | 493 |
| | $ | 3,426 |
| | $ | 4,956 |
| | $ | 7,490 |
| | $ | 1,260 |
| | $ | 12,087 |
| | $ | 14,280 |
| | $ | 9,947 |
| | $ | 10,555 |
| | $ | 10,168 |
| | $ | 11,463 |
| | $ | 16,469 |
| | $ | 11,195 |
|
| Basic earnings per common share | | $ | 0.07 |
| | $ | 0.36 |
| | $ | 0.37 |
| | $ | 0.03 |
| | $ | 0.19 |
| | $ | 0.27 |
| | $ | 0.41 |
| | $ | 0.07 |
| | $ | 0.64 |
| | $ | 0.75 |
| | $ | 0.52 |
| | $ | 0.55 |
| | $ | 0.54 |
| | $ | 0.61 |
| | $ | 0.87 |
| | $ | 0.59 |
|
| Diluted earnings per common share | | $ | 0.07 |
| | $ | 0.35 |
| | $ | 0.37 |
| | $ | 0.01 |
| | $ | 0.18 |
| | $ | 0.27 |
| | $ | 0.40 |
| | $ | 0.07 |
| | $ | 0.62 |
| | $ | 0.73 |
| | $ | 0.51 |
| | $ | 0.54 |
| | $ | 0.53 |
| | $ | 0.59 |
| | $ | 0.85 |
| | $ | 0.58 |
|
| Cash dividends paid per share | | $ | 0.13 |
| | $ | 0.13 |
| | $ | 0.13 |
| | $ | 0.13 |
| | $ | 0.13 |
| | $ | 0.13 |
| | $ | 0.13 |
| | $ | 0.13 |
| | $ | 0.15 |
| | $ | 0.15 |
| | $ | 0.15 |
| | $ | 0.15 |
| | $ | 0.13 |
| | $ | 0.13 |
| | $ | 0.13 |
| | $ | 0.13 |
|
(1) Includes $4.1 million of restructuring charges for the three months ended September 30, 2019.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency market risk. With our operations in the Americas, Europe and Asia Pacific, we conduct business using various currencies. Revenue earned in each country is generally matched with the associated expenses incurred, thereby reducing currency risk to earnings. A 10% change in the average exchange rate for currencies of all foreign countries in which we operate would have increased or decreased our 2019 net income by approximately $0.9 million. However, because certain assets and liabilities are denominated in currencies other than the U.S. dollar,their respective functional currency, changes in currency rates may cause fluctuations in the valuation of such assets and liabilities. AsBased on balances exposed to fluctuation in exchange rates as of December 31, 2019, a 10% increase or decrease equally in the value of currencies could result in a foreign exchange gain or loss of approximately $1.4 million. In addition, as the local currency of our subsidiaries has generally been designated as the functional currency, we are affected by the translation of foreign currency financial statements into U.S. dollars. A 10% change in the average exchange rate for currencies of all foreign countries in which we operate would have increased or decreased our 2016 net income by approximately $0.7 million. For financial information by segment, see Note 16,18, Segment Information, in the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The
To the Stockholders and the Board of Directors and Stockholders
Heidrick & Struggles International, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Heidrick & Struggles International, Inc. and subsidiaries (the Company) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of comprehensive income (loss), changes in stockholders’stockholders' equity and cash flows for each of the two years in the three-year period ended December 31, 2016. We also have audited2019, and the Company’s internal control overrelated notes to the consolidated financial reportingstatements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by2019 and 2018, and the Committeeresults of Sponsoring Organizationsits operations and its cash flows for each of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, includedtwo years in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion onperiod ended December 31, 2019, in conformity with accounting principles generally accepted in the Company’s internal control over financial reporting based on our audits.United States of America.
We conducted our auditshave also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 24, 2020 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Lease Accounting
As discussed in Note 6 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of ASC 842 - Leases.
Segment Reporting
As discussed in Note 18 to the financial statements, the Company changed the composition of its segment information in 2018. We audited the adjustments necessary to restate the 2017 segment information provided in Note 18. In our opinion, such adjustments are appropriate and have been properly applied.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company's auditor since 2018
Chicago, Illinois
February 24, 2020
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
Heidrick & Struggles International, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Heidrick & Struggles International, Inc.'s (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of comprehensive income (loss), changes in stockholders' equity and cash flows of the Company for each of the two years in the period ended December 31, 2019, and our report dated February 24, 2020 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditsaudit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’scompany's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion,
/s/ RSM US LLP
Chicago, Illinois
February 24, 2020
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Heidrick & Struggles International, Inc.:
Opinion on the Consolidated Financial Statements
We have audited, before the effects of the adjustments to retrospectively apply the change in accounting described in Note 18, the consolidated financial statements referred to above present fairly,of comprehensive loss, changes in all material respects, the financial positionstockholders’ equity, and cash flows of Heidrick & Struggles International, Inc. and subsidiaries as of(the Company) for the year ended December 31, 20162017, and 2015, andthe related notes (collectively, the consolidated financial statements). The 2017 consolidated financial statements before the effects of the adjustments described in Note 18 are not presented herein. In our opinion, the consolidated financial statements, before the effects of the adjustments to retrospectively apply the change in accounting described in Note 18, present fairly, in all material respects, the results of its operations of the Company and its cash flows for each of the years in the three-year periodyear ended December 31, 2016,2017, in conformity with U.S. generally accepted accounting principles. Also
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the change in accounting described in Note 18 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our opinion,audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based oncriteria established in Internal Control - Integrated Framework (2013) issued byaccordance with the Committee of Sponsoring OrganizationsU.S. federal securities laws and the applicable rules and regulations of the TreadwaySecurities and Exchange Commission (COSO).and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2002 to 2018.
Chicago, Illinois
March 23, 201713, 2018
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| | | | | December 31, 2016 | | December 31, 2015 | | December 31,
2019 | | December 31,
2018 |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 165,011 |
| | $ | 190,452 |
| | $ | 271,719 |
| | $ | 279,906 |
|
| Marketable securities | | | 61,153 |
| | — |
|
| Accounts receivable, net | | 93,191 |
| | 76,058 |
| | 109,163 |
| | 114,977 |
|
| Prepaid expenses | | 21,602 |
| | 19,197 |
| | 20,185 |
| | 22,766 |
|
| Other current assets | | 13,779 |
| | 18,447 |
| | 27,848 |
| | 29,598 |
|
| Income taxes recoverable | | 4,847 |
| | 4,809 |
| | 4,414 |
| | 3,620 |
|
| Total current assets | | 298,430 |
| | 308,963 |
| | 494,482 |
|
| 450,867 |
|
| Non-current assets: | | | | | | | | |
| Property and equipment, net | | 35,099 |
| | 36,498 |
| | 28,650 |
| | 33,871 |
|
| Operating lease right-of-use assets | | | 99,391 |
| | — |
|
| Assets designated for retirement and pension plans | | 15,698 |
| | 16,857 |
| | 13,978 |
| | 15,035 |
|
| Investments | | 17,346 |
| | 14,145 |
| | 25,409 |
| | 19,442 |
|
| Other non-current assets | | 9,322 |
| | 11,115 |
| | 20,434 |
| | 22,276 |
|
| Goodwill | | 151,844 |
| | 131,122 |
| | 126,831 |
| | 122,092 |
|
| Other intangible assets, net | | 20,690 |
| | 18,687 |
| | 1,935 |
| | 2,216 |
|
| Deferred income taxes | | 33,073 |
| | 35,331 |
| |
| Deferred income taxes, net | | | 33,063 |
| | 34,830 |
|
| Total non-current assets | | 283,072 |
| | 263,755 |
| | 349,691 |
| | 249,762 |
|
| Total assets | | $ | 581,502 |
| | $ | 572,718 |
| | $ | 844,173 |
| | $ | 700,629 |
|
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 7,952 |
| | $ | 6,150 |
| | $ | 8,633 |
| | $ | 9,166 |
|
| Accrued salaries and employee benefits | | 155,523 |
| | 158,875 |
| |
| Deferred revenue, net | | 28,367 |
| | 29,724 |
| |
| Accrued salaries and benefits | | | 234,306 |
| | 227,653 |
|
| Deferred revenue | | | 41,267 |
| | 40,673 |
|
| Operating lease liabilities | | | 30,955 |
| | — |
|
| Other current liabilities | | 24,133 |
| | 31,239 |
| | 26,253 |
| | 33,219 |
|
| Income taxes payable | | 4,617 |
| | 3,442 |
| | 3,928 |
| | 8,240 |
|
| Total current liabilities | | 220,592 |
| | 229,430 |
| | 345,342 |
| | 318,951 |
|
| Non-current liabilities: | | | | | | | | |
| Accrued salaries and employee benefits | | 34,993 |
| | 32,690 |
| |
| Accrued salaries and benefits | | | 59,662 |
| | 57,234 |
|
| Retirement and pension plans | | 39,039 |
| | 35,949 |
| | 46,032 |
| | 39,865 |
|
| Operating lease liabilities | | | 79,388 |
| | — |
|
| Other non-current liabilities | | 28,288 |
| | 19,847 |
| | 4,634 |
| | 17,423 |
|
| Total non-current liabilities | | 102,320 |
| | 88,486 |
| | 189,716 |
| | 114,522 |
|
| Total liabilities | | 322,912 |
| | 317,916 |
| | 535,058 |
| | 433,473 |
|
| Commitments and contingencies (Note 18) | |
| |
| |
| Commitments and contingencies (Note 20) | | |
| |
|
| Stockholders’ equity: | | | | | | | | |
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at December 31, 2016 and December 31, 2015 | | — |
| | — |
| |
| Common stock, $0.01 par value, 100,000,000 shares authorized, 19,585,777 shares issued, 18,578,176 and 18,379,398 shares outstanding at December 31, 2016 and December 31, 2015, respectively | | 196 |
| | 196 |
| |
| Treasury stock at cost, 1,007,601 and 1,206,379 shares at December 31, 2016 and December 31, 2015, respectively | | (32,915 | ) | | (39,583 | ) | |
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at December 31, 2019 and December 31, 2018 | | | — |
| | — |
|
| Common stock, $0.01 par value, 100,000,000 shares authorized, 19,585,777 shares issued, 19,165,954 and 18,954,275 shares outstanding at December 31, 2019 and December 31, 2018, respectively | | | 196 |
| | 196 |
|
| Treasury stock at cost, 419,823 and 631,502 shares at December 31, 2019 and December 31, 2018, respectively | | | (14,795 | ) | | (20,298 | ) |
| Additional paid in capital | | 229,957 |
| | 232,358 |
| | 228,807 |
| | 227,147 |
|
| Retained earnings | | 58,030 |
| | 52,572 |
| | 91,083 |
| | 56,049 |
|
| Accumulated other comprehensive income | | 3,322 |
| | 9,259 |
| | 3,824 |
| | 4,062 |
|
| Total stockholders’ equity | | 258,590 |
| | 254,802 |
| | 309,115 |
| | 267,156 |
|
| Total liabilities and stockholders’ equity | | $ | 581,502 |
| | $ | 572,718 |
| | $ | 844,173 |
| | $ | 700,629 |
|
The accompanying notes to Consolidated Financial Statements are an integral part of these statements.
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
|
| | | | | | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 | | 2017 |
| Revenue: | | | | | | |
| Revenue before reimbursements (net revenue) | | $ | 706,924 |
| | $ | 716,023 |
| | $ | 621,400 |
|
| Reimbursements | | 18,690 |
| | 19,632 |
| | 18,656 |
|
| Total revenue | | 725,614 |
| | 735,655 |
| | 640,056 |
|
| Operating expenses: | | | | | | |
| Salaries and benefits | | 501,791 |
| | 506,349 |
| | 434,219 |
|
| General and administrative expenses | | 137,492 |
| | 140,817 |
| | 147,316 |
|
| Impairment charges | | — |
| | — |
| | 50,722 |
|
| Restructuring charges | | 4,130 |
| | — |
| | 15,666 |
|
| Reimbursed expenses | | 18,690 |
| | 19,632 |
| | 18,656 |
|
| Total operating expenses | | 662,103 |
| | 666,798 |
| | 666,579 |
|
| Operating income (loss) | | 63,511 |
| | 68,857 |
| | (26,523 | ) |
| Non-operating income (expense): | | | |
| | |
| Interest, net | | 2,880 |
| | 1,141 |
| | 385 |
|
| Other, net | | 2,898 |
| | 494 |
| | (3,280 | ) |
| Net non-operating income (expense) | | 5,778 |
| | 1,635 |
| | (2,895 | ) |
| Income (loss) before income taxes | | 69,289 |
| | 70,492 |
| | (29,418 | ) |
| Provision for income taxes | | 22,420 |
| | 21,197 |
| | 19,217 |
|
| Net income (loss) | | 46,869 |
| | 49,295 |
| | (48,635 | ) |
| Other comprehensive income (loss), net of tax: | | | | | | |
| Foreign currency translation adjustment | | 844 |
| | (3,885 | ) | | 6,853 |
|
| Net unrealized gain on available-for-sale investments | | 13 |
| | — |
| | 2,660 |
|
| Pension gain (loss) adjustment | | (1,095 | ) | | 721 |
| | 480 |
|
| Other comprehensive income (loss), net of tax | | (238 | ) | | (3,164 | ) | | 9,993 |
|
| Comprehensive income (loss) | | $ | 46,631 |
| | $ | 46,131 |
| | $ | (38,642 | ) |
| | | | | | | |
| Basic weighted average common shares outstanding | | 19,103 |
| | 18,917 |
| | 18,735 |
|
| Diluted weighted average common shares outstanding | | 19,551 |
| | 19,532 |
| | 18,735 |
|
| | | | | | | |
| Basic net income (loss) per common share | | $ | 2.45 |
| | $ | 2.61 |
| | $ | (2.60 | ) |
| Diluted net income (loss) per common share | | $ | 2.40 |
| | $ | 2.52 |
| | $ | (2.60 | ) |
| Cash dividends paid per share | | $ | 0.60 |
| | $ | 0.52 |
| | $ | 0.52 |
|
The accompanying notes to Consolidated Financial Statements are an integral part of these statements.
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS
(In thousands, except per share amounts)
thousands)
|
| | | | | | | | | | | | |
| | | December 31, |
| | | 2016 | | 2015 | | 2014 |
| Revenue: | | | | | | |
| Revenue before reimbursements (net revenue) | | $ | 582,390 |
| | $ | 531,139 |
| | $ | 494,292 |
|
| Reimbursements | | 18,516 |
| | 17,172 |
| | 18,947 |
|
| Total revenue | | 600,906 |
| | 548,311 |
| | 513,239 |
|
| Operating expenses: | | | | | | |
| Salaries and employee benefits | | 400,070 |
| | 369,385 |
| | 337,448 |
|
| General and administrative expenses | | 147,087 |
| | 127,692 |
| | 130,191 |
|
| Reimbursed expenses | | 18,516 |
| | 17,172 |
| | 18,947 |
|
| Total operating expenses | | 565,673 |
| | 514,249 |
| | 486,586 |
|
| Operating income | | 35,233 |
| | 34,062 |
| | 26,653 |
|
| Non-operating income (expense): | | | | | | |
| Interest, net | | 244 |
| | (122 | ) | | (358 | ) |
| Other, net | | 2,289 |
| | (2,386 | ) | | (2,108 | ) |
| Net non-operating income (expense) | | 2,533 |
| | (2,508 | ) | | (2,466 | ) |
| Income before income taxes | | 37,766 |
| | 31,554 |
| | 24,187 |
|
| Provision for income taxes | | 22,353 |
| | 14,422 |
| | 17,390 |
|
| Net income | | 15,413 |
| | 17,132 |
| | 6,797 |
|
| Other comprehensive (loss) income, net of tax: | | | | | | |
| Foreign currency translation adjustment | | (6,271 | ) | | (1,811 | ) | | (1,235 | ) |
| Net unrealized gain (loss) on available-for-sale investments | | 1,035 |
| | (789 | ) | | 262 |
|
| Pension gain (loss) adjustment | | (701 | ) | | 714 |
| | (2,736 | ) |
| Unrealized loss on cash flow hedge | | — |
| | (78 | ) | | (37 | ) |
| Other comprehensive loss, net of tax | | (5,937 | ) | | (1,964 | ) | | (3,746 | ) |
| Comprehensive income | | $ | 9,476 |
| | $ | 15,168 |
| | $ | 3,051 |
|
| Basic weighted average common shares outstanding | | 18,540 |
| | 18,334 |
| | 18,210 |
|
| Diluted weighted average common shares outstanding | | 19,038 |
| | 18,715 |
| | 18,432 |
|
| Basic net income per common share | | $ | 0.83 |
| | $ | 0.93 |
| | $ | 0.37 |
|
| Diluted net income per common share | | $ | 0.81 |
| | $ | 0.92 |
| | $ | 0.37 |
|
| Cash dividends paid per share | | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.52 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Cash flows - operating activities: | | | | | | |
| Net income (loss) | | $ | 46,869 |
| | $ | 49,295 |
| | $ | (48,635 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 10,371 |
| | 12,522 |
| | 14,774 |
|
| Deferred income taxes | | 1,644 |
| | (3,496 | ) | | (1,690 | ) |
| Stock-based compensation expense | | 10,298 |
| | 8,947 |
| | 4,935 |
|
| Accretion expense related to earnout payments | | 668 |
| | 1,285 |
| | 1,038 |
|
| Impairment charges | | — |
| | — |
| | 50,722 |
|
| Gain on marketable securities | | (595 | ) | | — |
| | — |
|
| Changes in assets and liabilities, net of effects of acquisitions: | | | | | | |
| Accounts receivable | | 6,899 |
| | (16,759 | ) | | (1,882 | ) |
| Accounts payable | | (994 | ) | | (526 | ) | | 1,474 |
|
| Accrued expenses | | 2,441 |
| | 71,526 |
| | 18,330 |
|
| Restructuring accrual | | 1,959 |
| | (11,617 | ) | | 13,025 |
|
| Deferred revenue | | 175 |
| | (1,899 | ) | | 2,010 |
|
| Income taxes (payable) recoverable, net | | (5,450 | ) | | 757 |
| | 3,381 |
|
| Retirement and pension plan assets and liabilities | | 3,258 |
| | (1,492 | ) | | 3,065 |
|
| Prepaid expenses | | (455 | ) | | (893 | ) | | 797 |
|
| Other assets and liabilities, net | | 1,557 |
| | (4,748 | ) | | 5,626 |
|
| Net cash provided by operating activities | | 78,645 |
| | 102,902 |
| | 66,970 |
|
| Cash flows - investing activities: | | | | | | |
| Acquisition of businesses, net of cash acquired | | (3,520 | ) | | (3,083 | ) | | (364 | ) |
| Capital expenditures | | (3,352 | ) | | (5,960 | ) | | (14,022 | ) |
| Purchases of available for sale investments | | (130,411 | ) | | (2,201 | ) | | (2,269 | ) |
| Proceeds from sale of available for sale investments | | 67,968 |
| | 2,995 |
| | 1,404 |
|
| Net cash used in investing activities | | (69,315 | ) | | (8,249 | ) | | (15,251 | ) |
| Cash flows - financing activities: | | | | | | |
| Proceeds from line of credit | | — |
| | 20,000 |
| | 40,000 |
|
| Payments on line of credit | | — |
| | (20,000 | ) | | (40,000 | ) |
| Debt issuance costs | | — |
| | (981 | ) | | — |
|
| Cash dividends paid | | (11,835 | ) | | (10,181 | ) | | (10,111 | ) |
| Payment of employee tax withholdings on equity transactions | | (4,552 | ) | | (2,234 | ) | | (2,392 | ) |
| Acquisition earnout payments | | (1,853 | ) | | (3,592 | ) | | (4,557 | ) |
| Net cash used in financing activities | | (18,240 | ) | | (16,988 | ) | | (17,060 | ) |
| Effect of exchange rates fluctuations on cash, cash equivalents and restricted cash | | 367 |
| | (5,565 | ) | | 7,933 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | | (8,543 | ) | | 72,100 |
| | 42,592 |
|
| Cash, cash equivalents and restricted cash at beginning of period | | 280,262 |
| | 208,162 |
| | 165,570 |
|
| Cash, cash equivalents and restricted cash at end of period | | $ | 271,719 |
| | $ | 280,262 |
| | $ | 208,162 |
|
| | | | | | | |
| Supplemental disclosures of cash flow information | | | | | | |
| Cash paid for | | | | | | |
| Income taxes | | $ | 27,338 |
| | $ | 22,616 |
| | $ | 14,814 |
|
| Interest | | $ | — |
| | $ | 67 |
| | $ | 193 |
|
The accompanying notes to Consolidated Financial Statements are an integral part of these statements.
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | Common Stock | | Treasury Stock | | Additional
Paid in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income | | Total | | Common Stock | | Treasury Stock | | Additional
Paid in
Capital | | Retained
Earnings (Deficit) | | Accumulated
Other
Comprehensive
Income | | Total |
| | | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | |
| Balance at December 31, 2013 | | 19,586 |
| | $ | 196 |
| | 1,452 |
| | $ | (47,811 | ) | | $ | 232,008 |
| | $ | 48,511 |
| | $ | 14,969 |
| | $ | 247,873 |
| |
| Balance at December 31, 2016 | | | 19,586 |
| | $ | 196 |
| | 1,008 |
| | $ | (32,915 | ) | | $ | 229,957 |
| | $ | 58,030 |
| | $ | 3,322 |
| | $ | 258,590 |
|
| Net loss | | | — |
| | — |
| | — |
| | — |
| | — |
| | (48,635 | ) | | — |
| | (48,635 | ) |
| Other comprehensive income, net of tax | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,993 |
| | 9,993 |
|
| Treasury and common stock transactions: | | | | | | | | | | | | | | | | | |
| Stock-based compensation | | | — |
| | — |
| | — |
| | — |
| | 4,935 |
| | — |
| | — |
| | 4,935 |
|
| Vesting of equity, net of tax withholdings | | | — |
| | — |
| | (188 | ) | | 6,311 |
| | (8,716 | ) | | — |
| | — |
| | (2,405 | ) |
| Re-issuance of treasury stock | | | — |
| | — |
| | (15 | ) | | 508 |
| | (170 | ) | | — |
| | — |
| | 338 |
|
| Cash dividends declared ($0.52 per share) | | | — |
| | — |
| | — |
| | — |
| | — |
| | (9,762 | ) | | — |
| | (9,762 | ) |
| Dividend equivalents on restricted stock units | | | — |
| | — |
| | — |
| | — |
| | — |
| | (349 | ) | | — |
| | (349 | ) |
| Balance at December 31, 2017 | | | 19,586 |
| | 196 |
| | 805 |
| | (26,096 | ) | | 226,006 |
| | (716 | ) | | 13,315 |
| | 212,705 |
|
| Net income | | | — |
| | — |
| | — |
| | — |
| | — |
| | 49,295 |
| | — |
| | 49,295 |
|
| Adoption of accounting standards | | | — |
| | — |
| | — |
| | — |
| | — |
| | 15,043 |
| | (6,089 | ) | | 8,954 |
|
| Other comprehensive loss, net of tax | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,164 | ) | | (3,164 | ) |
| Treasury and common stock transactions: | | | | | | | | | | | | | | | | | |
| Stock-based compensation | | | — |
| | — |
| | — |
| | — |
| | 8,947 |
| | — |
| | — |
| | 8,947 |
|
| Vesting of equity, net of tax withholdings | | | — |
| | — |
| | (167 | ) | | 5,604 |
| | (7,837 | ) | | — |
| | — |
| | (2,233 | ) |
| Re-issuance of treasury stock | | | — |
| | — |
| | (6 | ) | | 194 |
| | 31 |
| | — |
| | — |
| | 225 |
|
| Cash dividends declared ($0.39 per share) | | | — |
| | — |
| | — |
| | — |
| | — |
| | (7,389 | ) | | — |
| | (7,389 | ) |
| Dividend equivalents on restricted stock units | | | — |
| | — |
| | — |
| | — |
| | — |
| | (184 | ) | | — |
| | (184 | ) |
| Balance at December 31, 2018 | | | 19,586 |
| | 196 |
| | 632 |
| | (20,298 | ) | | 227,147 |
| | 56,049 |
| | 4,062 |
| | 267,156 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 6,797 |
| | — |
| | 6,797 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 46,869 |
| | — |
| | 46,869 |
|
| Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,746 | ) | | (3,746 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (238 | ) | | (238 | ) |
| Treasury and common stock transactions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation | | — |
| | — |
| | — |
| | — |
| | 3,579 |
| | — |
| | — |
| | 3,579 |
| | — |
| | — |
| | — |
| | — |
| | 10,298 |
| | — |
| | — |
| | 10,298 |
|
| Vesting of equity, net of tax withholdings | | — |
| | — |
| | (82 | ) | | 2,737 |
| | (3,142 | ) | | — |
| | — |
| | (405 | ) | | — |
| | — |
| | (163 | ) | | 5,154 |
| | (9,706 | ) | | — |
| | — |
| | (4,552 | ) |
| Re-issuance of treasury stock | | — |
| | — |
| | (24 | ) | | 813 |
| | (363 | ) | | — |
| | — |
| | 450 |
| | — |
| | — |
| | (49 | ) | | 349 |
| | 1,068 |
| | — |
| | — |
| | 1,417 |
|
| Cash dividends declared ($0.52 per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | (9,481 | ) | | — |
| | (9,481 | ) | |
| Cash dividends declared ($0.60 per share) | | | — |
| | — |
| | — |
| | — |
| | — |
| | (11,461 | ) | | — |
| | (11,461 | ) |
| Dividend equivalents on restricted stock units | | — |
| | — |
| | — |
| | — |
| | — |
| | (396 | ) | | — |
| | (396 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (374 | ) | | — |
| | (374 | ) |
| Tax deficit related to stock-based compensation | | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
| | (7 | ) | |
| Balance at December 31, 2014 | | 19,586 |
| | 196 |
| | 1,346 |
| | (44,261 | ) | | 232,075 |
| | 45,431 |
| | 11,223 |
| | 244,664 |
| |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 17,132 |
| | — |
| | 17,132 |
| |
| Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,964 | ) | | (1,964 | ) | |
| Treasury and common stock transactions: | | | | | | | | | | | | | | | | | |
| Stock-based compensation | | — |
| | — |
| | — |
| | — |
| | 5,066 |
| | — |
| | — |
| | 5,066 |
| |
| Vesting of equity, net of tax withholdings | | — |
| | — |
| | (123 | ) | | 4,094 |
| | (4,972 | ) | | — |
| | — |
| | (878 | ) | |
| Re-issuance of treasury stock | | — |
| | — |
| | (17 | ) | | 584 |
| | (135 | ) | | — |
| | — |
| | 449 |
| |
| Cash dividends declared ($0.52 per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | (9,550 | ) | | — |
| | (9,550 | ) | |
| Dividend equivalents on restricted stock units | | — |
| | — |
| | — |
| | — |
| | — |
| | (441 | ) | | — |
| | (441 | ) | |
| Tax surplus related to stock-based compensation | | — |
| | — |
| | — |
| | — |
| | 324 |
| | — |
| | — |
| | 324 |
| |
| Balance at December 31, 2015 | | 19,586 |
| | 196 |
| | 1,206 |
| | (39,583 | ) | | 232,358 |
| | 52,572 |
| | 9,259 |
| | 254,802 |
| |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 15,413 |
| | — |
| | 15,413 |
| |
| Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,937 | ) | | (5,937 | ) | |
| Treasury and common stock transactions: | | | | | | | | | | | | | | | | | |
| Stock-based compensation | | — |
| | — |
| | — |
| | — |
| | 6,393 |
| | — |
| | — |
| | 6,393 |
| |
| Vesting of equity, net of tax withholdings | | — |
| | — |
| | (167 | ) | | 5,636 |
| | (8,324 | ) | | — |
| | — |
| | (2,688 | ) | |
| Re-issuance of treasury stock | | — |
| | — |
| | (31 | ) | | 1,032 |
| | (470 | ) | | — |
| | — |
| | 562 |
| |
| Cash dividends declared ($0.52 per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | (9,668 | ) | | — |
| | (9,668 | ) | |
| Dividend equivalents on restricted stock units | | — |
| | — |
| | — |
| | — |
| | — |
| | (287 | ) | | — |
| | (287 | ) | |
| Balance at December 31, 2016 | | 19,586 |
| | $ | 196 |
| | 1,008 |
| | $ | (32,915 | ) | | $ | 229,957 |
| | $ | 58,030 |
| | $ | 3,322 |
| | $ | 258,590 |
| |
| Balance at December 31, 2019 | | | 19,586 |
| | $ | 196 |
| | 420 |
| | $ | (14,795 | ) | | $ | 228,807 |
| | $ | 91,083 |
| | $ | 3,824 |
| | $ | 309,115 |
|
The accompanying notes to Consolidated Financial Statements are an integral part of these statements.
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 |
| Cash flows - operating activities: | | | | | | |
| Net income | | $ | 15,413 |
| | $ | 17,132 |
| | $ | 6,797 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 16,433 |
| | 13,696 |
| | 15,312 |
|
| Deferred income taxes | | 2,394 |
| | (1,166 | ) | | 237 |
|
| Stock-based compensation expense | | 6,393 |
| | 5,066 |
| | 3,579 |
|
| Accretion expense related to earnout payments | | 635 |
| | 1,294 |
| | 1,854 |
|
| Cash paid for restructuring charges | | — |
| | — |
| | (142 | ) |
| Changes in assets and liabilities, net of effects of acquisitions: | | | | | | |
| Accounts receivables | | (14,425 | ) | | (8,714 | ) | | 217 |
|
| Accounts payable | | 941 |
| | 810 |
| | (2,113 | ) |
| Accrued expenses | | (909 | ) | | 37,207 |
| | 29,979 |
|
| Deferred revenue | | (1,672 | ) | | (236 | ) | | 3,486 |
|
| Income taxes (payable) recoverable, net | | 1,184 |
| | (3,257 | ) | | 1,482 |
|
| Retirement and pension plan assets and liabilities | | 4,215 |
| | (1,142 | ) | | 4,477 |
|
| Prepaid expenses | | (2,330 | ) | | (4,388 | ) | | (207 | ) |
| Other assets and liabilities, net | | (3,449 | ) | | 1,281 |
| | (8,194 | ) |
| Net cash provided by operating activities | | 24,823 |
| | 57,583 |
| | 56,764 |
|
| Cash flows - investing activities: | | | | | | |
| Restricted cash | | 7,228 |
| | — |
| | (53 | ) |
| Acquisition of business, net of cash acquired | | (27,722 | ) | | (10,312 | ) | | — |
|
| Capital expenditures | | (5,351 | ) | | (16,427 | ) | | (3,359 | ) |
| Purchases of available for sale investments | | (2,475 | ) | | (1,526 | ) | | (963 | ) |
| Proceeds from sale of available for sale investments | | 535 |
| | 758 |
| | 1,084 |
|
| Net cash used in investing activities | | (27,785 | ) | | (27,507 | ) | | (3,291 | ) |
| Cash flows - financing activities: | | | | | | |
| Debt repayment | | — |
| | (29,500 | ) | | (6,000 | ) |
| Debt issuance costs | | — |
| | (473 | ) | | — |
|
| Cash dividends paid | | (9,955 | ) | | (9,991 | ) | | (9,864 | ) |
| Payment of employee tax withholdings on equity transactions | | (2,676 | ) | | (878 | ) | | (406 | ) |
| Acquisition earnout payments | | (7,461 | ) | | (5,496 | ) | | (3,390 | ) |
| Net cash used in financing activities | | (20,092 | ) | | (46,338 | ) | | (19,660 | ) |
| Effect of exchange rates fluctuations on cash and cash equivalents | | (2,387 | ) | | (4,638 | ) | | (4,107 | ) |
| Net (decrease) increase in cash and cash equivalents | | (25,441 | ) | | (20,900 | ) | | 29,706 |
|
| Cash and cash equivalents at beginning of period | | 190,452 |
| | 211,352 |
| | 181,646 |
|
| Cash and cash equivalents at end of period | | $ | 165,011 |
| | $ | 190,452 |
| | $ | 211,352 |
|
| Supplemental Schedule of Non-cash Financing Activities: | | | | | | |
| Term loan facility retirement (Note 10) | | $ | — |
| | $ | (26,500 | ) | | $ | — |
|
| Subsequent drawing on line of credit (Note 10) | | $ | — |
| | $ | 26,500 |
| | $ | — |
|
| Supplemental disclosures of cash flow information | | | | | | |
| Cash paid for | | | | | | |
| Gross income taxes | | $ | 16,817 |
| | $ | 16,936 |
| | $ | 14,175 |
|
| Interest | | $ | 41 |
| | $ | 442 |
| | $ | 861 |
|
The accompanying notes to Consolidated Financial Statements are an integral part of these statements.
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except share and per share figures)
| |
1.1. | Basis of Presentation |
Heidrick & Struggles International, Inc. and Subsidiariessubsidiaries (the “Company”) is engaged in providing executive search culture shaping and leadership consulting services to clients on a retained basis. The Company operates in the Americas, Europe and Asia Pacific regions.
The consolidated financial statements include Heidrick & Struggles International, Inc. and its wholly-ownedwholly owned subsidiaries and have been prepared using accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Significant items subject to estimates and assumptions include revenue recognition, allowances for deferred tax assets and liabilities, and assessment of goodwill and other intangible assets for impairment. Estimates are subject to a degree of uncertainty and actual results could differ from these estimates.
| |
2.2. | Summary of Significant Accounting Policies |
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents.
Marketable Securities
The Company’s marketable securities consist of available-for-sale debt securities with original maturities exceeding three months.
Concentration of Risk
The Company is potentially exposed to concentrations of risk associated with its accounts receivable. However, this risk is limited due to the Company’s large number of clients and their dispersion across many different industries and geographies. At December 31, 2016,2019 and 2018, the Company had no significant concentrations of risk.
Accounts Receivable
The Company’s accounts receivable consistconsists of trade receivables. The allowance for doubtful accounts is developed based upon several factors including the age of the Company’s accounts receivable, historical write-off experience and specific account analysis. These factors may change over time, impacting the allowance level.
Fair Value of Financial Instruments
Cash equivalents are stated at cost, which approximates fair market value. The carrying value for receivables from clients, accounts payable, deferred revenue and other accrued liabilities reasonably approximate fair market value due to the nature of the financial instruments and the short termshort-term nature of the items.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the asset or, for leasehold improvements, the shorter of the lease term or the estimated useful life of the asset, as follows: |
| | |
| Office furniture, fixtures and equipment | | 5–10 years |
| Computer equipment and software | | 3–7 years |
Leasehold improvements are depreciated over the lesser of the lease term or life of the asset improvement, which typically range from three to ten years.
Depreciation is calculated for tax purposes using accelerated methods, where applicable.
Long-lived Assets
The Company reviews its long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge, equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset, is recognized.
Investments
The Company’s investments consist primarily of available-for-sale investments within the U.S. non-qualified deferred compensation plan (the “Plan”).
Available-for-sale investments are reported at fair value with changes in unrealized gains (losses) recorded as a separate component of Accumulated other comprehensive income in the Consolidated Balance Sheets until realized. Realizedand realized gains (losses) resulting from an employee’s termination from the Plan are recorded as a non-operating expense in Other, net in the Consolidated Statements of Comprehensive Income.Income (Loss).
Goodwill and Other Intangible Assets
Goodwill represents the difference between the purchase price of acquired companies and the related fair value of the net assets acquired, which is accounted for by the acquisition method of accounting. Other intangible assets include client relationships, trade name, software,names, and employee non-compete agreements and technology.agreements. The Company performs assessments of the carrying value of goodwill at least annually and of its goodwill and other intangible assets whenever events occur or circumstances indicate that a carrying amount of these assets may not be recoverable. These circumstances include a significant change in business climate, attrition of key personnel, changes in financial condition or results of operations, a prolonged decline in the Company’s stock price and market capitalization, competition, and other factors.
The goodwill impairment test compares the fair value of a reporting unit to its carrying amount, including goodwill. The Company has historically operatedoperates four reporting units: the Americas;Americas, Europe which(which includes Africa;Africa), Asia Pacific which(which includes the Middle East;East) and Culture Shaping. DuringHeidrick Consulting. The goodwill impairment test is completed by comparing the fourth quarter of 2016, the Company revised its reporting unit structure based on the manner in which the Company's chief operating decision maker allocates resources and assesses performance. Under the revised reporting unit structure, the Company operates five reporting units: Americas Executive Search; Europe Executive Search, which includes Africa; Asia Pacific Executive Search, which includes the Middle East; Leadership Consulting; and Culture Shaping. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit would be considered impaired. To measure the amount of the impairment loss, the implied fair value of a reporting unit’s goodwill is compared to theunit with its carrying amount of that goodwill. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined.amount. The fair value of each of the Company’s reporting units is determined using a discounted cash flow methodology. In connection withAn impairment charge is recognized for the amount by which the carrying value of the reporting unit structure change,exceeds its fair value; however, the Company revised its historical methodology for allocating corporate costsloss recognized is not to exceed the total amount of goodwill allocated to that reporting units for goodwill impairment purposes to more closely align with the Company's allocation methodology for financial reporting purposes and reflect estimated consumption. The Company also reallocated its goodwill to the new reporting unit structure utilizing the relative fair value method.unit.
The other intangible asset impairment review compares the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge, equal to the amount by which the carrying amount of the asset exceeds the fair value, is recognized.
Other intangible assets acquired are amortized either using the straight-line method over their estimated useful lives or based on the projected cash flow associated with the respective intangible assets.
Restructuring Charges
The Company accounts for restructuring charges by recognizing a liability at fair value when the costs are incurred.
Revenue Recognition
See Note 3, Revenue before reimbursements of out-of-pocket expenses (“net revenue”) consists of retainers and indirect expenses billed to clients. For each assignment, the Company and its client enter into a contract that outlines the general terms and conditions of the assignment. Typically, the Company is paid a retainer for its executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled. In addition, generally, if the actual compensation of a placed candidate exceeds the estimated compensation, the Company often is authorized to bill the client for one-third of
the excess. Indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search. The Company generally bills its clients for its retainer and indirect expenses in one-third increments over a three-month period commencing in the month of a client’s acceptance of the contract.
Net revenue is recognized when earned and realizable and therefore when the following criteria have been met: (a) persuasive evidence of an arrangement exists, (b) services have been rendered, (c) the fee to our client is fixed or determinable, and (d) collectability is reasonably assured. Taxes collected from clients and remitted to governmental authorities are presented on a net basis. Typically, net revenue from standard executive search engagements is recognized over the expected average period of performance, in proportion to the estimated personnel time incurred to fulfill our obligations under the arrangements. Net revenue in excess of the retainer, resulting from actual compensation of the placed candidate exceeding the estimated compensation, is recognized upon completion of the executive search when the amount of the additional fee is known.
Net revenue associated with culture shaping consulting is recognized proportionally as services are performed. Net revenue associated with licenses to use our culture shaping proprietary materials is typically recognized over the term of the arrangement.
Depending on the terms of that agreement, net revenue from certain leadership consulting and non-standard executive search engagements is either recognized proportionally as services are performed or in accordance with the completion of the engagement deliverables..
Reimbursements
The Company incurs certain out-of-pocket expenses that are reimbursed by its clients, which are accounted for as revenue and expense in its Consolidated Statements of Comprehensive Income.Income (Loss).
Salaries and Employee Benefits
Salaries and employee benefits consist of compensation and benefits paid to consultants, executive officers, and administrative and support personnel, of which the most significant elements are salaries and annual performance-related bonuses. Other items in this category are expenses related to sign-on bonuses, forgivable employee loans and minimum guaranteed bonuses (often incurred
in connection with the hiring of new consultants), restricted stock unit and performance share unit amortization, payroll taxes, profit sharing and retirement benefits, and employee insurance benefits.
Salaries and employee benefits are recognized on an accrual basis. Certain sign-on bonuses, retention awards, and minimum guaranteed compensation are capitalized and amortized in accordance with the terms of the respective agreements.
A portion of the Company’s consultants’ and management cash bonuses are deferred and paid over a three-year vesting period. The portion of the bonus is approximately 15% depending on the employee’s level or position. The compensation expense related to the amounts being deferred is recognized on a graded vesting attribution method over the requisite service period. This service period begins on January 1 of the respective fiscal year and continues through the deferral date, which coincides with the Company’s bonus payments in the first quarter of the following year and for an additional three yearthree-year vesting period. The deferrals are recorded in Accrued salaries and employee benefits within both Current liabilities and Non-current liabilities in the Consolidated Balance Sheets.
Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the tax differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income (loss) by weighted average common shares outstanding for the year. Diluted earnings (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Common equivalent shares are excluded from the determination of diluted earnings per share in periods in which they have an anti-dilutive effect.
The following table sets forth the computation of basic and diluted earnings (loss) per share:
| | | | December 31, | December 31, |
| | 2016 | | 2015 | | 2014 | 2019 | | 2018 | | 2017 |
| Net income | $ | 15,413 |
| | $ | 17,132 |
| | $ | 6,797 |
| |
| Net income (loss) | | $ | 46,869 |
| | $ | 49,295 |
| | $ | (48,635 | ) |
| Weighted average shares outstanding: | | | | | | | | | | |
| Basic | 18,540 |
| | 18,334 |
| | 18,210 |
| 19,103 |
| | 18,917 |
| | 18,735 |
|
| Effect of dilutive securities: | | | | | | | | | | |
| Restricted stock units | 347 |
| | 234 |
| | 155 |
| 285 |
| | 406 |
| | — |
|
| Performance stock units | 151 |
| | 147 |
| | 67 |
| 163 |
| | 209 |
| | — |
|
| Diluted | 19,038 |
| | 18,715 |
| | 18,432 |
| 19,551 |
| | 19,532 |
| | 18,735 |
|
| Basic earnings per share | $ | 0.83 |
| | $ | 0.93 |
| | $ | 0.37 |
| |
| Diluted earnings per share | $ | 0.81 |
| | $ | 0.92 |
| | $ | 0.37 |
| |
| Basic earnings (loss) per share | | $ | 2.45 |
| | $ | 2.61 |
| | $ | (2.60 | ) |
| Diluted earnings (loss) per share | | $ | 2.40 |
| | $ | 2.52 |
| | $ | (2.60 | ) |
Weighted average restricted stock units and performance stock units outstanding that could be converted into approximately 327,000 and 80,000 common shares, respectively, for the year ended December 31, 2017, were not included in the computation of diluted loss per share because the effects would be anti-dilutive.
Translation of Foreign Currencies
The Company generally designates the local currency for all its subsidiaries as the functional currency. The Company translates the assets and liabilities of its subsidiaries into U.S. dollars at the current rate of exchange prevailing at the balance sheet date. Revenue and expenses are translated at a monthly average exchange rate for the period. Translation adjustments are reported as a component of Accumulated other comprehensive income.
Restricted Cash
TheHistorically, the Company hashad lease agreements and business licenses with terms that requirerequired the Company to restrict cash through the termination dates of the agreements, which extend through 2018. During 2016, the Company paid certain key executives of Senn Delaney a $6.5 million retention bonus out of restricted cash for remaining with the Company for three years subsequent to the acquisition (See Note 7, Acquisitions). As of December 31, 2016 and 2015, the total restricted cash was $0.6 million and $7.8 million, respectively.agreements. Current and non-current restricted cash is included in Other current assets and Other non-current assets,, respectively, onin the Condensed Consolidated Balance Sheet.Sheets.
Certain prior year amounts have been recast asThe following table provides a resultreconciliation of the change incash and cash equivalents between the Company's operating segments. The reclassifications had no impact on net income, net cash flows or stockholders' equity.Condensed Consolidated Balance Sheets and the Condensed Consolidated Statement of Cash Flows as of December 31, 2019, 2018 and 2017:
|
| | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2018 | | 2017 |
| Cash and cash equivalents | $ | 271,719 |
| | $ | 279,906 |
| | $ | 207,534 |
|
| Restricted cash included within other current assets | — |
| | 108 |
| | 526 |
|
| Restricted cash included within other non-current assets | — |
| | 248 |
| | 102 |
|
| Total cash, cash equivalents and restricted cash | $ | 271,719 |
| | $ | 280,262 |
| | $ | 208,162 |
|
Recently Issued Financial Accounting Standards
In November 2016,December 2019, the Financial Accounting Standards Board ("FASB"), issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The guidance simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards UpdateCodification ("ASU"ASC") No. 2016-18, Statement740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of Cash Flows: Restricted Cash, which requiresdeferred tax liabilities for outside basis differences. The guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that the statement of cash flows explain the change during the periodresult in a step-up in the totaltax basis of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore amounts generally described as restricted cash should be included with cash and cash equivalents when recording the beginning of period and end of period total amounts shown on the statement of cash flows.goodwill. The Company currently does not include restricted cash amounts in the beginning and ending cash amounts and will change the presentation of the cash flow statement to include restricted cash in the beginning and ending cash totals. The standardguidance is effective for annual reportingfiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 with early2021. Early adoption permitted.The Company has not yet determined when it will adopt this guidance. The impact of this change is not expected to be significant to the classification of these activities on the Consolidated Statement of Cash Flows.
In August 2016, the Financial Accounting Standards Board ("FASB") issued accounting Standards Update ("ASU") No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice as to how certain cash receipts and cash payments should be presented and classified. The standard is effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company has evaluated the standard and noted the guidance for contingent consideration payments made after a business combination are applicable to the Condensed Consolidated Statements of Cash Flows. The Company currently classifies all contingent consideration payments as financing activities. The impact of this change is not expected to be significant to the classification of these activities on the Consolidated Statements of Cash Flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases, intended to improve financial reporting about leasing transactions. The new guidance will require entities that lease assets to recognize on their balance sheets the assets and
liabilities for the rights and obligations created by those leases and to disclose key information about the leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.
In JanuaryJune 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition andNo. 2016-13, Measurement of Credit Losses on Financial Assets and Financial Liabilities, which addressesInstruments. The guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain aspects of recognition, measurement, presentation and disclosuretypes of financial instruments, including the recognition of unrealized changes in fair value within net income.trade receivables. The standard is effective for annual reporting periodsfiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The ASU requires that an entity recognizes revenue to depict the transfer of promised goods or services to customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for these goods or services. The effective date has been deferred for one year to the interim and annual reporting periods beginning after December 15, 2017. The guidance permits the use of either of the following transition methods: (i) a full retrospective method reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or (ii) a retrospective method with the cumulative effect upon initial adoption recognized at the date of initial application (modified retrospective).2019. The Company will adopt this guidance in its fiscal year beginning January 1, 2020. The adoption of this guidance is not anticipated to have a material impact on our consolidated financial statements.
Recently Adopted Financial Accounting Standards
On January 1, 2019, the Company adopted ASU No. 2016-02, Leases, ASU No. 2018-10, Codification Improvements to Topic 842 (Leases) and ASU No. 2018-11, Targeted Improvements to Topic 842 (Leases). The guidance is intended to increase transparency and comparability among companies for leasing transactions, including a requirement for companies that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations created by those leases. The guidance also provides for disclosures that allow the users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted the guidance on January 1, 2018 and will apply2019 using the modified retrospective method.method without restatement of comparative periods. As such, periods prior to the date of adoption are presented in accordance with ASC 840 - Leases. The Company utilized the available practical expedient that allowed for the Company to not reassess whether existing contracts contain a lease under the new definition of a lease, lease classification for existing leases and whether previously capitalized initial direct costs would qualify for capitalization under the new guidance.
The adoption of this guidance had a material impact on the Condensed Consolidated Balance Sheet as of December 31, 2019 due to the recognition of equal right-of-use assets and lease liabilities for the Company's portfolio of operating leases. The right-of-use asset balance was then adjusted by the reclassification of pre-existing prepaid and accrued rent balances from other line items within the Condensed Consolidated Balance Sheet. The adoption had an immaterial impact on the Condensed Consolidated Statement of Comprehensive Income and Condensed Consolidated Statement of Cash Flows for the year ended December 31, 2019. The adoption had no impact on the Condensed Consolidated Statement of Changes in Stockholders' Equity for the year ended December 31, 2019.
Additional information and disclosures required by the new standard are contained in Note 6, Leases.
On January 1, 2019, the Company is performing its evaluation ofadopted ASU No. 2014-09.2018-02, Income Statement - Reporting Comprehensive Income, which is intended to improve the usefulness of information reported as a result of the Tax Cuts and Jobs Act. The Companynew guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.
Executive Search
Revenue is paidrecognized as we satisfy our performance obligations by transferring a retainer for itsgood or service to a client. Generally, each of our executive search servicescontracts contain one performance obligation which is the process of identifying potentially qualified candidates for a specific client position. In most contracts, the transaction price includes both fixed and variable consideration. Fixed compensation is comprised of a retainer, equal to approximately one-third of the estimated first year compensation for the position to be filled.filled, and indirect expenses, equal to a specified percentage of the retainer, as defined in the contract. The Company generally bills its clients for its retainer and indirect expenses in one-third increments over a three-month period commencing in the month of a client’s acceptance of the contract. If the actual compensation of a placed candidate exceeds the estimatedoriginal compensation estimate, the Company is often authorized to bill the client for one-third of the excess.excess compensation. The Company currently recognizesrefers to this additional billing as uptick revenue. In most contracts, variable consideration is comprised of uptick revenue associated withand direct expenses. The Company bills its clients for uptick revenue upon completion of the differenceexecutive search, and direct expenses are billed as incurred.
As required under ASU No. 2014-09, the Company now estimates uptick revenue at contract inception, based on a portfolio approach, utilizing the expected value method based on a historical analysis of uptick revenue realized in the Company’s geographic regions and industry practices, and initially records a contract’s uptick revenue in an amount that is probable not to result in a significant reversal of cumulative revenue recognized when the actual amount of uptick revenue for that contract is known. Differences between the estimated compensation and actual compensation at the time this amount is considered fixed and determinable. Under ASU 2014-09, the difference between estimated compensation and actual compensation is considered variable consideration. The Company will be required to estimate the amountamounts of variable consideration are recorded when known. The Company does not estimate revenue for itsdirect expenses as it is not materially different than recognizing revenue as direct expenses are incurred.
Revenue from our executive search engagement performance obligation is recognized over time as our clients simultaneously receive and consume the benefits provided by the Company's performance. Revenue from executive search engagements is recognized over the expected average period of performance, in proportion to the estimated personnel time incurred to fulfill our obligations under the executive search contract. Revenue is generally recognized over a period of approximately six months.
Our executive search contracts contain a replacement guarantee which provides for an additional search to be completed, free of charge except for expense reimbursements, should the candidate presented by the Company be hired by the client and subsequently terminated by the client for performance reasons within a specified period of time. The replacement guarantee is an assurance warranty, which is not a performance obligation under the terms of the executive search contract, as the Company does not provide any services at contract inception.under the terms of the guarantee that transfer benefits to the client in excess of assuring that the identified candidate complies with the agreed-upon specifications. The Company accounts for the replacement guarantee under the relevant warranty guidance in ASC 460 - Guarantees.
Heidrick Consulting
Revenue is still evaluatingrecognized as we satisfy our performance obligations by transferring a good or service to a client. Heidrick Consulting enters into contracts with clients that outline the financial impactgeneral terms and conditions of this change.the assignment to provide succession planning, executive assessment, top team and board effectiveness and culture shaping programs. The consideration the Company expects to receive under each contract is generally fixed. Most of our consulting contracts contain one performance obligation, which is the overall process of providing the consulting service requested by the client. The majority of our consulting revenue is recognized over time utilizing both input and output methods. Contracts that contain coaching sessions, training sessions or the completion of assessments are recognized using the output method as each session or assessment is delivered to the client. Contracts that contain general consulting work are recognized using the input method utilizing a measure of progress that is based on time incurred on the project.
The Company enters into enterprise agreements with clients to provide a license for online access, via the Company's Culture Connect platform, to training and other proprietary material related to the Company's culture shaping programs. The consideration the Company expects to receive under the terms of an enterprise agreement is continuingcomprised of a single fixed fee. Our enterprise agreements contain multiple performance obligations, the delivery of materials via Culture Connect and material rights related to evaluateoptions to renew enterprise agreements at a significant discount. The Company allocates the impactstransaction price to the performance obligations in the contract on a stand-alone selling price basis. The stand-alone selling price for the initial term of adoptionthe enterprise agreement is outlined in the contract and is equal to the price paid by the client for the agreement over the initial term of the contract. The stand-alone selling price for the options to renew, or material right, are not directly observable and must be estimated. This estimate is required to reflect the discount the client would obtain when exercising the option to renew, adjusted for the likelihood that the option will be exercised. The Company estimates the likelihood of renewal using a historical analysis of client renewals. Access to Culture Connect represents a right to access the Company’s intellectual property that the client simultaneously receives and consumes as the Company performs under the agreement, and therefore the Company recognizes revenue over time.
Given the continuous nature of this guidancecommitment, the Company utilizes straight-line ratable revenue recognition over the estimated subscription period as the Company's clients will receive and its preliminary assessments are subjectconsume the benefits from Culture Connect equally throughout the contract period. Revenue related to change.client renewals of enterprise agreements is recognized over the term of the renewal, which is generally twelve months. Enterprise agreements do not comprise a significant portion of the Company's revenue.
Recently Adopted Financial Accounting Standards
Contract Balances
In March 2016,Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the FASB issued ASU No. 2016-09,end of each reporting period. Contract assets and liabilities are classified as current due to the nature of the Company's contracts, which are completed within one year. Contract assets are included within Stock Compensation: ImprovementsOther Current Assets on the Condensed Consolidated Balance Sheets.
Unbilled receivables: Unbilled revenue represents contract assets from revenue recognized over time in excess of the amount billed to Employee Share-Based Payment Accountingthe client and the amount billed to the client is solely dependent upon the passage of time. This amount includes revenue recognized in excess of billed executive search retainers and Heidrick Consulting fees.
Contract assets:, Contract assets represent revenue recognized over time in excess of the amount billed to the client and the amount billed to the client is not solely subject to the passage of time. This amount primarily includes revenue recognized for upticks and contingent placement fees in executive search contracts.
Deferred revenue: Contract liabilities consist of deferred revenue, which is intendedequal to simplify several aspectsbillings in excess of revenue recognized.
The following table outlines the accounting for share-based payment transactions includingchanges in our contract asset and liability balances at the income tax accounting, classificationend of awards as either equity or liabilities, the accounting for forfeitures and classification on the statement of cash flows. The standard is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company early adopted this standard during the fourth quarter of 2016. The adoption of this standard reduced tax expense by approximately $0.7 million forperiod:
|
| | | | | | | | | | | |
| | December 31,
2019 | | December 31,
2018 | | Variance |
| Contract assets | | | | | |
| Unbilled receivables | $ | 7,585 |
| | $ | 8,684 |
| | $ | (1,099 | ) |
| Contract assets | 14,672 |
| | 15,291 |
| | (619 | ) |
| Total contract assets | 22,257 |
| | 23,975 |
| | (1,718 | ) |
| | | | | | |
| Contract liabilities | | | | | |
| Deferred revenue | $ | 41,267 |
| | $ | 40,673 |
| | $ | 594 |
|
During the year ended December 31, 2016.2019, we recognized revenue of $26.6 million that was included in the contract liabilities balance at the beginning of the period. The amount of revenue recognized during the year ended December 31, 2019 from performance obligations partially satisfied in previous periods as a result of changes in the estimates of variable consideration was $19.4 million. During the year ended December 31, 2018, we recognized revenue of $28.0 million that was included in the contract liabilities balance at the beginning of the period. The amount of revenue recognized during the year ended December 31, 2018, from performance obligations partially satisfied in previous periods as a result of changes in the estimates of variable consideration was $21.8 million.
Each of the Company's contracts has an expected duration of one year or less.Accordingly, the Company has elected to utilize the available practical expedient related to the disclosure of the transaction price allocated to the remaining performance obligations under its contracts. The Company has also elected the available practical expedients related to adjusting for the effects of a significant financing component and the capitalization of contract acquisition costs. The Company charges and collects from its clients, sales tax and value added taxes as required by certain jurisdictions. The Company has made an accounting policy election to exclude these items from the transaction price in its contracts.
| |
3.4. | Allowance for Doubtful Accounts |
The activity of the allowance for doubtful accounts for the years ended:
|
| | | | | | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 | | 2017 |
| Balance at January 1, | | $ | 3,502 |
| | $ | 2,534 |
| | $ | 2,575 |
|
| Provision charged to income | | 5,900 |
| | 3,790 |
| | 963 |
|
| Write-offs | | (4,270 | ) | | (2,708 | ) | | (1,134 | ) |
| Foreign currency translation | | 8 |
| | (114 | ) | | 130 |
|
| Balance at December 31, | | $ | 5,140 |
| | $ | 3,502 |
| | $ | 2,534 |
|
|
| | | | | | | | | | | | |
| | | December 31, |
| | | 2016 | | 2015 | | 2014 |
| Balance at January 1, | | $ | 5,376 |
| | $ | 3,942 |
| | $ | 4,709 |
|
| Provision charged to income | | 1,407 |
| | 2,772 |
| | 241 |
|
| Write-offs | | (4,106 | ) | | (1,140 | ) | | (772 | ) |
| Foreign currency translation | | (102 | ) | | (198 | ) | | (236 | ) |
| Balance at December 31, | | $ | 2,575 |
| | $ | 5,376 |
| | $ | 3,942 |
|
| |
4.5. | Property and Equipment, net |
The components of the Company’s property and equipment are as follows:
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2019 | | 2018 |
| Leasehold improvements | | $ | 42,891 |
| | $ | 40,583 |
| | $ | 47,269 |
| | $ | 48,455 |
|
| Office furniture, fixtures and equipment | | 16,677 |
| | 16,234 |
| | 17,740 |
| | 17,919 |
|
| Computer equipment and software | | 30,186 |
| | 28,648 |
| | 27,531 |
| | 27,063 |
|
| Property and equipment, gross | | 89,754 |
| | 85,465 |
| | 92,540 |
| | 93,437 |
|
| Accumulated depreciation | | (54,655 | ) | | (48,967 | ) | | (63,890 | ) | | (59,566 | ) |
| Property and equipment, net | | $ | 35,099 |
| | $ | 36,498 |
| | $ | 28,650 |
| | $ | 33,871 |
|
Depreciation expense for the years ended December 31, 2016, 2015,2019, 2018 and 20142017, was $9.4$9.5 million, $8.8$11.0 million and $9.8$10.4 million, respectively.
The Company's lease portfolio is comprised of operating leases for office space and equipment. The majority of the Company's leases include both lease and non-lease components, which the Company accounts for differently depending on the underlying class of asset. Certain of the Company's leases include one or more options to renew or terminate the lease at the Company's discretion. Generally, the renewal and termination options are not included in the right-of-use assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates the renewal and termination options and when they are reasonably certain of exercise, includes the renewal or termination option in the Company's lease term.
As most of the Company's leases do not provide an implicit interest rate, the Company utilizes its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company has a centrally managed treasury function; therefore, a portfolio approach is applied in determining the incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a fully collateralized basis over a similar term in an amount equal to the total lease payments in a similar economic environment.
As of December 31, 2019, office leases have remaining lease terms that range from less than one year to 10.4 years, some of which also include options to extend or terminate the lease. Most office leases contain both fixed and variable lease payments. Variable lease costs consist primarily of rent escalations based on an established index or rate and taxes, insurance, and common area or other maintenance costs, which are paid based on actual costs incurred by the lessor. The Company has elected to utilize the available practical expedient to not separate lease and non-lease components for office leases.
As of December 31, 2019, equipment leases, which are comprised of vehicle and office equipment leases, have remaining terms that range from less than one year to 4.8 years, some of which also include options to extend or terminate the lease. The Company's equipment leases do not contain variable lease payments. The Company separates the lease and non-lease components for its equipment leases. Equipment leases do not comprise a significant portion of the Company's lease portfolio.
Lease cost components included within General and Administrative Expenses in our Condensed Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2019, were as follows:
|
| | | | |
| Operating lease cost | | $ | 24,928 |
|
| Variable lease cost | | 7,932 |
|
| Total lease cost | | $ | 32,860 |
|
Rent expense, as previously defined under ASC 840, which includes the base rent, maintenance costs, operating expenses and real estate taxes, and the costs of equipment leases for the years ended December 31, 2018, and 2017, was $33.2 million and $32.2 million, respectively.
Supplemental cash flow information related to the Company's operating leases for the year ended December 31, 2019, was as follows:
|
| | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows from operating leases | | $ | 33,797 |
|
| Right-of-use assets obtained in exchange for lease obligations: | | |
| Operating leases | | $ | 19,640 |
|
The weighted average remaining lease term and weighted average discount rate for our operating leases as of December 31, 2019 was as follows:
|
| | |
| Weighted Average Remaining Lease Term | |
| Operating leases | 4.7 years |
|
| Weighted Average Discount Rate | |
| Operating leases | 3.9 | % |
The future maturities of the Company's operating lease liabilities for the years ended December 31, were as follows:
|
| | | |
| | Operating Lease Maturity |
| 2020 | $ | 30,246 |
|
| 2021 | 27,229 |
|
| 2022 | 23,577 |
|
| 2023 | 20,555 |
|
| 2024 | 9,981 |
|
| Thereafter | 8,983 |
|
| Total lease payments | 120,571 |
|
| Less: Interest | (10,228 | ) |
| Present value of lease liabilities | $ | 110,343 |
|
The minimum future operating lease payments due in each of the next five years as recorded under ASC 840 at December 2018, were as follows:
|
| | | |
| 2019 | $ | 34,456 |
|
| 2020 | 31,808 |
|
| 2021 | 27,381 |
|
| 2022 | 23,445 |
|
| 2023 | 20,087 |
|
| Thereafter | 14,448 |
|
| Total | $ | 151,625 |
|
The Company has a U.S. non-qualified deferred compensation plan that consists primarilyan obligation at the end of U.S. marketable securities and mutual funds, all ofthe lease term to return certain offices to the landlord in their original condition, which are valued using Level 1 inputs (See Note 6, Fair Value Measurements). Theis recorded at fair value for these investments was $17.3at the time the liability is incurred. The Company had $3.0 million and $14.1$2.7 million of asset retirement obligations as of December 31, 20162019 and 2015, respectively. The aggregate cost basis for these investments was $13.3 million2018, respectively, which are recorded within Other current liabilities and $11.1 million as of December 31, 2016 and 2015, respectively.Other non-current liabilities in the Consolidated Balance Sheets.
| |
6.7. | Financial Instruments and Fair Value Measurements |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•Level 1 – Quoted prices in active markets for identical assets and liabilities.
•Level 2 – Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
|
| | | | | | | | | | | | | | | | |
| | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| At December 31, 2016 | | | | | | | | |
| U.S. non-qualified deferred compensation plan | | $ | 17,346 |
| | $ | — |
| | $ | — |
| | $ | 17,346 |
|
| Assets designated for retirement and pension plans | | — |
| | 16,979 |
| | — |
| | 16,979 |
|
| Pension benefit obligation | | — |
| | (22,128 | ) | | — |
| | (22,128 | ) |
| Acquisition earnout accruals | | — |
| | — |
| | (10,991 | ) | | (10,991 | ) |
| | | $ | 17,346 |
| | $ | (5,149 | ) | | $ | (10,991 | ) | | $ | 1,206 |
|
The Company's investments in marketable debt securities, which consist of ContentsU.S. Treasury bills and commercial paper, are classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument's underlying contractual maturity date. Unrealized gains and losses on marketable debt securities classified as available-for-sale are recognized in Accumulated other comprehensive income in the Consolidated Balance Sheets until realized.
The Company's cash, cash equivalents, and marketable securities by significant investment category are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value | | Balance Sheet Classification |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Marketable Securities |
| Balance at December 31, 2019 | | | | | | | | | | | |
| Cash | | | | | | | | | $ | 177,493 |
| | $ | — |
|
| | | | | | | | | | | | |
| Level 1: | | | | | | | | | | | |
| Money market funds | | | | | | | 15,661 |
| | 15,661 |
| | — |
|
| U.S. Treasury securities | 139,705 |
| | 13 |
| | — |
| | 139,718 |
| | 78,565 |
| | 61,153 |
|
| Total Level 1 | 155,366 |
| | 13 |
| | — |
| | 155,379 |
| | 94,226 |
| | 61,153 |
|
| | | | | | | | | | | | |
| Total | $ | 155,366 |
| | $ | 13 |
| | $ | — |
| | $ | 155,379 |
| | $ | 271,719 |
| | $ | 61,153 |
|
|
| | | | | | | | | | | | | | | | |
| | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| At December 31, 2015 | | | | | | | | |
| U.S. non-qualified deferred compensation plan | | $ | 14,145 |
| | $ | — |
| | $ | — |
| | $ | 14,145 |
|
| Assets designated for retirement and pension plans | | — |
| | 18,164 |
| | — |
| | 18,164 |
|
| Pension benefit obligation | | — |
| | (22,388 | ) | | — |
| | (22,388 | ) |
| Acquisition earnout accruals | | — |
| | — |
| | (12,033 | ) | | (12,033 | ) |
| | | $ | 14,145 |
| | $ | (4,224 | ) | | $ | (12,033 | ) | | $ | (2,112 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value | | Balance Sheet Classification |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Marketable Securities |
| Balance at December 31, 2018 | | | | | | | | | | | |
| Cash | | | | | | | | | $ | 279,829 |
| | $ | — |
|
| | | | | | | | | | | | |
| Level 1: | | | | | | | | | | | |
| Money market funds |
| |
| |
| | 77 |
| | 77 |
| | — |
|
| | | | | | | | | | | | |
| Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | 77 |
| | $ | 279,906 |
| | $ | — |
|
Investments, Assets Designated for Retirement and Pension Plans and Associated Liabilities
The Company has a U.S. non-qualified deferred compensation plan that consists primarily of U.S. marketable securities and mutual funds. The aggregate cost basis for these investments was $17.2 million and $14.6 million as of December 31, 2019 and December 31, 2018, respectively.
The Company also maintains a pension plan for certain current and former employees in Germany. The pensions are individually fixed Euro amounts that vary depending on the function and the eligible years of service of the employee. The Company’s investment strategy is to support its pension obligations through reinsurance contracts. The BaFin—German Federal Financial Supervisory Authority—supervises the insurance companies and the reinsurance contracts. The BaFin requires each reinsurance contract to guarantee a fixed minimum return. The Company’s pension benefits are fully reinsured by group insurance contracts with ERGO Lebensversicherung AG, and the group insurance contracts are measured in accordance with BaFin guidelines (including mortality tables and discount rates) which are considered Level 2 inputs.
The following tables provide a summary of the fair value measurements for each major category of investments, assets designated for retirement and pension plans and associated liabilities measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Balance Sheet Classification |
| | | Fair Value | | Other Current Assets | | Assets Designated for Retirement and Pension Plans | | Investments | | Other Current Liabilities | | Retirement and Pension Plans |
| Balance at December 31, 2019 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Level 1: | | | | | | | | | | | | |
| U.S. non-qualified deferred compensation plan | | $ | 25,409 |
| | $ | — |
| | $ | — |
| | $ | 25,409 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | |
| Level 2: | | | | | | | | | | | | |
| Retirement and pension plan assets | | 15,296 |
| | 1,318 |
| | 13,978 |
| | — |
| | — |
| | — |
|
| Pension benefit obligation | | (20,918 | ) | | — |
| | — |
| | — |
| | (1,318 | ) | | (19,600 | ) |
| Total Level 2 | | (5,622 | ) | | 1,318 |
| | 13,978 |
| | — |
| | (1,318 | ) | | (19,600 | ) |
| | | | | | | | | | | | | |
| Total | | $ | 19,787 |
| | $ | 1,318 |
| | $ | 13,978 |
| | $ | 25,409 |
| | $ | (1,318 | ) | | $ | (19,600 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Balance Sheet Classification |
| | | Fair Value | | Other Current Assets | | Assets Designated for Retirement and Pension Plans | | Investments | | Other Current Liabilities | | Retirement and Pension Plans |
| Balance at December 31, 2018 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Level 1: | | | | | | | | | | | | |
| U.S. non-qualified deferred compensation plan | | $ | 19,442 |
| | $ | — |
| | $ | — |
| | $ | 19,442 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | |
| Level 2: | | | | | | | | | | | | |
| Retirement and pension plan assets | | 16,384 |
| | 1,349 |
| | 15,035 |
| | — |
| | — |
| | — |
|
| Pension benefit obligation | | (20,908 | ) | | — |
| | — |
| | — |
| | (1,349 | ) | | (19,559 | ) |
| Total Level 2 | | (4,524 | ) | | 1,349 |
| | 15,035 |
| | — |
| | (1,349 | ) | | (19,559 | ) |
| | | | | | | | | | | | | |
| Total | | $ | 14,918 |
| | $ | 1,349 |
| | $ | 15,035 |
| | $ | 19,442 |
| | $ | (1,349 | ) | | $ | (19,559 | ) |
Contingent Consideration
The former owners of the entities acquired by the Company are eligible to receive additional cash consideration based on the attainment of certain operating metrics in the periods subsequent to acquisition. Contingent consideration is valued using significant inputs that are not observable in the market which are defined as Level 3 inputs pursuant to fair value measurement accounting. The Company determines the fair value of contingent consideration using discounted cash flow models. As of December 31, 2019, all contingent consideration accruals are recorded within Other current liabilities on the Consolidated Balance Sheets.
The following table provides a reconciliation of the beginning and ending balance of Level 3 assets and liabilities for the year ended December 31, 2016.2019:
|
| | | | | |
| | | | Acquisition
Earnout
Accruals |
| Balance at December 31, 2015 | | | $ | (12,033 | ) |
| Acquisition earnouts (Note 7) | | | (6,051 | ) |
| Co Company earnout amendment (Note 7) | | | (577 | ) |
| Earnout accretion | | | (635 | ) |
| Earnout payments | | | 7,461 |
|
| Foreign currency translation | | | 844 |
|
| Balance at December 31, 2016 | | | $ | (10,991 | ) |
|
| | | | |
| | | Acquisition
Earnout
Accruals |
| Balance at December 31, 2018 | | $ | (6,627 | ) |
| Earnout accretion | | (668 | ) |
| Earnout payments | | 3,009 |
|
| Earnout adjustment | | (1,062 | ) |
| Foreign currency translation | | 70 |
|
| Balance at December 31, 2019 | | $ | (5,278 | ) |
The Level 2 assets above are reinsurance contracts fair valued in accordance with BaFin - German Federal Financial Supervisory Authority guidelines, which utilize observable inputs including mortality tables and discount rates. The Level 3 liabilities are accruals for future earnout payments related to current year and prior acquisitions, the values of which are determined based on discounted cash flow models. The Company considers the recorded value of its financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, and accounts payable, to approximate the fair value of the respective assets and liabilities at December 31, 2016 and December 31, 2015 based upon the short-term nature of the assets and liabilities.
Philosophy IB, LLP2Get Holdings Limited
OnIn September 1, 2016,2019, the Company acquired 2GET Holdings Limited ("2GET"), a Brazil-based provider of executive search services, and its wholly owned subsidiaries. Under the terms of the purchase agreement, the Company paid $5.2 million of initial consideration for substantially all of the assetsoutstanding equity of Philosophy IB, LLP ("Philosophy IB"), a New Jersey-based leadership, organization development and management consulting firm for $6.0 million, which2GET. The acquisition was funded with $4.1 million of existing cash at closing and $1.1 million of the Company's common stock transferred in October 2019. The common stock transferred as consideration was reissued from existing cash.the Company's treasury stock. The former owners of Philosophy IB are eligible to receive an additional cash consideration based on two components: achieving revenue milestones generated from its software products from September 2016 through August 2019 and percentage of consulting revenue achieved over the period September 2016 to August 2019, subject to a profitability test. When estimating the value of future cash consideration, the Company has accrued $1.1 million as of December 31, 2016. The Company recognized $0.1 million of accretion expense included in General and administrativeexpenses during the twelve months ended December 31, 2016. The Company recorded $2.9 million of intangible assets and $2.4 million of goodwill. The goodwill is primarily related to the acquired workforce and strategic fit. As of the acquisition date, the Company expects that approximately $1.3 million of goodwill will be deductible for tax purposes.
JCA Group Limited
On August 4, 2016, the Company acquired JCA Group Limited ("JCA Group"), a UK-based provider of executive search, succession planning and coaching services, and, from the partners thereof, the entire partnership interest in JCA Partners LLP for £11.2 million (equivalent to $14.9 million at the acquisition date and $13.8 million at December 31, 2016) of initial consideration, which was funded from existing cash. The former owners of JCA Group2GET are eligible to receive additional cash consideration, uponwhich the realizationCompany estimates to be between $5.0 million and $15.0 million, based on the achievement of specificcertain revenue and EBITDA milestones achieved overfor the period August 2016from acquisition through August 2018. When estimating the value of2023. The additional consideration is linked to future cash consideration,service with the Company has accrued £2.7 million (equivalent to $3.3 million)and is accounted for as of December 31, 2016. The Company recognized less than $0.1 million of accretion expense included in General and administrative expenses during the twelve months ended December 31, 2016.compensation expense. The Company recorded $3.9$0.7 million of intangible assets, consisting of the trade name of $0.4 million and $15.8customer relationships of $0.3 million, $3.8 million of goodwill.
net working capital. The goodwill is primarily related to the acquired workforce and strategic fit. The Company will not be able to deduct the recorded goodwill for tax purposes.
Decision Strategies International, Inc.Amrop A/S
On February 29, 2016,In January 2018, the Company acquired substantially all of the assets of Decision Strategies International, Inc.Amrop A/S ("DSI"Amrop"), a Pennsylvania-based business consulting firm and its wholly owned subsidiary, Decision Strategies International (UK) Limited. DSI specializes in advising organizations and institutionsDenmark-based provider of executive search services for 24.3 million Danish Kroner (equivalent to $3.9 million on strategic planning and decision making in uncertain operating environments, leadership development and talent strategy. Total consideration for the acquisition date) of DSI's assets was approximately $9.0 million andinitial consideration which was funded from existing cash. The former owners of DSIAmrop are eligibleexpected to receive an additional cash consideration payment in 2019 based on fee revenue targets to be achieved in 2017 and 2018.generated during the two-year period following the completion of the acquisition. When estimating the value of future cash consideration, the Company has accrued $1.7$5.3 million as of December 31, 2016. The Company recognized $0.3 million of accretion expense included in General and administrative expenses during the twelve months ended December 31, 2016.2019. The Company recorded $3.2$1.7 million of intangible assets related to customer relationships and $5.7$5.5 million of goodwill. The goodwill is primarily related to the acquired workforce and strategic fit. As of the acquisition date, the Company expects that approximately $4.2 million of goodwill will be deductible for tax purposes.
Co Company Limited
On October 1, 2015, the Company acquired Co Company, a UK-based management consulting firm that specializes in Organizational Development for £7.1 million (equivalent to $10.8 million at the acquisition date and $8.8 million at December 31, 2016) of initial consideration, pursuant to a stock purchase, which was funded from existing cash. The former owners of Co Company are eligible to receive additional cash consideration upon the realization of specific revenue and EBITDA Margin milestones achieved over the period October 1, 2015 through December 2018. On August 25, 2016, the Company and the former owners of Co Company entered into a Deed of Amendment (the "Amendment") to the Share Purchase Agreement dated October 1, 2015. The Amendment adjusts the target fee revenue and targeted EBITDA margin for each remaining earn out period taking into consideration the unanticipated acquisitions completed subsequent to the Share Purchase Agreement. The new targets include subsequent acquisitions and take effect retrospectively from January 1, 2016. When estimating the fair value of future cash consideration, the Company has accrued £3.2 million and £2.8 million (equivalent to $3.9 million and $4.2 million) as of December 31, 2016 and December 31, 2015, respectively, of which $0.2 million was paid during 2016. As a result of the Amendment and related adjustment of the earnout liability, the Company recognized $0.1 million of income in General and administrative expenses during the year ended December 31, 2016. The Company recognized $0.1 million of expense in General and administrative expenses during the year ended December 31, 2015. The Company recorded $2.9 million of intangible assets and $10.7 million of goodwill. The goodwill is primarily related to the acquired workforce and strategic fit. The Company will not be able to deduct the recorded goodwill for tax purposes.
Scambler MacGregor Executive Search Pty Limited
In November 2013, the Company acquired Scambler MacGregor, an Australian-based retained Executive Search boutique in the financial services industry for 1.1 million Australian dollars (equivalent to $1.0 million at the acquisition date and $0.8 million at December 31, 2016) of initial consideration, pursuant to a stock purchase, which was funded from existing cash. In December 2013, the Company paid an additional $0.1 million related to the final working capital settlement. The former owners of Scambler MacGregor are eligible to receive earnout payments of up to 2.8 million Australian dollars (equivalent to $2.1 million as of December 31, 2016) based on the achievement of certain revenue metrics over the period November 2013 through December 2018, of which $0.4 million and $0.7 million were paid during the first quarters of 2016 and 2015 respectively. When estimating the fair value of future earnout payments, the Company has accrued 1.1 million Australian dollars and 1.6 million Australian dollars, equivalent to $0.8 million and $1.2 million as of December 31, 2016 and 2015, respectively. The Company also recorded $0.4 million of intangible assets and $2.7 million of goodwill. The goodwill is primarily related to the acquired workforce and strategic fit. The Company will not be able to deduct the recorded goodwill for tax purposes.
Senn-Delaney Leadership Consulting Group, LLC
In December 2012, the Company acquired Senn-Delaney Leadership Consulting Group, LLC, a global leader of corporate culture shaping. Under the terms of the purchase agreement, the Company paid $53.5 million at closing for 100 percent of the equity of Senn Delaney. The agreement also included additional cash consideration up to $15.0 million based on the realization of specific earnings milestones achieved over the period December 2012 through December 2015, of which $6.8 million, $4.8 million and $3.4 million was paid in 2016, 2015 and 2014, respectively. The Company had accrued $6.6 million at December 31, 2015 for the remaining cash consideration, which was paid during the year ended December 31, 2016. The
Company has recognized $0.2 million and $1.1 million of accretion expense included in General and administrative expenses for the years ended December 31, 2016 and 2015, respectively. The Company recognized $2.1 million of compensation expense included in Salaries and employee benefits for the year ended December 31, 2015 related to the retention awards. As of the acquisition date, the Company expects that approximately $19.1 million of goodwill will be deductible for tax purposes.
| |
8.9. | Goodwill and Other Intangible Assets |
Goodwill
The Company's goodwill by segment is as follows: |
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Executive Search | | | |
| Americas | $ | 92,497 |
| | $ | 88,410 |
|
| Europe | 25,579 |
| | 24,924 |
|
| Asia Pacific | 8,755 |
| | 8,758 |
|
| Total Executive Search | 126,831 |
| | 122,092 |
|
| Heidrick Consulting | 36,257 |
| | 36,257 |
|
| Goodwill, gross | 163,088 |
| | 158,349 |
|
| Accumulated impairment | (36,257 | ) | | (36,257 | ) |
| Goodwill, net | $ | 126,831 |
| | $ | 122,092 |
|
Changes in the carrying amount of goodwill by segment for the years ended December 31, 2016, 20152019, 2018, and 20142017 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Executive Search | | | | | | |
| | | Americas | | Europe | | Asia Pacific | | Leadership Consulting | | Culture
Shaping | | Total |
| Gross goodwill at December 31, 2013 | | $ | 82,640 |
| | $ | 23,507 |
| | $ | 10,854 |
| | $ | — |
| | $ | 29,780 |
| | $ | 146,781 |
|
| Exchange rate fluctuations | | (370 | ) | | — |
| | (599 | ) | | — |
| | (129 | ) | | (1,098 | ) |
| Gross goodwill at December 31, 2014 | | 82,270 |
| | 23,507 |
| | 10,255 |
| | — |
| | 29,651 |
| | 145,683 |
|
| Co Company acquisition | | — |
| | 10,745 |
| | — |
| | — |
| | — |
| | 10,745 |
|
| Exchange rate fluctuations | | (644 | ) | | — |
| | (1,044 | ) | | — |
| | (111 | ) | | (1,799 | ) |
| Gross goodwill at December 31, 2015 | | 81,626 |
| | 34,252 |
| | 9,211 |
| | — |
| | 29,540 |
| | 154,629 |
|
| DSI acquisition | | 5,673 |
| | — |
| | — |
| | — |
| | — |
| | 5,673 |
|
| Philosophy IB acquisition | | 2,357 |
| | — |
| | — |
| | — |
| | — |
| | 2,357 |
|
| JCA acquisition | | — |
| | 15,769 |
| | — |
| | — |
| | — |
| | 15,769 |
|
| Segment reallocation (1) | | (1,670 | ) | | (4,517 | ) | | (347 | ) | | 6,534 |
| | — |
| | — |
|
| Exchange rate fluctuations | | 115 |
| | (2,905 | ) | | 29 |
| | — |
| | (316 | ) | | (3,077 | ) |
| Gross goodwill at December 31, 2016 | | 88,101 |
| | 42,599 |
| | 8,893 |
| | 6,534 |
| | 29,224 |
| | 175,351 |
|
| Accumulated goodwill impairment | | — |
| | (23,507 | ) | | — |
| | — |
| | — |
| | (23,507 | ) |
| Net goodwill at December 31, 2016 | | $ | 88,101 |
| | $ | 19,092 |
| | $ | 8,893 |
| | $ | 6,534 |
| | $ | 29,224 |
| | $ | 151,844 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Executive Search | | | | |
| | | Americas | | Europe | | Asia Pacific | | Heidrick Consulting | | Total |
| Balance as of December 31, 2016 | | | | | | | | | | |
| Goodwill | | $ | 88,101 |
| | $ | 19,092 |
| | $ | 8,893 |
| | $ | 35,758 |
| | $ | 151,844 |
|
| Accumulated impairment | | — |
| | — |
| | — |
| | — |
| | — |
|
| Goodwill, net as of December 31, 2016 | | 88,101 |
| | 19,092 |
| | 8,893 |
| | 35,758 |
| | 151,844 |
|
| Philosophy IB acquisition | | 357 |
| | — |
| | — |
| | 7 |
| | 364 |
|
| Foreign currency translation | | 232 |
| | 1,808 |
| | 409 |
| | 492 |
| | 2,941 |
|
| Impairment | | — |
| | — |
| | — |
| | (36,257 | ) | | (36,257 | ) |
| Goodwill, net as of December 31, 2017 | | 88,690 |
| | 20,900 |
| | 9,302 |
| | — |
| | 118,892 |
|
| Amrop acquisition | | — |
| | 5,478 |
| | — |
| | — |
| | 5,478 |
|
| Foreign currency translation | | (280 | ) | | (1,454 | ) | | (544 | ) | | — |
| | (2,278 | ) |
| Goodwill, net as of December 31, 2018 | | 88,410 |
| | 24,924 |
| | 8,758 |
| | — |
| | 122,092 |
|
| 2GET acquisition | | 3,793 |
| | — |
| | — |
| | — |
| | 3,793 |
|
| Foreign currency translation | | 294 |
| | 655 |
| | (3 | ) | | — |
| | 946 |
|
| Goodwill, net as of December 31, 2019 | | $ | 92,497 |
| | $ | 25,579 |
| | $ | 8,755 |
| | $ | — |
| | $ | 126,831 |
|
(1) DueIn September 2019, the Company acquired 2GET and included $3.8 million of goodwill related to the Company's change in segment reporting, goodwill amounts includedacquisition in the Company's Americas Europe and Asia Pacific segments in the prior year have been reallocated to the Leadership Consulting segment utilizing the relative fair value method.segment.
During the 20162019 fourth quarter, the Company conducted its annual goodwill impairment evaluation as of October 31, 2016.2019 in accordance with ASU No. 2017-04, Intangibles - Goodwill and Other. The goodwill impairment evaluationtest is performed using a two-step, fair value based test. The first step comparescompleted by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The second step measures theamount. An impairment charge and is performed only ifrecognized for the amount by which the carrying amountvalue of athe reporting unit exceeds its fair value as determined in step one. To measurevalue; however, the amount ofloss recognized is not to exceed the impairment loss, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as thetotal amount of goodwill recognized in a business combination.allocated to that reporting unit.
The impairment test is considered for each of the Company’s reporting units that havehas goodwill as defined in the accounting standard for goodwill and intangible assets. The Company has historically operatedoperates four reporting units: the Americas;Americas, Europe which(which includes Africa;Africa), Asia Pacific which(which includes the Middle East;East) and Culture Shaping. DuringHeidrick Consulting. As of October 31, 2019, only the fourth quarter of 2016, the Company revised its reporting unit structure based on the manner in which the Company's chief operating decision maker allocates resourcesAmericas, Europe and assesses performance. Under the revised reporting unit structure, the Company operates five reporting units: Americas Executive Search; Europe Executive Search, which includes Africa; Asia Pacific Executive Search, which includes the Middle East; Leadership Consulting; and Culture Shaping. As a result of the change in reporting units the Company conducted it's annual impairment evaluation for both the former and revised reporting unit structures as required by the accounting standard for goodwill and intangible assets.had recorded goodwill.
During the impairment evaluation process, the Company used a discounted cash flow methodology to estimate the fair value of each of its reporting units.units with goodwill. The discounted cash flow approach is dependent on a number of factors, including estimates of future market growth and trends, forecasted revenue and costs, capital investments, appropriate discount rates, certain assumptions to allocate shared costs, assets and liabilities, historical and projected performance of the Company’s reporting units, the outlook for the executive search industry,unit and the macroeconomic conditions affecting each of the Company’s reporting units.
The assumptions used in the determination of fair value were (1) a forecast of growth in the near and long term; (2) the discount rate; (3) working capital investments; and (4) other factors. As a result of the reporting unit structure change, the Company revised its historical methodology for allocating corporate costs to the reporting units for goodwill impairment purposes to more closely align with the Company's allocation methodology for financial reporting purposes and reflect estimated consumption.
Based on the resultresults of the first step of this goodwill impairment analysis, the fair values of the Americas, Europe, and Asia Pacific and Culture Shaping reporting units under the old reporting unit structure exceeded their carrying values by118%, 68%, 38%, and 5%, respectively. Under the new reporting unit structure, the result of the first step of this goodwill impairment analysis indicated the fair values of the Americas Executive Search, Europe Executive Search, Asia Pacific Executive Search, Leadership Consulting and Culture Shaping reporting units exceeded their carrying values by 124%329%, 69%, 34%,46%21% and 5%30%, respectively. The fair value
During the twelve months ended December 31, 2017, the Company determined that the goodwill within the former Culture Shaping and Leadership Consulting reporting units was impaired, which resulted in impairment charges of a reporting unit may deteriorate$29.3 million and could result in$6.9 million, respectively, to write off all of the need to record an impairment charge in future periods. The Company continues to monitor potential triggering events including changes in the business climate in which it operates, the Company’s market capitalization compared to its book value, and the Company’s recent operating performance. Any changes in these factors could result in an impairment charge. Since the fair valuegoodwill associated with each of the reporting units exceeded their carrying values,units. The impairment charges are recorded within Impairment charges in the second stepCondensed Consolidated Statements of Comprehensive Income (Loss) for the twelve months ended December 31, 2017. The impairments were non-cash in nature and did not affect our current liquidity, cash flows, borrowing capability or operations, nor did they impact the debt covenants under our credit agreement. Effective January 1, 2018, the Company completed its integration of the goodwill impairment test was not necessary.Culture Shaping and Leadership Consulting reporting units into the newly created Heidrick Consulting reporting unit.
Other Intangible Assets, net
The Company’s other intangible assets, net, by segment, are as follows:
| | | | | December 31, 2016 | | December 31, 2015 | | | | | |
| | | | | (As adjusted) | | December 31, 2019 | | December 31, 2018 |
| Executive Search | | | | | | | | |
| Americas | | $ | 501 |
| | $ | 764 |
| | $ | 557 |
| | $ | 52 |
|
| Europe (1) | | 2,937 |
| | — |
| |
| Europe | | | 1,314 |
| | 2,086 |
|
| Asia Pacific | | 127 |
| | 209 |
| | 64 |
| | 78 |
|
| Total Executive Search | | 3,565 |
| | 973 |
| | 1,935 |
| | 2,216 |
|
| Leadership Consulting (1) | | 6,223 |
| | 2,548 |
| |
| Culture Shaping | | 10,902 |
| | 15,166 |
| |
| Heidrick Consulting | | | — |
| | — |
|
| Total Other Intangible Assets, Net | | $ | 20,690 |
| | $ | 18,687 |
| | $ | 1,935 |
| | $ | 2,216 |
|
(1) Due toIn September 2019, the Company's change in segment reporting,Company acquired 2GET and recorded customer relationships and trade name intangible assets included in the Company's Europe Executive SearchAmericas segment of $0.3 million and $0.4 million, respectively.
During the twelve months ended December 31, 2017, the Company determined that the intangible assets within the Culture Shaping and Leadership Consulting segmentreporting units were impaired, which resulted in impairment charges of $9.9 million and $4.6 million, respectively, to write off all intangible assets associated with each reporting unit. The impairment charges are recorded within Impairment charges in the prior year have been reallocated toCondensed Consolidated Statement of Comprehensive Income (Loss) for the Leadership Consulting segment.twelve months ended December 31, 2017. The impairment charges were non-cash in nature and did not affect current liquidity, cash flows, borrowing capability or operations, nor did they impact the debt covenants under our credit agreement.
The carrying amount of amortizable intangible assets and the related accumulated amortization were as follows:
| | | | | | | December 31, 2016 | | December 31, 2015 | | | | December 31, 2019 | | December 31, 2018 |
| | | Weighted
Average
Life (in
years) | | Gross Carrying Amount | | Accumulated Amortization | | Net
Carrying
Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted
Average
Life (in
years) | | Gross Carrying Amount | | Accumulated Amortization | | Net
Carrying
Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Client relationships | | 8.1 | | $ | 33,299 |
| | $ | (21,653 | ) | | $ | 11,646 |
| | $ | 25,414 |
| | $ | (17,550 | ) | | $ | 7,864 |
| | 6.6 | | $ | 16,302 |
| | $ | (14,683 | ) | | $ | 1,619 |
| | $ | 15,910 |
| | $ | (13,694 | ) | | $ | 2,216 |
|
| Trade name | | 14.3 | | 9,436 |
| | (4,465 | ) | | 4,971 |
| | 9,251 |
| | (3,416 | ) | | 5,835 |
| | 5.0 | | 362 |
| | (46 | ) | | 316 |
| | — |
| | — |
| | — |
|
| Software | | 7.0 | | 7,200 |
| | (4,114 | ) | | 3,086 |
| | 7,200 |
| | (3,086 | ) | | 4,114 |
| |
| Non-compete | | 4.4 | | 974 |
| | (423 | ) | | 551 |
| | 586 |
| | (117 | ) | | 469 |
| |
| Technology | | 5.0 | | 604 |
| | (168 | ) | | 436 |
| | 442 |
| | (37 | ) | | 405 |
| |
| Total intangible assets | | 9.3 | | $ | 51,513 |
| | $ | (30,823 | ) | | $ | 20,690 |
| | $ | 42,893 |
| | $ | (24,206 | ) | | $ | 18,687 |
| | 6.3 | | $ | 16,664 |
| | $ | (14,729 | ) | | $ | 1,935 |
| | $ | 15,910 |
| | $ | (13,694 | ) | | $ | 2,216 |
|
Intangible asset amortization expense for the years ended December 31, 2016, 20152019, 2018 and 20142017, was $7.1$0.9 million, , $4.9$1.5 million and $5.5$4.4 million, respectively.
The Company's estimated future amortization expense related to intangible assets as of December 31, 20162019 for the years ended December 31st is as follows:
| | | 2017 | $ | 6,759 |
| |
| 2018 | 4,978 |
| |
| 2019 | 3,589 |
| |
| 2020 | 1,859 |
| $ | 798 |
|
| 2021 | 1,045 |
| 507 |
|
| 2022 | | 319 |
|
| 2023 | | 188 |
|
| 2024 | | 76 |
|
| Thereafter | 2,460 |
| 47 |
|
| Total | $ | 20,690 |
| $ | 1,935 |
|
| |
9.10. | Other Current Assets and Non-Current Liabilities |
The components of other current assets are as follows:
|
| | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| Contract assets | | $ | 22,257 |
| | $ | 23,975 |
|
| Other | | 5,591 |
| | 5,623 |
|
| Total other current assets | | $ | 27,848 |
| | $ | 29,598 |
|
The components of other non-current liabilities are as follows:
| | | | | December 31, 2016 | | December 31, 2015 | | December 31, 2019 | | December 31, 2018 |
| Premise related costs | | $ | 18,188 |
| | $ | 17,790 |
| | $ | 2,392 |
| | $ | 15,473 |
|
| Accrued earnout payments | | 8,518 |
| | 788 |
| |
| Other | | 1,582 |
| | 1,269 |
| | 2,242 |
| | 1,950 |
|
| Total other non-current liabilities | | $ | 28,288 |
| | $ | 19,847 |
| | $ | 4,634 |
| | $ | 17,423 |
|
On June 30, 2015,October 26, 2018, the Company entered into a new Credit Agreement (the "2018 Credit Agreement") to replace the Second Amended and Restated Credit Agreement (the “Restated"Restated Credit Agreement”Agreement"). executed on June 30, 2015. The 2018 Credit Agreement provides the Company with a senior unsecured revolving line of credit with an aggregate commitment of $175 million, which includes a sublimit of $25 million for letters of credit, and a $10 million swingline loan sublimit. The agreement also includes a $75 million expansion feature. The 2018 Credit Agreement will mature in October 2023. Borrowings under the 2018 Credit Agreement bear interest at the Company's election of the Alternate Base Rate (as defined in the 2018 Credit Agreement) or Adjusted LIBOR (as defined in the 2018 Credit Agreement) plus a spread as determined by the Company’s leverage ratio.
Borrowings under the 2018 Credit Agreement may be used for working capital, capital expenditures, Permitted Acquisitions (as defined in the 2018 Credit Agreement) and for other general purposes of the Company and its subsidiaries. The obligations under the 2018 Credit Agreement are guaranteed by certain of the Company's subsidiaries.
The Company capitalized approximately $1.0 million of loan acquisition costs related to the 2018 Credit Agreement, which will be amortized over the remaining term of the agreement.
Before October 26, 2018, the Company was party to its Restated Credit Agreement. The Restated Credit agreement amended and restated the Credit Agreement executed on June 22, 2011 (the “Credit Agreement”). Pursuant to the Restated Credit Agreement, the Company replaced its Revolving Facility and Term Facility (“Existing Facility”) withprovided a single senior unsecured revolving line of credit with an aggregate commitment of up to $100 million, which includes a sublimit of $25 million for letters of credit, and a $50 million expansion feature (the “Replacement Facility”). The Replacement Facility will mature on June 30, 2020. Borrowings under the Restated Credit Agreement bearbore interest at the Company’s election atof the existing Alternate Base Rate (as defined in the Restated Credit Agreement) or Adjusted LIBOR Rate (as defined in the Restated Credit Agreement) plus a spread as determined by the Company’s leverage ratio.
Borrowings
During the three months ended March 31, 2018, the Company borrowed $20 million under the Replacement Facility may be used for working capital, capital expenditures, Permitted Acquisition (as defined inRestated Credit Agreement and elected the Credit Agreement)Adjusted LIBOR Rate. The Company subsequently repaid $8 million during the three months ended March 31, 2018 and for other general purposes of$12 million during the three months ended June 30, 2018.
During the three months ended March 31, 2017, the Company and its subsidiaries. The obligationsborrowed $40 million under the Replacement Facility are guaranteed by certain ofRestated Credit Agreement and elected the Company's subsidiaries.Adjusted LIBOR rate. The Company subsequently repaid $15 million during the three months ended March 31, 2017 and $25 million during the three months ended June 30, 2017.
As of December 31, 20162019, and 2015,2018, the Company had no outstanding borrowings under the Restated2018 Credit Agreement and theAgreement. The Company was in compliance with the financial and other covenants under the Restated2018 Credit Agreement and no event of default existed.
On March 8, 2017, the Company borrowed $40.0 million under the Restated Credit Agreement and elected the Adjusted LIBOR Rate.
| |
11.12. | Employee Benefit Plans |
Qualified Retirement Plan
The Company has a defined contribution retirement plan (the “Plan”) for all eligible employees in the United States. Eligible employees may begin participating in the Plan upon their hire date. The Plan contains a 401(k) provision, which provides for employee pre-tax and/or after-tax contributions, from 1% to 50% of their eligible compensation up to a combined maximum permitted by law. The Company matched employee contributions on a dollar for dollardollar-for-dollar basis per participant up to the greater of $6,000, or 6.0%, of eligible compensation for the yearyears ended December 31, 2016. The Company matched employee contributions up to the greater of $5,500, or 5.5%, of eligible compensation for the year ended December 31, 2015,2019, 2018 and up to the greater of $5,000, or 5.0%, of eligible compensation for the year ended December 31, 2014. Beginning in 2016, employees2017. Employees are eligible for the Company match immediately provided that they are working on the last day of the Plan year in which the match is made. Previously, employees were eligible for the Company match after satisfying a one year service requirement provided that they were working on the last day of the Plan year in which the match was made. The Plan also provides for employees who retire, die or become disabled during the Plan year to receive the Company match for that Plan year. The Plan
provides that forfeitures will be used to reduce the Company’s contributions. Forfeitures are created annually by participants who terminate employment before becoming entitled to the Company’s matching contribution under the Plan. The Company also has the option of making discretionary contributions. There were no discretionary contributions made for the years ended December 31, 2016, 20152019, 2018 and 2014.2017. The expense that the Company incurred for matching employee contributions for the years ended December 31, 2016, 20152019, 2018 and 20142017, was $4.8$6.3 million, $3.3$5.7 million and $2.8$5.6 million, respectively.
The Company maintains additional retirement plans in the Americas, Europe and Asia Pacific regions which the Company does not consider as material, and, therefore additional disclosure has not been presented. The balances associated with these plans have been reported in the Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014 and in the Consolidated Balance Sheets as of December 31, 2016 and 2015.
Deferred Compensation Plans
The Company has a deferred compensation plan for certain U.S. employees (the “U.S. Plan”) that became effective on January 1, 2006. The U.S. Plan allows participants to defer up to 25% of their base compensation and up to the lesser of $500,000 or 25% of their eligible bonus compensation into several different investment vehicles. These deferrals are immediately vested and are not subject to a risk of forfeiture. In 20162019 and 2015,2018, all deferrals in the U.S. Plan were funded. The compensation deferred in the U.S. Plan was $14.9$23.8 million and $12.0$18.3 million at December 31, 20162019 and 2015,2018, respectively. The assets of the U.S. Plan are included in Investments and the liabilities of the U.S. Plan are included in Retirement and pension plans in the Consolidated Balance Sheets as of December 31, 20162019 and 2015.2018.
The Company has a Non-Employee Directors Voluntary Deferred Compensation Plan whereby non-employee members of the Company’s Board of Directors may elect to defer up to 100% of the cash component of their directors’ fees into several different investment vehicles. As of December 31, 20162019 and 2015,2018, the total amounts deferred under the plan were $2.4$1.6 million and $2.1$1.1 million, respectively, all of which waswere funded. The assets of the plan are included in Investments and the liabilities of the plan are included in Retirement and pension plans in the Consolidated Balance Sheets at December 31, 20162019 and 2015.2018.
The U.S. and Non-Employee Directors Voluntary Deferred Compensation Plans consist primarily of marketable securities and mutual funds, all of which are valued using Level 1 inputs (See Note 6,7, Financial Instruments and Fair Value Measurements).
| |
12.13. | Pension Plan and Life Insurance Contract |
The Company maintains a pension plan for certain current and former employees in Germany. The pensions are individually fixed Euro amounts that vary depending on the function and the eligible years of service of the employee.
| | | | | 2016 | | 2015 | | 2019 | | 2018 |
| Benefit obligation at January 1, | | $ | 22,388 |
| | $ | 26,985 |
| | $ | 20,908 |
| | $ | 23,886 |
|
| Interest cost | | 453 |
| | 436 |
| | 338 |
| | 373 |
|
| Actuarial (gain) loss | | 1,178 |
| | (1,052 | ) | | 1,506 |
| | (886 | ) |
| Benefits paid | | (1,198 | ) | | (1,244 | ) | | (1,375 | ) | | (1,450 | ) |
| Cumulative translation adjustment | | (693 | ) | | (2,737 | ) | | (459 | ) | | (1,015 | ) |
| Benefit obligation at December 31, | | $ | 22,128 |
| | $ | 22,388 |
| | $ | 20,918 |
| | $ | 20,908 |
|
The benefit obligation amounts recognized in the Consolidated Balance Sheets are as follows:
|
| | | | | | | | |
| | | December 31, |
| | | 2016 | | 2015 |
| Current liabilities | | $ | 1,281 |
| | $ | 1,307 |
|
| Noncurrent liabilities | | 20,847 |
| | 21,081 |
|
| Total | | $ | 22,128 |
| | $ | 22,388 |
|
The accumulated benefit obligation amounts at December 31, 2016 and 2015 are $22.1 million million and $22.4 million million, respectively. |
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Current liabilities | | $ | 1,318 |
| | $ | 1,349 |
|
| Noncurrent liabilities | | 19,600 |
| | 19,559 |
|
| Total | | $ | 20,918 |
| | $ | 20,908 |
|
The components of and assumptions used to determine the net periodic benefit cost are as follows:
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Net period benefit cost: | | | | | | | | | | | | |
| Interest cost | | $ | 453 |
| | $ | 436 |
| | $ | 799 |
| | $ | 338 |
| | $ | 373 |
| | $ | 362 |
|
| Amortization of net loss | | 17 |
| | 72 |
| | — |
| | 35 |
| | 92 |
| | 111 |
|
| Net periodic benefit cost | | $ | 470 |
| | $ | 508 |
| | $ | 799 |
| | $ | 373 |
| | $ | 465 |
| | $ | 473 |
|
| Weighted average assumptions | | | | | | | | | | | | |
| Discount rate (1) | | 2.15 | % | | 1.82 | % | | 3.25 | % | | 1.71 | % | | 1.64 | % | | 1.49 | % |
| Rate of compensation increase | | — | % | | 1.75 | % | | 1.75 | % | | — | % | | — | % | | — | % |
Assumptions to determine the Company’s benefit obligation are as follows:
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Discount rate (1) | | 1.53 | % | | 2.15 | % | | 1.82 | % | | 1.03 | % | | 1.71 | % | | 1.64 | % |
| Rate of compensation increase | | — | % | | — | % | | 1.75 | % | | — | % | | — | % | | — | % |
| Measurement Date | | 12/31/2016 |
| | 12/31/2015 |
| | 12/31/2014 |
| | 12/31/2019 |
| | 12/31/2018 |
| | 12/31/2017 |
|
| |
| (1) | The discount rates are based on long-term bond indices adjusted to reflect the longer duration of the benefit obligation. |
The amounts in Accumulated other comprehensive income as of December 31, 20162019 and 20152018, that had not yet been recognized as components of net periodic benefit cost were $3.6$4.0 million and $2.5$2.6 million, respectively. As of December 31, 2016, an insignificant amount of the accumulated other comprehensive income is expected to be recognized as a component of net periodic benefit cost in 2017.
The Company’s investment strategy is to support its pension obligations through reinsurance contracts. The BaFin—German Federal Financial Supervisory Authority—supervises the insurance companies and the reinsurance contracts. The BaFin requires each reinsurance contract to guarantee a fixed minimum return. The Company’s pension benefits are fully reinsured by group insurance contracts with ERGO Lebensversicherung AG, and the group insurance contracts are measured in accordance with BaFin guidelines (including mortality tables and discount rates) which are considered Level 2 inputs (See Note 6,7, Financial Instruments and Fair Value Measurements). The fair value at December 31, 20162019 and 20152018, was $17.0 million$15.3 million and $18.2$16.4 million, respectively. The expected contribution to be paid into the plan in 2017 is $1.3 million.
Since the pension assets are not segregated in trust from the Company’s other assets, the pension assets are not shown as an offset against the pension liabilities in the Consolidated Balance Sheets. These assets are included in the Consolidated Balance Sheets at December 31, 20162019 and 2015,2018, as a component of Other current assets and Assets designated for retirement and pension plans.
The benefits expected to be paid in each of the next five years, and in the aggregate for the five years thereafter are as follows:
|
| | | |
| Year ending December 31, | |
| 2017 | $ | 1,281 |
|
| 2018 | 1,274 |
|
| 2019 | 1,266 |
|
| 2020 | 1,255 |
|
| 2021 | 1,241 |
|
| 2022 through 2026 | 5,883 |
|
|
| | | |
| 2020 | $ | 1,318 |
|
| 2021 | 1,305 |
|
| 2022 | 1,288 |
|
| 2023 | 1,269 |
|
| 2024 | 1,245 |
|
| 2025 through 2029 | 5,713 |
|
| |
13.14. | Stock-Based Compensation |
GlobalShare Program
The Company’s 2007 Heidrick & Struggles GlobalShare Program (the “Prior Program”) provided for grants of stock options, stock appreciation rights,Company's Second Amended and other stock-based awards to directors, selected employees, and independent contractors. The Prior Program expired on May 24, 2012. Outstanding awards granted under the Prior Program remain outstanding and subject to the terms of the Prior Program and award agreements until such awards vest, are exercised, terminate or expire
pursuant to their terms. As of December 31, 2016, there were 43,338 awards outstanding under the Prior Program, consisting of 8,877 stock options and 34,461 restricted stock units.
On May 24, 2012, the stockholders of the Company approved theRestated 2012 Heidrick & Struggles GlobalShare Program (the “2012 Program”"2012 Program') at the Company’s Annual Meeting of Stockholders. The 2012 Program provides for grants of stock options, stock appreciation rights and other stock-based awards that are valued based upon the grant date fair value of shares. These awards may be granted to directors, selected employees and independent contractors.
The total number of shares authorized or reserved for issuance under the 2012 Program is 1,300,000 shares (consisting of a number of shares not previously authorized for issuance under any plan, and the number of shares not subject to awards and remaining available for issuance under the Prior Program, as amended on April 2, 2012), plus any shares subject to the 671,528 outstanding awards as of April 2, 2012 under the Prior Program that on or after the effective date cease for any reason to be subject to such awards. Stock awards forfeited or canceled under the Prior Program and the 2012 Program are eligible for reissuance under the 2012 Program.
On May 22, 2014, the stockholders of the Company approved an amendment to the 2012 Program to increase the number of shares of Common Stock reserved for issuance under the 2012 Program by 700,000 shares. As of December 31, 2016, 1,397,410 awards2019, 2,551,441 shares have been issued under the 2012 Program and 1,003,228981,682 shares remain available for future awards, which includes 400,638683,123 forfeited awards.shares. The 2012 Program provides that no awards can be granted after May 24, 2022.2028.
In September 2017, the Company entered into an agreement with its former Chief Executive Officer pursuant to which Mr. Wolstencroft voluntarily agreed, with the concurrence of the Board of Directors, to forfeit 100 percent of his 2017 restricted stock unit and performance stock unit grants totaling 39,352 restricted stock units and 39,352 performance stock units.
Mr. Wolstencroft vested in 41,667 restricted stock units, or 100 percent of his 2014 sign-on restricted stock unit grant, without proration. With respect to his 2015 and 2016 restricted stock unit and performance stock unit grants, Mr. Wolstencroft vested an agreed upon pro-rata portion of the tranches scheduled to vest in 2017 through 2019 (and with the performance goals for performance stock units deemed to have been achieved at target level performance) totaling 9,948 restricted stock units and 50,007 performance stock units, and he agreed to forfeit the remaining portions of such 2015 and 2016 restricted stock unit and performance stock unit awards totaling 28,903 restricted stock units and 26,246 performance stock units.
The Company measures its stock-based compensation costs based on the grant date fair value of the awards and recognizes these costs in the financial statements over the requisite service period.
A summary of information with respect to stock-based compensation is as follows:
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
Salaries and employee benefits | | $ | 5,830 |
| | $ | 4,616 |
| | $ | 3,128 |
| | $ | 12,857 |
| | $ | 9,548 |
| | $ | 4,597 |
|
| General and administrative expenses | | 563 |
| | 450 |
| | 451 |
| | 460 |
| | 562 |
| | 338 |
|
| Income tax benefit related to stock-based compensation included in net income | | 2,523 |
| | 1,856 |
| | 1,444 |
| | 3,529 |
| | 2,674 |
| | 1,948 |
|
(1) Includes $3.0 million and $1.2 million of expense related to cash settled restricted stock units for the years ended December 31, 2019, and 2018, respectively.
Restricted Stock Units
Restricted stock units are generally subject to ratable vesting over a three yearthree-year period. Beginning in 2018, a portion of the Company's restricted stock units are subject to ratable vesting over a four-year period. Compensation expense related to service-based restricted stock units is recognized on a straight-line basis over the vesting period. For awards requiring satisfaction of service and performance conditions, compensation expense is recognized using a graded vesting attribution method.
Restricted stock unit activity as offor the years ended December 31, 2016, 20152019, 2018 and 2014:2017 is as follows:
| | | | | Number of
Restricted
Stock Units | | Weighted-
Average
Grant-date
Fair Value | | Number of
Restricted
Stock Units | | Weighted-
Average
Grant-date
Fair Value |
| Outstanding on December 31, 2013 | | 270,455 |
| | $ | 18.64 |
| |
| Outstanding on December 31, 2017 | | | 491,154 |
| | $ | 21.92 |
|
| Granted | | 295,733 |
| | 18.02 |
| | 297,664 |
| | 34.64 |
| Vested and converted to common stock | | (93,159 | ) | | 19.65 |
| | (199,550 | ) | | 21.66 |
| Forfeited | | (10,312 | ) | | 17.45 |
| | (76,822 | ) | | 25.76 |
| Outstanding on December 31, 2014 | | 462,717 |
| | 18.07 |
| |
| Outstanding on December 31, 2018 | | | 512,446 |
| | 28.83 |
| Granted | | 184,541 |
| | 23.94 |
| | 270,488 |
| | 33.55 |
| Vested and converted to common stock | | (146,307 | ) | | 18.80 |
| | (175,792 | ) | | 24.19 |
| Forfeited | | (27,016 | ) | | 20.74 |
| | (8,154 | ) | | 34.29 |
| Outstanding on December 31, 2015 | | 473,935 |
| | 19.98 |
| |
| Granted | | 207,405 |
| | 22.92 |
| |
| Vested and converted to common stock | | (119,455 | ) | | 20.02 |
| |
| Forfeited | | (24,612 | ) | | 22.81 |
| |
| Outstanding on December 31, 2016 | | 537,273 |
| | 20.97 |
| |
| Outstanding on December 31, 2019 | | | 598,988 |
| | $ | 32.25 |
|
As of December 31, 2016,2019, there was $3.4$11.4 million of pre-tax unrecognized compensation expense related to unvested restricted stock units, which is expected to be recognized over a weighted average of 1.82.5 years.
Performance Stock Units
The Company grants performance stock units to certain of its senior executives. The performance stock units are generally subject to a cliff vesting at the end of a three yearthree-year period. The vesting will vary between 0% - 200% based on the attainment of operating income goals over the three yearthree-year vesting period. The performance stock units are expensed on a straight-line basis over the three yearthree-year vesting period.
In 2014,During the Company granted market-basedyear ended December 31, 2019, performance stock units were granted to the Chief Executive Officer as part of his initial compensation package. The market-based awards vest after a two-year service period and if the pricecertain employees of the Company’s common stock exceeds specified targets.Company, subject to a cliff vesting period of three years and certain other performance conditions. Half of award is based on the achievement of certain operating margin thresholds and half of the award is based on the Company's total shareholder return, relative to a peer group. The fair value of the market-based awards based on total shareholder return was determined using the Monte-Carlo simulation model. A Monte Carlo simulation model uses stock price volatility and other variables to estimate the probability of satisfying the marketperformance conditions and the resulting fair value of the award. Compensation costs related to the market-based awards are recognized regardless of whether the market condition is satisfied, as long as the requisite service has been provided. All of the market-based performance conditions were satisfied such that all 125,000 performance stock units granted to the Chief Executive Officer vested upon the completion of the two year service period in February 2016.
Performance share unit activity as offor the years ended December 31, 2016, 20152019, 2018 and 2014:2017 was as follows:
| | | | | Number of
Performance
Stock Units | | Weighted-
Average
Grant-date
Fair Value | | Number of
Performance
Stock Units | | Weighted-
Average
Grant-date
Fair Value |
| Outstanding on December 31, 2013 | | 61,321 |
| | $ | 19.77 |
| |
| Outstanding on December 31, 2017 | | | 185,891 |
| | $ | 23.82 |
|
| Granted | | 186,705 |
| | 17.19 |
| | 102,138 |
| | 25.81 |
|
| Vested and converted to common stock | | (9,429 | ) | | 27.18 |
| | (43,361 | ) | | 23.64 |
|
| Forfeited | | (9,427 | ) | | 27.18 |
| | (47,551 | ) | | 23.87 |
|
| Outstanding on December 31, 2014 | | 229,170 |
| | 17.06 |
| |
| Outstanding on December 31, 2018 | | | 197,117 |
| | 24.88 |
|
| Granted | | 59,221 |
| | 23.64 |
| | 81,661 |
| | 35.58 |
|
| Vested and converted to common stock | | (13,397 | ) | | 20.62 |
| | (99,219 | ) | | 25.04 |
|
| Forfeited | | (2,970 | ) | | 20.62 |
| | — |
| | — |
|
| Outstanding on December 31, 2015 | | 272,024 |
| | 18.28 |
| |
| Granted | | 125,388 |
| | 22.98 |
| |
| Vested and converted to common stock | | (160,600 | ) | | 15.51 |
| |
| Forfeited | | — |
| | — |
| |
| Outstanding on December 31, 2016 | | 236,812 |
| | 22.64 |
| |
| Outstanding on December 31, 2019 | | | 179,559 |
| | $ | 32.63 |
|
As of December 31, 2016,2019, there was $2.4$3.4 million of pre-tax unrecognized compensation expense related to unvested performance stock units, which is expected to be recognized over a weighted average of 1.91.8 years.
Phantom Stock Units
Phantom stock units are grants of phantom stock with respect to shares of the Company's common stock that are settled in cash and are subject to various restrictions, including restrictions on transferability, vesting and forfeiture provisions. Shares of phantom stock that do not vest for any reason will be forfeited by the recipient and will revert to the Company.
Phantom stock units are subject to vesting over a period of four years and certain other conditions, including continued service to the Company. As a result of the cash-settlement feature of the awards, the Company considers the awards to be liability awards, which are measured at fair value at each reporting date and the vested portion of the award is recognized as a liability to the extent that the service condition is deemed probable. The fair value of the phantom stock awards on the balance sheet date was determined using the closing share price of the Company's common stock on that date and is included within Accrued salaries and benefits - non-current on the Consolidated Balance Sheets.
The Company recorded phantom stock-based compensation expense of $3.0 million and $1.2 million for the years ended December 31, 2019 and December 31, 2018, respectively.
Phantom stock unit activity for the years ended December 31, 2019, 2018, and 2017 was as follows:
|
| | | |
| | Number of
Phantom Stock Units |
| Outstanding on December 31, 2017 | | — |
|
| Granted | | 111,673 |
|
| Vested | | — |
|
| Forfeited | | — |
|
| Outstanding on December 31, 2018 | | 111,673 |
|
| Granted | | 154,387 |
|
| Vested | | — |
|
| Forfeited | | — |
|
| Outstanding on December 31, 2019 | | 266,060 |
|
As of December 31, 2019, there was $5.2 million of pre-tax unrecognized compensation expense related to unvested phantom stock units, which is expected to be recognized over a weighted average of 3.3 years.
| |
14.15. | Changes in Accumulated Other Comprehensive IncomeRestructuring
|
Restructuring Charges
The changes in Accumulated other comprehensive income (“AOCI”) by component forDuring the year ended December 31, 2016 is summarized below:2019, the Company recorded restructuring charges of $4.1 million related to the closing of the Company's legacy Brazil operations due to the acquisition of 2GET (see Note 8, Acquisitions). The restructuring charges
primarily consist of employee-related costs for the Company's legacy Brazil operations. The America's incurred $4.1 million in restructuring charges, while Global Operations Support incurred less than $0.1 million in restructuring charges.
In 2017, the Company recorded restructuring charges of $15.7 million in connection with initiatives to reduce overall costs and improve operational efficiencies. The primary components of the restructuring included: the elimination of two executive officer roles for a flatter leadership structure, a workforce reduction as the firm aligned its support resources to better meet operational needs and recognize synergies with the combination of Leadership Consulting and Culture Shaping, a reduction of the firm’s real estate expenses and support costs by consolidating or closing three of its locations across its global footprint and the acceleration of future expenses under certain contractual obligations.
These charges consisted of $13.1 million of employee-related costs, including severance associated with reductions in our workforce of 251 employees globally, $2.3 million of other professional and consulting fees and $0.3 million of expenses associated with closing three office locations.
Restructuring charges by operating segment for the years ended December 31, were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Available-
for-
Sale
Securities | | Foreign
Currency
Translation | | Pension | | AOCI |
| Balance at December 31, 2015 | | $ | 2,394 |
| | $ | 8,561 |
| | $ | (1,696 | ) | | $ | 9,259 |
|
| Other comprehensive income (loss) before classification, net of tax | | 1,279 |
| | (6,271 | ) | | (1,156 | ) | | (6,148 | ) |
| Amount reclassified from AOCI (1) | | (244 | ) | | — |
| | 455 |
| | 211 |
|
| Net current period other comprehensive income (loss) | | 1,035 |
| | (6,271 | ) | | (701 | ) | | (5,937 | ) |
| Balance at December 31, 2016 | | $ | 3,429 |
| | $ | 2,290 |
| | $ | (2,397 | ) | | $ | 3,322 |
|
|
| | | | | | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 | | 2017 |
| Executive Search | | | | | | |
| Americas | | $ | 4,102 |
| | $ | — |
| | $ | 784 |
|
| Europe | | — |
| | — |
| | 3,993 |
|
| Asia Pacific | | — |
| | — |
| | 2,046 |
|
| Total Executive Search | | 4,102 |
| | — |
| | 6,823 |
|
| Heidrick Consulting | | — |
| | — |
| | 3,393 |
|
| Global Operations Support | | 28 |
| | — |
| | 5,450 |
|
| Total restructuring | | $ | 4,130 |
| | $ | — |
| | $ | 15,666 |
|
Changes in the restructuring accrual for the years ended December 31, 2019, 2018, and 2017 were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Employee Related | | Office Related | | Other | | Total |
| Accrual balance at December 31, 2016 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Restructuring charges | | 13,065 |
| | 308 |
| | 2,293 |
| | 15,666 |
|
| Cash payments | | (1,199 | ) | | (5 | ) | | (1,282 | ) | | (2,486 | ) |
| Non-cash write-offs | | — |
| | (155 | ) | | — |
| | (155 | ) |
| Accrual balance at December 31, 2017 | | 11,866 |
| | 148 |
| | 1,011 |
| | 13,025 |
|
| Cash payments | | (8,689 | ) | | (248 | ) | | (993 | ) | | (9,930 | ) |
| Non-cash write-offs | | — |
| | 195 |
| | — |
| | 195 |
|
| Other | | (1,843 | ) | | (95 | ) | | 5 |
| | (1,933 | ) |
| Exchange rate fluctuations | | (65 | ) | | — |
| | (6 | ) | | (71 | ) |
| Accrual balance at December 31, 2018 | | 1,269 |
| | — |
| | 17 |
| | 1,286 |
|
| Restructuring charges | | 4,130 |
| | — |
| | — |
| | 4,130 |
|
| Cash payments | | (2,213 | ) | | — |
| | — |
| | (2,213 | ) |
| Non-cash write-offs | | — |
| | — |
| | (17 | ) | | (17 | ) |
| Other | | 4 |
| | — |
| | — |
| | 4 |
|
| Exchange rate fluctuations | | 55 |
| | — |
| | — |
| | 55 |
|
| Accrual balance at December 31, 2019 | | $ | 3,245 |
| | $ | — |
| | $ | — |
| | $ | 3,245 |
|
| |
(1) | Available-for-Sale Securities and Pension reclassifications from AOCI are included in Interest, net, Other, net and Salaries and employee benefits, respectively, in the Consolidated Statement of Comprehensive Income.
|
The sources of income (loss) before income taxes are as follows:
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| United States | | $ | 30,696 |
| | $ | 26,550 |
| | $ | 25,956 |
| | $ | 53,461 |
| | $ | 47,191 |
| | $ | (28,577 | ) |
| Foreign | | 7,070 |
| | 5,004 |
| | (1,769 | ) | | 15,828 |
| | 23,301 |
| | (841 | ) |
| Income before income taxes | | $ | 37,766 |
| | $ | 31,554 |
| | $ | 24,187 |
| |
| Income (loss) before income taxes | | | $ | 69,289 |
| | $ | 70,492 |
| | $ | (29,418 | ) |
The provision for (benefit from) income taxes are as follows:
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Current | | | | | | | | | | | | |
| Federal | | $ | 12,261 |
| | $ | 8,598 |
| | $ | 10,997 |
| | $ | 11,311 |
| | $ | 12,311 |
| | $ | 10,107 |
|
| State and local | | 3,219 |
| | 1,697 |
| | 3,141 |
| | 4,422 |
| | 4,843 |
| | 2,372 |
|
| Foreign | | 5,668 |
| | 4,911 |
| | 2,537 |
| | 4,423 |
| | 6,907 |
| | 8,257 |
|
| Current provision for income taxes | | 21,148 |
| | 15,206 |
| | 16,675 |
| | 20,156 |
| | 24,061 |
| | 20,736 |
|
| Deferred | | | | | | | | | | | | |
| Federal | | 727 |
| | (1,551 | ) | | (2,845 | ) | | 2,031 |
| | 6,403 |
| | 5,642 |
|
| State and local | | (370 | ) | | (180 | ) | | (242 | ) | | 698 |
| | (354 | ) | | (2,951 | ) |
| Foreign | | 848 |
| | 947 |
| | 3,802 |
| | (465 | ) | | (8,913 | ) | | (4,210 | ) |
| Deferred provision (benefit) for income taxes | | 1,205 |
| | (784 | ) | | 715 |
| | 2,264 |
| | (2,864 | ) | | (1,519 | ) |
| Total provision for income taxes | | $ | 22,353 |
| | $ | 14,422 |
| | $ | 17,390 |
| | $ | 22,420 |
| | $ | 21,197 |
| | $ | 19,217 |
|
A reconciliation of the provision for income taxes to income taxes at the statutory U.S. federal income tax rate of 21% for the years ended December 31, 2019 and 2018, and 35% for the year ended December 31, 2017 is as follows:
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Income tax provision at the statutory U.S. federal rate | | $ | 13,218 |
| | $ | 11,044 |
| | $ | 8,466 |
| |
| State income tax provision, net of federal tax benefit | | 1,904 |
| | 1,272 |
| | 1,423 |
| |
| Income tax provision (benefit) at the statutory U.S. federal rate | | | $ | 14,551 |
| | $ | 14,803 |
| | $ | (10,296 | ) |
| State income tax provision (benefit), net of federal tax benefit | | | 3,509 |
| | 3,242 |
| | (593 | ) |
| Nondeductible expenses, net | | 1,410 |
| | 262 |
| | 1,747 |
| | 1,570 |
| | 1,651 |
| | 3,282 |
|
| Foreign taxes (includes rate differential and changes in foreign valuation allowance) | | (2,133 | ) | | 368 |
| | 1,396 |
| | 698 |
| | (35 | ) | | 5,465 |
|
| Establishment of valuation allowance | | 340 |
| | — |
| | 4,708 |
| |
| U.S. tax on foreign dividends | | 5,898 |
| | 1,120 |
| | 722 |
| |
| Release of valuation allowance | | | (117 | ) | | (43 | ) | | (3,200 | ) |
| Additional U.S. tax on foreign operations | | | 2,550 |
| | 1,628 |
| | — |
|
| Current/deferred true-up | | 1,226 |
| | 241 |
| | (1,499 | ) | | (157 | ) | | (1,199 | ) | | 567 |
|
| Tax reform | | | — |
| | — |
| | 23,732 |
|
| Other, net | | 490 |
| | 115 |
| | 427 |
| | (184 | ) | | 1,150 |
| | 260 |
|
| Total provision for income taxes | | $ | 22,353 |
| | $ | 14,422 |
| | $ | 17,390 |
| | $ | 22,420 |
| | $ | 21,197 |
| | $ | 19,217 |
|
The deferred tax assets and liabilities are attributable to the following components:
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2019 | | 2018 |
| Deferred tax assets attributable to: | | | | | | | | |
| Foreign net operating loss carryforwards | | $ | 26,902 |
| | $ | 26,265 |
| | $ | 17,940 |
| | $ | 18,259 |
|
| Accrued compensation & employee benefits | | 18,625 |
| | 21,022 |
| |
| Accrued compensation and employee benefits | | | 14,506 |
| | 15,442 |
|
| Deferred compensation | | 17,851 |
| | 15,434 |
| | 17,110 |
| | 15,587 |
|
| Foreign tax credit carryforwards | | 12,112 |
| | 16,290 |
| | 6,493 |
| | 8,163 |
|
| Accrued rent | | 5,113 |
| | 5,285 |
| | 2,655 |
| | 3,096 |
|
| Other accrued expenses | | 3,388 |
| | 2,629 |
| | 5,882 |
| | 6,290 |
|
| Deferred tax assets, before valuation allowance | | 83,991 |
| | 86,925 |
| | 64,586 |
| | 66,837 |
|
| Valuation allowance | | (25,020 | ) | | (25,216 | ) | | (24,200 | ) | | (26,460 | ) |
| Deferred tax assets, after valuation allowance | | 58,971 |
| | 61,709 |
| | 40,386 |
| | 40,377 |
|
| Deferred tax liabilities attributable to: | | | | | | | | |
| Goodwill | | 17,130 |
| | 16,893 |
| | 5,440 |
| | 2,203 |
|
| Taxes provided on unremitted earnings | | 3,331 |
| | 4,406 |
| | — |
| | 765 |
|
| Depreciation on property and equipment | | 4,723 |
| | 4,562 |
| | 1,652 |
| | 2,040 |
|
| Other | | 966 |
| | 600 |
| | 533 |
| | 686 |
|
| Deferred tax liabilities | | 26,150 |
| | 26,461 |
| | 7,625 |
| | 5,694 |
|
| Net deferred tax assets | | $ | 32,821 |
| | $ | 35,248 |
| | $ | 32,761 |
| | $ | 34,683 |
|
The recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefits associated with temporary differences, net operating loss carryforwards and tax credits will be utilized. The Company assesses the recoverability of the deferred tax assets on an ongoing basis. In making this assessment, the Company considers all positive and negative evidence, and all potential sources of taxable income including scheduled reversals of deferred tax liabilities, tax-planning strategies, projected future taxable income and recent financial performance. Certain of the Company's deferred tax liabilities of $0.3 million and $0.2 million do not qualify for deferred tax netting and are included in Other non-current liabilities on the Consolidated Balance Sheets at December 31, 2019 and 2018, respectively.
The valuation allowance decreased from $25.2$26.5 million at December 31, 20152018 to $25.0$24.2 million at December 31, 2016.2019. The valuation allowance at December 31, 20162019 was related to foreign net operating loss carryforwards, foreign tax credit carryforwards, and certain foreign deferred tax assets. The Company intends to maintain these valuation allowances until sufficient evidence exists to support their reversal.
At December 31, 2016,2019, the Company had a net operating loss carryforward of $101.7$116.1 million related to its foreign filings and $0.5 million related to its U.S. state tax filings. Of the $101.7$116.1 million net operating loss carryforward, $79.9$76.9 million is subject to a valuation allowance. Depending on the tax rules of the tax jurisdictions, the losses can be carried forward indefinitely or for periods ranging from five to twenty years. The Company also has a foreign tax credit carryforward of $12.1$6.5 million expiring in 2017 through 2025.subject to a valuation allowance of $6.5 million.
At December 31, 2015,2018, the Company had a net operating loss carryforward of $97.0$118.0 million related to its foreign filings and $1.1 million related to its U.S. state tax filings. Of the $97.0$118.0 million net operating loss carryforward, $75.6$59.8 million is subject to a valuation allowance. Depending on the tax rules of the tax jurisdictions, the losses can be carried forward indefinitely or for periods ranging from five to twenty years. The Company also hadhas a foreign tax credit carryforward of $16.3$8.2 million expiring in 2017 through 2025.subject to a valuation allowance of $8.2 million.
As of December 31, 2016,2018, the Company had unremitted earnings held in its foreign subsidiaries of approximately $72.7 million, of which the company has provided $3.3 million of tax on $15.6 million of earnings that are intended to be remitted. In 2016, the Company repatriated dividends from foreign operations to the United States. This resulted in additional book tax expense which will be offset by utilizing foreign tax credits. The Company did not recognize a deferred tax liability for U.S. income taxes and foreign withholding taxes related to the unremitted earnings of its foreign operations because the Company intends to reinvest those earnings indefinitely. If a distribution of these earnings were to be made, the Company might be subject to both foreign withholding taxes and U.S. income taxes, net of any allowable foreign tax credits or deductions. An estimate of these taxes; however, is not practicable. A deferred tax liability will be recognized if and when the Company is no longer able to demonstrate that it plans to permanently reinvest unremitted earnings.
As of December 31, 2015, the Company had certain unremitted earnings held in its foreign subsidiaries of approximately $72.9 million, of which the company has provided $4.4 million of tax on $18.2 million of earnings that are intended to be remitted. The Company did not recognize a deferred tax liability for U.S. income taxes and foreign withholding taxes related to the unremitted earnings of its foreign operations because the Company intends to reinvest those earnings
indefinitely. If a distribution of these earnings were to be made, the Company might be subject to both foreign withholding taxes and U.S. income taxes, net of any allowable foreign tax credits or deductions. An estimate of these taxes; however, is not practicable. A deferred tax liability will be recognized if and when the Company is no longer able to demonstrate that it plans to permanently reinvest unremitted earnings.
As of January 1, 2016, the Company had $0.1$1.1 million of unrecognized tax benefits. As of December 31, 20162019, the Company had $1.0$0.1 million of unrecognized tax benefits of which, if recognized, approximately $0.9 million, net of federal tax benefits, would be recorded as a component of income tax expense.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Gross unrecognized tax benefits at January 1, | | $ | 130 |
| | $ | 143 |
| | $ | 362 |
| | $ | 1,128 |
| | $ | 740 |
| | $ | 1,038 |
|
| Gross increases for tax positions of prior years | | 2,146 |
| | 22 |
| | 151 |
| | 389 |
| | 608 |
| | 167 |
|
| Gross decreases for tax positions of prior years | | (4 | ) | | (15 | ) | | (191 | ) | | (377 | ) | | — |
| | — |
|
| Settlements | | (1,234 | ) | | (20 | ) | | (143 | ) | | (1,010 | ) | | (220 | ) | | (465 | ) |
| Lapse of statute of limitations | | — |
| | — |
| | (36 | ) | | — |
| | — |
| | — |
|
| Gross unrecognized tax benefits at December 31, | | $ | 1,038 |
| | $ | 130 |
| | $ | 143 |
| | $ | 130 |
| | $ | 1,128 |
| | $ | 740 |
|
In many cases the Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant taxable authorities. Years 20122016 through 20152018 are subject to examination by the state taxing authorities. The years 2013 to 20152016 through 2018 are subject to examination by the federal taxing authority. There are certain foreign jurisdictions that are subject to examination for years prior to 2012.2016.
The Company is currently under audit by some jurisdictions. It is likely that the examination phase of several of these audits will conclude in the next twelve months. No significant increases or decreases in unrecognized tax benefits are expected to occur by December 31, 2017.2020.
Estimated interest and penalties related to the underpayment of income taxes are classified as a component of the provision for income taxes in the Consolidated Statements of Comprehensive Income.Income (Loss). Accrued interest and penalties are less than $0.1 million as of December 31, 2016.2019.
The “Tax Cuts and Jobs Act” was enacted in December 22, 2017. The Tax Act includeda territorial tax system, beginning in 2018, and it included two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The Global Intangible Low-Taxed Income ("GILTI") provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company became subject to incremental U.S. tax on GILTI income beginning in 2018 due to expense allocations required by the U.S. foreign tax credit rules. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2019.
The Base Erosion and Anti-Abuse Tax ("BEAT") provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2019.
| |
16.17. | Changes in Accumulated Other Comprehensive Income |
The changes in Accumulated other comprehensive income (“AOCI”) by component for the year ended December 31, 2019, are summarized below:
|
| | | | | | | | | | | | | | | | |
| | | Available-
for-
Sale
Securities | | Foreign
Currency
Translation | | Pension | | AOCI |
| Balance at December 31, 2018 | | $ | — |
| | $ | 5,258 |
| | $ | (1,196 | ) | | $ | 4,062 |
|
| Other comprehensive income before classification, net of tax | | 13 |
| | 844 |
| | (1,095 | ) | | (238 | ) |
| Balance at December 31, 2019 | | $ | 13 |
| | $ | 6,102 |
| | $ | (2,291 | ) | | $ | 3,824 |
|
In the fourth quarter of 2016,2018, the Company restructuredcompleted the integration of its operating segments. Given the significant growth of the Company's Leadership Consulting and Culture Shaping businesses into one combined service line,offering, Heidrick Consulting. In conjunction with the Company'sintegration, the Company reorganized its Management Committee, which the Company considers to be its chief operating decision maker, beganso as to regularly assess performance and make resource allocationallocations decisions separately for Executive Search and Leadership Consulting.the Heidrick Consulting business. Therefore, the Company now reports Executive Search and Leadership Consulting and Culture Shaping as separateone operating segments.segment, Heidrick Consulting. In conjunction with the change in operating segments, the Company modified its corporate cost allocation methodology. Previously reported operating segment results for the yearstwelve months ended December 31, 2015 and 20142017, have been recast to conform to the new operating segment structure.structure and corporate cost allocation methodology.
The Company currently operates itshas four operating segments. The executive search business operates in the Americas;Americas, Europe (which includes Africa); and Asia Pacific (which includes the Middle East), and the Heidrick Consulting business operates its leadership consulting and culture shaping businesses as separate segments.globally.
For segment purposes, reimbursements of out-of-pocket expenses classified as revenue and other operating income are reported separately and, therefore, are not included in the results of each segment. The Company believes that analyzing trends in revenue before reimbursements (net revenue), analyzing operating expenses as a percentage of net revenue, and analyzing operating income (loss) more appropriately reflects its core operations.
The revenue, operating income, depreciation and amortization, and capital expenditures, by segment, arewere as follows:
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Revenue: | | | | | | | |
| Revenue | | | | | | | |
| Executive Search | | | | | | | | | | | | |
| Americas | | $ | 313,292 |
| | $ | 294,606 |
| | $ | 253,718 |
| | $ | 415,455 |
| | $ | 405,267 |
| | $ | 339,793 |
|
| Europe | | 108,754 |
| | 92,135 |
| | 103,416 |
| | 135,070 |
| | 145,348 |
| | 125,346 |
|
| Asia Pacific | | 85,319 |
| | 89,026 |
| | 83,537 |
| | 95,827 |
| | 102,276 |
| | 86,905 |
|
| Total Executive Search | | 507,365 |
| | 475,767 |
| | 440,671 |
| | 646,352 |
| | 652,891 |
| | 552,044 |
|
| Leadership Consulting | | 38,806 |
| | 19,045 |
| | 18,870 |
| |
| Culture Shaping | | 36,219 |
| | 36,327 |
| | 34,751 |
| |
| Revenue Before Reimbursements | | 582,390 |
| | 531,139 |
| | 494,292 |
| |
| Heidrick Consulting | | | 60,572 |
| | 63,132 |
| | 69,356 |
|
| Revenue before reimbursements | | | 706,924 |
| | 716,023 |
| | 621,400 |
|
| Reimbursements | | 18,516 |
| | 17,172 |
| | 18,947 |
| | 18,690 |
| | 19,632 |
| | 18,656 |
|
| Total Revenue | | $ | 600,906 |
| | $ | 548,311 |
| | $ | 513,239 |
| |
| Operating income (loss): | | | | | | | |
| Total revenue | | | $ | 725,614 |
| | $ | 735,655 |
| | $ | 640,056 |
|
| | | | | | | | |
| Operating income (loss) | | | | | | | |
| Executive Search | | | | | | | |
| Americas (1) | | | $ | 100,833 |
| | $ | 96,880 |
| | $ | 75,337 |
|
| Europe (2) | | | 3,026 |
| | 5,849 |
| | 13 |
|
| Asia Pacific (3) | | | 13,590 |
| | 15,999 |
| | 537 |
|
| Total Executive Search | | | 117,449 |
| | 118,728 |
| | 75,887 |
|
| Heidrick Consulting (4) | | | (18,499 | ) | | (13,619 | ) | | (62,368 | ) |
| Total segments | | | 98,950 |
| | 105,109 |
| | 13,519 |
|
| Global Operations Support (5) | | | (35,439 | ) | | (36,252 | ) | | (40,042 | ) |
| Total operating income (loss) | | | $ | 63,511 |
| | $ | 68,857 |
| | $ | (26,523 | ) |
| | | | | | | | |
| Depreciation and amortization | | | | | | | |
| Executive Search | | | | | | | | | | | | |
| Americas | | $ | 73,857 |
| | $ | 68,043 |
| | $ | 57,370 |
| | $ | 4,204 |
| | $ | 4,605 |
| | $ | 4,794 |
|
| Europe | | 6,851 |
| | 3,644 |
| | 6,013 |
| | 2,784 |
| | 3,735 |
| | 3,328 |
|
| Asia Pacific | | 4,799 |
| | 5,909 |
| | 4,348 |
| | 1,472 |
| | 1,646 |
| | 1,565 |
|
| Total Executive Search | | 85,507 |
| | 77,596 |
| | 67,731 |
| | 8,460 |
| | 9,986 |
| | 9,687 |
|
| Leadership Consulting | | (1,495 | ) | | (1,847 | ) | | (357 | ) | |
| Culture Shaping | | (1,558 | ) | | 4,913 |
| | 4,621 |
| |
| Total Segment Operating Income | | 82,454 |
| | 80,662 |
| | 71,995 |
| |
| Heidrick Consulting | | | 1,079 |
| | 1,577 |
| | 4,099 |
|
| Total segments | | | 9,539 |
| | 11,563 |
| | 13,786 |
|
| Global Operations Support | | (47,221 | ) | | (46,600 | ) | | (45,342 | ) | | 832 |
| | 959 |
| | 988 |
|
| Total Operating Income | | $ | 35,233 |
| | $ | 34,062 |
| | $ | 26,653 |
| |
| Depreciation and Amortization | | | | | | | |
| Total depreciation and amortization | | | $ | 10,371 |
| | $ | 12,522 |
| | $ | 14,774 |
|
| | | | | | | | |
| Capital expenditures | | | | | | | |
| Executive Search | | | | | | | | | | | | |
| Americas | | $ | 3,892 |
| | $ | 3,858 |
| | $ | 3,534 |
| | $ | 1,121 |
| | $ | 601 |
| | $ | 7,123 |
|
| Europe | | 2,478 |
| | 1,530 |
| | 2,591 |
| | 1,070 |
| | 3,557 |
| | 1,460 |
|
| Asia Pacific | | 1,774 |
| | 1,383 |
| | 1,814 |
| | 295 |
| | 440 |
| | 2,633 |
|
| Total Executive Search | | 8,144 |
| | 6,771 |
| | 7,939 |
| | 2,486 |
| | 4,598 |
| | 11,216 |
|
| Leadership Consulting | | 2,501 |
| | 393 |
| | 138 |
| |
| Culture Shaping | | 4,341 |
| | 4,520 |
| | 5,325 |
| |
| Total Segments | | 14,986 |
| | 11,684 |
| | 13,402 |
| |
| Global Operation Support | | 1,447 |
| | 2,012 |
| | 1,910 |
| |
| Total | | $ | 16,433 |
| | $ | 13,696 |
| | $ | 15,312 |
| |
| Capital Expenditures | | | | | | | |
| Executive Search | | | | | | | |
| Americas | | $ | 2,221 |
| | $ | 7,334 |
| | $ | 2,794 |
| |
| Europe | | 835 |
| | 890 |
| | 466 |
| |
| Asia Pacific | | 3,346 |
| | 1,030 |
| | 465 |
| |
| Total Executive Search | | 6,402 |
| | 9,254 |
| | 3,725 |
| |
| Leadership Consulting | | 380 |
| | 330 |
| | 123 |
| |
| Culture Shaping | | 279 |
| | 95 |
| | 53 |
| |
| Total Segments | | 7,061 |
| | 9,679 |
| | 3,901 |
| |
| Global Operation Support | | 1,321 |
| | 6,184 |
| | 1,934 |
| |
| Total | | $ | 8,382 |
| | $ | 15,863 |
| | $ | 5,835 |
| |
| Heidrick Consulting | | | 541 |
| | 581 |
| | 1,172 |
|
| Total segments | | | 3,027 |
| | 5,179 |
| | 12,388 |
|
| Global Operations Support | | | 325 |
| | 1,006 |
| | 3,298 |
|
| Total capital expenditures | | | $ | 3,352 |
| | $ | 6,185 |
| | $ | 15,686 |
|
| |
| (1) | Operating income for the Americas includes restructuring charges of $4.1 million in 2019 and $0.8 million in 2017. |
| |
| (2) | Operating income for Europe includes restructuring charges of $4.0 million in 2017. |
| |
| (3) | Operating income for Asia Pacific includes restructuring charges of $2.0 million in 2017. |
| |
| (4) | Operating loss for Heidrick Consulting includes impairment charges of $50.7 million and restructuring charges of $3.4 million in 2017. |
| |
| (5) | Operating loss for Global Operations Support includes restructuring charges of less than $0.1 million in 2019 and $5.5 million in 2017. |
Identifiable assets, and goodwill and other intangible assets, net, by segment, are as follows:
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2019 | | 2018 |
| | | | | (As adjusted) (1) | |
| Current assets: | | | | | |
| Current assets | | | | | |
| Executive Search | | | | | | | | |
| Americas | | $ | 147,070 |
| | $ | 157,550 |
| | $ | 286,818 |
| | $ | 255,889 |
|
| Europe | | 54,153 |
| | 47,425 |
| | 96,230 |
| | 85,355 |
|
| Asia Pacific | | 60,704 |
| | 57,046 |
| | 78,967 |
| | 74,169 |
|
| Total Executive Search | | 261,927 |
| | 262,021 |
| | 462,015 |
| | 415,413 |
|
| Leadership Consulting | | 15,737 |
| | 9,413 |
| |
| Culture Shaping | | 19,059 |
| | 36,209 |
| |
| Heidrick Consulting | | | 30,628 |
| | 34,174 |
|
| Total segments | | 296,723 |
| | 307,643 |
| | 492,643 |
| | 449,587 |
|
| Global Operations Support | | 1,707 |
| | 1,320 |
| | 1,839 |
| | 1,280 |
|
| Total allocated current assets | | 298,430 |
| | 308,963 |
| | 494,482 |
| | 450,867 |
|
| Unallocated non-current assets: | | 110,538 |
| | 113,946 |
| |
| Goodwill and other intangible assets, net: | |
| |
| |
| Unallocated non-current assets | | | 220,925 |
| | 125,454 |
|
| Goodwill and other intangible assets, net | | | | | |
| Executive Search | |
| |
| | | | |
| Americas | | 88,602 |
| | 82,390 |
| | 93,054 |
| | 88,462 |
|
| Europe | | 22,029 |
| | 10,745 |
| | 26,893 |
| | 27,010 |
|
| Asia Pacific | | 9,020 |
| | 9,420 |
| | 8,819 |
| | 8,836 |
|
| Total Executive Search | | 119,651 |
| | 102,555 |
| | 128,766 |
| | 124,308 |
|
| Leadership Consulting | | 12,757 |
| | 2,548 |
| |
| Culture Shaping | | 40,126 |
| | 44,706 |
| |
| Heidrick Consulting | | | — |
| | — |
|
| Total goodwill and other intangible assets, net | | 172,534 |
| | 149,809 |
| | 128,766 |
| | 124,308 |
|
| Total assets: | | $ | 581,502 |
| | $ | 572,718 |
| |
| Total assets | | | $ | 844,173 |
| | $ | 700,629 |
|
(1) The December 31, 2015 goodwill and other intangible assets, net balances do not reflect the relative fair value allocation of goodwill to the Leadership Consulting segment that occurred in the fourth quarter of 2016 as a result of the Company restructuring its reporting units. Refer to Note 8, Goodwill and Other Intangible Assets, for additional information regarding the allocation of goodwill to the Leadership Consulting segment.
The Company has issued cash collateralized bank guarantees and letterutilized letters of credit backed bank guarantees supportingto support certain obligations, primarily the payment of office lease obligations and business license requirements for certain of its subsidiaries in Europe and Asia Pacific. The bank guaranteesletters of credit were made to secure the respective agreements and are for the terms of the agreements, which extend through 2018.2030. For each bank guaranteeletter of credit issued, the Company would have to perform underuse cash to fulfill the guaranteeobligation if the subsidiary defaults on a lease payment. The maximum amount of undiscounted payments the Company would be required to make in the event of default on all outstanding bank guarantees isletters of credit was approximately $2.3$2.5 million as of December 31, 2016.2019. The Company has not accrued for these arrangements as no event of default exists or is expected to exist.
| |
18.20. | Commitments and Contingencies |
Operating Leases
The Company leases office space in 47 cities in 25 countries. The terms of these office-related leases provide that the Company pay base rent and a share of operating expenses and real estate taxes in excess of defined amounts. These leases expire at various dates through 2026. The Company also leases certain computer equipment and cars, the terms of which are accounted for as operating leases. Rent expense, which includes the base rent, maintenance costs, operating expenses and real estate taxes, and the costs of equipment leases for the years ended December 31, 2016, 2015 and 2014 was $30.8 million, $29.6 million, and $32.3 million, respectively.
Minimum future operating lease payments due in each of the next five years and thereafter are as follows:
|
| | | |
| 2017 | $ | 31,400 |
|
| 2018 | 30,719 |
|
| 2019 | 29,117 |
|
| 2020 | 21,112 |
|
| 2021 | 17,398 |
|
| Thereafter | 36,684 |
|
| Total | $ | 166,430 |
|
The aggregate minimum future payments on office leases are $164.2 million. The Company has contractual arrangements to receive aggregate sublease income of $1.0 million related to certain leases that expire at various dates through 2019. This sublease income primarily relates to properties that were part of prior office consolidations and closings.
Certain leases provide for renewal options and payments of real estate taxes and other occupancy costs. In addition, certain leases contain rent escalation clauses that require additional rental amounts in later years of the term. Rent expense for leases with rent escalation clauses is recognized on a straight-line basis over the minimum lease term.
The Company has an obligation at the end of the lease term to return the office to the landlord in its original condition, which is recorded at fair value at the time the liability is incurred. The Company had $2.6 million and $2.3 million of asset retirement obligations as of December 31, 2016 and 2015, respectively.
Litigation
The Company has contingent liabilities from various pending claims and litigation matters arising in the ordinary course of the Company’s business, some of which involve claims for damages that are substantial in amount. Some of these matters are covered by insurance. Based upon information currently available, the Company believes the ultimate resolution of such claims and litigation including the “UK Employee Benefits Trust” matter discussed below, will not have a material adverse effect on its financial condition, results of operations or liquidity.
UK Employee Benefits Trust
On January 27, 2010, HM Revenue & Customs (“HMRC”) in the United Kingdom notified the Company that it was challenging the tax treatment of certain of the Company’s contributions in the United Kingdom to an Employee Benefits Trust between 2002 and 2008. HMRC alleges that these contributions should have been subject to Pay As You Earn tax and Class 1 National Insurance Contributions in the United Kingdom; and HMRC is proposing an adjustment to the Company’s payroll tax liability for the affected years. The aggregate amount of HMRC’s proposed adjustment is approximately £3.9 million million (equivalent to $4.8 million at December 31, 2016). The Company has appealed the proposed adjustment. At this time, the Company believes that the likelihood of an unfavorable outcome with respect to the proposed adjustment is not probable and the potential amount of any loss cannot be reasonably estimated. The Company also believes that the amount of any final adjustment would not be material to the Company’s financial condition.
PART II (continued)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.The Audit and Finance Committee of the Board of Directors (the “Audit Committee”) of the Company conducted a competitive process to select a firm to serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2018. The Audit Committee invited several firms to participate in this process.
As a result of this process, on June 13, 2018, the Audit Committee appointed RSM US LLP (“RSM”) as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2018. In conjunction with the selection of RSM to serve as the Company’s independent registered public accounting firm, the Audit Committee dismissed KPMG LLP (“KPMG”) from that role effective on June 13, 2018.
KPMG’s audit reports on the consolidated financial statements of the Company as of and for the fiscal year ended December 31, 2017, did not contain any adverse opinion or disclaimers of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal year ended December 31, 2017, and the interim period through June 13, 2018, there were (i) no disagreements between the Company and KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG would have caused KPMG to make reference to the subject matter of the disagreement in their reports on the Company’s consolidated financial statements for such years, and (ii) no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures as defined in Securities Exchange Act of 1934, as amended, (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e), that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (the “SEC”) rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Management of the Company, with the participation of the principal executive officer and the principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2016.2019. Based on the evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2016.2019.
(b) Management’s report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and includes those policies and procedures that:
(1)Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(2)Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013. Based on this evaluation, management concluded that the Company’s system of internal control over financial reporting was effective as of December 31, 2016.2019.
The Company’s independent registered public accounting firm, KPMGRSM LLP, has issued a report on the Company’s internal control over financial reporting. The report on the audit of internal control over financial reporting appears in this Form 10-K.
(c) Changes in Internal Control over Financial Reporting
Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases, and implemented changes to the relevant business processes, and related control activities within them, in order to monitor and maintain appropriate controls over financial reporting. There have beenwere no other changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K as of December 31, 2016, that have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information relating to our directors, executive officers isand corporate governance will be included in the Section entitled “Executive Officers” in Part I of this Form 10-K. Information relating to our directors, including our audit committee and audit committee financial experts and the procedures by which shareholders can recommend director nominees, and our executive officers will be in our definitive2020 Proxy Statement for our 2017 Annual Meeting of Stockholders, which will be filed within 120 days of the end of 2016 (2017 Proxy Statement) and is incorporated herein by reference. Information relating to our Code of Business Conduct and Ethics, which applies to our directors and executive officers, including senior financial officers, is included under “Available Information” in Part I, Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information relating toThe information required by this Item is included in our executive officer and director compensation and the compensation committee of the Board will be in the 20172020 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of our management will be in the 2017 Proxy Statement and is incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth additional information as of December 31, 2016,2019, about shares of our common stock that may be issued upon the vesting of restricted stock units and performance stock units and the exercise of options under our existing equity compensation plans and arrangements, divided between plans approved by our stockholders and plans or arrangements not submitted to the stockholders for approval. For a description of the types of securities that may be issued under our Second Amended and Restated 2012 Heidrick & Struggles GlobalShare Program (SeeProgram. See Note 13,14, Stock-Based Compensation).
| | | | | (a) | | (b) | | (c) | | (a) | | (b) | | (c) |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options | | | Weighted- average exercise price of outstanding options | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | Number of securities to be issued upon exercise of outstanding options | | Weighted- average exercise price of outstanding options | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| Equity compensation plans approved by stockholders | | 782,962 |
| | (1) | $ | — |
| | 1,397,410 |
| | 778,547 |
| (1) | $ | — |
| | 981,682 |
|
| Equity compensation plans not approved stockholders | �� | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
|
| Total equity compensation plans | | 782,962 |
| | | $ | — |
| | 1,397,410 |
| | 778,547 |
| | — |
| | 981,682 |
|
| |
| (1) | Includes 537,273598,988 restricted stock units 236,812and 179,559 performance stock units at their target levels and 8,877no options. The performance stock units represent the maximum amount of shares to be awarded at target levels, and accordingly, may overstate expected dilution. |
The other information required by this Item is included in our 2020 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions and director independence will beThe information required by this Item is included in the 2017our 2020 Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference toincluded in the discussion under the caption “Audit Fees” in our 20172020 Proxy Statement.Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| |
| (a) | THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: |
1. Index to Consolidated Financial Statements:
2. Exhibits:
|
| | |
Exhibit No. | | Description |
| | |
| 3.01 | | Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.02 of this Registrant’s Registration Statement on Form S-4 (File No. 333-61023)) |
| | |
| 3.02 | | Amended and Restated By-laws of the Registrant (Incorporated by reference to Exhibit 3.02 of the Registrant’s Form 10-K filed March 26, 2003) |
| |
3.03 | | |
| | | |
| 4.01 | | |
| | |
| *4.02 | | |
| | |
| 10.01 | | Credit Agreement dated as of June 22, 2011, among Heidrick & Struggles International, Inc., certain foreign subsidiary borrowers thereto, the lenders party thereto, and JPMorgan Chase Bank, as Administrative Agent dated June, 2011and Bank of America, N.A., as Syndication Agent (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K, dated June 22, 2011, filed on June 27, 2011) |
| | |
| 10.02 | | |
| | |
| 10.03 | | The Second Amended and Restated Credit Agreement among Heidrick & Struggles International, Inc., the Foreign Subsidiary Borrowers from time to time partiesparty thereto, the Lenders partiesparty thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agent parties thereto,Bank of America, N.A., as Syndication Agent, dated June 30, 2015 (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K, dated July 1, 2015) |
| | | |
| 10.04 | | |
| | |
| 10.05 | | Lease between 1114 6th6th Avenue Co., LLC and Heidrick & Struggles International, Inc., and Heidrick & Struggles, Inc., dated August 31, 2007 (Incorporated by reference to Exhibit 10.04 of the Registrant’s Form 10-K filed on February 28, 2008) |
| | |
| 10.06 | | |
| | |
| 10.07 | | |
| | |
| 10.08 | | |
| | | |
| 10.09 | | |
| | |
| 10.10 | | |
| | | |
| 10.11 | | |
| | |
| 10.12 | | |
| | |
| 10.13 | | |
| | |
|
| | |
| 10.14 | | |
| | | |
| 10.15 | | Asset |
| | | |
| 10.16 | | Asset Purchase Agreement, dated as of February 29,9, 2016, by and among Decision Strategies International, Inc., Decision Strategies International (UK) Limited, The Shareholders set forth on Annex I thereto, Paul J. H. Schoemaker, as the Shareholders' Representative, Heidrick & Struggles, International, Inc., Hedirick & Struggles Leadership Consulting Ltd. and Decision StrategiesHeidrick & Struggles International, Inc. (Incorporated by reference to exhibit 2.1 of the Registrant’s Form 8-K filed February 11, 2016). |
| | |
| 10.17 | | |
| | |
| 10.18 | | |
| | |
| 10.19 | | The |
| | |
| 10.20 | | |
| | |
| 10.21 | | |
| | |
| 10.22 | | |
| | |
| 10.23 | | |
| | |
| 10.24 | | |
| | |
| 10.25 | | |
| | |
| 10.26 | | |
| | |
| 10.27 | | |
| | |
| 10.28 | | |
| | | |
| 10.29 | |
|
| | | |
| 10.30 | | |
| | | |
| 10.31 | | |
| | | |
| 10.32 | | |
| | |
*21.01 | | Subsidiaries of the Registrant |
|
| | |
| | | |
| 10.33 | | |
| | |
| 10.34 | | |
| | |
| 10.35 | | |
| | |
| 10.36 | | |
| | |
| 10.37 | | |
| | |
| 10.38 | | |
| | |
| 10.39 | | |
| | |
| 10.40 | | |
| | |
| 10.41 | | |
| | |
| 10.42 | | |
| | |
| 10.43 | | |
| | |
| 10.44 | | |
| | |
| 10.45 | | |
| | |
| 10.46 | | |
| | |
| 10.47 | | Credit Agreement dated as of October 26, 2018 among Heidrick & Struggles International, Inc., the foreign subsidiary borrowers hereto, the lenders party thereto, Bank of America, N.A., as Administrative Agent, SunTrust Bank, as Syndication Agent and HSBC Bank USA, national Association, as Documentation Agent (Incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed October 29, 2018) |
| | |
| 10.48 | | |
| | |
| 10.49 | | |
| | |
| 10.50 | | |
| | |
| 10.51 | | |
| | |
| 10.52 | | |
| | |
| *10.53 | | |
| | |
| *21.01 | | |
| |
| *23.01 | | |
|
| | |
| | |
| *23.02 | | |
| | |
| *31.1 | | |
| | |
| *31.2 | | |
| | |
| *32.1 | | |
| | | |
| *32.2 | | |
| | | |
| *101.INS | | XBRL Instance document |
| | | |
| *101.SCH | | XBRL Taxonomy Extension Schema Document |
| | | |
| *101.CAL | | XBRL Taxonomy Calculation Linkbase Document |
| | | |
| *101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
| *101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | | |
| *101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith.
** Denotes a management contract or compensatory plan or arrangement.
| |
| (b) | SEE EXHIBIT INDEX ABOVE |
| |
| (c) | FINANCIAL STATEMENTS NOT PART OF ANNUAL REPORT |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on.on February 24, 2020.
|
| | |
| HEIDRICK & STRUGGLES INTERNATIONAL, INC. |
| | | /S/ STEPHENs/ Stephen A. BONDIBondi |
| By: | | Stephen A. Bondi |
| Title: | | Vice President, Controller |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 23, 2017.February 24, 2020.
|
| | |
| Signature | | Title |
| | |
/S/ TRACY R. WOLSTENCROFTs/ Krishnan Rajagopalan | | Chief Executive Officer & Director |
Tracy R. WolstencroftKrishnan Rajagopalan
(Principal Executive Officer) | | |
| | |
/S/ RICHARD W. PEHLKEs/ Mark R. Harris | | Executive Vice President, & Chief Financial Officer |
Richard W. PehlkeMark R. Harris
(Principal Financial Officer) | | |
| | |
/S/ STEPHENs/ Stephen A. BONDIBondi | | Vice President, Controller |
Stephen A. Bondi (Principal Accounting Officer) | | |
| | |
/S/ ELIZABETHs/ Elizabeth L. AXELRODAxelrod | | Director |
| Elizabeth L. Axelrod | | |
| | | |
/S/ RICHARD I. BEATTIE | | Director |
Richard I. Beattie | | |
| |
/S/ CLAREs/ Clare M. CHAPMANChapman | | Director |
| Clare M. Chapman | | |
| | | |
/S/ JOHN A. FAZIOs/ Gary E. Knell | | Director |
John A. FazioGary E. Knell | | |
| | | |
/S/ LYLE LOGANs/ Lyle Logan | | Director |
| Lyle Logan | | |
| | |
/S/ JILL KANIN-LOVERS | | Director |
Jill Kanin-Lovers | | |
| |
/S/ GARY E. KNELL | | Director |
Gary E. Knell | | |
| |
/S/s/ T. WILLEM MESDAGWillem Mesdag | | Director |
| T. Willem Mesdag | | |
| | | |
/S/ V. PAUL UNRUHs/ Stacey Rauch | | Director |
V. Paul UnruhStacey Rauch | | |
| |
| /s/ Adam Warby | | Director |
| Adam Warby | | |
