UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-25837
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
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)
(312) 496-1200
(Registrant’s Telephone Number, Including Area Code)
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 of time 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 registrant 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-Accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Emerging growth company | o | |||||
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 26, 2019, there were 19,131,799 shares of the Company’s common stock outstanding.
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE | ||
PART I. | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. | ||
Item 1. | ||
Item 6. | ||
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June 30, 2019 | December 31, 2018 | |||||||
(Unaudited) | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 105,314 | $ | 279,906 | ||||
Marketable securities | 38,698 | — | ||||||
Accounts receivable, net | 146,982 | 114,977 | ||||||
Prepaid expenses | 23,193 | 22,766 | ||||||
Other current assets | 30,082 | 29,598 | ||||||
Income taxes recoverable | 6,171 | 3,620 | ||||||
Total current assets | 350,440 | 450,867 | ||||||
Non-current assets | ||||||||
Property and equipment, net | 30,788 | 33,871 | ||||||
Operating lease right-of-use assets | 104,449 | — | ||||||
Assets designated for retirement and pension plans | 14,909 | 15,035 | ||||||
Investments | 23,647 | 19,442 | ||||||
Other non-current assets | 21,725 | 22,276 | ||||||
Goodwill | 122,070 | 122,092 | ||||||
Other intangible assets, net | 1,730 | 2,216 | ||||||
Deferred income taxes | 34,252 | 34,830 | ||||||
Total non-current assets | 353,570 | 249,762 | ||||||
Total assets | $ | 704,010 | $ | 700,629 | ||||
Current liabilities | ||||||||
Accounts payable | $ | 8,107 | $ | 9,166 | ||||
Accrued salaries and benefits | 124,923 | 227,653 | ||||||
Deferred revenue | 37,424 | 40,673 | ||||||
Operating lease liabilities | 31,895 | — | ||||||
Other current liabilities | 26,186 | 33,219 | ||||||
Income taxes payable | 6,779 | 8,240 | ||||||
Total current liabilities | 235,314 | 318,951 | ||||||
Non-current liabilities | ||||||||
Accrued salaries and benefits | 47,852 | 57,234 | ||||||
Retirement and pension plans | 43,922 | 39,865 | ||||||
Operating lease liabilities | 84,156 | — | ||||||
Other non-current liabilities | 4,317 | 17,423 | ||||||
Total non-current liabilities | 180,247 | 114,522 | ||||||
Total liabilities | 415,561 | 433,473 | ||||||
Commitments and contingencies (Note 17) | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at June 30, 2019 and December 31, 2018 | — | — | ||||||
Common stock, $0.01 par value, 100,000,000 shares authorized, 19,585,777 shares issued, 19,127,401 and 18,954,275 shares outstanding at June 30, 2019 and December 31, 2018, respectively | 196 | 196 | ||||||
Treasury stock at cost, 458,376 and 631,502 shares at June 30, 2019 and December 31, 2018, respectively | (14,795 | ) | (20,298 | ) | ||||
Additional paid in capital | 222,148 | 227,147 | ||||||
Retained earnings | 76,513 | 56,049 | ||||||
Accumulated other comprehensive income | 4,387 | 4,062 | ||||||
Total stockholders’ equity | 288,449 | 267,156 | ||||||
Total liabilities and stockholders’ equity | $ | 704,010 | $ | 700,629 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
1
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenue | |||||||||||||||
Revenue before reimbursements (net revenue) | $ | 173,122 | $ | 183,059 | $ | 344,716 | $ | 343,130 | |||||||
Reimbursements | 5,051 | 4,630 | 9,731 | 9,217 | |||||||||||
Total revenue | 178,173 | 187,689 | 354,447 | 352,347 | |||||||||||
Operating expenses | |||||||||||||||
Salaries and benefits | 120,601 | 127,679 | 241,419 | 239,088 | |||||||||||
General and administrative expenses | 34,168 | 36,919 | 68,553 | 72,460 | |||||||||||
Reimbursed expenses | 5,051 | 4,630 | 9,731 | 9,217 | |||||||||||
Total operating expenses | 159,820 | 169,228 | 319,703 | 320,765 | |||||||||||
Operating income | 18,353 | 18,461 | 34,744 | 31,582 | |||||||||||
Non-operating income (expense) | |||||||||||||||
Interest, net | 412 | (2 | ) | 1,220 | 237 | ||||||||||
Other, net | 708 | (48 | ) | 2,351 | (496 | ) | |||||||||
Net non-operating income (expense) | 1,120 | (50 | ) | 3,571 | (259 | ) | |||||||||
Income before income taxes | 19,473 | 18,411 | 38,315 | 31,323 | |||||||||||
Provision for income taxes | 5,193 | 6,948 | 11,948 | 9,692 | |||||||||||
Net income | 14,280 | 11,463 | 26,367 | 21,631 | |||||||||||
Other comprehensive income (loss), net of tax | |||||||||||||||
Foreign currency translation adjustment | (7 | ) | (3,816 | ) | 313 | (2,226 | ) | ||||||||
Net unrealized gain on available-for-sale investments | 12 | — | 12 | — | |||||||||||
Other comprehensive income (loss), net of tax | 5 | (3,816 | ) | 325 | (2,226 | ) | |||||||||
Comprehensive income | $ | 14,285 | $ | 7,647 | $ | 26,692 | $ | 19,405 | |||||||
Basic weighted average common shares outstanding | 19,120 | 18,934 | 19,062 | 18,880 | |||||||||||
Dilutive common shares | 311 | 394 | 469 | 509 | |||||||||||
Diluted weighted average common shares outstanding | 19,431 | 19,328 | 19,531 | 19,389 | |||||||||||
Basic net income per common share | $ | 0.75 | $ | 0.61 | $ | 1.38 | $ | 1.15 | |||||||
Diluted net income per common share | $ | 0.73 | $ | 0.59 | $ | 1.35 | $ | 1.12 | |||||||
Cash dividends paid per share | $ | 0.15 | $ | 0.13 | $ | 0.30 | $ | 0.26 | |||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
2
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||
Common Stock | Treasury Stock | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at December 31, 2018 | 19,586 | $ | 196 | 632 | $ | (20,298 | ) | $ | 227,147 | $ | 56,049 | $ | 4,062 | $ | 267,156 | ||||||||||||||
Net income | — | — | — | — | — | 12,087 | — | 12,087 | |||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | 320 | 320 | |||||||||||||||||||||
Common and treasury stock transactions: | |||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 1,343 | — | — | 1,343 | |||||||||||||||||||||
Vesting of equity, net of tax withholdings | — | — | (160 | ) | 5,155 | (9,707 | ) | — | — | (4,552 | ) | ||||||||||||||||||
Cash dividends declared ($0.15 per share) | — | — | — | — | — | (2,848 | ) | — | (2,848 | ) | |||||||||||||||||||
Dividend equivalents on restricted stock units | — | — | — | — | — | (87 | ) | — | (87 | ) | |||||||||||||||||||
Balance at March 31, 2019 | 19,586 | $ | 196 | 472 | $ | (15,143 | ) | $ | 218,783 | $ | 65,201 | $ | 4,382 | $ | 273,419 | ||||||||||||||
Net income | — | — | — | — | — | 14,280 | 14,280 | ||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | 5 | 5 | |||||||||||||||||||||
Common and treasury stock transactions: | |||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 3,368 | — | — | 3,368 | |||||||||||||||||||||
Vesting of equity, net of tax withholdings | — | — | (3 | ) | — | — | — | — | — | ||||||||||||||||||||
Re-issuance of treasury stock | — | — | (11 | ) | 348 | (3 | ) | — | — | 345 | |||||||||||||||||||
Cash dividends declared ($0.15 per share) | — | — | — | — | — | (2,867 | ) | — | (2,867 | ) | |||||||||||||||||||
Dividend equivalents on restricted stock units | — | — | — | — | — | (101 | ) | — | (101 | ) | |||||||||||||||||||
Balance at June 30, 2019 | 19,586 | $ | 196 | 458 | $ | (14,795 | ) | $ | 222,148 | $ | 76,513 | $ | 4,387 | $ | 288,449 | ||||||||||||||
3
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
(In thousands)
(Unaudited)
Additional Paid in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||
Common Stock | Treasury Stock | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at December 31, 2017 | 19,586 | $ | 196 | 805 | $ | (26,096 | ) | $ | 226,006 | $ | (716 | ) | $ | 13,315 | $ | 212,705 | |||||||||||||
Net income | — | — | — | — | — | 10,168 | — | 10,168 | |||||||||||||||||||||
Adoption of accounting standards | — | — | — | — | — | 15,043 | (6,089 | ) | 8,954 | ||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | 1,590 | 1,590 | |||||||||||||||||||||
Common and treasury stock transactions: | |||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 1,776 | — | — | 1,776 | |||||||||||||||||||||
Vesting of equity, net of tax withholdings | — | — | (138 | ) | 4,614 | (6,847 | ) | — | — | (2,233 | ) | ||||||||||||||||||
Cash dividends declared ($0.13 per share) | — | — | — | — | — | (2,460 | ) | — | (2,460 | ) | |||||||||||||||||||
Dividend equivalents on restricted stock units | — | — | — | — | — | (11 | ) | — | (11 | ) | |||||||||||||||||||
Balance at March 31, 2018 | 19,586 | $ | 196 | 667 | $ | (21,482 | ) | $ | 220,935 | $ | 22,024 | $ | 8,816 | $ | 230,489 | ||||||||||||||
Net income | — | — | — | — | — | 11,463 | 11,463 | ||||||||||||||||||||||
Other comprehensive (loss), net of tax | — | — | — | — | — | — | (3,816 | ) | (3,816 | ) | |||||||||||||||||||
Common and treasury stock transactions: | |||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,076 | — | — | 2,076 | |||||||||||||||||||||
Vesting of equity, net of tax withholdings | — | — | (29 | ) | 989 | (989 | ) | — | — | — | |||||||||||||||||||
Re-issuance of treasury stock | — | — | (6 | ) | 194 | 31 | — | — | 225 | ||||||||||||||||||||
Cash dividends declared ($0.13 per share) | — | — | — | — | — | (2,465 | ) | — | (2,465 | ) | |||||||||||||||||||
Dividend equivalents on restricted stock units | — | — | — | — | — | (106 | ) | — | (106 | ) | |||||||||||||||||||
Balance at June 30, 2018 | 19,586 | $ | 196 | 632 | $ | (20,299 | ) | $ | 222,053 | $ | 30,916 | $ | 5,000 | $ | 237,866 | ||||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
4
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Cash flows - operating activities | ||||||||
Net income | $ | 26,367 | $ | 21,631 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 5,348 | 6,493 | ||||||
Deferred income taxes | 512 | (347 | ) | |||||
Stock-based compensation expense | 4,711 | 3,852 | ||||||
Accretion expense related to earnout payments | 327 | 647 | ||||||
Gain on marketable securities | (116 | ) | — | |||||
Changes in assets and liabilities, net of effects of acquisition: | ||||||||
Accounts receivable | (32,093 | ) | (55,397 | ) | ||||
Accounts payable | (978 | ) | (1,797 | ) | ||||
Accrued expenses | (115,500 | ) | (60,116 | ) | ||||
Restructuring accrual | (1,189 | ) | (8,885 | ) | ||||
Deferred revenue | (3,240 | ) | (2,626 | ) | ||||
Income taxes recoverable and payable, net | (4,035 | ) | (3,066 | ) | ||||
Retirement and pension plan assets and liabilities | 1,686 | 121 | ||||||
Prepaid expenses | (3,507 | ) | (5,879 | ) | ||||
Other assets and liabilities, net | (176 | ) | (1,691 | ) | ||||
Net cash used in operating activities | (121,883 | ) | (107,060 | ) | ||||
Cash flows - investing activities | ||||||||
Acquisition of business | — | (3,161 | ) | |||||
Capital expenditures | (1,793 | ) | (2,548 | ) | ||||
Purchases of available-for-sale investments and marketable securities | (40,477 | ) | (1,891 | ) | ||||
Proceeds from sales of available-for-sale investments and marketable securities | 232 | 1,564 | ||||||
Net cash used in investing activities | (42,038 | ) | (6,036 | ) | ||||
Cash flows - financing activities | ||||||||
Proceeds from line of credit | — | 20,000 | ||||||
Payments on line of credit | — | (20,000 | ) | |||||
Cash dividends paid | (5,903 | ) | (5,042 | ) | ||||
Payment of employee tax withholdings on equity transactions | (4,552 | ) | (2,233 | ) | ||||
Acquisition earnout payments | (407 | ) | — | |||||
Net cash used in financing activities | (10,862 | ) | (7,275 | ) | ||||
Effect of exchange rate fluctuations on cash, cash equivalents and restricted cash | (165 | ) | (1,359 | ) | ||||
Net decrease in cash, cash equivalents and restricted cash | (174,948 | ) | (121,730 | ) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 280,262 | 208,162 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 105,314 | $ | 86,432 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
5
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except per share figures)
(Unaudited)
1. | Basis of Presentation of Interim Financial Information |
The accompanying unaudited Condensed Consolidated Financial Statements of Heidrick & Struggles International, Inc. and subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Significant items subject to estimates and assumptions include revenue recognition, income taxes, interim effective tax rate 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. These financial statements and notes are to be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 26, 2019.
2. | Summary of Significant Accounting Policies |
A complete listing of the Company’s significant accounting policies is discussed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Revenue Recognition
See Note 3, Revenue.
Marketable Securities
The Company’s marketable securities consist of available-for-sale debt securities with original maturities exceeding three months.
Available-for-sale debt securities are reported at fair value with realized gains (losses) recorded as non-operating income (expense) in Interest, net in the Condensed Consolidated Statements of Comprehensive Income. Unrealized gains (losses) are recorded as a separate component of Accumulated other comprehensive income in the Consolidated Balance Sheets until realized.
Restricted Cash
The Company has lease agreements and business licenses with terms that require the Company to restrict cash through the termination dates of the agreements. Current and non-current restricted cash is included in Other current assets and Other non-current assets, respectively, in the Condensed Consolidated Balance Sheets.
The following table provides a reconciliation of the cash and cash equivalents between the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statement of Cash Flows as of June 30, 2019 and 2018, and December 31, 2018 and 2017:
June 30, | December 31, | ||||||||||||||
2019 | 2018 | 2018 | 2017 | ||||||||||||
Cash and cash equivalents | $ | 105,314 | $ | 85,825 | $ | 279,906 | $ | 207,534 | |||||||
Restricted cash included within other current assets | — | 508 | 108 | 526 | |||||||||||
Restricted cash included within other non-current assets | — | 99 | 248 | 102 | |||||||||||
Total cash, cash equivalents and restricted cash | $ | 105,314 | $ | 86,432 | $ | 280,262 | $ | 208,162 | |||||||
Earnings per Common Share
Basic earnings per common share is computed by dividing net income by weighted average common shares outstanding for the period. Diluted earnings 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.
6
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income | $ | 14,280 | $ | 11,463 | $ | 26,367 | $ | 21,631 | |||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 19,120 | 18,934 | 19,062 | 18,880 | |||||||||||
Effect of dilutive securities: | |||||||||||||||
Restricted stock units | 202 | 250 | 300 | 355 | |||||||||||
Performance stock units | 109 | 144 | 169 | 153 | |||||||||||
Diluted | 19,431 | 19,328 | 19,531 | 19,389 | |||||||||||
Basic earnings per share | $ | 0.75 | $ | 0.61 | $ | 1.38 | $ | 1.15 | |||||||
Diluted earnings per share | $ | 0.73 | $ | 0.59 | $ | 1.35 | $ | 1.12 | |||||||
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating Lease Right-of-Use Assets, Operating Lease Liabilities - Current and Operating Lease Liabilities - Non-Current in our Condensed Consolidated Balance Sheets. The Company does not have any leases that meet the finance lease criteria.
Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The operating lease right-of-use asset also includes any lease payments made in advance and any accrued rent expense balances. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components. For office leases, we account for the lease and non-lease components as a single lease component. For equipment leases, such as vehicles and office equipment, we account for the lease and non-lease components separately.
Recently Adopted Financial Accounting Standards
On January 1, 2019, the Company adopted Accounting Standards Update ("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, 2019 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. 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 June 30, 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 three and six months ended June 30, 2019. The adoption had no impact on the Condensed Consolidated Statement of Changes in Stockholders' Equity for the three and six months ended June 30, 2019.
Additional information and disclosures required by the new standard are contained in Note 6, Leases.
7
On January 1, 2019, the Company adopted ASU No. 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 the Company's consolidated financial statements.
3. | Revenue |
Executive Search
Revenue is recognized as we satisfy our performance obligations by transferring a good or service to a client. Generally, each of our executive search contracts contains 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, 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 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.
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 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 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 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 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 SD 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 comprised of a single fixed fee. Our enterprise agreements contain multiple performance obligations, the delivery of materials via SD 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 outlined in the contract and is equal to the price paid by the client for the agreement over the initial term of the
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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 SD 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 SD Connect equally throughout the contract period. Revenue related to 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.
Contract Balances
Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the 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 Other 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 the 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 equal to billings in excess of revenue recognized.
The following table outlines the changes in our contract asset and liability balances during the period:
December 31, 2018 | June 30, 2019 | Change | |||||||||
Contract assets | |||||||||||
Unbilled receivables | $ | 8,684 | $ | 10,237 | $ | 1,553 | |||||
Contract assets | 15,291 | 14,506 | (785 | ) | |||||||
Total contract assets | 23,975 | 24,743 | 768 | ||||||||
Contract liabilities | |||||||||||
Deferred revenue | $ | 40,673 | $ | 37,424 | $ | (3,249 | ) | ||||
During the six months ended June 30, 2019, we recognized revenue of $30.3 million that was included in the contract liabilities balance at the beginning of the period. The amount of revenue recognized during the six months ended June 30, 2019, from performance obligations partially satisfied in previous periods as a result of changes in the estimates of variable consideration was $14.4 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.
4. | Allowance for Doubtful Accounts |
The activity of the allowance for doubtful accounts is as follows:
Balance at December 31, 2018 | $ | 3,502 | |
Provision charged to income | 1,821 | ||
Write-offs, net of recoveries | (1,099 | ) | |
Balance at June 30, 2019 | $ | 4,224 | |
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5. | Property and Equipment, net |
The components of the Company’s property and equipment are as follows:
June 30, 2019 | December 31, 2018 | ||||||
Leasehold improvements | $ | 46,741 | $ | 48,455 | |||
Office furniture, fixtures and equipment | 17,586 | 17,919 | |||||
Computer equipment and software | 26,830 | 27,063 | |||||
Property and equipment, gross | 91,157 | 93,437 | |||||
Accumulated depreciation | (60,369 | ) | (59,566 | ) | |||
Property and equipment, net | $ | 30,788 | $ | 33,871 | |||
Depreciation expense for the three months ended June 30, 2019 and 2018 was $2.4 million and $2.8 million, respectively. Depreciation expense for the six months ended June 30, 2019 and 2018 was $4.9 million and $5.6 million, respectively.
6. | Leases |
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 our 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.
Office leases have remaining lease terms that range from less than one year to 7.3 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.
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 were as follows:
Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | ||||||
Operating lease cost | $ | 5,907 | $ | 12,480 | |||
Variable lease cost | 2,057 | 3,914 | |||||
Total lease cost | $ | 7,964 | $ | 16,394 | |||
Supplemental cash flow information related to the Company's operating leases is as follows:
Six Months Ended June 30, 2019 | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from operating leases | $ | 16,886 | |
Right-of-use assets obtained in exchange for lease obligations: | |||
Operating leases | $ | 11,441 | |
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The weighted average remaining lease term and weighted average discount rate for our operating leases as of June 30, 2019 is as follows:
June 30, 2019 | ||
Weighted Average Remaining Lease Term | ||
Operating leases | 4.7 years | |
Weighted Average Discount Rate | ||
Operating leases | 3.97 | % |
The future maturities of the Company's operating lease liabilities as of June 30, 2019, for the years ended December 31 is as follows:
Operating Lease Maturity | |||
2019 | $ | 15,392 | |
2020 | 30,774 | ||
2021 | 25,991 | ||
2022 | 22,388 | ||
2023 | 19,429 | ||
Thereafter | 13,455 | ||
Total lease payments | 127,429 | ||
Less: Interest | (11,378 | ) | |
Present value of lease liabilities | $ | 116,051 | |
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. |
Cash, Cash Equivalents, Accounts Receivable and Accounts Payable
The Company considers the recorded value of its cash and cash equivalents, accounts receivable, and accounts payable, to approximate the fair value of the respective assets and liabilities at June 30, 2019, and December 31, 2018, based upon the short-term nature of the assets and liabilities.
Marketable Securities
The Company's investments in marketable debt securities, which consist of U.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 Condensed Consolidated Balance Sheets until realized.
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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 June 30, 2019 | |||||||||||||||||||||||
Cash | $ | 78,982 | $ | — | |||||||||||||||||||
Level 1(1): | |||||||||||||||||||||||
Money market funds | 5,518 | — | — | 5,518 | 5,518 | — | |||||||||||||||||
U.S. Treasury securities | 57,501 | 12 | — | 57,513 | 18,815 | 38,698 | |||||||||||||||||
Total Level 1 | 63,019 | 12 | — | 63,031 | 24,333 | 38,698 | |||||||||||||||||
Level 2(2): | |||||||||||||||||||||||
Commercial paper | 1,999 | — | — | 1,999 | 1,999 | — | |||||||||||||||||
Total | $ | 65,018 | $ | 12 | $ | — | $ | 65,030 | $ | 105,314 | $ | 38,698 | |||||||||||
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(1): | |||||||||||||||||||||||
Money market funds | 77 | — | — | 77 | 77 | — | |||||||||||||||||
Total | $ | 77 | $ | — | $ | — | $ | 77 | $ | 279,906 | $ | — | |||||||||||
(1) | Level 1 – Quoted prices in active markets for identical assets and liabilities. |
(2) | 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. |
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 $16.4 million and $14.6 million as of June 30, 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.
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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 June 30, 2019 | ||||||||||||||||||||||||
Level 1(1): | ||||||||||||||||||||||||
U.S. non-qualified deferred compensation plan | $ | 23,647 | $ | — | $ | — | $ | 23,647 | $ | — | $ | — | ||||||||||||
Level 2(2): | ||||||||||||||||||||||||
Retirement and pension plan assets | 16,246 | 1,337 | 14,909 | — | — | — | ||||||||||||||||||
Pension benefit obligation | (20,275 | ) | — | — | — | (1,338 | ) | (18,937 | ) | |||||||||||||||
Total Level 2 | (4,029 | ) | 1,337 | 14,909 | — | (1,338 | ) | (18,937 | ) | |||||||||||||||
Total | $ | 19,618 | $ | 1,337 | $ | 14,909 | $ | 23,647 | $ | (1,338 | ) | $ | (18,937 | ) | ||||||||||
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(1): | ||||||||||||||||||||||||
U.S. non-qualified deferred compensation plan | $ | 19,442 | $ | — | $ | — | $ | 19,442 | $ | — | $ | — | ||||||||||||
Level 2(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 | ) | ||||||||||
(1) | Level 1 – Quoted prices in active markets for identical assets and liabilities. |
(2) | 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. |
Contingent Consideration
The former owners of the Company's prior year acquisitions 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.
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The following table provides a reconciliation of the beginning and ending balance of Level 3 liabilities for the six months ended June 30, 2019:
Acquisition Earnout Accruals | |||
Balance at December 31, 2018 | $ | (6,627 | ) |
Earnout accretion | (327 | ) | |
Earnout payments | 553 | ||
DSI earnout adjustment | (56 | ) | |
Foreign currency translation | 20 | ||
Balance at June 30, 2019 | $ | (6,437 | ) |
8. | Goodwill and Other Intangible Assets |
Goodwill
The Company's goodwill by segment is as follows:
June 30, 2019 | December 31, 2018 | ||||||
Executive Search | |||||||
Americas | $ | 88,547 | $ | 88,410 | |||
Europe | 24,782 | 24,924 | |||||
Asia Pacific | 8,741 | 8,758 | |||||
Total Executive Search | 122,070 | 122,092 | |||||
Heidrick Consulting | 36,257 | 36,257 | |||||
Goodwill, gross | 158,327 | 158,349 | |||||
Accumulated impairment | (36,257 | ) | (36,257 | ) | |||
Goodwill, net | $ | 122,070 | $ | 122,092 | |||
Changes in the carrying amount of goodwill by segment for the six months ended June 30, 2019, are as follows:
Executive Search | |||||||||||||||||||
Americas | Europe | Asia Pacific | Heidrick Consulting | Total | |||||||||||||||
Gross goodwill at December 31, 2018 | $ | 88,410 | $ | 24,924 | $ | 8,758 | $ | 36,257 | $ | 158,349 | |||||||||
Accumulated impairment | — | — | — | (36,257 | ) | (36,257 | ) | ||||||||||||
Net goodwill at December 31, 2018 | 88,410 | 24,924 | 8,758 | — | 122,092 | ||||||||||||||
Foreign currency translation | 137 | (142 | ) | (17 | ) | — | (22 | ) | |||||||||||
Net goodwill at June 30, 2019 | $ | 88,547 | $ | 24,782 | $ | 8,741 | $ | — | $ | 122,070 | |||||||||
Other Intangible Assets, net
The Company’s other intangible assets, net by segment, are as follows:
June 30, 2019 | December 31, 2018 | ||||||
Executive Search | |||||||
Americas | $ | 13 | $ | 52 | |||
Europe | 1,645 | 2,086 | |||||
Asia Pacific | 72 | 78 | |||||
Total Executive Search | 1,730 | 2,216 | |||||
Heidrick Consulting | — | — | |||||
Total other intangible assets, net | $ | 1,730 | $ | 2,216 | |||
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The carrying amount of amortizable intangible assets and the related accumulated amortization are as follows:
Weighted Average Life (Years) | June 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
Client relationships | 6.7 | $ | 15,905 | $ | (14,175 | ) | $ | 1,730 | $ | 15,910 | $ | (13,694 | ) | $ | 2,216 | ||||||||||
Total intangible assets | 6.7 | $ | 15,905 | $ | (14,175 | ) | $ | 1,730 | $ | 15,910 | $ | (13,694 | ) | $ | 2,216 | ||||||||||
Intangible asset amortization expense for the three months ended June 30, 2019 and 2018 was $0.2 million and $0.5 million, respectively. Intangible asset amortization expense for the six months ended June 30, 2019 and 2018 was $0.5 million and $0.9 million, respectively.
The Company's estimated future amortization expense related to intangible assets as of June 30, 2019, for the years ended December 31 is as follows:
Estimated Future Amortization | |||
2019 | $ | 369 | |
2020 | 525 | ||
2021 | 354 | ||
2022 | 239 | ||
2023 | 146 | ||
Thereafter | 97 | ||
Total | $ | 1,730 | |
9. | Other Current Assets and Liabilities and Non-Current Liabilities |
The components of other current assets are as follows:
June 30, 2019 | December 31, 2018 | ||||||
Contract assets | $ | 24,743 | $ | 23,975 | |||
Other | 5,339 | 5,623 | |||||
Total other current assets | $ | 30,082 | $ | 29,598 | |||
The components of other current liabilities are as follows:
June 30, 2019 | December 31, 2018 | ||||||
Restructuring charges | $ | 89 | $ | 1,286 | |||
Other | 26,097 | 31,933 | |||||
Total other current liabilities | $ | 26,186 | $ | 33,219 | |||
The components of other non-current liabilities are as follows:
June 30, 2019 | December 31, 2018 | ||||||
Premise related costs | $ | 2,421 | $ | 15,473 | |||
Other | 1,896 | 1,950 | |||||
Total other non-current liabilities | $ | 4,317 | $ | 17,423 | |||
10. | Line of Credit |
On 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 Credit 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
15
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 term of the agreement.
Before October 26, 2018, the Company was party to the Restated Credit Agreement, which was executed on June 30, 2015. The Restated Credit Agreement provided a single senior unsecured revolving line of credit with an aggregate commitment of up to $100 million, which included a sublimit of $25 million for letters of credit, and a $50 million expansion feature (the “Replacement Facility”). Borrowings under the Restated Credit Agreement bore interest at the Company's election of 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.
During the three months ended March 31, 2018, the Company borrowed $20 million under the Restated Credit Agreement and elected the Adjusted LIBOR Rate. The Company 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 June 30, 2019, and December 31, 2018, the Company had no outstanding borrowings. The Company was in compliance with the financial and other covenants under both facilities and no event of default existed.
11. | Stock-Based Compensation |
The Company’s Second Amended and Restated 2012 Heidrick & Struggles GlobalShare Program (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 2012 Program originally authorized 1,300,000 shares of Common Stock for issuance pursuant to awards under the plan.
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. On May 24, 2018, 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 850,000 shares. As of June 30, 2019, 2,334,738 awards have been issued under the 2012 Program and 1,190,231 shares remain available for future awards, including 674,969 forfeited awards. The 2012 Program provides that no awards can be granted after May 24, 2028.
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:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Salaries and benefits (1) | $ | 2,976 | $ | 1,513 | $ | 4,647 | $ | 3,289 | |||||||
General and administrative expenses | 460 | 563 | 460 | 563 | |||||||||||
Income tax benefit related to stock-based compensation included in net income | 908 | 550 | 1,349 | 1,021 | |||||||||||
(1) Includes $0.1 million and $0.4 million of expense related to cash settled restricted stock units for the three and six months ended June 30, 2019, respectively.
Restricted Stock Units
Restricted stock units are generally subject to ratable vesting over a three-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.
Restricted stock unit activity for the six months ended June 30, 2019 is as follows:
Number of Restricted Stock Units | Weighted- Average Grant-Date Fair Value | |||||
Outstanding on December 31, 2018 | 512,446 | $ | 28.83 | |||
Granted | 109,298 | 39.57 | ||||
Vested and converted to common stock | (175,792 | ) | 24.19 | |||
Forfeited | — | — | ||||
Outstanding on June 30, 2019 | 445,952 | $ | 33.10 | |||
As of June 30, 2019, there was $7.2 million of pre-tax unrecognized compensation expense related to unvested restricted stock units, which is expected to be recognized over a weighted average of 2.4 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-year period. The vesting will vary between 0% and 200% based on the attainment of operating income goals over the three-year vesting period. The performance stock units are expensed on a straight-line basis over the three-year vesting period.
During the six months ended June 30, 2019, performance stock units were granted to certain employees of the Company and are 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 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 performance conditions and the resulting fair value of the award.
Performance stock unit activity for the six months ended June 30, 2019 is as follows:
Number of Performance Stock Units | Weighted- Average Grant-Date Fair Value | |||||
Outstanding on December 31, 2018 | 197,117 | $ | 27.58 | |||
Granted | 64,701 | 37.62 | ||||
Vested and converted to common stock | (99,219 | ) | 25.04 | |||
Forfeited | — | — | ||||
Outstanding on June 30, 2019 | 162,599 | $ | 33.13 | |||
As of June 30, 2019, there was $3.9 million of pre-tax unrecognized compensation expense related to unvested performance stock units, which is expected to be recognized over a weighted average of 2.3 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 were granted to certain employees of the Company and 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.
The Company recorded phantom stock-based compensation expense of $0.1 million and $0.4 million during the three and six months ended June 30, 2019, respectively.
Phantom stock unit activity for the six months ended June 30, 2019 is as follows:
Number of Phantom Stock Units | ||
Outstanding on December 31, 2018 | 111,673 | |
Granted | — | |
Vested and converted to common stock | — | |
Forfeited | — | |
Outstanding on June 30, 2019 | 111,673 | |
As of June 30, 2019, there was $1.5 million of pre-tax unrecognized compensation expense related to unvested phantom stock units, which is expected to be recognized over a weighted average of 3.1 years.
12. Restructuring
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.
Changes to the accrual for restructuring charges for the six months ended June 30, 2019, are as follows:
Employee Related | Other | Total | |||||||||
Outstanding on December 31, 2018 | $ | 1,269 | $ | 17 | $ | 1,286 | |||||
Cash payments | (1,127 | ) | — | (1,127 | ) | ||||||
Other | (67 | ) | — | (67 | ) | ||||||
Exchange rate fluctuations | (3 | ) | — | (3 | ) | ||||||
Outstanding on June 30, 2019 | $ | 72 | $ | 17 | $ | 89 | |||||
13. | Income Taxes |
The Company reported income before taxes of $19.5 million and an income tax provision of $5.2 million for the three months ended June 30, 2019. The Company reported income before taxes of $18.4 million and an income tax provision of $6.9 million for the three months ended June 30, 2018. The effective tax rates for the three months ended June 30, 2019 and 2018, were 26.7% and 37.7%, respectively. The effective tax rate for the three months ended June 30, 2019 was impacted by one-time items and the mix of income. The effective tax rate for the three months ended June 30, 2018 was impacted by one-time items and the Tax Cuts and Jobs Act enacted on December 22, 2017 in the United States.
The Company reported income before taxes of $38.3 million and an income tax provision of $11.9 million for the six months ended June 30, 2019. The Company reported income before taxes of $31.3 million and an income tax provision of $9.7 million for the six months ended June 30, 2018. The effective tax rates for the six months ended June 30, 2019 and 2018, were 31.2% and 30.9%, respectively. The effective tax rate for the six months ended June 30, 2019 was impacted by one-time items and the mix of income. The effective tax rate for the six months ended June 30, 2018 was impacted by one-time items and the Tax Cuts and Jobs Act enacted on December 22, 2017 in the United States.
The Company estimates that its effective tax rate for the year ended December 31, 2019, will be between 31% and 34%. The full year effective rate for 2019 is primarily the result of one-time items and the mix of income.
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14. | Changes in Accumulated Other Comprehensive Income |
The changes in Accumulated other comprehensive income (“AOCI”) by component for the six months ended June 30, 2019 is 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 | 12 | 313 | — | 325 | ||||||||||||
Amount reclassified from AOCI | — | — | — | — | ||||||||||||
Net current period other comprehensive income | 12 | 313 | — | 325 | ||||||||||||
Balance at June 30, 2019 | $ | 12 | $ | 5,571 | $ | (1,196 | ) | $ | 4,387 | |||||||
15. | Segment Information |
In 2018, the Company completed the integration of its Leadership Consulting and Culture Shaping businesses into one combined service offering, Heidrick Consulting. In conjunction with the integration, the Company reorganized its Management Committee, which the Company considers to be its chief operating decision maker, so as to regularly assess performance and make resource allocations decisions for the Heidrick Consulting business. Therefore, the Company now reports its former Leadership Consulting and Culture Shaping operating segments as one operating segment, Heidrick Consulting.
The Company has four operating segments. The executive search business operates in the Americas, Europe (which includes Africa) and Asia Pacific (which includes the Middle East), and the Heidrick Consulting business operates 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, more appropriately reflect its core operations.
The revenue and operating income (loss) by segment are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenue | |||||||||||||||
Executive Search | |||||||||||||||
Americas | $ | 100,517 | $ | 102,692 | $ | 199,822 | $ | 188,995 | |||||||
Europe | 34,864 | 37,286 | 68,417 | 72,967 | |||||||||||
Asia Pacific | 23,163 | 26,517 | 48,610 | 50,365 | |||||||||||
Total Executive Search | 158,544 | 166,495 | 316,849 | 312,327 | |||||||||||
Heidrick Consulting | 14,578 | 16,564 | 27,867 | 30,803 | |||||||||||
Revenue before reimbursements (net revenue) | 173,122 | 183,059 | 344,716 | 343,130 | |||||||||||
Reimbursements | 5,051 | 4,630 | 9,731 | 9,217 | |||||||||||
Total revenue | $ | 178,173 | $ | 187,689 | $ | 354,447 | $ | 352,347 | |||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Operating income (loss) | |||||||||||||||
Executive Search | |||||||||||||||
Americas | $ | 28,551 | $ | 26,012 | $ | 51,000 | $ | 46,647 | |||||||
Europe | 1,157 | 2,295 | 3,322 | 5,549 | |||||||||||
Asia Pacific | 3,315 | 2,891 | 8,221 | 7,194 | |||||||||||
Total Executive Search | 33,023 | 31,198 | 62,543 | 59,390 | |||||||||||
Heidrick Consulting | (4,793 | ) | (3,997 | ) | (9,620 | ) | (9,227 | ) | |||||||
Total segment operating income | 28,230 | 27,201 | 52,923 | 50,163 | |||||||||||
Global Operations Support | (9,877 | ) | (8,740 | ) | (18,179 | ) | (18,581 | ) | |||||||
Total operating income | $ | 18,353 | $ | 18,461 | $ | 34,744 | $ | 31,582 | |||||||
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16. | Guarantees |
The Company has utilized letters of credit to support certain obligations, primarily for its office lease agreements in Europe and Asia Pacific. The letters of credit were made to secure the respective agreements and are for the terms of the agreements, which extend through 2024. For each letter of credit issued, the Company would have to use cash to fulfill the obligation if there is a default on a payment. The maximum amount of undiscounted payments the Company would be required to make in the event of default on all outstanding letter of credits is approximately $2.4 million as of June 30, 2019. The Company has not accrued for these arrangements as no event of default exists or is expected to exist.
17. | Commitments and Contingencies |
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 will not have a material adverse effect on its financial condition, results of operations or liquidity.
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ITEM 2. 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 report on Form 10-Q 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.
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 prevent our consultants from taking our clients with them to another firm; our ability to maintain our professional reputation and brand name; the fact that our net revenue may be affected by adverse economic conditions; our clients’ ability to restrict us from recruiting their employees; the aggressive competition we face; our heavy reliance on information management systems; the fact that we face the risk of liability in the services we perform; the fact that data security, data privacy and data protection laws and other evolving regulations and cross-border data transfer restrictions may limit the use of our services and adversely affect our business; social, political, regulatory and legal risks in markets where we operate; the impact of foreign currency exchange rate fluctuations; the fact that we may not be able to align our cost structure with net revenue; unfavorable tax law changes and tax authority rulings; our ability to realize our tax losses; the timing of the establishment or reversal of valuation allowance on deferred tax assets; any impairment of our goodwill, other intangible assets and other long-lived assets; our ability to execute and integrate future acquisitions; the fact that we have anti-takeover provisions that make an acquisition of us difficult and expensive; our ability to access additional credit; and the increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks that could pose a risk to our systems, networks, solutions, services and data. For more information on the factors that could affect the outcome of forward-looking statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2018, under Risk Factors in Item 1A. We caution the reader that the list of factors may not be exhaustive. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Executive Overview
Our Business. We are a leadership advisory firm providing executive search and consulting services. We help our clients build leadership teams by facilitating the recruitment, management and development of senior executives. In addition to executive search, our consulting services include executive leadership assessment, leadership, team and board development, succession planning, talent strategy, people performance, inter-team collaboration, culture shaping and organizational transformation. 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 engagement, 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.
We provide our services to a broad range of clients through the expertise of over 400 consultants located in major cities around the world.
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 advantages including access to and influence with key decision makers, increased potential for recurring search and consulting engagements, higher fees per executive 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.
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. Our executive search services are provided on a retained basis. 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.
For each assignment, we enter into a contract with our client that outlines the general terms and conditions of the assignment. Typically, we are paid a retainer for our executive search 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. We refer to this excess compensation billing as uptick revenue. We also bill our clients for indirect expenses, which are calculated as a percentage of the retainer with certain dollar limits per search. Revenue before reimbursements of out-of-pocket expenses (“net revenue”) consists of retainers, an estimate of uptick revenue and indirect expenses billed to clients. We generally bill our clients for our 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 with uptick revenue billed upon the completion of the engagement.
Heidrick 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 consulting services include leadership assessment and development, executive coaching and on-boarding, succession planning, team and board effectiveness, organizational performance acceleration, workforce planning and culture shaping. Our consulting services generate revenue primarily through the professional fees generated for each engagement which are generally based on the size of the project and scope of services.
Key Performance Indicators
We manage and assess the Company's 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 Heidrick Consulting performance is also measured using consultant headcount and consultant productivity. 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 consulting engagements and the average revenue per search or engagement. 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 improving operating margins.
The number of consultants, confirmation trends, number of searches or engagements completed, productivity levels and the average revenue per search or engagement 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 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-year vesting period. The deferrals are recorded in Accrued salaries and benefits in the Condensed Consolidated Balance Sheets.
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Third Quarter 2019 Outlook
We are currently forecasting 2019 third quarter net revenue of between $175 million and $185 million. Our 2019 third 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 in June 2019.
Our 2019 guidance is subject to a number of risks and uncertainties, including those discussed under Item 1A - Risk Factors in our 2018 Annual Report on Form 10-K. As such, actual results could vary from these projections.
Results of Operations
The following table summarizes, for the periods indicated, our results of operations as a percentage of revenue before reimbursements (net revenue):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Revenue | |||||||||||
Revenue before reimbursements (net revenue) | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
Reimbursements | 2.9 | 2.5 | 2.8 | 2.7 | |||||||
Total revenue | 102.9 | 102.5 | 102.8 | 102.7 | |||||||
Operating expenses | |||||||||||
Salaries and benefits | 69.7 | 69.7 | 70.0 | 69.7 | |||||||
General and administrative expenses | 19.7 | 20.2 | 19.9 | 21.1 | |||||||
Reimbursed expenses | 2.9 | 2.5 | 2.8 | 2.7 | |||||||
Total operating expenses | 92.3 | 92.4 | 92.7 | 93.5 | |||||||
Operating income | 10.6 | 10.1 | 10.1 | 9.2 | |||||||
Non-operating income (expense) | |||||||||||
Interest, net | 0.2 | — | 0.4 | 0.1 | |||||||
Other, net | 0.4 | — | 0.7 | (0.1 | ) | ||||||
Net non-operating income (expense) | 0.6 | — | 1.0 | (0.1 | ) | ||||||
Income before income taxes | 11.2 | 10.1 | 11.1 | 9.1 | |||||||
Provision for income taxes | 3.0 | 3.8 | 3.5 | 2.8 | |||||||
Net income | 8.2 | % | 6.3 | % | 7.6 | % | 6.3 | % | |||
Note: Totals and sub-totals 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 our Heidrick Consulting services globally (See Note 15, Segment Information).
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The following tables set forth, for the periods indicated, our revenue and operating income by segment (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenue | |||||||||||||||
Executive Search | |||||||||||||||
Americas | $ | 100,517 | $ | 102,692 | $ | 199,822 | $ | 188,995 | |||||||
Europe | 34,864 | 37,286 | 68,417 | 72,967 | |||||||||||
Asia Pacific | 23,163 | 26,517 | 48,610 | 50,365 | |||||||||||
Total Executive Search | 158,544 | 166,495 | 316,849 | 312,327 | |||||||||||
Heidrick Consulting | 14,578 | 16,564 | 27,867 | 30,803 | |||||||||||
Revenue before reimbursements (net revenue) | 173,122 | 183,059 | 344,716 | 343,130 | |||||||||||
Reimbursements | 5,051 | 4,630 | 9,731 | 9,217 | |||||||||||
Total revenue | $ | 178,173 | $ | 187,689 | $ | 354,447 | $ | 352,347 | |||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Operating income (loss) | |||||||||||||||
Executive Search | |||||||||||||||
Americas | $ | 28,551 | $ | 26,012 | $ | 51,000 | $ | 46,647 | |||||||
Europe | 1,157 | 2,295 | 3,322 | 5,549 | |||||||||||
Asia Pacific | 3,315 | 2,891 | 8,221 | 7,194 | |||||||||||
Total Executive Search | 33,023 | 31,198 | 62,543 | 59,390 | |||||||||||
Heidrick Consulting | (4,793 | ) | (3,997 | ) | (9,620 | ) | (9,227 | ) | |||||||
Total segment operating income | 28,230 | 27,201 | 52,923 | 50,163 | |||||||||||
Global Operations Support | (9,877 | ) | (8,740 | ) | (18,179 | ) | (18,581 | ) | |||||||
Total operating income | $ | 18,353 | $ | 18,461 | $ | 34,744 | $ | 31,582 | |||||||
Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018
Total revenue. Consolidated total revenue decreased $9.5 million, or 5.1%, to $178.2 million for the three months ended June 30, 2019, from $187.7 million for the three months ended June 30, 2018. The decrease in total revenue was primarily due to the decrease in revenue before reimbursements (net revenue).
Revenue before reimbursements (net revenue). Consolidated net revenue decreased $9.9 million, or 5.4%, to $173.1 million for the three months ended June 30, 2019 from $183.1 million for the three months ended June 30, 2018. Foreign exchange rate fluctuations negatively impacted results by $3.4 million, or 1.9%. Executive Search net revenue was $158.5 million for the three months ended June 30, 2019, a decrease of $8.0 million compared to the three months ended June 30, 2018. Heidrick Consulting net revenue decreased $2.0 million, or 12.0%, to $14.6 million for the three months ended June 30, 2019, from $16.6 million for the three months ended June 30, 2018. The decrease in Heidrick Consulting net revenue is primarily due to a decrease in revenue per consulting engagement, partially offset by an increase in engagements.
The number of Executive Search and Heidrick Consulting consultants was 371 and 68, respectively, as of June 30, 2019, compared to 349 and 69, respectively, as of June 30, 2018. Executive Search productivity, as measured by annualized net Executive Search revenue per consultant, was $1.7 million and $1.9 million for the three months ended June 30, 2019 and 2018, respectively. The number of confirmed searches decreased 8.5% compared to 2018. The average revenue per executive search increased to $124,200 for the three months ended June 30, 2019, compared to $119,400 for the three months ended June 30, 2018.
Salaries and benefits. Consolidated salaries and benefits expense decreased $7.1 million, or 5.5%, to $120.6 million for the three months ended June 30, 2019 from $127.7 million for the three months ended June 30, 2018. The decrease was due to higher fixed compensation of $3.0 million and lower variable compensation of $10.0 million. Fixed compensation increased primarily due to stock compensation, retirement and benefits, and deferred compensation plan expenses related to participant contributions and market fluctuations, partially offset by decreases in talent acquisition and retention costs and base salaries and payroll taxes. Variable compensation decreased due to a decline in consultant productivity. Foreign exchange rate fluctuations positively impacted results by $2.4 million, or 1.9%.
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For the three months ended June 30, 2019, we had an average of 1,644 employees compared to an average of 1,611 employees for the three months ended June 30, 2018.
As a percentage of net revenue, salaries and benefits expense was 69.7% for both the three months ended June 30, 2019, and 2018.
General and administrative expenses. Consolidated general and administrative expenses decreased $2.8 million, or 7.5%, to $34.2 million for the three months ended June 30, 2019, from $36.9 million for the three months ended June 30, 2018. The decrease is primarily due to lower professional fees and office occupancy costs, partially offset by increases in information technology and internal travel. Foreign exchange rate fluctuations positively impacted results by $0.5 million, or 1.5%.
As a percentage of net revenue, general and administrative expenses were 19.7% for the three months ended June 30, 2019, compared to 20.2% for the three months ended June 30, 2018.
Operating income. Consolidated operating income was $18.4 million for the three months ended June 30, 2019, compared to $18.5 million for the three months ended June 30, 2018. Foreign exchange rate fluctuations negatively impacted operating income by $0.5 million, or 2.6%.
Net non-operating income (expense). Net non-operating income was $1.1 million for the three months ended June 30, 2019, compared to $0.1 million of expense for the three months ended June 30, 2018.
Interest, net, was $0.4 million of income for the three months ended June 30, 2019, and less than $0.1 million of expense for the three months ended June 30, 2018. The increase was primarily due to interest earned on marketable securities, which are primarily comprised of investments in U.S. Treasury Bills.
Other, net, was income of $0.7 million and expense of less than $0.1 million for the three months ended June 30, 2019 and 2018, respectively. The increase was the result of gains on the deferred compensation plan assets.
Income taxes. See Note 13, Income Taxes.
Executive Search
Americas
The Americas segment reported net revenue of $100.5 million for the three months ended June 30, 2019, a decrease of 2.1% from $102.7 million for the three months ended June 30, 2018. The decrease in net revenue was driven by a decrease in average revenue per executive search. The Healthcare and Life Sciences and Consumer practice groups exhibited growth over the prior year. Foreign exchange rate fluctuations negatively impacted results by $0.1 million, or 0.1%. There were 190 Partner and Principal consultants as of June 30, 2019, compared to 174 as of June 30, 2018.
Salaries and benefits expense decreased $4.7 million, or 7.2%, compared to the three months ended June 30, 2018. Fixed compensation increased $2.5 million, primarily due to base salaries and payroll taxes, deferred compensation plan expenses related to participant contributions and market fluctuations, stock compensation, and retirement and benefits, partially offset by a decrease in talent acquisition and retention costs. Variable compensation decreased $7.1 million due to a decline in consultant productivity.
General and administrative expenses decreased $0.1 million, or 0.5%, compared to the three months ended June 30, 2018, primarily due to professional fees, partially offset by an increase in internal travel expenses related to the global partners meeting.
Operating income was $28.6 million for the three months ended June 30, 2019, an increase of $2.5 million compared to $26.0 million for the three months ended June 30, 2018.
Europe
Europe reported net revenue of $34.9 million for the three months ended June 30, 2019, a decrease of 6.5% from $37.3 million for the three months ended June 30, 2018. The decrease in net revenue was due to a 14.9% decrease in the number of executive search confirmations. The Consumer and Global Technology and Services practice groups exhibited growth over the prior year. Foreign exchange rate fluctuations negatively impacted results by $2.1 million, or 5.6%. There were 111 Partner and Principal consultants as of June 30, 2019, compared to 96 as of June 30, 2018.
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Salaries and benefits expense decreased $0.4 million, or 1.6%, compared to the three months ended June 30, 2018. Fixed compensation increased $0.5 million for the three months ended June 30, 2019. The increase in fixed compensation was primarily due to retirement and benefits, and separation, partially offset by decreases in base salaries and payroll taxes, and talent acquisition and retention costs. Variable compensation decreased $0.9 million due to a decline in consultant productivity.
General and administrative expense decreased $0.8 million, or 10.2%, compared to the three months ended June 30, 2018, primarily due to decreases in internal travel, intangible asset amortization, and professional fees, partially offset by an increase in office occupancy.
The Europe segment reported operating income of $1.2 million for the three months ended June 30, 2019, a decrease of $1.1 million compared to $2.3 million for the three months ended June 30, 2018.
Asia Pacific
Asia Pacific reported net revenue of $23.2 million for the three months ended June 30, 2019, a decrease of 12.6% compared to $26.5 million for the three months ended June 30, 2018. The decrease in net revenue was due to a 25.9% decrease in the number of executive search confirmations over the prior year, partially offset by an increase in the average revenue per executive search. The Global Technology and Services practice group exhibited growth over the prior year. Foreign exchange rate fluctuations negatively impacted results by $0.9 million, or 3.6%. There were 70 Partner and Principal consultants as of June 30, 2019, compared to 79 as of June 30, 2018.
Salaries and benefits expense decreased $3.3 million, or 18.2%, compared to the three months ended June 30, 2018. Fixed compensation decreased $1.7 million due to base salaries and payroll taxes, talent acquisition and retention costs, and retirement and benefits. Variable compensation decreased $1.6 million due to a decline in consultant productivity.
General and administrative expenses decreased $0.5 million, or 9.0%, compared to the three months ended June 30, 2018, primarily due to a decrease in office occupancy, taxes and licenses.
The Asia Pacific segment reported operating income of $3.3 million for the three months ended June 30, 2019, an increase of $0.4 million compared to the three months ended June 30, 2018.
Heidrick Consulting
Heidrick Consulting reported net revenue of $14.6 million for the three months ended June 30, 2019, a decrease of 12.0% compared to $16.6 million for the three months ended June 30, 2018. The decrease in Heidrick Consulting net revenue is primarily due to a decrease in revenue per consulting engagement, partially offset by an increase in engagements. Foreign exchange rate fluctuations negatively impacted results by $0.4 million, or 2.4%. There were 68 Heidrick Consulting Partner and Principal consultants at June 30, 2019, compared to 69 at June 30, 2018.
Salaries and benefits expense decreased $0.1 million, or 0.5%, compared to the three months ended June 30, 2018. Fixed compensation increased $0.7 million due to talent acquisition and retention costs. Variable compensation decreased $0.7 million due to a decline in consultant productivity.
General and administrative expenses decreased $1.1 million, or 17.0%, compared to the three months ended June 30, 2018, primarily due to professional fees and office occupancy, partially offset by increases in information technology and internal travel.
The Heidrick Consulting segment reported an operating loss of $4.8 million for the three months ended June 30, 2019, a decline of $0.8 million compared to an operating loss of $4.0 million for the three months ended June 30, 2018.
Global Operations Support
Global Operations Support expenses for the three months ended June 30, 2019, increased $1.1 million, or 13.0%, to $9.9 million from $8.7 million for the three months ended June 30, 2018.
Salaries and benefits expense increased $1.4 million, or 30.3%, due to stock compensation, base salaries and payroll taxes, and retirement and benefits.
General and administrative expenses decreased $0.2 million, or 5.1%, primarily due to professional fees and office occupancy, partially offset by increases in internal travel and information technology.
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Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
Total revenue. Consolidated total revenue increased $2.1 million, or 0.6%, to $354.4 million for the six months ended June 30, 2019, from $352.3 million for the six months ended June 30, 2018. 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 $1.6 million, or 0.5%, to $344.7 million for the six months ended June 30, 2019 from $343.1 million for the six months ended June 30, 2018. Foreign exchange rate fluctuations negatively impacted results by $7.8 million, or 2.2%. Executive Search net revenue was $316.8 million for the six months ended June 30, 2019, an increase of $4.5 million compared to the six months ended June 30, 2018. Heidrick Consulting net revenue decreased $2.9 million, or 9.5%, to $27.9 million for the six months ended June 30, 2019, from $30.8 million for the six months ended June 30, 2018. The decrease in Heidrick Consulting net revenue is primarily due to a decrease in revenue per consulting engagement, partially offset by an increase in engagements.
The number of Executive Search and Heidrick Consulting consultants was 371 and 68, respectively, as of June 30, 2019, compared to 349 and 69, respectively, as of June 30, 2018. Executive Search productivity, as measured by annualized net Executive Search revenue per consultant, was $1.7 million and $1.8 million for the six months ended June 30, 2019 and 2018, respectively. The number of confirmed searches decreased 3.8% compared to 2018. The average revenue per executive search increased to $123,900 for the six months ended June 30, 2019, compared to $117,600 for the six months ended June 30, 2018.
Salaries and benefits. Consolidated salaries and benefits expense increased $2.3 million, or 1.0%, to $241.4 million for the six months ended June 30, 2019 from $239.1 million for the six months ended June 30, 2018. The increase was due to higher fixed compensation of $7.4 million, partially offset by lower variable compensation of $5.1 million. Fixed compensation increased primarily due to deferred compensation plan expenses related to participant contributions and market fluctuations, stock compensation, and talent acquisition and retention costs, partially offset by a decrease in base salaries and payroll taxes. Variable compensation decreased primarily due to a decrease in productivity in Executive Search. Foreign exchange rate fluctuations positively impacted results by $5.4 million, or 2.2%.
For the six months ended June 30, 2019, we had an average of 1,634 employees compared to an average of 1,628 employees for the six months ended June 30, 2018.
As a percentage of net revenue, salaries and benefits expense was 70.0% for the six months ended June 30, 2019, compared to 69.7% for the six months ended June 30, 2018.
General and administrative expenses. Consolidated general and administrative expenses decreased $3.9 million, or 5.4%, to $68.6 million for the six months ended June 30, 2019, from $72.5 million for the six months ended June 30, 2018. The decrease is primarily due to lower professional fees, intangible amortization, and earnout accretion, partially offset by an increase in taxes and licenses, and the use of external third-party consultants by Heidrick Consulting. Foreign exchange rate fluctuations positively impacted results by $1.4 million, or 2.0%.
As a percentage of net revenue, general and administrative expenses were 19.9% for the six months ended June 30, 2019, compared to 21.1% for the six months ended June 30, 2018.
Operating income. Consolidated operating income was $34.7 million for the six months ended June 30, 2019, compared to $31.6 million for the six months ended June 30, 2018. Foreign exchange rate fluctuations negatively impacted operating income by $1.0 million, or 2.8%.
Net non-operating income (expense). Net non-operating income was $3.6 million for the six months ended June 30, 2019, compared to $0.3 million of expense for the six months ended June 30, 2018.
Interest, net, was $1.2 million of income for the six months ended June 30, 2019, and $0.2 million of income for the six months ended June 30, 2018. The increase was primarily due to interest earned on marketable securities, which are primarily comprised of investments in U.S. Treasury Bills.
Other, net, was income of $2.4 million and expense of $0.5 million for the six months ended June 30, 2019 and 2018, respectively. The increase was primarily the result of gains on the deferred compensation plan assets.
Income taxes. See Note 13, Income Taxes.
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Executive Search
Americas
The Americas segment reported net revenue of $199.8 million for the six months ended June 30, 2019, an increase of 5.7% from $189.0 million for the six months ended June 30, 2018. The increase in net revenue was driven by a 5.1% increase in the number of executive search confirmations coupled with an increase in average revenue per executive search. All industry practice groups contributed to net revenue growth, with the exception of the Education and Social Enterprises, and Financial Services practice groups. There were 190 Partner and Principal consultants as of June 30, 2019, compared to 174 as of June 30, 2018.
Salaries and benefits expense increased $5.7 million, or 4.8%, compared to the six months ended June 30, 2018. Fixed compensation increased $8.8 million, primarily due to deferred compensation plan expenses related to participant contributions and market fluctuations, base salaries and payroll taxes, talent acquisition and retention costs, and stock compensation. Variable compensation decreased $3.0 million primarily due the mix of fixed and variable compensation related to minimum guarantees.
General and administrative expenses increased $0.7 million, or 3.1%, compared to the six months ended June 30, 2018, primarily due to internal travel expenses related to the global partners meeting, and taxes and licenses, partially offset by a decrease in professional fees.
Operating income was $51.0 million for the six months ended June 30, 2019, an increase of $4.4 million compared to $46.6 million for the six months ended June 30, 2018.
Europe
Europe reported net revenue of $68.4 million for the six months ended June 30, 2019, a decrease of 6.2% from $73.0 million for the six months ended June 30, 2018. The decrease in net revenue was due to a decrease in the number of executive search confirmations. The Global Technology and Services, Industrial, and Consumer practice groups contributed to net revenue growth. Foreign exchange rate fluctuations negatively impacted results by $4.7 million, or 6.4%. There were 111 Partner and Principal consultants as of June 30, 2019, compared to 96 as of June 30, 2018.
Salaries and benefits expense decreased $0.8 million, or 1.5%, compared to the six months ended June 30, 2018. Fixed compensation decreased $0.3 million for the six months ended June 30, 2019. The decrease in fixed compensation was primarily due to base salaries and payroll taxes, partially offset by increases in separation and retirement and benefits. Variable compensation decreased $0.4 million due to a decline in consultant productivity.
General and administrative expense decreased $1.6 million, or 9.3%, compared to the six months ended June 30, 2018, primarily due to intangible asset amortization, earnout accretion, internal travel, and bad debt expense.
The Europe segment reported operating income of $3.3 million for the six months ended June 30, 2019, a decrease of $2.2 million compared to $5.5 million for the six months ended June 30, 2018.
Asia Pacific
Asia Pacific reported net revenue of $48.6 million for the six months ended June 30, 2019, a decrease of 3.5% compared to $50.4 million for the six months ended June 30, 2018. The decrease in net revenue was due to a decrease in the number of executive search confirmations. All industry practice groups contributed to the decline in net revenue. Foreign exchange rate fluctuations negatively impacted results by $2.1 million, or 4.1%. There were 70 Partner and Principal consultants as of June 30, 2019, compared to 79 as of June 30, 2018.
Salaries and benefits expense decreased $2.5 million, or 7.6%, compared to the six months ended June 30, 2018. Fixed compensation decreased $2.8 million due to base salaries and payroll taxes, talent acquisition and retention costs, and retirement and benefits. Variable compensation increased $0.3 million due to the mix of fixed and variable compensation related to minimum guarantees.
General and administrative expenses decreased $0.3 million, or 2.8%, compared to the six months ended June 30, 2018, primarily due to lower office occupancy, partially offset by increases in bad debt expense, and internal travel related to the global partners meeting.
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The Asia Pacific segment reported operating income of $8.2 million for the six months ended June 30, 2019, an increase of $1.0 million compared to the six months ended June 30, 2018.
Heidrick Consulting
Heidrick Consulting reported net revenue of $27.9 million for the six months ended June 30, 2019, a decrease of 9.5% compared to $30.8 million for the six months ended June 30, 2018. The decrease in Heidrick Consulting net revenue is primarily due to a decrease in revenue per consulting engagement, partially offset by an increase in engagements. Foreign exchange rate fluctuations negatively impacted results by $0.7 million, or 2.3%. There were 68 Heidrick Consulting Partner and Principal consultants at June 30, 2019, compared to 69 at June 30, 2018.
Salaries and benefits expense decreased $0.5 million, or 1.7%, compared to the six months ended June 30, 2018. Fixed compensation increased $1.9 million due to an increase in talent acquisition and retention costs, and retirement and benefits. Variable compensation decreased $2.3 million due to a decline in consultant productivity.
General and administrative expenses decreased $2.1 million, or 15.9%, compared to the six months ended June 30, 2018, primarily due to a reduction in professional fees, partially offset by an increase in the use of external third-party consultants and internal travel.
The Heidrick Consulting segment reported an operating loss of $9.6 million for the six months ended June 30, 2019, a decrease of $0.4 million compared to an operating loss of $9.2 million for the six months ended June 30, 2018.
Global Operations Support
Global Operations Support expenses for the six months ended June 30, 2019, decreased $0.4 million, or 2.2%, to $18.2 million from $18.6 million for the six months ended June 30, 2018.
Salaries and benefits expense increased $0.3 million, or 2.9%, due to base salaries and payroll taxes, partially offset by a decrease in separation.
General and administrative expenses decreased $0.7 million, or 8.1%, primarily due to lower professional fees, including audit and legal fees, and internal travel.
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, 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 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 Credit Agreement") executed 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 2018 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 the 2018 Credit Agreement, which will be amortized over the remaining term of the agreement.
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Before October 26, 2018, we were party to the Restated Credit Agreement, which was executed on June 30, 2015. The Restated Credit Agreement provided a single senior unsecured revolving line of credit with an aggregate commitment of up to $100 million, which included a sublimit of $25 million for letters of credit, and a $50 million expansion feature (the “Replacement Facility”). Borrowings under the Restated Credit Agreement bore interest at our election of 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 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 June 30, 2019, and December 31, 2018, we had no outstanding borrowings and were in compliance with the financial and other covenants under both facilities and no event of default existed.
Cash, cash equivalents and marketable securities. Cash, cash equivalents and marketable securities at June 30, 2019, December 31, 2018, and June 30, 2018 were $144.0 million, $279.9 million and $85.8 million, respectively. The $144.0 million of cash, cash equivalents and marketable securities at June 30, 2019, includes $71.4 million held by our foreign subsidiaries. A portion of the $71.4 million is considered permanently reinvested in these foreign subsidiaries. If these funds were required to satisfy obligations in the U.S., the repatriation of these funds could cause us to incur additional U.S. income taxes or foreign withholding taxes.
Cash flows used in operating activities. For the six months ended June 30, 2019, cash used in operating activities was $121.9 million. This use of cash was primarily the result of cash bonus payments related to 2018 and prior year cash bonus deferrals partially offset by an increase in 2019 bonus accruals, and an increase in accounts receivable of $31.2 million, partially offset by net income of $26.4 million.
For the six months ended June 30, 2018, cash used in operating activities was $107.1 million. This use of cash was primarily the result of cash bonus payments related to 2017 and prior year cash bonus deferrals, an increase in accounts receivable of $55.4 million and restructuring payments of $8.9 million, partially offset by net income of $21.6 million.
Cash flows used in investing activities. Cash used in investing activities was $42.0 million for the six months ended June 30, 2019, primarily due to purchases of available for sale investments of $40.5 million and capital expenditures of $1.8 million for office build-outs.
Cash used in investing activities was $6.0 million for the six months ended June 30, 2018, primarily due to the $3.2 million acquisition of Amrop, capital expenditures of $2.5 million and purchases of available for sale investments of $1.9 million.
Cash flows used in financing activities. Cash used by financing activities was $10.9 million for the six months ended June 30, 2019, primarily due to dividend payments of $5.9 million, employee tax withholding payments on equity transactions of $4.6 million, and the final earnout payment for the Scambler MacGregor acquisition of $0.4 million.
Cash used by financing activities was $7.3 million for the six months ended June 30, 2018, primarily due to dividend payments of $5.0 million and employee tax withholding payments on equity transactions of $2.2 million. Gross borrowings and payments on the Company's line of credit were each $20.0 million during the six months ended June 30, 2018.
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.
Application of Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed 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, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2019, and in Note 2, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements included in Item 1. 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
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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, and if different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes its critical accounting policies that reflect its more significant estimates and assumptions relate to revenue recognition, income taxes, interim effective tax rate and assessment of goodwill and other intangible assets for impairment. See Application of Critical Accounting Policies and Estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 26, 2019.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating Lease Right-of-Use Assets, Operating Lease Liabilities - Current and Operating Lease Liabilities - Non-Current in our Condensed Consolidated Balance Sheets. The Company does not have any finance leases.
Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The operating lease right-of-use asset also includes any lease payments made in advance and any accrued rent balances. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components. For office leases, we account for the lease and non-lease components as a single lease component. For equipment leases, such as vehicles and information technology hardware, we account for the lease and non-lease components separately.
Recently Adopted Financial Accounting Standards
On January 1, 2019, the Company adopted Accounting Standards Update ("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, 2019 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. 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 June 30, 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 three and six months ended June 30, 2019. The adoption had no impact on the Condensed Consolidated Statement of Changes in Stockholders' Equity for the three and six months ended June 30, 2019.
On January 1, 2019, the Company adopted ASU No. 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 the Company's consolidated financial statements.
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ITEM 3. 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 net income for three months ended June 30, 2019 by approximately $1.0 million. However, because certain assets and liabilities are denominated in currencies other than the U.S. dollar, changes in currency rates may cause fluctuations in the valuation of such assets and liabilities. Based on balances exposed to fluctuation in exchange rates as of June 30, 2019, a 10% increase or decrease equally in the value of currencies could result in a foreign exchange gain or loss of approximately $1.2 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. For financial information by geographic segment, see Note 15, Segment Information, in the Notes to Condensed Consolidated Financial Statements.
ITEM 4. CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures |
The Company maintains disclosure controls and procedures as defined in the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) Rule 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 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 June 30, 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 June 30, 2019.
(b) | Changes in Internal Control Over Financial Reporting |
Effective January 1, 2019, the Company adopted ASU 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 were no other changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information presented in Note 17, Commitments and Contingencies, to our Condensed Consolidated Financial Statements within this Quarterly Report on Form 10-Q is incorporated herein by reference.
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Item 6. Exhibits
Exhibit No. | Description | |
*31.1 | ||
*31.2 | ||
*32.1 | ||
*32.2 | ||
*10.1 | ||
*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. |
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SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 29, 2019
Heidrick & Struggles International, Inc. | |
(Registrant) | |
/s/ Stephen A. Bondi | |
Stephen A. Bondi | |
Vice President, Controller | |
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Exhibit 10.1
Performance Stock Unit Participation Agreement
This Performance Stock Unit Participation Agreement (the “Agreement”) is dated as of this __th day of ______ and sets forth the terms and conditions of the Award described below made by Heidrick & Struggles International, Inc. (the “Company”) to _____ (the “Participant”), pursuant to the Second Amended and Restated 2012 Heidrick & Struggles GlobalShare Program (the “Program” or the “Plan”).
As of ________ (the “Grant Date”), the Company has granted a target award of _____ Performance Stock Units (“PSUs”) to the Participant as set forth herein. The PSUs are granted pursuant to the Program and are governed by the terms and conditions of the Program. All defined terms used herein, unless specifically defined in this Agreement, have the meanings assigned to them in the Program. The Participant agrees to be bound by all terms and conditions of the Agreement and the Program, and has received and reviewed a copy of the Program and the Prospectus for the Program dated June 5, 2018.
The PSUs granted under this Agreement shall not become valid or enforceable unless and until the Participant executes the Agreement and it is accepted by the Company. By the Participant’s signature and the Company’s signature below, the Participant and the Company agree that this constitutes the signature page of the Agreement. Participant further agrees that the PSUs are granted under and governed by the terms and conditions of the Agreement and the Program. Agreements that are not signed and returned shall be invalid and unenforceable.
As a material condition and inducement to the Company’s grant of PSUs to the Participant, the Participant agrees that he or she has received and reviewed the Program and the Prospectus, and the Participant further agrees to be bound by all of the terms and conditions of the Agreement and the Program, as may be amended by the Company from time to time.
IN WITNESS WHEREOF, the parties hereto have duly executed the Agreement as of the date first set forth above.
Name:
Heidrick & Struggles International, Inc.
By:
Name: Kamau Coar
Title: General Counsel & Corporate Secretary
Exhibit 10.1
NOW, THEREFORE, in consideration of the agreements of the Participant herein provided and pursuant to the Program, the parties agree as follows:
1. | Definitions. All capitalized terms used herein, unless specifically defined herein, shall have the same meanings as established in the Program. |
2. | Participation. Pursuant to the Program and contingent upon the execution of the Agreement, the Company hereby grants to the Participant a target award of [_____] PSUs subject to the terms and conditions herein. |
3.Vesting of PSUs.
(a) | The number of [_____] PSUs granted under the Agreement that shall vest on [_____] is subject to the following conditions: |
(i) | 50% of the award will be based upon the attainment of Adjusted Operating Margin (“AOM”) goals for the 3 year period 2019 through 2021. The attainment will be in accordance with the schedule set forth below. |
3-year Adjusted Operating Margin | Percentage of Target PSUs Vesting |
Intentionally omitted due to competitive nature of information | 200% (Maximum) |
100% (Target) | |
50% (Threshold) | |
0 % | |
For performance greater than 100% and less than 150% of target, or performance less than 100% and greater than 50% of target, the vesting percentage will be interpolated.
Except as set forth in Section 4 below, the portion of the target PSU Award that does not vest in accordance with the schedule set forth above shall be forfeited to the Company.
(ii) | 50% of the award will be based upon the attainment of Total Shareholder Return (R-TSR) performance relative to the HR & Employment Services Industry. The attainment will be in accordance with the schedule set forth below. |
3-year R-TSR | Percentage of Target PSUs Vesting |
75th Percentile or greater | 200% (Maximum) |
50th Percentile | 100% (Target) |
25th Percentile | 50% (Threshold) |
Less than 25th Percentile | 0 % |
For performance greater than the 50th percentile and less than the 75th percentile, or performance less than the 50th percentile and greater than the 25th percentile, the vesting percentage will be interpolated.
Exhibit 10.1
Except as set forth in Section 4 below, the portion of the target PSU Award that does not vest in accordance with the schedule set forth above shall be forfeited to the Company.
(iii) | The Participant has been in Continuous Service through the vesting date. For purposes of the Agreement, “Continuous Service” shall mean the Participant’s service with the Company or any Subsidiary or Affiliate as an employee, or the Participant’s service as a member of the Board of Directors of the Company, has not been interrupted or terminated, and shall include any period during which the Participant is on an approved leave of absence from the Company or its Subsidiaries or Affiliates. |
(b) | Notwithstanding the terms of Section 3(a) above, if the Participant’s Continuous Service is terminated as a result of the Participant’s death or Disability, the target number of PSUs granted to the Participant under the Agreement will immediately vest. |
(c) | In the case of a Participant who is both an employee of the Company or any Subsidiary or Affiliate and a member of the Board of Directors of the Company, Continuous Service shall not end until the Participant’s service as both an employee and a director terminates. |
4. | Change in Control. The PSUs are subject to the Change of Control provisions as set forth in detail in the Plan. |
5. Characteristics of PSUs.
(a) | PSUs are not Shares and the grant of a target number of PSUs shall provide only those rights expressly set forth in the Agreement and the Program. The Participant is not deemed to be a stockholder in the Company or have any of the rights of a stockholder in the Company by virtue of the grant of PSUs. |
(b) | The Participant does not have voting rights or any other rights inherent to the ownership of Shares, including the rights to dividends (other than as provided in Section 10), or other liquidating or non-liquidating distributions, by virtue of being granted PSUs. |
(c) | Neither the PSUs nor any right hereunder or under the Program shall be transferable or be subject to attachment, execution or other similar process. In the event of any attempt by the Participant to alienate, assign, pledge, hypothecate or otherwise dispose of the PSUs or of any right hereunder or under the Program, except as provided for in the Program, or in the event of any levy or any attachment, execution or similar process upon the rights or interest conferred by the PSUs, the Company may terminate the PSUs by notice to the Participant and the PSUs and any related rights, including the right to dividend equivalents as described in Section 10, shall thereupon be cancelled. |
6. Effect of Vesting.
(a) | If, and at the time, the Participant’s PSUs vest under the terms of Section 3 or Section 4, such Participant shall receive as full consideration for the PSUs a number of Shares equal to the number of PSUs which vested on such date. |
Exhibit 10.1
(b) | The PSUs granted to the Participant shall be maintained in a bookkeeping account with the custodian appointed by the Committee from time to time (the “Custodian”) for such Participant if and until the PSUs are converted into Shares pursuant to this Section 6, at which time the Shares shall be issued to the Participant in accordance with Section 9 below. |
7. | Forfeiture of PSUs. Subject to the next following sentence, the Participant’s PSUs shall be forfeited to the Company upon the Participant’s termination of Continuous Service with the Company and its Subsidiaries and Affiliates (a) for any reason other than the Participant’s death or Disability that occurs prior to the date the PSUs vest as provided in Section 3 above or (b) for any reason other than the Participant’s termination by the Company without Cause or the Participant’s voluntary termination due to the existence of Good Reason, in either case during the two-year period beginning on the date of a Change in Control, as provided in Section 4 above. The foregoing provisions of this Section 7 shall be subject to the provisions of the Company’s Bonus, Restricted Stock Unit, Performance Stock Unit and Bonus Cash Deferral Retirement Policy (the “Retirement Policy”), and any other Company plan or written employment, severance or similar agreement that has been or may be executed by the Participant and the Company, and the provisions in such Retirement Policy or agreement concerning the vesting of the PSUs in connection with the Participant’s termination of Continuous Service shall supersede any inconsistent or contrary provision of this Section 7. |
8. | Compensation Recovery. The Participant’s PSUs are subject to the Clawback Policy adopted by the Board of Directors. |
9. | Delivery of Shares to the Participant. As soon as practicable after the PSUs vest and are converted into Shares, and subject to Section 11, the Custodian shall, without transfer or issue tax or other incidental expense to the Participant, deliver to the Participant by first-class insured mail addressed to the Participant at the address shown on page 1 or the last address of record on file with the Custodian, (a) a statement from the Custodian referencing the number of Shares held in the Participant’s name in a book entry account, or (b) at the Participant’s request, certificate(s) for the number of Shares as to which the PSUs vested. In any event, Shares due the Participant shall be delivered as described above no later than March 15 of the year following the calendar year in which such PSUs vest. |
10. | Dividend Equivalents. The Company shall credit the Participant’s PSU account with an amount equal to the dividends, if any, that would be paid with respect to the unvested PSUs as if the PSUs were actual Shares to a shareholder as of the Record date. Such amount shall be credited to the Participant’s PSU account at the same time dividends are paid with respect to the Shares, shall be subject to the vesting and forfeiture provisions set forth in Sections 3, 4 and 7 of the Agreement, and shall be paid to the Participant in cash, on the first payroll date following the date the Participant’s related PSUs vest and are issued as Shares to the Participant. |
11. Tax Withholdings and Payments.
(a) | The Company or any Subsidiary or Affiliate is authorized to withhold from any payment to be made to the Participant, amounts of income tax withholding and other taxes due in connection with compensation or any other transaction under the Program, including the receipt of Shares under Section 6. The Participant shall hold the Company |
Exhibit 10.1
harmless for any damages caused by his or her failure to so comply and for any other damages caused by his or her actions or inactions.
(b) | The Participant may pay withholding taxes attributable to the receipt of Shares in cash, by having Shares withheld by the Company from any Shares that would otherwise be received by the Participant under the Agreement (in which case, the number of Shares so withheld shall have an aggregate Fair Market Value at the time of such withholding sufficient to satisfy the applicable withholding taxes), or by any other method approved by the Committee. If the Participant does not satisfy the withholding obligation by cash payment within a reasonable time established by the Committee, the Participant’s withholding obligation shall be satisfied by the Company’s withholding of Shares from the vested PSUs. |
(c) | The Company shall deduct from the dividend equivalents paid to the Participant pursuant to Section 10 the Participant’s withholding obligation arising from such payment. |
12. Miscellaneous.
(a) | The granting of an Award under the Program and the Agreement shall impose no obligation on the Company or any Subsidiary or Affiliate to continue the employment relationship or any other relationship between it and the Participant and shall not lessen or affect the Company’s, Subsidiary’s or Affiliate’s right to terminate its relationship with the Participant. The Participant shall have no claim to be granted any further or other Award under the Program, and there is no obligation for uniformity of treatment of the Participants. The Participant acknowledges and agrees that: (i) the Program is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time; (ii) the grant of PSUs is voluntary and occasional and does not create any contractual or other right to receive future grants of PSUs, or benefits in lieu of PSUs, even if PSUs have been granted repeatedly in the past; (iii) all decisions with respect to future PSU grants, if any, will be at the sole discretion of the Company; (iv) participation in the Program is voluntary; (v) the PSUs are not a part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; (vi) the future value of the underlying shares is unknown and cannot be predicted with certainty; and (vii) in consideration of the grant of PSUs, no claim or entitlement to compensation or damages shall arise from termination of the PSUs or diminution in value of the PSUs or Shares received upon vesting including (without limitation) any claim or entitlement resulting from termination of the Participant’s active employment by the Company or a Subsidiary or Affiliate (for any reason whatsoever and whether or not in breach of local labor laws) and the Participant hereby releases the Company and its Subsidiaries and Affiliates from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, the Participant shall be deemed irrevocably to have waived the Participant’s entitlement to pursue such claim. |
Exhibit 10.1
(b) | The Agreement shall, subject to the terms hereof, terminate upon the forfeiture and/or vesting of all PSUs and dividend equivalents granted to the Participant hereunder, unless otherwise agreed upon by the parties hereto. |
(c) | The Agreement may be amended by the written agreement of the Company and the Participant. Notwithstanding the foregoing, (i) the Company may amend, alter or discontinue the Agreement, without the consent of the Participant so long as such amendment, alteration or discontinuance would not impair any of the rights or obligations under any Award theretofore granted to the Participant under the Program; and (ii) the Committee may amend the Agreement in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws. |
(d) | The parties agree that the Agreement shall be governed by and interpreted and construed in accordance with the laws of the United States and, in particular, those of the State of Illinois without regard to its conflict of law principles, as Illinois is the situs of the principal corporate office of the Company. Furthermore, to the extent not prohibited under applicable law, and unless the Company affirmatively elects in writing to allow the proceeding to be brought (or itself brings such a proceeding) in a different venue, the parties agree that any suit, action or proceeding with respect to the Program, the PSUs or the Agreement shall be brought in the state courts in Chicago, Illinois or in the U.S. District Court for the Northern District of Illinois. The parties hereby accept the exclusive jurisdiction of those courts for the purpose of any such suit, action or proceeding. Venue for any such action, in addition to any other venue required or otherwise mandated by statute, will be in Chicago, Illinois. Each party further agrees to waive any applicable right to a jury trial, and expressly elects to have the matter heard as a bench trial. |
(e) | Unless waived by the Company, any notice to the Company required under or relating to the Agreement shall be in writing and addressed to: |
General Counsel & Corporate Secretary
Heidrick & Struggles International, Inc.
233 South Wacker Drive
Suite 4900
Chicago, IL 60606-6303
13. | Program Governs. All terms and conditions of the Program are incorporated herein and made part hereof as if stated herein. If there is any conflict between the terms and conditions of the Program and the Agreement, the terms and conditions of the Program, as interpreted by the Committee, shall govern. |
14. | Data Privacy. By signing below, the Participant voluntarily acknowledges and consents to the collection, use, processing and transfer of personal data as described in this Section 14. The Participant is not obliged to consent to such collection, use, processing and transfer of personal data. However, the Participant’s failure to provide the consent may affect the Participant’s ability to participate in the Program. The Company and its Subsidiaries and Affiliates hold certain personal information about the Participant, including the Participant’s name, home address and telephone number, date of birth, employee identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details |
Exhibit 10.1
of all options or any other rights or entitlements to shares of stock in the Participant’s favor, for the purpose of managing and administering the Program (“Data”). The Company, its Subsidiaries and its Affiliates will transfer Data amongst themselves as necessary for the purpose of implementation, administration and management of the Participant’s participation in the Program, and the Company and any of its Subsidiaries or Affiliates may each further transfer Data to any third parties assisting in the implementation, administration and management of the Program. These recipients may be located in the European Economic Area, or elsewhere throughout the world, such as the United States. The Participant authorizes them to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Program, including any requisite transfer of such Data as may be required for the administration of the Program and/or the subsequent holding of Shares on the Participant’s behalf to a broker or other third party with whom the Participant may elect to deposit any Shares acquired pursuant to the Program. The Participant may, at any time, review Data, require any necessary amendments to it or withdraw the consents herein in writing by contacting the Company; however, by withdrawing consent, the Participant will affect his or her ability to participate in the Program.
15. Execution of the Agreement.
(a) | The Parties agree that this Agreement shall be considered executed by both parties executing the Agreement as the first page hereof, which is a part hereof. |
(b) | This Agreement, or any amendments thereto, may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. |
Exhibit 31.1
CERTIFICATION
I, Krishnan Rajagopalan, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Heidrick & Struggles International, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: | July 29, 2019 | /s/ Krishnan Rajagopalan | |
Krishnan Rajagopalan | |||
President and Chief Executive Officer | |||
Exhibit 31.2
CERTIFICATION
I, Mark R. Harris, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Heidrick & Struggles International, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: | July 29, 2019 | /s/ Mark R. Harris | |
Mark R. Harris | |||
Executive Vice President and Chief Financial Officer | |||
Exhibit 32.1
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of Heidrick & Struggles International, Inc., a Delaware corporation (the “Company”), does hereby certify that:
The Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: | July 29, 2019 | /s/ Krishnan Rajagopalan | |
Krishnan Rajagopalan | |||
President and Chief Executive Officer | |||
Exhibit 32.2
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of Heidrick & Struggles International, Inc., a Delaware corporation (the “Company”), does hereby certify that:
The Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: | July 29, 2019 | /s/ Mark R. Harris | |
Mark R. Harris | |||
Executive Vice President and Chief Financial Officer | |||