Document


 
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

8




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



9




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


10





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.


11




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.


12




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.

13





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


14





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: