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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 SEPTEMBER 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)
 Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange On Which Registered
Common Stock, $.01 par value
HSII
The NASDAQ Stock Market LLC

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 October 25, 2019, there were 19,170,352 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)


September 30,
2019

December 31, 2018
 

(Unaudited)

 
Current assets


 
 
Cash and cash equivalents

$
176,372


$
279,906

Marketable securities

42,566


—

Accounts receivable, net
 
150,872

 
114,977

Prepaid expenses

20,436


22,766

Other current assets

27,966


29,598

Income taxes recoverable

5,818


3,620

Total current assets

424,030


450,867

 
 
 
 
 
Non-current assets

 
 
 
Property and equipment, net

29,356


33,871

Operating lease right-of-use assets
 
98,097

 
—

Assets designated for retirement and pension plans

14,289


15,035

Investments

23,807


19,442

Other non-current assets

20,317


22,276

Goodwill

128,286


122,092

Other intangible assets, net

4,428


2,216

Deferred income taxes

34,013

 
34,830

Total non-current assets

352,593


249,762

 
 
 
 
 
Total assets

$
776,623


$
700,629

 
 
 
 
 
Current liabilities

 
 
 
Accounts payable

$
9,093


$
9,166

Accrued salaries and benefits

180,207


227,653

Deferred revenue

40,434


40,673

Operating lease liabilities
 
30,663

 
—

Other current liabilities

29,327


33,219

Income taxes payable

6,517


8,240

Total current liabilities

296,241


318,951

 
 
 
 
 
Non-current liabilities

 
 
 
Accrued salaries and benefits

53,099


57,234

Retirement and pension plans

43,269


39,865

Operating lease liabilities
 
76,871

 
—

Other non-current liabilities

10,508


17,423

Total non-current liabilities

183,747


114,522

 
 
 
 
 
Total liabilities

479,988


433,473

 
 
 
 
 
Commitments and contingencies (Note 18)
 

 

 
 
 
 
 
Stockholders’ equity
 
 
 
 
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at September 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 September 30, 2019 and December 31, 2018, respectively
 
196

 
196

Treasury stock at cost, 458,376 and 631,502 shares at September 30, 2019 and December 31, 2018, respectively
 
(14,795
)
 
(20,298
)
Additional paid in capital
 
224,687

 
227,147

Retained earnings
 
83,497

 
56,049

Accumulated other comprehensive income
 
3,050

 
4,062

Total stockholders’ equity
 
296,635

 
267,156

 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
776,623

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
Revenue before reimbursements (net revenue)
$
182,174

 
$
187,588

 
$
526,890

 
$
530,718

Reimbursements
4,344

 
4,753

 
14,075

 
13,970

Total revenue
186,518

 
192,341

 
540,965

 
544,688

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Salaries and benefits
130,479

 
133,933

 
371,898

 
373,021

General and administrative expenses
33,093

 
33,072

 
101,646

 
105,532

Restructuring charges
4,130

 
—

 
4,130

 
—

Reimbursed expenses
4,344

 
4,753

 
14,075

 
13,970

Total operating expenses
172,046

 
171,758

 
491,749

 
492,523

 
 
 
 
 
 
 
 
Operating income
14,472

 
20,583

 
49,216

 
52,165

 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
Interest, net
819

 
259

 
2,039

 
496

Other, net
(464
)
 
2,345

 
1,887

 
1,849

Net non-operating income (expense)
355

 
2,604

 
3,926

 
2,345

 
 
 
 
 
 
 
 
Income before income taxes
14,827

 
23,187

 
53,142

 
54,510

 
 
 
 
 
 
 
 
Provision for income taxes
4,880

 
6,718

 
16,828

 
16,410

 
 
 
 
 
 
 
 
Net income
9,947

 
16,469

 
36,314

 
38,100

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustment
(1,337
)
 
(881
)
 
(1,024
)
 
(3,107
)
Net unrealized gain on available-for-sale investments
—

 
—

 
12

 
—

Other comprehensive loss, net of tax
(1,337
)
 
(881
)
 
(1,012
)
 
(3,107
)
 
 
 
 
 
 
 
 
Comprehensive income
$
8,610

 
$
15,588

 
$
35,302

 
$
34,993

 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
19,127

 
18,954

 
19,084

 
18,905

Diluted weighted average common shares outstanding
19,428

 
19,401

 
19,518

 
19,444

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.52

 
$
0.87

 
$
1.90

 
$
2.02

Diluted net income per common share
$
0.51

 
$
0.85

 
$
1.86

 
$
1.96

Cash dividends paid per share
$
0.15

 
$
0.13

 
$
0.45

 
$
0.39

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Net income
—

 
—

 
—

 
—

 
—

 
9,947

 
—

 
$
9,947

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(1,337
)
 
(1,337
)
Common and treasury stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
—

 
—

 
—

 
—

 
2,539

 
—

 
—

 
2,539

Cash dividends declared ($0.15 per share)
—

 
—

 
—

 
—

 
—

 
(2,870
)
 
—

 
(2,870
)
Dividend equivalents on restricted stock units
—

 
—

 
—

 
—

 
—

 
(93
)
 
—

 
(93
)
Balance at September 30, 2019
19,586

 
$
196

 
458

 
$
(14,795
)
 
$
224,687

 
$
83,497

 
$
3,050

 
$
296,635


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
)
 
195

 
29

 
—

 
—

 
224

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

 
$
(20,298
)
 
$
222,051

 
$
30,916

 
$
5,000

 
$
237,865

Net income
—

 
—

 
—

 
—

 
—

 
16,469

 
—

 
16,469

Other comprehensive (loss), net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(881
)
 
(881
)
Common and treasury stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

Stock-based compensation
—

 
—

 
—

 
—

 
2,911

 
—

 
—

 
2,911

Cash dividends declared ($0.13 per share)
—

 
—

 
—

 
—

 
—

 
(2,464
)
 
—

 
(2,464
)
Dividend equivalents on restricted stock units
—

 
—

 
—

 
—

 
—

 
(67
)
 
—

 
(67
)
Balance at September 30, 2018
$
19,586

 
$
196

 
$
632

 
$
(20,298
)
 
$
224,962

 
$
44,854

 
$
4,119

 
$
253,833


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)
 
 

Nine Months Ended
September 30,
 

2019

2018
Cash flows - operating activities




Net income

$
36,314


$
38,100

Adjustments to reconcile net income to net cash used in operating activities:

 

 
Depreciation and amortization

7,983


9,558

Deferred income taxes

(24
)

(438
)
Stock-based compensation expense

7,250


6,763

Accretion expense related to earnout payments

495


963

Gain on marketable securities
 
(353
)
 
—

Changes in assets and liabilities, net of effects of acquisition:

 

 
Accounts receivable

(36,961
)

(60,057
)
Accounts payable

(144
)

(761
)
Accrued expenses

(52,680
)

3,834

Restructuring accrual
 
2,762

 
(10,833
)
Deferred revenue

113


185

Income taxes payable, net

(3,952
)

(2,003
)
Retirement and pension plan assets and liabilities

1,824


(1,019
)
Prepaid expenses

(920
)

(3,416
)
Other assets and liabilities, net

2,874


(3,761
)
Net cash used in operating activities

(35,419
)

(22,885
)
 
 
 
 
 
Cash flows - investing activities




Acquisition of business
 
(3,520
)
 
(3,119
)
Capital expenditures

(2,641
)
 
(4,939
)
Purchases of available-for-sale investments

(83,146
)
 
(2,046
)
Proceeds from sales of available-for-sale investments

39,162

 
2,890

Net cash used in investing activities

(50,145
)
 
(7,214
)
 
 
 
 
 
Cash flows - financing activities




Proceeds from line of credit
 
—

 
20,000

Payments on line of credit

—

 
(20,000
)
Cash dividends paid

(8,866
)
 
(7,573
)
Payment of employee tax withholdings on equity transactions

(4,552
)
 
(2,234
)
Acquisition earnout payments

(1,853
)
 
—

Net cash used in financing activities

(15,271
)
 
(9,807
)
 
 
 
 
 
Effect of exchange rate fluctuations on cash, cash equivalents and restricted cash
 
(3,055
)
 
(3,442
)
 
 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
 
(103,890
)
 
(43,348
)
Cash, cash equivalents and restricted cash at beginning of period
 
280,262

 
208,162

Cash, cash equivalents and restricted cash at end of period
 
$
176,372

 
$
164,814

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 the 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

Historically, the Company had lease agreements and business licenses with terms that required 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 September 30, 2019 and 2018, and December 31, 2018 and 2017:
 
September 30,
 
December 31,
 
2019
 
2018
 
2018
 
2017
Cash and cash equivalents
$
176,372

 
$
164,216

 
$
279,906

 
$
207,534

Restricted cash included within other current assets
—

 
598

 
108

 
526

Restricted cash included within other non-current assets
—

 
—

 
248

 
102

Total cash, cash equivalents and restricted cash
$
176,372

 
$
164,814

 
$
280,262

 
$
208,162



6



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.

The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
9,947

 
$
16,469

 
$
36,314

 
$
38,100

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
19,127

 
18,954

 
19,084

 
18,905

Effect of dilutive securities:
 
 
 
 
 
 
 
Restricted stock units
195

 
278

 
283

 
345

Performance stock units
106

 
169

 
151

 
194

Diluted
19,428

 
19,401

 
19,518

 
19,444

Basic earnings per share
$
0.52

 
$
0.87

 
$
1.90

 
$
2.02

Diluted earnings per share
$
0.51

 
$
0.85

 
$
1.86

 
$
1.96


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 on the 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 September 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

7



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 nine months ended September 30, 2019. The adoption had no impact on the Condensed Consolidated Statement of Changes in Stockholders' Equity for the three and nine months ended September 30, 2019.

Additional information and disclosures required by the new standard are contained in Note 6, Leases.

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.

8



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 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
 
September 30,
2019
 
Change
Contract assets
 
 
 
 
 
Unbilled receivables
$
8,684

 
$
9,090

 
$
406

Contract assets
15,291

 
13,686

 
(1,605
)
Total contract assets
23,975

 
22,776

 
(1,199
)
 
 
 
 
 
 
Contract liabilities
 
 
 
 
 
Deferred revenue
$
40,673

 
$
40,434

 
$
(239
)

During the nine months ended September 30, 2019, we recognized revenue of $33.8 million that was included in the contract liabilities balance at the beginning of the period. The amount of revenue recognized during the nine months ended September 30, 2019, from performance obligations partially satisfied in previous periods as a result of changes in the estimates of variable consideration was $17.8 million.

Each of the Company's contracts has an expected duration of one year or less. Accordingly, the Company has elected to utilize the available practical expedient related to the disclosure of the transaction price allocated to the remaining performance obligations under its contracts. The Company has also elected the available practical expedients related to adjusting for the effects of a significant financing component and the capitalization of contract acquisition costs. The Company charges and collects from its clients, sales tax and value added taxes as required by certain jurisdictions. The Company has made an accounting policy election to exclude these items from the transaction price in its contracts.


9



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
3,058

Write-offs, net of recoveries
(2,101
)
Foreign currency translation
(72
)
Balance at September 30, 2019
$
4,387


5.
Property and Equipment, net

The components of the Company’s property and equipment are as follows:
 
September 30,
2019
 
December 31,
2018
Leasehold improvements
$
45,839

 
$
48,455

Office furniture, fixtures and equipment
17,441

 
17,919

Computer equipment and software
27,243

 
27,063

Property and equipment, gross
90,523

 
93,437

Accumulated depreciation
(61,167
)
 
(59,566
)
Property and equipment, net
$
29,356

 
$
33,871


Depreciation expense for the three months ended September 30, 2019 and 2018 was $2.4 million and $2.7 million, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 was $7.3 million and $8.3 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 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 4.7 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.

10




Lease cost components included within General and Administrative Expenses in our Condensed Consolidated Statements of Comprehensive Income were as follows:
 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
Operating lease cost
$
6,180

 
$
18,660

Variable lease cost
2,128

 
6,042

Total lease cost
$
8,308

 
$
24,702


Supplemental cash flow information related to the Company's operating leases is as follows:
 
Nine Months Ended
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
26,879

Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
$
11,385


The weighted average remaining lease term and weighted average discount rate for our operating leases as of September 30, 2019 is as follows:
 
September 30, 2019
Weighted Average Remaining Lease Term
 
Operating leases
4.5 years

Weighted Average Discount Rate
 
Operating leases
3.97
%

The future maturities of the Company's operating lease liabilities as of September 30, 2019, for the years ended December 31 is as follows:
 
Operating Lease Maturity
2019
$
9,441

2020
30,518

2021
25,662

2022
22,097

2023
19,189

Thereafter
13,258

Total lease payments
120,165

Less: Interest
(12,631
)
Present value of lease liabilities
$
107,534


7.
Financial Instruments and Fair Value

Cash, Cash Equivalents and 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 September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Cash

 

 

 

 
$
114,467

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
Level 1(1):
 
 
 
 
 
 
 
 
 
 
 
Money market funds
15,595

 
—

 
—

 
15,595

 
15,595

 
—

U.S. Treasury securities
82,386

 
12

 
—

 
82,398

 
46,310

 
36,088

Total Level 1
97,981

 
12

 
—

 
97,993

 
61,905

 
36,088

 
 
 
 
 
 
 
 
 
 
 
 
Level 2(2):
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
6,478

 
—

 
—

 
6,478

 
—

 
6,478

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
104,459

 
$
12

 
$
—

 
$
104,471

 
$
176,372

 
$
42,566


 
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 $16.5 million and $14.6 million as of September 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 September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1(1):
 
 
 
 
 
 
 
 
 
 
 
 
U.S. non-qualified deferred compensation plan
 
$
23,807

 
$
—

 
$
—

 
$
23,807

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2(2):
 
 
 
 
 
 
 
 
 
 
 
 
Retirement and pension plan assets
 
15,571

 
1,282

 
14,289

 
—

 
—

 
—

Pension benefit obligation
 
(19,870
)
 
—

 
—

 
—

 
(1,282
)
 
(18,588
)
Total Level 2
 
(4,299
)
 
1,282

 
14,289

 
—

 
(1,282
)
 
(18,588
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
19,508

 
$
1,282

 
$
14,289

 
$
23,807

 
$
(1,282
)
 
$
(18,588
)

 
 
 
 
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 nine months ended September 30, 2019:
 
Acquisition
Earnout
Accruals
Balance at December 31, 2018
$
(6,627
)
Acquisition earnouts (Note 8)
(5,862
)
Earnout accretion
(495
)
Earnout payments
3,009

Earnout adjustments
(1,135
)
Foreign currency translation
209

Balance at September 30, 2019
$
(10,901
)

8.
Acquisitions

In September 2019, the Company acquired 2GET Holdings Limited ("2GET"), a Brazil-based provider of executive search services, and its wholly owned subsidiaries. Under the terms of the purchase agreement, the Company paid $5.2 million of initial consideration for substantially all of the outstanding equity of 2GET subject to a final working capital settlement. The acquisition was funded with $4.1 million of existing cash at closing and $1.1 million of the Company's common stock to be transferred in October 2019. The former owners of 2GET are eligible to receive additional cash consideration, which the Company estimates to be between $5.0 million and $15.0 million, based on the achievement of certain revenue and EBITDA milestones for the period from acquisition through 2023. When estimating the present value of future cash consideration, the Company accrued $5.9 million as of the acquisition date. The Company recorded an estimated $3.0 million of intangible assets and $7.5 million of goodwill. The goodwill is primarily related to the acquired workforce and strategic fit. The fair value estimate of assets acquired and liabilities assumed, including the earnout liability, identifiable intangible assets and goodwill, is pending completion. The Company expects to finalize its estimates of fair value during the three months ended December 31, 2019.

9.
Goodwill and Other Intangible Assets

Goodwill

The Company's goodwill by segment is as follows:
 
September 30,
2019
 
December 31,
2018
Executive Search
 
 
 
Americas
$
96,012

 
$
88,410

Europe
23,949

 
24,924

Asia Pacific
8,325

 
8,758

Total Executive Search
128,286

 
122,092

Heidrick Consulting
36,257

 
36,257

Goodwill, gross
164,543

 
158,349

Accumulated impairment
(36,257
)
 
(36,257
)
Goodwill, net
$
128,286

 
$
122,092


Changes in the carrying amount of goodwill by segment for the nine months ended September 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

2GET acquisition
7,504

 
—

 
—

 
—

 
7,504

Foreign currency translation
98

 
(975
)
 
(433
)
 
—

 
(1,310
)
Net goodwill at September 30, 2019
$
96,012

 
$
23,949

 
$
8,325

 
$
—

 
$
128,286



14



In September 2019 the Company acquired 2GET and included an estimate of the fair value of the acquired assets and liabilities as of the acquisition date in the Condensed Consolidated Balance Sheets. The Company included an estimated $7.5 million of goodwill related the acquisition in the Americas segment. The Company's estimate of the fair value of the acquired assets and liabilities is pending completion and is expected to be finalized during the three months ended December 31, 2019.

Other Intangible Assets, net

The Company’s other intangible assets, net by segment, are as follows:
 
September 30,
2019
 
December 31,
2018
Executive Search
 
 
 
Americas
$
2,951

 
$
52

Europe
1,412

 
2,086

Asia Pacific
65

 
78

Total Executive Search
4,428

 
2,216

Heidrick Consulting
—

 
—

Total other intangible assets, net
$
4,428

 
$
2,216


The Company recorded an estimate for customer relationships in the Americas segment of $3.0 million related to the acquisition of 2GET. The Company's estimate of the fair value of the acquired assets and liabilities is pending completion and is expected to be finalized during the three months ended December 31, 2019.

The carrying amount of amortizable intangible assets and the related accumulated amortization are as follows:
 
Weighted
Average
Life (Years)
 
September 30, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Client relationships
6.2
 
$
18,628

 
$
(14,200
)
 
$
4,428

 
$
15,910

 
$
(13,694
)
 
$
2,216