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 MARCH 31, 2020

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)

Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, $0.01 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 April 24, 2020, there were 19,274,921 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 1A.
 
 
 
Item 6.
 
 
 
 





PART I. FINANCIAL INFORMATION
 

HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)


March 31,
2020

December 31,
2019
 

(Unaudited)

 
Current assets


 
 
Cash and cash equivalents

$
251,000


$
271,719

Marketable securities



61,153

Accounts receivable, net of allowances of $5,209 and $5,140, respectively
 
131,371

 
109,163

Prepaid expenses

26,505


20,185

Other current assets

32,133


27,848

Income taxes recoverable

4,400


4,414

Total current assets

445,409


494,482

 
 
 
 
 
Non-current assets

 
 
 
Property and equipment, net

28,450


28,650

Operating lease right-of-use assets
 
98,943

 
99,391

Assets designated for retirement and pension plans

13,756


13,978

Investments

23,516


25,409

Other non-current assets

25,181


20,434

Goodwill

123,422


126,831

Other intangible assets, net

1,554


1,935

Deferred income taxes

32,299

 
33,063

Total non-current assets

347,121


349,691

 
 
 
 
 
Total assets

$
792,530


$
844,173

 
 
 
 
 
Current liabilities

 
 
 
Accounts payable

$
11,088


$
8,633

Accrued salaries and benefits

97,875


234,306

Deferred revenue

41,433


41,267

Operating lease liabilities
 
29,818

 
30,955

Other current liabilities

19,534


26,253

Income taxes payable

8,198


3,928

Total current liabilities

207,946


345,342

 
 
 
 
 
Non-current liabilities

 
 
 
Non-current debt
 
100,000

 

Accrued salaries and benefits

46,823


59,662

Retirement and pension plans

43,851


46,032

Operating lease liabilities
 
77,594

 
79,388

Other non-current liabilities

4,551


4,634

Total non-current liabilities

272,819


189,716

 
 
 
 
 
Total liabilities

480,765


535,058

 
 
 
 
 
Commitments and contingencies (Note 17)
 

 

 
 
 
 
 
Stockholders’ equity
 
 
 
 
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at March 31, 2020 and December 31, 2019
 

 

Common stock, $0.01 par value, 100,000,000 shares authorized, 19,585,777 shares issued, 19,274,921 and 19,165,954 shares outstanding at March 31, 2020 and December 31, 2019, respectively
 
196

 
196

Treasury stock at cost, 310,856 and 419,823 shares at March 31, 2020 and December 31, 2019, respectively
 
(10,957
)
 
(14,795
)
Additional paid in capital
 
226,033

 
228,807

Retained earnings
 
96,415

 
91,083

Accumulated other comprehensive income
 
78

 
3,824

Total stockholders’ equity
 
311,765

 
309,115

 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
792,530

 
$
844,173


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
March 31,
 
2020
 
2019
Revenue
 
 
 
Revenue before reimbursements (net revenue)
$
171,481

 
$
171,594

Reimbursements
3,366

 
4,680

Total revenue
174,847

 
176,274

 
 
 
 
Operating expenses
 
 
 
Salaries and benefits
121,089

 
120,818

General and administrative expenses
32,240

 
34,385

Reimbursed expenses
3,366

 
4,680

Total operating expenses
156,695

 
159,883

 
 
 
 
Operating income
18,152

 
16,391

 
 
 
 
Non-operating income (expense)
 
 
 
Interest, net
679

 
808

Other, net
(4,435
)
 
1,643

Net non-operating income (expense)
(3,756
)
 
2,451

 
 
 
 
Income before income taxes
14,396

 
18,842

 
 
 
 
Provision for income taxes
5,730

 
6,755

 
 
 
 
Net income
8,666

 
12,087

 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
Foreign currency translation adjustment
(3,716
)
 
320

Net unrealized loss on available-for-sale investments
(30
)
 

Other comprehensive income (loss), net of tax
(3,746
)
 
320

 
 
 
 
Comprehensive income
$
4,920

 
$
12,407

 
 
 
 
Weighted-average common shares outstanding
 
 
 
Basic
19,192

 
19,003

Diluted
19,776

 
19,504

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.45

 
$
0.64

Diluted
$
0.44

 
$
0.62

 
 
 
 
Cash dividends paid per share
$
0.15

 
$
0.15

 
 
 
 
 
 
 
 
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, 2019
19,586

 
$
196

 
420

 
$
(14,795
)
 
$
228,807

 
$
91,083

 
$
3,824

 
$
309,115

Net income

 

 

 

 

 
8,666

 

 
8,666

Adoption of accounting standards

 

 

 

 

 
(332
)
 

 
(332
)
Other comprehensive loss, net of tax

 

 

 

 

 

 
(3,746
)
 
(3,746
)
Common and treasury stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation

 

 

 

 
2,614

 

 

 
2,614

Vesting of equity, net of tax withholdings

 

 
(109
)
 
3,838

 
(5,388
)
 

 

 
(1,550
)
Cash dividends declared ($0.15 per share)

 

 

 

 

 
(2,876
)
 

 
(2,876
)
Dividend equivalents on restricted stock units

 

 

 

 

 
(126
)
 

 
(126
)
Balance at March 31, 2020
19,586

 
$
196

 
311

 
$
(10,957
)
 
$
226,033

 
$
96,415

 
$
78

 
$
311,765


 
 
 
 
 
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


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

3




HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 

Three Months Ended
March 31,
 

2020

2019
Cash flows - operating activities




Net income

$
8,666


$
12,087

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

 

 
Depreciation and amortization

2,337


2,734

Deferred income taxes

110


336

Stock-based compensation expense

2,614


1,343

Accretion expense related to earnout payments



160

Gain on marketable securities
 
(111
)
 

Loss on disposal of property and equipment
 
1

 

Changes in assets and liabilities:

 

 
Accounts receivable

(24,656
)

(20,167
)
Accounts payable

1,897


99

Accrued expenses

(147,265
)

(146,222
)
Restructuring accrual
 
(138
)
 
(681
)
Deferred revenue

837


(1,586
)
Income taxes payable, net

4,082


2,496

Retirement and pension plan assets and liabilities

2,033


1,550

Prepaid expenses

(6,566
)

(6,499
)
Other assets and liabilities, net

(9,441
)

(923
)
Net cash used in operating activities

(165,600
)

(155,273
)
 
 
 
 
 
Cash flows - investing activities




Capital expenditures

(1,753
)
 
(898
)
Purchases of available-for-sale investments

(2,125
)
 
(1,678
)
Proceeds from sales of available-for-sale investments

61,395

 
113

Net cash provided by (used in) investing activities

57,517

 
(2,463
)
 
 
 
 
 
Cash flows - financing activities




Proceeds from line of credit
 
100,000

 

Cash dividends paid

(3,002
)
 
(2,935
)
Payment of employee tax withholdings on equity transactions

(1,550
)
 
(4,552
)
Acquisition earnout payments

(2,788
)
 
(407
)
Net cash provided by (used in) financing activities

92,660

 
(7,894
)
 
 
 
 
 
Effect of exchange rate fluctuations on cash, cash equivalents and restricted cash
 
(5,296
)
 
130

 
 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
 
(20,719
)
 
(165,500
)
Cash, cash equivalents and restricted cash at beginning of period
 
271,719

 
280,262

Cash, cash equivalents and restricted cash at end of period
 
$
251,000

 
$
114,762

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


4




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. In the opinion of management, all adjustments necessary to fairly present the financial position of the Company at March 31, 2020 and December 31, 2019, the results of operations for the three months ended March 31, 2020 and 2019 and its cash flow for the three months ended March 31, 2020 and 2019 have been included and are of a normal, recurring nature except as otherwise disclosed. 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, 2019, as filed with the SEC on February 24, 2020.

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, 2019.

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.

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 March 31, 2020 and 2019, and December 31, 2019 and 2018:
 
March 31,
 
December 31,
 
2020
 
2019
 
2019
 
2018
Cash and cash equivalents
$
251,000

 
$
114,414

 
$
271,719

 
$
279,906

Restricted cash included within other current assets

 
106

 

 
108

Restricted cash included within other non-current assets

 
242

 

 
248

Total cash, cash equivalents and restricted cash
$
251,000

 
$
114,762

 
$
271,719

 
$
280,262


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.


5




The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended
March 31,
 
2020
 
2019
Net income
$
8,666

 
$
12,087

Weighted average shares outstanding:
 
 
 
Basic
19,192

 
19,003

Effect of dilutive securities:
 
 
 
Restricted stock units
418

 
319

Performance stock units
166

 
182

Diluted
19,776

 
19,504

Basic earnings per share
$
0.45

 
$
0.64

Diluted earnings per share
$
0.44

 
$
0.62


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, 2020, the Company adopted Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments, and all related ASU amendments, using the modified retrospective method. The guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables.  The adoption had an immaterial impact on the Condensed Consolidated Statement of Comprehensive Income, Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Cash Flows and Condensed Consolidated Statement of Changes in Stockholders' Equity for the three months ended March 31, 2020.

Recently Issued Financial Accounting Standards

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

In December 2019, the FASB, issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The guidance simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification ("ASC") 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the

6




tax basis of goodwill. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.

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 Accounting Standards Codification ("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 Culture Connect platform, to training and other proprietary material related to the Company's culture shaping programs. The consideration the Company expects to receive under the terms of an enterprise agreement is comprised of a single fixed fee. Our enterprise agreements contain multiple performance obligations, the delivery of materials via Culture Connect and material rights related to options to renew enterprise agreements at a significant discount. The Company allocates the transaction price to the performance obligations in the contract on a stand-alone selling price basis. The stand-alone selling price for the initial term of the enterprise agreement is 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.

7




This estimate is required to reflect the discount the client would obtain when exercising the option to renew, adjusted for the likelihood that the option will be exercised. The Company estimates the likelihood of renewal using a historical analysis of client renewals. Access to Culture Connect represents a right to access the Company’s intellectual property that the client simultaneously receives and consumes as the Company performs under the agreement, and therefore the Company recognizes revenue over time. Given the continuous nature of this commitment, the Company utilizes straight-line ratable revenue recognition over the estimated subscription period as the Company's clients will receive and consume the benefits from Culture Connect equally throughout the contract period. Revenue related to client renewals of enterprise agreements is recognized over the term of the 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:
 
March 31,
2020
 
December 31,
2019
 
Change
Contract assets
 
 
 
 
 
Unbilled receivables, net
$
11,366

 
$
7,585

 
$
3,781

Contract assets
14,858

 
14,672

 
186

Total contract assets
26,224

 
22,257

 
3,967

 
 
 
 
 
 
Contract liabilities
 
 
 
 
 
Deferred revenue
$
41,433

 
$
41,267

 
$
166


During the three months ended March 31, 2020, we recognized revenue of $25.0 million that was included in the contract liabilities balance at the beginning of the period. The amount of revenue recognized during the three months ended March 31, 2020, from performance obligations partially satisfied in previous periods as a result of changes in the estimates of variable consideration was $7.2 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.
Credit Losses

The Company is exposed to credit losses primarily through the provision of its executive search and consulting services. The Company’s expected credit loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of amount of accounts receivable that may not be collected is primarily based on historical loss-rate experience. When required, the Company adjusts the loss-rate methodology to account for current conditions and reasonable and supportable expectations of future economic and market conditions. The Company generally assesses future economic conditions for a period of sixty to ninety days, which corresponds with the contractual life of its accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution,

8




payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the novel coronavirus ("COVID-19") pandemic and determined that the estimate of credit losses was not significantly impacted.

The activity in the allowance for credit losses on the Company's trade receivables is as follows:
Balance at December 31, 2019
$
5,140

Provision for credit losses
639

Write-offs
(514
)
Foreign currency translation
(56
)
Balance at March 31, 2020
$
5,209


The fair value and unrealized losses on available for sale debt securities, aggregated by investment category and the length of time the security has been in an unrealized loss position, are as follows:
 
Less Than 12 Months
 
Balance Sheet Classification
Balance at March 31, 2020
Fair Value
 
Unrealized Loss
 
Cash and Cash Equivalents
 
Marketable Securities
U.S. Treasury securities
$
151,750

 
$
18

 
$
151,750

 
$


The unrealized losses on three investments in U.S. Treasury securities were caused by fluctuations in market interest rates. The contractual cash flows of these investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the investments would not be settled at a price less than the amortized cost basis. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of the amortized cost basis.

5.
Property and Equipment, net

The components of the Company’s property and equipment are as follows:
 
March 31,
2020
 
December 31,
2019
Leasehold improvements
$
47,386

 
$
47,269

Office furniture, fixtures and equipment
17,744

 
17,740

Computer equipment and software
27,821

 
27,531

Property and equipment, gross
92,951

 
92,540

Accumulated depreciation
(64,501
)
 
(63,890
)
Property and equipment, net
$
28,450

 
$
28,650


Depreciation expense for the three months ended March 31, 2020 and 2019 was $2.1 million and $2.5 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 10.1 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

9




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 4.6 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 for the three months ended March 31:
 
2020
 
2019
Operating lease cost
$
6,261

 
$
6,573

Variable lease cost
2,073

 
1,857

Total lease cost
$
8,334

 
$
8,430


Supplemental cash flow information related to the Company's operating leases is as follows for the three months ended March 31:
 
2020
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
7,812

 
$
8,481

Right-of-use assets obtained in exchange for lease obligations:
 
 
 
Operating leases
$
1,641

 
$
8,726


The weighted average remaining lease term and weighted average discount rate for our operating leases as of March 31, is as follows:
 
2020
 
2019
Weighted Average Remaining Lease Term
 
 
 
Operating leases
4.6 years

 
4.9 years

Weighted Average Discount Rate
 
 
 
Operating leases
3.84
%
 
3.97
%

The future maturities of the Company's operating lease liabilities as of March 31, 2020, for the years ended December 31 is as follows:
 
Operating Lease Maturity
2020
$
21,796

2021
28,043

2022
24,314

2023
21,409

2024
10,950

Thereafter
10,275

Total lease payments
116,787

Less: Interest
(9,375
)
Present value of lease liabilities
$
107,412


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, 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.


10




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 March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Cash
 
 
 
 
 
 
 
 
$
94,243

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Level 1(1):
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
156,774

 
1

 
18

 
156,757

 
156,757

 

Total Level 1
156,774

 
1

 
18

 
156,757

 
156,757

 

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
156,774

 
$
1

 
$
18

 
$
156,757

 
$
251,000

 
$


 
Fair Value
 
Balance Sheet Classification
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
Balance at December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Cash

 

 

 

 
$
177,493

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Level 1(1):
 
 
 
 
 
 
 
 
 
 
 
Money market funds

 

 

 

 
15,661

 

U.S. Treasury securities
139,705

 
13

 

 
139,718

 
78,565

 
61,153

Total Level 1
139,705

 
13

 

 
139,718

 
94,226

 
61,153

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
139,705

 
$
13

 
$

 
$
139,718

 
$
271,719

 
$
61,153


(1)
Level 1 – Quoted prices in active markets for identical assets and liabilities.
 
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 $19.3 million and $17.2 million as of March 31, 2020 and December 31, 2019, 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.


11




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 March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1(1):
 
 
 
 
 
 
 
 
 
 
 
 
U.S. non-qualified deferred compensation plan
 
$
23,516

 
$

 
$

 
$
23,516

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2(2):
 
 
 
 
 
 
 
 
 
 
 
 
Retirement and pension plan assets
 
15,053

 
1,297

 
13,756

 

 

 

Pension benefit obligation
 
(20,586
)
 

 

 

 
(1,297
)
 
(19,289
)
Total Level 2
 
(5,533
)
 
1,297

 
13,756

 

 
(1,297
)
 
(19,289
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
17,983

 
$
1,297

 
$
13,756

 
$
23,516

 
$
(1,297
)
 
$
(19,289
)

 
 
 
 
Balance Sheet Classification
 
 
Fair Value
 
Other Current Assets
 
Assets Designated for Retirement and Pension Plans
 
Investments
 
Other Current Liabilities
 
Retirement and Pension Plans
Balance at December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1(1):
 
 
 
 
 
 
 
 
 
 
 
 
U.S. non-qualified deferred compensation plan
 
$
25,409

 
$

 
$

 
$
25,409

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2(2):
 
 
 
 
 
 
 
 
 
 
 
 
Retirement and pension plan assets
 
15,296

 
1,318

 
13,978

 

 

 

Pension benefit obligation
 
(20,918
)
 

 

 

 
(1,318
)
 
(19,600
)
Total Level 2
 
(5,622
)
 
1,318

 
13,978

 

 
(1,318
)
 
(19,600
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
19,787

 
$
1,318

 
$
13,978

 
$
25,409

 
$
(1,318
)
 
$
(19,600
)

(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.

12





The following table provides a reconciliation of the beginning and ending balance of Level 3 liabilities for the three months ended March 31, 2020:
 
Acquisition
Earnout
Accruals
Balance at December 31, 2019
$
(5,278
)
Earnout payments
5,051

Foreign currency translation
227

Balance at March 31, 2020
$


8.
Goodwill and Other Intangible Assets

Goodwill

The Company's goodwill by segment is as follows:
 
March 31,
2020
 
December 31,
2019
Executive Search
 
 
 
Americas
$
91,338

 
$
92,497

Europe
24,196

 
25,579

Asia Pacific
7,888

 
8,755

Total goodwill
$
123,422

 
$
126,831


Changes in the carrying amount of goodwill by segment for the three months ended March 31, 2020, are as follows:
 
Executive Search
 
 
 
Americas
 
Europe
 
Asia Pacific
 
Total
Goodwill at December 31, 2019
92,497

 
25,579

 
8,755

 
126,831

Foreign currency translation
(1,159
)
 
(1,383
)
 
(867
)
 
(3,409
)
Goodwill at March 31, 2020
$
91,338

 
$
24,196

 
$
7,888

 
$
123,422


Other Intangible Assets, net

The Company’s other intangible assets, net by segment, are as follows:
 
March 31,
2020
 
December 31,
2019
Executive Search
 
 
 
Americas
$
372

 
$
557

Europe
1,130

 
1,314

Asia Pacific
52

 
64

Total other intangible assets, net
$
1,554

 
$
1,935


The carrying amount of amortizable intangible assets and the related accumulated amortization are as follows:
 
Weighted
Average
Life (Years)
 
March 31, 2020
 
December 31, 2019
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Client relationships
6.6
 
$
15,816

 
$
(14,469
)
 
$
1,347

 
$
16,302

 
$
(14,683
)
 
$
1,619

Trade name
5.0
 
279

 
(72
)
 
207

 
362

 
(46
)
 
316

Total intangible assets
6.4
 
$
16,095

 
$
(14,541
)
 
$
1,554

 
$
16,664

 
$
(14,729
)
 
$
1,935


Intangible asset amortization expense for the three months ended March 31, 2020 and 2019 was $0.2 million and $0.2 million, respectively.


13




The Company's estimated future amortization expense related to intangible assets as of March 31, 2020, for the years ended December 31 is as follows:
 
Estimated Future Amortization
2020
$
519

2021
458

2022
291

2023
172

2024
71

Thereafter
43

Total
$
1,554


9.
Other Current Assets

The components of other current assets are as follows:
 
March 31,
2020
 
December 31,
2019
Contract assets
$
26,224

 
$
22,257

Other
5,909

 
5,591

Total other current assets
$
32,133

 
$
27,848


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 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.

During the three months ended March 31, 2020, the Company borrowed $100 million under the 2018 Credit Agreement. The borrowings outstanding under the revolving line of credit currently bear interest at a rate of 1.77% per annum. The Company elected to draw down a portion of the available funds from its revolving line of credit as a precautionary measure to increase its cash position and further enhance its financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak.

As of March 31, 2020, the Company had $100 million of outstanding borrowings. As of December 31, 2019, the Company had no outstanding borrowings. The Company was in compliance with the financial and other covenants under the 2018 Credit Agreement 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.

As of March 31, 2020, 2,844,025 awards have been issued under the 2012 Program and 689,098 shares remain available for future awards, including 683,123 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
March 31,
 
2020
 
2019
Salaries and benefits (1)
$
1,804

 
$
1,671

Income tax benefit related to stock-based compensation included in net income
479

 
441


(1) Includes $0.8 million of income and $0.3 million of expense related to cash settled restricted stock units for the three months ended March 31, 2020 and 2019, respectively.

Restricted Stock Units

Restricted stock units are generally subject to ratable vesting over a three-year period. 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 three months ended March 31, 2020 is as follows:
 
Number of
Restricted
Stock Units
 
Weighted-
Average
Grant-Date
Fair Value
Outstanding on December 31, 2019
598,988

 
$
32.25

Granted
186,737

 
23.43

Vested and converted to common stock
(125,257
)
 
30.64

Forfeited

 

Outstanding on March 31, 2020
660,468

 
$
30.06


As of March 31, 2020, there was $12.2 million of pre-tax unrecognized compensation expense related to unvested restricted stock units, which is expected to be recognized over a weighted average of 2.6 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 three months ended March 31, 2020, 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 the 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 three months ended March 31, 2020 is as follows:
 
Number of
Performance
Stock Units
 
Weighted-
Average
Grant-Date
Fair Value
Outstanding on December 31, 2019
179,559

 
$
32.63

Granted
105,847

 
23.52

Vested and converted to common stock
(50,472
)
 
26.69

Forfeited

 

Outstanding on March 31, 2020
234,934

 
$
29.80


As of March 31, 2020, there was $5.1 million of pre-tax unrecognized compensation expense related to unvested performance stock units, which is expected to be recognized over a weighted average of 2.3 years.

Phantom Stock Units

Phantom stock units are grants of phantom stock with respect to shares of the Company's common stock that are settled in cash and are subject to various restrictions, including restrictions on transferability, vesting and forfeiture provisions. Shares of phantom stock that do not vest for any reason will be forfeited by the recipient and will revert to the Company.

Phantom stock units were granted to certain employees of the Company and are subject to vesting over a period of four years and certain other conditions, including continued service to the Company. As a result of the cash-settlement feature of the awards, the Company considers the awards to be liability awards, which are measured at fair value at each reporting date and the vested portion of the award is recognized as a liability to the extent that the service condition is deemed probable. The fair value of the phantom stock awards on the balance sheet date was determined using the closing share price of the Company's common stock on that date.

The Company recorded phantom stock-based compensation income of $0.8 million during the three months ended March 31, 2020 due to a decline in the Company's share price. The Company recorded phantom stock-based compensation expense of $0.3 million during the three months ended March 31, 2019.

Phantom stock unit activity for the three months ended March 31, 2020 is as follows:
 
Number of
Phantom
Stock Units
Outstanding on December 31, 2019
266,060

Granted

Vested

Forfeited

Outstanding on March 31, 2020
266,060


As of March 31, 2020, there was $2.9 million of pre-tax unrecognized compensation expense related to unvested phantom stock units, which is expected to be recognized over a weighted average of 3.0 years.
 
12. Restructuring

During the three months ended September 30, 2019, the Company recorded restructuring charges of $4.1 million in connection with initiatives to integrate the Company's existing Brazil operations into the 2GET business operation. The Americas incurred $4.1 million in restructuring charges, while Global Operations Support incurred less than $0.1 million. The restructuring charges primarily consist of employee-related costs for the Company's existing Brazil operations.

Changes to the accrual for restructuring charges for the three months ended March 31, 2020, are as follows:
 
Employee Related
Outstanding on December 31, 2019
$
3,245

Cash payments
(94
)
Non cash write offs
(28
)
Exchange rate fluctuations
(735
)
Outstanding on March 31, 2020
$
2,388


13.
Income Taxes

The Company reported income before taxes of $14.4 million and an income tax provision of $5.7 million for the three months ended March 31, 2020. The Company reported income before taxes of $18.8 million and an income tax provision of $6.8 million for the three months ended March 31, 2019. The effective tax rates for the three months ended March 31, 2020 and 2019, were 39.8% and 35.9%, respectively. The effective tax rates for the three months ended March 31, 2020 and 2019 were each impacted by one-time items and the mix of income.


14




14.
Changes in Accumulated Other Comprehensive Income

The changes in Accumulated other comprehensive income (“AOCI”) by component for the three months ended March 31, 2020 is summarized below:
 
 
Available-
for-
Sale
Securities
 
Foreign
Currency
Translation
 
Pension
 
AOCI
Balance at December 31, 2019
 
$
13

 
$
6,102

 
$
(2,291
)
 
$
3,824

Other comprehensive income before classification, net of tax
 
(30
)
 
(3,716
)
 

 
(3,746
)
Balance at March 31, 2020
 
$
(17
)
 
$
2,386

 
$
(2,291
)
 
$
78


15.
Segment Information

The Company has four operating segments. The executive search business operates in the Americas, Europe (which includes Africa) and Asia Pacific (which includes the Middle East), and the Heidrick Consulting business operates globally.

For segment purposes, reimbursements of out-of-pocket expenses classified as revenue and other operating income are reported separately and, therefore, are not included in the results of each segment. The Company believes that analyzing trends in revenue before reimbursements (net revenue), analyzing operating expenses as a percentage of net revenue, and analyzing operating income, more appropriately reflect its core operations.

The revenue and operating income (loss) by segment are as follows:
 
Three Months Ended
March 31,
 
2020
 
2019
Revenue

 

Executive Search


 

Americas
$
100,301

 
$
99,305

Europe
33,082

 
33,553

Asia Pacific
22,070

 
25,447

Total Executive Search
155,453

 
158,305

Heidrick Consulting
16,028

 
13,289

Revenue before reimbursements (net revenue)
171,481

 
171,594

Reimbursements
3,366

 
4,680

Total revenue
$
174,847

 
$
176,274

 
Three Months Ended
March 31,
 
2020
 
2019
Operating income (loss)
 
 
 
Executive Search
 
 
 
Americas
$
25,732

 
$
22,449

Europe
3,049

 
2,165

Asia Pacific
2,502

 
4,906

Total Executive Search
31,283

 
29,520

Heidrick Consulting
(4,092
)
 
(4,827
)
Total segment operating income
27,191

 
24,693

Global Operations Support
(9,039
)
 
(8,302
)
Total operating income
$
18,152

 
$
16,391

 

16.
Guarantees

The Company has utilized letters of credit to support certain obligations, primarily for its office lease agreements in Europe and Asia Pacific. The letters of credit were made to secure the respective agreements and are for the terms of the agreements, which extend through 2030. For each letter of credit issued, the Company would have to use cash to fulfill the obligation if there is a default on a payment. The maximum amount of undiscounted payments the Company would be required to make in the event of default on all outstanding letters of credit is approximately $3.6 million as of March 31, 2020. The Company has not accrued for these arrangements as no event of default exists or is expected to exist.
 

15




17.
Commitments and Contingencies

Litigation

The Company has contingent liabilities from various pending claims and litigation matters arising in the ordinary course of the Company’s business, some of which involve claims for damages that are substantial in amount. Some of these matters are covered by insurance. Based upon information currently available, the Company believes the ultimate resolution of such claims and litigation will not have a material adverse effect on its financial condition, results of operations or liquidity.

18.
Subsequent Event

The challenges posed by the COVID-19 pandemic on the global economy increased significantly as the first quarter progressed. The pandemic has created significant volatility, uncertainty and economic disruption. Certain governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of the pandemic. Additional, more restrictive proclamations and/or directives may be issued in the future. The Company has temporarily closed its offices and shifted its workforce to remote operations to ensure the safety of our employees. In addition, certain customers of the Company have closed or reduced their operations during this pandemic. While the Company has not incurred any significant disruptions to our business to date, the extent to which the pandemic impacts the Company's business, operations and financial results will depend on numerous evolving factors that may not be able to be accurately predicted. The Company expects that all of its business segments, across all of its geographies, will be impacted to some degree by the pandemic and actions taken in response to the pandemic, but the significance of the impact of the pandemic on the Company and the duration for which it may have an impact cannot be determined at this time.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as other sections of this report on Form 10-Q contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements are not historical facts, but instead represent only our beliefs, assumptions, expectations, estimates, forecasts and projections regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.

Factors that may affect the outcome of the forward-looking statements include, among other things, the impacts, direct and indirect, of the COVID-19 pandemic on our business, our consultants and employees, and the overall economy; leadership changes, our ability to attract, integrate, develop, manage and retain qualified consultants and senior leaders; our ability to prevent our consultants from taking our clients with them to another firm; our ability to maintain our professional reputation and brand name; the fact that our net revenue may be affected by adverse economic conditions; our clients’ ability to restrict us from recruiting their employees; the aggressive competition we face; our heavy reliance on information management systems; the fact that we face the risk of liability in the services we perform; the fact that data security, data privacy and data protection laws and other evolving regulations and cross-border data transfer restrictions may limit the use of our services and adversely affect our business; social, political, regulatory and legal risks in markets where we operate; the impact of foreign currency exchange rate fluctuations; the fact that we may not be able to align our cost structure with net revenue; unfavorable tax law changes and tax authority rulings; our ability to realize our tax losses; the timing of the establishment or reversal of valuation allowance on deferred tax assets; any impairment of our goodwill, other intangible assets and other long-lived assets; our ability to execute and integrate future acquisitions; the fact that we have anti-takeover provisions that make an acquisition of us difficult and expensive; our ability to access additional credit; and the increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks that could pose a risk to our systems, networks, solutions, services and data. For more information on the factors that could affect the outcome of forward-looking statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2019, under Risk Factors in Item 1A. We caution the reader that the list of factors may not be exhaustive. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

Our Business. We are a leadership advisory firm providing executive search and consulting services. We help our clients build leadership teams by facilitating the recruitment, management and development of senior executives. We believe focusing on top-level services offers us several advantages that include access to and influence with key decision makers, increased potential for recurring search consulting engagements, higher fees per search, enhanced brand visibility and a leveraged global footprint, which create added barriers to entry for potential competitors. Working at the top of client organizations also allows us to attract and retain high-caliber consultants.

In addition to executive search, we provide consulting services including executive leadership assessment, leadership, team and board development, succession planning, talent strategy, people performance, inter-team collaboration, culture shaping and organizational transformation.

We provide our services to a broad range of clients through the expertise of over 450 consultants located in major cities around the world. Our executive search services are provided on a retained basis. Revenue before reimbursements of out-of-pocket expenses (“net revenue”) consists of retainers and indirect expenses billed to clients. Typically, we are paid a retainer for our executive search services equal to approximately one-third of the estimated first-year compensation for the position to be filled. In addition, if the actual compensation of a placed candidate exceeds the estimated compensation, we often are authorized to bill the client for one-third of the excess. Indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search.

Executive Search. We partner with respected organizations globally to build and sustain the best leadership teams in the world, with a specialized focus on the placement of top-level senior executives. We believe focusing on top-level senior executives provides the opportunity for several advantages including access to and influence with key decision makers, increased potential for recurring search and consulting engagements, higher fees per executive search, enhanced brand visibility, and a leveraged global footprint. Working at the top of client organizations also facilitates the attraction and retention of high-caliber consultants who desire to serve top industry executives and their leadership needs.

We employ a global approach to executive search built on better insights, more data and faster decision making facilitated by the use of our proprietary Infinity Framework and Heidrick Connect. Our Infinity Framework allows clients to holistically evaluate

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a candidate's pivotal experience and expertise, leadership capabilities, agility and potential, and culture fit and impact, thereby allowing our clients to find the right person for the role. We supplement our Infinity Framework through a series of additional online tools including our Leadership Accelerator, Leadership Signature and Culture Signature assessments. Heidrick Connect, a completely digital, always available, client experience portal allows our clients to access talent insights for each engagement, including the Infinity Framework and other proprietary assessment tools.

The executive search industry is highly fragmented, consisting of several thousand executive search firms worldwide. Executive search firms are generally separated into two broad categories: retained search and contingency search. Our executive search services are provided on a retained basis. Retained executive search firms fulfill their clients’ senior leadership needs by identifying potentially qualified candidates and assisting clients in evaluating and assessing these candidates. Retained executive search firms generally are compensated for their services regardless of whether the client employs a candidate identified by the search firm and are generally retained on an exclusive basis.

For each assignment, we enter into a contract with our client that outlines the general terms and conditions of the assignment. Typically, we are paid a retainer for our executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled. In addition, if the actual compensation of a placed candidate exceeds the estimated compensation, executive search firms often are authorized to bill the client for one-third of the excess. We refer to this excess compensation billing as uptick revenue. We also bill our clients for indirect expenses, which are calculated as a percentage of the retainer with certain dollar limits per search. Revenue before reimbursements of out-of-pocket expenses (“net revenue”) consists of retainers, an estimate of uptick revenue and indirect expenses billed to clients. We generally bill our clients for our retainer and indirect expenses in one-third increments over a three-month period commencing in the month of a client's acceptance of the contract with uptick revenue billed upon the completion of the engagement.
  
Heidrick Consulting. Our consulting services include leadership assessment and development, executive coaching and on-boarding, succession planning, team and board effectiveness, organizational performance acceleration, workforce planning and culture shaping. Our consulting services generate revenue primarily through the professional fees generated for each engagement which are generally based on the size of the project and scope of services.

Key Performance Indicators

We manage and assess our performance through various means, with primary financial and operational measures including net revenue, operating income, operating margin, Adjusted EBITDA (non-GAAP) and Adjusted EBITDA margin (non-GAAP). Executive Search and Heidrick Consulting performance is also measured using consultant headcount. Specific to Executive Search, confirmation trends, consultant productivity and average revenue per search are used to measure performance.

Revenue is driven by market conditions and a combination of the number of executive search engagements and consulting projects and the average revenue per search or project. With the exception of compensation expense, incremental increases in revenue do not necessarily result in proportionate increases in costs, particularly operating and administrative expenses, thus creating the potential to improve operating margins.

The number of consultants, confirmation trends, number of searches or projects completed, productivity levels and the average revenue per search or project will vary from quarter to quarter, affecting net revenue and operating margin.

Our Compensation Model

At the Executive Search consultant level, there are fixed and variable components of compensation. Individuals are rewarded for their performance based on a system that directly ties a portion of their compensation to the amount of net revenue for which they are responsible. A portion of the reward may be based upon individual performance against a series of non-financial measures. Credit towards the variable portion of an executive search consultant’s compensation is earned by generating net revenue for winning and executing work. Each quarter, we review and update the expected annual performance of all Executive Search consultants and accrue variable compensation accordingly. The amount of variable compensation that is accrued for each Executive Search consultant is based on a tiered payout model. Overall Company performance determines the amount available for total variable compensation. The more net revenue that is generated by the consultant, the higher the percentage credited towards the consultant’s variable compensation and thus accrued by our Company as expense. 

At the Heidrick Consulting consultant level, there are also fixed and variable components of compensation. Overall compensation is determined based on the total economic contribution of the Heidrick Consulting segment to the business as a whole. Individual consultant compensation can vary and is derived from credits earned for delivering client work plus credits earned for contributions of intellectual and human capital, client relationship development and consulting practice development. Each quarter, we review and update the expected annual performance of all Heidrick Consulting consultants and accrue variable compensation accordingly.

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The mix of individual consultants who generate revenue in Executive Search and economic contributions in Heidrick Consulting can significantly affect the total amount of compensation expense recorded, which directly impacts operating margin. As a result, the variable portion of the compensation expense may fluctuate significantly from quarter to quarter. The total variable compensation is discretionary and is based on Company-wide financial targets approved by the Human Resources and Compensation Committee of the Board of Directors.

A portion of our Executive Search consultants’ and management cash bonuses is deferred and paid over a three-year vesting period. The compensation expense related to the amounts being deferred is recognized on a graded vesting attribution method over the requisite service period. This service period begins on January 1 of the respective fiscal year and continues through the deferral date, which coincides with our bonus payments in the first quarter of the following year, and for an additional three-year vesting period. The deferrals are recorded in Accrued salaries and benefits in the Consolidated Balance Sheets.

Recent Developments

On March 11, 2020, the World Health Organization designated the recent novel coronavirus ("COVID-19") as a global pandemic. COVID-19 was first detected in Wuhan City, China and continued to spread, significantly impacting various markets around the world, including the United States.

With infections reported throughout the world, certain governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of the pandemic. Additional, more restrictive proclamations and/or directives may be issued in the future. We have temporarily closed our offices and shifted our workforce to remote operations to ensure the safety of our employees. During this uncertain time, our critical priorities are:

the health and safety of our employees, clients and their families;
providing support to our clients; and
helping our clients accelerate their business performance and transform with agility

While we have not incurred any significant disruptions to our business to date, the extent to which the pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including, but not limited to:

the duration and scope of the pandemic;
the impact of the pandemic, and actions taken in response to the pandemic, on economic activity;
governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic;
restrictions inhibiting our employees’ ability to access our offices;
the effect on our clients and client demand for our services and solutions;
our ability to sell and provide our services and solutions, including as a result of travel restrictions and people working from home; and
the ability of our clients to pay for our services and solutions

We expect that all of our business segments, across all of our geographies, will be impacted to some degree by the pandemic and actions taken in response to the pandemic, but the significance of the impact of the pandemic on our business and the duration for which it may have an impact cannot be determined at this time. Specific factors that may impact our business include, but are not limited to:

a decline in demand for our executive search and consulting services due to temporary and permanent workforce reductions, and general economic uncertainty;
a lengthening of the executive search process due to a slow-down in client decision making;
an increase in executive searches placed on hold due to delays in planned work by our clients;
an inability to execute in-person consulting engagements; and
disruptions in business operations for offices in areas most impacted by the pandemic, including the United States, United Kingdom, Italy, Spain and China

A sustained economic downturn may also result in the carrying value of our goodwill, other intangible assets, and long-lived assets exceeding their fair value, which may require us to recognize an impairment to those assets.

We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. On March 24,

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2020, we elected to draw down $100 million of the available funds from our revolving line of credit as a precautionary measure to increase our cash position and further enhance our financial flexibility in light of current uncertainty in the global markets.

We have not experienced any material impact to our internal controls over financial reporting despite the fact that our employees are working remotely due to the pandemic. We are continually monitoring and assessing the pandemic situation on our internal controls to minimize the impact on their design and operating effectiveness.

For more information, see Item 1A, "Risk Factors."

Results of Operations

The following table summarizes, for the periods indicated, our results of operations as a percentage of revenue before reimbursements (net revenue): 
 
Three Months Ended
March 31,
 
2020
 
2019
Revenue
 
 
 
Revenue before reimbursements (net revenue)
100.0
 %
 
100.0
%
Reimbursements
2.0

 
2.7

Total revenue
102.0

 
102.7

 
 
 
 
Operating expenses
 
 
 
Salaries and benefits
70.6

 
70.4

General and administrative expenses
18.8

 
20.0

Reimbursed expenses
2.0

 
2.7

Total operating expenses
91.4

 
93.2

 
 
 
 
Operating income
10.6

 
9.6

 
 
 
 
Non-operating income (expense)
 
 
 
Interest, net
0.4

 
0.5

Other, net
(2.6
)
 
1.0

Net non-operating income (expense)
(2.2
)
 
1.4

 
 
 
 
Income before income taxes
8.4

 
11.0

 
 
 
 
Provision for income taxes
3.3

 
3.9

 
 
 
 
Net income
5.1
 %
 
7.0
%

Note: Totals and sub-totals may not equal the sum of individual line items due to rounding.

We operate our executive search services in the Americas; Europe (which includes Africa); and Asia Pacific (which includes the Middle East) and our Heidrick Consulting services globally (See Note 15Segment Information).


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The following tables set forth, for the periods indicated, our revenue and operating income by segment (in thousands):
 
Three Months Ended
March 31,
 
2020
 
2019
Revenue
 
 
 
Executive Search
 
 
 
Americas
$
100,301

 
$
99,305

Europe
33,082

 
33,553

Asia Pacific
22,070

 
25,447

Total Executive Search
155,453

 
158,305

Heidrick Consulting
16,028

 
13,289

Revenue before reimbursements (net revenue)
171,481

 
171,594

Reimbursements
3,366

 
4,680

Total revenue
$
174,847

 
$
176,274

 
 
Three Months Ended
March 31,
 
2020
 
2019
Operating income (loss)
 
 
 
Executive Search
 
 
 
Americas
$
25,732

 
$
22,449

Europe
3,049

 
2,165

Asia Pacific
2,502

 
4,906

Total Executive Search
31,283

 
29,520

Heidrick Consulting
(4,092
)
 
(4,827
)
Total segment operating income
27,191

 
24,693

Global Operations Support
(9,039
)
 
(8,302
)
Total operating income
$
18,152

 
$
16,391


Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

Total revenue. Consolidated total revenue decreased $1.4 million, or 0.8%, to $174.8 million for the three months ended March 31, 2020, from $176.3 million for the three months ended March 31, 2019. The decrease in total revenue was primarily due to the decrease in revenue before reimbursements (net revenue).

Revenue before reimbursements (net revenue). Consolidated net revenue decreased $0.1 million, or 0.1%, to $171.5 million for the three months ended March 31, 2020 from $171.6 million for the three months ended March 31, 2019. Foreign exchange rate fluctuations negatively impacted results by $1.9 million, or 1.1%. Executive Search net revenue was $155.5 million for the three months ended March 31, 2020, a decrease of $2.9 million, or 1.8%, compared to the three months ended March 31, 2019. Heidrick Consulting net revenue increased $2.7 million, or 20.6%, to $16.0 million for the three months ended March 31, 2020.

The number of Executive Search and Heidrick Consulting consultants was 396 and 70, respectively, as of March 31, 2020, compared to 370 and 67, respectively, as of March 31, 2019. Executive Search productivity, as measured by annualized net Executive Search revenue per consultant, was $1.6 million and $1.7 million for the three months ended March 31, 2020 and 2019, respectively. The number of confirmed searches increased 2.4% compared to 2019. The average revenue per executive search decreased to $118,600