| Square Footage | |||||
| Americas | |||||
| Europe | |||||
| Asia Pacific | |||||
| Total | |||||
ITEM 3. LEGAL PROCEEDINGS
We have contingent liabilities from various pending claims and litigation matters arising in the ordinary course of our business, some of which involve claims for damages that may be substantial in amount. Some of these matters are covered by insurance. Based upon information currently available, we believe the ultimate resolution of such claims and litigation will not have a material adverse effect on our financial condition, results of operations or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for our Common Stock
Our common stock, $0.01 par value, is listed on the Nasdaq Global Stock marketMarket under the symbol "HSII"“HSII”.
Holders of Record
As of February 15, 2021, we had 50 holders of record of our common stock and 19,359,586 shares of common stock outstanding. A greater number of holders of our common stock are beneficial holders, whose shares are held by banks, brokers, and other financial institutions.
Performance Graph
We have presented below a graph which compares the cumulative total stockholder return on our common shares with the cumulative total stockholder return of the Standard & Poor’s SmallCap 600 Index and the Standard & Poor’s Composite 1500 Human Resource and Employment Services Index. The S&P Composite 1500 Human Resource & Employment Services Index includes 11 companies in related businesses, including Heidrick & Struggles. Cumulative total return for each of the periods shown in the performance graph is measured assuming an initial investment of $100 on December 31, 2014.2015.
The stock price performance depicted in this graph is not necessarily indicative of future price performance. This graph will not be deemed to be filed as part of this Form 10-K, and will not be deemed to be incorporated by reference by any general statement incorporating this Form 10-K into any filing by us under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate this information by reference.
* Assuming $100 invested on 12/31/1415 in HSII or index, including reinvestment of dividends.
Prepared by: Zacks Investment Research, Inc.
Copyright: Standard and Poor’s, Inc.
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Dividends
From September 2007 through December 2018, we paid a quarterly cash dividend of $0.13 per share as approved by our Board of Directors. Beginning with the dividend paid on March 22,In 2019, we began paying a quarterly cash dividend of $0.15 per share as approved by our Board of Directors. In 2019,2020, the total cash dividend paid was $0.60 per share.
In February 2020,2021, our Board of Directors approved a quarterly dividend of $0.15 per share on our common stock which will be paid on March 20, 202019, 2021 to shareholders of record as of March 6, 2020.5, 2021.
In connection with the quarterly cash dividend, we also pay a dividend equivalent on outstanding restricted stock units. The amounts related to the dividend equivalent payments for restricted stock units are accrued over the vesting period and paid upon vesting. In 20192020 and 2018,2019, we paid $0.4$0.5 million and $0.2$0.4 million, respectively, in dividend equivalent payments.
Issuer Purchases of Equity Securities
On February 11, 2008, we announced that our Board of Directors authorized management to repurchase shares of our common stock with an aggregate purchase price of up to $50 million.million (the "Repurchase Agreement"). We may from time to time and as business conditions warrant purchase shares of our common stock on the open market or in negotiated or block trades. No time limit has been set for completion of this program. We did not repurchase any shares of our common stock in 2020 or 2019. The most recent purchase of shares of common stock occurred during the year ended December 31, 2012. As of December 31, 2019,2020, we have purchased 1,038,670 shares of our common stock pursuant to the Repurchase Authorization for a total of $28.3 million and $21.7 million remains available for future purchases under the authorization.Repurchase Authorization.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below has been derived from our audited consolidated financial statements. The data as of December 31, 20192020 and 2018,2019, and for the years ended December 31, 2020, 2019 2018 and 2017,2018, is derived from the audited current and historical consolidated financial statements, which are included elsewhere in this Form 10-K. Other than noted below, the data as of December 31, 2018, 2017 2016 and 2015,2016, and for the years ended December 31, 20162017 and 2015,2016, are derived from audited historical consolidated financial statements, which are not included in this report. The data set forth is qualified in its entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the audited consolidated financial statements, the notes thereto, and the other financial data and statistical information included in this Form 10-K.
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||
| (in thousands, except per share and other operating data) | ||||||||||||||||||||||||||||||||
| Statements of Operations Data | ||||||||||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||
| Revenue before reimbursements (net revenue) | $ | 621,615 | $ | 706,924 | $ | 716,023 | $ | 621,400 | $ | 582,390 | ||||||||||||||||||||||
| Reimbursements | 7,755 | 18,690 | 19,632 | 18,656 | 18,516 | |||||||||||||||||||||||||||
| Total revenue | 629,370 | 725,614 | 735,655 | 640,056 | 600,906 | |||||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| Salaries and benefits | 450,424 | 501,791 | 506,349 | 434,219 | 400,070 | |||||||||||||||||||||||||||
| General and administrative expenses | 121,378 | 137,492 | 140,817 | 147,316 | 147,087 | |||||||||||||||||||||||||||
Impairment charges(1) | 32,970 | — | — | 50,722 | — | |||||||||||||||||||||||||||
Restructuring charges(2) | 52,372 | 4,130 | — | 15,666 | — | |||||||||||||||||||||||||||
| Reimbursed expenses | 7,755 | 18,690 | 19,632 | 18,656 | 18,516 | |||||||||||||||||||||||||||
| Total operating expenses | 664,899 | 662,103 | 666,798 | 666,579 | 565,673 | |||||||||||||||||||||||||||
| Operating income (loss) | (35,529) | 63,511 | 68,857 | (26,523) | 35,233 | |||||||||||||||||||||||||||
| Non-operating income (expense) | ||||||||||||||||||||||||||||||||
| Interest, net | 204 | 2,880 | 1,141 | 385 | 244 | |||||||||||||||||||||||||||
| Other, net | 3,927 | 2,898 | 494 | (3,280) | 2,289 | |||||||||||||||||||||||||||
| Net non-operating income (expense) | 4,131 | 5,778 | 1,635 | (2,895) | 2,533 | |||||||||||||||||||||||||||
| Income (loss) before income taxes | (31,398) | 69,289 | 70,492 | (29,418) | 37,766 | |||||||||||||||||||||||||||
| Provision for income taxes | 6,309 | 22,420 | 21,197 | 19,217 | 22,353 | |||||||||||||||||||||||||||
| Net income (loss) | $ | (37,707) | $ | 46,869 | $ | 49,295 | $ | (48,635) | $ | 15,413 | ||||||||||||||||||||||
| Basic weighted average common shares outstanding | 19,301 | 19,103 | 18,917 | 18,735 | 18,540 | |||||||||||||||||||||||||||
| Diluted weighted average common shares outstanding | 19,301 | 19,551 | 19,532 | 18,735 | 18,939 | |||||||||||||||||||||||||||
| Basic net income (loss) per common share | $ | (1.95) | $ | 2.45 | $ | 2.61 | $ | (2.60) | $ | 0.83 | ||||||||||||||||||||||
| Diluted net income (loss) per common share | $ | (1.95) | $ | 2.40 | $ | 2.52 | $ | (2.60) | $ | 0.81 | ||||||||||||||||||||||
| Cash dividends paid per share | $ | 0.60 | $ | 0.60 | $ | 0.52 | $ | 0.52 | $ | 0.52 | ||||||||||||||||||||||
| Balance Sheet Data (at end of period) | ||||||||||||||||||||||||||||||||
| Working capital | $ | 154,448 | $ | 149,140 | $ | 131,916 | $ | 77,998 | $ | 77,838 | ||||||||||||||||||||||
| Total assets | 787,812 | 844,173 | 700,629 | 587,204 | 581,502 | |||||||||||||||||||||||||||
| Long-term debt, less current maturities | — | — | — | — | — | |||||||||||||||||||||||||||
| Stockholders’ equity | 267,602 | 309,115 | 267,156 | 212,705 | 258,590 | |||||||||||||||||||||||||||
(1)Includes goodwill impairment charges of $24.5 million in Europe and $8.5 million in Asia Pacific in 2020. Includes $50.7 million of goodwill and other intangible asset impairment charges related to Heidrick Consulting in 2017. (See Note 8, Goodwill and Other Intangible Assets).
(2)The 2020 restructuring charges consist of $32.8 million of employee-related costs associated with severance agreements and the elimination of certain deferred compensation programs, $18.9 million of real estate related expenses, and $0.7 million of professional fees and other expenses. The 2019 charges consist primarily of employee-related costs associated with severance arrangements. The 2017 charges consist of $13.1 million of employee-related costs associated with severance arrangements, $2.3 million in professional fees and other expenses and $0.3 million in real estate related expenses (See Note 14, Restructuring).
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| Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (in thousands, except per share and other operating data) | ||||||||||||||||||||
| Statements of Operations Data: | ||||||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Revenue before reimbursements (net revenue) | $ | 706,924 | $ | 716,023 | $ | 621,400 | $ | 582,390 | $ | 531,139 | ||||||||||
| Reimbursements | 18,690 | 19,632 | 18,656 | 18,516 | 17,172 | |||||||||||||||
| Total revenue | 725,614 | 735,655 | 640,056 | 600,906 | 548,311 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Salaries and benefits | 501,791 | 506,349 | 434,219 | 400,070 | 369,385 | |||||||||||||||
| General and administrative expenses | 137,492 | 140,817 | 147,316 | 147,087 | 127,692 | |||||||||||||||
| Impairment charges (1) | — | — | 50,722 | — | — | |||||||||||||||
| Restructuring charges (2) | 4,130 | — | 15,666 | — | — | |||||||||||||||
| Reimbursed expenses | 18,690 | 19,632 | 18,656 | 18,516 | 17,172 | |||||||||||||||
| Total operating expenses | 662,103 | 666,798 | 666,579 | 565,673 | 514,249 | |||||||||||||||
| Operating income (loss) | 63,511 | 68,857 | (26,523 | ) | 35,233 | 34,062 | ||||||||||||||
| Non-operating income (expense): | ||||||||||||||||||||
| Interest, net | 2,880 | 1,141 | 385 | 244 | (122 | ) | ||||||||||||||
| Other, net | 2,898 | 494 | (3,280 | ) | 2,289 | (2,386 | ) | |||||||||||||
| Net non-operating income (expense) | 5,778 | 1,635 | (2,895 | ) | 2,533 | (2,508 | ) | |||||||||||||
| Income (loss) before income taxes | 69,289 | 70,492 | (29,418 | ) | 37,766 | 31,554 | ||||||||||||||
| Provision for income taxes | 22,420 | 21,197 | 19,217 | 22,353 | 14,422 | |||||||||||||||
| Net income (loss) | $ | 46,869 | $ | 49,295 | $ | (48,635 | ) | $ | 15,413 | $ | 17,132 | |||||||||
| Basic weighted average common shares outstanding | 19,103 | 18,917 | 18,735 | 18,540 | 18,334 | |||||||||||||||
| Diluted weighted average common shares outstanding | 19,551 | 19,532 | 18,735 | 18,939 | 18,715 | |||||||||||||||
| Basic net income (loss) per common share | $ | 2.45 | $ | 2.61 | $ | (2.60 | ) | $ | 0.83 | $ | 0.93 | |||||||||
| Diluted net income (loss) per common share | $ | 2.40 | $ | 2.52 | $ | (2.60 | ) | $ | 0.81 | $ | 0.92 | |||||||||
| Cash dividends paid per share | $ | 0.60 | $ | 0.52 | $ | 0.52 | $ | 0.52 | $ | 0.52 | ||||||||||
| Balance Sheet Data (at end of period): | ||||||||||||||||||||
| Working capital (3) | $ | 149,140 | $ | 131,916 | $ | 77,998 | $ | 77,838 | $ | 79,533 | ||||||||||
| Total assets (3) | 844,173 | 700,629 | 587,204 | 581,502 | 572,718 | |||||||||||||||
| Long-term debt, less current maturities | — | — | — | — | — | |||||||||||||||
| Stockholders’ equity | 309,115 | 267,156 | 212,705 | 258,590 | 254,802 | |||||||||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as other sections of this annual report on Form 10-K contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements are not historical facts, but instead represent only our beliefs, assumptions, expectations, estimates, forecasts and projections regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed under the Section heading “Risk Factors” in Part I, Item 1A of this Form 10-K.
Factors that may affect the outcome of the forward-looking statements include, among other things, 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. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for years 20192020 and 2018. for2019. For the discussion of changes from 20172018 to 20182019 and other financial information related to 2017,2018, refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2018.2019. This document was filed with the SEC on February 26, 2019.24, 2020.
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 450425 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
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authorized to bill the client for one-third of the excess. Indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search.
Key Performance Indicators
We manage and assess 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, confirmationconfirmed search (confirmation) trends, consultant productivity and average revenue per search are used to measure performance. Productivity is as measured by annualized Executive Search net revenue per consultant.
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.
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’ andthe Company’s management cash bonuses isare deferred and paid over a three-year vesting period. The portion of the bonus is approximately 15% depending on the employee’s level or position. The compensation expense related to the amounts being deferred is recognized on a graded vesting attribution method over the requisite service period. This service period begins on January 1 of the respective fiscal year and continues through the deferral date, which coincides with ourthe Company’s 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 within both Current liabilities and Non-current liabilities in the Consolidated Balance Sheets.
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Impact of COVID-19
On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. COVID-19 has significantly impacted 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 temporarily closed our offices and shifted our workforce to remote operations to ensure the safety of our employees. Our offices are now accessible to our employees, however, we continue to encourage all employees to work remotely. 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.
In response to working remotely, our Executive Search teams employed our robust digital search platform, Heidrick Connect, to operate effectively and efficiently while engaging virtually with our clients. Additionally, we have introduced upgrades to Heidrick Connect, resulting in greater flexibility, increased productivity and the ability to deliver more insights to our clients. Our Heidrick Consulting teams have pivoted to create new digital solutions for Leadership Assessments, Team Acceleration, and Organization and Culture Acceleration that can be delivered virtually in response to required social distancing practices.
Beginning in the second quarter, we experienced a decline in demand for our executive search and consulting services, a lengthening of the executive search process due to a slow-down in client decision making and an inability to execute in-person consulting engagements, which had a material adverse impact on our results of operations. The extent to which the pandemic continues to impact 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.
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We expect that all of our business segments, across all of our geographies, will continue to be impacted 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, China and Brazil.
During the year ended December 31, 2020, and as a direct result of the economic impact of COVID-19, we experienced a decline in demand for our executive search services and a lengthening of the executive search process due to a slow-down in client decision making, which had a material adverse impact on our results of operations. As a result, we identified a triggering event and performed an interim goodwill impairment evaluation during the three months ended June 30, 2020 resulting in the impairment of the goodwill in our Europe and Asia Pacific reporting units. We also evaluated the recoverability our intangible and other long-lived assets and determined that no impairment was necessary. We continue to monitor the impact of the economic downturn for additional potential impairment of goodwill, other intangible assets and long-lived 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. In the event we require additional liquidity, our 2018 Credit Agreement (as defined below) provides us with a senior unsecured revolving line of credit with an aggregate commitment of $175 million, which includes a sublimit of $25 million for letters of credit and a $10 million swingline loan sublimit. The agreement also includes a $75 million expansion feature.
In the third quarter, we implemented a restructuring plan to optimize future growth and profitability. The expected annual cost savings from the restructuring ranges from $30 million to $40 million. The primary components of the restructuring include a workforce reduction, and a reduction of the firm’s real estate expenses, professional fees and the future elimination of certain deferred compensation programs.
As part of this restructuring plan, we implemented several real estate initiatives including downsizing and terminating certain of our existing office leases. Our success working from home, utilizing Heidrick Connect and our digital consulting solutions, allowed us to reevaluate how we utilize our offices and plan to use them in a post-pandemic environment. Upon the expiration of the leases included in the restructuring, we will have reduced our square footage under lease by approximately 20%.
Moving forward, we will continue with our real estate strategy, which consists of three objectives: 1) matching our real estate footprint to the new, post-pandemic office occupancy expectations 2) creating open and collaborative environments, including unassigned work spaces that facilitate work from anywhere; and 3) increasing our focus on reducing our carbon footprint as part of our long-term sustainability goals. We believe we have opportunity to further decrease costs primarily through lease renewals and rightsizing offices where it makes business sense.
We have not experienced any material impact to our internal controls over financial reporting 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.
2020 Overview
Consolidated net revenue was $706.9$621.6 million for the year ended December 31, 2019,2020, a decrease of $9.1$85.3 million, or 1.3%12.1%, compared to 2018.2019. Executive Search net revenue was $646.4$565.2 million in 2019,2020, a decrease of $6.5$81.2 million compared to 2018.2019. The decrease in Executive Search net revenue was the result of declines in Europe and Asia Pacific, partially offset by growth in the Americas. Our acquisition of 2Get in September 2019 also contributed to Executive Search net revenue.Americas, and Europe. The number of Executive Search consultants was 361 as of December 31, 2020, compared to 380 as of December 31, 2019, compared to 353 as of December 31, 2018.2019. Executive Search productivity, as measured by annualized net Executive Search revenue per consultant was $1.7$1.5 million and $1.9$1.7 million
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for the years ended December 31, 20192020 and 2018,2019, respectively. The number of confirmed searches decreased 4.6% in 20196.3%, compared to 2018.2019. The average revenue per executive search increaseddecreased to $123,200 in 2020 compared to $132,000 in 2019 compared to $127,300 in 2018.2019. Heidrick Consulting net revenue decreased $2.6$4.1 million, or 4.1%6.8%, to $56.4 million in 2020 from $60.6 million in 2019, from $63.1 million in 2018.2019. The number of Heidrick Consulting consultants was 65 as of December 31, 2020, compared to 71 as of December 31, 2019, compared to 66 as of December 31, 2018.2019.
Operating incomeloss as a percentage of net revenue was 5.7% in 2020, compared to operating income as a percentage of revenue of 9.0% in 2019, compared to 9.6% in 2018.2019. The change in operating income was primarily due to a decrease in net revenue of $9.1$85.3 million, and $4.1$52.4 million of restructuring charges, and $33.0 million of impairment charges in 2019,2020, partially offset by decreases in salaries and benefits expense, and general and administrative expenseexpenses of $4.6$51.4 million and $3.3$16.1 million, respectively. Salaries and benefits expense as a percentage of net revenue was 72.5% in 2020, compared to 71.0% in 2019 and 70.7% in 2018.2019. General and administrative expense as a percentage of net revenue was 19.5% in 2020, compared to 19.4% in 2019 and 19.7% in 2018.2019.
We ended the year with combined cash, cash equivalents, and marketable securities of $332.9$336.5 million, an increase of $53.0$3.6 million compared to $279.9$332.9 million at December 31, 2018. The increase was primarily due to the strong cash inflows from operations partially offset by acquisition spend and larger bonus payments year-over-year.2019. We pay the majority of bonuses in the first quarter following the year in which they were earned. Employee bonuses are accrued throughout the year and are based on the Company’s performance and the performance of the individual employee. We expect to pay approximately $205.0$180.4 million in bonuses related to 20192020 performance in March and April 2020.2021. In January 2020,2021, we paid approximately $17.1$19.9 million in cash bonuses deferred fromin prior years.
We are currently forecasting 20202021 first quarter net revenue of between $165$160 million and $175$170 million. Our 20202021 first quarter guidance is based upon, among other things, management’s assumptions for the anticipated volume of new executive search confirmations and leadership consulting and culture shaping projects, the current backlog, consultant productivity, consultant retention, the seasonality of our business and average currency rates from December 2019.2020.
Our 20202021 first quarter guidance is subject to a number of risks and uncertainties, including those disclosed under "Item 1A - Risk"Risk Factors" and in this "Management’s Discussion and Analysis of Financial Condition and Results of Operations". included in this Form 10-K. As such, actual results could vary from these projections.
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Results of Operations
The following table summarizes, for the periods indicated, the results of operations (in thousands, except per share data):
| Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Revenue | ||||||||||||||||||||
| Revenue before reimbursements (net revenue) | $ | 621,615 | $ | 706,924 | $ | 716,023 | ||||||||||||||
| Reimbursements | 7,755 | 18,690 | 19,632 | |||||||||||||||||
| Total revenue | 629,370 | 725,614 | 735,655 | |||||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Salaries and benefits | 450,424 | 501,791 | 506,349 | |||||||||||||||||
| General and administrative expenses | 121,378 | 137,492 | 140,817 | |||||||||||||||||
Impairment charges(1) | 32,970 | — | — | |||||||||||||||||
Restructuring charges(2) | 52,372 | 4,130 | — | |||||||||||||||||
| Reimbursed expenses | 7,755 | 18,690 | 19,632 | |||||||||||||||||
| Total operating expenses | 664,899 | 662,103 | 666,798 | |||||||||||||||||
| Operating income (loss) | (35,529) | 63,511 | 68,857 | |||||||||||||||||
| Non-operating income | ||||||||||||||||||||
| Interest, net | 204 | 2,880 | 1,141 | |||||||||||||||||
| Other, net | 3,927 | 2,898 | 494 | |||||||||||||||||
| Net non-operating income | 4,131 | 5,778 | 1,635 | |||||||||||||||||
| Income (loss) before taxes | (31,398) | 69,289 | 70,492 | |||||||||||||||||
| Provision for income taxes | 6,309 | 22,420 | 21,197 | |||||||||||||||||
| Net income (loss) | $ | (37,707) | $ | 46,869 | $ | 49,295 | ||||||||||||||
| Weighted-average common shares outstanding | ||||||||||||||||||||
| Basic | 19,301 | 19,103 | 18,917 | |||||||||||||||||
| Diluted | 19,301 | 19,551 | 19,532 | |||||||||||||||||
| Earnings (loss) per common share | ||||||||||||||||||||
| Basic | $ | (1.95) | $ | 2.45 | $ | 2.61 | ||||||||||||||
| Diluted | $ | (1.95) | $ | 2.40 | $ | 2.52 | ||||||||||||||
| Cash dividends paid per share | $ | 0.60 | $ | 0.60 | $ | 0.52 | ||||||||||||||
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Revenue | ||||||||||||
| Revenue before reimbursements (net revenue) | $ | 706,924 | $ | 716,023 | $ | 621,400 | ||||||
| Reimbursements | 18,690 | 19,632 | 18,656 | |||||||||
| Total revenue | 725,614 | 735,655 | 640,056 | |||||||||
| Operating Expenses | ||||||||||||
| Salaries and benefits | 501,791 | 506,349 | 434,219 | |||||||||
| General and administrative expenses | 137,492 | 140,817 | 147,316 | |||||||||
| Impairment charges (1) | — | — | 50,722 | |||||||||
| Restructuring charges (2) | 4,130 | — | 15,666 | |||||||||
| Reimbursed expenses | 18,690 | 19,632 | 18,656 | |||||||||
| Total operating expenses | 662,103 | 666,798 | 666,579 | |||||||||
| Operating income (loss) | 63,511 | 68,857 | (26,523 | ) | ||||||||
| Non-operating income (expense) | ||||||||||||
| Interest, net | 2,880 | 1,141 | 385 | |||||||||
| Other, net | 2,898 | 494 | (3,280 | ) | ||||||||
| Net non-operating income (expense) | 5,778 | 1,635 | (2,895 | ) | ||||||||
| Income (loss) before taxes | 69,289 | 70,492 | (29,418 | ) | ||||||||
| Provision for income taxes | 22,420 | 21,197 | 19,217 | |||||||||
| Net income (loss) | $ | 46,869 | $ | 49,295 | $ | (48,635 | ) | |||||
| Basic weighted average common shares outstanding | 19,103 | 18,917 | 18,735 | |||||||||
| Diluted weighted average common shares outstanding | 19,551 | 19,532 | 18,735 | |||||||||
| Basic net income (loss) per common share | $ | 2.45 | $ | 2.61 | $ | (2.60 | ) | |||||
| Diluted net income (loss) per common share | $ | 2.40 | $ | 2.52 | $ | (2.60 | ) | |||||
| Cash dividends paid per share | $ | 0.60 | $ | 0.52 | $ | 0.52 | ||||||
(1)Includes goodwill impairment charges of $33.0 million related to Europe and Asia Pacific in 2020 (See Note 8, Goodwill and Other Intangible Assets).
(2)Includes restructuring charges of $30.5 million in the Americas, $8.6 million in Europe, $4.6 million in Asia Pacific, $4.7 million in Heidrick Consulting, and $4.0 million in Global Operations Support. The 2019 restructuring charges include $4.1 million in the Americas and less than $0.1 million in Global Operations Support. (See Note 14, Restructuring).
25
The following table summarizes, for the periods indicated, our results of operations as a percentage of revenue before reimbursements (net revenue):
| Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Revenue | ||||||||||||||||||||
| Revenue before reimbursements (net revenue) | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
| Reimbursements | 1.2 | 2.6 | 2.7 | |||||||||||||||||
| Total revenue | 101.2 | 102.6 | 102.7 | |||||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Salaries and benefits | 72.5 | 71.0 | 70.7 | |||||||||||||||||
| General and administrative expenses | 19.5 | 19.4 | 19.7 | |||||||||||||||||
| Impairment charges | 5.3 | — | — | |||||||||||||||||
| Restructuring charges | 8.4 | 0.6 | — | |||||||||||||||||
| Reimbursed expenses | 1.2 | 2.6 | 2.7 | |||||||||||||||||
| Total operating expenses | 107.0 | 93.7 | 93.1 | |||||||||||||||||
| Operating income (loss) | (5.7) | 9.0 | 9.6 | |||||||||||||||||
| Non-operating income | ||||||||||||||||||||
| Interest, net | — | 0.4 | 0.2 | |||||||||||||||||
| Other, net | 0.6 | 0.4 | 0.1 | |||||||||||||||||
| Net non-operating income | 0.7 | 0.8 | 0.2 | |||||||||||||||||
| Income (loss) before income taxes | (5.1) | 9.8 | 9.8 | |||||||||||||||||
| Provision for income taxes | 1.0 | 3.2 | 3.0 | |||||||||||||||||
| Net income (loss) | (6.1) | % | 6.6 | % | 6.9 | % | ||||||||||||||
| Year Ended December 31, | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Revenue: | |||||||||
| Revenue before reimbursements (net revenue) | 100.0 | % | 100.0 | % | 100.0 | % | |||
| Reimbursements | 2.6 | 2.7 | 3.0 | ||||||
| Total revenue | 102.6 | 102.7 | 103.0 | ||||||
| Operating expenses: | |||||||||
| Salaries and benefits | 71.0 | 70.7 | 69.9 | ||||||
| General and administrative expenses | 19.4 | 19.7 | 23.7 | ||||||
| Impairment charges | — | — | 8.2 | ||||||
| Restructuring charges | 0.6 | — | 2.5 | ||||||
| Reimbursed expenses | 2.6 | 2.7 | 3.0 | ||||||
| Total operating expenses | 93.7 | 93.1 | 107.3 | ||||||
| Operating income (loss) | 9.0 | 9.6 | (4.3 | ) | |||||
| Non-operating income (expense) | |||||||||
| Interest, net | 0.4 | 0.2 | 0.1 | ||||||
| Other, net | 0.4 | 0.1 | (0.5 | ) | |||||
| Net non-operating income (expense) | 0.8 | 0.2 | (0.5 | ) | |||||
| Income (loss) before income taxes | 9.8 | 9.8 | (4.7 | ) | |||||
| Provision for income taxes | 3.2 | 3.0 | 3.1 | ||||||
| Net income (loss) | 6.6 | % | 6.9 | % | (7.8 | )% | |||
Note: Totals and subtotals may not equal the sum of individual line items due to rounding.
26
We operate our Executive Search business in the Americas, Europe (which includes Africa) and Asia Pacific (which includes the Middle East), and we operate our Heidrick Consulting business globally, (See Note 18, 17, Segment Information).
The following table sets forth, for the periods indicated, our revenue and operating income by segment (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Revenue | ||||||||||||||||||||
| Executive Search | ||||||||||||||||||||
| Americas | $ | 361,416 | $ | 415,455 | $ | 405,267 | ||||||||||||||
| Europe | 124,243 | 135,070 | 145,348 | |||||||||||||||||
| Asia Pacific | 79,511 | 95,827 | 102,276 | |||||||||||||||||
| Total Executive Search | 565,170 | 646,352 | 652,891 | |||||||||||||||||
| Heidrick Consulting | 56,445 | 60,572 | 63,132 | |||||||||||||||||
| Revenue before reimbursements (net revenue) | 621,615 | 706,924 | 716,023 | |||||||||||||||||
| Reimbursements | 7,755 | 18,690 | 19,632 | |||||||||||||||||
| Total revenue | $ | 629,370 | $ | 725,614 | $ | 735,655 | ||||||||||||||
| Operating income (loss) | ||||||||||||||||||||
| Executive Search | ||||||||||||||||||||
Americas(1) | $ | 62,806 | $ | 100,833 | $ | 96,880 | ||||||||||||||
Europe(2) | (22,827) | 3,026 | 5,849 | |||||||||||||||||
Asia Pacific(3) | (6,724) | 13,590 | 15,999 | |||||||||||||||||
| Total Executive Search | 33,255 | 117,449 | 118,728 | |||||||||||||||||
Heidrick Consulting(4) | (28,369) | (18,499) | (13,619) | |||||||||||||||||
| Total segments | 4,886 | 98,950 | 105,109 | |||||||||||||||||
Global Operations Support(5) | (40,415) | (35,439) | (36,252) | |||||||||||||||||
| Total operating income (loss) | $ | (35,529) | $ | 63,511 | $ | 68,857 | ||||||||||||||
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Revenue: | ||||||||||||
| Executive Search | ||||||||||||
| Americas | $ | 415,455 | $ | 405,267 | $ | 339,793 | ||||||
| Europe | 135,070 | 145,348 | 125,346 | |||||||||
| Asia Pacific | 95,827 | 102,276 | 86,905 | |||||||||
| Total Executive Search | 646,352 | 652,891 | 552,044 | |||||||||
| Heidrick Consulting | 60,572 | 63,132 | 69,356 | |||||||||
| Revenue before reimbursements (net revenue) | 706,924 | 716,023 | 621,400 | |||||||||
| Reimbursements | 18,690 | 19,632 | 18,656 | |||||||||
| Total revenue | $ | 725,614 | $ | 735,655 | $ | 640,056 | ||||||
| Operating income (loss): | ||||||||||||
| Executive Search | ||||||||||||
| Americas (1) | $ | 100,833 | $ | 96,880 | $ | 75,337 | ||||||
| Europe (2) | 3,026 | 5,849 | 13 | |||||||||
| Asia Pacific (3) | 13,590 | 15,999 | 537 | |||||||||
| Total Executive Search | 117,449 | 118,728 | 75,887 | |||||||||
| Heidrick Consulting (4) | (18,499 | ) | (13,619 | ) | (62,368 | ) | ||||||
| Total segments | 98,950 | 105,109 | 13,519 | |||||||||
| Global Operations Support (5) | (35,439 | ) | (36,252 | ) | (40,042 | ) | ||||||
| Total operating income (loss) | $ | 63,511 | $ | 68,857 | $ | (26,523 | ) | |||||
(1)Includes $30.5 million and $4.1 million of restructuring charges in 2020 and 2019, respectively.
(2)Includes $24.5 million of goodwill impairment charges and $8.6 million of restructuring charges in 2020.
(3)Includes $8.5 million of goodwill impairment charges and $4.6 million of restructuring charges in 2020.
(4)Includes $4.7 million of restructuring charges in 2020.
(5)Includes $4.0 million of restructuring charges in 2020.
Year ended December 31, 20192020 compared to year ended December 31, 20182019
Total revenue. Consolidated total revenue decreased $10.0$96.2 million, or 1.4%13.3%, to $629.4 million in 2020 from $725.6 million in 2019 from $735.7 million in 2018.2019. 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 $9.1$85.3 million, or 1.3%12.1%, to $621.6 million in 2020 from $706.9 million in 2019 from $716.0 million in 2018.2019. Foreign exchange rates negatively impacted results by $11.3$0.9 million, or 1.6%0.1%. Executive Search net revenue was $646.4$565.2 million in 2019,2020, a decrease of $6.5$81.2 million, or 12.6%, compared to 2018.2019. The decrease in Executive Search net revenue was the result of declines in both Europe and Asia Pacific, partially offset by growth in the Americas.all three executive search regions. Heidrick Consulting net revenue decreased $2.6$4.1 million, or 4.1%6.8%, to $56.4 million in 2020 from $60.6 million in 2019 from $63.1 million2019. Both Executive Search revenue and Heidrick Consulting revenue were materially impacted by the ongoing COVID-19 pandemic. Significant factors contributing to the decline in 2018.revenue include a decline in demand for our executive search and consulting services, a lengthening of the executive search process due to a slow-down in client decision making and an inability to execute in-person consulting engagements.
The number of Executive Search and Heidrick Consulting consultants was 361 and 65, respectively, as of December 31, 2020, compared to 380 and 71, respectively, as of December 31, 2019, compared to 353 and 66, respectively, as of December 31, 2018. Specific to2019. Executive Search which is our largest business, productivity, as measured by annualized net Executive Search revenue per consultant, was $1.7$1.5 million and $1.9$1.7 million for the years ended December 31,
27
2020 and 2019, and 2018, respectively. The number of confirmed searches decreased 4.6%6.3%, compared to 2018.2019. The average revenue per executive search increaseddecreased to $123,200 in 2020 compared to $132,000 in 2019 compared to $127,300 in 2018.2019.
Salaries and benefits. Consolidated salaries and benefits expense decreased $4.6$51.4 million, or 0.9%10.2%, to $450.4 million in 2020 from $501.8 million in 2019 from $506.3 million in 2018.2019. The decrease was due to lower fixed compensation of $13.5 million and lower variable compensation of $17.5 million,$37.9 million. Fixed compensation decreased due retirement and benefits, and talent acquisition and retention costs, partially offset by higher fixed compensation of $12.9 million.an increase in base salaries and payroll taxes. Variable compensation decreased due to lower consultant productivityproduction compared to the prior year. Included in variable compensation for the year ended December 31, 2019 is $0.6 million of contingent compensation for the former owners of 2GET, which is based on the achievement of certain revenue and EBITDA milestones for the period from acquisition through 2023. Fixed compensation increased due to the deferred compensation plan, stock compensation, base salaries and payroll taxes, and retirement and benefits, partially offset by declines in talent acquisition and retention costs and separation. Foreign exchange rate fluctuations positively impacted salaries and benefits expenses by $8.2$1.5 million, or 1.6%0.3%.
In 2019,2020, we had an average of 1,6801,708 employees, compared to an average of 1,6101,680 employees in 2018.2019.
As a percentage of net revenue, salaries and benefits expense was 72.5% in 2020, compared to 71.0% in 2019 compared to 70.7% in 2018.2019.
General and administrative expenses. Consolidated general and administrative expenses decreased $3.3$16.1 million, or 2.4%11.7%, to $121.4 million in 2020 from $137.5 million in 2019 from $140.8 million in 2018.2019. The decrease was primarily due to decreases in professionalinternal travel, office occupancy, hiring fees, marketing, intangible amortization, resource library fees,earnout accretion, and office occupancy expenses,taxes and licenses, partially offset by increases in professional fees, information technology, and bad debt, the use of external third-party consultants, and taxes and licenses.debt. Foreign exchange rate fluctuations positively impacted general and administrative expenses by $2.1$0.3 million, or 1.5%0.3%.
As a percentage of net revenue, general and administrative expenses were 19.5% in 2020, compared to 19.4% in 2019 compared2019.
Impairment charges. In 2020, and as a direct result of the economic impact of COVID-19, the Company experienced a decline in demand for our executive search services and a lengthening of the executive search process due to 19.7%a slow-down in 2018.client decision making, which had a material adverse impact on our results of operations. As a result, the Company identified a triggering event and performed an interim goodwill impairment evaluation. Based on the results of the of the impairment evaluation, the Company recorded an impairment charge of $24.5 million in Europe and $8.5 million in Asia Pacific to write-off all of the goodwill associated with each reporting unit. The impairment was non-cash in nature and did not affect our current liquidity, cash flows, borrowing capability or operations; nor did it impact the debt covenants under our credit agreement. The impairment charges are recorded within Impairment charges in the Consolidated Statements of Comprehensive Income (Loss).
Restructuring charges. The Company incurred approximately $52.4 million in restructuring charges during the year ended December 31, 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, and the future elimination of certain deferred compensation programs. The Company incurred approximately $4.1 million in restructuring charges during the year ended December 31, 2019 in connection with initiatives to integrate the Company's legacyexisting Brazil operations into the 2GET business operation. The expenses arewere primarily employee-related including the elimination of duplicative positions in the Company's legacyexisting Brazil operations. There were no similarThe restructuring charges duringare recorded within Restructuring charges in the year ended December 31, 2018.Consolidated Statements of Comprehensive Income (Loss).
Operating income. Consolidated operating loss was $35.5 million, including impairment charges of $33.0 million and restructuring charges of $52.4 million in 2020, compared to operating income wasof $63.5 million, in 2019, including restructuring charges of $4.1 million, compared to $68.9 million in 2018.2019. Foreign exchange rate fluctuations negativelypositively impacted operating income by $1.1$1.0 million, or 1.6%2.1%. Excluding the impact of restructuring charges in 2019, operating income decreased $1.2 million from $68.9 million to $67.6 million.
Net non-operating income (expense). Net non-operating income was $4.1 million in 2020, compared to $5.8 million in 2019 compared to $1.62019.
Interest, net was income of $0.2 million in 2018.
Other, net was income of $3.9 million in 2020, compared to $2.9 million in 2019 compared to $0.5 million in 2018.2019. The increase was primarily the result of gains on the deferred compensation plan assets. Investments held in the Company’s deferred compensation plan are recorded at fair value.
Income taxes. See Note 1615, Income Taxes.
28
Executive Search
Americas
The Americas segment reported net revenue of $361.4 million in 2020, a decrease of 13.0% from $415.5 million in 2019, an increase of 2.5% from $405.3 million in 2018.2019. The increasedecrease in net revenue was driven by an increasedue to a 2.6% decrease in the number of executive search confirmations and a decrease in average revenue per executive search. All industry practice groups contributed to the increased netdecline in revenue with the exception of the Education and Social Enterprises, and Financial ServicesLife Sciences practice groups.group. Foreign exchange fluctuations negatively impacted net revenue by $0.8$2.0 million, or 0.2%0.6%. There were 200190 Executive Search consultants in the Americas as of December 31, 2019,2020, compared to 179200 as of December 31, 2018.2019.
Salaries and benefits expense decreased $0.1$34.7 million, from 2018.or 13.3%, compared to 2019. Fixed compensation increased $14.8decreased $11.4 million, primarily due to decreases in retirement and benefits, talent acquisition and retention costs, and base salaries and payroll taxes, the deferred compensation plan, stock compensation, and retirement and benefits, partially offset by a decrease in talent acquisition and retention costs.taxes. Variable compensation decreased $14.9$23.3 million primarily due to the mixlower bonus accruals as a result of decreased consultant productivity. Included in variable compensation for the year ended December 31, 2019 is $0.6 million ofproductivity, partially offset by contingent compensation forrelated to the former ownersacquisition of 2GET, which is based on the achievement of certain revenue and EBITDA milestones for the period from acquisition through 2023.2GET.
General and administrative expenses increased $2.2decreased $7.7 million, or 4.8%15.7%, from 2018compared to 2019 due to increases in bad debt, internal travel, office occupancy, and taxes and licenses, office occupancypartially offset by increases in other operating expense and bad debt.
Restructuring charges were $30.5 million in 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, partially offset by decreases in research tool expenses and the usefuture elimination of external third-party consultants.
The Americas reported operating income of $62.8 million, including restructuring charges during the year ended December 31, 2018.
Europe
Europe reported net revenue of $124.2 million in 2020, a decrease of 8.0% from $135.1 million in 2019, a decrease of 7.1% from $145.3 million in 2018.2019. The decrease in net revenue was due to a 5.1%10.2% decrease in the number of executive search confirmations. All industry practice groups contributed to the decline in revenue with the exception of the Global TechnologySocial Impact and ServicesLife Sciences practice group.groups. Foreign exchange rate fluctuations negativelypositively impacted net revenue by $6.8$1.4 million, or 4.8%1.1%. There were 107102 Executive Search consultants in Europe as of December 31, 2019,2020, compared to 101107 as of December 31, 2018.2019.
Salaries and benefits expense decreased $4.2$10.9 million, or 4.0%10.8%, from 2018.compared to 2019. Fixed compensation decreased $0.2$2.7 million primarily due to decreases in base salaries and payroll taxes and retirement and benefits, partially offset by increases inand talent acquisition and retention costs, andpartially offset by an increase in stock compensation. Variable compensation decreased $4.0$8.2 million due to lower bonus accruals as a decline inresult of decreased consultant productivity.
General and administrative expenses decreased $3.3$7.1 million, or 9.5% from 2018, primarily23.1%, compared to 2019, due to decreasesinternal travel, office occupancy, intangible amortization and earnout accretion, partially offset by increases in the use of external third-party consultants, professional fees, intangible amortization, internal travel, and office occupancy expenses.bad debt.
Impairment charges in 2020 were $24.5 million as a result of an interim impairment evaluation on the goodwill of the Europe reporting unit.
Restructuring charges were $8.6 million in 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, and the future elimination of certain deferred compensation programs.
Europe segment reported an operating loss of $22.8 million, including impairment and restructuring charges of $33.1 million, in 2020, a decrease of $25.9 million compared to operating income of $3.0 million in 2019 compared to $5.8 million in 2018.2019.
29
Asia Pacific
Asia Pacific reported net revenue of $79.5 million in 2020, a decrease of 17.0% compared to $95.8 million in 2019, a decrease of 6.3% compared to $102.3 million in 2018.2019. The decrease in net revenue was due to a 12.3%9.4% decrease in the number of executive search confirmations partially offset by an increaseand a decrease in average revenue per executive search. All industry practice groups contributed to the decline in revenue with the exception of the Global TechnologySocial Impact and ServicesLife Sciences practice group.groups. Foreign exchange rate fluctuations negatively impacted net revenue by $2.7$0.5 million, or 2.7%0.6%. There were 7369 Executive Search consultants in Asia Pacific as of both December 31, 2019 and 2018.2020, compared to 73 as of December 31, 2019.
Salaries and benefits expense decreased $3.3$7.7 million, or 5.0%12.4%, from 2018.compared to 2019. Fixed compensation decreased $3.7increased $0.8 million due to decreases intalent acquisition and retention costs, and base salaries and payroll taxes, and talent acquisition and retention costs, partially offset by increasesa decrease in retirement and benefits, and stock compensation.benefits. Variable compensation increased $0.4decreased $8.5 million due to the mixlower bonus accruals as a result of a decline in consultant productivity.
General and administrative expenses decreased $0.7$1.4 million, or 3.5%6.8%, from 2018compared to 2019 primarily due to a decrease in office occupancy expenses,internal travel, hiring fees, and communication services, partially offset by increases in bad debt and internal travel.other operating expenses.
Restructuring charges were $4.6 million in 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, and the future elimination of certain deferred compensation programs.
Asia Pacific reported an operating loss of $6.7 million, including impairment and restructuring charges of $13.1 million, in 2020, a decrease of $20.3 million compared to operating income of $13.6 million in 2019, a decrease of $2.4 million compared to $16.0 million in 2018.2019.
Heidrick Consulting
Salaries and benefits expense increased $4.0$1.5 million, or 7.5%2.6%, from 2018.compared to 2019. Fixed compensation increased $1.8decreased $0.6 million, primarily due to increasestalent acquisition and retention costs, retirement and benefits, and separation, partially offset by an increase in base salaries and payroll taxes, and retirement and benefits, partially offset by a decrease in talent acquisition and retention costs.taxes. Variable compensation increased $2.2$2.0 million due to cross collaboration bonuses.bonus accruals on certain consulting arrangements.
General and administrative expenses decreased $1.7$0.4 million, or 7.0%1.7%, from 2018, primarilycompared to 2019, due to decreases in professional fees, information technology,internal travel, office occupancy, and earnout accretion, partially offset by increases in the use of external third-party consultants, partially offset by increases in professional fees and internal travel.bad debt.
Restructuring charges were $4.7 million in 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, and the future elimination of certain deferred compensation programs.
Heidrick Consulting segment reported an operating loss of $28.4 million, including restructuring charges of $4.7 million, in 2020 an increase of $9.9 million compared to an operating loss of $18.5 million in 2019, an increase of $4.9 million compared to an operating loss of $13.6 million in 2018.2019.
Global Operations Support
Global Operations Support expenses decreased $0.8increased $1.0 million, or 2.3%2.8%, to $36.4 million from $35.4 million from $36.3 million in 2018.2019.
Salaries and benefits expenses decreased $0.9increased $0.5 million, or 4.4%2.5%, compared to 2019 due to decreases in management bonuses, separation, and stock compensation, partially offset by increases in base salaries and payroll taxes, and separation, partially offset by decreases in retirement and benefits.benefits, and talent acquisition and retention costs.
General and administrative expenses increased $0.1$0.5 million, or 3.2%, compared to 2019 due to increases inprofessional fees and information technology, the use of external third-party consultants, and taxes and licenses, partially offset by decreases in internal travel and office occupancy.
30
Restructuring charges were $4.0 million in 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, and office occupancy expenses.the future elimination of certain deferred compensation programs.
Liquidity and Capital Resources
General. We continually evaluate our liquidity requirements, capital needs and availability of capital resources based on our operating needs. We believe that our available cash balances together with the funds expected to be generated from operations and funds available under our committed revolving credit facility will be sufficient to finance our operations for the foreseeable future, as well as to finance the cash payments associated with our cash dividends and stock repurchase program.
We pay the non-deferred portion of annual bonuses in the first quarter following the year in which they are earned. Employee bonuses are accrued throughout the year and are based on our performance and the performance of the individual employee.
Lines of Credit.credit. On October 26, 2018, we entered into a new Credit Agreement (the "2018 Credit Agreement") to replace the Second Amended and Restated Credit Agreement (the "Restated Credit Agreement") executed on June 30, 2015.. The 2018 Credit Agreement provides us with a senior unsecured revolving line of credit with an aggregate commitment of $175 million, which includes a sublimit of $25 million for letters of credit and a $10 million swingline loan sublimit. The agreement also includes a $75 million expansion feature. The 2018 Credit Agreement will mature in October 2023. Borrowings under the 2018 Credit Agreement bear interest at our election of the Alternate Base Rate (as defined in the 2018 Credit Agreement) or Adjusted LIBOR (as defined in the 2018 Credit Agreement) plus a spread as determined by our leverage ratio.
Borrowings under the 2018 Credit Agreement may be used for working capital, capital expenditures, Permitted Acquisitions (as defined in the 2018 Credit Agreement) and for other general purposes. The obligations under the 2018 Credit Agreement are guaranteed by certain of our subsidiaries.
We capitalized approximately $1.0 million of loan acquisition costs related to the 2018 Credit Agreement, which will be amortized over the remaining term of the agreement.
As of December 31, 2019,2020 and 2018,December 31, 2019, we had no outstanding borrowings under the 2018 Credit Agreement andborrowings. In both periods, we were in compliance with the financial and other covenants under the 2018 Credit Agreementfacility and no event of default existed.
Cash, cash equivalents, and marketable securities. Cash, cash equivalents and marketable securities at December 31, 20192020 were $332.9$336.5 million, an increase of $53.0$3.6 million compared to $279.9$332.9 million at December 31, 2018.2019. The $332.9$336.5 million of cash, cash equivalents, and marketable securities at December 31, 20192020 includes $131.6$122.8 million held by our foreign subsidiaries. The foreign cash balanceA portion of $131.6the $122.8 million is considered permanently reinvested in these foreign subsidiaries. If these funds were required to satisfy obligations in the United States, the repatriation of these funds could cause us to incur additional foreign withholding taxes. We expect to pay approximately $205.0$180.4 million in variable compensation related to 20192020 performance in March and April 2020.2021. In January 2020,2021, we paid approximately $17.1$19.9 million in variable compensation that was deferred in prior years.
Cash flows provided by operating activities. For the year ended December 31, 2020, cash provided by operating activities was $23.4 million, primarily reflecting net loss net of non-cash charges of $30.6 million and a decrease in accounts receivable of $22.6 million, partially offset by a decrease in accrued expenses of $26.5 million. The decrease in accrued expenses primarily reflects approximately $202.0 million of 2019 bonuses paid in March 2020, offset by 2020 bonus accruals of $180.4 million.
For the year ended December 31, 2019, cash provided by operating activities was $78.6 million, primarily reflecting net income net of non-cash charges of $69.2 million, a decrease in accounts receivable of $6.9 million, an increase in net retirement and pension plan liabilities of $3.3 million and an increase in accrued expenses of $2.4 million. The increase in accrued expenses primarily reflects approximately $205.0 million of current year bonus accruals, partially offset by $202.0 million of bonus payments for 2018 made in early 2019.
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Cash provided by operating activities forflows used in investing activities. For the year ended December 31, 2018,2020, cash provided investing activities was $102.9$32.6 million, primarily reflecting net income netdue to proceeds from the maturity and sales of non-cash chargesmarketable securities and investments of $68.6 million, an increase in accrued expenses of $71.5$158.9 million, partially offset by an increase in accounts receivablepurchases of $16.8marketable securities and investments of $118.9 million and restructuring paymentscapital expenditures of $11.6$7.3 million. The increase in accrued expensescapital expenditures is primarily reflects approximately $202.0 millionthe result of bonus accruals, partially offset by $148.0 million of bonus payments for 2017 made in early 2018.office build-outs.
Cash flows used in investing activities forfinancing activities. For the year ended December 31, 2018,2020, cash used in financing activities was $8.2$16.4 million, primarily due to capital expenditurescash dividend payments of $6.0$12.0 million, earnout payments related to the acquisition in January 2018Amrop acquisitions of Amrop A/S ("Amrop") for $3.1$2.8 million, and purchasespayment of available for sale securitiesemployee tax withholdings on equity transactions of $2.2$1.6 million. Gross borrowings and payments on the line of credit were each $100.0 million partially offset by proceeds fromduring the sale of available for sale securities of $3.0 million. The increase in capital expenditures is primarily the result of office build-outs and a global information technology update.year ended December 31, 2020.
On February 11, 2008, we announced that our Boarda Repurchase Authorization of Directors authorized management to repurchase shares of our common stock with an aggregate total amount up to $50 million. We may from time to time and as business conditions warrant purchase shares of our common stock on the open market or in negotiated or block trades. No time limit has been set for completion of this program. We did not repurchase any shares of our common stock in 2020 or 2019. The most recent purchase of shares of common stock occurred during the year ended December 31, 2012. As of December 31, 2019,2020 we have purchased 1,038,670 shares of our common stock pursuant to the Repurchase Authorization for a total of $28.3 million and $21.7 million remains available for future purchases under the authorization. Unless terminated or extended earlierRepurchase Authorization.
COVID-19 Considerations 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. We expect that all of our business segments, across all of our geographies, will continue to be impacted to some degree by resolutionthe pandemic and actions taken in response to the pandemic, but the significance of the Boardimpact of Directors, the program will expire whenpandemic on our business and liquidity, and the amount authorizedduration for repurchases has been spent.which it may have an impact cannot be determined at this time. In the event we require additional liquidity, our 2018 Credit Agreement provides us with a senior unsecured revolving line of credit with an aggregate commitment of $175 million, which includes a sublimit of $25 million for letters of credit and a $10 million swingline loan sublimit. The agreement also includes a $75 million expansion feature.
Off-balance sheet arrangements. We do not have material off-balance sheet arrangements, special purpose entities, trading activities of non-exchange traded contracts or transactions with related parties.
Contractual obligations. The following table presents our known contractual obligations as of December 31, 2019,2020, and the expected timing of cash payments related to these contractual obligations (in millions):
| Payments due for the years ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||||||||||||||||||
| Contractual obligations: | ||||||||||||||||||||||||||||||||||||||||||||
| Operating lease obligations | $ | 28.1 | $ | 25.8 | $ | 23.8 | $ | 14.0 | $ | 6.7 | $ | 30.2 | $ | 128.7 | ||||||||||||||||||||||||||||||
| Asset retirement obligations (1) | 0.8 | 0.2 | 0.6 | 1.3 | 0.2 | 0.2 | 3.3 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 28.9 | $ | 26.0 | $ | 24.4 | $ | 15.3 | $ | 6.9 | $ | 30.4 | $ | 132.0 | ||||||||||||||||||||||||||||||
| Payments due for the years ended December 31, | ||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||||||||||
| Contractual obligations: | ||||||||||||||||||||||||||||
| Operating lease obligations | $ | 30.2 | $ | 27.2 | $ | 23.6 | $ | 20.6 | $ | 10.0 | $ | 9.0 | $ | 120.6 | ||||||||||||||
| Asset retirement obligations (1) | 0.6 | 0.9 | 0.1 | 0.5 | 0.8 | 0.1 | 3.0 | |||||||||||||||||||||
| Total | $ | 30.8 | $ | 28.1 | $ | 23.7 | $ | 21.1 | $ | 10.8 | $ | 9.1 | $ | 123.6 | ||||||||||||||
(1) Represents the fair value of the obligation associated with the retirement of tangible long-lived assets primarily related to our obligation at the end of the lease term to return office space to the landlord in its original condition.
In addition to the contractual obligations included in the above table, we have liabilities related to certain employee benefit plans. These liabilities are recorded in our Consolidated Balance Sheet at December 31, 2019.2020. The obligations related to these employee benefit plans are described in Note 12, 11, Employee Benefit Plans, and Note 13, 12, Pension Plan and Life Insurance Contract,, in the Notes to Consolidated Financial Statements. As the timing of cash disbursements related to these employee benefit plans is uncertain, we have not included these obligations in the above table. The table excludes our liability for
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uncertain tax positions including accrued interest and penalties, which totaled $0.2$0.5 million as of December 31, 2019,2020, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.
Application of Critical Accounting Policies and Estimates
General. Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared using accounting principles generally accepted in the United States of America. Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies and Note 3, Revenue, in the Notes to Consolidated Financial Statements. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. If actual amounts are ultimately different from previous estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, there are different estimates that reasonably could have been used, or if changes in the accounting estimates are reasonably likely to occur periodically, that could materially impact the financial statements. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.
Revenue recognition. In our Executive Search segment, revenue is recognized as we satisfy our performance obligations by transferring a good or service to a client. Generally, each of our executive search contracts contain one performance obligation which is the process of identifying potentially qualified candidates for a specific client position. In most contracts, the transaction price includes both fixed and variable consideration. Fixed compensation is comprised of a retainer, equal to approximately one-third of the estimated first year compensation for the position to be filled, and indirect expenses, equal to a specified percentage of the retainer, as defined in the contract. The CompanyWe generally bills itsbill our clients for itsthe 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 iswe are often authorized to bill the client for one-third of the excess compensation. The Company refersWe refer to this additional billing as uptick revenue. In most contracts, variable consideration is comprised of uptick revenue and direct expenses. The Company bills itsWe bill our clients for uptick revenue upon completion of the executive search, and direct expenses are billed as incurred.
As required under Accounting Standards Update ("ASU") No. 2014-09, the Company estimateswe now estimate 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 recordsrecord 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 doesWe do 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'sour 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 Companyus 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 doeswe do 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 accountsWe account for the replacement guarantee under the relevant warranty guidance in ASC 460 - Guarantees.
In our Heidrick Consulting segment, 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
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the assignment to provide succession planning, executive assessment, top team and board effectiveness and culture shaping programs. The consideration the Company expectswe expect 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.
Each of the Company'sour contracts has an expected duration of one year or less.Accordingly, the Company haswe have 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 hasWe have 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 chargesWe charge and collectscollect from itsour clients, sales tax and value added taxes as required by certain jurisdictions. The Company hasWe have made an accounting policy election to exclude these items from the transaction price in itsour contracts.
Income taxes. Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment. As a global company, we calculate and provide for income taxes in each of the tax jurisdictions in which we operate. This involves estimating current tax exposures in each jurisdiction as well as making judgments regarding the recoverability of deferred tax assets. Tax exposures can involve complex issues and may require an extended period to resolve. Changes in the geographic mix or estimated level of annual income before taxes can affect the overall effective tax rate.
The recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefits associated with temporary differences, net operating loss carryforwards and tax credits will be utilized. We assess the recoverability of the deferred tax assets on an ongoing basis. In making this assessment, we consider all positive and negative evidence, and all
potential sources of taxable income including scheduled reversals of deferred tax liabilities, tax-planning strategies, projected future taxable income and recent financial performance.
Deferred taxes have been recorded for U.S. income taxes and foreign withholding taxes related to undistributed foreign earnings that are not permanently reinvested. Annually, we assess material changes in estimates of cash, working capital and long-term investment requirements in order to determine whether these earnings should be distributed. If so, an additional provision for taxes may apply, which could materially affect our future effective tax rate.
Goodwill and other intangible assets. We reviewperform assessments of the carrying value of goodwill for impairment annually. We also review goodwillat least annually and long-lived assets, including identifiable intangible assets, for impairment whenever events occur or changes in circumstances indicate that it is more-likely-than-not that the fair value has fallen below thea carrying amount of an asset. We review factors such asgoodwill may not be recoverable. These circumstances may include a significant change in business climate, attrition of key personnel, changes in financial condition or results of operations, a prolonged decline in our stock price and market capitalization, competition, and other factors to determine if an impairment test is necessary. Our annual impairment test begins with a qualitative assessment to determine whether it is necessary to perform a fair value-based goodwill impairment test. The qualitative assessment includes evaluating whether events and circumstances indicate that it is more-likely-than-not that fair values of reporting units are greater than the carrying values. If the qualitative factors do not indicate that it is more-likely-than-not that the fair values of the reporting units are greater than the carrying values, then we perform the fair value test.factors.
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market growth and trends, forecasted revenue and costs, capital investments, appropriate discount rates, certain assumptions to allocate shared costs, assets and liabilities, historical and projected performance of our reporting units, the outlook for the executive search industry and the macroeconomic conditions affecting each of our reporting units. The assumptions used in the determination of fair value were (1) a forecast of growth in the near and long term; (2) the discount rate; (3) working capital investments; (4) macroeconomic conditions and (5) other factors. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. The fair value of our reporting units is also impacted by our overall market capitalization and may be impacted by volatility in our stock price and assumed control premium, among other factors. As a result, actual future results may differ from those estimates and may result in a future impairment charge. These assumptions are updated annually, at a minimum, to reflect information concerning our reportable segments. The Company continues to monitor potential triggering events including changes in the business climate in which it operates, the Company’s market capitalization compared to its book value, and the Company’s recent operating performance. Any changes in these factors could result in an impairment charge. An impairment charge is recognized for the amount by which the carrying value of a reporting unit exceeds its carrying amount;fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit.
We believe that the accounting estimate related to goodwill and other intangible asset impairment is a critical accounting estimate because the assumptions used are highly susceptible to changes in the operating results and cash flows of our reportable segments.
Other intangible assets and long-lived assets. We review our other intangible assets and long-lived assets, including property and equipment and right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge, equal to the amount by which the carrying amount of the asset group exceeds the fair value of the asset group, is recognized.
We believe that the accounting estimate related to other intangible and long-lived asset impairment is a critical accounting estimate because the assumptions used are highly susceptible to changes in operating results and cash flows.
Recently Adopted Financial Accounting Standards
On January 1, 2019,2020, we adopted Accounting Standards Update ("ASU") No. 2016-02, Leases, ASU No. 2018-10, Codification Improvements to Topic 842 (Leases)2016-13, Measurement of Credit Losses on Financial Instruments, and all related 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.
Recent Financial Accounting Standards
In December 2019,March 2020, the Financial Accounting Standards Board ("FASB"), issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance 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 March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.
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")ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years, and interim 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.
Quarterly Financial Information (Unaudited)
The following table sets forth certain financial information for each quarter of 20192020 and 2018.2019. The information is derived from our quarterly consolidated financial statements which are unaudited but which, in the opinion of management, have been prepared on the same basis as the audited annual consolidated financial statements included in this document. The consolidated financial data shown below should be read in conjunction with the consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
| Quarter Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Mar. 31 | Jun. 30 | Sept. 30 | Dec. 31 | Mar. 31 | Jun. 30 | Sept. 30 | Dec. 31 | |||||||||||||||||||||||||||||||||||||||||||
| Revenue before reimbursements (net revenue) | $ | 171,481 | $ | 145,603 | $ | 143,544 | $ | 160,987 | $ | 171,594 | $ | 173,122 | $ | 182,174 | $ | 180,034 | ||||||||||||||||||||||||||||||||||
Operating income (loss) (1) | 18,152 | (23,986) | (38,233) | 8,538 | 16,391 | 18,353 | 14,472 | 14,295 | ||||||||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | 14,396 | (21,249) | (36,594) | 12,049 | 18,842 | 19,473 | 14,827 | 16,147 | ||||||||||||||||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | 5,730 | 4,484 | (10,416) | 6,511 | 6,755 | 5,193 | 4,880 | 5,592 | ||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 8,666 | $ | (25,733) | $ | (26,178) | $ | 5,538 | $ | 12,087 | $ | 14,280 | $ | 9,947 | $ | 10,555 | ||||||||||||||||||||||||||||||||||
| Basic earnings (loss) per common share | $ | 0.45 | $ | (1.33) | $ | (1.35) | $ | 0.29 | $ | 0.64 | $ | 0.75 | $ | 0.52 | $ | 0.55 | ||||||||||||||||||||||||||||||||||
| Diluted earnings (loss) per common share | $ | 0.44 | $ | (1.33) | $ | (1.35) | $ | 0.28 | $ | 0.62 | $ | 0.73 | $ | 0.51 | $ | 0.54 | ||||||||||||||||||||||||||||||||||
| Cash dividends paid per share | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.15 | ||||||||||||||||||||||||||||||||||
| Quarter Ended | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||
| Mar. 31 | Jun. 30 | Sept. 30 | Dec. 31 | Mar. 31 | Jun. 30 | Sept. 30 | Dec. 31 | |||||||||||||||||||||||||
| Revenue before reimbursements (net revenue) | $ | 171,594 | $ | 173,122 | $ | 182,174 | $ | 180,034 | $ | 160,071 | $ | 183,059 | $ | 187,588 | $ | 185,305 | ||||||||||||||||
| Operating income (1) | 16,391 | 18,353 | 14,472 | 14,295 | 13,121 | 18,461 | 20,583 | 16,692 | ||||||||||||||||||||||||
| Income before income taxes | 18,842 | 19,473 | 14,827 | 16,147 | 12,912 | 18,411 | 23,187 | 15,982 | ||||||||||||||||||||||||
| Provision for income taxes | 6,755 | 5,193 | 4,880 | 5,592 | 2,744 | 6,948 | 6,718 | 4,787 | ||||||||||||||||||||||||
| Net income | $ | 12,087 | $ | 14,280 | $ | 9,947 | $ | 10,555 | $ | 10,168 | $ | 11,463 | $ | 16,469 | $ | 11,195 | ||||||||||||||||
| Basic earnings per common share | $ | 0.64 | $ | 0.75 | $ | 0.52 | $ | 0.55 | $ | 0.54 | $ | 0.61 | $ | 0.87 | $ | 0.59 | ||||||||||||||||
| Diluted earnings per common share | $ | 0.62 | $ | 0.73 | $ | 0.51 | $ | 0.54 | $ | 0.53 | $ | 0.59 | $ | 0.85 | $ | 0.58 | ||||||||||||||||
| Cash dividends paid per share | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.13 | $ | 0.13 | $ | 0.13 | $ | 0.13 | ||||||||||||||||
(1) Includes $33.0 million of goodwill impairment charges for the three months ended June 30, 2020. Includes $48.1 million of restructuring charges for the three months ended September 30, 2020. Includes $4.3 million of restructuring charges for the three months ended December 31, 2020. Includes $4.1 million of restructuring charges for the three months ended September 30, 2019.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency market risk. With our operations in the Americas, Europe and Asia Pacific, we conduct business using various currencies. Revenue earned in each country is generally matched with the associated expenses incurred, thereby reducing currency risk to earnings. A 10% change in the average exchange rate for currencies of all foreign countries in which we operate would have increased or decreased our 20192020 net income by approximately $0.9$4.4 million. However, because certain assets and liabilities are denominated in currencies other than their respective functional currency,the U.S. dollar, changes in currency rates may cause fluctuations in the valuation of such assets and liabilities. Based on balances exposed to fluctuation in exchange rates as of December 31, 2019,2020, a 10% increase or decrease equally in the value of currencies could result in a foreign exchange gain or loss of approximately $1.4$0.2 million. In addition, as the local currency of our subsidiaries has generally been designated as the functional currency, we are affected by the translation of foreign currency financial statements into U.S. dollars. For financial information by segment, see Note 18, 17, Segment Information, in the Notes to Consolidated Financial Statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| PAGE | |||||
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Heidrick & Struggles International, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Heidrick & Struggles International, Inc. (the Company) as of December 31, 20192020 and 2018,2019, the related consolidated statements of comprehensive income (loss), changes in stockholders' equity and cash flows for each of the twothree years in the period ended December 31, 2019,2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2019,2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 24, 20202021, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition
As described in Note 3 of the consolidated financial statements, revenue before reimbursements from executive search and from consulting engagements of $565,170,000 and $56,445,000, respectively, is recognized over the expected average period of performance, in proportion to the estimated personnel time incurred to fulfill the obligations under the executive search or consulting contract. This requires management to make significant estimates including the amount of effort extended over certain defined time periods of the executive search or consulting engagement. The transaction price for executive search engagements generally includes variable consideration, known as uptick revenue, in addition to fixed consideration. The Company estimates the amount of uptick revenue at contract inception based on a portfolio approach utilizing the expected value method based on a historical analysis. This requires management to make significant estimates including the average amount of uptick revenue earned on an executive search engagement. Changes in the assumptions used in these estimates could have a significant impact on the revenue recognized during the period.
We identified the Company’s revenue recognition from executive search and consulting engagements as a critical audit matter because of certain significant assumptions management makes when estimating progress over time for executive search and consulting engagements, and estimating the average uptick revenue earned on executive search engagements. Auditing these
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assumptions involved a high degree of judgement and subjectivity as changes in these assumptions could have a significant impact on the amount of revenue recognized.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assumptions involved in estimating progress over time for executive search and consulting engagements, and estimating the average uptick revenue earned on executive search engagements included the following, among others:
•We obtained an understanding of the relevant controls related to management’s estimates of progress over time and average uptick revenue, such as internal controls related to management’s review of the completeness and accuracy of data compiled and used in the estimate vs. excluded from the estimate, and tested such controls for design and operating effectiveness.
•We evaluated whether the historical data utilized to estimate progress over time was complete and accurate based on historical time studies, on a sample basis.
•We evaluated the estimate of the average uptick revenue on executive search engagements by comparing the estimate to historical data of the total uptick revenue billed and total retainer fee for a sample of executive search engagements.
•We selected a sample of contracts and performed the following procedures:
◦Obtained and read contract source documents for each selection.
◦Tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and variable consideration.
◦Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.
◦Tested the mathematical accuracy of management’s revenue calculations and recalculated deferred revenue at period end, if any.
Goodwill
As described in Note 8 of the consolidated financial statements, the Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company’s fair value estimate for each reporting unit is based on the present value of estimated future cash flows attributable to the respective reporting unit. This requires management to make significant estimates and assumptions including estimates of future growth rates, operating margins and discount rates based on the estimated weighted average cost of capital for the business. Changes in these assumptions could have a significant impact on the fair value, which could have an impact on the impairment charge, if any. The Company, as a direct result of the economic impact of COVID-19, experienced a decline in demand for the Company’s executive search and consulting services, and determined that it was more likely than not that an impairment occurred during 2020. Accordingly, the Company performed an interim impairment assessment of its reporting units as of April 30, 2020. In the impairment test, the Europe and Asia Pacific reporting units had a carrying value that exceeded their estimated fair values. As a result, an impairment charge of $32,970,000 was recorded in the consolidated statement of comprehensive income (loss) for the year ended December 31, 2020. Key financial assumptions used to determine the fair value of the reporting units were developed by management.
We identified the valuation of goodwill as a critical audit matter because of certain significant assumptions management makes in determining the estimate, including revenue, profit margin and terminal growth rate projections and the discount rate. Auditing management’s assumptions of revenue, profit margin and terminal growth rate projections and the discount rate involved a high degree of auditor judgment and increased audit effort, including the use of a valuation specialist, as changes in these assumptions could have a significant impact on the fair value of the reporting units and potential impairment charges.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the projections of future revenue growth rates, profit margins, the terminal growth rate and the determination of the discount rate for each of the reporting units included the following, among others:
•We obtained an understanding of the relevant controls related to the development of forecasts of revenue, profit margin and terminal growth rates and the selection of the reporting unit specific discount rate and tested such controls for design and operating effectiveness.
•We evaluated management’s ability to accurately forecast revenue and profit margin projections by comparing management’s prior forecasts to historical results for the Company.
39
•We evaluated the reasonableness of management’s forecasted revenue, profit margin and growth rates by comparing the projections to historic results and industry expectations.
•We evaluated the impact of changes to significant assumptions on the fair value of the respective reporting unit.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate and tested the relevance and reliability of source information underlying the determination of the rate, tested the mathematical accuracy of the calculation, and performed sensitivities by analyzing the break-even discount rate and compared those to the rate selected by management.
/s/ RSM US LLP
We have served as the Company's auditor since 20182018.
Chicago, Illinois
February 24, 20202021
40
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Heidrick & Struggles International, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Heidrick & Struggles International, Inc.'s (the Company) internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 20192020 and 2018,2019, and the related consolidated statements of comprehensive income (loss), changes in stockholders'stockholders’ equity and cash flows of the Company for each of the twothree years in the period ended December 31, 2019,2020, and our report dated February 24, 20202021 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Chicago, Illinois
February 24, 20202021
41
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||
| December 31, 2019 | December 31, 2018 | ||||||||||||||||||
| Current assets: | |||||||||||||||||||
| Current assets | Current assets | ||||||||||||||||||
| Cash and cash equivalents | $ | 271,719 | $ | 279,906 | Cash and cash equivalents | $ | 316,473 | $ | 271,719 | ||||||||||
| Marketable securities | 61,153 | — | Marketable securities | 19,999 | 61,153 | ||||||||||||||
| Accounts receivable, net | 109,163 | 114,977 | |||||||||||||||||
| Accounts receivable, net of allowances of $6,557 and $5,140, respectively | Accounts receivable, net of allowances of $6,557 and $5,140, respectively | 88,123 | 109,163 | ||||||||||||||||
| Prepaid expenses | 20,185 | 22,766 | Prepaid expenses | 18,956 | 20,185 | ||||||||||||||
| Other current assets | 27,848 | 29,598 | Other current assets | 23,279 | 27,848 | ||||||||||||||
| Income taxes recoverable | 4,414 | 3,620 | Income taxes recoverable | 5,856 | 4,414 | ||||||||||||||
| Total current assets | 494,482 | 450,867 | Total current assets | 472,686 | 494,482 | ||||||||||||||
| Non-current assets: | |||||||||||||||||||
| Non-current assets | Non-current assets | ||||||||||||||||||
| Property and equipment, net | 28,650 | 33,871 | Property and equipment, net | 23,492 | 28,650 | ||||||||||||||
| Operating lease right-of-use assets | 99,391 | — | Operating lease right-of-use assets | 92,671 | 99,391 | ||||||||||||||
| Assets designated for retirement and pension plans | 13,978 | 15,035 | Assets designated for retirement and pension plans | 14,425 | 13,978 | ||||||||||||||
| Investments | 25,409 | 19,442 | Investments | 31,369 | 25,409 | ||||||||||||||
| Other non-current assets | 20,434 | 22,276 | Other non-current assets | 24,439 | 20,434 | ||||||||||||||
| Goodwill | 126,831 | 122,092 | Goodwill | 91,643 | 126,831 | ||||||||||||||
| Other intangible assets, net | 1,935 | 2,216 | Other intangible assets, net | 1,129 | 1,935 | ||||||||||||||
| Deferred income taxes, net | 33,063 | 34,830 | Deferred income taxes, net | 35,958 | 33,063 | ||||||||||||||
| Total non-current assets | 349,691 | 249,762 | Total non-current assets | 315,126 | 349,691 | ||||||||||||||
| Total assets | $ | 844,173 | $ | 700,629 | Total assets | $ | 787,812 | $ | 844,173 | ||||||||||
| Current liabilities: | |||||||||||||||||||
| Current liabilities | Current liabilities | ||||||||||||||||||
| Accounts payable | $ | 8,633 | $ | 9,166 | Accounts payable | $ | 8,799 | $ | 8,633 | ||||||||||
| Accrued salaries and benefits | 234,306 | 227,653 | Accrued salaries and benefits | 217,908 | 234,306 | ||||||||||||||
| Deferred revenue | 41,267 | 40,673 | Deferred revenue | 38,050 | 41,267 | ||||||||||||||
| Operating lease liabilities | 30,955 | — | Operating lease liabilities | 28,984 | 30,955 | ||||||||||||||
| Other current liabilities | 26,253 | 33,219 | Other current liabilities | 23,311 | 26,253 | ||||||||||||||
| Income taxes payable | 3,928 | 8,240 | Income taxes payable | 1,186 | 3,928 | ||||||||||||||
| Total current liabilities | 345,342 | 318,951 | Total current liabilities | 318,238 | 345,342 | ||||||||||||||
| Non-current liabilities: | |||||||||||||||||||
| Non-current liabilities | Non-current liabilities | ||||||||||||||||||
| Accrued salaries and benefits | 59,662 | 57,234 | Accrued salaries and benefits | 56,925 | 59,662 | ||||||||||||||
| Retirement and pension plans | 46,032 | 39,865 | Retirement and pension plans | 53,496 | 46,032 | ||||||||||||||
| Operating lease liabilities | 79,388 | — | Operating lease liabilities | 86,816 | 79,388 | ||||||||||||||
| Other non-current liabilities | 4,634 | 17,423 | Other non-current liabilities | 4,735 | 4,634 | ||||||||||||||
| Total non-current liabilities | 189,716 | 114,522 | Total non-current liabilities | 201,972 | 189,716 | ||||||||||||||
| Total liabilities | 535,058 | 433,473 | Total liabilities | 520,210 | 535,058 | ||||||||||||||
| Commitments and contingencies (Note 20) | |||||||||||||||||||
| Stockholders’ equity: | |||||||||||||||||||
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at December 31, 2019 and December 31, 2018 | — | — | |||||||||||||||||
| Common stock, $0.01 par value, 100,000,000 shares authorized, 19,585,777 shares issued, 19,165,954 and 18,954,275 shares outstanding at December 31, 2019 and December 31, 2018, respectively | 196 | 196 | |||||||||||||||||
| Treasury stock at cost, 419,823 and 631,502 shares at December 31, 2019 and December 31, 2018, respectively | (14,795 | ) | (20,298 | ) | |||||||||||||||
| Commitments and contingencies (Note 19) | Commitments and contingencies (Note 19) | 0 | 0 | ||||||||||||||||
| Stockholders’ equity | Stockholders’ equity | ||||||||||||||||||
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, 0 shares issued at December 31, 2020 and December 31, 2019 | Preferred stock, $0.01 par value, 10,000,000 shares authorized, 0 shares issued at December 31, 2020 and December 31, 2019 | 0 | 0 | ||||||||||||||||
| Common stock, $0.01 par value, 100,000,000 shares authorized, 19,585,777 shares issued, 19,359,586 and 19,165,954 shares outstanding at December 31, 2020 and December 31, 2019, respectively | Common stock, $0.01 par value, 100,000,000 shares authorized, 19,585,777 shares issued, 19,359,586 and 19,165,954 shares outstanding at December 31, 2020 and December 31, 2019, respectively | 196 | 196 | ||||||||||||||||
| Treasury stock at cost, 226,191 and 419,823 shares at December 31, 2020 and December 31, 2019, respectively | Treasury stock at cost, 226,191 and 419,823 shares at December 31, 2020 and December 31, 2019, respectively | (8,041) | (14,795) | ||||||||||||||||
| Additional paid in capital | 228,807 | 227,147 | Additional paid in capital | 231,048 | 228,807 | ||||||||||||||
| Retained earnings | 91,083 | 56,049 | Retained earnings | 40,982 | 91,083 | ||||||||||||||
| Accumulated other comprehensive income | 3,824 | 4,062 | Accumulated other comprehensive income | 3,417 | 3,824 | ||||||||||||||
| Total stockholders’ equity | 309,115 | 267,156 | Total stockholders’ equity | 267,602 | 309,115 | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | 844,173 | $ | 700,629 | Total liabilities and stockholders’ equity | $ | 787,812 | $ | 844,173 | ||||||||||
The accompanying notes to Consolidated Financial Statements are an integral part of these statements.
42
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
| December 31, | ||||||||||||||||||||||||||||||||
| December 31, | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||
| Revenue | Revenue | |||||||||||||||||||||||||||||||
| Revenue before reimbursements (net revenue) | $ | 706,924 | $ | 716,023 | $ | 621,400 | Revenue before reimbursements (net revenue) | $ | 621,615 | $ | 706,924 | $ | 716,023 | |||||||||||||||||||
| Reimbursements | 18,690 | 19,632 | 18,656 | Reimbursements | 7,755 | 18,690 | 19,632 | |||||||||||||||||||||||||
| Total revenue | 725,614 | 735,655 | 640,056 | Total revenue | 629,370 | 725,614 | 735,655 | |||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Operating expenses | Operating expenses | |||||||||||||||||||||||||||||||
| Salaries and benefits | 501,791 | 506,349 | 434,219 | Salaries and benefits | 450,424 | 501,791 | 506,349 | |||||||||||||||||||||||||
| General and administrative expenses | 137,492 | 140,817 | 147,316 | General and administrative expenses | 121,378 | 137,492 | 140,817 | |||||||||||||||||||||||||
| Impairment charges | — | — | 50,722 | Impairment charges | 32,970 | 0 | 0 | |||||||||||||||||||||||||
| Restructuring charges | 4,130 | — | 15,666 | Restructuring charges | 52,372 | 4,130 | 0 | |||||||||||||||||||||||||
| Reimbursed expenses | 18,690 | 19,632 | 18,656 | Reimbursed expenses | 7,755 | 18,690 | 19,632 | |||||||||||||||||||||||||
| Total operating expenses | 662,103 | 666,798 | 666,579 | Total operating expenses | 664,899 | 662,103 | 666,798 | |||||||||||||||||||||||||
| Operating income (loss) | 63,511 | 68,857 | (26,523 | ) | Operating income (loss) | (35,529) | 63,511 | 68,857 | ||||||||||||||||||||||||
| Non-operating income (expense): | ||||||||||||||||||||||||||||||||
| Non-operating income | Non-operating income | |||||||||||||||||||||||||||||||
| Interest, net | 2,880 | 1,141 | 385 | Interest, net | 204 | 2,880 | 1,141 | |||||||||||||||||||||||||
| Other, net | 2,898 | 494 | (3,280 | ) | Other, net | 3,927 | 2,898 | 494 | ||||||||||||||||||||||||
| Net non-operating income (expense) | 5,778 | 1,635 | (2,895 | ) | ||||||||||||||||||||||||||||
| Net non-operating income | Net non-operating income | 4,131 | 5,778 | 1,635 | ||||||||||||||||||||||||||||
| Income (loss) before income taxes | 69,289 | 70,492 | (29,418 | ) | Income (loss) before income taxes | (31,398) | 69,289 | 70,492 | ||||||||||||||||||||||||
| Provision for income taxes | 22,420 | 21,197 | 19,217 | Provision for income taxes | 6,309 | 22,420 | 21,197 | |||||||||||||||||||||||||
| Net income (loss) | 46,869 | 49,295 | (48,635 | ) | Net income (loss) | (37,707) | 46,869 | 49,295 | ||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax: | Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 844 | (3,885 | ) | 6,853 | Foreign currency translation adjustment | 82 | 844 | (3,885) | ||||||||||||||||||||||||
| Net unrealized gain on available-for-sale investments | 13 | — | 2,660 | |||||||||||||||||||||||||||||
| Net unrealized gain (loss) on available-for-sale investments | Net unrealized gain (loss) on available-for-sale investments | (13) | 13 | 0 | ||||||||||||||||||||||||||||
| Pension gain (loss) adjustment | (1,095 | ) | 721 | 480 | Pension gain (loss) adjustment | (476) | (1,095) | 721 | ||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (238 | ) | (3,164 | ) | 9,993 | |||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | (407) | (238) | (3,164) | ||||||||||||||||||||||||||||
| Comprehensive income (loss) | $ | 46,631 | $ | 46,131 | $ | (38,642 | ) | Comprehensive income (loss) | $ | (38,114) | $ | 46,631 | $ | 46,131 | ||||||||||||||||||
| Basic weighted average common shares outstanding | 19,103 | 18,917 | 18,735 | |||||||||||||||||||||||||||||
| Diluted weighted average common shares outstanding | 19,551 | 19,532 | 18,735 | |||||||||||||||||||||||||||||
| Weighted-average common shares outstanding | Weighted-average common shares outstanding | |||||||||||||||||||||||||||||||
| Basic | Basic | 19,301 | 19,103 | 18,917 | ||||||||||||||||||||||||||||
| Diluted | Diluted | 19,301 | 19,551 | 19,532 | ||||||||||||||||||||||||||||
| Basic net income (loss) per common share | $ | 2.45 | $ | 2.61 | $ | (2.60 | ) | |||||||||||||||||||||||||
| Diluted net income (loss) per common share | $ | 2.40 | $ | 2.52 | $ | (2.60 | ) | |||||||||||||||||||||||||
| Earnings (loss) per common share | Earnings (loss) per common share | |||||||||||||||||||||||||||||||
| Basic | Basic | $ | (1.95) | $ | 2.45 | $ | 2.61 | |||||||||||||||||||||||||
| Diluted | Diluted | $ | (1.95) | $ | 2.40 | $ | 2.52 | |||||||||||||||||||||||||
| Cash dividends paid per share | $ | 0.60 | $ | 0.52 | $ | 0.52 | Cash dividends paid per share | $ | 0.60 | $ | 0.60 | $ | 0.52 | |||||||||||||||||||
The accompanying notes to Consolidated Financial Statements are an integral part of these statements.
43
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Cash flows - operating activities: | ||||||||||||||||||||||||||||||||
| Cash flows - operating activities | Cash flows - operating activities | |||||||||||||||||||||||||||||||
| Net income (loss) | $ | 46,869 | $ | 49,295 | $ | (48,635 | ) | Net income (loss) | $ | (37,707) | $ | 46,869 | $ | 49,295 | ||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||||||||||||||||||
| Depreciation and amortization | 10,371 | 12,522 | 14,774 | Depreciation and amortization | 26,656 | 10,371 | 12,522 | |||||||||||||||||||||||||
| Deferred income taxes | 1,644 | (3,496 | ) | (1,690 | ) | Deferred income taxes | (1,680) | 1,644 | (3,496) | |||||||||||||||||||||||
| Stock-based compensation expense | 10,298 | 8,947 | 4,935 | Stock-based compensation expense | 10,199 | 10,298 | 8,947 | |||||||||||||||||||||||||
| Accretion expense related to earnout payments | 668 | 1,285 | 1,038 | Accretion expense related to earnout payments | 0 | 668 | 1,285 | |||||||||||||||||||||||||
| Impairment charges | — | — | 50,722 | Impairment charges | 32,970 | 0 | 0 | |||||||||||||||||||||||||
| Gain on marketable securities | (595 | ) | — | — | Gain on marketable securities | (154) | (595) | 0 | ||||||||||||||||||||||||
| Loss on disposal of property and equipment | Loss on disposal of property and equipment | 287 | 0 | 0 | ||||||||||||||||||||||||||||
| Changes in assets and liabilities, net of effects of acquisitions: | Changes in assets and liabilities, net of effects of acquisitions: | |||||||||||||||||||||||||||||||
| Accounts receivable | 6,899 | (16,759 | ) | (1,882 | ) | Accounts receivable | 22,644 | 6,899 | (16,759) | |||||||||||||||||||||||
| Accounts payable | (994 | ) | (526 | ) | 1,474 | Accounts payable | 451 | (994) | (526) | |||||||||||||||||||||||
| Accrued expenses | 2,441 | 71,526 | 18,330 | Accrued expenses | (26,513) | 2,441 | 71,526 | |||||||||||||||||||||||||
| Restructuring accrual | 1,959 | (11,617 | ) | 13,025 | Restructuring accrual | 2,479 | 1,959 | (11,617) | ||||||||||||||||||||||||
| Deferred revenue | 175 | (1,899 | ) | 2,010 | Deferred revenue | (3,688) | 175 | (1,899) | ||||||||||||||||||||||||
| Income taxes (payable) recoverable, net | (5,450 | ) | 757 | 3,381 | ||||||||||||||||||||||||||||
| Income taxes recoverable (payable), net | Income taxes recoverable (payable), net | (4,016) | (5,450) | 757 | ||||||||||||||||||||||||||||
| Retirement and pension plan assets and liabilities | 3,258 | (1,492 | ) | 3,065 | Retirement and pension plan assets and liabilities | 1,794 | 3,258 | (1,492) | ||||||||||||||||||||||||
| Prepaid expenses | (455 | ) | (893 | ) | 797 | Prepaid expenses | 1,642 | (455) | (893) | |||||||||||||||||||||||
| Other assets and liabilities, net | 1,557 | (4,748 | ) | 5,626 | Other assets and liabilities, net | (2,011) | 1,557 | (4,748) | ||||||||||||||||||||||||
| Net cash provided by operating activities | 78,645 | 102,902 | 66,970 | Net cash provided by operating activities | 23,353 | 78,645 | 102,902 | |||||||||||||||||||||||||
| Cash flows - investing activities: | ||||||||||||||||||||||||||||||||
| Acquisition of businesses, net of cash acquired | (3,520 | ) | (3,083 | ) | (364 | ) | ||||||||||||||||||||||||||
| Cash flows - investing activities | Cash flows - investing activities | |||||||||||||||||||||||||||||||
| Acquisition of business, net of cash acquired | Acquisition of business, net of cash acquired | 0 | (3,520) | (3,083) | ||||||||||||||||||||||||||||
| Capital expenditures | (3,352 | ) | (5,960 | ) | (14,022 | ) | Capital expenditures | (7,322) | (3,352) | (5,960) | ||||||||||||||||||||||
| Purchases of available for sale investments | (130,411 | ) | (2,201 | ) | (2,269 | ) | Purchases of available for sale investments | (118,904) | (130,411) | (2,201) | ||||||||||||||||||||||
| Proceeds from sale of available for sale investments | 67,968 | 2,995 | 1,404 | Proceeds from sale of available for sale investments | 158,852 | 67,968 | 2,995 | |||||||||||||||||||||||||
| Net cash used in investing activities | (69,315 | ) | (8,249 | ) | (15,251 | ) | ||||||||||||||||||||||||||
| Cash flows - financing activities: | ||||||||||||||||||||||||||||||||
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | 32,626 | (69,315) | (8,249) | ||||||||||||||||||||||||||||
| Cash flows - financing activities | Cash flows - financing activities | |||||||||||||||||||||||||||||||
| Proceeds from line of credit | — | 20,000 | 40,000 | Proceeds from line of credit | 100,000 | 0 | 20,000 | |||||||||||||||||||||||||
| Payments on line of credit | — | (20,000 | ) | (40,000 | ) | Payments on line of credit | (100,000) | 0 | (20,000) | |||||||||||||||||||||||
| Debt issuance costs | — | (981 | ) | — | Debt issuance costs | 0 | 0 | (981) | ||||||||||||||||||||||||
| Cash dividends paid | (11,835 | ) | (10,181 | ) | (10,111 | ) | Cash dividends paid | (12,063) | (11,835) | (10,181) | ||||||||||||||||||||||
| Payment of employee tax withholdings on equity transactions | (4,552 | ) | (2,234 | ) | (2,392 | ) | Payment of employee tax withholdings on equity transactions | (1,550) | (4,552) | (2,234) | ||||||||||||||||||||||
| Acquisition earnout payments | (1,853 | ) | (3,592 | ) | (4,557 | ) | Acquisition earnout payments | (2,789) | (1,853) | (3,592) | ||||||||||||||||||||||
| Net cash used in financing activities | (18,240 | ) | (16,988 | ) | (17,060 | ) | Net cash used in financing activities | (16,402) | (18,240) | (16,988) | ||||||||||||||||||||||
| Effect of exchange rates fluctuations on cash, cash equivalents and restricted cash | 367 | (5,565 | ) | 7,933 | Effect of exchange rates fluctuations on cash, cash equivalents and restricted cash | 5,193 | 367 | (5,565) | ||||||||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | (8,543 | ) | 72,100 | 42,592 | Net increase (decrease) in cash, cash equivalents and restricted cash | 44,770 | (8,543) | 72,100 | ||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 280,262 | 208,162 | 165,570 | Cash, cash equivalents and restricted cash at beginning of period | 271,719 | 280,262 | 208,162 | |||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 271,719 | $ | 280,262 | $ | 208,162 | Cash, cash equivalents and restricted cash at end of period | $ | 316,489 | $ | 271,719 | $ | 280,262 | |||||||||||||||||||
| Supplemental disclosures of cash flow information | Supplemental disclosures of cash flow information | |||||||||||||||||||||||||||||||
| Cash paid for | Cash paid for | |||||||||||||||||||||||||||||||
| Income taxes | $ | 27,338 | $ | 22,616 | $ | 14,814 | Income taxes | $ | 12,154 | $ | 27,338 | $ | 22,616 | |||||||||||||||||||
| Interest | $ | — | $ | 67 | $ | 193 | Interest | $ | 761 | $ | 0 | $ | 67 | |||||||||||||||||||
The accompanying notes to Consolidated Financial Statements are an integral part of these statements.
44
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
| Common Stock | Treasury Stock | Additional Paid in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income | Total | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2016 | 19,586 | $ | 196 | 1,008 | $ | (32,915 | ) | $ | 229,957 | $ | 58,030 | $ | 3,322 | $ | 258,590 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (48,635 | ) | — | (48,635 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 9,993 | 9,993 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury and common stock transactions: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 4,935 | — | — | 4,935 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of equity, net of tax withholdings | — | — | (188 | ) | 6,311 | (8,716 | ) | — | — | (2,405 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock | — | — | (15 | ) | 508 | (170 | ) | — | — | 338 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.52 per share) | — | — | — | — | — | (9,762 | ) | — | (9,762 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend equivalents on restricted stock units | — | — | — | — | — | (349 | ) | — | (349 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 19,586 | 196 | 805 | (26,096 | ) | 226,006 | (716 | ) | 13,315 | 212,705 | Balance at December 31, 2017 | 19,586 | $ | 196 | 805 | $ | (26,096) | $ | 226,006 | $ | (716) | $ | 13,315 | $ | 212,705 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 49,295 | — | 49,295 | Net income | — | — | — | — | — | 49,295 | — | 49,295 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of accounting standards | — | — | — | — | — | 15,043 | (6,089 | ) | 8,954 | Adoption of accounting standards | — | — | — | — | — | 15,043 | (6,089) | 8,954 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (3,164 | ) | (3,164 | ) | Other comprehensive loss, net of tax | — | — | — | — | — | — | (3,164) | (3,164) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury and common stock transactions: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common and treasury stock transactions: | Common and treasury stock transactions: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 8,947 | — | — | 8,947 | Stock-based compensation | — | — | — | — | 8,947 | — | — | 8,947 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of equity, net of tax withholdings | — | — | (167 | ) | 5,604 | (7,837 | ) | — | — | (2,233 | ) | Vesting of equity, net of tax withholdings | — | — | (167) | 5,604 | (7,837) | — | — | (2,233) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock | — | — | (6 | ) | 194 | 31 | — | — | 225 | Re-issuance of treasury stock | — | — | (6) | 194 | 31 | — | — | 225 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.39 per share) | — | — | — | — | — | (7,389 | ) | — | (7,389 | ) | Cash dividends declared ($0.39 per share) | — | — | — | — | — | (7,389) | — | (7,389) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend equivalents on restricted stock units | — | — | — | — | — | (184 | ) | — | (184 | ) | Dividend equivalents on restricted stock units | — | — | — | — | — | (184) | — | (184) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 19,586 | 196 | 632 | (20,298 | ) | 227,147 | 56,049 | 4,062 | 267,156 | Balance at December 31, 2018 | 19,586 | 196 | 632 | (20,298) | 227,147 | 56,049 | 4,062 | 267,156 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 46,869 | — | 46,869 | Net income | — | — | — | — | — | 46,869 | — | 46,869 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (238 | ) | (238 | ) | Other comprehensive loss, net of tax | — | — | — | — | — | — | (238) | (238) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury and common stock transactions: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common and treasury stock transactions: | Common and treasury stock transactions: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 10,298 | — | — | 10,298 | Stock-based compensation | — | — | — | — | 10,298 | — | — | 10,298 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of equity, net of tax withholdings | — | — | (163 | ) | 5,154 | (9,706 | ) | — | — | (4,552 | ) | Vesting of equity, net of tax withholdings | — | — | (163) | 5,154 | (9,706) | — | — | (4,552) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock | — | — | (49 | ) | 349 | 1,068 | — | — | 1,417 | Re-issuance of treasury stock | — | — | (49) | 349 | 1,068 | — | — | 1,417 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.60 per share) | — | — | — | — | — | (11,461 | ) | — | (11,461 | ) | Cash dividends declared ($0.60 per share) | — | — | — | — | — | (11,461) | — | (11,461) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend equivalents on restricted stock units | — | — | — | — | — | (374 | ) | — | (374 | ) | Dividend equivalents on restricted stock units | — | — | — | — | — | (374) | — | (374) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 19,586 | $ | 196 | 420 | $ | (14,795 | ) | $ | 228,807 | $ | 91,083 | $ | 3,824 | $ | 309,115 | Balance at December 31, 2019 | 19,586 | 196 | 420 | (14,795) | 228,807 | 91,083 | 3,824 | 309,115 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | Net loss | — | — | — | — | — | (37,707) | — | (37,707) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of accounting standards | Adoption of accounting standards | — | — | — | — | — | (332) | — | (332) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | — | — | — | — | — | — | (407) | (407) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common and treasury stock transactions: | Common and treasury stock transactions: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | Stock-based compensation | — | — | — | — | 10,199 | — | — | 10,199 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of equity, net of tax withholdings | Vesting of equity, net of tax withholdings | — | — | (179) | 6,225 | (7,775) | — | — | (1,550) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of treasury stock | Re-issuance of treasury stock | — | — | (15) | 529 | (183) | — | — | 346 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.60 per share) | Cash dividends declared ($0.60 per share) | — | — | — | — | — | (11,576) | — | (11,576) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend equivalents on restricted stock units | Dividend equivalents on restricted stock units | — | — | — | — | — | (486) | — | (486) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | Balance at December 31, 2020 | 19,586 | $ | 196 | 226 | $ | (8,041) | $ | 231,048 | $ | 40,982 | $ | 3,417 | $ | 267,602 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes to Consolidated Financial Statements are an integral part of these statements.
45
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except share and per share figures)
1. Basis of Presentation
Heidrick & Struggles International, Inc. and subsidiaries (the “Company”) is engaged in providing executive search and consulting services to clients on a retained basis. The Company operates in the Americas, Europe and Asia Pacific regions.
The consolidated financial statements include Heidrick & Struggles International, Inc. and its wholly owned subsidiaries and have been prepared using accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Significant items subject to estimates and assumptions include revenue recognition, allowances for deferred tax assets and liabilities, and assessment of goodwill, and other intangible assets and long-lived assets for impairment. Estimates are subject to a degree of uncertainty and actual results could differ from these estimates.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents.
Marketable Securities
The Company’s marketable securities consist of available-for-sale debt securities with original maturities exceeding three months.
Concentration of Risk
The Company is potentially exposed to concentrations of risk associated with its accounts receivable. However, this risk is limited due to the Company’s large number of clients and their dispersion across many different industries and geographies. At December 31, 20192020 and 2018,2019, the Company had no significant concentrations of risk.
Accounts Receivable
The Company’s accounts receivable consists of trade receivables. The Company’s expected credit loss allowance methodology for doubtful accounts receivable is developed based upon several factors including the ageusing historical collection experience, current and future economic and market conditions and a review of the Company’scurrent status of customers' trade accounts receivable, historical write-off experience and specific account analysis.receivables. These factors may change over time, impacting the allowance level. See Note 4, Credit Losses.
Fair Value of Financial Instruments
Cash equivalents are stated at cost, which approximates fair value. The carrying value for receivables from clients, accounts payable, deferred revenue and other accrued liabilities reasonably approximate fair value due to the nature of the financial instruments and the short-term nature of the items.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the asset or, for leasehold improvements, the shorter of the lease term or the estimated useful life of the asset, as follows:
| Office furniture, fixtures and equipment | 5–10 years | |||||||
| Computer equipment and software | 3–7 years | |||||||
46
Leasehold improvements are depreciated over the lesser of the lease term or life of the asset improvement, which typically range from three to ten years.
Depreciation is calculated for tax purposes using accelerated methods, where applicable.
The Company reviews its other intangible assets and long-lived assets, including property and equipment and right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assetsasset groups to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset.asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge, equal to the amount by which the carrying amount of the asset group exceeds the fair value of the asset group, is recognized. The Company evaluated the recoverability of its other intangible assets and long-lived assets during the three months ended June 30, 2020 and determined that the other intangible assets and long-lived assets were recoverable. The Company continues to monitor the impact of the economic downturn resulting from COVID-19 for additional potential impairment indicators related to other intangible assets and long-lived assets.
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 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, an incremental borrowing rate based on the information available at the commencement date is used 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. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components. For office leases, the Company accounts for the lease and non-lease components as a single lease component. For equipment leases, such as vehicles and office equipment, the Company accounts for the lease and non-lease components separately.
Investments
The Company’s investments consist primarily of available-for-sale investments within the U.S. non-qualified deferred compensation plan (the “Plan”).
Available-for-sale investments are reported at fair value with changes in unrealized gains (losses) and realized gains (losses) recorded as a non-operating expense in Other, net in the Consolidated Statements of Comprehensive Income (Loss).
Goodwill and Other Intangible Assets
Goodwill represents the difference between the purchase price of acquired companies and the related fair value of the net assets acquired, which is accounted for by the acquisition method of accounting. Other intangible assets include client relationships, trade names, and employee non-compete agreements. The Company performs assessments of the carrying value of goodwill at least annually and of its goodwill and other intangible assets whenever events occur or circumstances indicate that a carrying amount of these assetsgoodwill may not be recoverable. These circumstances include a significant change in business climate, attrition of key personnel, changes in financial condition or results of operations, a prolonged decline in the Company’s stock price and market capitalization, competition, and other factors.
The goodwill impairment test compares the fair value of a reporting unit to its carrying amount, including goodwill. The Company operates four reporting units: Americas, Europe (which includes Africa), Asia Pacific (which includes the Middle East) and Heidrick Consulting. The goodwill impairment test is completed by comparing the fair value of a reporting unit with its carrying amount. The fair value of each of the Company’s reporting units is determined using a discounted cash flow
47
methodology. An impairment charge is recognized for the amount by which the carrying value of the reporting unit exceeds its fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit.
During the three months ended June 30, 2020, and as a direct result of the economic impact of the COVID-19 pandemic, the Company experienced a decline in demand for our executive search and consulting services, a lengthening of the executive search process due to a slow-down in client decision making and an inability to execute in-person consulting engagements, which had a material negative impact on our results of operations. As a result, the Company identified a triggering event and performed an interim goodwill impairment evaluation during the three months ended June 30, 2020.
During the impairment evaluation process, the Company used a discounted cash flow methodology to estimate the fair value of its reporting units. The discounted cash flow approach is dependent on a number of factors, including estimates of future market growth and trends, forecasted revenue and costs, capital investments, appropriate discount rates, certain assumptions to allocate shared costs, assets and liabilities, historical and projected performance of the reporting unit, and the macroeconomic conditions affecting each of the Company’s reporting units. The assumptions used in the determination of fair value were (1) a forecast of growth in the near and long term; (2) the discount rate; (3) working capital investments; (4) macroeconomic conditions and (5) other intangible assetfactors.
Based on the results of the impairment review comparesevaluation, the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated byCompany determined that the asset. Ifgoodwill within the carrying amount of an asset exceeds its estimated future cash flows,Europe and Asia Pacific reporting units was impaired, which resulted in an impairment charge equalof $24.5 million in Europe and $8.5 million in Asia Pacific to the amount by which the carrying amountwrite-off all of the asset exceeds the fair value, is recognized.
The Company continues to monitor potential triggering events for its Americas reporting unit including changes in the business climate in which it operates, the Company’s market capitalization compared to its book value, and the Company’s recent operating performance. Any changes in these factors could result in a further impairment charge.
Restructuring Charges
The Company accounts for restructuring charges by recognizing a liability at fair value when the costs are incurred.
Revenue Recognition
See Note 3, Revenue.
Reimbursements
The Company incurs certain out-of-pocket expenses that are reimbursed by its clients, which are accounted for as revenue and expense in its Consolidated Statements of Comprehensive Income (Loss).
Salaries and Benefits
Salaries and benefits consist of compensation and benefits paid to consultants, executive officers, and administrative and support personnel, of which the most significant elements are salaries and annual performance-related bonuses. Other items in this category are expenses related to sign-on bonuses, forgivable employee loans and minimum guaranteed bonuses (often incurred
in connection with the hiring of new consultants), restricted stock unit and performance share unit amortization, payroll taxes, profit sharing and retirement benefits, and employee insurance benefits.
Salaries and benefits are recognized on an accrual basis. Certain sign-on bonuses, retention awards, and minimum guaranteed compensation are capitalized and amortized in accordance with the terms of the respective agreements.
A portion of the Company’s consultants’ and management cash bonuses are deferred and paid over a three-yearthree-year vesting period. The portion of the bonus is approximately 15% depending on the employee’s level or position. The compensation expense related to the amounts being deferred is recognized on a graded vesting attribution method over the requisite service period. This service period begins on January 1 of the respective fiscal year and continues through the deferral date, which coincides with the Company’s bonus payments in the first quarter of the following year and for an additional three-yearthree-year vesting period. The deferrals are recorded in Accrued salaries and benefits within both Current liabilities and Non-current liabilities in the Consolidated Balance Sheets.
48
Historically, the Company's consultants participated in the same cash bonus deferral program as management. In 2020, the Company terminated the cash bonus deferral for consultants and now pays 100% of the cash bonuses earned by consultants in the first quarter of the following year. Consultant cash bonuses earned prior to 2020 will continue to be paid under the terms of the cash bonus deferral program.
Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the tax differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income (loss) by weighted average common shares outstanding for the year. Diluted earnings (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Common equivalent shares are excluded from the determination of diluted earnings per share in periods in which they have an anti-dilutive effect.
The following table sets forth the computation of basic and diluted earnings (loss) per share:
| December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net income (loss) | $ | (37,707) | $ | 46,869 | $ | 49,295 | |||||||||||
| Weighted average shares outstanding: | |||||||||||||||||
| Basic | 19,301 | 19,103 | 18,917 | ||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||
| Restricted stock units | 0 | 285 | 406 | ||||||||||||||
| Performance stock units | 0 | 163 | 209 | ||||||||||||||
| Diluted | 19,301 | 19,551 | 19,532 | ||||||||||||||
| Basic earnings (loss) per share | $ | (1.95) | $ | 2.45 | $ | 2.61 | |||||||||||
| Diluted earnings (loss) per share | $ | (1.95) | $ | 2.40 | $ | 2.52 | |||||||||||
| December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Net income (loss) | $ | 46,869 | $ | 49,295 | $ | (48,635 | ) | ||||
| Weighted average shares outstanding: | |||||||||||
| Basic | 19,103 | 18,917 | 18,735 | ||||||||
| Effect of dilutive securities: | |||||||||||
| Restricted stock units | 285 | 406 | — | ||||||||
| Performance stock units | 163 | 209 | — | ||||||||
| Diluted | 19,551 | 19,532 | 18,735 | ||||||||
| Basic earnings (loss) per share | $ | 2.45 | $ | 2.61 | $ | (2.60 | ) | ||||
| Diluted earnings (loss) per share | $ | 2.40 | $ | 2.52 | $ | (2.60 | ) | ||||
Weighted average restricted stock units and performance stock units outstanding that could be converted into approximately 327,000472,000 and 80,000120,000 common shares, respectively, for the year ended December 31, 2017,2020, were not included in the computation of diluted lossearnings per share because the effects would be anti-dilutive.
Translation of Foreign Currencies
The Company generally designates the local currency for all its subsidiaries as the functional currency. The Company translates the assets and liabilities of its subsidiaries into U.S. dollars at the current rate of exchange prevailing at the balance sheet date. Revenue and expenses are translated at a monthly average exchange rate for the period. Translation adjustments are reported as a component of Accumulated other comprehensive income.
Restricted Cash
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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 December 31, 2020, 2019 2018 and 2017:2018:
| December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash and cash equivalents | $ | 316,473 | $ | 271,719 | $ | 279,906 | |||||||||||
| Restricted cash included within other current assets | 0 | 0 | 108 | ||||||||||||||
| Restricted cash included within other non-current assets | 16 | 0 | 248 | ||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 316,489 | $ | 271,719 | $ | 280,262 | |||||||||||
| December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Cash and cash equivalents | $ | 271,719 | $ | 279,906 | $ | 207,534 | |||||
| Restricted cash included within other current assets | — | 108 | 526 | ||||||||
| Restricted cash included within other non-current assets | — | 248 | 102 | ||||||||
| Total cash, cash equivalents and restricted cash | $ | 271,719 | $ | 280,262 | $ | 208,162 | |||||
Recently Issued Financial Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance 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 March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.
In December 2019, the Financial Accounting Standards Board ("FASB"),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")ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years, and interim 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.
On January 1, 2020, the FASB issuedCompany adopted ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments.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 standard is effective for fiscal years beginning after December 15, 2019. The Company will adopt this guidance in its fiscal year beginning January 1, 2020. The adoption of this guidance is not anticipated to have a material impact on our consolidated financial statements.
3.Revenue
Executive Search
Revenue is recognized as we satisfy our performance obligations are satisfied by transferring a good or service to a client. Generally, each of our executive search contracts containcontract 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 itsthe 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.
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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 isobligations are 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 ourthe obligations under the executive search contract. Revenue is generally recognized over a period of approximately six months.
Heidrick Consulting
Revenue is recognized as we satisfy our performance obligations are satisfied 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. OurThe 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. 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.
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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 atfor the end of and during the period:years ended:
| December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Contract assets | |||||||||||||||||
| Unbilled receivables | $ | 9,907 | $ | 7,585 | $ | 2,322 | |||||||||||
| Contract assets | 9,745 | 14,672 | (4,927) | ||||||||||||||
| Total contract assets | 19,652 | 22,257 | (2,605) | ||||||||||||||
| Contract liabilities | |||||||||||||||||
| Deferred revenue | $ | 38,050 | $ | 41,267 | $ | (3,217) | |||||||||||
| December 31, 2019 | December 31, 2018 | Variance | |||||||||
| Contract assets | |||||||||||
| Unbilled receivables | $ | 7,585 | $ | 8,684 | $ | (1,099 | ) | ||||
| Contract assets | 14,672 | 15,291 | (619 | ) | |||||||
| Total contract assets | 22,257 | 23,975 | (1,718 | ) | |||||||
| Contract liabilities | |||||||||||
| Deferred revenue | $ | 41,267 | $ | 40,673 | $ | 594 | |||||
During the year ended December 31, 2019,2020, we recognized revenue of $26.6$36.2 million that was included in the contract liabilities balance at the beginning of the period. The amount of revenue recognized during the year ended December 31, 20192020, from performance obligations partially satisfied in previous periods as a result of changes in the estimates of variable consideration was $19.4 million. During the year ended December 31, 2018, we recognized revenue of $28.0 million that was included in the contract liabilities balance at the beginning of the period. The amount of revenue recognized during the year ended December 31, 2018, from performance obligations partially satisfied in previous periods as a result of changes in the estimates of variable consideration was $21.8$16.7 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, 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 COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted. 52 |
The activity ofin the allowance for doubtful accountscredit losses on the Company's trade receivables is as follows:
| December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Balance at January 1, | $ | 5,140 | $ | 3,502 | $ | 2,534 | ||||||||||||||
| Provision for credit losses | 6,696 | 5,900 | 3,790 | |||||||||||||||||
| Write-offs | (5,418) | (4,270) | (2,708) | |||||||||||||||||
| Foreign currency translation | 139 | 8 | (114) | |||||||||||||||||
| Balance at December 31, | $ | 6,557 | $ | 5,140 | $ | 3,502 | ||||||||||||||
The fair value and unrealized losses on available for sale debt securities, aggregated by investment category and the years ended:length of time the security has been in an unrealized loss position, are as follows:
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Balance at January 1, | $ | 3,502 | $ | 2,534 | $ | 2,575 | ||||||
| Provision charged to income | 5,900 | 3,790 | 963 | |||||||||
| Write-offs | (4,270 | ) | (2,708 | ) | (1,134 | ) | ||||||
| Foreign currency translation | 8 | (114 | ) | 130 | ||||||||
| Balance at December 31, | $ | 5,140 | $ | 3,502 | $ | 2,534 | ||||||
| Less Than 12 Months | Balance Sheet Classification | ||||||||||||||||||||||
| Balance at December 31, 2020 | Fair Value | Unrealized Loss | Cash and Cash Equivalents | Marketable Securities | |||||||||||||||||||
| U.S. Treasury securities | $ | 31,997 | $ | 1 | $ | 31,997 | $ | 0 | |||||||||||||||
The unrealized loss on one investment in U.S. Treasury securities at December 31, 2020 was 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. There were no investments with unrealized losses at December 31, 2019.
5. Property and Equipment, net
The components of the Company’s property and equipment are as follows:
| December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Leasehold improvements | $ | 40,320 | $ | 47,269 | ||||||||||
| Office furniture, fixtures and equipment | 14,816 | 17,740 | ||||||||||||
| Computer equipment and software | 25,544 | 27,531 | ||||||||||||
| Property and equipment, gross | 80,680 | 92,540 | ||||||||||||
| Accumulated depreciation | (57,188) | (63,890) | ||||||||||||
| Property and equipment, net | $ | 23,492 | $ | 28,650 | ||||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Leasehold improvements | $ | 47,269 | $ | 48,455 | ||||
| Office furniture, fixtures and equipment | 17,740 | 17,919 | ||||||
| Computer equipment and software | 27,531 | 27,063 | ||||||
| Property and equipment, gross | 92,540 | 93,437 | ||||||
| Accumulated depreciation | (63,890 | ) | (59,566 | ) | ||||
| Property and equipment, net | $ | 28,650 | $ | 33,871 | ||||
Depreciation expense for the years ended December 31, 2020, 2019 and 2018, and 2017, was $8.1 million, $9.5 million $11.0 million and $10.4$11.0 million, respectively.
Additionally, as part of the Company's restructuring plan, property and equipment located at certain of the Company's offices was abandoned and the useful life of the assets were shortened to correspond with the cease-use date. As a result of the change in the useful life, approximately $4.2 million of depreciation expense was accelerated and recorded in Restructuring charges in the Consolidated Statements of Comprehensive Income (Loss) and Depreciation and amortization in the Consolidated Statements of Cash Flows during the year ended December 31, 2020.
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 the Company'sour 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
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Company has a centrally managed treasury function; therefore, a portfolio approach is applied in determining the incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a fully collateralized basis over a similar term in an amount equal to the total lease payments in a similar economic environment.
As part of the Company's restructuring plan, lease components related to certain of the Company's offices were abandoned and the useful life of the associated right-of-use asset was shortened to correspond with the cease-use date. As a result of the change in the useful life, approximately $13.7 million of right-of-use asset amortization was accelerated and recorded in Restructuring charges in the Consolidated Statements of Comprehensive Income (Loss) and Depreciation and amortization in the Consolidated Statements of Cash Flows during the year ended December 31, 2019, equipment2020.
Equipment leases, which are comprised of vehicle and office equipment leases, have remaining terms that range from less than one1 year to 4.85.0 years, some of which also include options to extend or terminate the lease. The Company's equipment leases do not contain variable lease payments. The Company separates the lease and non-lease components for its equipment leases. Equipment leases do not comprise a significant portion of the Company's lease portfolio.
Lease cost components included within General and Administrative Expenses in our Condensed Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2019, were as follows:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Operating lease cost | $ | 22,227 | $ | 24,928 | |||||||
| Variable lease cost | 6,047 | 7,932 | |||||||||
| Total lease cost | $ | 28,274 | $ | 32,860 | |||||||
| Operating lease cost | $ | 24,928 | ||
| Variable lease cost | 7,932 | |||
| Total lease cost | $ | 32,860 | ||
Rent expense, as previously defined under ASC 840, which includes the base rent, maintenance costs, operating expenses and real estate taxes, and the costs of equipment leases for the yearsyear ended December 31, 2018, and 2017, was $33.2 million and $32.2 million, respectively.million.
Supplemental cash flow information related to the Company's operating leases for the year ended December 31, 2019, wasis as follows:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 31,573 | $ | 33,797 | |||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | 31,829 | $ | 19,640 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | 33,797 | ||
| Right-of-use assets obtained in exchange for lease obligations: | ||||
| Operating leases | $ | 19,640 | ||
The weighted average remaining lease term and weighted average discount rate for our operating leases as of December 31, 2019 wasis as follows:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Weighted Average Remaining Lease Term | |||||||||||
| Operating leases | 6.0 years | 4.7 years | |||||||||
| Weighted Average Discount Rate | |||||||||||
| Operating leases | 3.5 | % | 3.9 | % | |||||||
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The future maturities of the Company's operating lease liabilities for the years ended December 31, wereis as follows:
| Operating Lease Maturity | |||||
| 2021 | $ | 28,089 | |||
| 2022 | 25,803 | ||||
| 2023 | 23,822 | ||||
| 2024 | 14,030 | ||||
| 2025 | 6,726 | ||||
| Thereafter | 30,226 | ||||
| Total lease payments | 128,696 | ||||
| Less: Interest | (12,896) | ||||
| Present value of lease liabilities | $ | 115,800 | |||
| Operating Lease Maturity | |||
| 2020 | $ | 30,246 | |
| 2021 | 27,229 | ||
| 2022 | 23,577 | ||
| 2023 | 20,555 | ||
| 2024 | 9,981 | ||
| Thereafter | 8,983 | ||
| Total lease payments | 120,571 | ||
| Less: Interest | (10,228 | ) | |
| Present value of lease liabilities | $ | 110,343 | |
| 2019 | $ | 34,456 | |
| 2020 | 31,808 | ||
| 2021 | 27,381 | ||
| 2022 | 23,445 | ||
| 2023 | 20,087 | ||
| Thereafter | 14,448 | ||
| Total | $ | 151,625 | |
The Company has an obligation at the end of the lease term to return certain offices to the landlord in theirits original condition, which is recorded at fair value at the time the liability is incurred. The Company had $3.0$3.3 million and $2.7$3.0 million of asset retirement obligations as of December 31, 20192020 and 2018,2019, respectively, which are recorded within Other current liabilities and Other non-current liabilities in the Consolidated Balance Sheets.
7. Financial Instruments and Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: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 Consolidated Balance Sheets until realized.
The Company's cash, cash equivalents, and marketable securities by significant investment category are as follows:
| Fair Value | Balance Sheet Classification | ||||||||||||||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable Securities | ||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Cash | $ | 230,490 | $ | — | |||||||||||||||||||||||||||||||
Level 1(1): | |||||||||||||||||||||||||||||||||||
| Money market funds | 53,986 | ||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 51,996 | 1 | (1) | 51,996 | 31,997 | 19,999 | |||||||||||||||||||||||||||||
| Total Level 1 | 51,996 | 1 | (1) | 51,996 | 85,983 | 19,999 | |||||||||||||||||||||||||||||
| Total | $ | 51,996 | $ | 1 | $ | (1) | $ | 51,996 | $ | 316,473 | $ | 19,999 | |||||||||||||||||||||||
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| Fair Value | Balance Sheet Classification | Fair Value | Balance Sheet Classification | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable Securities | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable Securities | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | Balance at December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash | $ | 177,493 | $ | — | Cash | $ | 177,493 | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Level 1: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 1(1): | Level 1(1): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | 15,661 | 15,661 | — | Money market funds | 15,661 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 139,705 | 13 | — | 139,718 | 78,565 | 61,153 | U.S. Treasury securities | 139,705 | 13 | — | 139,718 | 78,565 | 61,153 | |||||||||||||||||||||||||||||||||||||||||||||
| Total Level 1 | 155,366 | 13 | — | 155,379 | 94,226 | 61,153 | Total Level 1 | 139,705 | 13 | — | 139,718 | 94,226 | 61,153 | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 155,366 | $ | 13 | $ | — | $ | 155,379 | $ | 271,719 | $ | 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.
| Fair Value | Balance Sheet Classification | ||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable Securities | ||||||||||||||||||
| Balance at December 31, 2018 | |||||||||||||||||||||||
| Cash | $ | 279,829 | $ | — | |||||||||||||||||||
| Level 1: | |||||||||||||||||||||||
| Money market funds | 77 | 77 | — | ||||||||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | 77 | $ | 279,906 | $ | — | |||||||||||
Investments, Assets Designated for Retirement and Pension Plans and Associated Liabilities
The Company has a U.S. non-qualified deferred compensation plan that consists primarily of U.S. marketable securities and mutual funds. The aggregate cost basis for these investments was $17.2$19.5 million and $14.6$17.2 million as of December 31, 20192020 and December 31, 2018,2019, 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.
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 | Goodwill | Assets Designated for Retirement and Pension Plans | Investments | Other Current Liabilities | Retirement and Pension Plans | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Measured on a recurring basis: | ||||||||||||||||||||||||||||||||||||||||||||
Level 1(1): | ||||||||||||||||||||||||||||||||||||||||||||
| U.S. non-qualified deferred compensation plan | $ | 31,369 | $ | — | — | $ | — | $ | 31,369 | $ | — | $ | — | |||||||||||||||||||||||||||||||
Level 2(2): | ||||||||||||||||||||||||||||||||||||||||||||
| Retirement and pension plan assets | 15,859 | 1,434 | — | 14,425 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Pension benefit obligation | (22,351) | — | — | — | — | (1,434) | (20,917) | |||||||||||||||||||||||||||||||||||||
| Total Level 2 | (6,492) | 1,434 | — | 14,425 | — | (1,434) | (20,917) | |||||||||||||||||||||||||||||||||||||
| Measured on a non-recurring basis: | ||||||||||||||||||||||||||||||||||||||||||||
Level 3(3)(4): | ||||||||||||||||||||||||||||||||||||||||||||
| Goodwill | 91,643 | 91,643 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 116,520 | $ | 1,434 | 91,643 | $ | 14,425 | $ | 31,369 | $ | (1,434) | $ | (20,917) | |||||||||||||||||||||||||||||||
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| Balance Sheet Classification | ||||||||||||||||||||||||
| Fair Value | Other Current Assets | Assets Designated for Retirement and Pension Plans | Investments | Other Current Liabilities | Retirement and Pension Plans | |||||||||||||||||||
| Balance at December 31, 2019 | ||||||||||||||||||||||||
| Level 1: | ||||||||||||||||||||||||
| U.S. non-qualified deferred compensation plan | $ | 25,409 | $ | — | $ | — | $ | 25,409 | $ | — | $ | — | ||||||||||||
| Level 2: | ||||||||||||||||||||||||
| Retirement and pension plan assets | 15,296 | 1,318 | 13,978 | — | — | — | ||||||||||||||||||
| Pension benefit obligation | (20,918 | ) | — | — | — | (1,318 | ) | (19,600 | ) | |||||||||||||||
| Total Level 2 | (5,622 | ) | 1,318 | 13,978 | — | (1,318 | ) | (19,600 | ) | |||||||||||||||
| Total | $ | 19,787 | $ | 1,318 | $ | 13,978 | $ | 25,409 | $ | (1,318 | ) | $ | (19,600 | ) | ||||||||||
| Balance Sheet Classification | ||||||||||||||||||||||||||||||||||||||||||||
| Fair Value | Other Current Assets | Assets Designated for Retirement and Pension Plans | Investments | Other Current Liabilities | Retirement and Pension Plans | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 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) | ||||||||||||||||||||||||||||||||
| Balance Sheet Classification | ||||||||||||||||||||||||
| Fair Value | Other Current Assets | Assets Designated for Retirement and Pension Plans | Investments | Other Current Liabilities | Retirement and Pension Plans | |||||||||||||||||||
| Balance at December 31, 2018 | ||||||||||||||||||||||||
| Level 1: | ||||||||||||||||||||||||
| U.S. non-qualified deferred compensation plan | $ | 19,442 | $ | — | $ | — | $ | 19,442 | $ | — | $ | — | ||||||||||||
| Level 2: | ||||||||||||||||||||||||
| Retirement and pension plan assets | 16,384 | 1,349 | 15,035 | — | — | — | ||||||||||||||||||
| Pension benefit obligation | (20,908 | ) | — | — | — | (1,349 | ) | (19,559 | ) | |||||||||||||||
| Total Level 2 | (4,524 | ) | 1,349 | 15,035 | — | (1,349 | ) | (19,559 | ) | |||||||||||||||
| Total | $ | 14,918 | $ | 1,349 | $ | 15,035 | $ | 19,442 | $ | (1,349 | ) | $ | (19,559 | ) | ||||||||||
(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.
(3)Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
(4)In accordance with Subtopic 350-20, goodwill with a carrying value of $33.0 million was written down to its implied fair value of zero, resulting in the revised total goodwill of $91.6 million and an impairment charge of $33.0 million in earnings.
Contingent Consideration
The former owners of the entities acquired by the CompanyCompany's 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. As of December 31, 2019, all contingentContingent consideration accruals areis recorded within Other current liabilities onnon-current Accrued salaries and benefits in the Consolidated Balance Sheets.
The following table provides a reconciliation of the beginning and ending balance of Level 3 liabilities for the year ended December 31, 2019:2020:
| Acquisition Earnout Accruals | Contingent Compensation Accruals | |||||||||||||
| Balance at December 31, 2019 | $ | (5,278) | $ | (618) | ||||||||||
| Earnout accretion/compensation expense | 0 | (1,942) | ||||||||||||
| Payments | 5,051 | 0 | ||||||||||||
| Foreign currency translation | 227 | 170 | ||||||||||||
| Balance at December 31, 2020 | $ | 0 | $ | (2,390) | ||||||||||
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| Acquisition Earnout Accruals | ||||
| Balance at December 31, 2018 | $ | (6,627 | ) | |
| Earnout accretion | (668 | ) | ||
| Earnout payments | 3,009 | |||
| Earnout adjustment | (1,062 | ) | ||
| Foreign currency translation | 70 | |||
| Balance at December 31, 2019 | $ | (5,278 | ) | |
Goodwill represents the difference between the purchase price of acquired companies and the related fair value of the net assets acquired, which is accounted for by the acquisition method of accounting. The Company performs assessments of the carrying value of goodwill at least annually and whenever events occur or circumstances indicate that a carrying amount of goodwill may not be recoverable. During the three months ended June 30, 2020, an interim goodwill impairment evaluation was conducted to determine the fair value of goodwill resulting in an impairment of $33.0 million. On October 31, 2020, the Company conducted its annual goodwill impairment evaluation in accordance with ASU No. 2017-04, Intangibles - Goodwill and Other, which indicated that the fair value of the Americas reporting unit was in excess of its carrying value and no impairment was necessary. Goodwill 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 goodwill using discounted cash flow models.
The following table provides a reconciliation of the beginning and ending balance of Level 3 assets for the twelve months ended December 31, 2020:
| Goodwill | |||||
| Balance at December 31, 2019 | $ | 126,831 | |||
| (32,970) | |||||
| Balance at December 31, 2020 | $ | 91,643 | |||
8. Goodwill and Other Intangible Assets
Goodwill
The Company's goodwill by segment is as follows:
| December 31, 2019 | December 31, 2018 | ||||||
| Executive Search | |||||||
| Americas | $ | 92,497 | $ | 88,410 | |||
| Europe | 25,579 | 24,924 | |||||
| Asia Pacific | 8,755 | 8,758 | |||||
| Total Executive Search | 126,831 | 122,092 | |||||
| Heidrick Consulting | 36,257 | 36,257 | |||||
| Goodwill, gross | 163,088 | 158,349 | |||||
| Accumulated impairment | (36,257 | ) | (36,257 | ) | |||
| Goodwill, net | $ | 126,831 | $ | 122,092 | |||
| December 31, 2020 | December 31, 2019 | ||||||||||
| Executive Search | |||||||||||
| Americas | $ | 91,643 | $ | 92,497 | |||||||
| Europe | 0 | 25,579 | |||||||||
| Asia Pacific | 0 | 8,755 | |||||||||
| Total goodwill | $ | 91,643 | $ | 126,831 | |||||||
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Changes in the carrying amount of goodwill by segment for the years ended December 31, 2020, 2019, 2018, and 20172018 were as follows:
| Executive Search | |||||||||||||||||||||||||||||||||||
| Americas | Europe | Asia Pacific | Total | ||||||||||||||||||||||||||||||||
| Goodwill | $ | 88,690 | $ | 20,900 | $ | 9,302 | $ | 118,892 | |||||||||||||||||||||||||||
| Accumulated impairment losses | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 88,690 | 20,900 | 9,302 | 118,892 | |||||||||||||||||||||||||||||||
| Amrop acquisition | 0 | 5,478 | 0 | 5,478 | |||||||||||||||||||||||||||||||
| Foreign currency translation | (280) | (1,454) | (544) | (2,278) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 88,410 | 24,924 | 8,758 | 122,092 | |||||||||||||||||||||||||||||||
| 2GET acquisition | 3,793 | 0 | 0 | 3,793 | |||||||||||||||||||||||||||||||
| Foreign currency translation | 294 | 655 | (3) | 946 | |||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 92,497 | 25,579 | 8,755 | 126,831 | |||||||||||||||||||||||||||||||
| Impairment | 0 | (24,475) | (8,495) | (32,970) | |||||||||||||||||||||||||||||||
| Foreign currency translation | (854) | (1,104) | (260) | (2,218) | |||||||||||||||||||||||||||||||
| Goodwill | 91,643 | 24,475 | 8,495 | 124,613 | |||||||||||||||||||||||||||||||
| Accumulated impairment losses | 0 | (24,475) | (8,495) | (32,970) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 91,643 | $ | 0 | $ | 0 | $ | 91,643 | |||||||||||||||||||||||||||
| Executive Search | ||||||||||||||||||||
| Americas | Europe | Asia Pacific | Heidrick Consulting | Total | ||||||||||||||||
| Balance as of December 31, 2016 | ||||||||||||||||||||
| Goodwill | $ | 88,101 | $ | 19,092 | $ | 8,893 | $ | 35,758 | $ | 151,844 | ||||||||||
| Accumulated impairment | — | — | — | — | — | |||||||||||||||
| Goodwill, net as of December 31, 2016 | 88,101 | 19,092 | 8,893 | 35,758 | 151,844 | |||||||||||||||
| Philosophy IB acquisition | 357 | — | — | 7 | 364 | |||||||||||||||
| Foreign currency translation | 232 | 1,808 | 409 | 492 | 2,941 | |||||||||||||||
| Impairment | — | — | — | (36,257 | ) | (36,257 | ) | |||||||||||||
| Goodwill, net as of December 31, 2017 | 88,690 | 20,900 | 9,302 | — | 118,892 | |||||||||||||||
| Amrop acquisition | — | 5,478 | — | — | 5,478 | |||||||||||||||
| Foreign currency translation | (280 | ) | (1,454 | ) | (544 | ) | — | (2,278 | ) | |||||||||||
| Goodwill, net as of December 31, 2018 | 88,410 | 24,924 | 8,758 | — | 122,092 | |||||||||||||||
| 2GET acquisition | 3,793 | — | — | — | 3,793 | |||||||||||||||
| Foreign currency translation | 294 | 655 | (3 | ) | — | 946 | ||||||||||||||
| Goodwill, net as of December 31, 2019 | $ | 92,497 | $ | 25,579 | $ | 8,755 | $ | — | $ | 126,831 | ||||||||||
During the 2019 fourth quarter,three months ended June 30, 2020, and as a direct result of the economic impact of COVID-19, the Company conducted its annualexperienced a decline in demand for our executive search services and a lengthening of the executive search process due to a slow-down in client decision making, which had a material adverse impact on our results of operations. As a result, the Company identified a triggering event and performed an interim goodwill impairment evaluation as of October 31, 2019 in accordance with ASU No. 2017-04, Intangibles - Goodwill and Other. The goodwill impairment test is completed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value of the reporting unit exceeds its fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit.evaluation.
During the impairment evaluation process, the Company used a discounted cash flow methodology to estimate the fair value of each of its reporting units with goodwill.units. The discounted cash flow approach is dependent on a number of factors, including estimates of future market growth and trends, forecasted revenue and costs, capital investments, appropriate discount rates, certain assumptions to allocate shared costs, assets and liabilities, historical and projected performance of the reporting unit, and the macroeconomic conditions affecting each of the Company’s reporting units. The assumptions used in the determination of fair value were (1) a forecast of growth in the near and long term; (2) the discount rate; (3) working capital investments; (4) macroeconomic conditions and (4)(5) other factors.
Based on the results of the impairment analysis, the fair values of the Americas, Europe, and Asia Pacific reporting units exceeded their carrying values by 329%, 21% and 30%, respectively.
During the 2020 fourth quarter, the Company conducted its annual goodwill impairment evaluation as of October 31, 2020 in accordance with ASU No. 2017-04, Intangibles - Goodwill and Other for the Company's remaining goodwill in the Americas reporting unit. The goodwill impairment test is completed by comparing the fair value of a reporting unit, calculated as described above, with its integrationcarrying amount. An impairment charge is recognized for the amount by which the carrying value of the Culture Shapingreporting unit exceeds its fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit.
Based on the results of the impairment analysis, the fair value of the Americas reporting unit exceeded its carrying value by an amount in excess of 100%.
The Company continues to monitor potential triggering events for its Americas reporting unit including changes in the business climate in which it operates, the Company’s market capitalization compared to its book value, and Leadership Consulting reporting units into the newly created Heidrick Consulting reporting unit.Company’s recent operating performance. Any changes in these factors could result in a further impairment charge.
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Other Intangible Assets, net
The Company’s other intangible assets, net by segment, are as follows:
| December 31, 2020 | December 31, 2019 | |||||||||||||
| Executive Search | ||||||||||||||
| Americas | $ | 225 | $ | 557 | ||||||||||
| Europe | 852 | 1,314 | ||||||||||||
| Asia Pacific | 52 | 64 | ||||||||||||
| Total Other Intangible Assets, Net | $ | 1,129 | $ | 1,935 | ||||||||||
| December 31, 2019 | December 31, 2018 | |||||||
| Executive Search | ||||||||
| Americas | $ | 557 | $ | 52 | ||||
| Europe | 1,314 | 2,086 | ||||||
| Asia Pacific | 64 | 78 | ||||||
| Total Executive Search | 1,935 | 2,216 | ||||||
| Heidrick Consulting | — | — | ||||||
| Total Other Intangible Assets, Net | $ | 1,935 | $ | 2,216 | ||||
The carrying amount of amortizable intangible assets and the related accumulated amortization were as follows:
| December 31, 2019 | December 31, 2018 | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted Average Life (in years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Life (in years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Client relationships | 6.6 | $ | 16,302 | $ | (14,683 | ) | $ | 1,619 | $ | 15,910 | $ | (13,694 | ) | $ | 2,216 | Client relationships | 6.6 | $ | 16,600 | $ | (15,587) | $ | 1,013 | $ | 16,302 | $ | (14,683) | $ | 1,619 | |||||||||||||||||||||||||||||||||||||||||
| Trade name | 5.0 | 362 | (46 | ) | 316 | — | — | — | Trade name | 5.0 | 280 | (164) | 116 | 362 | (46) | 316 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total intangible assets | 6.3 | $ | 16,664 | $ | (14,729 | ) | $ | 1,935 | $ | 15,910 | $ | (13,694 | ) | $ | 2,216 | Total intangible assets | 6.4 | $ | 16,880 | $ | (15,751) | $ | 1,129 | $ | 16,664 | $ | (14,729) | $ | 1,935 | |||||||||||||||||||||||||||||||||||||||||
Intangible asset amortization expense for the years ended December 31, 2020, 2019 and 2018, and 2017, was $0.7 million, $0.9 million $1.5 million and $4.4$1.5 million, respectively.
The Company's estimated future amortization expense related to intangible assets as of December 31, 20192020 for the years ended December 31st31, is as follows:
| 2021 | 496 | ||||
| 2022 | 318 | ||||
| 2023 | 189 | ||||
| 2024 | 77 | ||||
| 2025 | 49 | ||||
| Total | 1,129 | ||||
9. Other Current Assets
| 2020 | $ | 798 | |
| 2021 | 507 | ||
| 2022 | 319 | ||
| 2023 | 188 | ||
| 2024 | 76 | ||
| Thereafter | 47 | ||
| Total | $ | 1,935 | |
The components of other current assets are as follows:
| December 31, 2020 | December 31, 2019 | |||||||||||||
| Contract assets | $ | 19,652 | $ | 22,257 | ||||||||||
| Other | 3,627 | 5,591 | ||||||||||||
| Total other current assets | $ | 23,279 | $ | 27,848 | ||||||||||
10. Line of Credit
| December 31, 2019 | December 31, 2018 | |||||||
| Contract assets | $ | 22,257 | $ | 23,975 | ||||
| Other | 5,591 | 5,623 | ||||||
| Total other current assets | $ | 27,848 | $ | 29,598 | ||||
| December 31, 2019 | December 31, 2018 | |||||||
| Premise related costs | $ | 2,392 | $ | 15,473 | ||||
| Other | 2,242 | 1,950 | ||||||
| Total other non-current liabilities | $ | 4,634 | $ | 17,423 | ||||
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.
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Borrowings under the 2018 Credit Agreement may be used for working capital, capital expenditures, Permitted Acquisitions (as defined in the 2018 Credit Agreement) and for other general purposes of the Company and its subsidiaries. The obligations under the 2018 Credit Agreement are guaranteed by certain of the Company's subsidiaries.
The Company capitalized approximately $1.0 million of loan acquisition costs related to the 2018 Credit Agreement, which will be amortized over the remaining term of the agreement.
During the three months ended March 31, 2018, the Company borrowed $20 million under the Restated Credit Agreement and elected the Adjusted LIBOR Rate.rate. The Company subsequently repaid $8 million during the three months ended March 31, 2018 and $12 million during the three months ended June 30, 2018.
As of December 31, 2019,2020, and 2018,2019, the Company had no0 outstanding borrowings under the 2018 Credit Agreement. The Company was in compliance with the financial and other covenants under the 2018 Credit Agreement and no event of default existed.
11. Employee Benefit Plans
Qualified Retirement Plan
The Company has a defined contribution retirement plan (the “Plan”) for all eligible employees in the United States. Eligible employees may begin participating in the Plan upon their hire date. The Plan contains a 401(k) provision, which provides for employee pre-tax and/or after-tax contributions, from 1% to 50% of their eligible compensation up to a combined maximum permitted by law. The Company matched employee contributions on a dollar-for-dollar basis per participant up to the greater of $6,000, or 6.0%, of eligible compensation for the years ended December 31, 2020, 2019 2018 and 2017.2018. Employees are eligible for the Company match immediately upon entry into the plan. Those contributions vest annually, provided that they are workingthe employee is employed by the Company on the last day of the Plan year in which the match is made. The Plan also provides for employees who retire, die or become disabled during the Plan year to receive the Company match for that Plan year. The Plan provides that forfeitures will be used to reduce the Company’s contributions. Forfeitures are created annually by participants who terminate employment before becoming entitled to the Company’s matching contribution under the Plan. The Company also has the option of making discretionary contributions. There were no0 discretionary contributions made for the years ended December 31, 2020, 2019 2018 and 2017.2018. The expense that the Company incurred for matching employee contributions for the years ended December 31, 2020, 2019 and 2018, and 2017, was $5.7 million, $6.3 million $5.7 million and $5.6$5.7 million, respectively.
The Company maintains additional retirement plans in the Americas, Europe and Asia Pacific regions which the Company does not consider as material and, therefore, additional disclosure has not been presented.
Deferred Compensation Plans
The Company has a deferred compensation plan for certain U.S. employees (the “U.S. Plan”) that became effective on January 1, 2006. The U.S. Plan allows participants to defer up to 25% of their base compensation and up to the lesser of $500,000 or 25% of their eligible bonus compensation into several different investment vehicles. These deferrals are immediately vested and are not subject to a risk of forfeiture. In 20192020 and 2018,2019, all deferrals in the U.S. Plan were funded. The compensation deferred in the U.S. Plan was $23.8$30.5 million and $18.3$23.8 million at December 31, 20192020 and 2018,2019, respectively. The assets of the U.S. Plan are included in Investments and the liabilities of the U.S. Plan are included in Retirement and pension plans in the Consolidated Balance Sheets as of December 31, 20192020 and 2018.2019.
The Company has a Non-Employee Directors Voluntary Deferred Compensation Plan whereby non-employee members of the Company’s Board of Directors may elect to defer up to 100% of the cash component of their directors’ fees into several different investment vehicles. As of December 31, 20192020, and 2018,2019, the total amounts deferred under the plan were $1.6$0.9 million and $1.1$1.6 million, respectively, all of which were funded. The assets of the plan are included in Investments and the liabilities of the plan are included in Retirement and pension plans in the Consolidated Balance Sheets at December 31, 20192020 and 2018.2019.
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The U.S. and Non-Employee Directors Voluntary Deferred Compensation Plans consist primarily of marketable securities and mutual funds, all of which are valued using Level 1 inputs (See Note 7, Financial Instruments and Fair Value).
12. Pension Plan and Life Insurance Contract
The Company maintains a pension plan for certain current and former employees in Germany. The pensions are individually fixed Euro amounts that vary depending on the function and the eligible years of service of the employee.
| 2020 | 2019 | |||||||||||||
| Benefit obligation at January 1, | $ | 20,918 | $ | 20,908 | ||||||||||
| Interest cost | 212 | 338 | ||||||||||||
| Actuarial loss | 790 | 1,506 | ||||||||||||
| Benefits paid | (1,402) | (1,375) | ||||||||||||
| Cumulative translation adjustment | 1,833 | (459) | ||||||||||||
| Benefit obligation at December 31, | $ | 22,351 | $ | 20,918 | ||||||||||
| 2019 | 2018 | |||||||
| Benefit obligation at January 1, | $ | 20,908 | $ | 23,886 | ||||
| Interest cost | 338 | 373 | ||||||
| Actuarial (gain) loss | 1,506 | (886 | ) | |||||
| Benefits paid | (1,375 | ) | (1,450 | ) | ||||
| Cumulative translation adjustment | (459 | ) | (1,015 | ) | ||||
| Benefit obligation at December 31, | $ | 20,918 | $ | 20,908 | ||||
The benefit obligation amounts recognized in the Consolidated Balance Sheets are as follows:
| December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Current liabilities | $ | 1,434 | $ | 1,318 | ||||||||||
| Noncurrent liabilities | 20,917 | 19,600 | ||||||||||||
| Total | $ | 22,351 | $ | 20,918 | ||||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Current liabilities | $ | 1,318 | $ | 1,349 | ||||
| Noncurrent liabilities | 19,600 | 19,559 | ||||||
| Total | $ | 20,918 | $ | 20,908 | ||||
The components of and assumptions used to determine the net periodic benefit cost are as follows:
| December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Net period benefit cost: | ||||||||||||||||||||
| Interest cost | $ | 212 | $ | 338 | $ | 373 | ||||||||||||||
| Amortization of net loss | 140 | 35 | 92 | |||||||||||||||||
| Net periodic benefit cost | $ | 352 | $ | 373 | $ | 465 | ||||||||||||||
| Weighted average assumptions | ||||||||||||||||||||
| Discount rate (1) | 1.03 | % | 1.71 | % | 1.64 | % | ||||||||||||||
| Rate of compensation increase | 0 | % | 0 | % | 0 | % | ||||||||||||||
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net period benefit cost: | ||||||||||||
| Interest cost | $ | 338 | $ | 373 | $ | 362 | ||||||
| Amortization of net loss | 35 | 92 | 111 | |||||||||
| Net periodic benefit cost | $ | 373 | $ | 465 | $ | 473 | ||||||
| Weighted average assumptions | ||||||||||||
| Discount rate (1) | 1.71 | % | 1.64 | % | 1.49 | % | ||||||
| Rate of compensation increase | — | % | — | % | — | % | ||||||
Assumptions to determine the Company’s benefit obligation are as follows:
| December 31, | December 31, | ||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| Discount rate (1) | 1.03 | % | 1.71 | % | 1.64 | % | Discount rate (1) | 0.72 | % | 1.03 | % | 1.71 | % | ||||||||||||||||
| Rate of compensation increase | — | % | — | % | — | % | Rate of compensation increase | 0 | % | 0 | % | 0 | % | ||||||||||||||||
| Measurement Date | 12/31/2019 | 12/31/2018 | 12/31/2017 | Measurement Date | 12/31/2020 | 12/31/2019 | 12/31/2018 | ||||||||||||||||||||||
(1)The discount rates are based on long-term bond indices adjusted to reflect the longer duration of the benefit obligation.
The amounts in Accumulated other comprehensive income as of December 31, 20192020 and 2018,2019, that had not yet been recognized as components of net periodic benefit cost were $5.1 million and $4.0 million, and $2.6 million, respectively. As of December 31, 2020, an insignificant amount of the accumulated other comprehensive income is expected to be recognized as a component of net periodic benefit cost in 2021.
The Company’s investment strategy is to support its pension obligations through reinsurance contracts. The BaFin—German Federal Financial Supervisory Authority—supervises the insurance companies and the reinsurance contracts. The BaFin requires each reinsurance contract to guarantee a fixed minimum return. The Company’s pension benefits are fully reinsured by group insurance contracts with ERGO Lebensversicherung AG, and the group insurance contracts are measured in accordance with BaFin guidelines (including mortality tables and discount rates) which are considered Level 2 inputs (See Note 7, Financial Instruments and Fair Value). The fair value at December 31, 2020 and 2019, was $15.9 million and 2018, was $15.3 million, and $16.4 million, respectively.
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Since the pension assets are not segregated in trust from the Company’s other assets, the pension assets are not shown as an offset against the pension liabilities in the Consolidated Balance Sheets. These assets are included in the Consolidated Balance Sheets at December 31, 20192020 and 2018,2019, as a component of Other current assets and Assets designated for retirement and pension plans.
The benefits expected to be paid in each of the next five years, and in the aggregate for the five years thereafter are as follows:
| 2021 | 1,434 | ||||
| 2022 | 1,415 | ||||
| 2023 | 1,393 | ||||
| 2024 | 1,367 | ||||
| 2025 | 1,335 | ||||
| 2025 through 2029 | 6,034 | ||||
13. Stock-Based Compensation
| 2020 | $ | 1,318 | |
| 2021 | 1,305 | ||
| 2022 | 1,288 | ||
| 2023 | 1,269 | ||
| 2024 | 1,245 | ||
| 2025 through 2029 | 5,713 | ||
As of December 31, 2019, 2,551,441 shares2020, 3,001,357 awards have been issued under the Third A&R 2012 Program and 981,6821,057,037 shares remain available for future awards, which includes 683,123including 708,394 forfeited shares.awards. The Third A&R 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:
| December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Salaries and employee benefits (1) | $ | 12,968 | $ | 12,857 | $ | 9,548 | ||||||||||||||
| General and administrative expenses | 460 | 460 | 562 | |||||||||||||||||
| Income tax benefit related to stock-based compensation included in net income | 3,571 | 3,529 | 2,674 | |||||||||||||||||
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Salaries and employee benefits (1) | $ | 12,857 | $ | 9,548 | $ | 4,597 | ||||||
| General and administrative expenses | 460 | 562 | 338 | |||||||||
| Income tax benefit related to stock-based compensation included in net income | 3,529 | 2,674 | 1,948 | |||||||||
(1) Includes $3.2 million, $3.0 million and $1.2 million of expense related to cash settled restricted stock units for the years ended December 31, 2020, 2019 and 2018, respectively.
Restricted Stock Units
Restricted stock units are generally subject to ratable vesting over a three-yearthree-year period. Beginning in 2018, a portion of the Company's restricted stock units are subject to ratable vesting over a four-yearfour-year period. Compensation expense related to service-based restricted stock units is recognized on a straight-line basis over the vesting period.
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Restricted stock unit activity for the years ended December 31, 2020, 2019 2018 and 20172018 is as follows:
| Number of Restricted Stock Units | Weighted- Average Grant-date Fair Value | |||||||||||||
| Outstanding on December 31, 2018 | 512,446 | $ | 28.83 | |||||||||||
| Granted | 270,488 | 33.55 | ||||||||||||
| Vested and converted to common stock | (175,792) | 24.19 | ||||||||||||
| Forfeited | (8,154) | 34.29 | ||||||||||||
| Outstanding on December 31, 2019 | 598,988 | 32.25 | ||||||||||||
| Granted | 329,068 | 22.20 | ||||||||||||
| Vested and converted to common stock | (194,921) | 29.67 | ||||||||||||
| Forfeited | (25,271) | 30.62 | ||||||||||||
| Outstanding on December 31, 2020 | 707,864 | $ | 28.35 | |||||||||||
| Number of Restricted Stock Units | Weighted- Average Grant-date Fair Value | ||||||
| Outstanding on December 31, 2017 | 491,154 | $ | 21.92 | ||||
| Granted | 297,664 | 34.64 | |||||
| Vested and converted to common stock | (199,550 | ) | 21.66 | ||||
| Forfeited | (76,822 | ) | 25.76 | ||||
| Outstanding on December 31, 2018 | 512,446 | 28.83 | |||||
| Granted | 270,488 | 33.55 | |||||
| Vested and converted to common stock | (175,792 | ) | 24.19 | ||||
| Forfeited | (8,154 | ) | 34.29 | ||||
| Outstanding on December 31, 2019 | 598,988 | $ | 32.25 | ||||
As of December 31, 2019,2020, there was $11.4$7.1 million of pre-tax unrecognized compensation expense related to unvested restricted stock units, which is expected to be recognized over a weighted average of 2.52.3 years.
Performance Stock Units
The Company grants performance stock units to certain of its senior executives. The performance stock units are generally subject to a cliff vesting at the end of a three-yearthree-year period. The vesting will vary between 0% - 200% based on the attainment of operating income goals over the three-yearthree-year vesting period. The performance stock units are expensed on a straight-line basis over the three-yearthree-year vesting period.
Performance share unit activity for the years ended December 31, 2020, 2019 and 2018 and 2017 wasis as follows:
| Number of Performance Stock Units | Weighted- Average Grant-date Fair Value | |||||||||||||
| Outstanding on December 31, 2018 | 197,117 | $ | 24.88 | |||||||||||
| Granted | 81,661 | 35.58 | ||||||||||||
| Vested and converted to common stock | (99,219) | 25.04 | ||||||||||||
| Forfeited | 0 | 0 | ||||||||||||
| 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 | 0 | 0 | ||||||||||||
| Outstanding on December 31, 2020 | 234,934 | $ | 29.80 | |||||||||||
| Number of Performance Stock Units | Weighted- Average Grant-date Fair Value | ||||||
| Outstanding on December 31, 2017 | 185,891 | $ | 23.82 | ||||
| Granted | 102,138 | 25.81 | |||||
| Vested and converted to common stock | (43,361 | ) | 23.64 | ||||
| Forfeited | (47,551 | ) | 23.87 | ||||
| Outstanding on December 31, 2018 | 197,117 | 24.88 | |||||
| Granted | 81,661 | 35.58 | |||||
| Vested and converted to common stock | (99,219 | ) | 25.04 | ||||
| Forfeited | — | — | |||||
| Outstanding on December 31, 2019 | 179,559 | $ | 32.63 | ||||
As of December 31, 2019,2020, there was $3.4$4.0 million of pre-tax unrecognized compensation expense related to unvested performance stock units, which is expected to be recognized over a weighted average of 1.81.7 years.
Phantom Stock Units
Phantom stock units are grants of phantom stock with respect to shares of the Company's common stock that are settled in cash and are subject to various restrictions, including restrictions on transferability, vesting and forfeiture provisions. Shares of phantom stock that do not vest for any reason will be forfeited by the recipient and will revert to the Company.
Phantom stock units are subject to vesting over a period of four years and certain other conditions, including continued service to the Company. As a result of the cash-settlement feature of the awards, the Company considers the awards to be liability awards, which are measured at fair value at each reporting date and the vested portion of the award is recognized as a
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liability to the extent that the service condition is deemed probable. The fair value of the phantom stock awards on the balance sheet date, was determined using the closing share price of the Company's common stock on that date and is included within Accrued salaries and benefits - non-current on the Consolidated Balance Sheets.date.
The Company recorded phantom stock-based compensation expense of $3.0$3.2 million and $1.2$3.0 million for the years ended December 31, 20192020 and December 31, 2018,2019, respectively.
Phantom stock unit activity for the years ended December 31, 2020, 2019, and 2018 and 2017 wasis as follows:
Number of Phantom Stock Units | |||||||||
| Outstanding on December 31, 2018 | 111,673 | ||||||||
| Granted | 154,387 | ||||||||
| Vested | |||||||||
| Forfeited | |||||||||
| Outstanding on December 31, 2019 | 266,060 | ||||||||
| Granted | 118,596 | ||||||||
| Vested | (21,346) | ||||||||
| Forfeited | (11,676) | ||||||||
| Outstanding on December 31, 2020 | 351,634 | ||||||||
As of December 31, 2019,2020, there was $5.2$4.1 million of pre-tax unrecognized compensation expense related to unvested phantom stock units, which is expected to be recognized over a weighted average of 3.32.9 years.
14.Restructuring
Restructuring Charges
During the year ended December 31, 2020, the Company implemented a restructuring plan to optimize future growth and profitability. The primary components of the restructuring included a workforce reduction, a reduction of the Company's real estate expenses and professional fees, and the elimination of certain deferred compensation programs. The Company recorded restructuring charges of $30.5 million in the Americas, $8.6 million in Europe, $4.6 million in Asia Pacific, $4.7 million in Heidrick Consulting and $4.0 million in Global Operations Support. The Company anticipates future restructuring charges of $7.0 million to $10.0 million related to further real estate optimization will be recognized in 2021.
During the year ended December 31, 2019, the Company recorded restructuring charges of $4.1 million related to the closing of the Company's legacy Brazil operations due to the acquisition of 2GET (see Note 8, Acquisitions).Holdings Limited. The restructuring charges
primarily consist of employee-related costs for the Company's legacy Brazil operations. The America's incurred $4.1 million in restructuring charges, while Global Operations Support incurred less than $0.1 million in restructuring charges.
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Restructuring charges by operating segment for the years ended December 31, 2020, 2019, and 2018 were as follows:
| December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Executive Search | ||||||||||||||||||||
| Americas | $ | 30,479 | $ | 4,102 | $ | 0 | ||||||||||||||
| Europe | 8,603 | 0 | 0 | |||||||||||||||||
| Asia Pacific | 4,614 | 0 | 0 | |||||||||||||||||
| Total Executive Search | 43,696 | 4,102 | 0 | |||||||||||||||||
| Heidrick Consulting | 4,657 | 0 | 0 | |||||||||||||||||
| Global Operations Support | 4,019 | 28 | 0 | |||||||||||||||||
| Total restructuring | $ | 52,372 | $ | 4,130 | $ | 0 | ||||||||||||||
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Executive Search | ||||||||||||
| Americas | $ | 4,102 | $ | — | $ | 784 | ||||||
| Europe | — | — | 3,993 | |||||||||
| Asia Pacific | — | — | 2,046 | |||||||||
| Total Executive Search | 4,102 | — | 6,823 | |||||||||
| Heidrick Consulting | — | — | 3,393 | |||||||||
| Global Operations Support | 28 | — | 5,450 | |||||||||
| Total restructuring | $ | 4,130 | $ | — | $ | 15,666 | ||||||
Changes in the restructuring accrual for the years ended December 31, 2020, 2019, 2018, and 20172018 were as follows:
| Employee Related | Office Related | Other | Total | |||||||||||||||||||||||
| Accrual balance at December 31, 2017 | 11,866 | 148 | 1,011 | 13,025 | ||||||||||||||||||||||
| Cash payments | (8,689) | (248) | (993) | (9,930) | ||||||||||||||||||||||
| Non-cash write-offs | 0 | 195 | 0 | 195 | ||||||||||||||||||||||
| Other | (1,843) | (95) | 5 | (1,933) | ||||||||||||||||||||||
| Exchange rate fluctuations | (65) | 0 | (6) | (71) | ||||||||||||||||||||||
| Accrual balance at December 31, 2018 | 1,269 | 0 | 17 | 1,286 | ||||||||||||||||||||||
| Restructuring charges | 4,130 | 0 | 0 | 4,130 | ||||||||||||||||||||||
| Cash payments | (2,213) | 0 | 0 | (2,213) | ||||||||||||||||||||||
| Non-cash write-offs | 0 | 0 | (17) | (17) | ||||||||||||||||||||||
| Other | 4 | 0 | 0 | 4 | ||||||||||||||||||||||
| Exchange rate fluctuations | 55 | 0 | 0 | 55 | ||||||||||||||||||||||
| Accrual balance at December 31, 2019 | 3,245 | 0 | 0 | 3,245 | ||||||||||||||||||||||
| Restructuring charges | 32,780 | 18,910 | 682 | 52,372 | ||||||||||||||||||||||
| Cash payments | (11,443) | (138) | (682) | (12,263) | ||||||||||||||||||||||
| Non-cash write-offs | (1,633) | (17,823) | 0 | (19,456) | ||||||||||||||||||||||
| Other | (173) | 0 | 0 | (173) | ||||||||||||||||||||||
| Exchange rate fluctuations | (464) | 4 | 0 | (460) | ||||||||||||||||||||||
| Accrual balance at December 31, 2020 | $ | 22,312 | $ | 953 | $ | 0 | $ | 23,265 | ||||||||||||||||||
Restructuring accruals of are recorded within Other current liabilities in the Consolidated Balance Sheets with the exception of certain employee related accruals. Accruals associated with the elimination of certain deferred compensation programs of $7.2 million and $11.3 million are recorded within current and non-current Accrued salaries and benefits, respectively, as of December 31, 2020.
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| Employee Related | Office Related | Other | Total | |||||||||||||
| Accrual balance at December 31, 2016 | $ | — | $ | — | $ | — | $ | — | ||||||||
| Restructuring charges | 13,065 | 308 | 2,293 | 15,666 | ||||||||||||
| Cash payments | (1,199 | ) | (5 | ) | (1,282 | ) | (2,486 | ) | ||||||||
| Non-cash write-offs | — | (155 | ) | — | (155 | ) | ||||||||||
| Accrual balance at December 31, 2017 | 11,866 | 148 | 1,011 | 13,025 | ||||||||||||
| Cash payments | (8,689 | ) | (248 | ) | (993 | ) | (9,930 | ) | ||||||||
| Non-cash write-offs | — | 195 | — | 195 | ||||||||||||
| Other | (1,843 | ) | (95 | ) | 5 | (1,933 | ) | |||||||||
| Exchange rate fluctuations | (65 | ) | — | (6 | ) | (71 | ) | |||||||||
| Accrual balance at December 31, 2018 | 1,269 | — | 17 | 1,286 | ||||||||||||
| Restructuring charges | 4,130 | — | — | 4,130 | ||||||||||||
| Cash payments | (2,213 | ) | — | — | (2,213 | ) | ||||||||||
| Non-cash write-offs | — | — | (17 | ) | (17 | ) | ||||||||||
| Other | 4 | — | — | 4 | ||||||||||||
| Exchange rate fluctuations | 55 | — | — | 55 | ||||||||||||
| Accrual balance at December 31, 2019 | $ | 3,245 | $ | — | $ | — | $ | 3,245 | ||||||||
15.Income Taxes
The sources of income (loss) before income taxes are as follows:
| December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| United States | $ | 11,346 | $ | 53,461 | $ | 47,191 | ||||||||||||||
| Foreign | (42,744) | 15,828 | 23,301 | |||||||||||||||||
| Income (loss) before income taxes | $ | (31,398) | $ | 69,289 | $ | 70,492 | ||||||||||||||
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| United States | $ | 53,461 | $ | 47,191 | $ | (28,577 | ) | |||||
| Foreign | 15,828 | 23,301 | (841 | ) | ||||||||
| Income (loss) before income taxes | $ | 69,289 | $ | 70,492 | $ | (29,418 | ) | |||||
The provision for (benefit from) income taxes are as follows:
| December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Current | ||||||||||||||||||||
| Federal | $ | 4,469 | $ | 11,311 | $ | 12,311 | ||||||||||||||
| State and local | 1,948 | 4,422 | 4,843 | |||||||||||||||||
| Foreign | 2,172 | 4,423 | 6,907 | |||||||||||||||||
| Current provision for income taxes | 8,589 | 20,156 | 24,061 | |||||||||||||||||
| Deferred | ||||||||||||||||||||
| Federal | (2,416) | 2,031 | 6,403 | |||||||||||||||||
| State and local | (697) | 698 | (354) | |||||||||||||||||
| Foreign | 833 | (465) | (8,913) | |||||||||||||||||
| Deferred provision (benefit) for income taxes | (2,280) | 2,264 | (2,864) | |||||||||||||||||
| Total provision for income taxes | $ | 6,309 | $ | 22,420 | $ | 21,197 | ||||||||||||||
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Current | ||||||||||||
| Federal | $ | 11,311 | $ | 12,311 | $ | 10,107 | ||||||
| State and local | 4,422 | 4,843 | 2,372 | |||||||||
| Foreign | 4,423 | 6,907 | 8,257 | |||||||||
| Current provision for income taxes | 20,156 | 24,061 | 20,736 | |||||||||
| Deferred | ||||||||||||
| Federal | 2,031 | 6,403 | 5,642 | |||||||||
| State and local | 698 | (354 | ) | (2,951 | ) | |||||||
| Foreign | (465 | ) | (8,913 | ) | (4,210 | ) | ||||||
| Deferred provision (benefit) for income taxes | 2,264 | (2,864 | ) | (1,519 | ) | |||||||
| Total provision for income taxes | $ | 22,420 | $ | 21,197 | $ | 19,217 | ||||||
A reconciliation of the provision for income taxes to income taxes at the statutory U.S. federal income tax rate of 21% for the years ended December 31, 2019 and 2018, and 35% for the year ended December 31, 2017 is as follows:
| December 31, | December 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Income tax provision (benefit) at the statutory U.S. federal rate | $ | 14,551 | $ | 14,803 | $ | (10,296 | ) | Income tax provision (benefit) at the statutory U.S. federal rate | $ | (6,594) | $ | 14,551 | $ | 14,803 | ||||||||||||||||||
| State income tax provision (benefit), net of federal tax benefit | 3,509 | 3,242 | (593 | ) | ||||||||||||||||||||||||||||
| State income tax provision, net of federal tax benefit | State income tax provision, net of federal tax benefit | 735 | 3,509 | 3,242 | ||||||||||||||||||||||||||||
| Nondeductible expenses, net | 1,570 | 1,651 | 3,282 | Nondeductible expenses, net | 7,065 | 1,570 | 1,651 | |||||||||||||||||||||||||
| Foreign taxes (includes rate differential and changes in foreign valuation allowance) | 698 | (35 | ) | 5,465 | Foreign taxes (includes rate differential and changes in foreign valuation allowance) | 4,470 | 698 | (35) | ||||||||||||||||||||||||
| Release of valuation allowance | (117 | ) | (43 | ) | (3,200 | ) | ||||||||||||||||||||||||||
| Establishment (release) of valuation allowance | Establishment (release) of valuation allowance | 566 | (117) | (43) | ||||||||||||||||||||||||||||
| Additional U.S. tax on foreign operations | 2,550 | 1,628 | — | Additional U.S. tax on foreign operations | 0 | 2,550 | 1,628 | |||||||||||||||||||||||||
| Current/deferred true-up | (157 | ) | (1,199 | ) | 567 | |||||||||||||||||||||||||||
| Tax reform | — | — | 23,732 | |||||||||||||||||||||||||||||
| Current/deferred items | Current/deferred items | (505) | (157) | (1,199) | ||||||||||||||||||||||||||||
| Other, net | (184 | ) | 1,150 | 260 | Other, net | 572 | (184) | 1,150 | ||||||||||||||||||||||||
| Total provision for income taxes | $ | 22,420 | $ | 21,197 | $ | 19,217 | Total provision for income taxes | $ | 6,309 | $ | 22,420 | $ | 21,197 | |||||||||||||||||||
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The deferred tax assets and liabilities are attributable to the following components:
| December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Deferred tax assets attributable to: | ||||||||||||||
| Operating lease liability and accrued rent | $ | 22,765 | $ | 20,371 | ||||||||||
| Foreign net operating loss carryforwards | 19,721 | 17,940 | ||||||||||||
| Accrued compensation and employee benefits | 18,553 | 14,506 | ||||||||||||
| Deferred compensation | 17,376 | 17,110 | ||||||||||||
| Foreign tax credit carryforwards | 5,196 | 6,493 | ||||||||||||
| Other accrued expenses | 4,350 | 5,882 | ||||||||||||
| Deferred tax assets, before valuation allowance | 87,961 | 82,302 | ||||||||||||
| Valuation allowance | (25,218) | (24,200) | ||||||||||||
| Deferred tax assets, after valuation allowance | 62,743 | 58,102 | ||||||||||||
| Deferred tax liabilities attributable to: | ||||||||||||||
| Operating lease, right-of-use, assets | 17,526 | 17,716 | ||||||||||||
| Goodwill | 7,625 | 5,440 | ||||||||||||
| Depreciation on property and equipment | 1,172 | 1,652 | ||||||||||||
| Other | 533 | 533 | ||||||||||||
| Deferred tax liabilities | 26,856 | 25,341 | ||||||||||||
| Net deferred tax assets | $ | 35,887 | $ | 32,761 | ||||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Deferred tax assets attributable to: | ||||||||
| Foreign net operating loss carryforwards | $ | 17,940 | $ | 18,259 | ||||
| Accrued compensation and employee benefits | 14,506 | 15,442 | ||||||
| Deferred compensation | 17,110 | 15,587 | ||||||
| Foreign tax credit carryforwards | 6,493 | 8,163 | ||||||
| Accrued rent | 2,655 | 3,096 | ||||||
| Other accrued expenses | 5,882 | 6,290 | ||||||
| Deferred tax assets, before valuation allowance | 64,586 | 66,837 | ||||||
| Valuation allowance | (24,200 | ) | (26,460 | ) | ||||
| Deferred tax assets, after valuation allowance | 40,386 | 40,377 | ||||||
| Deferred tax liabilities attributable to: | ||||||||
| Goodwill | 5,440 | 2,203 | ||||||
| Taxes provided on unremitted earnings | — | 765 | ||||||
| Depreciation on property and equipment | 1,652 | 2,040 | ||||||
| Other | 533 | 686 | ||||||
| Deferred tax liabilities | 7,625 | 5,694 | ||||||
| Net deferred tax assets | $ | 32,761 | $ | 34,683 | ||||
The recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefits associated with temporary differences, net operating loss carryforwards and tax credits will be utilized. The Company assesses the recoverability of the deferred tax assets on an ongoing basis. In making this assessment, the Company considers all positive and negative evidence, and all potential sources of taxable income including scheduled reversals of deferred tax liabilities, tax-planning strategies, projected future taxable income and recent financial performance. Certain of the Company'sCompany’s deferred tax liabilities, based on jurisdictional netting, of $0.1 million and $0.3 million and $0.2 million do not qualify for deferred tax netting and are included in Other non-current liabilities on the Consolidated Balance Sheets at December 31, 2020 and 2019, and 2018, respectively.
The valuation allowance decreasedincreased from $26.5 million at December 31, 2018 to $24.2 million at December 31, 2019.2019 to $25.2 million at December 31, 2020. The valuation allowance at December 31, 20192020 was related to foreign net operating loss carryforwards, foreign tax credit carryforwards, and certain foreign deferred tax assets. The Company intends to maintain these valuation allowances until sufficient evidence exists to support their reversal.
At December 31, 2020, the Company had a net operating loss carryforward of $128.1 million related to its foreign tax filings. Of the $128.1 million net operating loss carryforward, $87.9 million is subject to a valuation allowance. Depending on the tax rules of the tax jurisdictions, the losses can be carried forward indefinitely or for periods ranging from five to twenty years. The Company also has a foreign tax credit carryforward of $5.2 million subject to a valuation allowance of $5.2 million.
At December 31, 2019, the Company had a net operating loss carryforward of $116.1 million related to its foreign tax filings. Of the $116.1 million net operating loss carryforward, $76.9 million iswas subject to a valuation allowance. Depending on the tax rules of the tax jurisdictions, the losses can be carried forward indefinitely or for periods ranging from five to twenty years. The Company also has a foreign tax credit carryforward of $6.5 million subject to a valuation allowance of $6.5 million.
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A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
| December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Gross unrecognized tax benefits at January 1, | $ | 130 | $ | 1,128 | $ | 740 | ||||||||||||||
| Gross increases for tax positions of prior years | 500 | 389 | 608 | |||||||||||||||||
| Gross decreases for tax positions of prior years | (31) | (377) | 0 | |||||||||||||||||
| Settlements | (183) | (1,010) | (220) | |||||||||||||||||
| Gross unrecognized tax benefits at December 31, | $ | 416 | $ | 130 | $ | 1,128 | ||||||||||||||
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Gross unrecognized tax benefits at January 1, | $ | 1,128 | $ | 740 | $ | 1,038 | ||||||
| Gross increases for tax positions of prior years | 389 | 608 | 167 | |||||||||
| Gross decreases for tax positions of prior years | (377 | ) | — | — | ||||||||
| Settlements | (1,010 | ) | (220 | ) | (465 | ) | ||||||
| Lapse of statute of limitations | — | — | — | |||||||||
| Gross unrecognized tax benefits at December 31, | $ | 130 | $ | 1,128 | $ | 740 | ||||||
In many cases the Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant taxable authorities. Years 20162017 through 20182019 are subject to examination by the state taxing authorities. The years 20162017 through 20182019 are also subject to examination by the federal taxing authority.There are certain foreign jurisdictions that are subject to examination for years prior to 2016.2017.
The Company is currently under audit by some jurisdictions. It is likely that the examination phase of several of these audits will conclude in the next twelve months. No significant increases or decreases in unrecognized tax benefits are expected to occur by December 31, 2020.2021.
Estimated interest and penalties related to the underpayment of income taxes are classified as a component of the provision for income taxes in the Consolidated Statements of Comprehensive Income (Loss). Accrued interest and penalties are less than $0.1 million as of December 31, 2019.
The Global Intangible Low-Taxed Income ("GILTI"(“GILTI”) provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company becamewill be subject to incremental U.S. tax on GILTI income beginning in 2018, due to expense allocations required by the U.S. foreign tax credit rules. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2019.2020.
The Base Erosion and Anti-Abuse Tax ("BEAT"(“BEAT”) provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2019.2020.
16.Changes in Accumulated Other Comprehensive Income
The changes in Accumulated other comprehensive income (“AOCI”) by component for the year ended December 31, 2019,2020, are 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 (loss) before classification, net of tax | (13) | 82 | (476) | (407) | ||||||||||||||||||||||
| Balance at December 31, 2020 | 0 | $ | 6,184 | $ | (2,767) | $ | 3,417 | |||||||||||||||||||
17. Segment Information
| Available- for- Sale Securities | Foreign Currency Translation | Pension | AOCI | |||||||||||||
| Balance at December 31, 2018 | $ | — | $ | 5,258 | $ | (1,196 | ) | $ | 4,062 | |||||||
| Other comprehensive income before classification, net of tax | 13 | 844 | (1,095 | ) | (238 | ) | ||||||||||
| Balance at December 31, 2019 | $ | 13 | $ | 6,102 | $ | (2,291 | ) | $ | 3,824 | |||||||
The Company has four4 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 (loss) more appropriately reflects its core operations.
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The revenue, operating income, depreciation and amortization, and capital expenditures, by segment, wereare as follows:
| December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Revenue | ||||||||||||||||||||
| Executive Search | ||||||||||||||||||||
| Americas | $ | 361,416 | $ | 415,455 | $ | 405,267 | ||||||||||||||
| Europe | 124,243 | 135,070 | 145,348 | |||||||||||||||||
| Asia Pacific | 79,511 | 95,827 | 102,276 | |||||||||||||||||
| Total Executive Search | 565,170 | 646,352 | 652,891 | |||||||||||||||||
| Heidrick Consulting | 56,445 | 60,572 | 63,132 | |||||||||||||||||
| Revenue before reimbursements | 621,615 | 706,924 | 716,023 | |||||||||||||||||
| Reimbursements | 7,755 | 18,690 | 19,632 | |||||||||||||||||
| Total revenue | $ | 629,370 | $ | 725,614 | $ | 735,655 | ||||||||||||||
| Operating income (loss) | ||||||||||||||||||||
| Executive Search | ||||||||||||||||||||
| Americas (1) | $ | 62,806 | $ | 100,833 | $ | 96,880 | ||||||||||||||
| Europe (2) | (22,827) | 3,026 | 5,849 | |||||||||||||||||
| Asia Pacific (3) | (6,724) | 13,590 | 15,999 | |||||||||||||||||
| Total Executive Search | 33,255 | 117,449 | 118,728 | |||||||||||||||||
| Heidrick Consulting (4) | (28,369) | (18,499) | (13,619) | |||||||||||||||||
| Total segments | 4,886 | 98,950 | 105,109 | |||||||||||||||||
| Global Operations Support (5) | (40,415) | (35,439) | (36,252) | |||||||||||||||||
| Total operating income (loss) | $ | (35,529) | $ | 63,511 | $ | 68,857 | ||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Executive Search | ||||||||||||||||||||
| Americas | $ | 20,937 | $ | 4,204 | $ | 4,605 | ||||||||||||||
| Europe | 2,270 | 2,784 | 3,735 | |||||||||||||||||
| Asia Pacific | 1,837 | 1,472 | 1,646 | |||||||||||||||||
| Total Executive Search | 25,044 | 8,460 | 9,986 | |||||||||||||||||
| Heidrick Consulting | 953 | 1,079 | 1,577 | |||||||||||||||||
| Total segments | 25,997 | 9,539 | 11,563 | |||||||||||||||||
| Global Operations Support | 659 | 832 | 959 | |||||||||||||||||
| Total depreciation and amortization | $ | 26,656 | $ | 10,371 | $ | 12,522 | ||||||||||||||
| Capital expenditures | ||||||||||||||||||||
| Executive Search | ||||||||||||||||||||
| Americas | $ | 4,258 | $ | 1,121 | $ | 601 | ||||||||||||||
| Europe | 409 | 1,070 | 3,557 | |||||||||||||||||
| Asia Pacific | 2,015 | 295 | 440 | |||||||||||||||||
| Total Executive Search | 6,682 | 2,486 | 4,598 | |||||||||||||||||
| Heidrick Consulting | 116 | 541 | 581 | |||||||||||||||||
| Total segments | 6,798 | 3,027 | 5,179 | |||||||||||||||||
| Global Operations Support | 524 | 325 | 1,006 | |||||||||||||||||
| Total capital expenditures | $ | 7,322 | $ | 3,352 | $ | 6,185 | ||||||||||||||
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Revenue | ||||||||||||
| Executive Search | ||||||||||||
| Americas | $ | 415,455 | $ | 405,267 | $ | 339,793 | ||||||
| Europe | 135,070 | 145,348 | 125,346 | |||||||||
| Asia Pacific | 95,827 | 102,276 | 86,905 | |||||||||
| Total Executive Search | 646,352 | 652,891 | 552,044 | |||||||||
| Heidrick Consulting | 60,572 | 63,132 | 69,356 | |||||||||
| Revenue before reimbursements | 706,924 | 716,023 | 621,400 | |||||||||
| Reimbursements | 18,690 | 19,632 | 18,656 | |||||||||
| Total revenue | $ | 725,614 | $ | 735,655 | $ | 640,056 | ||||||
| Operating income (loss) | ||||||||||||
| Executive Search | ||||||||||||
| Americas (1) | $ | 100,833 | $ | 96,880 | $ | 75,337 | ||||||
| Europe (2) | 3,026 | 5,849 | 13 | |||||||||
| Asia Pacific (3) | 13,590 | 15,999 | 537 | |||||||||
| Total Executive Search | 117,449 | 118,728 | 75,887 | |||||||||
| Heidrick Consulting (4) | (18,499 | ) | (13,619 | ) | (62,368 | ) | ||||||
| Total segments | 98,950 | 105,109 | 13,519 | |||||||||
| Global Operations Support (5) | (35,439 | ) | (36,252 | ) | (40,042 | ) | ||||||
| Total operating income (loss) | $ | 63,511 | $ | 68,857 | $ | (26,523 | ) | |||||
| Depreciation and amortization | ||||||||||||
| Executive Search | ||||||||||||
| Americas | $ | 4,204 | $ | 4,605 | $ | 4,794 | ||||||
| Europe | 2,784 | 3,735 | 3,328 | |||||||||
| Asia Pacific | 1,472 | 1,646 | 1,565 | |||||||||
| Total Executive Search | 8,460 | 9,986 | 9,687 | |||||||||
| Heidrick Consulting | 1,079 | 1,577 | 4,099 | |||||||||
| Total segments | 9,539 | 11,563 | 13,786 | |||||||||
| Global Operations Support | 832 | 959 | 988 | |||||||||
| Total depreciation and amortization | $ | 10,371 | $ | 12,522 | $ | 14,774 | ||||||
| Capital expenditures | ||||||||||||
| Executive Search | ||||||||||||
| Americas | $ | 1,121 | $ | 601 | $ | 7,123 | ||||||
| Europe | 1,070 | 3,557 | 1,460 | |||||||||
| Asia Pacific | 295 | 440 | 2,633 | |||||||||
| Total Executive Search | 2,486 | 4,598 | 11,216 | |||||||||
| Heidrick Consulting | 541 | 581 | 1,172 | |||||||||
| Total segments | 3,027 | 5,179 | 12,388 | |||||||||
| Global Operations Support | 325 | 1,006 | 3,298 | |||||||||
| Total capital expenditures | $ | 3,352 | $ | 6,185 | $ | 15,686 | ||||||
(1)Includes $30.5 million of restructuring charges in 2020 and $4.1 million of restructuring charges in 2019.
(2)Includes $8.6 million of restructuring charges and $24.5 million of impairment charges in 2020.
(3)Includes $4.6 million of restructuring charges and $8.5 million of impairment charges in 2020.
(4)Includes $4.7 million of restructuring charges in 2020.
(5)Includes $4.0 million of restructuring charges in 2020 and less than $0.1 million of restructuring charges in 2019.
70
Identifiable assets, and goodwill and other intangible assets, net, by segment, are as follows:
| December 31, | December 31, | |||||||||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
| Current assets | Current assets | |||||||||||||||||||||
| Executive Search | Executive Search | |||||||||||||||||||||
| Americas | $ | 286,818 | $ | 255,889 | Americas | $ | 284,837 | $ | 286,818 | |||||||||||||
| Europe | 96,230 | 85,355 | Europe | 84,841 | 96,230 | |||||||||||||||||
| Asia Pacific | 78,967 | 74,169 | Asia Pacific | 76,523 | 78,967 | |||||||||||||||||
| Total Executive Search | 462,015 | 415,413 | Total Executive Search | 446,201 | 462,015 | |||||||||||||||||
| Heidrick Consulting | 30,628 | 34,174 | Heidrick Consulting | 24,546 | 30,628 | |||||||||||||||||
| Total segments | 492,643 | 449,587 | Total segments | 470,747 | 492,643 | |||||||||||||||||
| Global Operations Support | 1,839 | 1,280 | Global Operations Support | 1,939 | 1,839 | |||||||||||||||||
| Total allocated current assets | 494,482 | 450,867 | Total allocated current assets | 472,686 | 494,482 | |||||||||||||||||
| Unallocated non-current assets | 220,925 | 125,454 | Unallocated non-current assets | 222,354 | 220,925 | |||||||||||||||||
| Goodwill and other intangible assets, net | Goodwill and other intangible assets, net | |||||||||||||||||||||
| Executive Search | Executive Search | |||||||||||||||||||||
| Americas | 93,054 | 88,462 | Americas | 91,868 | 93,054 | |||||||||||||||||
| Europe | 26,893 | 27,010 | Europe | 852 | 26,893 | |||||||||||||||||
| Asia Pacific | 8,819 | 8,836 | Asia Pacific | 52 | 8,819 | |||||||||||||||||
| Total Executive Search | 128,766 | 124,308 | Total Executive Search | 92,772 | 128,766 | |||||||||||||||||
| Heidrick Consulting | — | — | Heidrick Consulting | 0 | 0 | |||||||||||||||||
| Total goodwill and other intangible assets, net | 128,766 | 124,308 | Total goodwill and other intangible assets, net | 92,772 | 128,766 | |||||||||||||||||
| Total assets | $ | 844,173 | $ | 700,629 | Total assets | $ | 787,812 | $ | 844,173 | |||||||||||||
18.Guarantees
The Company has utilized letters of credit to support certain obligations, primarily the payment of office lease obligations and business license requirements for certain of its subsidiaries in Europe and Asia Pacific. The letters of credit were made to secure the respective agreements and are for the terms of the agreements, which extend through 2030.2033. For each letter of credit issued, the Company would have to use cash to fulfill the obligation if the subsidiary defaults on a lease payment. The maximum amount of undiscounted payments the Company would be required to make in the event of default on all outstanding letters of credit wasis approximately $2.5$5.4 million as of December 31, 2019.2020. The Company has not accrued for these arrangements as no event of default exists or is expected to exist.
19.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.
71
PART II (continued)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures as defined in Securities Exchange Act of 1934, as amended, (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e), that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (the “SEC”) rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Management of the Company, with the participation of the principal executive officer and the principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2019.2020. Based on the evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2019.2020.
(b) Management’s report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and includes those policies and procedures that:
(1)Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(2)Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013. Based on this evaluation, management concluded that the Company’s system of internal control over financial reporting was effective as of December 31, 2019.2020.
The Company’s independent registered public accounting firm, RSM LLP, has issued a report on the Company’s internal control over financial reporting. The report on the audit of internal control over financial reporting appears in Part II, Item 8 of this Form 10-K.
72
(c) Changes in Internal Control over Financial Reporting
ITEM 9B. OTHER INFORMATION
None.
73
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information relating to our directors, executive officers and corporate governance will be included in the 2020Company's definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 27, 2021 (the "2021 Proxy Statement") and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of our management will be included in the 2021 Proxy Statement and is incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth additional information as of December 31, 2019,2020, about shares of our common stock that may be issued upon the vesting of restricted stock units and performance stock units and the exercise of options under our existing equity compensation plans and arrangements, divided between plans approved by our stockholders and plans or arrangements not submitted to the stockholders for approval. For a description of the types of securities that may be issued under our SecondThird Amended and Restated 2012 Heidrick & Struggles GlobalShare Program. See Note 14, 13, Stock-Based Compensation.
| (a) | (b) | (c) | (a) | (b) | (c) | |||||||||||||||||||||||||
| Plan Category | Number of securities to be issued upon exercise of outstanding options | Weighted- average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | Plan Category | Number of securities to be issued upon exercise of outstanding options | Weighted- average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||||||||||||||||
| Equity compensation plans approved by stockholders | 778,547 | (1) | $ | — | 981,682 | Equity compensation plans approved by stockholders | 942,798 | (1) | $ | — | 1,057,037 | |||||||||||||||||||
| Equity compensation plans not approved stockholders | — | — | — | Equity compensation plans not approved stockholders | — | — | — | |||||||||||||||||||||||
| Total equity compensation plans | 778,547 | — | 981,682 | Total equity compensation plans | 942,798 | — | 1,057,037 | |||||||||||||||||||||||
(1)Includes 707,864 restricted stock units and 234,934 performance stock units at their target levels and no options. The performance stock units represent the maximum amount of shares to be awarded at target levels, and accordingly, may overstate expected dilution.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is included inincorporated by reference to the discussion under the caption “Audit Fees” in our 20202021 Proxy Statement and is incorporated herein by reference.Statement.
74
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. Index to Consolidated Financial Statements:
2. Exhibits:
75
| 10.13 | ||||||||
76
| 10.32 | ||||||||
77
| 10.55 | ||||||||
| 10.56 | ||||||||
| 10.57 | ||||||||
| *10.58 | ||||||||
| *21.01 | ||||||||
| *23.01 | ||||||||
| *31.1 | ||||||||
| *31.2 | ||||||||
| *32.1 | ||||||||
| *32.2 | ||||||||
| *101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
| *101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| *101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| *101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| *101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| *101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| *104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
* Filed herewith.
** Denotes a management contract or compensatory plan or arrangement.
(b)SEE EXHIBIT INDEX ABOVE
(c)FINANCIAL STATEMENTS NOT PART OF ANNUAL REPORT
None.
ITEM 16. FORM 10-K SUMMARY
None.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 24, 2020.on.
| HEIDRICK & STRUGGLES INTERNATIONAL, INC. | ||||||||
| /s/ Stephen A. Bondi | ||||||||
| By: | Stephen A. Bondi | |||||||
| Title: | Vice President, Controller | |||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 24, 2020.
2021.
| Signature | Title | |||||||
| /s/ Krishnan Rajagopalan | Chief Executive Officer & Director | |||||||
| Krishnan Rajagopalan (Principal Executive Officer) | ||||||||
| /s/ Mark R. Harris | Executive Vice President, Chief Financial Officer | |||||||
| Mark R. Harris (Principal Financial Officer) | ||||||||
| /s/ Stephen A. Bondi | Vice President, Controller | |||||||
| Stephen A. Bondi (Principal Accounting Officer) | ||||||||
| /s/ Elizabeth L. Axelrod | Director | |||||||
| Elizabeth L. Axelrod | ||||||||
| Laszlo Bock | ||||||||
| /s/ Clare M. Chapman | Director | |||||||
| Clare M. Chapman | ||||||||
| /s/ Lyle Logan | Director | |||||||
| Lyle Logan | ||||||||
| /s/ T. Willem Mesdag | Director | |||||||
| T. Willem Mesdag | ||||||||
| /s/ Stacey Rauch | Director | |||||||
| Stacey Rauch | ||||||||
| /s/ Adam Warby | Director | |||||||
| Adam Warby | ||||||||
79