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EX-32.2 - EXHIBIT 32.2 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-033118xex322.htm
EX-32.1 - EXHIBIT 32.1 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-033118xex321.htm
EX-31.2 - EXHIBIT 31.2 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-033118xex312.htm
EX-31.1 - EXHIBIT 31.1 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-033118xex311.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 
FORM 10-Q
 

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

OR

 ¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number 0-25837
 
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
36-2681268
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
233 South Wacker Drive-Suite 4900
Chicago, Illinois
60606-6303
(Address of Principal Executive Offices)

(312) 496-1200
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period of time that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
x
Non-Accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Emerging growth company
 
o
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of May 1, 2018, there were 18,923,363 shares of the Company’s common stock outstanding.
 




HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
 
 
 
PAGE
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1.
 
 
 
Item 6.
 
 
 
 





PART I. FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)


March 31,
2018

December 31,
2017
 

(Unaudited)

 
Current assets


 
 
Cash and cash equivalents

$
73,358


$
207,534

Accounts receivable, net

133,681


98,700

Prepaid expenses

29,075


22,003

Other current assets

28,104


11,620

Income taxes recoverable

4,428


3,933

Total current assets

268,646


343,790

 
 
 
 
 
Non-current assets

 
 
 
Property and equipment, net

38,464


39,514

Assets designated for retirement and pension plans

17,569


17,130

Investments

22,884


21,319

Other non-current assets

16,865


8,999

Goodwill

123,284


118,892

Other intangible assets, net

3,943


2,158

Deferred income taxes

32,691

 
35,402

Total non-current assets

255,700


243,414

 
 
 
 
 
Total assets

$
524,346


$
587,204

 
 
 
 
 
Current liabilities

 
 
 
Accounts payable

$
9,574


$
9,824

Accrued salaries and employee benefits

83,414


177,426

Deferred revenue

39,598


31,272

Other current liabilities

39,499


40,346

Income taxes payable

8,300


6,924

Total current liabilities

180,385


265,792

 
 
 
 
 
Non-current liabilities

 
 
 
Non-current debt
 
12,000

 

Accrued salaries and employee benefits

30,951


40,308

Retirement and pension plans

46,999


44,802

Other non-current liabilities

23,522


23,597

Total non-current liabilities

113,472


108,707

 
 
 
 
 
Total liabilities

293,857


374,499

 
 
 
 
 
Commitments and contingencies (Note 18)
 
 
 

 
 
 
 
 
Stockholders’ equity
 
 
 
 
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at March 31, 2018 and December 31, 2017
 

 

Common stock, $0.01 par value, 100,000,000 shares authorized, 19,585,777 shares issued, 18,918,965 and 18,781,433 shares outstanding at March 31, 2018 and December 31, 2017, respectively
 
196

 
196

Treasury stock at cost, 666,812 and 804,344 shares at March 31, 2018 and December 31, 2017, respectively
 
(21,482
)
 
(26,096
)
Additional paid in capital
 
220,935

 
226,006

Retained earnings (deficit)
 
22,024

 
(716
)
Accumulated other comprehensive income
 
8,816

 
13,315

Total stockholders’ equity
 
230,489

 
212,705

 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
524,346

 
$
587,204

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

1




HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2018
 
2017
Revenue
 
 
 
Revenue before reimbursements (net revenue)
$
160,071

 
$
140,006

Reimbursements
4,587

 
4,171

Total revenue
164,658

 
144,177

 
 
 
 
Operating expenses
 
 
 
Salaries and employee benefits
111,409

 
97,235

General and administrative expenses
35,541

 
36,133

Reimbursed expenses
4,587

 
4,171

Total operating expenses
151,537

 
137,539

 
 
 
 
Operating income
13,121

 
6,638

 
 
 
 
Non-operating income (expense)
 
 
 
Interest, net
239

 
197

Other, net
(448
)
 
(2,741
)
Net non-operating income (expense)
(209
)
 
(2,544
)
 
 
 
 
Income before income taxes
12,912

 
4,094

 
 
 
 
Provision for income taxes
2,744

 
3,444

 
 
 
 
Net income
10,168

 
650

 
 
 
 
Other comprehensive income, net of tax
 
 
 
Foreign currency translation adjustment
1,590

 
1,817

Net unrealized gain on available-for-sale investments

 
808

Other comprehensive income, net of tax
1,590

 
2,625

 
 
 
 
Comprehensive income
$
11,758

 
$
3,275

 
 
 
 
Weighted-average common shares outstanding
 
 
 
Basic
18,826

 
18,628

Diluted
19,321

 
19,219

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.54

 
$
0.03

Diluted
$
0.53

 
$
0.03

 
 
 
 
Cash dividends paid per share
$
0.13

 
$
0.13

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

2




HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
 
 
 
 
 
Additional
Paid in
Capital
 
Retained Earnings (Deficit)
 
Accumulated
Other
Comprehensive
Income
 
Total
 
Common Stock
 
Treasury Stock
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at December 31, 2017
19,586

 
$
196

 
805

 
$
(26,096
)
 
$
226,006

 
$
(716
)
 
$
13,315

 
$
212,705

Net income


 


 


 


 


 
10,168

 


 
10,168

Adoption of accounting standards


 


 


 


 


 
15,043

 
(6,089
)
 
8,954

Other comprehensive income, net of tax


 


 


 


 


 


 
1,590

 
1,590

Common and treasury stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation


 


 


 


 
1,776

 


 


 
1,776

Vesting of equity, net of tax withholdings


 


 
(138
)
 
4,614

 
(6,847
)
 


 


 
(2,233
)
Cash dividends declared


 


 


 


 


 
(2,460
)
 


 
(2,460
)
Dividend equivalents on restricted stock units


 


 


 


 


 
(11
)
 


 
(11
)
Balance at March 31, 2018
19,586

 
$
196

 
667

 
$
(21,482
)
 
$
220,935

 
$
22,024

 
$
8,816

 
$
230,489

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


3




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

Three Months Ended
March 31,
 

2018

2017
Cash flows - operating activities




Net income

$
10,168


$
650

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

 

 
Depreciation and amortization

3,184


3,808

Deferred income taxes

(98
)

2,381

Stock-based compensation expense

1,776


1,640

Accretion expense related to earnout payments

364


426

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

 

 
Accounts receivable

(32,024
)

(17,179
)
Accounts payable

(871
)

(325
)
Accrued expenses

(105,644
)

(98,115
)
Restructuring accrual
 
(5,642
)
 

Deferred revenue

(1,772
)

3,871

Income taxes payable, net

503


323

Retirement and pension plan assets and liabilities

1,632


2,393

Prepaid expenses

(6,806
)

(2,604
)
Other assets and liabilities, net

(2,276
)

(7,795
)
Net cash used in operating activities

(137,506
)

(110,526
)
 
 
 
 
 
Cash flows - investing activities




Acquisition of business
 
(3,210
)
 

Capital expenditures

(1,182
)
 
(4,163
)
Purchases of available-for-sale investments

(1,748
)
 
(1,806
)
Proceeds from sales of available-for-sale investments

145

 
256

Net cash used in investing activities

(5,995
)
 
(5,713
)
 
 
 
 
 
Cash flows - financing activities




Proceeds from line of credit
 
20,000

 
40,000

Payments on line of credit

(8,000
)
 
(15,000
)
Cash dividends paid

(2,471
)
 
(2,598
)
Payment of employee tax withholdings on equity transactions

(2,233
)
 
(2,392
)
Acquisition earnout payments


 
(2,189
)
Net cash provided by financing activities

7,296

 
17,821

 
 
 
 
 
Effect of exchange rates fluctuations on cash and cash equivalents
 
2,038

 
1,755

 
 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
 
(134,167
)
 
(96,663
)
Cash, cash equivalents and restricted cash at beginning of period
 
208,162

 
165,569

Cash, cash equivalents and restricted cash at end of period
 
$
73,995

 
$
68,906

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


4




HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except share and per share figures)
(Unaudited) 

1.
Basis of Presentation of Interim Financial Information

The accompanying unaudited Condensed Consolidated Financial Statements of Heidrick & Struggles International, Inc. and subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Significant items subject to estimates and assumptions include revenue recognition, income taxes, interim effective tax rate and assessment of goodwill and other intangible assets for impairment. Estimates are subject to a degree of uncertainty and actual results could differ from these estimates. These financial statements and notes are to be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 13, 2018.

2.
Summary of Significant Accounting Policies

A complete listing of the Company’s significant accounting policies is discussed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Revenue Recognition

As a result of the adoption of ASU 2014-09, Revenue from Contracts with Customers, the Company's accounting policy for revenue recognition has been updated. See Note 3, Revenue.

Restricted Cash

The Company has lease agreements and business licenses with terms that require the Company to restrict cash through the termination dates of the agreements. Current and non-current restricted cash is included in Other current assets and Other non-current assets, respectively, in the Condensed Consolidated Balance Sheets.

The following table provides a reconciliation of the cash and cash equivalents between the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statement of Cash Flows as of March 31, 2018 and 2017, and December 31, 2017 and 2016:
 
March 31,
 
December 31,
 
2018
 
2017
 
2017
 
2016
Cash and cash equivalents
$
73,358

 
$
68,329

 
$
207,534

 
$
165,011

Restricted cash included within other current assets
533

 
147

 
526

 
139

Restricted cash included within other non-current assets
104

 
430

 
102

 
419

Total cash, cash equivalents and restricted cash
$
73,995

 
$
68,906

 
$
208,162

 
$
165,569


Reclassifications

Certain prior year amounts have been recast as a result of the change in the Company's operating segments and adoption of ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. The reclassifications had no impact on net income, net cash flows or stockholders' equity.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income by weighted average common shares outstanding for the year. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Common equivalent shares are excluded from the determination of diluted earnings per share in periods in which they have an anti-dilutive effect.


5




The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended
March 31,
 
2018
 
2017
Net income
$
10,168

 
$
650

Weighted average shares outstanding:
 
 
 
Basic
18,826

 
18,628

Effect of dilutive securities:
 
 
 
Restricted stock units
346

 
431

Performance stock units
149

 
160

Diluted
19,321

 
19,219

Basic earnings per share
$
0.54

 
$
0.03

Diluted earnings per share
$
0.53

 
$
0.03


Recently Issued Financial Accounting Standards

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, Income Statement - Reporting Comprehensive Income, intended to improve the usefulness of information reported as a result of the Tax Cuts and Jobs Act. The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.

In February 2016, the FASB issued ASU No. 2016-02, Leases, intended to improve financial reporting about leasing transactions. The new guidance will require entities that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations created by those leases and to disclose key information about the leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.

Recently Adopted Financial Accounting Standards

On January 1, 2018, the Company adopted ASU No. 2017-09, Compensation - Stock Compensation, Scope of Modification Accounting, which is intended to provide clarity and reduce both diversity in practice, cost and complexity when implementing a change in the terms or conditions of a share-based payment award. ASU 2017-09 requires that an entity should account for the effects of a modification unless the fair value, vesting conditions, and whether the award is classified as a liability instrument or an equity instrument remain unchanged in the modification. The adoption of this guidance did not have an impact on the Company's financial statements. The future impact of this accounting guidance will be dependent on future modification events including the number of awards modified.

On January 1, 2018, the Company adopted ASU No. 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost, which is intended to improve the consistency, transparency and usefulness of net benefit cost disclosures. ASU 2017-07 requires that an employer report the service cost component of net benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Additionally, the other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The adoption of this guidance did not have an impact on the Company's financial statements.

On January 1, 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The adoption of this guidance increased the Company's beginning and ending balances of cash, cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows by approximately $0.6 million for each period presented. Changes in the Company's restricted cash balances between periods are immaterial.


6




On January 1, 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice as to how certain cash receipts and cash payments should be presented and classified. The adoption of this guidance did not have an impact on the Company's financial statements.

On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments including the recognition of unrealized changes in fair value within net income. The adoption of this guidance resulted in a reclassification of accumulated unrealized gains of approximately $6.1 million from accumulated other comprehensive income to retained earnings. The impact of the adoption of this guidance on the Company's Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2018, was not material. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods.

On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, using the modified retrospective method. The Company applied the guidance to all contracts that were not complete as of the adoption date. The guidance requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for these goods or services. The Company recognized the cumulative effect of initially applying the new guidance as an adjustment to the opening balance of retained earnings. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods.

Impacts on Financial Statements of Recently Adopted Financial Accounting Standards

The cumulative effect of the changes made to our Condensed Consolidated Balance Sheet as of January 1, 2018 as a result of the adoption of ASU 2014-09, Revenue from Contracts with Customers, and ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities were as follows:

 
December 31,
2017
 
ASU 2014-09 Adjustments
 
ASU 2016-01 Adjustments
 
January 1,
2018
Current assets
 
 
 
 
 
 
 
Other current assets
$
11,620

 
$
14,689

 
$

 
$
26,309

Total current assets
343,790

 
14,689

 

 
358,479

 
 
 
 
 
 
 
 
Non-current assets
 
 
 
 
 
 
 
Deferred income taxes
35,402

 
(3,099
)
 

 
32,303

Total non-current assets
243,414

 
(3,099
)
 

 
240,315

 
 
 
 
 
 
 
 
Total assets
$
587,204

 
$
11,590

 
$

 
$
598,794

 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
Deferred revenue
$
31,272

 
$
(1,059
)
 
$

 
$
30,213

Other current liabilities
40,346

 
3,695

 

 
44,041

Total current liabilities
265,792

 
2,636

 

 
268,428

 
 
 
 
 
 
 
 
Total liabilities
374,499

 
2,636

 

 
377,135

 
 
 
 
 
 
 
 
Stockholders' equity
 
 
 
 
 
 
 
Retained earnings (deficit)
(716
)
 
8,954

 
6,089

 
14,327

Accumulated other comprehensive income
13,315

 

 
(6,089
)
 
7,226

Total stockholders’ equity
212,705

 
8,954

 

 
221,659

 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
$
587,204

 
$
11,590

 
$

 
$
598,794






7




The impact of ASU 2014-09, Revenue from Contracts with Customers, on our Condensed Consolidated Balance Sheet as of March 31, 2018 was as follows:
 
March 31, 2018
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Adoption Higher/(Lower)
Current assets
 
 
 
 
 
Other current assets
$
28,104

 
$
12,523

 
$
15,581

Total current assets
268,646

 
253,065

 
15,581

 
 
 
 
 
 
Non-current assets
 
 
 
 
 
Deferred income taxes
32,691

 
35,790

 
(3,099
)
Total non-current assets
255,700

 
258,799

 
(3,099
)
 
 
 
 
 
 
Total assets
$
524,346

 
$
511,864

 
$
12,482

 
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accrued salaries and employee benefits
$
83,414

 
$
81,690

 
$
1,724

Deferred revenue
39,598

 
42,242

 
(2,644
)
Other current liabilities
39,499

 
35,804

 
3,695

Income taxes payable
8,300

 
8,072

 
228

Total current liabilities
180,385

 
177,382

 
3,003

 
 
 
 
 
 
Total liabilities
293,857

 
290,854

 
3,003

 
 
 
 
 
 
Stockholders' equity
 
 
 
 
 
Retained earnings (deficit)
22,024

 
12,545

 
9,479

Total stockholders’ equity
230,489

 
221,010

 
9,479

 
 
 
 
 
 
Total liabilities and stockholders’ equity
$
524,346

 
$
511,864

 
$
12,482





8




The impact of ASU 2014-09, Revenue from Contracts with Customers, on our Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2018 was as follows:
 
Three Months Ended March 31, 2018
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Adoption
Higher/(Lower)
Revenue
 
 
 
 
 
Revenue before reimbursements (net revenue)
$
160,071

 
$
157,594

 
$
2,477

Reimbursements
4,587

 
4,587

 

Total revenue
164,658

 
162,181

 
2,477

 
 
 
 
 
 
Operating expenses
 
 
 
 
 
Salaries and employee benefits
111,409

 
109,685

 
1,724

General and administrative expenses
35,541

 
35,541

 

Reimbursed expenses
4,587

 
4,587

 

Total operating expenses
151,537

 
149,813

 
1,724

 
 
 
 
 
 
Operating income
13,121

 
12,368

 
753

 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
Interest, net
239

 
239

 

Other, net
(448
)
 
(448
)
 

Net non-operating income (expense)
(209
)
 
(209
)
 

 
 
 
 
 
 
Income before income taxes
12,912

 
12,159

 
753

 
 
 
 
 
 
Provision for income taxes
2,744

 
2,516

 
228

 
 
 
 
 
 
Net income
$
10,168

 
$
9,643

 
$
525

 
 
 
 
 
 
Basic earnings per share
$
0.54

 
$
0.51

 
$
0.03

Diluted earnings per share
$
0.53

 
$
0.50

 
$
0.03


The impact of ASU 2014-09, Revenue from Contracts with Customers, on our Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2018 was as follows:
 
Three Months Ended March 31, 2018
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Adoption
Higher/(Lower)
Cash flows - operating activities
 
 
 
 
 
Net income
$
10,168

 
$
9,643

 
$
525

Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
 
 
Accrued expenses
(105,644
)
 
(111,063
)
 
5,419

Deferred revenue
(1,772
)
 
2,869

 
(4,641
)
Income taxes payable, net
503

 
275

 
228

Other assets and liabilities, net
(2,276
)
 
(745
)
 
(1,531
)

3.
Revenue

Executive Search

Revenue is recognized as we satisfy performance obligations by transferring a good or service to a customer. 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 Company generally bills its clients for its retainer and indirect expenses in one-third increments over a three-

9




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.

As required under ASU 2014-09, and as described in Note 2, Summary of Significant Accounting Policies, the Company now estimates uptick revenue at contract inception, based on a portfolio approach, utilizing the expected value method based on a historical analysis of uptick revenue realized in the Company’s geographic regions and industry practices, which results in an initial recording of a contract’s uptick revenue 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 amount 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 on our executive search engagement performance obligation is recognized over time as our clients simultaneously receive and consume the benefits provided by the Company's performance.  Revenue from executive search engagements is recognized over the expected average period of performance, in proportion to the estimated personnel time incurred to fulfill our obligations under the executive search contract. Revenue is generally recognized over a period of approximately six months.

Our executive search contracts contain a replacement guarantee which provides for an additional search to be completed, free of charge except for expense reimbursements, should the candidate presented by the Company be hired by the client and subsequently terminated by the customer for performance reasons within a specified period of time. The replacement guarantee is an assurance warranty, that is not a performance obligation under the terms of the executive search contract, as the Company does not provide any services under the terms of the guarantee that transfer benefits to the customer in excess of assuring that the identified candidate complies with the agreed-upon specifications. The Company accounts for the replacement guarantee under the relevant warranty guidance in ASC 460 - Guarantees.

Heidrick Consulting

Revenue is recognized as we satisfy performance obligations by transferring a good or service to a customer. Heidrick Consulting enters into contracts with customers, 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 generally includes only fixed consideration. Most of our consulting contracts contain one performance obligation which is the overall process of 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 customers to provide a license for online access, via the Company's SD Connect platform, to training and other proprietary material related to the Company's culture shaping programs. The consideration the Company expects to receive under the terms of an enterprise agreement is comprised of a single fixed fee. Our enterprise agreements contain multiple performance obligations, the delivery of materials via SD Connect and material rights related options to renew the Enterprise Agreement 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 customer 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 customer 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 customer renewals. Access to SD Connect represents a right to access the Company’s intellectual property that the customer 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 customers will receive and consume the benefits from SD Connect equally throughout the contract period. Revenue related to customer 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.


10




Contract Balances

Contract assets and liabilities are reported in a net position on an 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.

Unbilled receivables: Unbilled revenue represents contract assets from revenue recognized over time in excess of the amount billed to the customer and the amount billed to the customer 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 customer and the amount billed to the customer is is not just subject to the passage of time. This amount primarily includes revenue recognized for upticks and contingent placement fees in executive search contracts.

Deferred revenue: Contract liabilities consist of deferred revenue, which is equal to billings in excess or revenue recognized.

The following table outlines the changes in our contract asset and liability balances during the period:
 
January 1,
2018
 
March 31,
2018
 
Variance
Contract assets
 
 
 
 
 
Unbilled receivables
$
5,487

 
$
6,493

 
$
1,006

Contract assets
12,398

 
13,559

 
1,161

 
 
 
 
 
 
Contract liabilities
 
 
 
 
 
Deferred revenue
$
30,370

 
$
39,598

 
$
9,228


During the three months ended March 31, 2018, we recognized revenue of $23.4 million that was included in the contract liabilities balance at the beginning of the period. The amount of revenue recognized during the three months ended March 31, 2018 from performance obligations partially satisfied in previous periods as a result of changes in the estimates of variable consideration was $6.1 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 customers sales tax and value added taxes as required by certain jurisdictions. The Company has made an accounting policy election to exclude these items from the transaction price in its contracts.

4.
Allowance for Doubtful Accounts

The activity of the allowance for doubtful accounts is as follows:
Balance at December 31, 2017
$
2,534

Provision charged to income
922

Write-offs
(266
)
Foreign currency translation
39

Balance at March 31, 2018
$
3,229


5.
Property and Equipment, net

The components of the Company’s property and equipment are as follows:
 
March 31,
2018
 
December 31,
2017
Leasehold improvements
$
47,472

 
$
48,216

Office furniture, fixtures and equipment
18,240

 
17,732

Computer equipment and software
28,978

 
28,300

Property and equipment, gross
94,690

 
94,248

Accumulated depreciation
(56,226
)
 
(54,734
)
Property and equipment, net
$
38,464

 
$
39,514


11





Depreciation expense for the three months ended March 31, 2018 and 2017 was $2.8 million and $1.8 million, respectively.

6.
Investments

The Company has a U.S. non-qualified deferred compensation plan that consists primarily of U.S. marketable securities and mutual funds, all of which are valued using Level 1 inputs (See Note 7, Fair Value Measurements). The fair value for these investments was $22.9 million and $21.3 million as of March 31, 2018 and December 31, 2017, respectively. The aggregate cost basis for these investments was $16.2 million and $14.6 million as of March 31, 2018 and December 31, 2017, respectively.
 
7.
Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.

The three levels of inputs used to measure fair value are as follows:
 
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The following tables provide a summary of the fair value measurements at March 31, 2018 and December 31, 2017 for each major category of assets and liabilities measured at fair value on a recurring basis:
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Balance at March 31, 2018
 
 
 
 
 
 
 
 
U.S. non-qualified deferred compensation plan
 
$
22,884

 
$

 
$

 
$
22,884

Assets designated for retirement and pension plans
 

 
19,067

 

 
19,067

Pension benefit obligation
 

 
(24,506
)
 

 
(24,506
)
Acquisition earnout accruals
 

 

 
(10,669
)
 
(10,669
)
 
 
$
22,884

 
$
(5,439
)
 
$
(10,669
)
 
$
6,776

 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Balance at December 31, 2017
 
 
 
 
 
 
 
 
U.S. non-qualified deferred compensation plan
 
$
21,319

 
$

 
$

 
$
21,319

Assets designated for retirement and pension plans
 

 
18,590

 

 
18,590

Pension benefit obligation
 

 
(23,886
)
 

 
(23,886
)
Acquisition earnout accruals
 

 

 
(7,213
)
 
(7,213
)
 
 
$
21,319

 
$
(5,296
)
 
$
(7,213
)
 
$
8,810


The Level 2 assets above are reinsurance contracts fair valued in accordance with BaFin - German Federal Financial Supervisory Authority guidelines, which utilize observable inputs including mortality tables and discount rates. The Level 3 liabilities include accruals for future earnout payments related to prior acquisitions, the values of which are determined based on discounted cash flow models. The Company considers the recorded value of its financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, and accounts payable, to approximate the fair value of the respective assets and liabilities at March 31, 2018 and December 31, 2017, based upon the short-term nature of the assets and liabilities.


12




The following table provides a reconciliation of the beginning and ending balance of Level 3 assets and liabilities for the three months ended March 31, 2018:
 
Acquisition
Earnout
Accruals
Balance at December 31, 2017
$
(7,213
)
Acquisition earnouts (Note 8)
(2,880
)
Earnout accretion
(364
)
Foreign currency translation
(212
)
Balance at March 31, 2018
$
(10,669
)

8.
Acquisitions

On January 4, 2018, the Company acquired Amrop A/S ("Amrop"), a Denmark-based provider of executive search services for 24.3 million Danish Kroner (equivalent to $3.9 million on the acquisition date) of initial consideration which was funded from existing cash. The former owners of Amrop are expected to receive additional cash consideration based on fee revenue generated during the two-year period following the completion of the acquisition. When estimating the value of future cash consideration, the Company has accrued $3.1 million as of March 31, 2018. The Company recorded $2.1 million of intangible assets related to customer relationships and $3.6 million of goodwill. The goodwill is primarily related to the acquired workforce and strategic fit. The fair value estimate of assets acquired and liabilities assumed, including the earnout liability, customer relationships and goodwill, is pending completion. The Company expects to finalize its estimates of fair value during the three months ended June 30, 2018.

9.
Goodwill and Other Intangible Assets

Goodwill

The Company's goodwill by segment is as follows:
 
March 31,
2018
 
December 31, 2017
Executive Search
 
 
 
Americas
$
88,595

 
$
88,690

Europe
48,839

 
44,407

Asia Pacific
9,357

 
9,302

Total Executive Search
146,791

 
142,399

Heidrick Consulting
36,257

 
36,257

Goodwill, gross
183,048

 
178,656

Accumulated impairment
(59,764
)
 
(59,764
)
Goodwill, net
$
123,284

 
$
118,892


Changes in the carrying amount of goodwill by segment for the three months ended March 31, 2018, are as follows:
 
Executive Search
 
Heidrick Consulting
 
 
 
Americas
 
Europe
 
Asia Pacific
 
 
Total
Gross goodwill at December 31, 2017
$
88,690

 
$
44,407

 
$
9,302

 
$
36,257

 
$
178,656

Accumulated impairment

 
(23,507
)
 

 
(36,257
)
 
(59,764
)
Net goodwill at December 31, 2017
88,690

 
20,900

 
9,302

 

 
118,892

Amrop acquisition

 
3,632

 

 

 
3,632

Foreign currency translation
(95
)
 
800

 
55

 

 
760

Net goodwill at March 31, 2018
$
88,595

 
$
25,332

 
$
9,357

 
$

 
$
123,284


On January 4, 2018, the Company acquired Amrop and included an estimate of the fair value of the acquired assets and liabilities as of the acquisition date in the Condensed Consolidated Balance Sheets. The Company included an estimated $3.6 million of goodwill related to the acquisition in the Europe segment. The Company's estimate of the fair value of the acquired assets and liabilities is pending completion and is expected to be finalized during the three months ended June 30, 2018.


13




Other Intangible Assets, net

The Company’s other intangible assets, net by segment, are as follows:
 
March 31,
2018
 
December 31, 2017
Executive Search
 
 
 
Americas
$
193

 
$
252

Europe
3,650

 
1,799

Asia Pacific
100

 
107

Total Executive Search
3,943

 
2,158

Heidrick Consulting

 

Total other intangible assets, net
$
3,943

 
$
2,158


The Company recorded an estimate for customer relationships in the Europe segment of $2.1 million related to the acquisition of Amrop. The Company's estimate of the fair value of the acquired assets and liabilities is pending completion and is expected to be finalized during the three months ended June 30, 2018.

The carrying amount of amortizable intangible assets and the related accumulated amortization are as follows:
 
Weighted
Average
Life (Years)
 
March 31, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Client relationships
6.9
 
$
15,921

 
$
(12,018
)
 
$
3,903

 
$
13,703

 
$
(11,612
)
 
$
2,091

Trade name
0.0
 
477

 
(477
)
 

 
459

 
(459
)
 

Non-compete
2.0
 
239

 
(199
)
 
40

 
230

 
(163
)
 
67

Total intangible assets
6.8
 
$
16,637

 
$
(12,694
)
 
$
3,943

 
$
14,392

 
$
(12,234
)
 
$
2,158


Intangible asset amortization expense for the three months ended March 31, 2018 and 2017, was $0.4 million and $1.8 million, respectively.

The Company's estimated future amortization expense related to intangible assets as of March 31, 2018, for the years ended December 31st is as follows:
 
Estimated Future Amortization
2018
$
958

2019
874

2020
655

2021
552

2022
484

Thereafter
420

Total
$
3,943


10.
Other Current Assets and Liabilities and Non-Current Liabilities

The components of other current assets are as follows:
 
March 31,
2018
 
December 31,
2017
Contract assets
$
20,052

 
$
3,538

Other
8,052

 
8,082

Total other current assets
$
28,104

 
$
11,620



14




The components of other current liabilities are as follows:
 
March 31,
2018
 
December 31,
2017
Restructuring charges
$
7,325

 
$
13,023

Other
32,174

 
27,323

Total other current liabilities
$
39,499

 
$
40,346


The components of other non-current liabilities are as follows:
 
March 31,
2018
 
December 31,
2017
Premise related costs
$
17,632

 
$
18,360

Accrued earnout payments
3,690

 
3,076

Restructuring charges

 
10

Other
2,200

 
2,151

Total other non-current liabilities
$
23,522

 
$
23,597


11.
Line of Credit

On June 30, 2015, the Company entered into a Second Amended and Restated Credit Agreement (the “Restated Credit Agreement”). The Restated Credit Agreement amended and restated the Credit Agreement executed on June 22, 2011 (the “Credit Agreement”). Pursuant to the Restated Credit Agreement, the Company replaced its Revolving Facility and Term Facility (“Existing Facility”) with a single senior unsecured revolving line of credit with an aggregate commitment of up to $100 million, which includes a sublimit of $25 million for letters of credit, and a $50 million expansion feature (the “Replacement Facility”). The Replacement Facility will mature on June 30, 2020. Borrowings under the Restated Credit Agreement bear interest at the Company’s election at the existing Alternate Base Rate (as defined in the Credit Agreement) or Adjusted LIBOR Rate (as defined in the Credit Agreement) plus a spread as determined by the Company’s leverage ratio.

Borrowings under the Replacement Facility may be used for working capital, capital expenditures, Permitted Acquisitions (as defined in the Credit Agreement) and for other general corporate purposes of the Company and its subsidiaries. The obligations under the Replacement Facility are guaranteed by certain of the Company’s subsidiaries.

During the three months ended March 31, 2018, the Company borrowed $20.0 million under the Restated Credit Agreement and elected the Adjusted LIBOR Rate. The Company subsequently repaid $8.0 million during the three months ended March 31, 2018.

As of March 31, 2018, the Company had $12.0 million of outstanding borrowing under the Restated Credit Agreement. The Company had no outstanding borrowings under the Restated Credit Agreement as of December 31, 2017. The Company was in compliance with the financial and other covenants under the Restated Credit Agreement and no event of default existed.

On April 30, 2018, the Company repaid the $12.0 million of outstanding borrowings under the Restated Credit Agreement.
 
12.
Stock-Based Compensation

The Company’s 2012 Heidrick & Struggles GlobalShare Program (the “2012 Program”) provides for grants of stock options, stock appreciation rights, and other stock-based awards that are valued based upon the grant date fair value of shares. These awards may be granted to directors, selected employees and independent contractors. The 2012 Program originally authorized 1,300,000 shares of Common Stock for issuance pursuant to awards under the plan.

On May 22, 2014, the stockholders of the Company approved an amendment to the 2012 Program to increase the number of shares of Common Stock reserved for issuance under the 2012 Program by 700,000 shares. As of March 31, 2018, 2,015,470 awards have been issued under the 2012 Program and 620,747 shares remain available for future awards, including 636,217 forfeited awards. The 2012 Program provides that no awards can be granted after May 24, 2022.

The Company measures its stock-based compensation costs based on the grant date fair value of the awards and recognizes these costs in the financial statements over the requisite service period.

A summary of information with respect to stock-based compensation is as follows
 
Three Months Ended
March 31,
 
2018
 
2017
Salaries and employee benefits
$
1,776

 
$
1,640

Income tax benefit related to stock-based compensation included in net income
470

 
647


Restricted Stock Units

Restricted stock unit activity for the three months ended March 31, 2018:
 
Number of
Restricted
Stock Units
 
Weighted-
Average
Grant-Date
Fair Value
Outstanding on December 31, 2017
491,194

 
$
21.92

Granted
169,066

 
30.45

Vested and converted to common stock
(170,036
)
 
22.03

Forfeited
(42,564
)
 
24.01

Outstanding on March 31, 2018
447,660

 
$
24.90


As of March 31, 2018, there was $6.6 million of pre-tax unrecognized compensation expense related to unvested restricted stock units, which is expected to be recognized over a weighted average of 2.5 years.

Performance Stock Units

The Company grants performance stock units to certain of its senior executives. The performance stock units are generally subject to a cliff vesting at the end of a three-year period. The vesting will vary between 0% and 200% based on the attainment of operating income goals over the three-year vesting period. The performance stock units are expensed on a straight-line basis over the three year vesting period.

Performance stock unit activity for the three months ended March 31, 2018:
 
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
(43,057
)
 
23.83

Outstanding on March 31, 2018
201,611

 
$
24.87


As of March 31, 2018, there was $3.2 million of pre-tax unrecognized compensation expense related to unvested performance stock units, which is expected to be recognized over a weighted average of 2.5 years.
 
13.
Restructuring

Restructuring Charges

In 2017, the Company recorded restructuring charges of $15.7 million in connection with initiatives to reduce overall costs and improve operational efficiencies. The primary components of the restructuring include: the elimination of two executive officer roles for a flatter leadership structure; a workforce reduction as the firm aligns its support resources to better meet operational needs and recognize synergies with the combination of Leadership Consulting and Culture Shaping; a reduction of the firm’s real estate expenses and support costs by consolidating or closing three of its locations across its global footprint; and the acceleration of future expenses under certain contractual obligations. These charges consist of $13.1 million of employee-related costs, including severance associated with reductions in our workforce of 251 employees globally, $2.3 million of other professional and consulting fees and $0.3 million of expenses associated with closing three office locations.


15




Changes to the accrual for restructuring charges for the three months ended March 31, 2018, are as follows:
 
Employee Related
 
Office Related
 
Other
 
Total
Outstanding on December 31, 2017
$
11,866

 
$
148

 
$
1,011

 
$
13,025

Cash payments
(4,018
)
 
(248
)
 
(976
)
 
(5,242
)
Other
(775
)
 
205

 
24

 
(546
)
Exchange rate fluctuations
89

 

 
(1
)
 
88

Outstanding on March 31, 2018
$
7,162

 
$
105

 
$
58

 
$
7,325


14.
Income Taxes

The Company reported income before taxes of $12.9 million and an income tax provision of $2.7 million for the three months ended March 31, 2018. The Company reported income before taxes of $4.1 million and an income tax provision of $3.4 million for the three months ended March 31, 2017. The effective tax rates for the three months ended March 31, 2018 and 2017, were 20.9% and 82.9%, respectively. The effective tax rate for the three months ended March 31, 2018 was impacted by one-time items and the Tax Cuts and Jobs Act enacted on December 22, 2017 in the United States. The effective tax rate for the three months ended March 31, 2017 was impacted by losses that are not benefited for tax purposes and the mix of income.

Excluding the impact of one-time items, the Company estimates that its effective tax rate for the year ended December 31, 2018, will be between 33% and 37%. The full year effective rate for 2018 is primarily the result of one-time items and the Tax Cuts and Jobs Act.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities, foreign earnings intended to be remitted, and the tax on foreign earnings intended to be remitted. The Company has included these amounts in its consolidated financial statements for the quarter ended March 31, 2018. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018. 

15.
Changes in Accumulated Other Comprehensive Income

The changes in Accumulated other comprehensive income (“AOCI”) by component for the three months ended March 31, 2018 is summarized below:
 
 
Available-
for-
Sale
Securities
 
Foreign
Currency
Translation
 
Pension
 
AOCI
Balance at December 31, 2017
 
$
6,089

 
$
9,143

 
$
(1,917
)
 
$
13,315

Other comprehensive income before classification, net of tax
 

 
1,590

 

 
1,590

Amount reclassified from AOCI (1)
 
(6,089
)
 

 

 
(6,089
)
Net current period other comprehensive income
 
(6,089
)
 
1,590

 

 
(4,499
)
Balance at March 31, 2018
 
$

 
$
10,733

 
$
(1,917
)
 
$
8,816

 
(1) Upon adoption of ASC 2016-01, unrealized gains (losses) on available for sale securities was reclassified from AOCI to retained earnings.

16.
Segment Information

In 2018, the Company completed the integration of its Leadership Consulting and Culture Shaping businesses into one combined service offering, Heidrick Consulting. In conjunction with the integration, the Company reorganized its Management Committee, which the Company considers to be its chief operating decision maker, so as to regularly assess performance and make resource allocations decisions for the Heidrick Consulting business. Therefore, the Company now reports Leadership Consulting and Culture Shaping as one operating segment, Heidrick Consulting. In conjunction with the change in operating segments, the Company modified its corporate cost allocation methodology. Previously reported operating segment results for the three months ended March 31, 2017, have been recast to conform to the new operating segment structure and corporate cost allocation methodology.

16




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

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

The revenue and operating income (loss) by segment are as follows:
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Revenue
 
 
 
 
Executive Search
 
 
 
 
Americas
 
$
86,303

 
$
77,098

Europe
 
35,681

 
26,205

Asia Pacific
 
23,848

 
21,182

Total Executive Search
 
145,832

 
124,485

Heidrick Consulting
 
14,239

 
15,521

Revenue before reimbursements (net revenue)
 
160,071

 
140,006

Reimbursements
 
4,587

 
4,171

Total revenue
 
$
164,658

 
$
144,177

 
Three Months Ended
March 31,
 
2018
 
2017
Operating income (loss)
 
 
 
Executive Search
 
 
 
Americas
$
20,635

 
$
18,352

Europe
3,254

 
(296
)
Asia Pacific
4,303

 
3,010

Total Executive Search
28,192

 
21,066

Heidrick Consulting
(5,230
)
 
(4,971
)
Total segment operating income
22,962

 
16,095

Global Operations Support
(9,841
)
 
(9,457
)
Total operating income
$
13,121

 
$
6,638

 

17.
Guarantees

The Company has issued cash collateralized bank guarantees and letter of credit-backed bank guarantees supporting certain obligations, primarily the payment of office lease obligations and business license requirements for certain of its subsidiaries in Europe and Asia Pacific. The bank guarantees were made to secure the respective agreements and are for the terms of the agreements, which extend through 2019. For each bank guarantee issued, the Company would have to perform under the guarantee 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 guarantees is approximately $2.6 million as of March 31, 2018. The Company has not accrued for these arrangements as no event of default exists or is expected to exist.
 
18.
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.


17




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

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

Factors that may affect the outcome of the forward-looking statements include, among other things, leadership changes; our ability to attract, integrate, manage and retain qualified consultants and senior leaders; our ability to develop and maintain strong, long-term relationships with our clients; fluctuations in the global and local economies and our ability to execute successfully our strategies; social or political instability in markets where we operate, the impact of the U.K. referendum to leave the European Union (Brexit); the impact of foreign currency exchange rate fluctuations; unfavorable tax law changes and tax authority rulings; price competition; the ability to forecast, on a quarterly basis, variable compensation accruals that ultimately are determined based on the achievement of annual results; our ability to realize our tax losses; the timing of the establishment or reversal of valuation allowance on deferred tax assets; the mix of profit and loss by country; our ability to integrate future acquisitions; our reliance on information management systems; any impairment of our goodwill, intangible assets and other long-lived assets; and the ability to align our cost structure and headcount with net revenue. For more information on the factors that could affect the outcome of forward-looking statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2017, under Risk Factors in Item 1A. We caution the reader that the list of factors may not be exhaustive. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

Our Business. We are a leadership advisory firm providing executive search and leadership consulting services to businesses and business leaders worldwide. We help our clients build leadership teams by facilitating the recruitment, management and development of senior executives. We provide our services to a broad range of clients through the expertise of approximately 400 consultants located in major cities around the world.

In 2018, the Company completed the integration of its Leadership Consulting and Culture Shaping businesses into one combined service offering, Heidrick Consulting. In conjunction with the integration, the Company reorganized its Management Committee, which the Company considers to be its chief operating decision maker, so as to regularly assess performance and make resource allocations decisions for the Heidrick Consulting business. Therefore, the Company now reports Leadership Consulting and Culture Shaping as one operating segment, Heidrick Consulting. In conjunction with the change in operating segments, the Company modified its corporate cost allocation methodology. Previously reported operating segment results for the three months ended March 31, 2017 have been recast to conform to the new operating segment structure.

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

Our executive search services are provided on a retained basis. For each assignment, we enter into a contract with our client that outlines the general terms and conditions of the assignment. Typically, we are paid a retainer for our executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled. In addition, generally, if the actual compensation of a placed candidate exceeds the estimated compensation, we often are authorized to bill the client for one-third of the excess. We refer to this excess compensation billing as uptick revenue. Indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search. Revenue before reimbursements of out-of-pocket expenses (“net revenue”) consists of retainers, an estimate of uptick revenue and indirect expenses billed to clients. We generally bill our clients for our retainer and indirect expenses in one-third increments over a three-month period commencing in the month of a client's acceptance of the contract with uptick revenue billed upon the completion of the engagement.

Heidrick Consulting. We work with clients to assess and develop leadership, assist in developing culture as a top business priority, and transform and accelerate team and organization effectiveness. Consulting services generate revenue through a

18




combination of professional service and license fees related to the engagement. Depending on the terms of the agreement, net revenue from consulting is either recognized proportionally as services are performed or in accordance with the completion of the engagement deliverables. Net revenue associated with licenses to use consulting proprietary materials is typically recognized over the terms of the arrangement.

Key Performance Indicators

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

Revenue is driven by market conditions and a combination of the number of executive search engagements and consulting projects and the average revenue per search or project. With the exception of compensation expense, incremental increases in revenue do not necessarily result in proportionate increases in costs, particularly operating and administrative expenses, thus potentially improving 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 is 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. The mix of individual consultants who generate the revenue can significantly affect the total amount of compensation expense recorded, which directly impacts operating margin. As a result, the variable portion of the compensation expense may fluctuate significantly from quarter to quarter. The total variable compensation is discretionary and is based on Company-wide financial targets approved by the Human Resources and Compensation Committee of the Board of Directors.

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

Second Quarter 2018 Outlook

We are currently forecasting 2018 second quarter net revenue of between $160 million and $170 million. Our 2018 second quarter guidance is based upon, among other things, management’s assumptions for the anticipated volume of new executive search confirmations and leadership consulting and culture shaping projects, the current backlog, consultant productivity, consultant retention, the seasonality of our business and average currency rates in March 2018.

Our 2018 guidance is subject to a number of risks and uncertainties, including those discussed under Item 1A - Risk Factors in our 2017 Annual Report on 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, our results of operations as a percentage of revenue before reimbursements (net revenue): 
 
Three Months Ended
March 31,
 
2018
 
2017
Revenue
 
 
 
Revenue before reimbursements (net revenue)
100.0
 %
 
100.0
 %
Reimbursements
2.9

 
3.0

Total revenue
102.9

 
103.0

 
 
 
 
Operating expenses
 
 
 
Salaries and employee benefits
69.6

 
69.5

General and administrative expenses
22.2

 
25.8

Impairment Charges

 

Reimbursed expenses
2.9

 
3.0

Total operating expenses
94.7

 
98.2

 
 
 
 
Operating income
8.2

 
4.7

 
 
 
 
Non-operating income (expense)
 
 
 
Interest, net
0.1

 
0.1

Other, net
(0.3
)
 
(2.0
)
Net non-operating income (expense)
(0.1
)
 
(1.8
)
 
 
 
 
Income before income taxes
8.1

 
2.9

 
 
 
 
Provision for income taxes
1.7

 
2.5

 
 
 
 
Net income
6.4
 %
 
0.5
 %

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

We operate our executive search services in the Americas; Europe (which includes Africa); and Asia Pacific (which includes the Middle East) and our Heidrick Consulting services globally. (See Note 16, Segment Information).

The following tables set forth, for the periods indicated, our revenue and operating income by segment (in thousands):
 
Three Months Ended
March 31,
 
2018
 
2017
Revenue
 
 
 
Executive Search
 
 
 
Americas
$
86,303

 
$
77,098

Europe
35,681

 
26,205

Asia Pacific
23,848

 
21,182

Total Executive Search
145,832

 
124,485

Heidrick Consulting
14,239

 
15,521

Revenue before reimbursements (net revenue)
160,071

 
140,006

Reimbursements
4,587

 
4,171

Total revenue
$
164,658

 
$
144,177

 

20




 
Three Months Ended
March 31,
 
2018
 
2017
Operating income (loss)
 
 
 
Executive Search
 
 
 
Americas
$
20,635

 
$
18,352

Europe
3,254

 
(296
)
Asia Pacific
4,303

 
3,010

Total Executive Search
28,192

 
21,066

Heidrick Consulting
(5,230
)
 
(4,971
)
Total segment operating income
22,962

 
16,095

Global Operations Support
(9,841
)
 
(9,457
)
Total operating income
$
13,121

 
$
6,638


Three months ended March 31, 2018 Compared to the Three Months Ended March 31, 2017

Total revenue. Consolidated total revenue increased $20.5 million, or 14.2%, to $164.7 million for the three months ended March 31, 2018, from $144.2 million for the three months ended March 31, 2017. The increase in total revenue was primarily due to the increase in revenue before reimbursements (net revenue).

Revenue before reimbursements (net revenue). Consolidated net revenue increased $20.1 million, or 14.3%, to $160.1 million for the three months ended March 31, 2018 from $140.0 million for the three months ended March 31, 2017. Foreign exchange rate fluctuations positively impacted results by $5.8 million, or 3.8%. Executive Search net revenue was $145.8 million for the three months ended March 31, 2018, an increase of $21.3 million compared to the three months ended March 31, 2017. The increase in Executive Search net revenue was the result of growth in the Americas, Europe, and Asia Pacific. The net impact of the new revenue recognition standard of $3.5 million and our acquisition of Amrop in January 2018 also contributed to the growth in Executive Search net revenue. Heidrick Consulting net revenue decreased $1.3 million, or 8.3%, to $14.2 million for the three months ended March 31, 2018 from $15.5 million for the three months ended March 31, 2017. Heidrick Consulting net revenue declined approximately $1.0 million due to the adoption of the new revenue recognition standard.

The number of Executive Search and Heidrick Consulting consultants was 349 and 28, respectively, as of March 31, 2018, compared to 363 and 28, respectively, as of March 31, 2017. Specific to Executive Search, our largest business, productivity as measured by annualized net Executive Search revenue per consultant was $1.6 million and $1.4 million for the three months ended March 31, 2018 and 2017, respectively. The number of confirmed searches increased 4.7% compared to 2017. The average revenue per executive search increased to $115,600 for the three months ended March 31, 2018, compared to $103,300 for the three months ended March 31, 2017.

Salaries and employee benefits. Consolidated salaries and employee benefits expense increased $14.2 million, or 14.6%, to $111.4 million for the three months ended March 31, 2018 from $97.2 million for the three months ended March 31, 2017. The impact of the new revenue recognition standard increased salaries and benefits expense by $1.7 million. The increase was due to higher fixed compensation of $2.0 million and higher variable compensation of $12.2 million. Fixed compensation increased primarily due compensation costs related to our recent acquisition, base salaries and payroll taxes, and minimum guarantee and sign-on bonus amortization. Variable compensation increased primarily due to improved productivity in the Executive Search business. Foreign exchange rate fluctuations negatively impacted results by $3.6 million, or 3.4%.

For the three months ended March 31, 2018, we had an average of 1,645 employees compared to an average of 1,809 employees for the three months ended March 31, 2017. The decline in average employees reflects the restructuring activities announced in 2017 to reduce overall costs and improve operational efficiencies.

As a percentage of net revenue, salaries and employee benefits expense was 69.6% for the three months ended March 31, 2018, compared to 69.5% for the three months ended March 31, 2017.

General and administrative expenses. Consolidated general and administrative expenses decreased $0.6 million, or 1.6%, to $35.5 million for the three months ended March 31, 2018, from $36.1 million for the three months ended March 31, 2017. The decrease is due to lower intangible amortization due to intangible asset impairment in the prior year, and decreases in earnout accretion, bad debt expense and the use of external third-party consultants to complete work for Heidrick Consulting, partially offset by an increase in office occupancy and professional fees. Foreign exchange rate fluctuations negatively impacted results by $1.1 million, or 3.2%.


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As a percentage of net revenue, general and administrative expenses were 22.2% for the three months ended March 31, 2018, compared to 25.8% for the three months ended March 31, 2017.

Operating income. Consolidated operating income was $13.1 million for the three months ended March 31, 2018, compared to $6.6 million for the three months ended March 31, 2017. Foreign exchange rate fluctuations positively impacted operating income by $1.1 million, or 9.1%.

Net non-operating income (expense). Net non-operating expense was $0.2 million for the three months ended March 31, 2018, compared to $2.5 million for the three months ended March 31, 2017.

Interest, net was $0.2 million of income for each of the three months ended March 31, 2018 and 2017.

Other, net was expense of $0.4 million for the three months ended March 31, 2018 and $2.7 million for the three months ended March 31, 2017. Other, net expense decreased primarily due to the HMRC employee benefit tax settlement of $2.4 million in the prior year.

Income taxes. See Note 14, Income Taxes.

Executive Search

Americas
The Americas segment reported net revenue of $86.3 million for the three months ended March 31, 2018, an increase of 11.9% from $77.1 million for the three months ended March 31, 2017. The increase in net revenue was due to a 9.4% increase in the number of executive search confirmations coupled with an increase in average revenue per executive search. The net impact of the new revenue recognition standard increased revenue by approximately $1.8 million. The Financial Services, Consumer, and Global Technology Services practice groups each contributed to the growth in net revenue. There were 169 Partner and Principal consultants as of March 31, 2018, compared to 176 as of March 31, 2017.
Salaries and employee benefits expense increased $6.9 million compared to the three months ended March 31, 2017. The impact of the new revenue recognition standard increased salaries and benefits expense by $1.2 million. Fixed compensation increased $0.5 million, primarily due to higher base salaries and payroll taxes and minimum guarantee and sign-on bonus amortization. Variable compensation increased $6.4 million primarily due to higher bonus accruals as a result of increased productivity.
General and administrative expenses increased less than $0.1 million primarily due to an increase in professional fees, partially offset by a decline in internal travel.
Operating income was $20.6 million for the three months ended March 31, 2018, an increase of $2.3 million compared to $18.4 million for the three months ended March 31, 2017.

Europe
Europe reported net revenue of $35.7 million for the three months ended March 31, 2018, an increase of 36.2% from $26.2 million for the three months ended March 31, 2017. The increase in net revenue was due to a 5.9% increase in the number of executive search confirmations, an increase in average revenue per executive search and the Company's acquisition of Amrop in January 2018. The net impact of the new revenue recognition standard increased revenue by approximately $1.1 million. All industry practice groups contributed to net revenue growth. Foreign exchange rate fluctuations positively impacted results by $4.3 million, or 13.6%. There were 101 Partner and Principal consultants as of March 31, 2018 as compared to 103 as of March 31, 2017.

Salaries and employee benefits expense increased $4.4 million compared to the three months ended March 31, 2017. The impact of the new revenue recognition standard increased salaries and benefits expense by $0.8 million. Fixed compensation increased $1.0 million for the three months ended March 31, 2018. The increase in fixed compensation was primarily due to merit increases and additional headcount as a result of our recent acquisition of Amrop, partially offset by the UK EBT settlement in the prior year. Variable compensation increased $3.4 million due to higher bonus accruals as a result of increased productivity.
General and administrative expense increased $1.6 million as compared to the three months ended March 31, 2017, primarily due to an increase in office occupancy, internal travel and professional fees, as well as ongoing general and administrative expenses related to our recent acquisition of Amrop.

22




The Europe segment reported operating income of $3.3 million for the three months ended March 31, 2018, an increase of $3.6 million compared to an operating loss of $0.3 million for the three months ended March 31, 2017.

Asia Pacific
Asia Pacific reported net revenue of $23.8 million for the three months ended March 31, 2018, an increase of 12.6% compared to $21.2 million for the three months ended March 31, 2017. The increase in net revenue was due to an increase in average revenue per executive search, partially offset by a 4.4% decrease in the number of executive search confirmations. The net impact of the new revenue recognition standard increased revenue by approximately $0.6 million. The Consumer, Financial Services and Global Technology Services practice groups each contributed to the growth in net revenue. Foreign exchange rate fluctuations positively impacted results by $0.8 million, or 3.5%. There were 79 Partner and Principal consultants as of March 31, 2018 compared to 84 as of March 31, 2017.
Salaries and employee benefits expense increased $2.1 million compared to the three months ended March 31, 2017. The impact of the new revenue recognition standard increased salaries and benefits expense by $0.4 million. Fixed compensation increased $0.4 million due to an increase in minimum guarantee and sign-on bonus amortization. Variable compensation increased $1.7 million due to higher bonus accruals due to increased productivity.
General and administrative expenses decreased $0.8 million compared to the three months ended March 31, 2017, primarily due to lower bad debt expense and business taxes and licenses, partially offset by higher office occupancy costs.
The Asia Pacific segment reported operating income of $4.3 million for the three months ended March 31, 2018, an increase of $1.3 million compared to the three months ended March 31, 2017.

Heidrick Consulting
Heidrick Consulting reported net revenue of $14.2 million for the three months ended March 31, 2018, a decrease of 8.3% compared to $15.5 million for the three months ended March 31, 2017. The decline in revenue is due to decreases in both consulting work and enterprise agreements. The net impact of the new revenue recognition standard decreased revenue by approximately $1.0 million. Foreign exchange rate fluctuations positively impacted results by $0.6 million, or 4.5%. There were 28 Heidrick Consulting Partner consultants at both March 31, 2018 and 2017.
Salaries and employee benefits expense increased $0.7 million compared to the prior year. The impact of the new revenue recognition standard decreased salaries and benefits expense by $0.7 million. Fixed compensation increased $0.1 million due to an increase in base salaries and payroll taxes, partially offset by declines in retirement and benefits, and minimum guarantee and sign-on bonus amortization. Variable compensation increased $0.6 million due to higher bonus accruals.
General and administrative expenses decreased $1.7 million due to lower intangible amortization and earnout accretion, as well as a decrease in the use of external third-party consultants to execute work.
The Heidrick Consulting segment reported an operating loss of $5.2 million for the three months ended March 31, 2018, a decrease of $0.3 million compared to an operating loss of $5.0 million for the three months ended March 31, 2018.

Global Operations Support
Global Operations Support expenses for the three months ended March 31, 2018, increased $0.4 million, or 4.1%, to $9.8 million from $9.5 million for the three months ended March 31, 2017.

Salaries and employee benefits expense increased $0.1 million due to a decrease in base salaries and payroll taxes and lower stock compensation expense, partially offset by higher separation costs.

General and administrative expenses increased $0.3 million, primarily due to higher office occupancy, internal travel and information technology costs, partially offset by professional fees.

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.


23




We pay the non-deferred portion of annual bonuses in the first quarter following the year in which they are earned. Employee bonuses are accrued throughout the year and are based on our performance and the performance of the individual employee.

Lines of credit. On June 30, 2015, the Company entered into a Second Amended and Restated Credit Agreement (the “Restated Credit Agreement”). The Restated Credit Agreement amended and restated the Credit Agreement executed on June 22, 2011 (the “Credit Agreement”). Pursuant to the Restated Credit Agreement, the Company replaced its Revolving Facility and Term Facility (“Existing Facility”) with a single senior unsecured revolving line of credit with an aggregate commitment of up to $100 million, which includes a sublimit of $25 million for letters of credit, and a $50 million expansion feature (the “Replacement Facility”). The Replacement Facility will mature on June 30, 2020. Borrowings under the Restated Credit Agreement bear interest at the Company’s election at the existing Alternate Base Rate (as defined in the Credit Agreement) or Adjusted LIBOR Rate (as defined in the Credit Agreement) plus a spread as determined by the Company’s leverage ratio.

Borrowings under the Replacement Facility may be used for working capital, capital expenditures, Permitted Acquisitions (as defined in the Credit Agreement) and for other general corporate purposes of the Company and its subsidiaries. The obligations under the Replacement Facility are guaranteed by certain of the Company’s subsidiaries.

During the three months ended March 31, 2018, we borrowed $20.0 million under the Restated Credit Agreement and elected the Adjusted LIBOR Rate. We subsequently repaid $8.0 million during the three months ended March 31, 2018.

As of March 31, 2018, the Company had $12.0 million in outstanding borrowing under the Restated Credit Agreement. The Company had no outstanding borrowings under the Restated Credi