Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-093018xex322.htm
EX-32.1 - EXHIBIT 32.1 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-093018xex321.htm
EX-31.2 - EXHIBIT 31.2 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-093018xex312.htm
EX-31.1 - EXHIBIT 31.1 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-093018xex311.htm
EX-10.1 - EXHIBIT 10.1 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-093018xex101.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 SEPTEMBER 30, 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 October 26, 2018, there were 18,958,673 shares of the Company’s common stock outstanding.
 




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





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


September 30,
2018

December 31,
2017
 

(Unaudited)

 
Current assets


 
 
Cash and cash equivalents

$
164,216


$
207,534

Accounts receivable, net

158,107


98,700

Prepaid expenses

25,083


22,003

Other current assets

29,783


11,620

Income taxes recoverable

5,763


3,933

Total current assets

382,952


343,790

 
 
 
 
 
Non-current assets

 
 
 
Property and equipment, net

35,491


39,514

Assets designated for retirement and pension plans

16,554


17,130

Investments

21,013


21,319

Other non-current assets

19,546


8,999

Goodwill

122,445


118,892

Other intangible assets, net

2,535


2,158

Deferred income taxes

32,320

 
35,402

Total non-current assets

249,904


243,414

 
 
 
 
 
Total assets

$
632,856


$
587,204

 
 
 
 
 
Current liabilities

 
 
 
Accounts payable

$
8,979


$
9,824

Accrued salaries and employee benefits

177,930


177,426

Deferred revenue

42,870


31,272

Other current liabilities

35,127


40,346

Income taxes payable

7,866


6,924

Total current liabilities

272,772


265,792

 
 
 
 
 
Non-current liabilities

 
 
 
Accrued salaries and employee benefits

40,946


40,308

Retirement and pension plans

43,536


44,802

Other non-current liabilities

21,769


23,597

Total non-current liabilities

106,251


108,707

 
 
 
 
 
Total liabilities

379,023


374,499

 
 
 
 
 
Commitments and contingencies (Note 18)
 

 

 
 
 
 
 
Stockholders’ equity
 
 
 
 
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at September 30, 2018 and December 31, 2017
 

 

Common stock, $0.01 par value, 100,000,000 shares authorized, 19,585,777 shares issued, 18,954,275 and 18,781,433 shares outstanding at September 30, 2018 and December 31, 2017, respectively
 
196

 
196

Treasury stock at cost, 631,502 and 804,344 shares at September 30, 2018 and December 31, 2017, respectively
 
(20,298
)
 
(26,096
)
Additional paid in capital
 
224,962

 
226,006

Retained earnings (deficit)
 
44,854

 
(716
)
Accumulated other comprehensive income
 
4,119

 
13,315

Total stockholders’ equity
 
253,833

 
212,705

 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
632,856

 
$
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 (LOSS)
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Revenue before reimbursements (net revenue)
$
187,588

 
$
159,800

 
$
530,718

 
$
452,020

Reimbursements
4,753

 
4,665

 
13,970

 
13,740

Total revenue
192,341

 
164,465

 
544,688

 
465,760

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Salaries and employee benefits
133,933

 
108,546

 
373,021

 
309,159

General and administrative expenses
33,072

 
37,232

 
105,532

 
111,454

Impairment charges

 

 

 
39,158

Reimbursed expenses
4,753

 
4,665

 
13,970

 
13,740

Total operating expenses
171,758

 
150,443

 
492,523

 
473,511

 
 
 
 
 
 
 
 
Operating income (loss)
20,583

 
14,022

 
52,165

 
(7,751
)
 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
Interest, net
259

 
94

 
496

 
195

Other, net
2,345

 
147

 
1,849

 
(2,773
)
Net non-operating income (expense)
2,604

 
241

 
2,345

 
(2,578
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
23,187

 
14,263

 
54,510

 
(10,329
)
 
 
 
 
 
 
 
 
Provision for (benefit from) income taxes
6,718

 
6,092

 
16,410

 
(902
)
 
 
 
 
 
 
 
 
Net income (loss)
16,469

 
8,171

 
38,100

 
(9,427
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustment
(881
)
 
995

 
(3,107
)
 
5,779

Net unrealized gain on available-for-sale investments

 
624

 

 
1,858

Other comprehensive income (loss), net of tax
(881
)
 
1,619

 
(3,107
)
 
7,637

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
15,588

 
$
9,790

 
$
34,993

 
$
(1,790
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
 
 
 
 
 
 
Basic
18,954

 
18,781

 
18,905

 
18,720

Diluted
19,401

 
19,016

 
19,444

 
18,720

 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.87

 
$
0.44

 
$
2.02

 
$
(0.50
)
Diluted
$
0.85

 
$
0.43

 
$
1.96

 
$
(0.50
)
 
 
 
 
 
 
 
 
Cash dividends paid per share
$
0.13

 
$
0.13

 
$
0.39

 
$
0.39

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

2




HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
 
 
 
 
 
Additional
Paid in
Capital
 
Retained Earnings (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

 

 

 

 

 
38,100

 

 
38,100

Adoption of accounting standards

 

 

 

 

 
15,043

 
(6,089
)
 
8,954

Other comprehensive income (loss), net of tax

 

 

 

 

 

 
(3,107
)
 
(3,107
)
Common and treasury stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation

 

 

 

 
6,763

 

 

 
6,763

Vesting of equity, net of tax withholdings

 

 
(167
)
 
5,604

 
(7,838
)
 

 

 
(2,234
)
Re-issuance of treasury stock

 

 
(6
)
 
194

 
31

 

 

 
225

Cash dividends declared ($0.39 per share)

 

 

 

 

 
(7,389
)
 

 
(7,389
)
Dividend equivalents on restricted stock units

 

 

 

 

 
(184
)
 

 
(184
)
Balance at September 30, 2018
19,586

 
$
196

 
632

 
$
(20,298
)
 
$
224,962

 
$
44,854

 
$
4,119

 
$
253,833

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


3




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

Nine Months Ended
September 30,
 

2018

2017
Cash flows - operating activities




Net income (loss)

$
38,100


$
(9,427
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 
Depreciation and amortization

9,558


11,270

Deferred income taxes

(438
)

(15,340
)
Stock-based compensation expense

6,763


3,915

Accretion expense related to earnout payments

963


836

Impairment charges
 

 
39,158

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

 

 
Accounts receivable

(60,057
)

(32,603
)
Accounts payable

(761
)

49

Accrued expenses

3,834


(38,043
)
Restructuring accrual
 
(10,833
)
 

Deferred revenue

185


6,061

Income taxes payable, net

(2,003
)

(44
)
Retirement and pension plan assets and liabilities

(1,019
)

2,798

Prepaid expenses

(3,416
)

(1,631
)
Other assets and liabilities, net

(3,761
)

(3,000
)
Net cash used in operating activities

(22,885
)

(36,001
)
 
 
 
 
 
Cash flows - investing activities




Acquisition of business
 
(3,119
)
 
(364
)
Capital expenditures

(4,939
)
 
(13,161
)
Purchases of available-for-sale investments

(2,046
)
 
(2,117
)
Proceeds from sales of available-for-sale investments

2,890

 
1,271

Net cash used in investing activities

(7,214
)
 
(14,371
)
 
 
 
 
 
Cash flows - financing activities




Proceeds from line of credit
 
20,000

 
40,000

Payments on line of credit

(20,000
)
 
(40,000
)
Cash dividends paid

(7,573
)
 
(7,676
)
Payment of employee tax withholdings on equity transactions

(2,234
)
 
(2,392
)
Acquisition earnout payments


 
(4,557
)
Net cash used in financing activities

(9,807
)
 
(14,625
)
 
 
 
 
 
Effect of exchange rate fluctuations on cash, cash equivalents and restricted cash
 
(3,442
)
 
5,766

 
 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
 
(43,348
)
 
(59,231
)
Cash, cash equivalents and restricted cash at beginning of period
 
208,162

 
165,569

Cash, cash equivalents and restricted cash at end of period
 
$
164,814

 
$
106,338

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


4




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

1.
Basis of Presentation of Interim Financial Information

The accompanying unaudited Condensed Consolidated Financial Statements of Heidrick & Struggles International, Inc. and subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Significant items subject to estimates and assumptions include revenue recognition, income taxes, interim effective tax rate and 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 September 30, 2018 and 2017, and December 31, 2017 and 2016:
 
September 30,
 
December 31,
 
2018
 
2017
 
2017
 
2016
Cash and cash equivalents
$
164,216

 
$
105,718

 
$
207,534

 
$
165,011

Restricted cash included within other current assets
598

 
265

 
526

 
139

Restricted cash included within other non-current assets

 
355

 
102

 
419

Total cash, cash equivalents and restricted cash
$
164,814

 
$
106,338

 
$
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 period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Common equivalent shares are excluded from the determination of diluted earnings per share in periods in which they have an anti-dilutive effect.


5




The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
16,469

 
$
8,171

 
$
38,100

 
$
(9,427
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
18,954

 
18,781

 
18,905

 
18,720

Effect of dilutive securities:
 
 
 
 
 
 
 
Restricted stock units
278

 
187

 
345

 

Performance stock units
169

 
48

 
194

 

Diluted
19,401

 
19,016

 
19,444

 
18,720

Basic earnings per share
$
0.87

 
$
0.44

 
$
2.02

 
$
(0.50
)
Diluted earnings per share
$
0.85

 
$
0.43

 
$
1.96

 
$
(0.50
)

Weighted average restricted stock units and performance stock units outstanding that could be converted into approximately 327,000 and 80,000 common shares, respectively, for the nine months ended September 30, 2017, were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

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. In July 2018, the FASB issued ASU No. 2018-11, Leases, intended to provide transition relief on comparative reporting at adoption. The ASU allows companies to present prior periods under current GAAP (Topic 840), rather than restating all periods presented under the new requirements of ASU No. 2016-02. ASU No. 2018-11 also eliminated the requirement that companies separate non-lease and lease components in a contract, and allows companies to account for those components as a single lease.

The Company will adopt the guidance on January 1, 2019 using the modified retrospective method without restatement of the prior periods. As such, prior periods will continue to be presented under the existing ASC 840 lease accounting guidance. The Company is currently performing its evaluation of ASU 2016-02 and ASU 2018-11. The adoption of the guidance will have a material impact on the Company's Consolidated Balance Sheets with respect to recording a right-of-use asset and lease liability for each of the Company's leases. The Company's lease portfolio is primarily comprised of office leases, which are currently classified as operating leases and will continue to be classified as operating leases under the new guidance. The Company does not anticipate a significant change in expense recognition as it relates to the new guidance.

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

6




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.

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 nine months ended September 30, 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.


7




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 was 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



8




The impact of ASU 2014-09, Revenue from Contracts with Customers, on our Condensed Consolidated Balance Sheet as of September 30, 2018 was as follows:
 
September 30, 2018
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Adoption Higher/(Lower)
Current assets
 
 
 
 
 
Other current assets
$
29,783

 
$
12,678

 
$
17,105

Total current assets
382,952

 
365,847

 
17,105

 
 
 
 
 
 
Non-current assets
 
 
 
 
 
Deferred income taxes
32,320

 
35,419

 
(3,099
)
Total non-current assets
249,904

 
253,003

 
(3,099
)
 
 
 
 
 
 
Total assets
$
632,856

 
$
618,850

 
$
14,006

 
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accrued salaries and employee benefits
177,930

 
176,984

 
946

Deferred revenue
42,870

 
43,531

 
(661
)
Other current liabilities
35,127

 
30,760

 
4,367

Income taxes payable
7,866

 
7,746

 
120

Total current liabilities
272,772

 
268,000

 
4,772

 
 
 
 
 
 
Total liabilities
$
379,023

 
$
374,251

 
$
4,772

 
 
 
 
 
 
Stockholders' equity
 
 
 
 
 
Retained earnings (deficit)
44,854

 
35,620

 
9,234

Total stockholders’ equity
253,833

 
244,599

 
9,234

 
 
 
 
 
 
Total liabilities and stockholders’ equity
$
632,856

 
$
618,850

 
$
14,006



9




The impact of ASU 2014-09, Revenue from Contracts with Customers, on our Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2018 was as follows:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Adoption
Higher/(Lower)
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Adoption
Higher/(Lower)
Revenue
 
 
 
 
 
 
 
 
 
 
 
Revenue before reimbursements (net revenue)
$
187,588

 
$
187,720

 
$
(132
)
 
$
530,718

 
$
529,372

 
$
1,346

Reimbursements
4,753

 
4,753

 

 
13,970

 
13,970

 

Total revenue
192,341

 
192,473

 
(132
)
 
544,688

 
543,342

 
1,346

 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
133,933

 
134,017

 
(84
)
 
373,021

 
372,075

 
946

General and administrative expenses
33,072

 
33,072

 

 
105,532

 
105,532

 

Reimbursed expenses
4,753

 
4,753

 

 
13,970

 
13,970

 

Total operating expenses
171,758

 
171,842

 
(84
)
 
492,523

 
491,577

 
946

 
 
 
 
 
 
 
 
 
 
 
 
Operating income
20,583

 
20,631

 
(48
)
 
52,165

 
51,765

 
400

 
 
 
 
 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
 
 
 
 
Interest, net
259

 
259

 

 
496

 
496

 

Other, net
2,345

 
2,345

 

 
1,849

 
1,849

 

Net non-operating income (expense)
2,604

 
2,604

 

 
2,345

 
2,345

 

 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
23,187

 
23,235

 
(48
)
 
54,510

 
54,110

 
400

 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
6,718

 
6,736

 
(18
)
 
16,410

 
16,290

 
120

 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
16,469

 
$
16,499

 
$
(30
)
 
$
38,100

 
$
37,820

 
$
280

 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.87

 
$
0.87

 
$

 
$
2.02

 
$
2.00

 
$
0.02

Diluted earnings per share
$
0.85

 
$
0.85

 
$

 
$
1.96

 
$
1.95

 
$
0.01


The impact of ASU 2014-09, Revenue from Contracts with Customers, on our Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2018 was as follows:
 
Nine Months Ended September 30, 2018
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Adoption
Higher/(Lower)
Cash flows - operating activities
 
 
 
 
 
Net income
$
38,100

 
$
37,820

 
$
280

Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
 
 
Accrued expenses
3,834

 
(1,479
)
 
5,313

Deferred revenue
185

 
2,843

 
(2,658
)
Income taxes payable, net
(2,003
)
 
(2,123
)
 
120

Other assets and liabilities, net
$
(3,761
)
 
$
(705
)
 
$
(3,056
)


10




3.
Revenue

Executive Search

Revenue is recognized as we satisfy our performance obligations by transferring a good or service to a client. Generally, each of our executive search contracts 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-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, and initially records a contract’s uptick revenue in an amount that is probable not to result in a significant reversal of cumulative revenue recognized when the actual amount of uptick revenue for that contract is known. Differences between the estimated and actual amounts of variable consideration are recorded when known. The Company does not estimate revenue for direct expenses as it is not materially different than recognizing revenue as direct expenses are incurred.

Revenue from our executive search engagement performance obligation is recognized over time as our clients simultaneously receive and consume the benefits provided by the Company's performance.  Revenue from executive search engagements is recognized over the expected average period of performance, in proportion to the estimated personnel time incurred to fulfill our obligations under the executive search contract. Revenue is generally recognized over a period of approximately six months.

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

Heidrick Consulting

Revenue is recognized as we satisfy our performance obligations by transferring a good or service to a client. Heidrick Consulting enters into contracts with clients that outline the general terms and conditions of the assignment to provide succession planning, executive assessment, top team and board effectiveness and culture shaping programs. The consideration the Company expects to receive under each contract is generally fixed. Most of our consulting contracts contain one performance obligation, which is the overall process of providing the consulting service requested by the client. The majority of our consulting revenue is recognized over time utilizing both input and output methods. Contracts that contain coaching sessions, training sessions or the completion of assessments are recognized using the output method as each session or assessment is delivered to the client. Contracts that contain general consulting work are recognized using the input method utilizing a measure of progress that is based on time incurred on the project.
The Company enters into enterprise agreements with clients to provide a license for online access, via the Company's SD Connect platform, to training and other proprietary material related to the Company's culture shaping programs. The consideration the Company expects to receive under the terms of an enterprise agreement is comprised of a single fixed fee. Our enterprise agreements contain multiple performance obligations, the delivery of materials via SD Connect and material rights related to options to renew enterprise agreements at a significant discount. The Company allocates the transaction price to the performance obligations in the contract on a stand-alone selling price basis. The stand-alone selling price for the initial term of the enterprise agreement is outlined in the contract and is equal to the price paid by the client for the agreement over the initial term of the contract. The stand-alone selling price for the options to renew, or material right, are not directly observable and must be estimated. This estimate is required to reflect the discount the client would obtain when exercising the option to renew, adjusted for the likelihood that the option will be exercised. The Company estimates the likelihood of renewal using a historical analysis of client renewals. Access to SD Connect represents a right to access the Company’s intellectual property that the client simultaneously receives and consumes as the Company performs under the agreement, and therefore the Company recognizes revenue over time. Given the continuous nature of this commitment, the Company utilizes straight-line ratable revenue recognition over the estimated

11




subscription period as the Company's clients will receive and consume the benefits from SD Connect equally throughout the contract period. Revenue related to client renewals of enterprise agreements is recognized over the term of the renewal, which is generally twelve months. Enterprise agreements do not comprise a significant portion of the Company's revenue.

Contract Balances

Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Contract assets and liabilities are classified as current due to the nature of the Company's contracts, which are completed within one year. Contract assets are included within Other Current Assets on the Condensed Consolidated Balance Sheets.

Unbilled receivables: Unbilled revenue represents contract assets from revenue recognized over time in excess of the amount billed to the client and the amount billed to the client is solely dependent upon the passage of time. This amount includes revenue recognized in excess of billed executive search retainers and Heidrick Consulting fees.

Contract assets: Contract assets represent revenue recognized over time in excess of the amount billed to the client and the amount billed to the client is not solely subject to the passage of time. This amount primarily includes revenue recognized for upticks and contingent placement fees in executive search contracts.

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

The following table outlines the changes in our contract asset and liability balances during the period:
 
January 1,
2018
 
September 30,
2018
 
Variance
Contract assets
 
 
 
 
 
Unbilled receivables
$
5,487

 
$
7,655

 
$
2,168

Contract assets
12,398

 
14,334

 
1,936

 
 
 
 
 
 
Contract liabilities
 
 
 
 
 
Deferred revenue
$
30,370

 
$
42,870

 
$
12,500


During the nine months ended September 30, 2018, we recognized revenue of $27.4 million that was included in the contract liabilities balance at the beginning of the period. The amount of revenue recognized during the nine months ended September 30, 2018, from performance obligations partially satisfied in previous periods as a result of changes in the estimates of variable consideration was $20.9 million.

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

4.
Allowance for Doubtful Accounts

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

Provision charged to income
3,899

Write-offs, net of recoveries
(1,203
)
Foreign currency translation
(99
)
Balance at September 30, 2018
$
5,131



12




5.
Property and Equipment, net

The components of the Company’s property and equipment are as follows:
 
September 30,
2018
 
December 31,
2017
Leasehold improvements
$
47,863

 
$
48,216

Office furniture, fixtures and equipment
17,960

 
17,732

Computer equipment and software
27,427

 
28,300

Property and equipment, gross
93,250

 
94,248

Accumulated depreciation
(57,759
)
 
(54,734
)
Property and equipment, net
$
35,491

 
$
39,514


Depreciation expense for the three months ended September 30, 2018 and 2017 was $2.7 million and $2.8 million, respectively. Depreciation expense for the nine months ended September 30, 2018 and 2017 was $8.3 million and $7.4 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 $21.0 million and $21.3 million as of September 30, 2018 and December 31, 2017, respectively. The aggregate cost basis for these investments was $14.8 million and $14.6 million as of September 30, 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 September 30, 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 September 30, 2018
 
 
 
 
 
 
 
 
U.S. non-qualified deferred compensation plan
 
$
21,013

 
$

 
$

 
$
21,013

Assets designated for retirement and pension plans
 

 
17,965

 

 
17,965

Pension benefit obligation
 

 
(23,089
)
 

 
(23,089
)
Acquisition earnout accruals
 

 

 
(10,490
)
 
(10,490
)
 
 
$
21,013

 
$
(5,124
)
 
$
(10,490
)
 
$
5,399


13




 
 
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 September 30, 2018, and December 31, 2017, based upon the short-term nature of the assets and liabilities.

The following table provides a reconciliation of the beginning and ending balance of Level 3 assets and liabilities for the nine months ended September 30, 2018:
 
Acquisition
Earnout
Accruals
Balance at December 31, 2017
$
(7,213
)
Acquisition earnouts (Note 8)
(3,054
)
Earnout accretion
(963
)
Philosophy IB earnout adjustment (1)
436

Foreign currency translation
304

Balance at September 30, 2018
$
(10,490
)

(1)
During the three months ended September 30, 2018, the Company determined that the software and consulting revenue targets for the period from September 2017 to August 2018, or second installment, would not be achieved. As such, the Company reduced the second installment earnout accrual by $0.4 million.

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 accrued $3.1 million on the acquisition date. The Company recorded $1.7 million of intangible assets related to customer relationships and $5.1 million of goodwill. The goodwill is primarily related to the acquired workforce and strategic fit.


14




9.
Goodwill and Other Intangible Assets

Goodwill

The Company's goodwill by segment is as follows:
 
September 30,
2018
 
December 31, 2017
Executive Search
 
 
 
Americas
$
88,595

 
$
88,690

Europe
48,601

 
44,407

Asia Pacific
8,756

 
9,302

Total Executive Search
145,952

 
142,399

Heidrick Consulting
36,257

 
36,257

Goodwill, gross
182,209

 
178,656

Accumulated impairment
(59,764
)
 
(59,764
)
Goodwill, net
$
122,445

 
$
118,892


Changes in the carrying amount of goodwill by segment for the nine months ended September 30, 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

 
5,102

 

 

 
5,102

Foreign currency translation
(95
)
 
(908
)
 
(546
)
 

 
(1,549
)
Net goodwill at September 30, 2018
$
88,595

 
$
25,094

 
$
8,756

 
$

 
$
122,445


On January 4, 2018, the Company acquired Amrop and included the fair value of the acquired assets and liabilities as of the acquisition date in the Condensed Consolidated Balance Sheets. The Company included $5.1 million of goodwill related to the acquisition in the Europe segment.

During the nine months ended September 30, 2017, the Company determined that the goodwill within the Culture Shaping reporting unit was impaired, which resulted in an impairment charge of $29.3 million to write off all goodwill in the Culture Shaping reporting unit. The impairment charge is recorded within Impairment charges in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2017. 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. Effective January 1, 2018, the Company completed its integration of the Culture Shaping reporting unit into the newly created Heidrick Consulting reporting unit.

Other Intangible Assets, net

The Company’s other intangible assets, net by segment, are as follows:
 
September 30,
2018
 
December 31, 2017
Executive Search
 
 
 
Americas
$
73

 
$
252

Europe
2,378

 
1,799

Asia Pacific
84

 
107

Total Executive Search
2,535

 
2,158

Heidrick Consulting

 

Total other intangible assets, net
$
2,535

 
$
2,158


The Company recorded customer relationships in the Europe segment of $1.7 million related to the acquisition of Amrop.

During the nine months ended September 30, 2017, the Company determined that the intangible assets within the Culture Shaping reporting unit were impaired, which resulted in an impairment charge of $9.9 million to write off all intangible assets in

15




the Culture Shaping reporting unit. The impairment charge is recorded within Impairment charges in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2017. The impairment was non-cash in nature and did not affect current liquidity, cash flows, borrowing capability or operations, nor did it impact the debt covenants under our credit agreement.

The carrying amount of amortizable intangible assets and the related accumulated amortization are as follows:
 
Weighted
Average
Life (Years)
 
September 30, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Client relationships
6.8
 
$
16,053

 
$
(13,518
)
 
$
2,535

 
$
13,703

 
$
(11,612
)
 
$
2,091

Trade name
0.0
 
443

 
(443
)
 

 
459

 
(459
)
 

Non-compete
0.0
 
222

 
(222
)
 

 
230

 
(163
)
 
67

Total intangible assets
6.8
 
$
16,718

 
$
(14,183
)
 
$
2,535

 
$
14,392

 
$
(12,234
)
 
$
2,158


Intangible asset amortization expense for the three months ended September 30, 2018 and 2017 was $0.4 million and $0.9 million, respectively. Intangible asset amortization expense for the nine months ended September 30, 2018 and 2017 was $1.2 million and $3.9 million, respectively.

The Company's estimated future amortization expense related to intangible assets as of September 30, 2018, for the years ended December 31 is as follows:
 
Estimated Future Amortization
2018
$
281

2019
860

2020
538

2021
363

2022
246

Thereafter
247

Total
$
2,535


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

The components of other current assets are as follows:
 
September 30,
2018
 
December 31,
2017
Contract assets
$
21,989

 
$
3,538

Other
7,794

 
8,082

Total other current assets
$
29,783

 
$
11,620


The components of other current liabilities are as follows:
 
September 30,
2018
 
December 31,
2017
Restructuring charges
$
2,124

 
$
13,023

Other
33,003

 
27,323

Total other current liabilities
$
35,127

 
$
40,346


The components of other non-current liabilities are as follows:
 
September 30,
2018
 
December 31,
2017
Premise related costs
$
16,180

 
$
18,360

Accrued earnout payments
3,373

 
3,076

Restructuring charges

 
10

Other
2,216

 
2,151

Total other non-current liabilities
$
21,769

 
$
23,597



16




11.
Line of Credit

On June 30, 2015, the Company entered into a Second Amended and Restated Credit Agreement (the “Restated Credit Agreement”). Pursuant to the Restated Credit Agreement, the Company replaced its 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 Restated Credit Agreement 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 Restated Credit Agreement) or Adjusted LIBOR Rate (as defined in the Restated Credit Agreement) plus a spread as determined by the Company’s leverage ratio.

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

During the nine months ended September 30, 2018, the Company borrowed $20.0 million under the Restated Credit Agreement and elected the Adjusted LIBOR Rate. The Company subsequently repaid $20.0 million during the nine months ended September 30, 2018. As of September 30, 2018 and December 31, 2017, the Company had no outstanding borrowings under the Restated Credit Agreement. As of September 30, 2018, the Company was in compliance with the financial and other covenants in the Restated Credit Agreement, and no event of default existed.
 
12.
Stock-Based Compensation

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

On May 22, 2014, the stockholders of the Company approved an amendment to the 2012 Program to increase the number of shares of Common Stock reserved for issuance under the 2012 Program by 700,000 shares. On May 24, 2018, the stockholders of the Company approved an amendment to the 2012 Program to increase the number of shares of Common Stock reserved for issuance under the 2012 Program by 850,000 shares. As of September 30, 2018, 2,149,864 awards have been issued under the 2012 Program and 1,368,789 shares remain available for future awards, including 668,653 forfeited awards. The 2012 Program provides that no awards can be granted after May 24, 2028.

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

A summary of information with respect to stock-based compensation is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Salaries and employee benefits
$
2,911

 
$
199

 
$
6,200

 
$
3,915

General and administrative expenses

 

 
563

 
338

Income tax benefit related to stock-based compensation included in net income
771

 
79

 
1,792

 
1,561

Restricted Stock Units

Restricted stock unit activity for the nine months ended September 30, 2018 is as follows:
 
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
(70,506
)
 
25.66

Outstanding on September 30, 2018
518,762

 
$
28.81


As of September 30, 2018, there was $7.8 million of pre-tax unrecognized compensation expense related to unvested restricted stock units, which is expected to be recognized over a weighted average of 2.9 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 nine months ended September 30, 2018 is as follows:
 
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 September 30, 2018
197,117

 
$
24.88


As of September 30, 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 2.0 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.

During the three months ended September 30, 2018, phantom stock with respect to 114,118 shares of common stock were granted to certain employees of the Company and are subject to vesting over a period of four years and certain other conditions, including continued service to the Company. As a result of the cash-settlement feature of the awards, the Company considers the awards to be liability awards, which are measured at fair value at each reporting date and the vested portion of the award is recognized as a liability to the extent that the service condition is deemed probable. The fair value of the phantom stock awards as of September 30, 2018, was determined using the closing share price of the Company's common stock on that date.

The Company recorded phantom stock based compensation expense of $0.4 million during the three months ended September 30, 2018.

Phantom stock unit activity for the nine months ended September 30, 2018 is as follows:
 
Number of
Phantom
Stock Units
Outstanding on December 31, 2017

Granted
114,118

Vested

Forfeited

Outstanding on September 30, 2018
114,118


As of September 30, 2018, there was $3.3 million of pre-tax unrecognized compensation expense related to unvested phantom stock units, which is expected to be recognized over a weighted average of 3.8 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

17




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.

Changes to the accrual for restructuring charges for the nine months ended September 30, 2018, are as follows:
 
Employee Related
 
Office Related
 
Other
 
Total
Outstanding on December 31, 2017
$
11,866

 
$
148

 
$
1,011

 
$
13,025

Cash payments
(7,940
)
 
(248
)
 
(981
)
 
(9,169
)
Other
(1,793
)
 
100

 
27

 
(1,666
)
Exchange rate fluctuations
(59
)
 

 
(7
)
 
(66
)
Outstanding on September 30, 2018
$
2,074

 
$

 
$
50

 
$
2,124


14.
Income Taxes

The Company reported income before taxes of $23.2 million and an income tax provision of $6.7 million for the three months ended September 30, 2018. The Company reported income before taxes of $14.3 million and an income tax provision of $6.1 million for the three months ended September 30, 2017. The effective tax rates for the three months ended September 30, 2018 and 2017, were 29.0% and 42.7%, respectively. The effective tax rate for the three months ended September 30, 2018 was impacted by one-time items and the Tax Cuts and Jobs Act. The effective tax rate for the three months ended September 30, 2017 was impacted by the deferred tax effect on the long-lived assets and goodwill impairment and the inability to recognize losses in certain jurisdictions.

The Company reported income before taxes of $54.5 million and an income tax provision of $16.4 million for the nine months ended September 30, 2018. The Company reported loss before taxes of $10.3 million and an income tax benefit of $0.9 million for the nine months ended September 30, 2017. The effective tax rates for the nine months ended September 30, 2018 and 2017, were 30.1% and 8.7%, respectively. The effective tax rate for the nine months ended September 30, 2018 was impacted by one-time items and the Tax Cuts and Jobs Act. The effective tax rate for the nine months ended September 30, 2017 was impacted by the non-deductibility of the employee benefit tax settlement, the deferred tax effect on the long-lived assets and goodwill impairment and the inability to recognize losses in certain jurisdictions.

The Company estimates that its effective tax rate for the year ended December 31, 2018, will be between 31% and 36%. 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 Cuts and Jobs 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 September 30, 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 Cuts and Jobs Act. The Company expects to complete the analysis and update the provisional amounts within the measurement period in accordance with SAB 118.


18




15.
Changes in Accumulated Other Comprehensive Income

The changes in Accumulated other comprehensive income (“AOCI”) by component for the nine months ended September 30, 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
 

 
(3,107
)
 

 
(3,107
)
Amount reclassified from AOCI
 

 

 

 

Net current period other comprehensive income
 

 
(3,107
)
 

 
(3,107
)
Adoption of accounting standards (1)
 
(6,089
)
 

 

 
(6,089
)
Balance at September 30, 2018
 
$

 
$
6,036