HEIDRICK & STRUGGLES INTERNATIONAL INC - Annual Report: 2011 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Commission File No. 0-25837

HEIDRICK & STRUGGLES INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

233 South Wacker Drive, Suite 4200, Chicago, Illinois 60606-6303

(Address of principal executive offices) (Zip Code)

(312) 496-1200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.    Yes  ¨    No  x

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  ¨    Accelerated  Filer  x    Non-Accelerated Filer  ¨    Smaller Reporting Company  ¨

(Do not check if a smaller reporting company)

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

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant on June 30, 2011 was approximately $399,492,807 based upon the closing market price of $22.64 on that date of a share of Common Stock as reported on the Nasdaq Global Stock Market. As of March 7, 2012, there were 17,870,236 shares of the Company’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 24, 2012, are incorporated by reference into Part III of this Form 10-K.

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HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES

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PART I

ITEM 1. BUSINESS

Overview

Heidrick & Struggles International, Inc. (“Heidrick & Struggles”) is a leadership advisory firm providing executive search and leadership consulting services. We provide our services to a broad range of clients through the expertise of 347 consultants located in major cities around the world. Heidrick & Struggles and its predecessors have been a leadership advisor for nearly 60 years. Heidrick & Struggles was formed as a Delaware corporation in 1999 when two of our predecessors merged to form Heidrick & Struggles.

Our service offerings include the following:

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

The executive search industry is highly fragmented, consisting of several thousand executive search firms worldwide. Executive search firms are generally separated into two broad categories: retained and contingency. Retained executive search firms fulfill their clients’ senior leadership needs by identifying potentially qualified candidates and assisting clients in evaluating and assessing these candidates. Retained executive search firms generally are compensated for their services regardless of whether the client employs a candidate identified by the search firm and are generally retained on an exclusive basis. Retained executive search firms normally charge a fee for their services equal to approximately one-third of the first year’s total compensation for the position being filled. In contrast, contingency search firms are compensated only upon successfully placing a recommended candidate.

We are a retained executive search firm. Our search process typically consists of the following steps:

Leadership Consulting.    Our leadership consulting services, which is currently less than 10% of our net revenue, includes succession planning, executive assessment, talent retention management, executive development, transition consulting for newly appointed executives, and mergers and acquisitions human capital integration consulting.

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Client base.    For many of our clients, our global access to and knowledge of regional and functional markets and candidate talent is an important differentiator of our business. We provide our executive search services on a retained basis, recruiting senior executives whose first year base salary and bonus averaged approximately $338,700 in 2011 on a worldwide basis. Our clients include the following:

Available Information

We maintain an Internet website at http://www.heidrick.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available free of charge on this site as soon as reasonably practicable after the reports are filed with or furnished to the Securities and Exchange Commission. We also post news releases on our financial results, investor presentations and other documents containing additional information related to our company on this site. Our Internet website and the information contained in or accessible from our website are for informational purposes only and are not incorporated into this annual report on Form 10-K.

Organization

Our organizational structure, which is arranged by geography and industry/functional practices, is designed to enable us to better understand our clients’ cultures, operations, business strategies, industries and regional markets for executive talent.

Geographic Structure.    We provide senior-level executive search and leadership consulting services to our clients worldwide through a network of more than 57 offices in 28 countries. Major locations are staffed with consultants, research associates, administrative assistants and other support staff. Administrative functions are centralized where possible, although certain support and research functions are situated regionally because of variations in local requirements. We face risks associated with political instability, legal requirements and currency fluctuations in our international operations. Examples of such risks include difficulties in managing global operations, social and political instability, regulations, and potential adverse tax consequences.

Our worldwide network includes affiliate relationships in Finland, South Africa, Turkey and Portugal. We have no financial investment in these affiliates but receive licensing fees from them for the use of our name and our databases. Licensing fees are less than 1% of our net revenue.

Information by Geographic Segment.    We operate our executive search and leadership consulting services in three geographic regions: the Americas; Europe, which includes the Middle East and Africa; and Asia Pacific.

Americas.    As of December 31, 2011, we had 160 consultants in our Americas segment. The largest offices in this segment, as defined by net revenue, are located in New York, Chicago and Atlanta.

Europe.    As of December 31, 2011, we had 104 consultants in our European segment. The largest offices in this segment, as defined by net revenue, are located in the United Kingdom, Germany and France.

Asia Pacific.    As of December 31, 2011, we had 83 consultants in our Asia Pacific segment. The largest offices in this segment, as defined by net revenue, are located in China (including Hong Kong), Australia and Singapore.

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The relative percentages of net revenue attributable to each segment were as follows:

For financial information relating to each geographic segment, see Note 21, Segment Information, in the Notes to Consolidated Financial Statements.

Global Industry Practices.    Our executive search business operates in six broad industry groups: Financial Services, Industrial, Consumer Markets, Global Technology and Services, Life Sciences, and Education and Social Enterprise. These industry categories and their relative sizes, as measured by net revenue for 2011 and 2010 are as follows:

Within each broad industry group are a number of industry sub-sectors. Consultants often specialize in one or more sub sectors to provide clients with market intelligence and candidate knowledge specific to their industry. For example, within the Financial Services sector our business is diversified among a number of industry sub sectors including Asset & Wealth Management, Consumer & Commercial Finance, Financial Services Practices & Infrastructure, Investment Banking, Global Markets, Hedge Fund, Insurance, Private Equity Investment Professionals, and Real Estate.

We service our clients through unified global executive search teams who specialize in industry practices. This go-to-market strategy allows us to better leverage our global diversity and market intelligence to provide better client service. Each client is served by one global account team, which we believe is a key differentiator from our competition.

Global Functional Practices.    Our executive search consultants also specialize in searches for specific “C-level” functional positions, which are roles that generally report directly to the chief executive officer. These include chief financial officers, chief information officers, chief legal officers, chief marketing officers and chief human resources officers.

Our Global Functional Practices include Chief Executive Officer and Board of Directors; Chief Human Resources Officers; Financial Officers; Information Officers; Interim Executives; Legal, Risk, Compliance & Government Affairs; Marketing, Sales & Strategy Officers; Multicultural & Digital Marketing; Sales Officers; Research & Development; and Supply Chain & Transportation.

Our team of executive search consultants may service clients from any one of our offices around the world. For example, an executive search for a chief financial officer of an industrial company located in the United Kingdom may involve a consultant in the United Kingdom with an existing relationship with the client, another

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executive search consultant in the United States with expertise in our Industrial practice and a third executive search consultant with expertise in recruiting chief financial officers. This same industrial client may also engage us to perform skill-based assessments for each of its senior managers, which could require the expertise of one of our leadership advisory consultants trained in this service.

Seasonality

There is no discernible seasonality in our business, although as a percentage of total annual net revenue, the first quarter is typically the lowest. Revenue and operating income have historically varied by quarter and are hard to predict from quarter to quarter. In addition, the volatility in the global economy impacts our quarterly revenue and operating income.

Clients and Marketing

Our consultants market the firm’s executive search and leadership consulting services through two principal means: targeted client calling and industry networking with clients and referral sources. These efforts are supported by proprietary databases, which provide our consultants with information as to contacts made by their colleagues with particular referral sources, candidates and clients. In addition, we benefit from a significant number of referrals generated by our reputation for high quality service and successfully completed assignments, as well as repeat business resulting from our ongoing client relationships.

Either by agreement with the clients or to maintain strong client relationships, executive search firms generally refrain from recruiting employees of a client, and possibly other entities affiliated with that client, for a specified period of time but typically not more than one year from the commencement of a search. We seek to mitigate any adverse effects of these off-limits arrangements by strengthening our long-term relationships, allowing us to communicate our belief to prospective clients that we can conduct searches without these off-limits arrangements impeding the quality of our work.

No single client accounted for more than 2% of our net revenue in 2011, 2010 or 2009. Our top ten clients in 2011, 2010 and 2009 in aggregate accounted for less than 8% of total net revenue.

Information Management Systems

We rely on technology to support our consultants and staff in the search process. Our technology infrastructure consists of internally developed databases containing candidate profiles and client records, coupled with online services and industry reference sources. We use technology to manage and share information on current and potential clients and candidates, to communicate to both internal and external constituencies and to support administrative functions.

Professional Staff and Employees

Our professionals are generally categorized either as consultants or associates. Associates assist consultants by providing research support, coordinating candidate contact and performing other engagement-related functions. As of December 31, 2011, we had 1,506 full-time equivalent employees, of whom 347 were executive search consultants, 429 were associates and 730 were other search, support and Global Operations Support staff.

We promote our associates to consultant during the annual consultant promotion process and we recruit our consultants from other executive search or human capital firms, or in the case of executive search, consultants new to search who have worked in industries or functions represented by our practices. In the latter case, these are often seasoned executives with extensive contacts and outstanding reputations who are entering the search profession as a second career and whom we train in our techniques and methodologies. In each of the past five years, no single consultant accounted for a material portion of our net revenue. We are not a party to any collective bargaining agreement, and we consider relations with our employees to be good.

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Competition

The executive search industry is highly competitive. While we face competition to some degree from all firms in the industry, we believe our most direct competition comes from four established global retained executive search firms that conduct searches primarily for the most senior-level positions within an organization. In particular, our competitors include Egon Zehnder International, Korn/Ferry International, Russell Reynolds Associates, Inc. and Spencer Stuart & Associates. To a lesser extent, we also face competition from Internet-based firms and smaller boutiques that specialize in certain regional markets or industry segments. Each firm with which we compete is also a competitor in the marketplace for effective consultants.

Overall, the search industry has relatively few barriers to entry. Higher barriers exist, however, for global retained executive search firms that can provide leadership consulting services at the senior level. At this level, clients rely more heavily on a search firm’s reputation, global access and the experience level of its consultants. We believe that the segment of executive search in which we compete is more quality-sensitive than price-sensitive. As a result, we compete on the level of service we offer, reflected by our client services specialties and, ultimately, by the quality of our search results. We believe that our emphasis on senior-level executive search, the depth of experience of our search consultants and our global presence enable us to compete favorably with other executive search firms.

Competition in the leadership consulting services markets in which we operate is highly fragmented, with no universally recognized market leaders.

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EXECUTIVE OFFICERS

Our executive officers as of March 14, 2012 are as follows:

There are no family relationships between any executive officer or director. The following information sets forth the business experience for at least the past five years for each of our executive officers as of March 14, 2012:

L. Kevin Kelly was elected Chief Executive Officer and a Director in September 2006. He was elected President in May 2007. Previously, Mr. Kelly was President, Europe, Middle East, Africa and Asia Pacific from March 2005 to September 2006; Regional Managing Partner, Asia Pacific from September 2002 to March 2005; and Office Managing Partner, Tokyo from February 2002 to September 2002. He joined us in 1997.

Richard W. Pehlke joined us in August 2011 after serving as interim Chief Financial Officer since May 2011. Previously, Mr. Pehlke was Executive Vice President and Chief Financial Officer at Grubb & Ellis Company, a commercial real estate advisory firm, from 2007 to 2010. From 2003 to 2005 he was an Executive Vice President and Chief Financial Officer and Director of Hudson Highland Group, a temporary and permanent staffing company.

Stephen W. Beard was elected Executive Vice President, General Counsel and Secretary in November 2010. Mr. Beard was Vice President, Deputy General Counsel and Chief Compliance Officer from 2008 through November 2010 and Assistant General Counsel from 2003 through 2008. He joined us in 2003. Previously, Mr. Beard worked with Schiff Hardin, LLP, in Chicago where he was a member of the firm’s corporate and securities practice group, representing public and private companies in mergers and acquisitions, corporate finance, securities and corporate governance matters.

Timothy C. Hicks was elected Executive Vice President and Managing Partner, Operations in October 2011. Since joining us in 2002, Mr. Hicks has held several leadership roles including partner-in-charge of the Chicago Office and sector leader of the global Automotive Practice. Previously, Mr. Hicks was a partner with another international search firm for 11 years where he held several leadership positions including heading the firm's automotive practice.

ITEM 1A. RISK FACTORS

In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating our business because such factors may have a material impact on our business, operating results, cash flows and financial condition. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations.

We depend on attracting, integrating, managing, and retaining qualified consultants.

Our success depends upon our ability to attract, integrate, manage and retain consultants who possess the skills and experience necessary to fulfill our clients’ needs. Our ability to hire and retain qualified consultants could be impaired by any diminution of our reputation, decrease in compensation levels relative to our

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competitors or modifications to our total compensation philosophy or competitor hiring programs. If we cannot attract, hire and retain qualified consultants, our business, financial condition and results of operations may suffer. Our future success also depends upon our ability to complete the integration of newly-hired consultants successfully into our operations and to manage the performance of our consultants. Failure to successfully integrate newly-hired consultants or to manage the performance of our consultants could affect our profitability by causing operating inefficiencies that could increase operating expenses and reduce operating income.

We may not be able to prevent our consultants from taking our clients with them to another firm.

Our success depends upon our ability to develop and maintain strong, long-term relationships with our clients. Although we work on building these relationships between our firm and our clients, in many cases, one or two consultants have primary responsibility for a client relationship. When a consultant leaves one executive search firm and joins another, clients who have established relationships with the departing consultant may move their business to the consultant’s new employer. We may also lose clients if the departing consultant has widespread name recognition or a reputation as a specialist in executing searches in a specific industry or management function. If we fail to limit departing consultants from moving business to another employer, our business, financial condition and results of operations may be adversely affected.

Our success depends on our ability to maintain our professional reputation and brand name.

We depend on our overall professional reputation and brand name recognition to secure new engagements and hire qualified consultants. Our success also depends on the individual reputations of our consultants. We obtain many of our new engagements from existing clients or from referrals by those clients. A client who is dissatisfied with our work can adversely affect our ability to secure new engagements. If any factor hurts our reputation, including poor performance, we may experience difficulties in competing successfully for both new engagements and qualified consultants. Failure to maintain our professional reputation and brand name could seriously harm our business, financial condition and results of operations.

Our net revenue may be affected by adverse economic conditions.

Demand for our services is affected by global economic conditions and the general level of economic activity in the geographic regions in which we operate. During periods of slowed economic activity many companies hire fewer permanent employees, and our financial condition and results of operations can be adversely affected. While the economic activity in certain regions has stabilized or shown modest improvement recently, economic conditions remain uncertain. If such uncertainty persists or unfavorable changes in economic conditions occur, our business, financial condition and results of operations could suffer.

Because our clients may restrict us from recruiting their employees, we may be unable to fill or obtain new executive search assignments.

Clients frequently require us to refrain from recruiting certain of their employees when conducting executive searches on behalf of other clients. These restrictions generally remain in effect for no more than one year following the commencement of an engagement. However, the specific duration and scope of the off-limits arrangements depend on the length of the client relationship, the frequency with which the client engages us to perform searches, the number of assignments we have performed for the client and the potential for future business with the client.

Client restrictions on recruiting their employees could hinder us from fulfilling executive searches. Additionally, if a prospective client believes that we are overly restricted by these off-limits arrangements from recruiting the employees of our existing clients, these prospective clients may not engage us to perform their executive searches. As a result, our business, financial condition and results of operations may suffer.

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We face aggressive competition.

The global executive search industry is highly competitive and fragmented. We compete with other large global executive search firms, smaller specialty firms, and more recently with Internet-based firms. Specialty firms can focus on regional or functional markets or on particular industries. Some of our competitors may possess greater resources, greater name recognition and longer operating histories than we do in particular markets or practice areas, or be willing to reduce their fees in order to attract clients and increase market share. There are limited barriers to entry into the search industry and new search firms continue to enter the market. Many executive search firms that have a smaller client base may be subject to fewer off-limits arrangements. In addition, our clients or prospective clients may decide to perform executive searches using in-house personnel. Also, as internet-based firms continue to evolve, they may develop offerings similar to or more expansive than ours, thereby increasing competition for our services or more broadly causing market disruption in the executive search industry. We may not be able to continue to compete effectively with existing or potential competitors. Our inability to meet these competitive challenges could have an adverse impact on our business, financial condition and results of operations.

We rely heavily on information management systems.

Our success depends upon our ability to store, retrieve, process and manage substantial amounts of information. To achieve our goals, we must continue to improve and upgrade our information management systems. We may be unable to license, design and implement, in a cost-effective and timely manner, improved information systems that allow us to compete effectively. In addition, business process reengineering efforts may result in a change in software platforms and programs. Such efforts may result in an acceleration of depreciation expense over the shortened expected remaining life of the software and present transitional problems. In 2012, we plan to launch a new proprietary search system. The launch of the new proprietary search system or other factors may result in interruptions or loss in our information processing capabilities which may cause our business, financial condition and results of operations to suffer.

We face the risk of liability in the services we perform.

We are exposed to potential claims with respect to the executive search process. A client could assert a claim for violations of off-limits arrangements, breaches of confidentiality agreements or professional malpractice. The growth and development of our other leadership advisory services brings with it the potential for new types of claims. In addition, candidates and client employees could assert claims against us. Possible claims include failure to maintain the confidentiality of the candidate’s employment search or for discrimination or other violations of the employment laws or malpractice. In various countries, we are subject to data protection laws impacting the processing of candidate information. We maintain professional liability insurance in amounts and coverage that we believe are adequate; however, we cannot guarantee that our insurance will cover all claims or that coverage will always be available. Significant uninsured liabilities could have a negative impact on our business, financial condition and results of operations.

Our multinational operations may be adversely affected by social, political, regulatory, legal and economic risks.

We generate substantial revenue outside the United States. We offer our services through a network of offices in 28 countries around the world. We are exposed to the risk of changes in social, political, legal and economic conditions inherent in international operations, which could have a significant impact on our business, financial condition and results of operations. Beginning in 2011, several countries within the European Union experienced sovereign debt and credit issues. This has caused more volatility in the economic environment throughout the European Union. In addition, we conduct business in countries where the legal systems, local laws and trade practices are unsettled and evolving. Commercial laws in these countries are sometimes vague, arbitrary and inconsistently applied. Under these circumstances, it is difficult for us to determine at all times the

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exact requirements of such local laws. If we fail to comply with local laws, our business, financial condition and results of operations could suffer. In addition, the global nature of our operations poses challenges to our management, and financial and accounting systems. Failure to meet these challenges could seriously harm our business, financial condition and results of operations.

A significant currency fluctuation between the U.S. dollar and other currencies could adversely impact our operating income.

With our operations in the Americas, Europe and Asia Pacific, we conduct business using various currencies. In 2011, approximately 51% of our net revenue was generated outside the United States. As we typically transact business in the local currency of our subsidiaries, our profitability may be impacted by the translation of foreign currency financial statements into U.S. dollars. Significant long-term fluctuations in relative currency values, in particular an increase in the value of the U.S. dollar against foreign currencies, could have an adverse effect on our profitability and financial condition.

We may not be able to align our cost structure with net revenue.

We must ensure that our costs and workforce continue to be in proportion to demand for our services. Failure to align our cost structure and headcount with net revenue could adversely affect our business, financial condition, and results of operations.

The global financial crisis could adversely affect the financial position of our clients.

The ongoing financial crisis has tightened credit markets and lowered liquidity levels. Some of our clients may experience serious financial problems due to reduced access to credit and lower revenues resulting in their inability to meet their payment obligation to us.

Unfavorable tax law changes and tax authority rulings may adversely affect results.

We are subject to income taxes in the United States and in various foreign jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings among countries with differing statutory tax rates, or changes in the valuation allowance of deferred tax assets or tax laws. The amount of income taxes and other taxes are subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from amounts recorded, future financial results may include unfavorable tax adjustments.

We may not be able to generate sufficient profits to realize the benefit of our net deferred tax assets.

We establish valuation allowances against deferred tax assets when there is insufficient evidence that we will be able to realize the benefit of these deferred tax assets. We reassess our ability to realize deferred tax assets as facts and circumstances dictate. If after future assessments of our ability to realize the deferred tax assets, we determine that a lesser or greater allowance is required, we record a reduction or increase to the income tax expense and the valuation allowance in the period of such determination. The uncertainty surrounding the future realization of our net deferred tax assets could adversely impact our results of operations.

We may experience impairment of our goodwill and other intangible assets.

In accordance with generally accepted accounting principles, we perform assessments of the carrying value of our goodwill and other intangible assets at least annually or whenever events occur or circumstances indicate that a carrying amount of these assets may not be recoverable which include, a significant change in business climate, attrition of key personnel, changes in financial condition or results of operations, a prolonged decline in

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our stock price and market capitalization, competition, and other factors. In performing these assessments, we must make assumptions regarding the estimated fair value of our goodwill and other intangible assets. These assumptions include estimates of future market growth and trends, forecasted revenue and costs, capital investments, discount rates, and other variables. If the fair market value of one of our reporting units or other long term assets is less than the carrying amount of the related assets, we could be required to record an impairment charge. In the third quarter of 2011, we recorded a non-cash impairment charge in the amount of $26.4 million. (See Note 19: Restructuring and Impairment Charges) Due to continual changes in market and general business conditions, we cannot predict whether, and to what extent, our goodwill and long-lived intangible assets may be further impaired in future periods. Any resulting impairment loss could have an adverse impact on our business, financial condition and results of operations.

We have anti-takeover provisions that make an acquisition of us difficult and expensive.

Anti-takeover provisions in our Certificate of Incorporation, our Bylaws and the Delaware laws make it difficult and expensive for someone to acquire us in a transaction which is not approved by our Board of Directors. Some of the provisions in our Certificate of Incorporation and Bylaws include:

These provisions could discourage an acquisition attempt or other transaction in which stockholders could receive a premium over the current market price for the common stock.

Our ability to access additional credit could be limited.

In the current economic environment, banks can be expected to strictly enforce the terms of our credit agreement. Although we are currently in compliance with the financial covenants of our revolving credit facility, a further deterioration of economic conditions may negatively impact our business resulting in our failure to comply with these covenants, which could limit our ability to borrow funds under our credit facility or from other borrowing facilities in the future. In such circumstances, we may not be able to secure alternative financing or may only be able to do so at significantly higher costs.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters is located in Chicago, Illinois. We have leased office space in 57 cities in 28 countries around the world. All of our offices are leased. We do not own any real estate. The aggregate square footage of office space under lease was 576,809 as of December 31, 2011. Our office leases call for future minimum lease payments of approximately $200.5 million and have terms that expire between 2012 and 2024, exclusive of renewal options that we can exercise.

As part of our restructuring plan executed in 2011, we closed 11 of our smaller office locations in the Americas and Europe. Seven of the eleven offices have remaining lease obligations, which expire at various dates through 2014. As a result of the 2011 and prior restructuring activities, approximately 40,000 square feet of office space has been sublet to third parties.

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Our office space and future minimum lease payments by geographic segment as of December 31, 2011 are as follows:

ITEM 3. LEGAL PROCEEDINGS

We have contingent liabilities from various pending claims and litigation matters arising in the ordinary course of our business, some of which involve claims for damages that may be substantial in amount. Some of these matters are covered by insurance. Although our ultimate liability in the matter discussed below cannot be determined, based upon information currently available, we believe the ultimate resolution of such claims and litigation will not have a material adverse effect on our financial condition, results of operations or liquidity.

UK Employee Benefits Trust

On January 27, 2010, HM Revenue & Customs (“HMRC”) in the United Kingdom notified us that it was challenging the tax treatment of certain of our contributions in the United Kingdom to an Employee Benefits Trust between 2002 and 2008. HMRC alleges that these contributions should have been subject to Pay As You Earn tax and Class 1 National Insurance Contributions in the United Kingdom; and HMRC is proposing an adjustment to our payroll tax liability for the affected years. The aggregate amount of HMRC’s proposed adjustment is approximately £3.9 million (equivalent to $6.1 million at December 31, 2011). We have appealed the proposed adjustment. At this time, we believe that the likelihood of an unfavorable outcome with respect to the proposed adjustment is not probable and the potential amount of any loss cannot be reasonably estimated. We also believe that the amount of a final adjustment, if any, would not be material to our financial condition.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

Market for Registrant’s Common Equity

Our common stock is listed on the Nasdaq Global Stock Market under the symbol “HSII.” The following table sets forth the high and low stock price per share of the common stock for the periods indicated, as reported on the Nasdaq Global Stock Market.

As of March 7, 2012, the last reported price on the Nasdaq Global Stock Market for our common stock was $20.45 per share, and there were 89 stockholders of record of the common stock.

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Performance Graph

We have presented below a graph which compares the cumulative total stockholder return on our common shares with the cumulative total stockholder return of the Standard & Poor’s SmallCap 600 Index and the Standard & Poor’s Composite 1500 Human Resource and Employment Services Index. The S&P Composite 1500 Human Resource & Employment Services Index includes 13 companies in related businesses, including Heidrick & Struggles. Cumulative total return for each of the periods shown in the performance graph is measured assuming an initial investment of $100 on December 31, 2006.

The stock price performance depicted in this graph is not necessarily indicative of future price performance. This graph will not be deemed to be filed as part of this Form 10-K and will not be deemed to be incorporated by reference by any general statement incorporating this Form 10-K into any filing by us under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate this information by reference.

* Assuming $100 invested on 12/31/06 in HSII or index, including reinvestment of dividends.

Prepared by: Zacks Investment Research, Inc.

Copyright: Standard and Poor’s, Inc.

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Dividends

Since September 2007, we have paid a quarterly cash dividend of $0.13 per share as approved by our Board of Directors. In 2011, the total cash dividend paid was $0.52 per share.

The following table outlines the record date, payment date and amount of quarterly cash dividends paid during 2010 and 2011:

In December 2011, our Board of Directors declared a quarterly dividend of $0.13 per share on our common stock which was paid on February 17, 2012 to shareholders of record as of February 2, 2012. Cash dividends payable of $2.3 million related to the fourth quarter 2011 cash dividend, which was paid in the first quarter of 2012, and cash dividends payable of $2.3 million related to the fourth quarter 2010 cash dividend, which was paid in the first quarter of 2011, are accrued in the Consolidated Balance Sheets as of December 31, 2011 and 2010, respectively.

In connection with the quarterly cash dividend, we also pay a dividend equivalent on outstanding restricted stock units. The amounts related to the dividend equivalent payments for restricted stock units are accrued over the vesting period and paid upon vesting. In 2011 and 2010, we paid $0.5 million and $0.7 million, respectively, in dividend equivalent payments.

Issuer Purchases of Equity Securities

On February 8, 2008, our Board of Directors authorized management to repurchase shares of our common stock with an aggregate purchase price up to $50 million. We intend from time to time and as business conditions warrant, to purchase shares of our common stock on the open market or in negotiated or block trades. We did not repurchase any shares of our common stock in the fourth quarter of 2011, and we have not repurchased any shares since 2008. As of December 31, 2011 and 2010, $22.8 million remains available under this authorization. Unless terminated or extended earlier by resolution of the board of directors, the program will expire when the number of authorized shares has been repurchased. For further information of our share repurchase activity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below have been derived from our audited consolidated financial statements. The data as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 are derived from the audited current and historical consolidated financial statements, which are included elsewhere in this Form 10-K. The data as of December 31, 2009, 2008 and 2007 and for the years ended December 31, 2008 and 2007 are derived from audited historical consolidated financial statements, which are not included in this report. The data set forth is qualified in its entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited consolidated financial statements, the notes thereto, and the other financial data and statistical information included in this Form 10-K.

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Notes to Selected Financial Data:

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Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as other sections of this annual report on Form 10-K contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. The forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate and management’s beliefs and assumptions. Forward-looking statements may be identified by the use of words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,” and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in the forward-looking statements. Factors that may affect the outcome of the forward-looking statements include, among other things, our ability to attract, integrate, manage and retain qualified executive search consultants; our ability to develop and maintain strong, long-term relationships with our clients; further declines in the global economy and our ability to execute successfully through business cycles; the timing, speed or robustness of any future economic recovery; social or political instability in markets where we operate, 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; the effect of our goodwill and intangible asset impairment charges and our restructuring initiatives; delays in the development and/or implementation of new or improved technology and systems; 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, see Risk Factors in Item 1A of this Form 10-K. 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. We help our clients build leadership teams by facilitating the recruitment, management and deployment of senior executives. Focusing on top-level services offers us several advantages that include access to and influence with key decision makers, increased potential for recurring search consulting engagements, higher fees per search, enhanced brand visibility, and a leveraged global footprint, which create added barriers to entry for potential competitors. Working at the top of client organizations also allows us to attract and retain high-caliber consultants.

In addition to executive search, we provide a range of leadership consulting services to clients. These services include succession planning, executive assessment, talent retention management, executive development, transition consulting for newly appointed executives, and mergers and acquisitions human capital integration consulting.

We provide our services to a broad range of clients through the expertise of 347 consultants located in major cities around the world. Our executive search services are provided on a retained basis. Revenue before reimbursements of out-of-pocket expenses (“net revenue”) consists of retainers and indirect expenses billed to clients. Typically, we are paid a retainer for our executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled. In addition, if the actual compensation of a placed candidate exceeds the estimated compensation, we often are authorized to bill the client for one-third of the excess. Indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search.

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Key Performance Indicators

We manage and assess Heidrick & Struggles’ performance through various means, with the primary financial and operational measures including net revenue growth, operating income, operating margin, consultant headcount, confirmation trends, consultant productivity, and average revenue per search or project.

Revenue growth is driven by a combination of an increase in executive search wins and leadership consulting projects, higher average revenue per search or project and the hiring of additional consultants. With the exception of compensation expense, incremental increases in revenue do not necessarily result in proportional 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 revenue growth and operating margin.

Our Compensation Model

At the consultant level, individuals are largely rewarded for their performance based on a system that directly ties a significant 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 a 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 consultants and accrue variable compensation accordingly. The amount of variable compensation that is accrued for each consultant is based on a tiered payout model and adjusted for overall Company performance. 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 and thus, operating margins. 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 consultants’ and management cash bonuses are deferred and paid over a three-year vesting period. The portion of the bonus that is deferred varies between 10% and 15% depending on the employee’s level or position. The compensation expense related to the amounts being deferred is recognized on a graded vesting attribution method over the requisite service period. This service period begins on January 1 of the respective fiscal year and continues through the deferral date, which coincides with 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 and other non-current liabilities in the Consolidated Balance Sheets.

2011 Overview

Consolidated net revenue of $527.8 million increased 7.0% or $34.7 million in 2011, compared to 2010. Net revenue increased 12.1% in the Americas and 4.3% in Europe, but declined 1.4% in Asia Pacific. Consultant productivity measured by net revenue per consultant was $1.4 million for the year ended December 31, 2011, the same as for the year ended December 31, 2010. Average revenue per executive search was $112,900 for the year ended December 31, 2011 compared to $108,500 for the year ended December 31, 2010.

Operating loss as a percentage of net revenue was 2.1% in 2011 compared to operating income as a percentage of net revenue of 3.6% in 2010. The operating loss was driven by impairment charges of $26.4 million, an increase in restructuring charges of $14.7 million and an increase in salaries and employee benefits

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expense of $32.2 million. The operating loss was offset by an increase in net revenue of $34.7 million and a decrease in general and administrative expenses of $7.0 million. Salaries and employee benefits expense as a percentage of net revenue increased from 69.0% in 2010 to 70.6% in 2011. General and administrative expenses as a percentage of net revenue decreased from 26.5% in 2010 to 23.4% in 2011.

We ended the year with combined cash and cash equivalents balance of $185.4 million, an increase of $4.3 million compared to a combined cash and cash equivalents balance of $181.1 million at December 31, 2010. We pay the majority of bonuses in the first quarter following the year in which they were earned. Employee bonuses are accrued throughout the year and are based on the Company’s performance and the performance of the individual employee. We expect to pay approximately $109 million in bonuses related to 2011 performance in March and April 2012 and approximately $8 million in restructuring payments within the next twelve months. In February 2012, we paid approximately $10 million in deferred cash bonuses related to 2010 and prior year performance.

2012 Outlook

We are currently forecasting 2012 first quarter net revenue of between $105 million and $115 million and full-year 2012 net revenue of between $510 million and $540 million. The Company is targeting operating margin (defined as operating income divided by net revenue) of between 7 and 9 percent for the year ending December 31, 2012. The Company does not expect robust growth in 2012 unless the global economic climate improves. Our 2012 first quarter and full-year guidance is based upon management’s assumptions regarding the anticipated volume of new executive search and leadership consulting projects, the Company’s current backlog, consultant productivity, the seasonality of our business, the uncertainty in the global economic climate, and no change in future currency rates.

Our 2012 first quarter and full-year guidance is subject to a number of risks and uncertainties, including those disclosed under Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K (See Item 1A. Risk Factors). As such, actual results could vary from these projections.

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Results of Operations

The following table summarizes, for the periods indicated, the results of operations (in thousands):

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The following table summarizes, for the periods indicated, our selected statements of operations data as a percentage of revenue before reimbursements (net revenue):

We operate our executive search and leadership consulting services in three geographic regions: the Americas; Europe, which includes the Middle East and Africa; and Asia Pacific.

For segment purposes, reimbursements of out-of-pocket expenses classified as revenue, restructuring charges, impairment charges, and other operating income are reported separately and, therefore, are not included in the results of each geographic region. We believe that analyzing trends in revenue before reimbursements (net revenue), analyzing operating expenses as a percentage of net revenue, and analyzing operating income (loss) excluding restructuring charges, impairment charges, and other operating income, more appropriately reflects our core operations.

By segment, the restructuring charges recorded in 2011 were $8.3 million in Europe, $5.1 million in the Americas, and $0.7 million in Asia Pacific and $2.2 in Global Operations Support; and the impairment charges recorded in 2011 were $26.0 million in Europe and $0.4 million in the Americas. By segment, the restructuring charges recorded in 2010 were $1.0 million in the Americas, $0.3 million in Europe region, and $0.3 million in Global Operations Support. The other operating income of $1.1 million in 2010 was recorded in Europe. By segment, the restructuring charges recorded in 2009 were $9.5 million in the Americas, $9.5 million in Europe, $2.4 million in Asia Pacific and $1.5 million in Global Operations Support and the impairment charges recorded in 2009 were $3.8 million in the Americas and $0.2 million in Europe. Additionally, we recorded an adjustment of $0.3 million in Europe related to a previously restructured office. The other operating income of $1.7 million in 2009 was recorded in Europe region.

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The following table sets forth, for the periods indicated, our revenue and operating income (loss) by segment (in thousands):

2011 Compared to 2010

Total revenue.    Consolidated total revenue increased $40.7 million, or 7.9%, to $554.0 million in 2011 from $513.2 million in 2010. 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 $34.7 million, or 7.0%, to $527.8 million in 2011 from $493.1 million in 2010. The positive impact of exchange rate fluctuations resulted in approximately 3 percentage points of the increase in 2011. Net revenue increased in the Americas and Europe, but declined in Asia Pacific. Revenue grew in all industry groups, except Financial Services. In 2011, the number of confirmed executive searches increased 2.2% to 4,274 from 4,181 in 2010. The average number of consultants was 376 in 2011 compared to 353 in 2010 and there were 347 consultants as of December 31, 2011 and 2010. Productivity, as measured by annualized net revenue per consultant, was $1.4 million for the year ended December 31, 2011 and 2010, and average revenue per executive search was $112,900 for the year ended December 31, 2011 compared to $108,500 for the year ended December 31, 2010.

Net revenue in the Americas was $286.5 million in 2011, an increase of $30.8 million, or 12.1% from $255.7 million in 2010. The positive impact of exchange rate fluctuations in Canada and Latin America resulted in approximately 1 percentage point of the increase in 2011. Net revenue in Europe was $132.7 million in 2011, an increase of $5.5 million, or 4.3% from $127.3 million in 2010. The positive impact of exchange rate fluctuations resulted in approximately 6 percentage points of the increase in 2011. Net revenue in Asia Pacific was $108.6 million in 2011, a decrease of $1.6 million, or 1.4% from $110.1 million in 2010. The positive impact of exchange rate fluctuations offset the decrease in net revenue by approximately 7 percentage points in 2011.

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Salaries and employee benefits.    Consolidated salaries and employee benefits expense increased $32.2 million or 9.5% to $372.4 million in 2011 from $340.2 million in 2010. The increase in salaries and employee benefits expense is primarily a result of an increase in fixed compensation of $20.3 million related to a $15.2 million increase in base compensation and payroll taxes associated with merit salary increases, $1.4 million increase in retirement, severance, insurance, and other salaries and employee benefits expense, and $2.2 million of expense associated with special recognition awards issued in the second quarter of 2011. For the year ended December 31, 2011, amortization of deferred cash compensation increased $3.8 million as a result of the cash bonuses earned in 2010 that have been deferred, partially offset by a decrease in stock-based compensation expense of $2.3 million as a result of an overall decrease in the amount of outstanding equity awards.

Performance related compensation expense increased $11.9 million due to an increase in accruals for variable compensation due to an increase in net revenue.

Excluding a negative impact of $11.7 million due to exchange rate fluctuations, which we believe provides a better comparison of operational performance, consolidated salaries and employee benefits expense increased by 6.0% versus 9.5% as reported in 2011.

As a percentage of net revenue, salaries and employee benefits expense increased to 70.6% in 2011 from 69.0% in 2010.

General and administrative expenses.    Consolidated general and administrative expenses decreased $7.0 million, or 5.4%, to $123.6 million in 2011 from $130.6 million in 2010. The decrease is primarily due to decreases in travel and entertainment of $2.2 million, premise expense of $2.0 million, bad debt expense of $1.7 million, and non-recurring legal costs of $1.3 million. There were also decreases in depreciation and amortization of $1.3 million, other operating infrastructure expense of $0.5 million, and hiring and temporary staffing fees of $0.2 million. These decreases were offset by increases in advertising, communication, sponsorship and other of $2.2 million.

Excluding a negative impact of $3.2 million due to exchange rate fluctuations, which we believe provides a better comparison of operational performance, consolidated general and administrative expenses decreased by 7.9% versus 5.4% as reported in 2011.

As a percentage of net revenue, general and administrative expenses decreased to 23.4% in 2011 from 26.5% in 2010.

Other charges.    The other charges of $4.2 million for the year ended December 31, 2010 consist of $3.2 million of accelerated occupancy costs and depreciation, dilapidation costs, and professional fees related to the settlement of our lease obligations with our former London office which we vacated during 2010 and $1.0 million due to an unfavorable judgment in a lawsuit filed by a former European employee separated from us in 2006.

Restructuring charges.    In 2011, we recorded restructuring charges of $16.3 million in connection with initiatives to reduce overall costs and improve operational efficiencies. These charges consist of employee-related costs, including severance associated with reductions in our workforce of 139 employees globally, and expenses associated with consolidating and closing 11 of our smaller office locations, predominately in Europe. By segment, the restructuring charges recorded in 2011 were $8.3 million in Europe, $5.1 million in the Americas, $0.7 million in Asia Pacific and $2.2 million in Global Operations Support.

In 2010, we recorded restructuring charges of $1.6 million. These charges consist of $0.6 million of severance associated with reductions in our workforce of 19 employees globally and $1.0 million related to the default of two of our subtenants in previously restructured offices. By segment the restructuring charges recorded in the year ended December 31, 2010 were $1.0 million in the Americas, $0.3 million in Europe, and $0.3 million in Global Operations Support.

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Impairment charges.    In 2011, we recorded impairment charges of $26.4 million. As a result of the restructuring initiatives announced on October 5, 2011, which were primarily related to Europe, and the volatility associated with the economic outlook for Europe, including political and economic uncertainty in the region during 2011, we performed a goodwill and intangible asset impairment evaluation as of September 30, 2011. Based on this evaluation, we recorded a goodwill and intangible asset impairment charge in Europe of $26.0 million, resulting in a write-off of all the goodwill within Europe, and an intangible asset impairment of $0.4 million in the Americas.

Other operating income.    As a result of continued lower than expected 2010 revenue production from consultants acquired in the Ray and Berndtson Sp. z o. o acquisition, we performed a fair value assessment of the potential future earnout payments under the purchase agreement. This assessment indicated that there would not be any future earnout payments and resulted in a $1.1 million adjustment. Under the acquisition method of accounting for business combinations, we recognized the 2010 fair value adjustments as other operating income in the Consolidated Statements of Operations.

Operating income (loss).    Our consolidated operating loss was $10.9 million in 2011 compared to operating income of $17.5 million in 2010. The decrease in operating income is primarily due to increases in impairment charges of $26.4 million, restructuring charges of $14.7 million, salaries and employee benefits expense of $32.2 million, and a decrease in other operating income of $1.1 million, offset by an increase in net revenue of $34.7 million, and a decreases in general and administrative expenses of $7.0 million and other charges of $4.2 million.

For segment purposes, restructuring charges, impairment charges and other operating income are not included in operating income (loss) by geographic region. We believe that analyzing trends in operating income (loss) excluding restructuring charges, impairment charges, and other operating income more appropriately reflects our core operations.

The Americas reported operating income of $60.6 million in 2011, compared to $40.3 million in 2010. The increase in operating income of $20.3 million is due to an increase in net revenue of $30.8 million and lower general and administrative expenses of $1.7 million offset by a $12.3 million increase in salaries and employee benefits expense. The increase in salaries and benefits is primarily related to increases in performance related compensation of $7.6 million due to higher net revenues and fixed compensation of $4.7 million due primarily to merit salary increases.

Europe reported operating income of $1.2 million in 2011, compared to an operating loss of $0.6 million in 2010. The increase in operating income is due to a $5.5 million increase in net revenue and decreases in general and administrative expenses of $2.6 million and other charges of $4.2 million partially offset by an increase in salary and employee benefits of $10.5 million. The increase in salaries and benefits is primarily related to higher fixed compensation of $9.5 million related to $2.8 million increase in base compensation and payroll taxes associated with merit salary increases, $2.0 million of sign on bonuses and minimum guarantees, $1.9 million of retirement and insurance benefits, $0.6 million of expense associated with special recognition awards issued in the second quarter, $0.5 million related to the cash bonuses earned between 2008 and 2010 that have been deferred, and $1.7 million of other fixed compensation.

Asia Pacific reported operating income of $13.0 million in 2011, compared to $24.5 million in 2010. The decrease in operating income of $11.5 million is due to a decrease in net revenue of $1.6 million, and increases in salaries and employee benefits expense of $8.0 million and general and administrative expenses of $1.9 million. The increase in salaries and employee benefits is primarily related to higher fixed compensation of $7.7 million related to $5.6 million increase in base compensation and payroll taxes associated with merit increases, $0.8 million of expense associated with special recognition awards issued in the second quarter, $0.8 million related to the cash bonuses earned between 2008 and 2010 that have been deferred, and $0.5 million of other fixed compensation.

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Global Operations Support expenses in 2011 were $43.0 million, a decrease of $3.1 million, compared to $46.1 million in 2010. General and administrative expenses decreased $4.6 million and salaries and employee benefits expense increased $1.5 million. The decrease in general and administrative expenses is due to decreases of $2.6 million in professional services and $2.0 million in travel and entertainment expenses primarily related to non-recurring expenses, including the worldwide consultants’ meeting held in the second quarter of 2010. The increase in compensation expense is due to increased performance related compensation of $3.0 million offset by a decrease in fixed compensation of $1.5 million.

Net non-operating income (expense).    Net non-operating expense was $3.9 million in 2011 compared to $0.6 million in 2010.

Net interest income in 2011 was $1.4 million, compared to $0.8 million in 2010. Interest income increased $0.6 million primarily due to higher average cash balances during 2011 compared to 2010.

Net other non-operating expense was $5.3 million in 2011 compared to $1.4 million in 2010. Net other non-operating expense primarily consists of exchange gains and losses on cash and intercompany balances, which are denominated in currencies other than the functional currency and are not considered permanent in nature. Also included in net other non-operating expense is $2.8 million related to the write-off of our investment in Jobkoo that was recorded in the first quarter of 2011 (See Note 6, Investments). Additionally, during the second quarter of 2010, we identified that we were not properly accounting for our non-controlling interest associated with our operations in China. As a result, we recorded a cumulative adjustment of $1.1 million in net other non-operating expense.

Income taxes.    In 2011, we reported a loss before taxes of $14.8 million and recorded an income tax provision of $18.9 million. Our effective income tax rate for 2011 was 128.2%. This tax rate is higher than the statutory tax rate due to the establishment of valuation allowances on several European entities, non-recognition of tax benefits related to the corresponding current year losses in entities with valuation allowances, and non-recognition of tax benefits related to goodwill impairment.

In 2010, we reported income before taxes of $16.9 million and recorded an income tax provision of $9.5 million. Our effective income tax rate for 2010 was 55.8%.

2010 Compared to 2009

Total revenue.    Consolidated total revenue increased $98.5 million, or 23.8%, to $513.2 million in 2010 from $414.7 million in 2009. 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 $97.4 million, or 24.6%, to $493.1 million in 2010 from $395.7 million in 2009. The positive impact of exchange rate fluctuations resulted in approximately one percentage point of the increase in 2010. Net revenue increased in all regions and industry groups with significant growth in the Global Technology & Services and Financial Services industry groups. In 2010, the number of confirmed executive searches increased 14.5% to 4,181 from 3,651 in 2009. The number of consultants decreased to 347 as of December 31, 2010 compared to 359 as of December 31, 2009. Productivity, as measured by annualized net revenue per consultant, increased to $1.4 million for the year ended December 31, 2010 from $1.0 million for the year ended December 31, 2009, and average revenue per executive search was $108,500 for the year ended December 31, 2010 compared to $101,000 for the year ended December 31, 2009.

Net revenue in the Americas was $255.7 million in 2010, an increase of $54.2 million, or 26.9% from $201.5 million in 2009. The positive impact of exchange rate fluctuations in Canada and Latin America resulted in approximately one percentage point of the increase in 2010. Net revenue in Europe was $127.3 million in

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2010, an increase of $7.8 million, or 6.6% from $119.4 million in 2009. The negative impact of exchange rate fluctuations offset the increase in net revenue by approximately 3 percentage points in 2010. Net revenue in Asia Pacific was $110.1 million in 2010, an increase of $35.5 million, or 47.5% from $74.7 million in 2009. The positive impact of exchange rate fluctuations resulted in approximately 9 percentage points of the increase in 2010.

Salaries and employee benefits.    Consolidated salaries and employee benefits expense increased $58.6 million or 20.8% to $340.2 million in 2010 from $281.5 million in 2009. The increase in salaries and employee benefits expense is primarily a result of a $62.7 million increase in performance-related compensation expense reflecting higher variable compensation accruals associated with higher net revenue. Included in this increase is approximately $7.1 million of discretionary consultant compensation related to individual performance factors. The increase in performance-related compensation expense was offset by a $4.1 million decrease in fixed compensation primarily related to a year-over-year decline in stock-based compensation of $11.3 million as a result of a decrease in the amount of equity awards granted in 2009 and 2010 and significant forfeitures in 2010, and a $3.9 million decrease in amortization of deferred cash compensation associated with lower 2009 bonus accruals due to lower 2009 net revenue levels and consultant headcount. These decreases were partially offset by a $0.8 million increase in base compensation, payroll taxes, and other employee-related expenses associated with increased headcount and the restoration of salaries following a 5% salary reduction in 2009, additional severance expense of $2.7 million, and $1.5 million primarily due to the reinstatement of the Company’s 401(k) match in 2010. In 2010, we issued awards to certain of our consultants in order to incentivize future service to the Company which resulted in additional fixed compensation expense of $6.1 million. At December 31, 2010 we had 1,516 total employees, up 8.3% compared to 1,400 total employees at December 31, 2009.

Excluding a negative impact of $3.7 million due to exchange rate fluctuations, which we believe provides a better comparison of operational performance, consolidated salaries and employee benefits expense increased by 19.6% versus 20.8% as reported in 2010 compared to 2009.

As a percentage of net revenue, salaries and employee benefits expense decreased to 69.0% in 2010 from 71.2% in 2009.

General and administrative expenses.    Consolidated general and administrative expenses increased $14.9 million, or 12.8%, to $130.6 million in 2010 from $115.8 million in 2009. The increase reflects $8.0 million in fees for professional services primarily related to investments in various initiatives intended to yield cost savings and improve productivity. These initiatives include additional hiring, increased training and development programs, the outsourcing of a portion of our information technology function, and ongoing system improvements. The increase also included non-recurring legal costs incurred in 2010, offset by a decrease in expenses related to a process improvement project aimed at increasing operational effectiveness and efficiency, which we substantially completed during 2010.

Additionally, we incurred $5.0 million in travel expenses related to training and business development initiatives reinstated in 2010, $2.5 million of expense related to the worldwide consultants’ meeting held in the second quarter of 2010, $1.9 million of temporary employee and hiring expenses, $1.6 million of increased bad debt expenses and $0.4 million of other operating and infrastructure expenses. During 2010, we recorded impairment charges of $0.7 million associated with intangible assets related to our Schwab Enterprise, LLC, 75 Search Partners, LLC and Ray and Berndtson Sp. z o. o acquisitions. These increases were partially offset by decreases in premise-related costs and depreciation expense of $3.6 million and $1.6 million, respectively, as a result of favorable lease terminations in the Americas and European regions.

Excluding a negative impact of $1.1 million due to exchange rate fluctuations, which we believe provides a better comparison of operational performance, consolidated general and administrative expenses increased by 11.9% versus 12.8% as reported in 2010 compared to 2009.

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As a percentage of net revenue, general and administrative expenses decreased to 26.5% in 2010 from 29.3% in 2009.

Other charges.    The other charges of $4.2 million for the year ended December 31, 2010 consist of $3.2 million of accelerated occupancy costs and depreciation, dilapidation costs, and professional fees related to the settlement of our lease obligations with our former London office which we vacated during 2010 and $1.0 million due to an unfavorable judgment in a lawsuit filed by a former European employee separated from us in 2006.

Restructuring charges.    In 2010, we recorded restructuring charges of $1.6 million. These charges consist of $0.6 million of severance associated with reductions in our workforce of 19 employees globally and $1.0 million related to the default of two of our subtenants in previously restructured offices. By segment the restructuring charges recorded in the year ended December 31, 2010 were $1.0 million in the Americas, $0.3 million in Europe, and $0.3 million in Global Operations Support.

In 2009, we recorded net restructuring charges of $22.6 million. These charges related to $22.9 million of employee-related costs, including severance associated with reductions in our workforce of 363 employees globally, and included 75 executive search consultants. By segment, the restructuring charges recorded in 2009 were $9.5 million in the Americas, $9.5 million in Europe, $2.4 million in Asia Pacific and $1.5 million in Global Operations Support. Additionally, during 2009 we recorded a reduction of $0.3 million in Europe related to a previously restructured office.

Impairment charges.    In 2009, we recorded impairment charges of $4.0 million. As a result of our workforce reductions in January and May 2009 and continued business and economic uncertainty, we performed an evaluation of the remaining client relationship intangible asset associated with our 2006 acquisition of Highland Partners. Based on this analysis, we recorded an impairment charge related to the Americas region of $3.8 million in 2009. Additionally, we recorded an impairment charge of $0.2 million on our client relationship asset associated with our acquisition of Ray and Berndtson Sp. z o. o.

Other operating income.    As a result of continued lower than expected 2010 revenue production from consultants acquired in the Ray and Berndtson Sp. z o. o acquisition, we performed a fair value assessment of the potential future earnout payments under the purchase agreement. This assessment indicated that there would not be any future earnout payments and resulted in a $1.1 million adjustment.

As a result of significantly lower than expected 2009 revenue production from consultants acquired in the Ray and Berndtson Sp. z. o. o acquisition, and uncertainty regarding their future performance, we performed a fair value assessment of the potential future earnout payments under the purchase agreement. This assessment resulted in a $1.7 million reduction to the original earnout accrual.

Under the acquisition method of accounting for business combinations, we recognized the 2010 and 2009 fair value adjustments as other operating income in the Consolidated Statements of Operations.

Operating income (loss).    Our consolidated operating income was $17.5 million in 2010 compared to an operating loss of $26.7 million in 2009. The increase in operating income is primarily due to an increase in net revenue of $97.4 million and a decrease in restructuring and impairment charges of $25.1 million, offset by increases in salaries and employee benefits expense of $58.6 million, general and administrative expenses of $14.9 million, other charges of $4.2 million, and a decrease in other operating income of $0.6 million.

For segment purposes, restructuring and impairment charges and other operating income are not included in operating income (loss) by geographic region. We believe that analyzing trends in operating income (loss) excluding restructuring and impairment charges and other operating income more appropriately reflects our core operations.

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The Americas reported operating income of $40.3 million in 2010, compared to $18.5 million in 2009. The increase in operating income of $21.8 million is due to an increase in net revenue of $54.2 million and lower general and administrative expenses of $0.3 million offset by a $32.7 million increase in salaries and employee benefits expense.

Europe reported an operating loss of $0.6 million in 2010, compared to operating income of $2.7 million in 2009. The decrease in operating income is due to a $5.0 million increase in salaries and employee benefits expense, other charges of $4.2 million and a $1.9 million increase in general and administrative expenses. These increases were partially offset by a $7.8 million increase in net revenue. The increase in salaries and employee benefits expense primarily reflects higher variable compensation accruals associated with higher net revenue levels in 2010. Other charges of $4.2 million include $3.2 million related to exit and settlement expenses for a lease obligation at our former London office, and $1.0 million due to an unfavorable judgment in a lawsuit filed by a former European employee separated from us in 2006.

Asia Pacific reported operating income of $24.5 million in 2010, compared to $9.5 million in 2009. The increase in operating income of $15.0 million is due to higher net revenue of $35.5 million offset by a $16.1 million increase in salaries and employee benefits expense and a $4.4 million increase in general and administrative expenses.

Global Operations Support expenses in 2010 were $46.1 million, an increase of $13.8 million, compared to $32.4 million in 2009. General and administrative expenses increased $8.9 million and salaries and employee benefits expense increased $4.9 million. The increase in general and administrative expenses is due to $5.2 million in fees for professional services associated with investments in various initiatives intended to yield cost savings and increase productivity, including outsourcing certain Global Operations Support functions, hiring, and training and development programs. The increase also included non-recurring legal fees, $2.5 million related to the worldwide consultants’ meeting held in the second quarter of 2010, and $2.8 million reflecting several initiatives reinstated in 2010 including travel, hiring and temporary employee expenses, offset by a decrease of $1.6 million in expenses related to a process improvement project aimed at increasing operational effectiveness and efficiency which we substantially completed during 2010. The increase in compensation expense is primarily due to increased base compensation expense related to the restoration of salaries following a 5% salary reduction in place for 2009, $2.4 million of search and Global Operations Support expenses previously provided through the geographic segments that has been provided through our Global Business Services group since May 2010, and $2.1 million of severance expense, offset by a $0.2 million reduction in stock-based compensation expense as a result of significant forfeitures in 2010 and an overall decrease in the amount of equity awards granted in 2009 and 2010.

Net non-operating income (expense).    Net non-operating expense was $0.6 million in 2010 compared to net non-operating expense of $3.0 million in 2009.

Net interest income in 2010 was $0.8 million, compared to $1.2 million in 2009. Interest income decreased primarily due to lower average interest rates in 2010 compared to 2009.

Net other non-operating expense was $1.4 million in 2010, compared to net other non-operating expense of $4.2 million in 2009. Net other non-operating expense consists of exchange gains and losses on cash and intercompany balances, which are denominated in currencies other than the functional currency and are not considered permanent in nature. Additionally, during 2010, we identified that we were not properly accounting for our non-controlling interest associated with our operations in China. As a result, we recorded a cumulative adjustment of $1.1 million in net other non-operating expense. During 2009, we wrote-off our investment in VisualCV, Inc. of $3.0 million.

Income taxes.    In 2010, we reported income before taxes of $16.9 million and recorded an income tax provision of $9.5 million. Our effective income tax rate for 2010 was 55.8%. This tax rate is higher than the

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statutory tax rate due to losses not benefited in several foreign jurisdictions, the non-deductibility of certain costs like vacating our former London office, and tax costs associated with the domestic inclusion of foreign earnings.

In 2009, we reported a loss before taxes of $29.7 million and recorded an income tax benefit of $8.8 million. The effective tax rate for 2009 was 29.6%.

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, committed unsecured revolving credit facility and cash flows expected to be generated from operations will be sufficient to satisfy our current and planned working capital and investment needs. We pay the majority of 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.

A portion of our consultants’ and management cash bonuses are deferred and paid over a three-year vesting period. The portion of the bonus that is deferred varies between 10% and 15% depending on the employee’s level or position. The compensation expense related to the amounts being deferred is recognized on a graded vesting attribution method over the requisite service period. This service period begins on January 1 of the respective fiscal year and continues through the deferral date, which coincides with 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 and other non-current liabilities in the Consolidated Balance Sheets.

Lines of credit.    On June 22, 2011, the Company and certain foreign subsidiary borrowers of the Company entered into a Credit Agreement (the “Agreement”) with its lenders. The Agreement provides the terms under which the lenders will make available to the Company a committed unsecured revolving credit facility in an aggregate amount of up to $75 million (the “Facility”). The Agreement includes an expansion feature that allows the Company to seek to increase the aggregate commitment under the Facility by up to $25 million provided that the Company is in compliance with certain conditions set forth in the Agreement. The Agreement also provides for the issuance of letters of credit. The Facility matures on June 22, 2016. Under the Agreement, the Borrowers may borrow U.S. dollars, euros, British pound sterling, Australian dollars or other major traded currencies as agreed by the lenders. Borrowings under the Agreement bear interest, at the Company’s election, at the existing Alternate Base Rate (as defined in the Agreement) or Adjusted LIBOR Rate (as defined in the Agreement) plus a spread as determined by the Company’s leverage ratio.

There were no borrowings made or outstanding during the years ended December 31, 2011 or 2010. During 2011 and 2010, we were in compliance with the financial covenants under the existing lines of credit and no event of default existed.

Cash and cash equivalents.    Cash and cash equivalents at December 31, 2011 were $185.4 million, an increase of $4.3 million compared to $181.1 million at December 31, 2010. We expect to pay approximately $109 million in variable compensation related to 2011 performance in March and April 2012 and approximately $8 million in restructuring payments within the next twelve months. In February 2012, we paid approximately $10 million in variable compensation that was deferred in prior years.

Cash flows from operating activities.    In 2011, cash provided by operating activities was $44.8 million, principally reflecting income net of non-cash charges, decreases in trade and other receivables of $10.8 million and an increase in variable compensation accruals, partially offset by bonus payments of approximately $95 million in 2011 related to 2010 performance and a decrease in income taxes payable of $6.9 million.

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In 2010, cash provided by operating activities was $84.3 million, principally reflecting an increase in variable compensation accruals, other non-cash charges and net income of $7.5 million, partially offset by bonus payments of approximately $47 million in March 2010 related to 2009 performance and a $17.2 million increase in trade and other receivables.

In 2009, cash used in operating activities was $73.2 million, principally reflecting our net loss of $20.9 million, cash bonus payments and the associated payroll taxes of approximately $127 million and restructuring payments of $25.0 million.

Cash flows from investing activities.    Cash used in investing activities was $23.7 million in 2011 primarily due to capital expenditures of $18.0 million, a $3.9 million earnout payment related to the IronHill acquisition, a $1.0 million loan to JobKoo, an equity method investment, and purchases of available for sale investments of $1.0 million.

Cash used in investing activities was $16.3 million in 2010 primarily due to capital expenditures of $17.6 million and $0.6 million related to the Bell McCaw Bampfylde Limited acquisition, offset by the release of $2.6 million of restricted cash.

Cash used in investing activities was $23.4 million in 2009, primarily due to acquisition earn-out payments of $12.8 million, the Ray & Berndtson Sp. z o. o acquisition of $2.6 million, capital expenditures of $12.3 million and $1.3 million related to the second payment associated with our 2008 purchase of an equity method investment, offset by the release of $5.1 million restricted cash.

Capital expenditures were $18.0 million, $17.6 million, and $12.3 million in 2011, 2010 and 2009, respectively. Capital expenditures in 2011 were primarily related to the build outs of the Chicago and Zurich offices, the development of our internal search system and new laptop purchases. We anticipate that our capital expenditures for 2012 will be approximately $8 million to $11 million, which primarily reflects investments in a new internal search system, as well as office build outs in Boston, India and China and ongoing capital expenditures.

Cash flows from financing activities.    Cash used in financing activities in 2011 was $12.6 million primarily due to $9.7 million of quarterly cash dividends to shareholders and $2.9 million of payments for employee tax withholdings on equity transactions.

Cash used in financing activities in 2010 was $14.3 million primarily due to $9.7 million of quarterly cash dividends to shareholders and $4.6 million of payments for employee tax withholdings on equity transactions.

Cash used in financing activities in 2009 was $11.5 million primarily due to $9.3 million of quarterly cash dividends to shareholders and $3.4 million of payments for employee tax withholdings on equity transactions offset by $1.2 million of proceeds from stock options exercised during the year.

On February 8, 2008, our Board of Directors authorized management to repurchase shares of our common stock with an aggregate total amount up to $50 million. We did not repurchase any stock during 2011. We intend from time to time and as business conditions warrant, to purchase shares of our common stock on the open market or in negotiated or block trades. As of December 31, 2008, we purchased 951,160 shares of our common stock under the February 2008 authorization for a total of $27.2 million. As of December 31, 2011 and 2010, $22.8 million remains available under this authorization. Unless terminated or extended earlier by resolution of the board of directors, the program will expire when the number of authorized shares has been repurchased.

Off-Balance Sheet Arrangements.    We do not have material off-balance sheet arrangements, special purpose entities, trading activities of non-exchange traded contracts or transactions with related parties.

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Contractual obligations.    The following table presents our known contractual obligations as of December 31, 2011 and the expected timing of cash payments related to these contractual obligations (in millions):

In addition to the contractual obligations included in the above table, we have liabilities related to certain employee benefit plans. These liabilities are recorded in our Consolidated Balance Sheet at December 31, 2011. The obligations related to these employee benefit plans are described in Note 13, Employee Benefit Plans, and Note 14, Pension Plan and Life Insurance Contract, in the Notes to Consolidated Financial Statements. As the timing of cash disbursements related to these employee benefit plans is uncertain, we have not included these obligations in the above table. The table excludes our liability for uncertain tax positions including accrued interest and penalties, which totaled $1.3 million as of January 1, 2011 and $0.9 million as of December 31, 2011, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.

Application of Critical Accounting Policies and Estimates

General.    Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared using accounting principles generally accepted in the United States of America. Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. If actual amounts are ultimately different from previous estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, that could materially impact the financial statements. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements:

Revenue recognition.    Revenue before reimbursements for out-of-pocket expenses (“net revenue”) is recognized when earned and realizable when the following criteria have been met: (a) persuasive evidence of an arrangement exists; (b) services have been rendered; (c) the fee to our client is fixed or determinable; and (d) collectability is reasonably assured. Taxes collected from clients and remitted to governmental authorities are

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presented on a net basis. Net revenue consists of retainers and indirect expenses billed to clients. Typically, we are paid a retainer for our executive search services equal to approximately one-third of the estimated first year compensation of the position to be filled. If actual compensation of the placed candidate exceeds the estimated compensation, we are generally authorized to bill the client for one-third of the excess.

Typically, net revenue from standard 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 arrangements. Net revenue in excess of the retainer, resulting from actual compensation of the placed candidate exceeding estimated compensation, is recognized upon completion of the executive search when the amount of the additional fee is known. Our assumptions about the duration of the time and extent of efforts for search teams to complete our services in an executive search engagement require significant judgment as these variables have fluctuated in the past and are expected to continue to do so. These assumptions are updated annually or whenever conditions exist to indicate that more frequent updates are necessary.

Net revenue from certain leadership consulting and non-standard executive search engagements is recognized in accordance with the completion of the engagement deliverables. Taxes collected from clients and remitted to governmental authorities are presented on a net basis.

Restructuring charges.    We account for restructuring charges by recognizing a liability at fair value when the costs are incurred. Restructuring charges include employee-related costs, including severance associated with reductions in the Company’s workforce, and expenses associated with consolidating and closing office locations.

Inherent in these accruals are estimates related to employee settlements, expected sublease income, and costs to terminate the leases. We believe that the accounting estimate related to accruals for the consolidation and closing of offices is a critical accounting estimate because it is highly susceptible to changes in the commercial real estate markets and the local regional economic factors where this leased office space is located. These accruals are periodically updated to reflect information concerning the commercial real estate markets in which the offices are located.

Income taxes.    Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment. As a global company, we calculate and provide for income taxes in each of the tax jurisdictions in which we operate. This involves estimating current tax exposures in each jurisdiction as well as making judgments regarding the recoverability of deferred tax assets. Tax exposures can involve complex issues and may require an extended period to resolve. Changes in the geographic mix or estimated level of annual income before taxes can affect the overall effective tax rate.

We apply an estimated annual effective tax rate to our cumulative quarterly operating results to determine the provision for income tax expense. In the event there are significant unusual or infrequent items recognized in our quarterly operating results, the tax attributable to that item is recorded in the interim period in which it occurs.

No deferred tax liabilities have been recorded for U.S. income taxes and foreign withholding taxes related to undistributed foreign earnings that are planned to be indefinitely reinvested. If future events, including material changes in estimates of cash, working capital and long-term investment requirements, necessitate that these earnings be distributed, an additional provision for taxes may apply, which could materially affect our future effective tax rate.

As a matter of course, we are regularly audited by various taxing authorities, and sometimes these audits result in proposed assessments where the ultimate resolution may result in our owing additional taxes. We establish reserves on uncertain tax return positions that do not meet the more likely than not recognition criteria. We evaluate these reserves each quarter and adjust the reserves and the related accrued interest in light of changing facts and circumstances regarding the uncertainty of realizing tax benefits, such as the ultimate

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settlement of tax audits or the expiration of a statute of limitations. We believe the estimates and assumptions used to support our evaluation of tax benefit realization are reasonable. However, final determinations of prior year tax liabilities, either by settlement with tax authorities or expiration of statutes of limitations, could be materially different than estimates reflected in assets and liabilities and historical income tax provisions. The outcome of these final determinations could have a material effect on our income tax provision, net income, or cash flows in the period in which that determination is made. We believe our tax positions comply with applicable tax law and that we have adequately provided for any known tax reserves.

Goodwill and other intangible assets.    We review goodwill for impairment annually. We also review goodwill and long-lived assets; including identifiable intangible assets for impairment whenever events or changes in circumstances indicate that it is more likely than not that the fair value has fallen below the carrying amount of an asset. We review factors such as a significant change in business climate, attrition of key personnel, changes in financial condition or results of operations, a prolonged decline in our stock price and market capitalization, competition, and other factors. The goodwill impairment test is performed using a two-step, fair value based test. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step measures the impairment charge and is performed only if the carrying amount of a reporting unit exceeds its fair value as determined in step one. To measure the amount of the impairment loss, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.

The impairment test is considered for each of our reporting units as defined in the accounting standard for goodwill and intangible assets. We operate our executive search and leadership consulting services in three geographic regions: the Americas; Europe, which includes the Middle East and Africa; and Asia Pacific. The Americas is comprised of the North America and the Latin America operations. These geographic regions are also considered to be our reporting units as follows: North America, Latin America, Europe, and Asia Pacific.

During the first step, the fair value of each of our reporting units is determined using a combination of valuation techniques, including a discounted cash flow methodology and comparable public company methodology, with the assistance of an independent valuation firm.

The discounted cash flow approach is dependent on a number of factors including estimates of future market growth and trends, forecasted revenue and costs, capital investments, appropriate discount rates, certain assumptions to allocate shared assets and liabilities, historical and projected performance of the our reporting units, the outlook for the executive search industry, and the macroeconomic conditions affecting each of our reporting units. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. The fair value of our reporting units is also impacted by our overall market capitalization and may be impacted by volatility in our stock price and assumed control premium, among other factors. As a result, actual future results may differ from those estimates. These assumptions are updated annually, at a minimum, to reflect information concerning our reportable segments.

Additionally, we review long-lived assets, such as property, equipment, and purchased intangibles subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge, equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset, is recognized.

We believe that the accounting estimate related to goodwill and other intangible asset impairment is a critical accounting estimate because the assumptions used are highly susceptible to changes in the operating results and cash flows of our reportable segments.

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Allowance for doubtful accounts.    Accounts receivable from our customers are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in existing accounts receivable balances. We determine the allowance for doubtful accounts through an analysis of several factors, including the aging of our accounts receivable, historical write-off experience, and specific account analyses. We consider current and projected economic conditions and historical trends when determining the allowance for doubtful accounts. Actual collections of accounts receivable could differ from our estimates due to changes in future economic or industry conditions or specific customers’ financial condition.

The allowance for doubtful accounts is recorded as a reduction in revenue to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the provision relates to a customer’s inability to make required payments on accounts receivables, the provision is recorded as bad debt expense within general and administrative expenses.

Stock-based compensation.    We measure our stock-based compensation costs based on the grant date fair value of the awards and recognize these costs in the financial statements over the requisite service period. We apply a forfeiture rate to our share-based awards that represents our best estimate of the amount of awards that will be forfeited. Our estimate is based on our historical experience and specific analysis. We review our forfeiture rate quarterly or whenever events or changes in circumstances indicate our estimate may need to be revised. Actual forfeitures could differ from our estimates due to changes in retention rates of our employee population.

Recently Adopted Financial Accounting Standards

On January 1, 2011, we adopted guidance which expands the required disclosures about fair value measurements. This guidance requires disclosures about transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). The adoption of this guidance did not have a material impact on our financial condition or results of operations.

Recently Issued Financial Accounting Standards

In June 2011, the Financial Accounting Standards Board issued guidance to increase the prominence of other comprehensive income within the financial statements. The guidance requires entities to present the components of net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present other comprehensive income within the statement of stockholders’ equity will be eliminated. This guidance is effective for us as of January 1, 2012 and will be applied retrospectively beginning with the March 31, 2012 interim reporting period. We do not believe adoption of this guidance will have any impact on our financial condition or results of operations.

In September 2011, the Financial Accounting Standards Board issued guidance that permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. We do not believe adoption of this guidance will have any impact on our financial condition or results of operations.

In December 2011, the Financial Accounting Standards Board issued guidance that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendment enhances disclosures

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required by U.S. GAAP by requiring additional disclosures about financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement. The amendment is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We do not believe adoption of the guidance will have any impact on our financial condition or results of operations.

Quarterly Financial Information

The following table sets forth certain financial information for each quarter of 2011 and 2010. The information is derived from our quarterly consolidated financial statements which are unaudited but which, in the opinion of management, have been prepared on the same basis as the audited annual consolidated financial statements included in this document. The consolidated financial data shown below should be read in conjunction with the consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.