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HEIDRICK & STRUGGLES INTERNATIONAL INC - Quarter Report: 2013 June (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

OR

 

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

For the transition period from                     to                     

Commission File Number 0-25837

 

 

HEIDRICK & STRUGGLES INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   36-2681268

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

233 South Wacker Drive-Suite 4200

Chicago, Illinois

60606-6303

(Address of Principal Executive Offices)

(312) 496-1200

(Registrant’s Telephone Number, Including Area Code)

 

 

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

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

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

 

Large accelerated filer     ¨    Accelerated filer   x
Non-Accelerated filer   (Do not check if a smaller reporting company)   ¨    Smaller reporting company   ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 25, 2013, there were 18,106,106 shares of the Company’s common stock outstanding.

 

 

 


Table of Contents

HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

 

          PAGE  

PART I. FINANCIAL INFORMATION

  

Item 1.

   Condensed Consolidated Financial Statements   
  

Condensed Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and December 31, 2012

     1   
  

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2013 and 2012

     2   
  

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2013

     3   
  

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012

     4   
  

Unaudited Notes to Condensed Consolidated Financial Statements

     5   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      13   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      21   

Item 4.

   Controls and Procedures      22   

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings      22   

Item 6.

   Exhibits      23   

SIGNATURE

     24   


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

     June 30,
2013
    December 31,
2012
 

Current assets:

    

Cash and cash equivalents

   $ 99,695      $ 117,605   

Restricted cash

     223        199   

Accounts receivable, less allowance for doubtful accounts of $5,166 and $4,798 at June 30, 2013 and December 31, 2012, respectively

     90,867        69,107   

Other receivables

     10,446        10,288   

Prepaid expenses

     14,200        14,167   

Other current assets

     2,597        1,366   

Income taxes recoverable

     7,212        5,651   

Deferred income taxes

     7,182        7,899   
  

 

 

   

 

 

 

Total current assets

     232,422        226,282   

Non-current assets:

    

Property and equipment, net

     37,571        42,362   

Restricted cash

     7,829        7,968   

Assets designated for retirement and pension plans

     22,297        22,763   

Investments

     12,751        11,902   

Other non-current assets

     5,401        5,301   

Goodwill

     119,948        120,940   

Other intangible assets, net

     28,839        32,020   

Deferred income taxes

     23,520        25,454   
  

 

 

   

 

 

 

Total non-current assets

     258,156        268,710   
  

 

 

   

 

 

 

Total assets

   $ 490,578      $ 494,992   
  

 

 

   

 

 

 

Current liabilities:

    

Current portion of debt

   $ 6,000      $ —     

Accounts payable

     7,454        8,657   

Accrued salaries and employee benefits

     62,898        102,597   

Other current liabilities

     47,720        40,390   

Income taxes payable

     3,956        709   

Deferred income taxes

     33        43   
  

 

 

   

 

 

 

Total current liabilities

     128,061        152,396   

Non-current liabilities:

    

Non-current debt, less current maturities

     32,500        —     

Retirement and pension plans

     37,604        37,247   

Other non-current liabilities

     47,884        56,943   

Deferred income taxes

     132        59   
  

 

 

   

 

 

 

Total non-current liabilities

     118,120        94,249   
  

 

 

   

 

 

 

Total liabilities

     246,181        246,645   
  

 

 

   

 

 

 

Commitments and contingencies (Note 18)

     —          —     

Stockholders’ equity:

    

Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued at June 30, 2013 and December 31, 2012

     —          —     

Common stock, $.01 par value, 100,000,000 shares authorized, 19,585,777 shares issued, 18,101,708 and 17,993,652 shares outstanding at June 30, 2013 and December 31, 2012, respectively

     196        196   

Treasury stock at cost, 1,484,069 and 1,592,125 shares at June 30, 2013 and December 31, 2012, respectively

     (48,899     (52,523

Additional paid in capital

     232,040        234,010   

Retained earnings

     47,605        51,704   

Accumulated other comprehensive income

     13,455        14,960   
  

 

 

   

 

 

 

Total stockholders’ equity

     244,397        248,347   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 490,578      $ 494,992   
  

 

 

   

 

 

 

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

 

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Table of Contents

HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Revenue:

        

Revenue before reimbursements (net revenue)

   $ 122,033      $ 116,065      $ 225,011      $ 222,591   

Reimbursements

     5,295        5,692        9,625        11,484   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     127,328        121,757        234,636        234,075   

Operating expenses:

        

Salaries and employee benefits

     83,066        79,859        154,545        156,531   

General and administrative expenses

     33,225        28,960        64,335        55,325   

Reimbursed expenses

     5,295        5,692        9,625        11,484   

Restructuring charges

     —          507        —          810   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     121,586        115,018        228,505        224,150   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     5,742        6,739        6,131        9,925   

Non-operating income (expense):

        

Interest expense, net

     (106     231        (29     707   

Other, net

     (584     (1,476     (966     (650
  

 

 

   

 

 

   

 

 

   

 

 

 

Net non-operating income (expense)

     (690     (1,245     (995     57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     5,052        5,494        5,136        9,982   

Provision for income taxes

     3,115        3,642        4,415        7,451   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,937        1,852        721        2,531   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustment

     (1,511     (1,049     (2,001     (466

Unrealized gain on cash flow hedge

     270        —          150        —     

Unrealized (loss) gains on available-for-sale investments

     (105     (97     346        504   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (1,346     (1,146     (1,505     38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 591      $ 706      $ (784   $ 2,569   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average common shares outstanding

     18,076        18,010        18,043        17,956   

Dilutive common shares

     148        128        157        200   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     18,224        18,138        18,200        18,156   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share

   $ 0.11      $ 0.10      $ 0.04      $ 0.14   

Diluted net income per common share

   $ 0.11      $ 0.10      $ 0.04      $ 0.14   

Cash dividends paid per share

   $ 0.13      $ 0.13      $ 0.13      $ 0.26   

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

 

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HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

                                           Accumulated        
                                           Other        
     Common Stock      Treasury Stock     Additional           Compre-        
                  Paid in     Retained     hensive        
     Shares      Amount      Shares     Amount     Capital     Earnings     Income     Total  

Balance at December 31, 2012

     19,586       $ 196         1,592      $ (52,523   $ 234,010      $ 51,704      $ 14,960      $ 248,347   

Net income

     —           —           —          —          —          721        —          721   

Other comprehensive loss, net of tax

                   (1,505     (1,505

Treasury and common stock transactions:

                  

Stock-based compensation expense

     —           —           —          —          2,472        —          —          2,472   

Vesting of restricted stock units, net of tax witholdings

     —           —           (88     2,950        (3,527     —          —          (577

Re-issuance of treasury stock

     —           —           (20     674        (374     —          —          300   

Cash dividends declared ($0.26 per share)

     —           —           —          —          —          (4,702     —          (4,702

Dividend equivalents on restricted stock units

     —           —           —          —          —          (118     —          (118

Tax deficit related to stock-based compensation

     —           —           —          —          (541     —          —          (541
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

     19,586       $ 196         1,484      $ (48,899   $ 232,040      $ 47,605      $ 13,455      $ 244,397   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2013     2012  

Cash flows—operating activities:

    

Net income

   $ 721      $ 2,531   

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

    

Depreciation and amortization

     8,027        5,292   

Deferred income taxes

     1,426        1,700   

Stock-based compensation expense

     2,472        2,800   

Accretion expense

     1,033        —     

Restructuring charges

     —          810   

Cash paid for restructuring charges

     (616     (6,663

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

    

Trade and other receivables

     (24,041     (16,050

Accounts payable

     (541     (1,104

Accrued expenses

     (40,684     (71,194

Income taxes recoverable (payable), net

     1,488        8,231   

Retirement and pension assets and liabilities

     540        797   

Prepayments

     (306     (3,397

Other assets and liabilities, net

     1,981        (670
  

 

 

   

 

 

 

Net cash used in operating activities

     (48,500     (76,917
  

 

 

   

 

 

 

Cash flows—investing activities:

    

Restricted cash

     (26     231   

Capital expenditures

     (1,358     (5,114

Purchases of available for sale investments

     (571     (926

Proceeds from sales of available for sale investments

     64        77   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,891     (5,732
  

 

 

   

 

 

 

Cash flows—financing activities:

    

Proceeds from debt issuance

     40,000        —     

Debt repayment

     (1,500     —     

Cash dividends paid

     (2,519     (4,946

Payment of employee tax withholdings on equity transactions

     (576     (1,569

Acquisition earnout payments

     (357     (381
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     35,048        (6,896
  

 

 

   

 

 

 

Effect of exchange rates fluctuations on cash and cash equivalents

     (2,567     1,006   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (17,910     (88,539

Cash and cash equivalents at beginning of period

     117,605        185,390   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 99,695      $ 96,851   
  

 

 

   

 

 

 

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

 

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Table of Contents

HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All tables in thousands, except share and per share figures)

(Unaudited)

1. Basis of Presentation of Interim Financial Information

The accompanying unaudited Condensed Consolidated Financial Statements of Heidrick & Struggles International, Inc. and subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Significant items subject to estimates and assumptions include revenue recognition, allowance for doubtful accounts, interim effective tax rate, allowances for deferred tax assets, compensation accruals, and contingent liabilities. Estimates are subject to a degree of uncertainty and actual results could differ from these estimates. These financial statements and notes are to be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 15, 2013.

2. Summary of Significant Accounting Policies

A complete listing of the Company’s significant accounting policies is discussed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 15, 2013.

Recently Adopted Financial Accounting Standards

On January 1, 2013 the Company adopted the Financial Accounting Standards Board’s (“FASB”) guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income (See Note 14, Changes in Accumulated Other Comprehensive Income). For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. These requirements are to be applied to each component of accumulated other comprehensive income. Other than the additional disclosure, the adoption of these changes had no impact on the Condensed Consolidated Financial Statements.

Recently Issued Financial Accounting Standards

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial statements upon adoption.

3. Allowance for Doubtful Accounts

The activity of the allowance for doubtful accounts for the six months ended June 30, 2013 is as follows:

 

Balance at December 31, 2012

   $ 4,798   

Provision charged to income

     1,014   

Write-offs

     (517

Currency

     (129
  

 

 

 

Balance at June 30, 2013

   $ 5,166   
  

 

 

 

 

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Table of Contents

4. Property and Equipment, net

The components of the Company’s property and equipment are as follows:

 

     June 30,
2013
    December 31,
2012
 

Leasehold improvements

   $ 42,809      $ 44,043   

Office furniture, fixtures and equipment

     23,881        24,067   

Computer equipment and software

     37,905        39,052   
  

 

 

   

 

 

 

Property and equipment, gross

     104,595        107,162   

Accumulated depreciation

     (67,024     (64,800
  

 

 

   

 

 

 

Property and equipment, net

   $ 37,571      $ 42,362   
  

 

 

   

 

 

 

Depreciation expense for the three months ended June 30, 2013 and 2012 was $2.4 million and $2.5 million, respectively. Depreciation expense for the six months ended June 30, 2013 and 2012 was $5.1 million and $4.9 million, respectively.

5. Restricted Cash

The Company had $8.1 million and $8.2 million of restricted cash at June 30, 2013 and December 31, 2012, respectively. The restricted cash consists of $6.5 million for a retention escrow associated with the Senn Delaney acquisition, which will be paid to certain key executives of Senn Delaney if they remain with the company for three years subsequent to the acquisition. Additionally, there was $1.6 million and $1.7 million of restricted cash related to lease guarantees at June 30, 2013 and December 31, 2012, respectively. In accordance with the terms of the lease agreements, the cash balances are restricted through the termination dates of the leases, which extend through 2018.

6. Investments

The components of the Company’s investments are as follows:

 

     June 30,
2013
     December 31,
2012
 

U.S. non-qualified deferred compensation plan

   $ 12,270       $ 11,401   

Warrants and equity securities

     481         501   
  

 

 

    

 

 

 

Total

   $ 12,751       $ 11,902   
  

 

 

    

 

 

 

The Company’s U.S. non-qualified deferred compensation plan consists primarily of U.S. marketable securities and mutual funds, all of which are valued using Level 1 inputs (See Note 7, Fair Value Measurements). The aggregate cost basis for these investments was $9.9 million and $9.3 million as of June 30, 2013 and December 31, 2012, respectively. The warrants and equity securities primarily consist of cost method investments, none of which were evaluated for impairment since there were no triggering events in the respective periods.

7. Fair Value Measurements

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

 

   

Level 1 – Quoted prices in active markets for identical assets and liabilities.

 

   

Level 2 – Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

   

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

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Table of Contents
     Quoted Prices in
Active Markets for
Identical Assets
(Level  1)
     Significant  Other
Observable

Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Total  

At June 30, 2013

         

U.S. non-qualified deferred compensation plan

   $ 12,270       $ —        $ —        $ 12,270   

Assets designated for retirement and pension plans

     —           23,758        —          23,758   

Derivative designated as cash flow hedge

     —           233        —          233   

Derivatives designated as fair value hedges

     —           825        —          825   

Warrants and equity securities

     —           —          481        481   

Acquisition earnout accruals

     —           —          (10,958     (10,958
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 12,270       $ 24,816      $ (10,477   $ 26,609   
  

 

 

    

 

 

   

 

 

   

 

 

 

At December 31, 2012

         

U.S. non-qualified deferred compensation plan

   $ 11,401       $ —        $ —        $ 11,401   

Assets designated for retirement and pension plans

     —           24,096        —          24,096   

Derivatives designated as fair value hedges

     —           (70     —          (70

Warrants and equity securities

     —           —          501        501   

Acquisition earnout accruals

     —           —          (10,270     (10,270
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 11,401       $ 24,026      $ (9,769   $ 25,658   
  

 

 

    

 

 

   

 

 

   

 

 

 

Substantially all of the Company’s assets that are measured at fair value on a recurring basis are measured using Level 1 inputs, except those noted in the table above. The Level 2 assets above are fair valued using a market approach. The Level 3 liabilities are accruals for future earnout payments related to prior acquisitions, the values of which are determined based on discounted cash flow models, and warrant and equity securities, the values of which are determined using a valuation model. The Company considers the recorded value of its financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, and accounts payable, to approximate the fair value of the respective assets and liabilities at June 30, 2013 and December 31, 2012 based upon the short-term nature of the assets and liabilities.

8. Acquisitions

Senn-Delaney Leadership Consulting Group, LLC

On December 31, 2012, the Company acquired Senn-Delaney Leadership Consulting Group, LLC, a global leader of corporate culture shaping. Under the terms of the purchase agreement, the Company paid $53.5 million at closing for 100 percent of the equity of Senn Delaney. The Company expects to pay up to $15.0 million of additional cash consideration based on the realization of specific earnings milestones achieved in the next three years, resulting in $1.0 million of accretion expense included in general and administrative expense in the six months ended June 30, 2013. The Company also paid $6.5 million for a retention escrow that will be paid to certain key executives of Senn Delaney if they remain with the Company for three years subsequent to the acquisition. The Company recognized $1.2 million of compensation expense in the six months ended June 30, 2013 related to the retention award.

Bell McCaw Bampflyde Limited

In March 2010, the Company acquired Bell McCaw Bampflyde Limited, a retained executive search firm based in New Zealand, for 0.8 million New Zealand dollars (equivalent to $0.6 million at June 30, 2013) of initial consideration, pursuant to an asset purchase, which was funded from existing cash. Bell McCaw Bampflyde Limited was eligible to receive earnout payments of up to 1.4 million New Zealand dollars based on the achievement of certain revenue metrics in 2011, 2012 and 2013. The Company made earnout payments of $0.4 million in 2011, $0.4 million in 2012 and a final payment of $0.4 million in 2013. There will be no further payments associated with the acquisition.

 

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9. Goodwill and Other Intangible Assets, Net

Goodwill

Changes in the carrying amount of goodwill by segment for the six months ended June 30, 2013 are as follows:

 

     Americas     Europe     Asia
Pacific
    Total  

Balance at December 31, 2012

   $ 108,833      $ 3,815      $ 8,292      $ 120,940   

Exchange rate fluctuations

     (258     (243     (491     (992
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ 108,575      $ 3,572      $ 7,801      $ 119,948   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Intangible Assets, Net

The carrying amount of amortizable intangible assets and the related accumulated amortization are as follows:

 

            June 30, 2013      December 31, 2012  
     Weighted
Average
Life (in
years)
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

Client relationships

     8.6       $ 22,903       $ (10,010   $ 12,893       $ 23,143       $ (8,323   $ 14,820   

Trade name

     15.0         9,298         (603     8,695         9,400         —          9,400   

Software

     7.0         7,200         (514     6,686         7,200         —          7,200   

Non-compete

     5.0         590         (25     565         600         —          600   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets

     10.1       $ 39,991       $ (11,152   $ 28,839       $ 40,343       $ (8,323   $ 32,020   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

By segment, other intangible assets, net, as of June 30, 2013 were $25.2 million in the Americas, $3.4 million in Europe, and $0.2 million in Asia Pacific. By Segment, other intangible assets, net as of December 31, 2012 were $27.7 million in the Americas, $4.0 million in Europe, and $0.3 million in Asia Pacific.

Intangible asset amortization expense for the three months ended June 30, 2013 and 2012 was $1.5 million and $0.2 million, respectively. Intangible asset amortization expense for the six months ended June 30, 2013 and 2012 was $2.9 million and $0.4 million, respectively. The estimated intangible amortization expense is $5.8 million for fiscal year 2013, $5.4 million for fiscal year 2014, $4.6 million for fiscal year 2015, $4.4 million for fiscal year 2016, and $3.6 million for fiscal year 2017. These amounts are based on intangible assets recorded as of June 30, 2013, and actual amortization expense could differ from these estimates as a result of future acquisitions and other factors.

10. Debt

On January 31, 2013, the Company and certain foreign subsidiary borrowers of the Company entered into an Amendment and Restatement Agreement, pursuant to which the Borrowers, the Lenders and the Administrative Agent amended and restated the Credit Agreement dated June 22, 2011. Pursuant to the Agreement, the Credit Agreement was amended to add a committed term loan facility in an aggregate amount of up to $40 million (the “Term Facility”). On January 31, 2013, the Company borrowed $40 million under the Agreement. The Term Facility will be amortized over a five-year period pursuant to which the Company will make fifteen quarterly payments of $1.5 million. The first payment was made on June 28, 2013 and payments will continue on the last calendar day of every fiscal quarter, up to and including December 31, 2016. Additionally, the Company will make four payments of $2.0 million on March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017 and a final payment of the remaining outstanding balance of the Term Facility on January 31, 2018. The interest rate on the debt is LIBOR plus a spread which is dependent on the Company’s leverage ratio and paid monthly. The Company entered into an interest rate swap to address the risk related to the fluctuation in LIBOR (See Note 11, Derivative Financial Instruments). The other material terms of the Credit Agreement (as in effect prior to the Agreement) were not amended by the Agreement. The Company is in compliance with its debt covenants as of June 30, 2013.

 

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11. Derivative Financial Instruments

Summary of Derivative Instruments

The Company uses derivative instruments primarily to manage exposures to foreign currency exchange rate risk and interest rate risk. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates and interest rates. The Company’s derivatives expose it to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company does, however, seek to mitigate such risks by limiting its counterparties to financial institutions that meet certain criteria. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.

Interest Rate Risk

The Company pays short-term variable interest rates, plus a spread which is dependent on the Company’s leverage ratio, calculated as defined within the Amendment and Restatement Agreement. The term loan exposes the Company to the variability in interest payments and therefore fluctuations in interest expense and cash flows due to changes in interest rates.

On February 28, 2013, the Company entered into an interest rate swap to hedge the variable interest rate exposure from the underlying term facility. The interest rate swap was entered into to manage fluctuations in cash flows resulting from interest rate risk attributable to changes in the short-term variable interest rate. This interest rate swap involves the exchange of variable-rate interest payments for fixed-rate interest payments based on the contractual underlying notional amount. Gains or losses on the interest rate swaps that are linked to the term loan being hedged are expected to perfectly offset the losses or gains on the underlying term loan from the short-term variable interest rate. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. If a derivative is deemed to be ineffective, the ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the quarter ended June 30, 2013, the Company’s interest rate swap entered into for purposes of managing fluctuations in cash flows resulting from the variable rate term loan was deemed effective and the Company expects it will be effective for the next twelve months. This interest rate swap was the only hedging instrument used by the Company to mitigate its interest rate risk.

The Company had the following interest rate swap in place as of June 30, 2013:

 

Interest Rate Swap Contract

   Notional
Amount
     Fair
Value (1)
     Gain
(Loss) (2)
 

Derivative designated as cash flow hedge

   $ 38,500       $ 233       $ 233   

 

(1) Included in the Condensed Consolidated Balance Sheets within Other current assets
(2) Included in Other comprehensive loss, net of $83 thousand of tax

Foreign Exchange Risk

The Company enters into foreign exchange forward contracts to reduce the short-term effects of foreign currency fluctuations on assets and liabilities such as foreign currency receivables and payables. These derivatives are designated as fair value hedges. Gains and losses on the contracts are included in other, net and substantially offset foreign exchange gains and losses from the remeasurement of intercompany balances or other assets or liabilities denominated in currencies other than the functional currency of the reporting entity. The Company purchased $12.4 million and sold $92.8 million in contracts in the three months ended June 30, 2013 and purchased $29.4 million and sold $168.1 million in contracts in the six months ended June 30, 2013, of which $4.9 million purchased contracts and $30.2 million sold contracts are outstanding as of June 30, 2013. The Company’s largest contracts are in Euro, Australian Dollar, Brazilian Real and British Pound Sterling.

The Company had the following foreign exchange forward contracts in place as of June 30, 2013:

 

Foreign Exchange Forward Contract

   Notional Amount
(in USD Equivalent)
    Fair
Value (1)
 

Derivatives designated as fair value hedges

   $ (25,255   $ 825   

 

(1) Included in the Condensed Consolidated Balance sheets within Other current assets

The gain on the foreign exchange contracts was $0.8 million and $1.1 million for the three and six months ended June 30, 2013, respectively and is included in Other, net in the Condensed Consolidated Statements of Comprehensive Income (Loss).

 

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12. Other Current and Non-Current Liabilities

The components of other current liabilities are as follows:

 

     June 30,
2013
     December 31,
2012
 

Deferred revenue

   $     26,033       $ 23,271   

VAT and sales tax payable

     5,011         3,418   

Other

     16,676         13,701   
  

 

 

    

 

 

 

Total other current liabilities

   $ 47,720       $ 40,390   
  

 

 

    

 

 

 

The components of other non-current liabilities are as follows:

 

     June 30,
2013
     December 31,
2012
 

Accrued salaries and employee benefits

   $     20,729       $ 27,023   

Premise related costs

     16,267         16,163   

Earnout payment

     8,000         9,900   

Other

     2,888         3,857   
  

 

 

    

 

 

 

Total other non-current liabilities

   $ 47,884       $ 56,943   
  

 

 

    

 

 

 

13. Stock-based Compensation

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

A summary of information with respect to stock-based compensation is as follows:

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2013      2012      2013      2012  

Total stock-based compensation expense included in operating income

   $ 1,462       $ 1,449       $ 2,472       $ 2,800   

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

   $ 531       $ 596       $ 899       $ 1,117   

Restricted Stock Units

Restricted stock unit activity for the six months ended June 30, 2013:

 

     Number of
Restricted
Stock Units
    Weighted-
Average

Grant-date
Fair Value
 

Outstanding on December 31, 2012

     361,778      $ 23.43   

Granted

     174,508        14.01   

Vested and converted to common stock

     (128,496     24.64   

Forfeited

     (8,678     21.90   
  

 

 

   

Outstanding on June 30, 2013

     399,112        18.95   
  

 

 

   

As of June 30, 2013, there was $4.1 million of pre-tax unrecognized compensation expense related to unvested restricted stock units, which is expected to be recognized over a weighted average of 1.8 years.

 

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Performance Stock Units

Performance stock unit activity for the six months ended June 30, 2013:

 

     Number of
Peformance
Stock Units
     Weighted-
Average

Grant-date
Fair Value
 

Outstanding on December 31, 2012

     80,000       $ 23.75   

Granted

     63,895         13.89   

Vested and converted to common stock

     —           —     

Forfeited

     —           —     
  

 

 

    

Outstanding on June 30, 2013

     143,895         19.37   
  

 

 

    

As of June 30, 2013, there was $1.2 million of pre-tax unrecognized compensation expense related to unvested performance stock units, which is expected to be recognized over a weighted average of 2.3 years.

14. Changes in Accumulated Other Comprehensive Income

The changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the six months ended June, 2013 is summarized below:

 

     Cash Flow
Hedge Adjustment
     Available-for-
Sale Securities
Adjustment
    Foreign
currency
Translation
Adjustment
    Pension
Adjustment
    Accumulated
Other
Comprehensive
Income (Loss)
 

Balance at December 31, 2012

   $ —         $ 1,656      $ 13,606      $ (302   $ 14,960   

Other comprehensive income (loss) before reclassification, net of tax

     150         361        (2,001     —          (1,490

Amount reclassified from AOCI (1)

     —           (15     —          —          (15
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income(loss)

     150         346        (2,001     —          (1,505
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ 150       $ 2,002      $ 11,605      $ (302   $ 13,455   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Included in Other, net in the Condensed Consolidated Statements of Other Comprehensive Income (Loss)

15. Income Taxes

In the second quarter of 2013, the Company reported income before taxes of $5.1 million and recorded an income tax provision of $3.1 million. The Company’s effective income tax rate for the second quarter of 2013 was 61.7%, which reflects an adjusted full-year expected annualized tax rate of approximately 64 percent, up from the first quarter 2013 adjusted full-year expected annualized tax rate of approximately 58 percent. The increase in the anticipated full-year annualized tax rate from the first quarter is primarily due to a change in the projection and mix of income earned worldwide. The annualized effective tax rate is higher than the statutory rate due to the Company incurring losses in certain jurisdictions that are not benefitted for tax purposes.

For the first six months of 2013, the Company reported income before taxes of $5.1 million and recorded an income tax provision of $4.4 million. The decrease in the tax rate from the first quarter was due to the impact of valuation allowances.

In the second quarter of 2012, the Company reported income before taxes of $5.5 million and recorded an income tax provision of $3.6 million. The Company’s effective income tax rate for the second quarter of 2012 was 66.3%.

For the first six months of 2012, the Company reported income before taxes of $10.0 million and recorded an income tax provision of $7.5 million. The Company’s effective income tax rate for the six months ended June 30, 2012 was 74.6%.

 

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16. Segment Information

The Company operates in three geographic regions: the Americas; Europe, which includes Africa; and Asia Pacific, which includes the Middle East.

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

There were no restructuring charges for the first six months of 2013. By segment, restructuring charges were $0.6 million in Europe and a credit of $0.1 million in the Americas for the second quarter of 2012, and $0.8 million in Europe for the first six months of 2012.

The revenue and operating income by segment, are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Revenue:

        

Americas

   $ 72,772      $ 65,320      $ 136,952      $ 124,190   

Europe

     24,128        27,148        43,123        54,208   

Asia Pacific

     25,133        23,597        44,936        44,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue before reimbursements (net revenue)

     122,033        116,065        225,011        222,591   

Reimbursements

     5,295        5,692        9,625        11,484   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 127,328      $ 121,757      $ 234,636      $ 234,075   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

        

Americas

   $ 18,066      $ 15,405      $ 31,454      $ 27,853   

Europe

     (2,485     1,110        (6,101     2,485   

Asia Pacific

     2,944        2,193        3,692        2,452   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total regions

     18,525        18,708        29,045        32,790   

Global Operations Support

     (12,783     (11,462     (22,914     (22,055
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before restructuring charges

     5,742        7,246        6,131        10,735   

Restructuring charges

     —          (507     —          (810
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 5,742      $ 6,739      $ 6,131      $ 9,925   
  

 

 

   

 

 

   

 

 

   

 

 

 

17. Guarantees

The Company has issued cash collateralized guarantees and letter of credit backed guarantees supporting certain obligations, primarily the payment of office lease obligations for certain of its subsidiaries in Europe and Asia Pacific. The guarantees were made to secure the respective lease agreements and are for the terms of the lease agreements, which extend through 2018. For each guarantee issued, the Company would have to perform under the guarantee if the subsidiary defaults on a lease payment. The maximum amount of undiscounted payments the Company would be required to make in the event of default on all outstanding guarantees is approximately $2.3 million as of June 30, 2013. The Company has not accrued for these arrangements as no event of default exists or is expected to exist.

18. Commitments and Contingencies

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

UK Employee Benefits Trust

On January 27, 2010, HM Revenue & Customs (“HMRC”) in the United Kingdom notified the Company that it was challenging the tax treatment of certain of the Company’s 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 the Company’s payroll tax liability for the affected years. The aggregate amount of HMRC’s proposed adjustment is approximately £3.9 million (equivalent to $5.9 million at June 30, 2013). The Company has appealed the proposed adjustment. At this time, the Company believes 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. The Company also believes that the amount of any final adjustment would not be material to the Company’s financial condition.

 

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as other sections of this report on Form 10-Q contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. 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; our reliance on information management systems; any further impairment of our goodwill and other intangible assets; and the ability to align our cost structure and headcount with net revenue. For more information on the factors that could affect the outcome of forward-looking statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2012, under Risk Factors in Item 1A. We caution the reader that the list of factors may not be exhaustive. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

Our Business

We are a leadership advisory firm providing executive search, culture shaping, 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 other services to clients. Our other services include culture shaping provided by Senn Delaney, a business that we acquired on December 31, 2012, and leadership consulting services which 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 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.

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, Adjusted EBITDA, Adjusted EBITDA margin, consultant headcount, confirmation trends, consultant productivity, and average revenue per search or project.

Revenue growth is driven by market conditions and a combination of an increase in executive search wins and leadership consulting and culture shaping projects, higher average revenue per search or project, and the development and hiring of additional consultants. With the exception of compensation expense, incremental increases in revenue do not necessarily result in proportionate increases in costs, particularly operating and administrative expenses, thus potentially improving operating margins.

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

 

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Our Compensation Model

At the consultant level there are fixed and variable components of compensation. 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, which directly impacts 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 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 Condensed Consolidated Balance Sheets.

Third Quarter 2013 Outlook

We are currently forecasting 2013 third quarter net revenue of between $115 million and $125 million. Our 2013 third quarter guidance is based upon management’s assumptions for the anticipated volume of new executive search confirmations and leadership consulting and culture shaping projects, the current backlog, consultant productivity, consultant retention, the seasonality of our business, the uncertainty in the global economic climate, and no change in future currency rates.

Our 2013 guidance is subject to a number of risks and uncertainties, including those discussed under Item 1A—Risk Factors and in our 2012 Annual Report on Form 10-K. As such, actual results could vary from these projections.

 

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Results of Operations

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

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2013     2012     2013     2012  

Revenue:

        

Revenue before reimbursements (net revenue)

     100.0     100.0     100.0     100.0

Reimbursements

     4.3        4.9        4.3        5.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     104.3        104.9        104.3        105.2   

Operating expenses:

        

Salaries and employee benefits

     68.1        68.8        68.7        70.3   

General and administrative expenses

     27.2        25.0        28.6        24.9   

Reimbursements

     4.3        4.9        4.3        5.2   

Restructuring charges

     —          0.4        —          0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     99.6        99.1        101.6        100.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     4.7        5.8        2.7        4.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating income (expense)

        

Interest expense, net

     (0.1     0.2        —          0.3   

Other, net

     (0.5     (1.3     (0.4     (0.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net non-operating income (expense)

     (0.6     (1.1     (0.4     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     4.1        4.7        2.3        4.5   

Provision for income taxes

     2.6        3.1        2.0        3.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1.6     1.6     0.3     1.1
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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We operate in three geographic regions (See Note 16, Segment Information). The following table sets forth, for the periods indicated, our revenue and operating income by segment (in thousands):

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2013     2012     2013     2012  

Revenue:

        

Americas

   $ 72,772      $ 65,320      $ 136,952      $ 124,190   

Europe

     24,128        27,148        43,123        54,208   

Asia Pacific

     25,133        23,597        44,936        44,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue before reimbursements (net revenue)

     122,033        116,065        225,011        222,591   

Reimbursements

     5,295        5,692        9,625        11,484   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 127,328      $ 121,757      $ 234,636      $ 234,075   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

        

Americas

   $ 18,066      $ 15,405      $ 31,454      $ 27,853   

Europe

     (2,485     1,110        (6,101     2,485   

Asia Pacific

     2,944        2,193        3,692        2,452   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total regions

     18,525        18,708        29,045        32,790   

Global Operations Support

     (12,783     (11,462     (22,914     (22,055
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before restructuring charges

     5,742        7,246        6,131        10,735   

Restructuring charges

     —          (507     —          (810
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 5,742      $ 6,739      $ 6,131      $ 9,925   
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012

Total revenue. Consolidated total revenue increased $5.6 million, or 4.6%, to $127.3 million in 2013 from $121.8 million in 2012. The increase in total revenue was due primarily to the increase in revenue before reimbursements (net revenue).

Revenue before reimbursements (net revenue). Consolidated net revenue increased $6.0 million, or 5.1%, to $122.0 million for the three months ended June 30, 2013 from $116.1 million for the three months ended June 30, 2012. Executive Search and Leadership Consulting net revenue increased $0.6 million and Senn Delaney net revenue was $5.4 million for the three months ended June 30, 2013. The impact of exchange rate fluctuations was insignificant. Increases in the Consumer Markets, Financial Services, Global Technology & Services and, Life Sciences search practices were the primary drivers of the increase in consolidated net revenue; however, these increases were partially offset by declines in net revenue from the Education & Social Enterprise and Industrial practices as well as Leadership Consulting. The number of confirmed executive searches increased 7% compared to the second quarter of 2012. The number of Executive Search and Leadership Consulting consultants was 315 as of June 30, 2013 compared to 340 as of June 30, 2012. Productivity, as measured by annualized net revenue per consultant, excluding Senn Delaney, was $1.5 million in the second quarter of 2013 compared to $1.3 million in the second quarter of 2012, and average revenue per executive search was $108,800 in the 2013 second quarter compared to $114,800 in the 2012 second quarter.

Net revenue in the Americas was $72.8 million for the three months ended June 30, 2013, an increase of $7.5 million, or 11.4%, from $65.3 million in the second quarter of 2012. Net revenue in Europe was $24.1 million for the three months ended June 30, 2013, a decrease of $3.0 million, or 11.1%, from $27.1 million in the second quarter of 2012. The positive impact of exchange rate fluctuations in Europe offset the decrease by approximately 2 percentage points in the second quarter of 2013. In Asia Pacific, net revenue was $25.1 million for the three months ended June 30, 2013, an increase of $1.5 million, or 6.5%, from $23.6 million in the second quarter of 2012. The negative impact of exchange rate fluctuations in Asia Pacific reduced the increase by approximately 2 percentage points in the second quarter of 2013.

Salaries and employee benefits. Consolidated salaries and employee benefits expense increased $3.2 million, or 4.0%, to $83.1 million for the three months ended June 30, 2013 from $79.9 million for the three months ended June 30, 2012. The increase in salaries and employee benefits expense is due to increases in performance-related compensation of $2.4 million and fixed compensation of $0.8 million. The increase in performance related compensation is predominantly related to the increase in the number of consultants whose compensation is primarily driven by performance. Excluding Senn Delaney, fixed compensation would have declined $2.6 million due to the decreases in guarantee and sign-on bonus expense of $2.9 million and base salaries of $0.6 million, partially offset by an increase in the amortization of retention related bonus payments from prior year of $0.8 million. In the 2013 second quarter we had on average 1,499 employees, including 90 Senn Delaney employees, compared to an average of 1,447 employees in the 2012 second quarter.

 

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The increase in salaries and employee benefits expense of 4.0% includes a negative impact of $0.5 million or 0.7% due to exchange rate fluctuations.

As a percentage of net revenue, salaries and employee benefits expense was 68.1% in the second quarter of 2013, compared to 68.8% in the second quarter of 2012.

General and administrative expenses. Consolidated general and administrative expenses increased $4.3 million, or 14.7%, to $33.2 million for the three months ended June 30, 2013 from $29.0 million for the three months ended June 30, 2012. The increase is primarily due to $2.9 million of general and administrative expense related to Senn Delaney (including $1.4 million of intangible asset amortization and $0.5 million associated with the accretion of the earnout payment), $1.6 million of costs associated with the timing of regional partner meetings and $0.7 million increase in the expense associated with our proprietary database, partially offset by a $0.7 million decrease in premise costs and a decrease in communication costs of $0.2 million.

The increase in general and administrative expense of 14.7% includes a negative impact of $0.1 million or 0.4% due to exchange rate fluctuations.

As a percentage of net revenue, general and administrative expenses were 27.2% in the second quarter of 2013 compared to 25.0% in the second quarter of 2012.

Restructuring charges. During the second quarter of 2012, we recorded restructuring charges of $0.5 million related to adjustments associated with our fourth quarter 2011 restructuring plan. These charges consisted of $0.8 million of employee-related costs associated with severance arrangements, partially offset by $0.3 million of adjustments to premise related costs.

Operating income. Consolidated operating income was $5.7 million for the three months ended June 30, 2013 compared to $6.7 million for the three months ended June 30, 2012. The $1.0 million decrease in operating income is primarily due to an increase in net revenue of $6.0 million and a decrease in restructuring charges of $0.5 million offset by an increase in general and administrative expenses of $4.3 million and an increase in salaries and employee benefits expense of $3.2 million.

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

In the Americas, operating income for the three months ended June 30, 2013 increased $2.7 million to $18.1 million from $15.4 million for the three months ended June 30, 2012. The increase in operating income is due to an increase in net revenue of $7.5 million, which was partially offset by increases in salaries and employee benefits expense of $2.9 million and general and administrative expense of $1.9 million. The increase in net revenue was due to Senn Delaney revenue of $4.6 million as well as increased net revenue in the Consumer Markets, Financial Services, Global Technology & Services and Life Sciences search practices, partially offset by decreases in the Education & Social Enterprises and Industrial practices and Leadership Consulting. The number of Executive Search and Leadership Consulting consultants was 139 as of June 30, 2013, compared to 157 as of June 30, 2012. The increase in salaries and employee benefits expense is due to a $2.2 million increase in performance-related compensation and a $0.7 million increase in fixed compensation. Performance-related compensation increased due primarily to higher net revenue associated with Executive Search. Fixed compensation increased primarily due to the increase in headcount due to Senn Delaney. The increase in general and administrative expense is primarily due to $2.5 million related to Senn Delaney (including $1.2 million of intangible amortization expense and $0.4 million of accretion expense related to the earnout payment), $0.9 million of costs associated with the timing of a regional partner meeting, partially offset by a $0.5 million decrease in travel and entertainment, a $0.5 million decrease in depreciation, and a $0.3 million decrease in premise costs.

In Europe, operating income (loss) for the three months ended June 30, 2013 decreased $3.6 million to a loss of $2.5 million from income of $1.1 million for the three months ended June 30, 2012. The decrease in operating income is primarily due to a decrease in net revenue of $3.0 million and an increase in general and administrative expense of $1.3 million, partially offset by a decrease in salaries and employee benefits expense of $0.7 million. The decrease in net revenue was across all search practices, except Consumer Markets and Life Sciences, and was partially offset by Senn Delaney revenue of $0.8 million. The number of Executive Search and Leadership Consulting consultants was 89 as of June 30, 2013 compared to 95 as of June 30, 2012. The increase in general and administrative expense was primarily due to $0.7 million in costs associated with the timing of a regional partner meeting, $0.4 million related to Senn Delaney and $0.3 million of professional fees. The decrease in salaries and employee benefits expense is due to a $1.5 million reduction in performance-related compensation associated with the decline in net revenue partially offset by an increase in fixed compensation of $0.8 million, primarily due to the addition of Senn Delaney.

In Asia Pacific, operating income for the three months ended June 30, 2013 increased $0.7 million to $2.9 million from $2.2 million for the three months ended June 30, 2012. The increase is due to an increase in revenue of $1.5 million, partially offset by increases in salaries and benefits expense of $0.7 million and general and administrative expenses of $0.1 million. The increase in net revenue was primarily due to increases in the Financial Services and Industrial search practices and Leadership Consulting. The number of Executive Search and Leadership Consulting consultants was 87 as of June 30, 2013 compared to 88 as of June 30, 2012. The increase in salaries and employee benefits expense reflects a $1.3 million increase in performance-related compensation primarily due to the higher net revenue partially offset by a $0.6 million decrease in fixed compensation related to the decline in headcount.

 

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Global Operations Support expenses for the three months ended June 30, 2013 increased $1.3 million, to $12.8 million from $11.5 million for the three months ended June 30, 2012. General and administrative expense increased $1.0 million and salaries and employee benefits expense increased $0.3 million. The increase in general and administrative expense is primarily due to a $0.3 million increase in travel and entertainment, $0.3 million increase in depreciation and $0.4 million in other operating and infrastructure costs. The increase in salaries and employee benefits expense is due to an increase in performance-related compensation related to higher net revenue.

Net non-operating income (expense). Net non-operating expense was $0.7 million for the three months ended June 30, 2013 compared to $1.2 million for the three months ended June 30, 2012.

Net interest expense was $0.1 million in the second quarter of 2013 compared to $0.2 million of interest income in the second quarter of 2012. The increase in interest expense is due to the interest associated with our 2013 borrowing.

Net other non-operating expense was $0.6 million for the three months ended June 30, 2013, compared to $1.5 million for the three months ended June 30, 2012. Net other non-operating expense consists of exchange gains and losses from balances which are denominated in currencies other than the functional currency and are not considered permanent in nature.

Income taxes. See Note 15, Income Taxes.

Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

Total revenue. Consolidated total revenue increased $0.6 million, or 0.2%, to $234.6 million in 2013 from $234.1 million in 2012. The increase in total revenue was due primarily to the increase in revenue before reimbursements (net revenue).

Revenue before reimbursements (net revenue). Consolidated net revenue increased $2.4 million, or 1.1%, to $225.0 million for the six months ended June 30, 2013 from $222.6 million for the six months ended June 30, 2012. Executive Search and Leadership Consulting net revenue decreased $8.6 million, offset by Senn Delaney net revenue of $11.0 million for the six months ended June 30, 2013. The negative impact of exchange rate fluctuations resulted in one percentage point of the decrease. Decreases in Leadership Consulting and the Consumer Markets, Educational & Social Enterprises and Industrial search practices were the primary drivers of the decrease in consolidated net revenue; however, these decreases were partially offset by growth in net revenue from the Financial Services, Global Technology & Services and Life Sciences search practices. The number of Executive Search and Leadership Consulting consultants was 315 as of June 30, 2013 compared to 340 as of June 30, 2012. The number of confirmed executive searches in the first six months of 2013 was consistent with the first six months of 2012. Productivity, as measured by annualized net revenue per consultant, excluding Senn Delaney, was $1.3 million in the first six months of 2013 consistent with the first six months of 2012, and average revenue per executive search was $106,000 for the six months ended June 30, 2013 compared to $107,400 for the six months ended June 30, 2012.

Net revenue in the Americas was $137.0 million for the six months ended June 30, 2013, an increase of $12.8 million, or 10.3%, from $124.2 million for the six months ended June 30, 2012. Net revenue in Europe was $43.1 million for the six months ended June 30, 2013, a decrease of $11.1 million, or 20.4%, from $54.2 million for the six months ended June 30, 2012. The negative impact of exchange rate fluctuations contributed to the decrease in net revenue in Europe by less than one percentage point for the first six months of 2013. In Asia Pacific, net revenue was $44.9 million for the six months ended June 30, 2013, an increase of $0.7 million, or 1.7%, from $44.2 million for the six months ended June 30, 2012. The negative impact of exchange rate fluctuations decreased net revenue in Asia Pacific by approximately two percentage points for the six months ended June 30, 2013.

Salaries and employee benefits. Consolidated salaries and employee benefits expense decreased $2.0 million, or 1.3%, to $154.5 million for the six months ended June 30, 2013 from $156.5 million for the six months ended June 30, 2012. The decrease in salaries and employee benefits expense is a result of decreases in performance related compensation of $1.1 million and fixed compensation of $0.9 million. The decrease in performance related compensation is primarily related to the reduction in net revenue in Executive Search and Leadership Consulting. The decrease in fixed compensation is primarily due to a $2.9 million decline in guarantee and sign-on bonus expense, a $1.9 million decrease in employee benefits, a $0.6 million decrease in base compensation and payroll taxes related to the reduction in Executive Search and Leadership Consulting consultants and a $0.5 million reduction in stock based compensation amortization, partially offset by the addition of Senn Delaney of $7.1 million. In the first six months ended June 30, 2013 we had on average 1,518 employees, including 90 Senn Delaney employees, compared to an average of 1,447 employees as of June 30, 2012.

The decrease in salaries and employee benefits expense of 1.3% includes a negative impact of $1.0 million or 0.6% due to exchange rate fluctuations.

As a percentage of net revenue, salaries and employee benefits expense was 68.7% in the first six months of 2013, compared to 70.3% in the first six months of 2012.

 

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General and administrative expenses. Consolidated general and administrative expenses increased $9.0 million, or 16.3%, to $64.3 million for the six months ended June 30, 2013 from $55.3 million for the six months ended June 30, 2012. The increase is primarily due to $6.2 million related to Senn Delaney (including $2.7 million of intangible asset amortization and $1.0 million associated with the accretion of the earnout payment), $1.9 million due to the timing of partner meetings, $1.1 million increase in professional fees, including $0.3 million related to the integration of Senn Delaney, and $1.0 million increase in expenses related to the company’s proprietary database. These increases were partially offset by a decrease in premise and other infrastructure costs of $0.7 million and a decline in other operating costs of $0.5 million.

The increase in general and administrative expense of 16.3% includes a positive impact of $0.3 million or 0.5% due to exchange rate fluctuations.

As a percentage of net revenue, general and administrative expenses were 28.6% in the first six months of 2013, compared to 24.9% in the first six months of 2012.

Restructuring charges. During the six months ended June 30, 2012, we recorded restructuring charges of $0.8 million related to adjustments associated with our fourth quarter 2011 restructuring plan. These charges consisted of $1.1 million of employee-related costs associated with severance arrangements, partially offset by $0.3 million of adjustments to premise related costs.

Operating income. Our consolidated operating income was $6.1 million for the six months ended June 30, 2013 and $9.9 million for the six months ended June 30, 2012.

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

The Americas reported operating income of $31.5 million for the six months ended June 30, 2013, an increase of $3.6 million compared to $27.9 million for the six months ended June 30, 2012. The increase in operating income is due to an increase in net revenue of $12.8 million, which was offset by increases in general and administrative expense of $5.6 million and salaries and employee benefits expense of $3.6 million. The increase in net revenue reflected Senn Delaney revenue of $9.6 million as well as increases in the Financial Services, Global Technology & Services and Life Sciences search practices, partially offset by decreases in the Consumer Markets and Industrial practices and Leadership Consulting. The number of Executive Search and Leadership Consulting consultants was 139 as of June 30, 2013, compared to 157 as of June 30, 2012. The increase in general and administrative costs is primarily due to $5.3 million related to Senn Delaney (including $2.3 million of intangible amortization expense and $0.8 million of accretion expense related to the earnout payment), $0.9 million of costs associated with a regional partner meeting, partially offset by a decrease in premise and other infrastructure costs of $0.7 million. The increase in salaries and employee benefits expense is due to a $2.3 million increase in performance-related compensation and a $1.3 million increase in fixed compensation. Performance-related compensation increased due primarily to higher net revenue associated with Executive Search. Fixed compensation increased primarily due an increase in headcount related to Senn Delaney.

Europe reported an operating loss of $6.1 million for the six months ended June 30, 2013, a decrease of $8.6 million compared to operating income of $2.5 million for the six months ended June 30, 2012. The decrease in operating income is due primarily to a decrease in net revenue of $11.1 million and an increase in general and administrative expense of $1.4 million, partially offset by a decrease in salaries and employee benefits expense of $3.9 million. The decrease in net revenue was across all search practices, except Life Sciences, and was partially offset by Senn Delaney revenue of $1.4 million. The number of Executive Search and Leadership Consulting consultants was 89 as of June 30, 2013 compared to 98 as of June 30, 2012. The increase in general and administrative expense was due primarily to $0.9 million related to Senn Delaney (including $0.4 million of intangible amortization expense and $0.2 million of accretion expense related to the earnout payment) and $0.7 million of costs associated with a regional partner meeting, partially offset by a $0.2 million decline in operating and other infrastructure costs. The decrease in salaries and employee benefits expense is due to a $3.7 million reduction in performance-related compensation associated with the decline in net revenue and a decrease in fixed compensation of $0.2 million, primarily due to the decrease in headcount excluding Senn Delaney.

Asia Pacific reported operating income of $3.7 million for the six months ended June 30, 2013, an increase of $1.2 million compared to $2.5 million for the six months ended June 30, 2012. The increase is due to an increase in net revenue of $0.7 million and a $1.1 million decrease in salaries and employee benefits, partially offset by an increase in general and administrative expenses of $0.6 million. The increase in net revenue was primarily due to increases in the Financial Services and Industrial search practices and Leadership Consulting. The number of Executive Search and Leadership Consulting consultants was 87 as of June 30, 2013 compared to 85 as of June 30, 2012. The decrease in salaries and employee benefits expense reflects a $1.5 million decrease in fixed compensation, partially offset by an increase of $0.4 million in performance-related compensation primarily due to the higher net revenue.

 

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Global Operations Support expenses for the six months ended June 30, 2013 were $22.9 million, an increase of $0.8 million, compared to $22.1 million for the six months ended June 30, 2012. General and administrative expense increased $1.5 million, partially offset by a decline in salaries and employee benefits expense of $0.7 million. The increase in general and administrative expense is primarily due to increases in depreciation of $0.7 million primarily related to our proprietary software that was launched in June 2012, equipment rental and maintenance of $0.4 and travel and entertainment of $0.3 million primarily related to regional partner meetings. The decrease in salaries and employee benefits expense is due to a decrease in fixed compensation of $0.5 million and a decrease in performance-related compensation of $0.1 million related to lower net revenue.

Net non-operating income (expense). Net non-operating loss was $1.0 million for the six months ended June 30, 2013 compared to income of $0.1 million for the six months ended June 30, 2012.

Net interest expense was $0.1 million for the six months ended June 30, 2013 compared to income of $0.7 million for the six months ended June 30, 2012. Interest income was $0.3 million for the six months ended June 30, 2013 offset by $0.4 million of interest expense associated our 2013 borrowings. There was no interest expense in the six months ended June 30, 2012.

Net other non-operating expense was $1.0 million for the six months ended June 30, 2013, compared to $0.7 million for the six months ended June 30, 2012. Net other non-operating expense consists of exchange gains and losses from balances which are denominated in currencies other than the functional currency and are not considered permanent in nature.

Income taxes. See Note 15, Income Taxes.

Liquidity and Capital Resources

General. We continually evaluate our liquidity requirements, capital needs and availability of capital resources based on our operating needs. We believe that our available cash balances together with the funds expected to be generated from operations and funds available under our committed revolving credit facility will be sufficient to finance our operations for the foreseeable future, as well as to finance the cash payments associated with our cash dividends and stock repurchase program.

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

Lines of credit. On January 31, 2013, the Company and certain foreign subsidiary borrowers of the Company entered into an Amendment and Restatement Agreement, pursuant to which the Borrowers, the Lenders and the Administrative Agent amended and restated the Credit Agreement dated as of June 22, 2011. Pursuant to the Agreement, the Credit Agreement was amended to add a committed term loan facility in an aggregate amount of up to $40 million (the “Term Facility”). On January 31, 2013 the Company borrowed $40 million under the Term Facility and $38.5 million was outstanding as of June 30, 2013. The Term Facility will be amortized over a five-year period pursuant to which the Company will make fifteen quarterly payments of $1.5 million. The first payment was made on June 28, 2013 and payments will continue on the last calendar day of every fiscal quarter, up to and including December 31, 2016. Additionally, the Company will make four payments of $2.0 million on March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017 and a final payment of the remaining outstanding balance of the Term Facility on January 31, 2018. The other material terms of the Credit Agreement (as in effect prior to the Agreement) were not amended by the Agreement.

There were no borrowings made or outstanding during the quarter ended June 30, 2012. We were in compliance with the financial and other covenants under the Agreement and no event of default existed at June 30, 2013.

Cash and cash equivalents. Cash and cash equivalents at June 30, 2013, December 31, 2012 and June 30, 2012 were $99.7 million, $117.6 million and $96.9 million, respectively. The $99.7 million of cash and cash equivalents at June 30, 2013, includes $46.6 million held by our foreign subsidiaries. A portion of the $46.6 million is considered permanently reinvested in these foreign subsidiaries. If these funds were required to satisfy obligations in the U.S., the repatriation of these funds could cause us to incur additional U.S. income taxes or foreign withholding taxes. Any additional taxes could be offset, in part or in whole, by foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated.

Cash flows used in operating activities. For the six months ended June 30, 2013, cash used in operating activities was $48.5 million, principally reflecting a decrease in accrued expenses primarily due to cash bonus payments of approximately $87 million, partially offset by 2013 bonus accruals and a $24.0 million increase in trade and other receivables, partially offset by $11.9 million of non-cash expenses.

Cash used in operating activities for the six months ended June 30, 2012, was $76.9 million, principally reflecting a decrease in accrued expenses primarily due to cash bonus payments of approximately $119 million, partially offset by 2012 bonus accruals, a $16 million increase in trade and other receivables and net income of $2.5 million.

 

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Cash flows used in investing activities. Cash used in investing activities was $1.9 million for the six months ended June 30, 2013 primarily due to capital expenditures of $1.4 million.

Cash used in investing activities was $5.7 million for the six months ended June 30, 2012 primarily due to capital expenditures of $5.1 million.

Cash flows provided by financing activities. Cash provided by financing activities for the six months ended June 30, 2013 was $35.1 million primarily due to $40.0 million of proceeds from the issuance of debt, partially offset by $2.5 million of quarterly cash dividends to shareholders, $1.5 million debt repayment, $0.6 million of payments for employee tax withholdings on equity transactions, and $0.4 million earnout payment related to the Bell McCaw Bampflyde acquisition.

Cash used in financing activities for the six months ended June 30, 2012 was $6.9 million primarily due to $4.9 million of quarterly cash dividends to shareholders, $1.6 million of payments for employee tax withholdings on equity transactions and a $0.4 million earnout payment related to the Bell McCaw Bampflyde acquisition.

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.

Application of Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed 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 included in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 15, 2013, and in Note 2, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements included in Item 1. 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, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes its critical accounting policies that reflect its more significant estimates and assumptions relate to revenue recognition, accruals for consultant bonuses, income taxes, contingent liabilities, and the allowance for doubtful accounts. See Application of Critical Accounting Policies and Estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 15, 2013.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency market risk. With our operations in the Americas, Europe and Asia Pacific we conduct business using various currencies. Revenue earned in each country is generally matched with the associated expenses incurred, thereby reducing currency risk to earnings. However, because certain assets and liabilities are denominated in currencies other than the U.S. dollar, changes in currency rates may cause fluctuations in the valuation of such assets and liabilities. As the local currency of our subsidiaries has generally been designated as the functional currency, we are affected by the translation of foreign currency financial statements into U.S. dollars. A 10% change in the average exchange rate for currencies of all foreign countries in which we operate would have increased or decreased our net income for the six months ended June 30, 2013 by $1.2 million (See Note 11, Derivative Financial Instruments). For financial information by geographic segment see Note 16, Segment Information.

 

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ITEM 4. CONTROLS AND PROCEDURES

a) Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Exchange Act of 1934, as amended, (the “Exchange Act”) Rule 13a-15(e) and 15d-15(e) that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (the “SEC”) rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Management of the Company, with the participation of the principal executive officer and the principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2013. This evaluation excluded an assessment of internal control over financial reporting of Senn-Delaney Leadership Consulting Group, LLC, (“Senn Delaney”), which was acquired on December 31, 2012 and whose consolidated financial statements reflect total assets and revenue constituting 14% and 5% respectively, of the Company’s consolidated financial statement amounts as of and for the year ended June 30, 2013. As permitted by the SEC, management has elected to exclude Senn Delaney from management’s assessment of the effectiveness the Company’s internal control over financial reporting for the six months ended June 30, 2013. Based on the evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2013.

The Company will be required to include Senn Delaney in its evaluation of internal controls over financial reporting as of December 31, 2013.

(b) Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1. 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 $5.9 million at June 30, 2013). 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 any final adjustment, if any, would not be material to our financial condition.

 

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Item 6. Exhibits

 

Exhibit No.

    

Description

  3.1       Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.02 of this Registrant’s Registration Statement on Form S-4 (File No. 333-61023)
  3.2       Amended and Restated By-laws of the Registration (Incorporated by reference to Exhibit 3.02 of the Registrant’s Form 10-K filed March 26, 2003)
  *31.1       Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  *31.2       Certification of the Company’s Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  *32.1       Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *32.2       Certification of the Company’s Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  **101       The following financial information from the Heidrick & Struggles International, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 formatted in Extensible Business Reporting Language (XBRL) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Consolidated Statement of Changes in Stockholders’ Equity; (iv) Condensed Consolidated Statements of Cash Flows; and (v) related Footnotes to the Condensed Consolidated Financial Statements.

 

* Filed herewith.

 

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURE

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: July 30, 2013

 

Heidrick & Struggles International, Inc.
                         (Registrant)
By:  

/s/ Karen K. Pepping

  Karen K. Pepping
  Senior Vice President, Chief Accounting Officer and Controller

 

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