HEIDRICK & STRUGGLES INTERNATIONAL, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations as well as other sections of this report on Form 10-Q contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements are not historical facts, but instead represent only our beliefs, assumptions, expectations, estimates, forecasts and projections regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.
Factors that may affect the outcome of the forward-looking statements include,
among other things, the impacts, direct and indirect, of the COVID-19 pandemic
on our business, our consultants and employees, and the overall economy;
leadership changes, our ability to attract, integrate, develop, manage and
retain qualified consultants and senior leaders; our ability to prevent our
consultants from taking our clients with them to another firm; our ability to
maintain our professional reputation and brand name; the fact that our net
revenue may be affected by adverse economic conditions; our clients' ability to
restrict us from recruiting their employees; the aggressive competition we face;
our heavy reliance on information management systems; the fact that we face the
risk of liability in the services we perform; the fact that data security, data
privacy and data protection laws and other evolving regulations and cross-border
data transfer restrictions may limit the use of our services and adversely
affect our business; social, political, regulatory and legal risks in markets
where we operate; the impact of foreign currency exchange rate fluctuations; the
fact that we may not be able to align our cost structure with net revenue;
unfavorable tax law changes and tax authority rulings; our ability to realize
our tax losses; the timing of the establishment or reversal of valuation
allowance on deferred tax assets; any impairment of our goodwill, other
intangible assets and other long-lived assets; our ability to execute and
integrate future acquisitions; the fact that we have anti-takeover provisions
that make an acquisition of us difficult and expensive; our ability to access
additional credit; and the increased cybersecurity requirements,
vulnerabilities, threats and more sophisticated and targeted cyber-related
attacks that could pose a risk to our systems, networks, solutions, services and
data. 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
Executive Overview
Our Business. We are a leadership advisory firm providing executive search and consulting services. We help our clients build leadership teams by facilitating the recruitment, management and development of senior executives. We believe focusing on top-level services offers us several advantages that include access to and influence with key decision makers, increased potential for recurring search consulting engagements, higher fees per search, enhanced brand visibility and a leveraged global footprint, which create added barriers to entry for potential competitors. Working at the top of client organizations also allows us to attract and retain high-caliber consultants.
In addition to executive search, we provide consulting services including executive leadership assessment, leadership, team and board development, succession planning, talent strategy, people performance, inter-team collaboration, culture shaping and organizational transformation.
We provide our services to a broad range of clients through the expertise of over 450 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.
Executive Search. We partner with respected organizations globally to build and sustain the best leadership teams in the world, with a specialized focus on the placement of top-level senior executives. We believe focusing on top-level senior executives provides the opportunity for several advantages including access to and influence with key decision makers, increased potential for recurring search and consulting engagements, higher fees per executive search, enhanced brand visibility, and a leveraged global footprint. Working at the top of client organizations also facilitates the attraction and retention of high-caliber consultants who desire to serve top industry executives and their leadership needs.
We employ a global approach to executive search built on better insights, more data and faster decision making facilitated by the use of our proprietary Infinity Framework and Heidrick Connect. Our Infinity Framework allows clients to holistically evaluate
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a candidate's pivotal experience and expertise, leadership capabilities, agility and potential, and culture fit and impact, thereby allowing our clients to find the right person for the role. We supplement our Infinity Framework through a series of additional online tools including our Leadership Accelerator, Leadership Signature and Culture Signature assessments. Heidrick Connect, a completely digital, always available, client experience portal allows our clients to access talent insights for each engagement, including the Infinity Framework and other proprietary assessment tools.
The executive search industry is highly fragmented, consisting of several thousand executive search firms worldwide. Executive search firms are generally separated into two broad categories: retained search and contingency search. Our executive search services are provided on a retained basis. Retained executive search firms fulfill their clients' senior leadership needs by identifying potentially qualified candidates and assisting clients in evaluating and assessing these candidates. Retained executive search firms generally are compensated for their services regardless of whether the client employs a candidate identified by the search firm and are generally retained on an exclusive basis.
For each assignment, we enter into a contract with our client that outlines the general terms and conditions of the assignment. Typically, we are paid a retainer for our executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled. In addition, if the actual compensation of a placed candidate exceeds the estimated compensation, executive search firms often are authorized to bill the client for one-third of the excess. We refer to this excess compensation billing as uptick revenue. We also bill our clients for indirect expenses, which are calculated as a percentage of the retainer with certain dollar limits per search. Revenue before reimbursements of out-of-pocket expenses ("net revenue") consists of retainers, an estimate of uptick revenue and indirect expenses billed to clients. We generally bill our clients for our retainer and indirect expenses in one-third increments over a three-month period commencing in the month of a client's acceptance of the contract with uptick revenue billed upon the completion of the engagement.
Key Performance Indicators
We manage and assess our performance through various means, with primary
financial and operational measures including net revenue, operating income,
operating margin, Adjusted EBITDA (non-GAAP) and Adjusted EBITDA margin
(non-GAAP).
Revenue is driven by market conditions and a combination of the number of executive search engagements and consulting projects and the average revenue per search or project. With the exception of compensation expense, incremental increases in revenue do not necessarily result in proportionate increases in costs, particularly operating and administrative expenses, thus creating the potential to improve operating margins.
The number of consultants, confirmation trends, number of searches or projects completed, productivity levels and the average revenue per search or project will vary from quarter to quarter, affecting net revenue and operating margin.
Our Compensation Model
At the Executive Search consultant level, there are fixed and variable
components of compensation. Individuals are rewarded for their performance based
on a system that directly ties a portion of their compensation to the amount of
net revenue for which they are responsible. A portion of the reward may be based
upon individual performance against a series of non-financial measures. Credit
towards the variable portion of an executive search consultant's compensation is
earned by generating net revenue for winning and executing work. Each quarter,
we review and update the expected annual performance of all Executive Search
consultants and accrue variable compensation accordingly. The amount of variable
compensation that is accrued for each Executive Search consultant is based on a
tiered payout model.
At the
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The mix of individual consultants who generate revenue in Executive Search and
economic contributions in
A portion of our Executive Search consultants' and management cash bonuses is
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
Recent Developments
On
With infections reported throughout the world, certain governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of the pandemic. Additional, more restrictive proclamations and/or directives may be issued in the future. We have temporarily closed our offices and shifted our workforce to remote operations to ensure the safety of our employees. During this uncertain time, our critical priorities are:
•the health and safety of our employees, clients and their families; •providing support to our clients; and •helping our clients accelerate their business performance and transform with agility
While we have not incurred any significant disruptions to our business to date, the extent to which the pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including, but not limited to:
• the duration and scope of the pandemic;
• the impact of the pandemic, and actions taken in response to the pandemic,
on economic activity;
• governmental, business and individuals' actions that have been and
continue to be taken in response to the pandemic;
• restrictions inhibiting our employees' ability to access our offices;
• the effect on our clients and client demand for our services and solutions;
• our ability to sell and provide our services and solutions, including as a
result of travel restrictions and people working from home; and
• the ability of our clients to pay for our services and solutions
We expect that all of our business segments, across all of our geographies, will be impacted to some degree by the pandemic and actions taken in response to the pandemic, but the significance of the impact of the pandemic on our business and the duration for which it may have an impact cannot be determined at this time. Specific factors that may impact our business include, but are not limited to:
• a decline in demand for our executive search and consulting services due
to temporary and permanent workforce reductions, and general economic
uncertainty;
• a lengthening of the executive search process due to a slow-down in client
decision making;
• an increase in executive searches placed on hold due to delays in planned
work by our clients;
• an inability to execute in-person consulting engagements; and
• disruptions in business operations for offices in areas most impacted by
the pandemic, including the United States , United Kingdom , Italy , Spain
and China A sustained economic downturn may also result in the carrying value of our goodwill, other intangible assets, and long-lived assets exceeding their fair value, which may require us to recognize an impairment to those assets.
We believe we have sufficient liquidity to satisfy our cash needs, however, we
continue to evaluate and take action, as necessary, to preserve adequate
liquidity and ensure that our business can continue to operate during these
uncertain times. On
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2020, we elected to draw down
We have not experienced any material impact to our internal controls over financial reporting despite the fact that our employees are working remotely due to the pandemic. We are continually monitoring and assessing the pandemic situation on our internal controls to minimize the impact on their design and operating effectiveness.
For more information, see Item 1A, "Risk Factors."
Results of Operations
The following table summarizes, for the periods indicated, our results of operations as a percentage of revenue before reimbursements (net revenue):
Three Months Ended
March 31,
2020 2019
Revenue
Revenue before reimbursements (net revenue) 100.0 % 100.0 % Reimbursements 2.0 2.7 Total revenue 102.0 102.7 Operating expenses Salaries and benefits 70.6 70.4 General and administrative expenses 18.8 20.0 Reimbursed expenses 2.0 2.7 Total operating expenses 91.4 93.2 Operating income 10.6 9.6 Non-operating income (expense) Interest, net 0.4 0.5 Other, net (2.6 ) 1.0 Net non-operating income (expense) (2.2 ) 1.4 Income before income taxes 8.4 11.0 Provision for income taxes 3.3 3.9 Net income 5.1 % 7.0 %
Note: Totals and sub-totals may not equal the sum of individual line items due to rounding.
We operate our executive search services in the
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The following tables set forth, for the periods indicated, our revenue and operating income by segment (in thousands):
Three Months Ended
March 31,
2020 2019
Revenue
Executive Search
Americas $ 100,301 $ 99,305
Europe 33,082 33,553
Asia Pacific 22,070 25,447
Total Executive Search 155,453 158,305
Heidrick Consulting 16,028 13,289
Revenue before reimbursements (net revenue) 171,481 171,594
Reimbursements 3,366 4,680
Total revenue $ 174,847 $ 176,274
Three Months Ended
March 31,
2020 2019
Operating income (loss)
Executive Search
Americas $ 25,732 $ 22,449
Europe 3,049 2,165
Asia Pacific 2,502 4,906
Total Executive Search 31,283 29,520
Heidrick Consulting (4,092 ) (4,827 )
Total segment operating income 27,191 24,693
Global Operations Support (9,039 ) (8,302 )
Total operating income
Three Months Ended
Total revenue. Consolidated total revenue decreased
Revenue before reimbursements (net revenue). Consolidated net revenue decreased
The number of
Salaries and benefits. Consolidated salaries and benefits expense increased
For the three months ended
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As a percentage of net revenue, salaries and benefits expense was 70.6% for the
three months ended
General and administrative expenses. Consolidated general and administrative
expenses decreased
As a percentage of net revenue, general and administrative expenses were 18.8%
for the three months ended
Operating income. Consolidated operating income was
Net non-operating income (expense). Net non-operating expense was
Interest, net, was
Other, net, was
Income taxes. See Note 13, Income Taxes.
Executive Search
The
Salaries and benefits expense decreased
General and administrative expenses decreased
Operating income was
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and Life Sciences practice groups exhibited growth over the prior year. Foreign
exchange rate fluctuations negatively impacted results by
Salaries and benefits expense increased
General and administrative expense decreased
The
Salaries and benefits expense decreased
General and administrative expenses decreased
The
Salaries and benefits expense increased
General and administrative expenses decreased
Global Operations Support
Global Operations Support expenses for the three months ended
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Salaries and benefits expense increased
General and administrative expenses increased
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, 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
Borrowings under the 2018 Credit Agreement may be used for working capital, capital expenditures, Permitted Acquisitions (as defined in the 2018 Credit Agreement) and for other general purposes. The obligations under the 2018 Credit Agreement are guaranteed by certain of our subsidiaries.
We capitalized approximately
During the three months ended
As of
Cash, cash equivalents and marketable securities. Cash, cash equivalents and
marketable securities at
Cash flows used in operating activities. For the three months ended
For the three months ended
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million, partially offset by net income of
Cash flows used in investing activities. Cash provided by investing activities
was
For the three months ended
Cash flows used in financing activities. Cash provided by financing activities
was
For the three months ended
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
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 if 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,
income taxes, interim effective tax rate and assessment of goodwill and other
intangible assets for impairment. 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
Recently Adopted Financial Accounting Standards
On
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Recently Issued Financial Accounting Standards
In
In
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