Company Quick10K Filing
Heidrick & Struggles
Price27.60 EPS0
Shares19 P/E56
MCap524 P/FCF6
Net Debt-176 EBIT15
TEV348 TEV/EBIT24
TTM 2019-09-30, in MM, except price, ratios
10-K 2020-12-31 Filed 2021-02-24
10-Q 2020-09-30 Filed 2020-10-26
10-Q 2020-06-30 Filed 2020-07-27
10-Q 2020-03-31 Filed 2020-04-27
10-K 2019-12-31 Filed 2020-02-24
10-Q 2019-09-30 Filed 2019-10-28
10-Q 2019-06-30 Filed 2019-07-29
10-Q 2019-03-31 Filed 2019-04-29
10-K 2018-12-31 Filed 2019-02-26
10-Q 2018-09-30 Filed 2018-10-29
10-Q 2018-06-30 Filed 2018-07-31
10-Q 2018-03-31 Filed 2018-05-03
10-K 2017-12-31 Filed 2018-03-13
10-Q 2017-09-30 Filed 2017-10-26
10-Q 2017-06-30 Filed 2017-07-27
10-Q 2017-03-31 Filed 2017-04-25
10-K 2016-12-31 Filed 2017-03-23
10-Q 2016-09-30 Filed 2016-10-26
10-Q 2016-06-30 Filed 2016-07-26
10-Q 2016-03-31 Filed 2016-04-27
10-K 2015-12-31 Filed 2016-03-10
10-Q 2015-09-30 Filed 2015-10-27
10-Q 2015-06-30 Filed 2015-07-28
10-Q 2015-03-31 Filed 2015-04-29
10-K 2014-12-31 Filed 2015-03-11
10-Q 2014-09-30 Filed 2014-10-28
10-Q 2014-06-30 Filed 2014-07-29
10-Q 2014-03-31 Filed 2014-04-29
10-K 2013-12-31 Filed 2014-03-13
10-Q 2013-09-30 Filed 2013-10-29
10-Q 2013-06-30 Filed 2013-07-30
10-Q 2013-03-31 Filed 2013-05-09
10-K 2012-12-31 Filed 2013-03-15
10-Q 2012-09-30 Filed 2012-11-05
10-Q 2012-06-30 Filed 2012-08-06
10-Q 2012-03-31 Filed 2012-04-30
10-K 2011-12-31 Filed 2012-03-15
10-Q 2011-09-30 Filed 2011-11-01
10-Q 2011-06-30 Filed 2011-08-01
10-Q 2011-03-31 Filed 2011-05-10
10-K 2010-12-31 Filed 2011-03-16
10-Q 2010-09-30 Filed 2010-11-09
10-Q 2010-06-30 Filed 2010-08-04
10-Q 2010-03-31 Filed 2010-05-03
10-K 2009-12-31 Filed 2010-03-01
8-K 2020-10-26
8-K 2020-07-27
8-K 2020-05-28
8-K 2020-04-27
8-K 2020-04-03
8-K 2020-03-20
8-K 2020-02-24
8-K 2019-10-28
8-K 2019-09-24
8-K 2019-07-29
8-K 2019-06-06
8-K 2019-05-23
8-K 2019-04-29
8-K 2019-02-25
8-K 2019-02-06
8-K 2019-01-28
8-K 2019-01-15
8-K 2018-12-19
8-K 2018-12-04
8-K 2018-10-26
8-K 2018-07-30
8-K 2018-06-13
8-K 2018-05-24
8-K 2018-04-23
8-K 2018-03-19
8-K 2018-02-26
8-K 2018-02-01
8-K 2018-01-04
8-K 2017-12-31

HSII 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10 - K Summary
EX-10.58 ex1058-hsiix20201231.htm
EX-21.01 ex2101-hsiix20201231x.htm
EX-23.01 ex2301-hsiix20201231x.htm
EX-31.1 ex311-hsiix20201231.htm
EX-31.2 ex312-hsiix20201231.htm
EX-32.1 ex321-hsiix20201231.htm
EX-32.2 ex322-hsiix20201231.htm

Heidrick & Struggles Earnings 2020-12-31

Balance SheetIncome StatementCash Flow
78062446831215602012201420172020
Assets, Equity
19514799513-452012201420172020
Rev, G Profit, Net Income
1307214-44-102-1602012201420172020
Ops, Inv, Fin

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-25837 
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-2681268
(State or Other Jurisdiction of
Incorporation or Organization)
 (I.R.S. Employer
Identification Number)
233 South Wacker Drive, Suite 4900, Chicago, Illinois 60606-6303
(Address of principal executive offices) (Zip Code)
(312) 496-1200
(Registrant’s telephone number, including area code)
 
 Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading SymbolName of Each Exchange On Which Registered
Common Stock, $.01 par value HSIIThe Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨  Accelerated Filer
Non-Accelerated filer 
¨ 
  Smaller reporting company¨
Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act ((15. U.S. C 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    Yes      No  ¨

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

The aggregate market value of the registrant’s Common Stock held by non-affiliates (excludes shares held by executive officers, directors and beneficial owners of 10% or more of the registrant’s outstanding Common Stock) on June 30, 2020 was approximately $356,598,123 based upon the closing market price of $21.62 on that date of a share of Common Stock as reported on the Nasdaq Global Stock Market. As of February 22, 2021, there were 19,359,586 shares of the Company’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 27, 2021, are incorporated by reference into Part III of this Form 10-K.



HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS
 
  PAGE
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
2



PART I
 
ITEM 1. BUSINESS

Overview

Heidrick & Struggles International, Inc. (“Heidrick & Struggles”) is a leadership advisory firm providing executive search and consulting services to businesses and business leaders worldwide. When we use the terms “Heidrick & Struggles,” “the Company,” “we,” “us” and “our,” in this Form 10-K, we mean Heidrick & Struggles International, Inc. a Delaware corporation, and its consolidated subsidiaries. We provide our services to a broad range of clients through the expertise of over 425 consultants located in major cities around the world. Heidrick & Struggles and its predecessors have been a leadership advisor for more than 60 years. Heidrick & Struggles was formed as a Delaware corporation in 1999 when two of our predecessors merged to form Heidrick & Struggles.

Our service offerings include the following:

Executive Search. We 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 competitive advantages including access to and influence with key decision makers, increased potential for recurring search and consulting engagements, higher fees per search, enhanced brand visibility, and a leveraged global footprint. Working at the top of client organizations also facilitates the attraction and retention of high-caliber consultants who desire to serve top industry executives and their leadership needs. Our executive search services derive revenue through the fees generated for each search engagement, which generally are based on the annual compensation for the placed executive. We provide our executive search services primarily on a retained basis, recruiting senior executives whose first-year base salary and bonus averaged approximately $370,000 in 2020 on a worldwide basis.

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. 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. Typically, retained executive search firms are paid a retainer for their 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. In contrast, contingency search firms are compensated only upon successfully placing a recommended candidate.

We are a retained executive search firm. Our search process typically consists of the following steps:
 
Analyzing the client’s business needs in order to understand its organizational structure, relationships and culture, advising the client as to the required set of skills and experiences for the position, and identifying with the client the other characteristics desired of the successful candidate;

Selecting, contacting, interviewing and evaluating candidates on the basis of experience and potential cultural fit with the client organization;

Presenting confidential written reports on the candidates who potentially fit the position specification;

Scheduling a mutually convenient meeting between the client and each candidate;

Completing reference checks on the final candidate selected by the client; and

Assisting the client in structuring compensation packages and supporting the successful candidate’s integration into the client team.

Heidrick Consulting. In 2018, we combined our Leadership Consulting and Culture Shaping businesses to create Heidrick Consulting, a comprehensive offering of the firm's leadership advisory services. Our consulting services include leadership assessment and development, executive coaching and on-boarding, succession planning, team and board effectiveness, organizational performance acceleration, workforce planning and culture shaping. Our consulting services generate revenue
3



primarily through the professional fees generated for each engagement which are generally based on the size of the project and scope of services. Heidrick Consulting represented less than 10% of our net revenue in 2020.

Organization

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

Geographic Structure. We provide senior-level executive search and consulting services to our clients worldwide through a network of 51 offices in 28 countries including our affiliates. Each office size varies; however, major locations are staffed with consultants, research associates, administrative assistants and other support staff. Administrative functions are centralized where possible, although certain support and research functions are situated regionally because of variations in local requirements. We face risks associated with political instability, legal requirements and currency fluctuations in our international operations. Examples of such risks include difficulties in managing global operations, social and political instability, regulations and potential adverse tax consequences. For a more complete description of the risks associated with our business see the Section in this Form 10-K entitled “Risk Factors”.

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

Information by Geography. We operate our Executive Search services in three geographic regions, each of which is reported as a separate reporting segment: the Americas (which includes the countries in North and South America); Europe (which includes the continents of Europe and Africa); and Asia Pacific (which includes Asia and the region generally known as the Middle East). Our Heidrick Consulting reporting segment operates globally.

Americas Executive Search. As of December 31, 2020, we had 190 consultants in our Americas segment. The largest offices in this segment, as defined by net revenue, are located in New York, Chicago, and San Francisco.

Europe Executive Search. As of December 31, 2020, we had 102 consultants in our Europe segment. The largest countries in this segment, as defined by net revenue, are the United Kingdom, Germany, and France.

Asia Pacific Executive Search. As of December 31, 2020, we had 69 consultants in our Asia Pacific segment. The largest countries in this segment, as defined by net revenue, are China (including Hong Kong), Australia, and Japan.

Heidrick Consulting. As of December 31, 2020, we had 65 consultants in our Heidrick Consulting segment. The largest countries in this segment, as defined by net revenue, are the United States, the United Kingdom, and Dubai.

The relative percentages of net revenue attributable to each segment were as follows:
 Year Ended December 31,
 202020192018
Executive Search
Americas58 %58 %57 %
Europe20 %19 %20 %
Asia Pacific13 %14 %14 %
Heidrick Consulting%%%

For financial information relating to each segment, see Note 17, Segment Information, in the Notes to Consolidated Financial Statements.

4



Global Industry Practices. Our executive search and consulting businesses operate in six broad industry groups listed below. These industry categories and their relative sizes, as measured by billings for 2020, 2019 and 2018, are as follows:
Percentage of Billings
Global Industry Practices202020192018
Financial Services25 %26 %28 %
Global Technology & Services21 21 20 
Industrial20 21 21 
Consumer Markets17 17 16 
Healthcare & Life Sciences14 12 11 
Social Impact
100 %100 %100 %

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

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

Global Functional Practices. Our Executive Search consultants also specialize in searches for specific “C-level” functional positions, which are roles that generally report directly to the chief executive officer.

Our Global Functional Practices include Chief Executive Officer & Board of Directors; Human Resources Officers, Financial Officers; Information and Technology Officers, Legal, Risk, Compliance & Government Affairs, Marketing, Sales and Strategy Officers and Supply Chain and Operations.

Our team of Executive Search consultants may service clients from any one of our offices around the world. For example, an executive search for a chief financial officer of an industrial company located in the United Kingdom may involve an executive search consultant in the United Kingdom with an existing relationship with the client, another executive search consultant in the United States with expertise in our Industrial practice and a third executive search consultant with expertise in recruiting chief financial officers. This same industrial client may also engage us to perform skill-based assessments for each of its senior managers, which could require the expertise of one of our leadership advisory consultants trained in this service.

Client Base

For many of our clients, our global access to and knowledge of regional and functional markets and candidate talent is an important differentiator of our business. Our clients generally fall into one of the following categories:
 
Fortune 1000 companies;

Major U.S. and non-U.S. companies;

Middle market and emerging growth companies;

Governmental, higher education and not-for-profit organizations; and

Other leading private and public entities.

Clients and Marketing

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

In support of client calling and networking, the practice teams as well as individual consultants also author and publish articles and white papers on a variety of leadership and talent topics and trends around the world. Our consultants often present research findings and talent insights at notable conferences and events as well. Our insights are sometimes acknowledged by major media outlets and trade journalists. These efforts aid in the marketing of our services as well.

Either by agreement with the clients or to maintain strong client relationships, we may refrain from recruiting employees of a client, or possibly other entities affiliated with that client, for a specified period of time but typically not more than one year from the commencement of a search. We seek to mitigate any adverse effects of these off-limits arrangements by strengthening our long-term relationships, allowing us to communicate our belief to prospective clients that we can conduct searches effectively notwithstanding certain off-limits arrangements.

No single client accounted for more than 1% of our net revenue in 2020, and no more than 2% in 2019 or 2018. As a percentage of total revenue, our top ten clients in aggregate accounted for approximately 6% in 2020, 7% in 2019, and 6% in 2018.

Information Management Systems

We rely on technology to support our consultants and staff in the search process. 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 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. In response to working remotely, our Executive Search teams employed Heidrick Connect to operate effectively and efficiently while engaging virtually with our clients. Additionally, we have introduced upgrades to Heidrick Connect, resulting in greater flexibility, increased productivity and the ability to deliver more insights to our clients.

Our consulting business’ proprietary Web-based system, Culture Connect, is integral to the culture-shaping process. This technology platform enables our consultants to administer, analyze and interpret online Corporate Culture Profiles™ surveys to develop clarity around team and organizational need and desired outcomes. In addition, we gather data using our online Culture Impact Survey™ to determine which culture-shaping concepts are being utilized by individuals and the team as a whole. Our Heidrick Consulting teams have pivoted to create new digital solutions for Leadership Assessments, Team Acceleration, and Organization and Culture Acceleration that can be delivered virtually in response to required social distancing practices.

Competition

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

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

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

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Seasonality

There is no discernible seasonality in our business, although as a percentage of total annual net revenue, the first quarter typically generates less revenue than the other three quarters. Revenue and operating income have historically varied by quarter and are hard to predict from quarter to quarter. In addition, the volatility in the global economy and business cycles can impact our quarterly revenue and operating income.

Human Capital Resources

Employee Summary. As of December 31, 2020, Heidrick & Struggles employed 1,563 employees, which includes 856 in the Americas, 442 in Europe, and 265 in Asia Pacific. Our headcount included of 426 consultants (361 related to Executive Search and 65 related to Heidrick Consulting), 480 associates and 657 other search, support and Global Operations Support staff.

Within Executive Search and Heidrick Consulting, our professionals are generally categorized either as consultants or associates. Associates assist consultants by providing research support, coordinating candidate contact and performing other engagement-related functions. We promote our associates to consultants during the annual consultant promotion process, and we recruit our consultants from other executive search or human capital firms, or in the case of executive search, consultants new to search who have worked in industries or functions represented by our practices. In the latter case, these are often seasoned executives with extensive contacts and outstanding reputations who are entering the search profession as a second career and whom we train in our techniques and methodologies. Our Heidrick Consulting consultants are recruited for their executive business experience as well as their skills in consulting and leadership advisory and often are former clients who are familiar with our consulting methodology. We are not a party to any U.S.-based collective bargaining agreement, and we consider relations with our employees to be good.

Our Values. We believe that our success is grounded in how we operate each and every day as individual professionals and, collectively, as a firm. In 2015, we formalized our long-held beliefs into defined values to guide our employees – Grow with our clients; Win as one firm; Always act with Integrity; and Own the results. These values still represent who we are and who we want to be. With the unique circumstances brought on by the pandemic and the renewed urgency to address racial inequality, over the last year we reflected further on how our employees, our connections with one another, and the communities we build together shape our identity and aspirations as a firm. Importantly, we saw an opportunity to directly underscore the importance of our employees in our values.

With this in mind, we have introduced an additional, important new value – Respect and value each individual – to more clearly articulate our commitment to increasing diversity and fostering an inclusive environment, one where all individual voices and backgrounds are welcomed, listened to and valued. Our values serve to guide us in how we approach our business and how we treat our colleagues and clients, and also help us build trust and a common understanding of what we stand for and believe in as a firm.

In 2020, we demonstrated the strength of our culture and the positive results we could achieve as we worked together to drive our transformation in the midst of an unprecedented year. We strive to build on these efforts as we continue to grow our business with our new, expanded and explicitly more inclusive values.

Diversity and Inclusion. Diversity and inclusion is imperative for our internal culture, as we believe it drives innovation and future growth. We have committed substantial time and resources to advance diversity in our workforce, and we continue to support a culture where diversity is celebrated. We also work to create a culture of inclusion, where everyone feels valued and supported, and is encouraged to contribute to our success through authentic participation. Collaboration and inclusion are among our greatest strengths. By cultivating a culture that brings the maximum range of ideas and experience to our work with clients around the world, we believe we increase our innovation, create better solutions to our clients’ business challenges and win as one firm.

Our diversity and inclusion efforts are comprised of many initiatives including:

Creating an Advancing Black Leaders Action Group.

Commitment to the “Paradigm for Parity”, a movement that is a coalition of business leaders dedicated to addressing the leadership gender gap in corporate America. We created and launched the Accelerating Women’s Excellence initiative to develop high-potential women for promotion into leadership positions. In 2021, we launched the third cohort of this program.
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Holding “Courageous Conversations” around race and intersectionality.

Development and signing of the Association of Executive Search Consultants Diversity Pledge.

Establishing employee resource groups including: Women’s Inclusion Network, Professionals of Color, Ethnic Diversity Engagement Network, Pride@Heidrick, and Honor Equality and Inclusion for Disability

Diverse office, practice and executive leaders within the firm.

In 2020, we reaffirmed our commitment to diversity and inclusion with the appointment of our Chief Inclusion Officer and the establishment of our diversity and inclusion aspirations - “We Create, We Invest, We Build.” These aspirations are explained below:

We create a culture of inclusion where everyone is valued and respected. We create a culture that embraces differences and encourages authenticity. We create innovation by maximizing the contributions of our diverse populations. We offer services to our clients to help them do the same.

We invest in the advancement, experience and success of diverse talent within our organization. We invest in leaders both internally and externally who are inclusive and empathetic and champion diversity. We invest in our communities, specifically targeting those groups who have been historically underrepresented and disadvantaged.

We build talent pipelines for our clients and ourselves that intentionally target and develop diverse talent. We build diverse and inclusive teams to best represent our clients and their interests. We build innovative solutions to enhance the success of diverse individuals. We build quantifiable measures that define and track diversity statistics to create accountability.

We believe that diversity and inclusion are key elements of an organization’s ability to mobilize, execute and transform with agility.

Employee Engagement. We provide all employees with the opportunity to share their opinions and feedback through our proprietary Organization Accelerator Questionnaire (“OAQ”) every two years. The OAQ provides an accurate Acceleration Profile based on assessment of the 13 Drive Factors of organizational performance. The OAQ captures an individual’s perception of the organization, as well as their own personal experience within the organization, and tracks progress from period to period, while also benchmarking teams within the same organization. The insights it provides enable focused action planning. Results of the questionnaire are measured, analyzed and discussed in live sessions in each office to enhance the employee experience, drive change, and leverage the overall success of our organization. On a global basis, 92% of our employees participated in the OAQ in 2020.

Learning and Development. We are committed to the professional development of our employees and promoting a continuous learning culture within our firm. Our learning and development programs have been created with the goal of building leadership, business development, account management, client service, and change leadership skills among our employees. In addition to building personal and professional capabilities, these programs set a standard for the behaviors that will help us realize our business goals and strategies.

In 2020, our Learning & Development team re-imagined our programs to adapt to a virtual environment, and we will continue to deliver programs virtually in 2021. Our learning catalog outlines dozens of live, virtual programs and thousands of eLearning courses designed to help build and enhance employee leadership, business acumen and business development skills. These programs are continually updated to reflect best practices and feedback received from employees.

Over 1,200 of our employees participated in almost 11,000 hours of virtual learning during 2020.

Participation in our Communities. We are proud members and eager participants in communities where we work. We know first-hand from our client work the positive effects that strong leaders can bring to both organizations and communities, and to encourage employees to contribute to our communities as well.

The Company formed a Global Philanthropic Committee in 2019 to establish a coordinated, global approach to supporting the charitable causes and philanthropic endeavors that impact our employees, clients and communities. We also respect the right
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of our employees to independently engage in charitable causes and encourage the same. We collaborate to find appropriate charitable and community causes by promoting suggestions to the Global Philanthropic Committee.

In 2019, employees participated in our first ever Global Day of Service where we, as a firm, gave back to our communities by raising awareness, volunteering and raising funds for non-profits and organizations focused on education, training, development and other local causes. In 2020, participation in the Global Day of Service increased to over 600 employees in 26 offices benefiting over 45 organizations and non-profits.

Compensation and Benefits. Our goal is not only to challenge our employees to reach their potential professionally, and reward them for great work, but also to understand and consider their need to be simultaneously healthy, balanced and focused. We believe in fair compensation, based upon demonstrated capabilities and achievement, experience, and superior performance. We place great importance on incentivizing, recognizing, and rewarding performance and behaviors aligned with our values in the form of discretionary bonus awards. Through our benefits program, we demonstrate commitment to fostering an environment in which employees are able to maintain a healthy work-life balance, and in which the best talent wants to work and thrive. Our benefits are administered on a country-by-country basis, so that benefits are comparable to other employers within each jurisdiction and our industry. We use several measures to ensure that our benefits offerings are up-to-date, competitive in the marketplace, and in line with employee needs, including employee surveys, benchmarking exercises, and other benefits measurement tools. Benefits offered to our employees may include annual leave and other paid time off, medical, dental and vision benefits, prescription drug benefits, flexible spending accounts, employee assistance programs, 401(k) and deferred compensation retirement programs, short and long-term disability insurance, critical illness insurance and life insurance.

Employee Safety. As we continue to navigate through these extraordinary times, our top priority has been ensuring the health and safety of our employees, clients and the communities where we live and work around the globe. To minimize the risk of exposure to COVID-19, and in line with guidance and mandates from local and national governments and health authorities, we have suspended all business travel and instituted a work-from-home policy across the Americas, Europe and Asia Pacific. As a digital-focused, tech-enabled firm, we have been able to adapt quickly to having so many of our employees work from home, and have also expanded the support provided to our employees and their families, including flexible work times and telemedicine options. In addition, we have been reviewing our business continuity plans on an ongoing basis to ensure our operations continue to run smoothly.

Ethics. Employees are encouraged to speak to their colleagues and representatives in Legal and Human Resources whenever an ethical question or situation arises. We also have established the Heidrick & Struggles EthicsLine, a service that provides a mechanism for reporting alleged breaches of any legal or regulatory obligations, financial fraud, including accounting, internal controls and auditing, or any alleged violation of the Code of Conduct or corporate policies to the Company. The EthicsLine is a web-based and telephonic reporting hotline available to all company employees, contractors, vendors, stockholders, clients, or other interested parties. The EthicsLine is administered by an independent third party that is separate from the Company and specializes in running whistleblower hotline programs for companies throughout the U.S. Calls are not recorded and callers may remain anonymous. The EthicsLine is operational 24 hours a day, seven days a week. To contact the EthicsLine, you may dial 800-735-0589 toll-free in the U.S. or 704-731-7242 outside the U.S. or by visiting https://heidrickandstruggles.alertline.com.

Regulation

We are subject to the U.S. securities laws and general corporate and commercial laws and regulations of the locations which we serve. These include regulations regarding anti-bribery, privacy and data protection, intellectual property, data security, data retention, personal information, economic or other trade prohibitions or sanctions. In particular, we are subject to federal, state, and foreign laws regarding privacy and protection of people's data. Foreign data protection, privacy, and other laws and regulations can be more restrictive than those in the United States. Most notably, certain aspects of our business are subject to the European Union's General Data Protection Regulation ("GDPR") which became effective on May 25, 2018. We have a GDPR compliance program to facilitate our ongoing efforts to comply with GDPR regulations. U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to change.

Available Information

We maintain an Internet website at http://www.heidrick.com. We make available free of charge through the investor relations section of our website annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of
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1934 ("Exchange Act"), as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). Also posted on our website, and available in print upon request of any shareholder to our Investor Relations Officer, are our certificate of incorporation and by-laws, charters for our Audit and Finance Committee, Human Resources and Compensation Committee and Nominating and Board Governance Committee, our Policy Regarding Director Independence Determinations, our Policy on Reporting of Concerns Regarding Accounting and Other Matters, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics governing our directors, officers and employees. Within the time period required by the SEC, we will post on our website any amendment to the Code of Business Conduct and Ethics and any waiver applicable to any executive officer, director or senior financial officer.

In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors, as well as disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast or by similar means from time to time.

Our Investor Relations Officer can be contacted at Heidrick & Struggles International, Inc., 233 South Wacker Drive, Suite 4900, Chicago, Illinois, 60606, Attn: Investor Relations Officer, telephone: 312-496-1200,
e-mail: InvestorRelations@heidrick.com.

ITEM 1A. RISK FACTORS

In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating our business because such factors may have a material impact on our business, operating results, cash flows and financial condition. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties of which we are unaware, or that we currently believe are not material, may also become important factors that adversely affect our business.

Company Risks

Operational Risks

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

Our success depends upon our ability to attract, develop, integrate, manage and retain quality consultants with the skills and experience necessary to fulfill our clients’ needs and achieve our operational and financial goals. Our ability to hire and retain qualified consultants could be impaired by any diminution of our reputation, disparity in compensation relative to our competitors, modifications to our total compensation philosophy or competitor hiring programs. If we cannot attract, hire, develop and retain qualified consultants, our business, financial condition and results of operations may suffer. Our future success also depends upon our ability to integrate newly hired consultants successfully into our operations and to manage the performance of our consultants. Failure to successfully integrate newly hired consultants or to manage the performance of our consultants could affect our profitability by causing operating inefficiencies that could increase operating expenses and reduce operating income. There is also a risk that unanticipated turnover in senior leadership could stall company activity, interrupt strategic vision or lower productive output which may adversely affect our business, financial condition and results of operations.

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

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

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

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

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

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

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

We rely heavily on information management systems.

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

Legal, Regulatory and Compliance Risks

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

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

Data security, data privacy and data protection laws, such as GDPR, and other evolving regulations and cross-border data transfer restrictions, may limit the use of our services and adversely affect our business.

We are or may become subject to a variety of laws and regulations in the European Union (including GDPR), United States and abroad regarding data privacy, protection and security. As these laws continue to evolve, we may be required to make changes to our services, solutions and/or products so as to enable the Company and/or our clients to meet the new legal requirements, including by taking on more onerous obligations in our contracts, limiting our storage, transfer and processing of data and, in some cases, limiting our service and/or solution offerings in certain locations. Changes in these laws may also increase our potential exposure through significantly higher potential penalties for non-compliance. The costs of compliance with, and other burdens imposed by, such laws and regulations and client demands in this area may limit the use of, or demand for, our services, solutions and/or products, make it more difficult and costly to meet client expectations, or lead to significant fines, penalties or liabilities for noncompliance, any of which could adversely affect our business, financial condition and results of operations.

In addition, due to the uncertainty and potentially conflicting interpretations of these laws, it is possible that such laws and regulations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict
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with other rules or our practices. Any failure or perceived failure by us to comply with applicable laws or satisfactorily protect personal information could result in governmental enforcement actions, litigation, or negative publicity, any of which could inhibit sales of our services, solutions and/or products.

Increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks could pose a risk to our systems, networks, solutions, services and data.

Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted cyber-related attacks pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. We have a program in place to detect and respond to data security incidents. However, we remain potentially vulnerable to additional known or unknown threats. We also have access to sensitive, confidential or personal data or information that is subject to privacy and security laws, regulations and client-imposed controls. Despite our efforts to protect sensitive, confidential or personal data or information, we may be vulnerable to security breaches, theft, lost data, employee errors and/or malfeasance that could potentially lead to the compromising of sensitive, confidential or personal data or information, improper use of our systems or networks, unauthorized access, use, disclosure, modification or destruction of information. In addition, a cyber-related attack could result in other negative consequences, including damage to our reputation or competitiveness, remediation or increased protection costs, litigation or regulatory action which could result in a negative impact to our results of operations.

Industry and General Economic Risks

The current COVID-19 pandemic, or the future outbreak of other highly infectious or contagious diseases, could continue to adversely impact or cause disruption to our business, financial condition, results of operations and cash flows. Further, the COVID-19 pandemic has caused severe disruptions in the U.S. and global economy, may further disrupt financial markets and could potentially create widespread business continuity issues.

COVID-19 has spread to over 100 countries, including the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19.

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 temporarily closed our offices and shifted our workforce to remote operations to ensure the safety of our employees. In addition, certain of our customers have closed or reduced their operations during this pandemic.

The global pandemic has created significant volatility, uncertainty and economic disruption. Beginning in the second quarter, we experienced a decline in demand for our executive search and consulting services, a lengthening of the executive search process due to a slow-down in client decision making and an inability to execute in-person consulting engagements, which negatively impacted our results of operations. The extent to which the pandemic continues to impact our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic, and actions taken in response to the pandemic, on economic activity; 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; the ability of our clients to pay for our services and solutions; and any closures of our and our clients’ offices and facilities. Restrictions inhibiting our employees’ and clients' ability to access those offices and facilities, has disrupted, and are expected to continue to disrupt, our ability to provide our services and solutions. These disruptions have, and may continue to, result in, among other things, a decline in demand for our executive search and consulting services due to temporary and permanent workforce reductions; 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; prolonged disruptions in business operations for offices in areas most impacted by the pandemic, including the United States, United Kingdom, Italy, Spain, China and Brazil; terminations of client contracts and losses of revenue.

Management expects that all of its business segments, across all of its geographies, will continue to 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. During the second quarter, the sustained economic downturn resulted in the impairment of the goodwill in our Europe and Asia Pacific reporting units. We also evaluated the recoverability of our intangible and other long-lived assets during the second quarter and determined that no
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impairment was necessary. We will continue to monitor the impact of the economic downturn for additional potential impairment of goodwill, other intangible assets and long-lived assets.

The impact of the COVID-19 pandemic may also exacerbate other risks discussed herein, any of which could have a material effect on us. The ultimate effect that the COVID-19 pandemic may have on our business, financial condition or results of operations is not presently known to us or may present unanticipated risks that cannot be determined at this time.

We face aggressive competition.

The global executive search industry is highly competitive and fragmented. We compete with other large global executive search firms, smaller specialty firms and, more recently with Internet-based firms and social media. Specialty firms may focus on regional or functional markets or on particular industries to a greater extent than we do. Some of our competitors may possess greater resources, greater name recognition and longer operating histories than we do in particular markets or practice areas, or be willing to reduce their fees or agree to alternative pricing practices in order to attract clients and increase market share. Our competitors may be further along in the development and design of technological solutions to meet client requirements.

There are limited barriers to entry into the search industry and new search firms continue to enter the market. Executive search firms that have a smaller client base than we do may be subject to fewer off-limits arrangements. In addition, our clients or prospective clients may decide to perform executive searches using in-house personnel. Also, as Internet-based firms continue to evolve, they may develop offerings similar to or more expansive than ours, thereby increasing competition for our services or more broadly disrupting the executive search industry. As a result, we may not be able to continue to compete effectively with existing or potential competitors and we may not be able to implement our leadership strategy effectively. Our inability to meet these competitive challenges could have an adverse effect on our business, financial condition and results of operations.

Our net revenue may be affected by adverse economic conditions.

Demand for our services is affected by global economic conditions and the general level of economic activity in the geographic regions in which we operate. During periods of slowed economic activity many companies hire fewer permanent employees, and our business, financial condition and results of operations may be adversely affected. If unfavorable changes in economic conditions occur, our business, financial condition and results of operations could suffer.

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

With our operations in the Americas, Europe and Asia Pacific, we conduct business using various currencies. In 2020, approximately 40% of our net revenue was generated outside the United States. As we typically transact business in the local currency of our subsidiaries, our profitability may be impacted by the translation of foreign currency financial statements into U.S. dollars. Significant long-term fluctuations in relative currency values, in particular an increase in the value of the U.S. dollar against foreign currencies, could have an adverse effect on our financial condition and results of operations.

Our ability to access additional credit could be limited.

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

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General Risks

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

We generate substantial revenue outside the United States. We offer our services through a network of offices in 28 countries around the world. Our ability to effectively serve our clients is dependent upon our ability to successfully leverage our operating model across all of these and any future locations, maintain effective management controls over all of our locations to ensure, among other things, compliance with applicable laws, rules and regulations, and instill our core values in all of our personnel at each of these and any future locations. We are exposed to the risk of changes in social, political, legal and economic conditions inherent in our operations, which could have a significant impact on our business, financial condition and results of operations. In addition, we conduct business in countries where the legal systems, local laws and trade practices are unsettled and evolving. Commercial laws in these countries are sometimes vague, arbitrary and inconsistently applied. Under these circumstances, it is difficult for us to determine at all times the exact requirements of such local laws. If we fail to comply with local laws, our business, financial condition and results of operations could suffer. In addition, the global nature of our operations poses challenges to our management, and financial and accounting systems. Failure to meet these challenges could adversely affect our business, financial condition and results of operations.

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

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

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

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

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

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

We may experience impairment of our goodwill, other intangible assets and other long-lived assets.

In accordance with generally accepted accounting principles, we perform assessments of the carrying value of our goodwill at least annually, and we review our goodwill, other intangible assets and other long-lived assets for impairment whenever events occur or circumstances indicate that a carrying amount of these assets may not be recoverable. These events and circumstances include a significant change in business climate, attrition of key personnel, changes in financial condition or results of operations, a prolonged decline in our stock price and market capitalization, competition, and other factors. In performing these assessments, we must make assumptions regarding the estimated fair value of our goodwill and other intangible assets. These assumptions include estimates of future market growth and trends, forecasted revenue and costs, capital investments, discount rates, and other variables. If the fair market value of one of our reporting units or other long-term assets is less than the carrying amount of the related assets, we would be required to record an impairment charge. Due to continual changes in market and general business conditions, we cannot predict whether, and to what extent, our goodwill and long-lived intangible assets may be impaired in future periods. Any resulting impairment loss could have an adverse impact on our business, financial condition and results of operations.

Our ability to execute and integrate future acquisitions, if any, could negatively affect our business and profitability.

Our future success may depend in part on our ability to complete the integration of acquisition targets successfully into our operations. The process of executing and integrating an acquired business may subject us to a number of risks, including:
14



diversion of management attention;

failure to successfully further develop the acquired business;

amortization of intangible assets, adversely affecting our reported results of operations;

inability to retain and/or integrate the management, key personnel and other employees of the acquired business;

inability to properly integrate businesses resulting in operating inefficiencies;

inability to establish uniform standards, disclosure controls and procedures, internal control over financial reporting and other systems, procedures and policies in a timely manner;

inability to retain the acquired company’s clients;

exposure to legal claims for activities of the acquired business prior to acquisition; and

inability to generate revenues to offset any new liabilities assumed and expenses associated with an acquired business.
If our acquisitions are not successfully executed and integrated, our business, financial condition and results of operations, as well as our professional reputation, could be adversely affected.

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

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

limitations on stockholder actions; and

the ability to issue one or more series of preferred stock by action of our Board of Directors.

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters is located in Chicago, Illinois. We have leased office space in 48 cities in 25 countries around the world. All of our offices are leased. We do not own any real estate. The aggregate office space under lease was 421,734 square feet as of December 31, 2020. Our office leases call for future minimum lease payments of approximately $128.7 million and have terms that expire between 2021 and 2033, exclusive of renewal options that we can exercise.

Our office space by geographic segment as of December 31, 2020 is as follows:
 Square
Footage
Americas214,821 
Europe131,586 
Asia Pacific75,327 
Total421,734 
 

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ITEM 3. LEGAL PROCEEDINGS

We have contingent liabilities from various pending claims and litigation matters arising in the ordinary course of our business, some of which involve claims for damages that may be substantial in amount. Some of these matters are covered by insurance. 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.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for our Common Stock

Our common stock, $0.01 par value, is listed on the Nasdaq Stock Market under the symbol “HSII”.

Holders of Record

As of February 15, 2021, we had 50 holders of record of our common stock and 19,359,586 shares of common stock outstanding. A greater number of holders of our common stock are beneficial holders, whose shares are held by banks, brokers, and other financial institutions.

Performance Graph

We have presented below a graph which compares the cumulative total stockholder return on our common shares with the cumulative total stockholder return of the Standard & Poor’s SmallCap 600 Index and the Standard & Poor’s Composite 1500 Human Resource and Employment Services Index. The S&P Composite 1500 Human Resource & Employment Services Index includes 11 companies in related businesses, including Heidrick & Struggles. Cumulative total return for each of the periods shown in the performance graph is measured assuming an initial investment of $100 on December 31, 2015.

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

hsii-20201231_g1.gif


* Assuming $100 invested on 12/31/15 in HSII or index, including reinvestment of dividends.
Prepared by: Zacks Investment Research, Inc.
Copyright: Standard and Poor’s, Inc.
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Dividends

From September 2007 through December 2018, we paid a quarterly cash dividend of $0.13 per share as approved by our Board of Directors. In 2019, we began paying a quarterly cash dividend of $0.15 per share as approved by our Board of Directors. In 2020, the total cash dividend paid was $0.60 per share.

In February 2021, our Board of Directors approved a quarterly dividend of $0.15 per share on our common stock which will be paid on March 19, 2021 to shareholders of record as of March 5, 2021.

In connection with the quarterly cash dividend, we also pay a dividend equivalent on outstanding restricted stock units. The amounts related to the dividend equivalent payments for restricted stock units are accrued over the vesting period and paid upon vesting. In 2020 and 2019, we paid $0.5 million and $0.4 million, respectively, in dividend equivalent payments.

Issuer Purchases of Equity Securities

On February 11, 2008, we announced that our Board of Directors authorized management to repurchase shares of our common stock with an aggregate purchase price of up to $50 million (the "Repurchase Agreement"). We may from time to time and as business conditions warrant purchase shares of our common stock on the open market or in negotiated or block trades. No time limit has been set for completion of this program. We did not repurchase any shares of our common stock in 2020 or 2019. The most recent purchase of shares of common stock occurred during the year ended December 31, 2012. As of December 31, 2020, we have purchased 1,038,670 shares of our common stock pursuant to the Repurchase Authorization for a total of $28.3 million and $21.7 million remains available for future purchases under the Repurchase Authorization.


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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below has been derived from our audited consolidated financial statements. The data as of December 31, 2020 and 2019, and for the years ended December 31, 2020, 2019 and 2018, is derived from the audited current and historical consolidated financial statements, which are included elsewhere in this Form 10-K. Other than noted below, the data as of December 31, 2018, 2017 and 2016, and for the years ended December 31, 2017 and 2016, are derived from audited historical consolidated financial statements, which are not included in this report. The data set forth is qualified in its entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the audited consolidated financial statements, the notes thereto, and the other financial data and statistical information included in this Form 10-K.
 Year Ended December 31,
 20202019201820172016
 (in thousands, except per share and other operating data)
Statements of Operations Data
Revenue
Revenue before reimbursements (net revenue)$621,615 $706,924 $716,023 $621,400 $582,390 
Reimbursements7,755 18,690 19,632 18,656 18,516 
Total revenue629,370 725,614 735,655 640,056 600,906 
Operating expenses
Salaries and benefits450,424 501,791 506,349 434,219 400,070 
General and administrative expenses121,378 137,492 140,817 147,316 147,087 
Impairment charges(1)
32,970 — — 50,722 — 
Restructuring charges(2)
52,372 4,130 — 15,666 — 
Reimbursed expenses7,755 18,690 19,632 18,656 18,516 
Total operating expenses664,899 662,103 666,798 666,579 565,673 
Operating income (loss)(35,529)63,511 68,857 (26,523)35,233 
Non-operating income (expense)
Interest, net204 2,880 1,141 385 244 
Other, net3,927 2,898 494 (3,280)2,289 
Net non-operating income (expense)4,131 5,778 1,635 (2,895)2,533 
Income (loss) before income taxes(31,398)69,289 70,492 (29,418)37,766 
Provision for income taxes6,309 22,420 21,197 19,217 22,353 
Net income (loss)$(37,707)$46,869 $49,295 $(48,635)$15,413 
Basic weighted average common shares outstanding19,301 19,103 18,917 18,735 18,540 
Diluted weighted average common shares outstanding19,301 19,551 19,532 18,735 18,939 
Basic net income (loss) per common share$(1.95)$2.45 $2.61 $(2.60)$0.83 
Diluted net income (loss) per common share$(1.95)$2.40 $2.52 $(2.60)$0.81 
Cash dividends paid per share$0.60 $0.60 $0.52 $0.52 $0.52 
Balance Sheet Data (at end of period)
Working capital$154,448 $149,140 $131,916 $77,998 $77,838 
Total assets787,812 844,173 700,629 587,204 581,502 
Long-term debt, less current maturities— — — — — 
Stockholders’ equity267,602 309,115 267,156 212,705 258,590 

(1)Includes goodwill impairment charges of $24.5 million in Europe and $8.5 million in Asia Pacific in 2020. Includes $50.7 million of goodwill and other intangible asset impairment charges related to Heidrick Consulting in 2017. (See Note 8, Goodwill and Other Intangible Assets).
(2)The 2020 restructuring charges consist of $32.8 million of employee-related costs associated with severance agreements and the elimination of certain deferred compensation programs, $18.9 million of real estate related expenses, and $0.7 million of professional fees and other expenses. The 2019 charges consist primarily of employee-related costs associated with severance arrangements. The 2017 charges consist of $13.1 million of employee-related costs associated with severance arrangements, $2.3 million in professional fees and other expenses and $0.3 million in real estate related expenses (See Note 14, Restructuring).


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ITEM 7. 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 annual report on Form 10-K contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. 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. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed under the Section heading “Risk Factors” in Part I, Item 1A of this Form 10-K.

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. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for years 2020 and 2019. For the discussion of changes from 2018 to 2019 and other financial information related to 2018, refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2019. This document was filed with the SEC on February 24, 2020.

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 425 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
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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 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). Executive Search and Heidrick Consulting performance is also measured using consultant headcount. Specific to Executive Search, confirmed search (confirmation) trends, consultant productivity and average revenue per search are used to measure performance. Productivity is as measured by annualized Executive Search net revenue per consultant.

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. Overall Company performance determines the amount available for total variable compensation. The more net revenue that is generated by the consultant, the higher the percentage credited towards the consultant’s variable compensation and thus accrued by our Company as expense. 

At the Heidrick Consulting consultant level, there are also fixed and variable components of compensation. Overall compensation is determined based on the total economic contribution of the Heidrick Consulting segment to the business as a whole. Individual consultant compensation can vary and is derived from credits earned for delivering client work plus credits earned for contributions of intellectual and human capital, client relationship development and consulting practice development. Each quarter, we review and update the expected annual performance of all Heidrick Consulting consultants and accrue variable compensation accordingly.

The mix of individual consultants who generate revenue in Executive Search and economic contributions in Heidrick Consulting can significantly affect the total amount of compensation expense recorded, which directly impacts operating margin. As a result, the variable portion of the compensation expense may fluctuate significantly from quarter to quarter. The total variable compensation is discretionary and is based on Company-wide financial targets approved by the Human Resources and Compensation Committee of the Board of Directors.

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

Historically, the Company's consultants participated in the same cash bonus deferral program as management. In 2020, the Company terminated the cash bonus deferral for consultants and now pays 100% of the cash bonuses earned by consultants in the first quarter of the following year. Consultant cash bonuses earned prior to 2020 will continue to be paid under the terms of the cash bonus deferral program.

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Impact of COVID-19

On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. COVID-19 has significantly impacted various markets around the world, including the United States.

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 temporarily closed our offices and shifted our workforce to remote operations to ensure the safety of our employees. Our offices are now accessible to our employees, however, we continue to encourage all employees to work remotely. 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.

In response to working remotely, our Executive Search teams employed our robust digital search platform, Heidrick Connect, to operate effectively and efficiently while engaging virtually with our clients. Additionally, we have introduced upgrades to Heidrick Connect, resulting in greater flexibility, increased productivity and the ability to deliver more insights to our clients. Our Heidrick Consulting teams have pivoted to create new digital solutions for Leadership Assessments, Team Acceleration, and Organization and Culture Acceleration that can be delivered virtually in response to required social distancing practices.

Beginning in the second quarter, we experienced a decline in demand for our executive search and consulting services, a lengthening of the executive search process due to a slow-down in client decision making and an inability to execute in-person consulting engagements, which had a material adverse impact on our results of operations. The extent to which the pandemic continues to impact 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.

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We expect that all of our business segments, across all of our geographies, will continue to be impacted 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, China and Brazil.

During the year ended December 31, 2020, and as a direct result of the economic impact of COVID-19, we experienced a decline in demand for our executive search services and a lengthening of the executive search process due to a slow-down in client decision making, which had a material adverse impact on our results of operations. As a result, we identified a triggering event and performed an interim goodwill impairment evaluation during the three months ended June 30, 2020 resulting in the impairment of the goodwill in our Europe and Asia Pacific reporting units. We also evaluated the recoverability our intangible and other long-lived assets and determined that no impairment was necessary. We continue to monitor the impact of the economic downturn for additional potential impairment of goodwill, other intangible assets and long-lived 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. In the event we require additional liquidity, our 2018 Credit Agreement (as defined below) provides us with a senior unsecured revolving line of credit with an aggregate commitment of $175 million, which includes a sublimit of $25 million for letters of credit and a $10 million swingline loan sublimit. The agreement also includes a $75 million expansion feature.

In the third quarter, we implemented a restructuring plan to optimize future growth and profitability. The expected annual cost savings from the restructuring ranges from $30 million to $40 million. The primary components of the restructuring include a workforce reduction, and a reduction of the firm’s real estate expenses, professional fees and the future elimination of certain deferred compensation programs.

As part of this restructuring plan, we implemented several real estate initiatives including downsizing and terminating certain of our existing office leases. Our success working from home, utilizing Heidrick Connect and our digital consulting solutions, allowed us to reevaluate how we utilize our offices and plan to use them in a post-pandemic environment. Upon the expiration of the leases included in the restructuring, we will have reduced our square footage under lease by approximately 20%.

Moving forward, we will continue with our real estate strategy, which consists of three objectives: 1) matching our real estate footprint to the new, post-pandemic office occupancy expectations 2) creating open and collaborative environments, including unassigned work spaces that facilitate work from anywhere; and 3) increasing our focus on reducing our carbon footprint as part of our long-term sustainability goals. We believe we have opportunity to further decrease costs primarily through lease renewals and rightsizing offices where it makes business sense.

We have not experienced any material impact to our internal controls over financial reporting 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.

2020 Overview

Consolidated net revenue was $621.6 million for the year ended December 31, 2020, a decrease of $85.3 million, or 12.1%, compared to 2019. Executive Search net revenue was $565.2 million in 2020, a decrease of $81.2 million compared to 2019. The decrease in Executive Search net revenue was the result of declines in Asia Pacific, the Americas, and Europe. The number of Executive Search consultants was 361 as of December 31, 2020, compared to 380 as of December 31, 2019. Executive Search productivity, as measured by annualized net Executive Search revenue per consultant was $1.5 million and $1.7 million
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for the years ended December 31, 2020 and 2019, respectively. The number of confirmed searches decreased 6.3%, compared to 2019. The average revenue per executive search decreased to $123,200 in 2020 compared to $132,000 in 2019. Heidrick Consulting net revenue decreased $4.1 million, or 6.8%, to $56.4 million in 2020 from $60.6 million in 2019. The number of Heidrick Consulting consultants was 65 as of December 31, 2020, compared to 71 as of December 31, 2019.

Operating loss as a percentage of net revenue was 5.7% in 2020, compared to operating income as a percentage of revenue of 9.0% in 2019. The change in operating income was primarily due to a decrease in net revenue of $85.3 million, $52.4 million of restructuring charges, and $33.0 million of impairment charges in 2020, partially offset by decreases in salaries and benefits expense, and general and administrative expenses of $51.4 million and $16.1 million, respectively. Salaries and benefits expense as a percentage of net revenue was 72.5% in 2020, compared to 71.0% in 2019. General and administrative expense as a percentage of net revenue was 19.5% in 2020, compared to 19.4% in 2019.

We ended the year with combined cash, cash equivalents, and marketable securities of $336.5 million, an increase of $3.6 million compared to $332.9 million at December 31, 2019. We pay the majority of bonuses in the first quarter following the year in which they were earned. Employee bonuses are accrued throughout the year and are based on the Company’s performance and the performance of the individual employee. We expect to pay approximately $180.4 million in bonuses related to 2020 performance in March and April 2021. In January 2021, we paid approximately $19.9 million in cash bonuses deferred in prior years.

2021 Outlook

We are currently forecasting 2021 first quarter net revenue of between $160 million and $170 million. Our 2021 first quarter guidance is based upon, among other things, management’s assumptions for the anticipated volume of new executive search confirmations and leadership consulting and culture shaping projects, the current backlog, consultant productivity, consultant retention, the seasonality of our business and average currency rates from December 2020.

Our 2021 first quarter guidance is subject to a number of risks and uncertainties, including those disclosed under "Risk Factors" and in this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in this 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 operations (in thousands, except per share data):
 Year Ended December 31,
 202020192018
Revenue
Revenue before reimbursements (net revenue)$621,615 $706,924 $716,023 
Reimbursements7,755 18,690 19,632 
Total revenue629,370 725,614 735,655 
Operating expenses
Salaries and benefits450,424 501,791 506,349 
General and administrative expenses121,378 137,492 140,817 
Impairment charges(1)
32,970 — — 
Restructuring charges(2)
52,372 4,130 — 
Reimbursed expenses7,755 18,690 19,632 
Total operating expenses664,899 662,103 666,798 
Operating income (loss)(35,529)63,511 68,857 
Non-operating income
Interest, net204 2,880 1,141 
Other, net3,927 2,898 494 
Net non-operating income4,131 5,778 1,635 
Income (loss) before taxes(31,398)69,289 70,492 
Provision for income taxes6,309 22,420 21,197 
Net income (loss)$(37,707)$46,869 $49,295 
Weighted-average common shares outstanding
Basic19,301 19,103 18,917 
Diluted19,301 19,551 19,532 
Earnings (loss) per common share
Basic$(1.95)$2.45 $2.61 
Diluted$(1.95)$2.40 $2.52 
Cash dividends paid per share$0.60 $0.60 $0.52 

(1)Includes goodwill impairment charges of $33.0 million related to Europe and Asia Pacific in 2020 (See Note 8, Goodwill and Other Intangible Assets).
(2)Includes restructuring charges of $30.5 million in the Americas, $8.6 million in Europe, $4.6 million in Asia Pacific, $4.7 million in Heidrick Consulting, and $4.0 million in Global Operations Support. The 2019 restructuring charges include $4.1 million in the Americas and less than $0.1 million in Global Operations Support. (See Note 14, Restructuring).




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The following table summarizes, for the periods indicated, our results of operations as a percentage of revenue before reimbursements (net revenue):
 Year Ended December 31,
 202020192018
Revenue
Revenue before reimbursements (net revenue)100.0 %100.0 %100.0 %
Reimbursements1.2 2.6 2.7 
Total revenue101.2 102.6 102.7 
Operating expenses
Salaries and benefits72.5 71.0 70.7 
General and administrative expenses19.5 19.4 19.7 
Impairment charges5.3 — — 
Restructuring charges8.4 0.6 — 
Reimbursed expenses1.2 2.6 2.7 
Total operating expenses107.0 93.7 93.1 
Operating income (loss)(5.7)9.0 9.6 
Non-operating income
Interest, net— 0.4 0.2 
Other, net0.6 0.4 0.1 
Net non-operating income0.7 0.8 0.2 
Income (loss) before income taxes(5.1)9.8 9.8 
Provision for income taxes1.0 3.2 3.0 
Net income (loss)(6.1)%6.6 %6.9 %

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


















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We operate our Executive Search business in the Americas, Europe (which includes Africa) and Asia Pacific (which includes the Middle East), and we operate our Heidrick Consulting business globally, (See Note 17, Segment Information).

The following table sets forth, for the periods indicated, our revenue and operating income by segment (in thousands):
 Year Ended December 31,
 202020192018
Revenue
Executive Search
Americas$361,416 $415,455 $405,267 
Europe 124,243 135,070 145,348 
Asia Pacific79,511 95,827 102,276 
Total Executive Search 565,170 646,352 652,891 
Heidrick Consulting56,445 60,572 63,132 
Revenue before reimbursements (net revenue)621,615 706,924 716,023 
Reimbursements7,755 18,690 19,632 
Total revenue$629,370 $725,614 $735,655 
Operating income (loss)
Executive Search
Americas(1)
$62,806 $100,833 $96,880 
Europe(2)
(22,827)3,026 5,849 
Asia Pacific(3)
(6,724)13,590 15,999 
Total Executive Search33,255 117,449 118,728 
Heidrick Consulting(4)
(28,369)(18,499)(13,619)
Total segments4,886 98,950 105,109 
Global Operations Support(5)
(40,415)(35,439)(36,252)
Total operating income (loss)$(35,529)$63,511 $68,857 

(1)Includes $30.5 million and $4.1 million of restructuring charges in 2020 and 2019, respectively.
(2)Includes $24.5 million of goodwill impairment charges and $8.6 million of restructuring charges in 2020.
(3)Includes $8.5 million of goodwill impairment charges and $4.6 million of restructuring charges in 2020.
(4)Includes $4.7 million of restructuring charges in 2020.
(5)Includes $4.0 million of restructuring charges in 2020.

Year ended December 31, 2020 compared to year ended December 31, 2019

Total revenue. Consolidated total revenue decreased $96.2 million, or 13.3%, to $629.4 million in 2020 from $725.6 million in 2019. The decrease in total revenue was primarily due to the decrease in revenue before reimbursements (net revenue).

Revenue before reimbursements (net revenue). Consolidated net revenue decreased $85.3 million, or 12.1%, to $621.6 million in 2020 from $706.9 million in 2019. Foreign exchange rates negatively impacted results by $0.9 million, or 0.1%. Executive Search net revenue was $565.2 million in 2020, a decrease of $81.2 million, or 12.6%, compared to 2019. The decrease in Executive Search net revenue was the result of declines in all three executive search regions. Heidrick Consulting net revenue decreased $4.1 million, or 6.8%, to $56.4 million in 2020 from $60.6 million in 2019. Both Executive Search revenue and Heidrick Consulting revenue were materially impacted by the ongoing COVID-19 pandemic. Significant factors contributing to the decline in revenue include a decline in demand for our executive search and consulting services, a lengthening of the executive search process due to a slow-down in client decision making and an inability to execute in-person consulting engagements.

The number of Executive Search and Heidrick Consulting consultants was 361 and 65, respectively, as of December 31, 2020, compared to 380 and 71, respectively, as of December 31, 2019. Executive Search productivity, as measured by annualized net Executive Search revenue per consultant, was $1.5 million and $1.7 million for the years ended December 31,
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2020 and 2019, respectively. The number of confirmed searches decreased 6.3%, compared to 2019. The average revenue per executive search decreased to $123,200 in 2020 compared to $132,000 in 2019.

Salaries and benefits. Consolidated salaries and benefits expense decreased $51.4 million, or 10.2%, to $450.4 million in 2020 from $501.8 million in 2019. The decrease was due to lower fixed compensation of $13.5 million and lower variable compensation of $37.9 million. Fixed compensation decreased due retirement and benefits, and talent acquisition and retention costs, partially offset by an increase in base salaries and payroll taxes. Variable compensation decreased due to lower production compared to the prior year. Foreign exchange rate fluctuations positively impacted salaries and benefits expenses by $1.5 million, or 0.3%.

In 2020, we had an average of 1,708 employees, compared to an average of 1,680 employees in 2019.

As a percentage of net revenue, salaries and benefits expense was 72.5% in 2020, compared to 71.0% in 2019.

General and administrative expenses. Consolidated general and administrative expenses decreased $16.1 million, or 11.7%, to $121.4 million in 2020 from $137.5 million in 2019. The decrease was primarily due to decreases in internal travel, office occupancy, hiring fees, marketing, intangible amortization, earnout accretion, and taxes and licenses, partially offset by increases in professional fees, information technology, and bad debt. Foreign exchange rate fluctuations positively impacted general and administrative expenses by $0.3 million, or 0.3%.

As a percentage of net revenue, general and administrative expenses were 19.5% in 2020, compared to 19.4% in 2019.

Impairment charges. In 2020, and as a direct result of the economic impact of COVID-19, the Company experienced a decline in demand for our executive search services and a lengthening of the executive search process due to a slow-down in client decision making, which had a material adverse impact on our results of operations. As a result, the Company identified a triggering event and performed an interim goodwill impairment evaluation. Based on the results of the of the impairment evaluation, the Company recorded an impairment charge of $24.5 million in Europe and $8.5 million in Asia Pacific to write-off all of the goodwill associated with each reporting unit. The impairment was non-cash in nature and did not affect our current liquidity, cash flows, borrowing capability or operations; nor did it impact the debt covenants under our credit agreement. The impairment charges are recorded within Impairment charges in the Consolidated Statements of Comprehensive Income (Loss).

Restructuring charges. The Company incurred approximately $52.4 million in restructuring charges during the year ended December 31, 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, and the future elimination of certain deferred compensation programs. The Company incurred approximately $4.1 million in restructuring charges during the year ended December 31, 2019 in connection with initiatives to integrate the Company's existing Brazil operations into the 2GET business operation. The expenses were primarily employee-related including the elimination of duplicative positions in the Company's existing Brazil operations. The restructuring charges are recorded within Restructuring charges in the Consolidated Statements of Comprehensive Income (Loss).

Operating income. Consolidated operating loss was $35.5 million, including impairment charges of $33.0 million and restructuring charges of $52.4 million in 2020, compared to operating income of $63.5 million, including restructuring charges of $4.1 million, in 2019. Foreign exchange rate fluctuations positively impacted operating income by $1.0 million, or 2.1%.

Net non-operating income (expense). Net non-operating income was $4.1 million in 2020, compared to $5.8 million in 2019.

Interest, net was income of $0.2 million in 2020, a $2.7 million decrease from $2.9 million in 2019. The decrease was primarily the result of reduced yields on the Company's investments in U.S. Treasury bills, lower overall par value throughout the year on which interest could be earned, and interest paid on the credit facility.

Other, net was income of $3.9 million in 2020, compared to $2.9 million in 2019. The increase was primarily the result of gains on the deferred compensation plan assets. Investments held in the Company’s deferred compensation plan are recorded at fair value.

Income taxes. See Note 15, Income Taxes.



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Executive Search

Americas

The Americas reported net revenue of $361.4 million in 2020, a decrease of 13.0% from $415.5 million in 2019. The decrease in net revenue was due to a 2.6% decrease in the number of executive search confirmations and a decrease in average revenue per executive search. All industry practice groups contributed to the decline in revenue with the exception of the Life Sciences practice group. Foreign exchange fluctuations negatively impacted net revenue by $2.0 million, or 0.6%. There were 190 Executive Search consultants in the Americas as of December 31, 2020, compared to 200 as of December 31, 2019.

Salaries and benefits expense decreased $34.7 million, or 13.3%, compared to 2019. Fixed compensation decreased $11.4 million, primarily due to decreases in retirement and benefits, talent acquisition and retention costs, and base salaries and payroll taxes. Variable compensation decreased $23.3 million primarily due to lower bonus accruals as a result of decreased consultant productivity, partially offset by contingent compensation related to the acquisition of 2GET.

General and administrative expenses decreased $7.7 million, or 15.7%, compared to 2019 due to internal travel, office occupancy, and taxes and licenses, partially offset by increases in other operating expense and bad debt.

Restructuring charges were $30.5 million in 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, and the future elimination of certain deferred compensation programs. Restructuring charges were $4.1 million in 2019. The charges were incurred in connection with initiatives to integrate the Company's existing Brazil operations into the 2GET business operation. The expenses were primarily employee-related including the elimination of duplicative positions in the Company's existing Brazil operations.

The Americas reported operating income of $62.8 million, including restructuring charges of $30.5 million, in 2020, a decrease of $38.0 million compared to $100.8 million, including restructuring charges of $4.1 million, in 2019.

Europe

Europe reported net revenue of $124.2 million in 2020, a decrease of 8.0% from $135.1 million in 2019. The decrease in net revenue was due to a 10.2% decrease in the number of executive search confirmations. All industry practice groups contributed to the decline in revenue with the exception of the Social Impact and Life Sciences practice groups. Foreign exchange rate fluctuations positively impacted net revenue by $1.4 million, or 1.1%. There were 102 Executive Search consultants in Europe as of December 31, 2020, compared to 107 as of December 31, 2019.

Salaries and benefits expense decreased $10.9 million, or 10.8%, compared to 2019. Fixed compensation decreased $2.7 million due to retirement and benefits, and talent acquisition and retention costs, partially offset by an increase in stock compensation. Variable compensation decreased $8.2 million due to lower bonus accruals as a result of decreased consultant productivity.

General and administrative expenses decreased $7.1 million, or 23.1%, compared to 2019, due to internal travel, office occupancy, intangible amortization and earnout accretion, partially offset by increases in the use of external third-party consultants, professional fees, and bad debt.

Impairment charges in 2020 were $24.5 million as a result of an interim impairment evaluation on the goodwill of the Europe reporting unit.

Restructuring charges were $8.6 million in 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, and the future elimination of certain deferred compensation programs.

Europe reported an operating loss of $22.8 million, including impairment and restructuring charges of $33.1 million, in 2020, a decrease of $25.9 million compared to operating income of $3.0 million in 2019.

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Asia Pacific

Asia Pacific reported net revenue of $79.5 million in 2020, a decrease of 17.0% compared to $95.8 million in 2019. The decrease in net revenue was due to a 9.4% decrease in the number of executive search confirmations and a decrease in average revenue per executive search. All industry practice groups contributed to the decline in revenue with the exception of the Social Impact and Life Sciences practice groups. Foreign exchange rate fluctuations negatively impacted net revenue by $0.5 million, or 0.6%. There were 69 Executive Search consultants in Asia Pacific as of December 31, 2020, compared to 73 as of December 31, 2019.

Salaries and benefits expense decreased $7.7 million, or 12.4%, compared to 2019. Fixed compensation increased $0.8 million due to talent acquisition and retention costs, and base salaries and payroll taxes, partially offset by a decrease in retirement and benefits. Variable compensation decreased $8.5 million due to lower bonus accruals as a result of a decline in consultant productivity.

General and administrative expenses decreased $1.4 million, or 6.8%, compared to 2019 primarily due to internal travel, hiring fees, and communication services, partially offset by increases in bad debt and other operating expenses.

Impairment charges in 2020 were $8.5 million as a result of an interim impairment evaluation on the goodwill of the Asia Pacific reporting unit.

Restructuring charges were $4.6 million in 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, and the future elimination of certain deferred compensation programs.

Asia Pacific reported an operating loss of $6.7 million, including impairment and restructuring charges of $13.1 million, in 2020, a decrease of $20.3 million compared to operating income of $13.6 million in 2019.

Heidrick Consulting

Heidrick Consulting reported net revenue of $56.4 million in 2020, a decrease of 6.8% compared to $60.6 million in 2019. The decrease in net revenue was due to an 8.8% decrease in the number of consulting confirmations and an inability to execute in person consulting engagements, partially offset by one large consulting project in the first quarter of 2020. Foreign exchange rate fluctuations positively impacted results by $0.2 million, or 0.4%. There were 65 Heidrick Consulting consultants as of December 31, 2020, compared to 71 as of December 31, 2019.

Salaries and benefits expense increased $1.5 million, or 2.6%, compared to 2019. Fixed compensation decreased $0.6 million, due to talent acquisition and retention costs, retirement and benefits, and separation, partially offset by an increase in base salaries and payroll taxes. Variable compensation increased $2.0 million due to bonus accruals on certain consulting arrangements.

General and administrative expenses decreased $0.4 million, or 1.7%, compared to 2019, due to internal travel, office occupancy, and the use of external third-party consultants, partially offset by increases in professional fees and bad debt.

Restructuring charges were $4.7 million in 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, and the future elimination of certain deferred compensation programs.

Heidrick Consulting reported an operating loss of $28.4 million, including restructuring charges of $4.7 million, in 2020 an increase of $9.9 million compared to an operating loss of $18.5 million in 2019.

Global Operations Support

Global Operations Support expenses increased $1.0 million, or 2.8%, to $36.4 million from $35.4 million in 2019.

Salaries and benefits expenses increased $0.5 million, or 2.5%, compared to 2019 due to base salaries and payroll taxes, and separation, partially offset by decreases in retirement and benefits, and talent acquisition and retention costs.

General and administrative expenses increased $0.5 million, or 3.2%, compared to 2019 due to professional fees and information technology, partially offset by decreases in internal travel and office occupancy.
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Restructuring charges were $4.0 million in 2020. The primary components of the restructuring include a workforce reduction, a reduction of the Company’s real estate expenses and professional fees, and the future elimination of certain deferred compensation programs.

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 October 26, 2018, we entered into a new Credit Agreement (the "2018 Credit Agreement"). The 2018 Credit Agreement provides us with a senior unsecured revolving line of credit with an aggregate commitment of $175 million, which includes a sublimit of $25 million for letters of credit and a $10 million swingline loan sublimit. The agreement also includes a $75 million expansion feature. The 2018 Credit Agreement will mature in October 2023. Borrowings under the 2018 Credit Agreement bear interest at our election of the Alternate Base Rate (as defined in the 2018 Credit Agreement) or Adjusted LIBOR (as defined in the 2018 Credit Agreement) plus a spread as determined by our leverage ratio.

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 $1.0 million of loan acquisition costs related to the 2018 Credit Agreement, which will be amortized over the remaining term of the agreement.

During the year ended December 31, 2020, we borrowed $100.0 million under the 2018 Credit Agreement. We elected to draw down a portion of the available funds from our revolving line of credit as a precautionary measure to increase our cash position and further enhance our financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. We believed that we had more than sufficient liquidity, even prior to taking this action, but elected to draw down available funds out of an abundance of caution in this period of uncertainty. The draw-down proceeds from the revolving line of credit were invested in short-term securities and we subsequently repaid $100.0 million during the year ended December 31, 2020.

As of December 31, 2020 and December 31, 2019, we had no outstanding borrowings. In both periods, we were in compliance with the financial and other covenants under the facility and no event of default existed.

Cash, cash equivalents, and marketable securities. Cash, cash equivalents and marketable securities at December 31, 2020 were $336.5 million, an increase of $3.6 million compared to $332.9 million at December 31, 2019. The $336.5 million of cash, cash equivalents, and marketable securities at December 31, 2020 includes $122.8 million held by our foreign subsidiaries. A portion of the $122.8 million is considered permanently reinvested in these foreign subsidiaries. If these funds were required to satisfy obligations in the United States, the repatriation of these funds could cause us to incur additional foreign withholding taxes. We expect to pay approximately $180.4 million in variable compensation related to 2020 performance in March and April 2021. In January 2021, we paid approximately $19.9 million in variable compensation that was deferred in prior years.

Cash flows provided by operating activities. For the year ended December 31, 2020, cash provided by operating activities was $23.4 million, primarily reflecting net loss net of non-cash charges of $30.6 million and a decrease in accounts receivable of $22.6 million, partially offset by a decrease in accrued expenses of $26.5 million. The decrease in accrued expenses primarily reflects approximately $202.0 million of 2019 bonuses paid in March 2020, offset by 2020 bonus accruals of $180.4 million.

For the year ended December 31, 2019, cash provided by operating activities was $78.6 million, primarily reflecting net income net of non-cash charges of $69.2 million, a decrease in accounts receivable of $6.9 million, an increase in net retirement and pension plan liabilities of $3.3 million and an increase in accrued expenses of $2.4 million. The increase in accrued expenses primarily reflects approximately $205.0 million of current year bonus accruals, partially offset by $202.0 million of bonus payments for 2018 made in early 2019.
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Cash flows used in investing activities. For the year ended December 31, 2020, cash provided investing activities was $32.6 million, primarily due to proceeds from the maturity and sales of marketable securities and investments of $158.9 million, partially offset by purchases of marketable securities and investments of $118.9 million and capital expenditures of $7.3 million. The increase in capital expenditures is primarily the result of office build-outs.

For the year ended December 31, 2019, cash used in investing activities was $69.3 million, primarily due to purchases of marketable securities and investments of $130.4 million, the acquisition of 2GET for $3.5 million, and capital expenditures of $3.4 million, partially offset by proceeds from the maturity and sales of marketable securities and investments of $68.0 million. The decrease in capital expenditures is primarily the result of reduced office build-outs.

Cash flows used in financing activities. For the year ended December 31, 2020, cash used in financing activities was $16.4 million, primarily due to cash dividend payments of $12.0 million, earnout payments related to the Amrop acquisitions of $2.8 million, and payment of employee tax withholdings on equity transactions of $1.6 million. Gross borrowings and payments on the line of credit were each $100.0 million during the year ended December 31, 2020.

For the year ended December 31, 2019, cash used in financing activities was $18.2 million, primarily due to cash dividend payments of $11.8 million, payment of employee tax withholdings on equity transactions of $4.6 million, and earnout payments related to the Scambler MacGregor and DSI acquisitions of $1.9 million.

On February 11, 2008, we announced a Repurchase Authorization of up to $50 million. We may from time to time and as business conditions warrant purchase shares of our common stock on the open market or in negotiated or block trades. No time limit has been set for completion of this program. We did not repurchase any shares of our common stock in 2020 or 2019. The most recent purchase of shares of common stock occurred during the year ended December 31, 2012. As of December 31, 2020 we have purchased 1,038,670 shares of our common stock pursuant to the Repurchase Authorization for a total of $28.3 million and $21.7 million remains available for future purchases under the Repurchase Authorization.

COVID-19 Considerations 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. We expect that all of our business segments, across all of our geographies, will continue to 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 liquidity, and the duration for which it may have an impact cannot be determined at this time. In the event we require additional liquidity, our 2018 Credit Agreement provides us with a senior unsecured revolving line of credit with an aggregate commitment of $175 million, which includes a sublimit of $25 million for letters of credit and a $10 million swingline loan sublimit. The agreement also includes a $75 million expansion feature.

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.

Contractual obligations. The following table presents our known contractual obligations as of December 31, 2020, and the expected timing of cash payments related to these contractual obligations (in millions):
 Payments due for the years ended December 31,
 20212022202320242025ThereafterTotal
Contractual obligations:
Operating lease obligations$28.1 $25.8 $23.8 $14.0 $6.7 $30.2 $128.7 
Asset retirement obligations (1)0.8 0.2 0.6 1.3 0.2 0.2 3.3 
Total$28.9 $26.0 $24.4 $15.3 $6.9 $30.4 $132.0 

(1) Represents the fair value of the obligation associated with the retirement of tangible long-lived assets primarily related to our obligation at the end of the lease term to return office space to the landlord in its original condition.

In addition to the contractual obligations included in the above table, we have liabilities related to certain employee benefit plans. These liabilities are recorded in our Consolidated Balance Sheet at December 31, 2020. The obligations related to these employee benefit plans are described in Note 11, Employee Benefit Plans, and Note 12, Pension Plan and Life Insurance Contract, in the Notes to Consolidated Financial Statements. As the timing of cash disbursements related to these employee benefit plans is uncertain, we have not included these obligations in the above table. The table excludes our liability for
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uncertain tax positions including accrued interest and penalties, which totaled $0.5 million as of December 31, 2020, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.

Application of Critical Accounting Policies and Estimates

General. Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared using accounting principles generally accepted in the United States of America. Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies and Note 3, Revenue, in the Notes to Consolidated Financial Statements. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. If actual amounts are ultimately different from previous estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.

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

Revenue recognition. In our Executive Search segment, revenue is recognized as we satisfy our performance obligations by transferring a good or service to a client. Generally, each of our executive search contracts contain one performance obligation which is the process of identifying potentially qualified candidates for a specific client position. In most contracts, the transaction price includes both fixed and variable consideration. Fixed compensation is comprised of a retainer, equal to approximately one-third of the estimated first year compensation for the position to be filled, and indirect expenses, equal to a specified percentage of the retainer, as defined in the contract. We generally bill our clients for the retainer and indirect expenses in one-third increments over a three-month period commencing in the month of a client’s acceptance of the contract. If actual compensation of a placed candidate exceeds the original compensation estimate, we are often authorized to bill the client for one-third of the excess compensation. We refer to this additional billing as uptick revenue. In most contracts, variable consideration is comprised of uptick revenue and direct expenses. We bill our clients for uptick revenue upon completion of the executive search, and direct expenses are billed as incurred.

As required under Accounting Standards Update ("ASU") No. 2014-09, we now estimate uptick revenue at contract inception, based on a portfolio approach, utilizing the expected value method based on a historical analysis of uptick revenue realized in the Company’s geographic regions and industry practices, and initially record a contract’s uptick revenue in an amount that is probable not to result in a significant reversal of cumulative revenue recognized when the actual amount of uptick revenue for that contract is known. Differences between the estimated and actual amounts of variable consideration are recorded when known. We do not estimate revenue for direct expenses as it is not materially different than recognizing revenue as direct expenses are incurred.

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

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

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

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

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

The recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefits associated with temporary differences, net operating loss carryforwards and tax credits will be utilized. We assess the recoverability of the deferred tax assets on an ongoing basis. In making this assessment, we consider all positive and negative evidence, and all potential sources of taxable income including scheduled reversals of deferred tax liabilities, tax-planning strategies, projected future taxable income and recent financial performance.

Deferred taxes have been recorded for U.S. income taxes and foreign withholding taxes related to undistributed foreign earnings that are not permanently reinvested. Annually, we assess material changes in estimates of cash, working capital and long-term investment requirements in order to determine whether these earnings should be distributed. If so, an additional provision for taxes may apply, which could materially affect our future effective tax rate.

Goodwill. We perform assessments of the carrying value of goodwill at least annually and whenever events occur or circumstances indicate that a carrying amount of goodwill may not be recoverable. These circumstances may include a significant change in business climate, attrition of key personnel, changes in financial condition or results of operations, a prolonged decline in our stock price and market capitalization, competition, and other factors.

We operate four reporting units: the Americas, Europe (which includes Africa), Asia Pacific (which includes the Middle East) and Heidrick Consulting. The goodwill impairment test is completed by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of each of our reporting units is determined using a discounted cash flow methodology. The discounted cash flow approach is dependent on a number of factors including estimates of future
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market growth and trends, forecasted revenue and costs, capital investments, appropriate discount rates, certain assumptions to allocate shared costs, assets and liabilities, historical and projected performance of our reporting units, the outlook for the executive search industry and the macroeconomic conditions affecting each of our reporting units. The assumptions used in the determination of fair value were (1) a forecast of growth in the near and long term; (2) the discount rate; (3) working capital investments; (4) macroeconomic conditions and (5) other factors. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. The fair value of our reporting units is also impacted by our overall market capitalization and may be impacted by volatility in our stock price and assumed control premium, among other factors. As a result, actual future results may differ from those estimates and may result in a future impairment charge. These assumptions are updated annually, at a minimum, to reflect information concerning our reportable segments. The Company continues to monitor potential triggering events including changes in the business climate in which it operates, the Company’s market capitalization compared to its book value, and the Company’s recent operating performance. Any changes in these factors could result in an impairment charge. An impairment charge is recognized for the amount by which the carrying value of a reporting unit exceeds its fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit.

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

Other intangible assets and long-lived assets. We review our other intangible assets and long-lived assets, including property and equipment and right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge, equal to the amount by which the carrying amount of the asset group exceeds the fair value of the asset group, is recognized.

We believe that the accounting estimate related to other intangible and long-lived asset impairment is a critical accounting estimate because the assumptions used are highly susceptible to changes in operating results and cash flows.

Recently Adopted Financial Accounting Standards

On January 1, 2020, we adopted ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, and all related ASU amendments, using the modified retrospective method. The guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. The adoption had an immaterial impact on the Consolidated Statement of Comprehensive Income (Loss), Consolidated Balance Sheet, Consolidated Statement of Cash Flows and Consolidated Statement of Changes in Stockholders' Equity for the year ended December 31, 2020.

Recent Financial Accounting Standards

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance is intended to provide temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.

In December 2019, the FASB, issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The guidance simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.


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Quarterly Financial Information (Unaudited)

The following table sets forth certain financial information for each quarter of 2020 and 2019. The information is derived from our quarterly consolidated financial statements which are unaudited but which, in the opinion of management, have been prepared on the same basis as the audited annual consolidated financial statements included in this document. The consolidated financial data shown below should be read in conjunction with the consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period. 
 Quarter Ended
 20202019
 Mar. 31Jun. 30Sept. 30Dec. 31Mar. 31Jun. 30Sept. 30Dec. 31
Revenue before reimbursements (net revenue)$171,481 $145,603 $143,544 $160,987 $171,594 $173,122 $182,174 $180,034 
Operating income (loss) (1)
18,152 (23,986)(38,233)8,538 16,391 18,353 14,472 14,295 
Income (loss) before income taxes14,396 (21,249)(36,594)12,049 18,842 19,473 14,827 16,147 
Provision for (benefit from) income taxes5,730 4,484 (10,416)6,511 6,755 5,193 4,880 5,592 
Net income (loss)$8,666 $(25,733)$(26,178)$5,538 $12,087 $14,280 $9,947 $10,555 
Basic earnings (loss) per common share$0.45 $(1.33)$(1.35)$0.29 $0.64 $0.75 $0.52 $0.55 
Diluted earnings (loss) per common share$0.44 $(1.33)$(1.35)$0.28 $0.62 $0.73 $0.51 $0.54 
Cash dividends paid per share$0.15 $0.15 $0.15 $0.15 $0.15 $0.15 $0.15 $0.15 

(1) Includes $33.0 million of goodwill impairment charges for the three months ended June 30, 2020. Includes $48.1 million of restructuring charges for the three months ended September 30, 2020. Includes $4.3 million of restructuring charges for the three months ended December 31, 2020. Includes $4.1 million of restructuring charges for the three months ended September 30, 2019.

ITEM 7A.    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. A 10% change in the average exchange rate for currencies of all foreign countries in which we operate would have increased or decreased our 2020 net income by approximately $4.4 million. 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. Based on balances exposed to fluctuation in exchange rates as of December 31, 2020, a 10% increase or decrease equally in the value of currencies could result in a foreign exchange gain or loss of approximately $0.2 million. In addition, 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. For financial information by segment, see Note 17, Segment Information, in the Notes to Consolidated Financial Statements.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 PAGE
37



Report of Independent Registered Public Accounting Firm


To the Stockholders and the Board of Directors of
Heidrick & Struggles International, Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Heidrick & Struggles International, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income (loss), changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 24, 2021, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition
As described in Note 3 of the consolidated financial statements, revenue before reimbursements from executive search and from consulting engagements of $565,170,000 and $56,445,000, respectively, is recognized over the expected average period of performance, in proportion to the estimated personnel time incurred to fulfill the obligations under the executive search or consulting contract. This requires management to make significant estimates including the amount of effort extended over certain defined time periods of the executive search or consulting engagement. The transaction price for executive search engagements generally includes variable consideration, known as uptick revenue, in addition to fixed consideration. The Company estimates the amount of uptick revenue at contract inception based on a portfolio approach utilizing the expected value method based on a historical analysis. This requires management to make significant estimates including the average amount of uptick revenue earned on an executive search engagement. Changes in the assumptions used in these estimates could have a significant impact on the revenue recognized during the period.

We identified the Company’s revenue recognition from executive search and consulting engagements as a critical audit matter because of certain significant assumptions management makes when estimating progress over time for executive search and consulting engagements, and estimating the average uptick revenue earned on executive search engagements. Auditing these
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assumptions involved a high degree of judgement and subjectivity as changes in these assumptions could have a significant impact on the amount of revenue recognized.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the assumptions involved in estimating progress over time for executive search and consulting engagements, and estimating the average uptick revenue earned on executive search engagements included the following, among others:

We obtained an understanding of the relevant controls related to management’s estimates of progress over time and average uptick revenue, such as internal controls related to management’s review of the completeness and accuracy of data compiled and used in the estimate vs. excluded from the estimate, and tested such controls for design and operating effectiveness.
We evaluated whether the historical data utilized to estimate progress over time was complete and accurate based on historical time studies, on a sample basis.
We evaluated the estimate of the average uptick revenue on executive search engagements by comparing the estimate to historical data of the total uptick revenue billed and total retainer fee for a sample of executive search engagements.
We selected a sample of contracts and performed the following procedures:
Obtained and read contract source documents for each selection.
Tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and variable consideration.
Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.
Tested the mathematical accuracy of management’s revenue calculations and recalculated deferred revenue at period end, if any.
Goodwill
As described in Note 8 of the consolidated financial statements, the Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company’s fair value estimate for each reporting unit is based on the present value of estimated future cash flows attributable to the respective reporting unit. This requires management to make significant estimates and assumptions including estimates of future growth rates, operating margins and discount rates based on the estimated weighted average cost of capital for the business. Changes in these assumptions could have a significant impact on the fair value, which could have an impact on the impairment charge, if any. The Company, as a direct result of the economic impact of COVID-19, experienced a decline in demand for the Company’s executive search and consulting services, and determined that it was more likely than not that an impairment occurred during 2020. Accordingly, the Company performed an interim impairment assessment of its reporting units as of April 30, 2020. In the impairment test, the Europe and Asia Pacific reporting units had a carrying value that exceeded their estimated fair values. As a result, an impairment charge of $32,970,000 was recorded in the consolidated statement of comprehensive income (loss) for the year ended December 31, 2020. Key financial assumptions used to determine the fair value of the reporting units were developed by management.

We identified the valuation of goodwill as a critical audit matter because of certain significant assumptions management makes in determining the estimate, including revenue, profit margin and terminal growth rate projections and the discount rate. Auditing management’s assumptions of revenue, profit margin and terminal growth rate projections and the discount rate involved a high degree of auditor judgment and increased audit effort, including the use of a valuation specialist, as changes in these assumptions could have a significant impact on the fair value of the reporting units and potential impairment charges.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the projections of future revenue growth rates, profit margins, the terminal growth rate and the determination of the discount rate for each of the reporting units included the following, among others:

We obtained an understanding of the relevant controls related to the development of forecasts of revenue, profit margin and terminal growth rates and the selection of the reporting unit specific discount rate and tested such controls for design and operating effectiveness.
We evaluated management’s ability to accurately forecast revenue and profit margin projections by comparing management’s prior forecasts to historical results for the Company.
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We evaluated the reasonableness of management’s forecasted revenue, profit margin and growth rates by comparing the projections to historic results and industry expectations.
We evaluated the impact of changes to significant assumptions on the fair value of the respective reporting unit.
With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate and tested the relevance and reliability of source information underlying the determination of the rate, tested the mathematical accuracy of the calculation, and performed sensitivities by analyzing the break-even discount rate and compared those to the rate selected by management.


/s/ RSM US LLP

We have served as the Company's auditor since 2018.

Chicago, Illinois
February 24, 2021

40




Report of Independent Registered Public Accounting Firm


To the Stockholders and the Board of Directors of
Heidrick & Struggles International, Inc.

Opinion on the Internal Control Over Financial Reporting
We have audited Heidrick & Struggles International, Inc.'s (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity and cash flows of the Company for each of the three years in the period ended December 31, 2020, and our report dated February 24, 2021 expressed an unqualified opinion.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ RSM US LLP

Chicago, Illinois
February 24, 2021




41



HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
December 31,
2020
December 31,
2019
Current assets
Cash and cash equivalents$316,473 $271,719 
Marketable securities19,999 61,153 
Accounts receivable, net of allowances of $6,557 and $5,140, respectively
88,123 109,163 
Prepaid expenses18,956 20,185 
Other current assets23,279 27,848 
Income taxes recoverable5,856 4,414 
Total current assets472,686 494,482 
Non-current assets
Property and equipment, net23,492 28,650 
Operating lease right-of-use assets92,671 99,391 
Assets designated for retirement and pension plans14,425 13,978 
Investments31,369 25,409 
Other non-current assets24,439 20,434 
Goodwill91,643 126,831 
Other intangible assets, net1,129 1,935 
Deferred income taxes, net35,958 33,063 
Total non-current assets315,126 349,691 
Total assets$787,812 $844,173 
Current liabilities
Accounts payable$8,799 $8,633 
Accrued salaries and benefits217,908 234,306 
Deferred revenue38,050 41,267 
Operating lease liabilities28,984 30,955 
Other current liabilities23,311 26,253 
Income taxes payable1,186 3,928