Results of Operations
The following table summarizes, for the periods indicated, our results of operations as a percentage of revenue before reimbursements (net revenue):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue:
|
|
|
|
|
|
|
|
Revenue before reimbursements (net revenue)
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Reimbursements
|
3.2
|
|
|
3.3
|
|
|
3.1
|
|
|
3.2
|
|
Total revenue
|
103.2
|
|
|
103.3
|
|
|
103.1
|
|
|
103.2
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
67.9
|
|
|
68.2
|
|
|
68.7
|
|
|
69.0
|
|
General and administrative expenses
|
25.0
|
|
|
23.9
|
|
|
25.4
|
|
|
25.4
|
|
Impairment Charges
|
25.7
|
|
|
—
|
|
|
13.4
|
|
|
—
|
|
Reimbursed expenses
|
3.2
|
|
|
3.3
|
|
|
3.1
|
|
|
3.2
|
|
Total operating expenses
|
121.9
|
|
|
95.5
|
|
|
110.6
|
|
|
97.7
|
|
Operating income (loss)
|
(18.7
|
)
|
|
7.9
|
|
|
(7.5
|
)
|
|
5.6
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
Interest, net
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Other, net
|
(0.1
|
)
|
|
0.1
|
|
|
(1.0
|
)
|
|
—
|
|
Net non-operating income (expense)
|
(0.2
|
)
|
|
0.1
|
|
|
(1.0
|
)
|
|
0.1
|
|
Income (loss) before income taxes
|
(18.8
|
)
|
|
7.9
|
|
|
(8.4
|
)
|
|
5.7
|
|
Provision for income taxes
|
(6.9
|
)
|
|
3.4
|
|
|
(2.4
|
)
|
|
2.8
|
|
Net income (loss)
|
(12.0
|
)%
|
|
4.5
|
%
|
|
(6.0
|
)%
|
|
2.9
|
%
|
Note: Totals and sub-totals may not equal the sum of individual line items due to rounding.
We operate our executive search services in the Americas; Europe (which includes Africa); and Asia Pacific (which includes the Middle East) and operate our leadership consulting and culture shaping businesses as separate segments (See Note 14,
Segment Information
).
The following tables set forth, for the periods indicated, our revenue and operating income by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue:
|
|
|
|
|
|
|
|
Executive Search
|
|
|
|
|
|
|
|
Americas
|
$
|
83,090
|
|
|
$
|
81,494
|
|
|
$
|
160,188
|
|
|
$
|
154,884
|
|
Europe
|
30,335
|
|
|
27,538
|
|
|
56,540
|
|
|
50,939
|
|
Asia Pacific
|
21,115
|
|
|
21,677
|
|
|
42,297
|
|
|
40,614
|
|
Total Executive Search
|
134,540
|
|
|
130,709
|
|
|
259,025
|
|
|
246,437
|
|
Leadership Consulting
|
11,433
|
|
|
8,450
|
|
|
21,199
|
|
|
14,568
|
|
Culture Shaping
|
6,241
|
|
|
9,702
|
|
|
11,996
|
|
|
18,045
|
|
Revenue before reimbursements (net revenue)
|
152,214
|
|
|
148,861
|
|
|
292,220
|
|
|
279,050
|
|
Reimbursements
|
4,904
|
|
|
4,955
|
|
|
9,075
|
|
|
9,053
|
|
Total revenue
|
$
|
157,118
|
|
|
$
|
153,816
|
|
|
$
|
301,295
|
|
|
$
|
288,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating income (loss):
|
|
|
|
|
|
|
|
Executive Search
|
|
|
|
|
|
|
|
Americas
|
$
|
23,445
|
|
|
$
|
21,581
|
|
|
$
|
42,512
|
|
|
$
|
39,375
|
|
Europe
|
1,717
|
|
|
3,107
|
|
|
1,816
|
|
|
4,396
|
|
Asia Pacific
|
786
|
|
|
1,988
|
|
|
4,106
|
|
|
2,607
|
|
Total Executive Search
|
25,948
|
|
|
26,676
|
|
|
48,434
|
|
|
46,378
|
|
Leadership Consulting
|
(1,688
|
)
|
|
(2,344
|
)
|
|
(2,570
|
)
|
|
(4,905
|
)
|
Culture Shaping (1)
|
(39,532
|
)
|
|
87
|
|
|
(42,497
|
)
|
|
(1,969
|
)
|
Total segment operating income (loss)
|
(15,272
|
)
|
|
24,419
|
|
|
3,367
|
|
|
39,504
|
|
Global Operations Support
|
(13,139
|
)
|
|
(12,725
|
)
|
|
(25,140
|
)
|
|
(23,942
|
)
|
Total operating income (loss)
|
$
|
(28,411
|
)
|
|
$
|
11,694
|
|
|
$
|
(21,773
|
)
|
|
$
|
15,562
|
|
|
|
(1)
|
Culture Shaping operating loss includes the impact of $39.2 million of impairment charges.
|
Three months ended June 30, 2017
Compared to the
Three Months Ended June 30, 2016
Total revenue.
Consolidated total revenue increased $3.3 million, or 2.1%, to $157.1 million for the three months ended June 30, 2017 from $153.8 million for the three months ended June 30, 2016. The increase in total revenue was due primarily to the increase in revenue before reimbursements (net revenue).
Revenue before reimbursements (net revenue).
Consolidated net revenue increased $3.4 million, or 2.3%, to $152.2 million for the three months ended June 30, 2017 from $148.9 million for the three months ended June 30, 2016. Excluding the impact of exchange rate fluctuations which negatively impacted results by $2.7 million, or 1.8%, consolidated net revenue increased $6.1 million or 4.1%. Executive Search net revenue was $134.5 million for the three months ended June 30, 2017, an increase of $3.8 million compared to the three months ended June 30, 2016. The increase in Executive Search net revenue was the result of growth in the Americas and Europe, partially offset by a decrease in revenue in Asia Pacific. Leadership Consulting net revenue increased $3.0 million, or 35.3%, to $11.4 million for the three months ended June 30, 2017 from $8.5 million for the three months ended June 30, 2016. The increase in Leadership Consulting net revenue was partially the result of the Philosophy IB acquisitions. Culture Shaping net revenue was $6.2 million for the three months ended June 30, 2017, a decrease of $3.5 million compared to the three months ended June 30, 2016.
The number of Executive Search and Leadership Consulting consultants was 355 and 18, respectively, as of June 30, 2017 compared to 316 and 20, respectively, as of June 30, 2016. Specific to Executive Search, our largest business, productivity as measured by annualized net Executive Search revenue per consultant was $1.5 million and $1.7 million for the three months ended June 30, 2017 and 2016, respectively. The number of confirmed searches increased 1.5% compared to 2016. The average revenue per executive search increased to $118,300 for the three months ended June 30, 2017 compared to $116,700 for the three months ended June 30, 2016.
Salaries and employee benefits.
Consolidated salaries and employee benefits expense increased $1.8 million, or 1.8%, to $103.4 million for the three months ended June 30, 2017 from $101.5 million for the three months ended June 30, 2016. The increase was due to higher fixed compensation of $3.8 million partially offset by lower variable compensation of $1.9 million. Fixed compensation increased due to higher compensation related to our recent acquisitions and new hires over the last year. Excluding the impact of exchange rate fluctuations, which positively impacted results by $1.6 million, or 1.6%, consolidated salaries and benefits expense increased $3.4 million, or 3.4%, compared to the three months ended June 30, 2016.
For the three months ended June 30, 2017, we had an average of 1,811 employees compared to an average of 1,698 employees for the three months ended June 30, 2016.
As a percentage of net revenue, salaries and employee benefits expense was 67.9% for the three months ended June 30, 2017, compared to 68.2% for the three months ended June 30, 2016.
General and administrative expenses.
Consolidated general and administrative expenses increased $2.5 million, or 6.9%, to $38.1 million for the three months ended June 30, 2017 from $35.6 million for the three months ended June 30, 2016. The increase reflects costs associated with ongoing general and administrative expenses related to the acquisitions made in 2016, including the expense of third-party consultants and contractors to execute work for leadership consulting services, and higher
professional fees. Excluding the impact of exchange rate fluctuations, which positively impacted results by $0.6 million, or 1.8%, consolidated general and administrative expenses increased $3.1 million, or 8.7%, compared to the three months ended June 30, 2016.
As a percentage of net revenue, general and administrative expenses were 25.0% for the three months ended June 30, 2017, compared to 23.9% for the three months ended June 30, 2016.
Impairment charges.
In 2017, the Culture Shaping business continued the transition of senior-level personnel which began in 2016, primarily due to planned retirements. The Company has experienced lower than expected consultant productivity during the transition period. Also, the marketplace for culture shaping services has become increasingly more competitive and the business experienced lengthening sales cycles and decision processes within target client organizations. These events led to a decline in the revenue performance of the business and uncertainty around the timing of improving such performance. As a result, the Company identified a triggering event and performed an interim impairment evaluation on the goodwill and intangible assets related to its Culture Shaping reporting unit during the quarter ended June 30, 2017.
Based on the results of the of the impairment evaluation, the Company determined that the goodwill and intangible assets within the Culture Shaping reporting unit were impaired, which resulted in an impairment charge of $39.2 million to write-off all of the goodwill and intangible assets. The impairment charge is recorded within
Impairment charges
in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended June 30, 2017. The impairment was non-cash in nature and did not affect our current liquidity, cash flows, borrowing capability or operations; nor did it impact the debt covenants under our credit agreement.
Operating income (loss).
Consolidated operating loss was $28.4 million for the three months ended June 30, 2017 compared to $11.7 million of operating income for the three months ended June 30, 2016. Excluding intangible asset and goodwill impairment charges of $39.2 million in the Culture Shaping segment, consolidated operating income was $10.7 million for the three months ended June 30, 2017. Exchange rate fluctuations negatively impacted operating income by $0.5 million for the three months ended June 30, 2017.
Net non-operating income (expense)
. Net non-operating expense was $0.3 million for the three months ended June 30, 2017 compared to net non-operating income of approximately $0.1 million for the three months ended June 30, 2016.
Interest, net was $0.1 million of expense for the three months ended June 30, 2017 compared to approximately $0.1 million of income for the three months ended June 30, 2016.
Other, net was expense of $0.2 million for the three months ended June 30, 2017 and income of less than $0.1 million for the three months ended June 30, 2016.
Income taxes.
See Note 12,
Income Taxes
.
Executive Search
Americas
The Americas segment reported net revenue of $83.1 million for the three months ended June 30, 2017, an increase of 2.0% from $81.5 million for the three months ended June 30, 2016. The increase in net revenue was due to an increase in consultant headcount. Both the Industrial and Education & Social Enterprise practice groups contributed to the increase in net revenue. There were 171 Partner and Principal consultants as of June 30, 2017 compared to 155 as of June 30, 2016.
Salaries and employee benefits expense decreased $1.9 million as compared to the three months ended June 30, 2016. Fixed compensation decreased $0.3 million, primarily due to lower amortization of sign-on bonuses and guarantees. Variable compensation decreased $1.6 million primarily due to the impact of deferred revenue on bonus accruals.
General and administrative expenses increased $1.7 million primarily due to professional fees and office occupancy.
Operating income was $23.4 million for the three months ended June 30, 2017, an increase of $1.8 million compared to $21.6 million for the three months ended June 30, 2016.
Europe
Europe reported net revenue of $30.3 million for the three months ended June 30, 2017, an increase of 10.2% from $27.5 million for the three months ended June 30, 2016. The increase in net revenue was due to an 8.1% increase in the number of executive search confirmations and an increase in consultant headcount. Our acquisition of JCA Group in August 2016 contributed to the year-over-year growth in net revenue. All industry practice groups contributed to net revenue growth except
for the Global Technology & Services practice groups. Excluding the impact of exchange rate fluctuations which negatively impacted results by $1.7 million, or 6.3%, net revenue increased $4.5 million or 16.4%. There were 103 Partner and Principal consultants as of June 30, 2017 as compared to 78 as of June 30, 2016.
Salaries and employee benefits expense increased $2.5 million as compared to the three months ended June 30, 2016. Fixed compensation increased $2.4 million for the three months ended June 30, 2017 primarily due to compensation expense associated with the JCA acquisition in August 2016. Variable compensation increased $0.1 million due to higher bonus accruals.
General and administrative expense increased $1.7 million from the three months ended June 30, 2016 primarily due to ongoing general and administrative expenses related to the JCA Group acquisition, partially offset by lower office occupancy costs.
The Europe segment reported operating income of $1.7 million for the three months ended June 30, 2017, a decrease of $1.4 million compared to $3.1 million for the three months ended June 30, 2016.
Asia Pacific
Asia Pacific reported net revenue of $21.1 million for the three months ended June 30, 2017, an decrease of 2.6% compared to $21.7 million for the three months ended June 30, 2016. The decrease in net revenue was due to a 2.7% decrease in the number of executive search confirmations. Excluding the impact of exchange rate fluctuations which negatively impacted results by $0.1 million, or 0.4%, net revenue decreased $0.5 million or 2.2%. There were 81 Partner and Principal consultants as of June 30, 2017 compared to 83 as of June 30, 2016.
Salaries and employee benefits expense increased $0.3 million. Fixed compensation increased $0.1 million due to higher amortization of guarantees and separation costs, partially offset by lower base salaries and payroll taxes. Variable compensation increased $0.2 million due to higher bonus accruals.
General and administrative expenses increased $0.4 million primarily due to higher audit fees and other professional services, partially offset by lower internal travel and occupancy costs.
The Asia Pacific segment reported operating income of $0.8 million for the three months ended June 30, 2017, a decrease of $1.2 million compared to the three months ended June 30, 2016.
Leadership Consulting
The Leadership Consulting segment reported net revenue of $11.4 million for the three months ended June 30, 2017, an increase of 35.3% compared to $8.5 million for the three months ended June 30, 2016. The increase in net revenue was primarily driven by our DSI and Philosophy IB acquisitions. Excluding the impact of exchange rate fluctuations which negatively impacted results by $0.7 million, or 8.6%, net revenue increased $3.7 million or 43.9%. There were 18 Leadership Consulting Partner consultants at June 30, 2017 compared to 20 at June 30, 2016.
Salaries and employee benefits expense increased $1.5 million compared to the prior year. Fixed compensation increased $0.9 million due to additional headcount related to the Philosophy IB acquisition, partially offset by lower amortization of guarantees and sign-on bonuses. Variable compensation increased $0.6 million compared to the prior year due to higher bonus accruals.
General and administrative expenses increased $0.9 million due to ongoing general and administrative expenses related to the Philosophy IB acquisition, partially offset by declines in internal travel and information technology costs.
The Leadership Consulting segment reported an operating loss of $1.7 million for the three months ended June 30, 2017, an improvement of $0.6 million compared to an operating loss of $2.3 million for the three months ended June 30, 2016.
Culture Shaping
The Culture Shaping segment reported net revenue of $6.2 million for the three months ended June 30, 2017, a decrease of $3.5 million, or 35.7%, compared to $9.7 million for the three months ended June 30, 2016. Net revenue decreased due to a decline in the volume of client work. Excluding the impact of exchange rate fluctuations which negatively impacted results by $0.2 million, or 1.6%, net revenue decreased $3.3 million or 34.0%. There were 17 Partner and Principal consultants at both June 30, 2017 and 2016.
Salaries and employee benefits expense decreased $1.9 million due to $1.8 million of investments in new and existing consultants incurred in the prior year that did not reoccur in the three months ended June 30, 2017.
General and administrative expenses decreased $1.1 million primarily due to lower intangible amortization, earnout accretion, and use of third-party external consultants to perform consulting work, partially offset by higher office occupancy and internal travel costs.
Impairment charges for the three months ended June 30, 2017 were $39.2 million as a result of an interim impairment evaluation on the goodwill and amortizable intangible assets related to our Culture Shaping reporting unit. The impairment charge is recorded within
Impairment charges
in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended June 30, 2017.
The Culture Shaping segment reported an operating loss of $39.5 million for the three months ended June 30, 2017, compared to operating income of less than $0.1 million for the three months ended June 30, 2016. The decline in operating income is primarily due to $39.2 million of impairment charges recorded during the three months ended June 30, 2017. When excluding impairment charges, the Culture Shaping segment reported an operating loss of $0.4 million for the three months ended June 30, 2017.
Global Operations Support
Global Operations Support expenses for the three months ended June 30, 2017 increased $0.4 million, or 3.2%, to $13.1 million from $12.7 million for the three months ended June 30, 2016.
Salaries and employee benefits expense increased $1.4 million due to higher base salaries and payroll taxes, partially offset by lower separation and retirement and benefits expense.
General and administrative expenses decreased $1.0 million due to decreases in litigation and other professional fees that were partially offset by higher information technology costs and office occupancy.
Six Months Ended June 30, 2017
Compared to the
Six Months Ended June 30, 2016
Total revenue.
Consolidated total revenue increased $13.2 million, or 4.6%, to $301.3 million for the six months ended June 30, 2017 from $288.1 million for the six months ended June 30, 2016. The increase in total revenue was due primarily to the increase in revenue before reimbursements (net revenue).
Revenue before reimbursements (net revenue).
Consolidated net revenue increased $13.2 million, or 4.7%, to $292.2 million for the six months ended June 30, 2017 from $279.1 million for the six months ended June 30, 2016. Excluding the impact of exchange rate fluctuations which negatively impacted results by $5.4 million, or 1.9%, consolidated net revenue increased $18.6 million or 6.7%. Executive Search net revenue was $259.0 million for the six months ended June 30, 2017, an increase of $12.6 million compared to the six months ended June 30, 2016. The increase in Executive Search net revenue was the result of growth in all regions. Leadership Consulting net revenue increased $6.6 million, or 45.5%, to $21.2 million for the six months ended June 30, 2017 from $14.6 million for the six months ended June 30, 2016. The increase in Leadership Consulting net revenue was primarily the result of the DSI and Philosophy IB acquisitions. Culture Shaping net revenue was $12.0 million for the six months ended June 30, 2017, a decrease of $6.0 million compared to the six months ended June 30, 2016 due to a lower volume of client work.
Specific to Executive Search, our largest business, productivity as measured by annualized net Executive Search revenue per consultant was $1.5 million and $1.6 million for the six months ended June 30, 2017 and 2016, respectively. The number of confirmed searches increased 4.7% compared to 2016. The average revenue per executive search increased to $110,600 for the six months ended June 30, 2017 compared to $110,200 for the six months ended June 30, 2016.
Salaries and employee benefits.
Consolidated salaries and employee benefits expense increased $8.0 million, or 4.1%, to $200.6 million for the six months ended June 30, 2017 from $192.7 million for the six months ended June 30, 2016. The increase was due to higher fixed compensation of $10.1 million partially offset by lower variable compensation of $2.1 million. Fixed compensation increased due to higher compensation related to our recent acquisitions, new hires over the last year and the HMRC employee benefit tax settlement of $1.5 million. Excluding the impact of exchange rate fluctuations, which positively impacted results by $3.2 million, or 1.6%, consolidated salaries and benefits expense increased $11.1 million, or 5.8%, compared to the three months ended June 30, 2016.
For the six months ended June 30, 2017, we had an average of 1,812 employees compared to an average of 1,662 employees for the six months ended June 30, 2016.
As a percentage of net revenue, salaries and employee benefits expense was 68.7% for the six months ended June 30, 2017, compared to 69.0% for the six months ended June 30, 2016.
General and administrative expenses.
Consolidated general and administrative expenses increased $3.4 million, or 4.8%, to $74.2 million for the six months ended June 30, 2017 from $70.8 million for the six months ended June 30, 2016. The increase reflects costs associated with ongoing general and administrative expenses related to the acquisitions made in 2016, including the expense of third-party consultants and contractors to execute work for leadership consulting services, and higher audit fees. Excluding the impact of exchange rate fluctuations, which positively impacted results by $1.4 million, or 2.0%, consolidated general and administrative expenses increased $4.8 million, or 6.8%, compared to the three months ended June 30, 2016.
As a percentage of net revenue, general and administrative expenses were 25.4% for each of the six months ended June 30, 2017 and 2016.
Impairment charges.
In 2017, the Culture Shaping business continued the transition of senior-level personnel which began in 2016, primarily due to planned retirements. The Company has experienced lower than expected consultant productivity during the transition period. Also, the marketplace for culture shaping services has become increasingly more competitive and the business experienced lengthening sales cycles and decision processes within target client organizations. These events led to a decline in the revenue performance of the business and uncertainty around the timing of improving such performance. As a result, the Company identified a triggering event and performed an interim impairment evaluation on the goodwill and intangible assets related to its Culture Shaping reporting unit during the quarter ended June 30, 2017.
Based on the results of the of the impairment evaluation, the Company determined that the goodwill and intangible assets within the Culture Shaping reporting unit were impaired, which resulted in an impairment charge of $39.2 million to write-off all of the goodwill and intangible assets. The impairment charge is recorded within
Impairment charges
in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the six months ended June 30, 2017. The impairment was non-cash in nature and did not affect our current liquidity, cash flows, borrowing capability or operations; nor did it impact the debt covenants under our credit agreement.
Operating income (loss).
Consolidated operating loss was $21.8 million for the six months ended June 30, 2017 compared to operating income of $15.6 million for the six months ended June 30, 2016. The decreased in operating income is the result of a $39.2 million impairment of intangible assets and goodwill within the Culture Shaping segment. When excluding impairment charges, the Company reported $17.4 million of operating income for the six months ended June 30, 2017. Exchange rate fluctuations negatively impacted operating income by $0.8 million for the six months ended June 30, 2017.
Net non-operating income (expense)
. Net non-operating expense was $2.8 million for the six months ended June 30, 2017 compared to net non-operating income of $0.2 million for the six months ended June 30, 2016.
Interest, net was $0.1 million of income for each of the six months ended June 30, 2017 and 2016.
Other, net was expense of $2.9 million for the six months ended June 30, 2017 and income of $0.1 million for the six months ended June 30, 2016. Other, net decreased primarily due to the HMRC employee benefit tax settlement of $2.4 million.
Income taxes.
See Note 12,
Income Taxes
.
Executive Search
Americas
The Americas segment reported net revenue of $160.2 million for the six months ended June 30, 2017, an increase of 3.4% from $154.9 million for the six months ended June 30, 2016. The increase in net revenue was due to a 2.9% increase in the number of executive search confirmations and an increase in consultant headcount. All practice groups contributed to the increased net revenue with the exception of the Financial Services and Global Technology & Services practice group. There were 171 Partner and Principal consultants as of June 30, 2017 compared to 155 as of June 30, 2016.
Salaries and employee benefits expense decreased $0.1 million from the six months ended June 30, 2016. Fixed compensation increased $3.3 million primarily due to higher base salaries, payroll taxes and benefits of $2.9 million, partially offset by lower amortization of sign-on bonuses and guarantees. Variable compensation decreased $3.4 million primarily due to the impact of deferred revenue on bonus accruals.
General and administrative expenses increased $2.3 million primarily due to professional fees, office occupancy and external third-party client services.
Operating income was $42.5 million for the six months ended June 30, 2017, an increase of $3.1 million compared to $39.4 million for the six months ended June 30, 2016.
Europe
Europe reported net revenue of $56.5 million for the six months ended June 30, 2017, an increase of 11.0% from $50.9 million for the six months ended June 30, 2016. The increase in net revenue was due to a 7.2% increase in the number of executive search confirmations and an increase in consultant headcount. Our acquisition of JCA Group in August 2016 also contributed to the year-over-year growth in net revenue. All industry practice groups contributed to net revenue growth except for the Global Technology & Services practice group. Excluding the impact of exchange rate fluctuations which negatively impacted results by $3.8 million, or 7.4%, net revenue increased $9.4 million or 18.4%. There were 103 Partner and Principal consultants as of June 30, 2017 compared to 78 as of June 30, 2016.
Salaries and employee benefits expense increased $5.8 million compared to the six months ended June 30, 2016. Fixed compensation increased $5.6 million for the six months ended June 30, 2017 primarily due to compensation expense associated with the JCA acquisition in August 2016 and the HMRC employee benefit tax settlement, net of reimbursements, of $1.5 million. Variable compensation increased $0.2 million due to higher bonus accruals.
General and administrative expense increased $2.4 million from the six months ended June 30, 2016 due to ongoing general and administrative expenses related to the JCA Group acquisition.
The Europe segment reported operating income of $1.8 million for the six months ended June 30, 2017, a decrease of $2.6 million compared to $4.4 million for the six months ended June 30, 2016.
Asia Pacific
Asia Pacific reported net revenue of $42.3 million for the six months ended June 30, 2017, an increase of 4.1% compared to $40.6 million for the six months ended June 30, 2016. The increase in net revenue was due to a 5.1% increase in the number of executive search confirmations. The Life Sciences and Industrial industry practice groups contributed to net revenue growth. Excluding the impact of exchange rate fluctuations which positively impacted results by $0.1 million, or 0.2%, net revenue increased $1.6 million or 4.0%. There were 81 Partner and Principal consultants as of June 30, 2017 compared to 83 as of June 30, 2016.
Salaries and employee benefits expense increased $0.6 million. Fixed compensation increased $0.1 million for the six months ended June 30, 2017 due to higher retirement and benefits and separation costs. Variable compensation increased $0.5 million due to higher bonus accruals.
General and administrative expenses decreased $0.4 million primarily due to lower office occupancy expenses and internal travel costs.
The Asia Pacific segment reported operating income of $4.1 million for the six months ended June 30, 2017, an increase of $1.5 million compared to the six months ended June 30, 2016.
Leadership Consulting
The Leadership Consulting segment reported net revenue of $21.2 million for the six months ended June 30, 2017, an increase of 45.5% compared to $14.6 million for the six months ended June 30, 2016. The increase in net revenue was partially driven by our DSI and Philosophy IB acquisitions. Excluding the impact of exchange rate fluctuations which negatively impacted results by $1.5 million, or 10.1%, net revenue increased $8.1 million or 55.6%. There were 18 Leadership Consulting Partner consultants at June 30, 2017 compared to 20 at June 30, 2016.
Salaries and employee benefits expense increased $3.2 million compared to the prior year. Fixed compensation increased $2.3 million due to additional headcount related to the Philosophy IB acquisition, in addition to six full months of expense for DSI, partially offset by lower separation expenses. Variable compensation increased $0.8 million compared to the prior year due to higher bonus accruals.
General and administrative expenses increased $1.1 million due to ongoing general and administrative expenses related to the Philosophy IB acquisition, in addition to six full months of expense for DSI, partially offset by declines in litigation expense and professional fees.
The Leadership Consulting segment reported an operating loss of $2.6 million for the six months ended June 30, 2017, an improvement of $2.3 million compared to an operating loss of $4.9 million for the six months ended June 30, 2016.
Culture Shaping
The Culture Shaping segment reported net revenue of $12.0 million for the six months ended June 30, 2017, a decrease of $6.0 million, or 33.5%, compared to $18.0 million for the six months ended June 30, 2016. Net revenue decreased due to a decline in the volume of client work. Excluding the impact of exchange rate fluctuations which negatively impacted results by $0.3 million, or 1.8%, net revenue decreased $5.7 million or 31.7%.There were 17 Partner and Principal consultants at both June 30, 2017 and 2016.
Salaries and employee benefits expense decreased $3.7 million due to investments in new and existing consultants incurred in the prior year that did not reoccur in the six months ended June 30, 2017.
General and administrative expenses decreased $1.0 million primarily due to lower intangible amortization and earnout accretion, partially offset by higher internal travel costs, information technology expenses, and office occupancy costs.
Impairment charges for the six months ended June 30, 2017 were $39.2 million as a result of an interim impairment evaluation on the goodwill and amortizable intangible assets related to our Culture Shaping reporting unit. The impairment charge is recorded within
Impairment charges
in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the six months ended June 30, 2017.
The Culture Shaping segment reported an operating loss of $42.5 million for the six months ended June 30, 2017, a decline of $40.5 million compared to an operating loss of $2.0 million for the six months ended June 30, 2016. The increase in operating loss primarily reflects the write-off of $39.2 million of goodwill and intangible assets due to impairment. When excluding goodwill and intangible asset impairment charges, the Culture Shaping segment report an operating loss of $3.3 million.
Global Operations Support
Global Operations Support expenses for the six months ended June 30, 2017 increased $1.2 million, or 5.0%, to $25.1 million from $23.9 million for the six months ended June 30, 2016.
Salaries and employee benefits expense increased $2.2 million due to higher bonus accruals, partially offset by lower separation costs.
General and administrative expenses decreased $1.0 million due to lower professional fees and internal travel, which was partially offset by increases in audit fees and information technology expenses.
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
June 30, 2015
, the Company entered into a Second Amended and Restated Credit Agreement (the “Restated Credit Agreement”). The Restated Credit Agreement amended and restated the Credit Agreement executed on
June 22, 2011
(the “Credit Agreement”). Pursuant to the Restated Credit Agreement, the Company replaced its Revolving Facility and Term Facility (“Existing Facility”) with a single senior unsecured revolving line of credit with an aggregate commitment of up to
$100 million
, which includes a sublimit of
$25 million
for letters of credit, and a
$50 million
expansion feature (the “Replacement Facility”). The Replacement Facility will mature on
June 30, 2020
. Borrowings under the Restated Credit Agreement bear interest at the Company’s election at the existing Alternate Base Rate (as defined in the Credit Agreement) or Adjusted LIBOR Rate (as defined in the Credit Agreement) plus a spread as determined by the Company’s leverage ratio.
Borrowings under the Replacement Facility may be used for working capital, capital expenditures, Permitted Acquisitions (as defined in the Credit Agreement) and for other general corporate purposes of the Company and its subsidiaries. The obligations under the Replacement Facility are guaranteed by certain of the Company’s subsidiaries.
During the three months ended March 31, 2017, we borrowed
$40.0 million
under the Restated Credit Agreement and elected the Adjusted LIBOR Rate. We subsequently repaid
$15.0 million
during the three months ended March 31, 2017 and repaid
$25.0 million
during the
three months ended June 30, 2017
.
As of
June 30, 2017
and
December 31, 2016
, the Company had no outstanding borrowings under the Restated Credit Agreement and the Company was in compliance with the financial and other covenants under the Restated Credit Agreement and no event of default existed.
Cash and cash equivalents.
Cash and cash equivalents at
June 30, 2017
,
December 31, 2016
and
June 30, 2016
were
$58.2 million
,
$165.0 million
and
$85.4 million
, respectively. The
$58.2 million
of cash and cash equivalents at
June 30, 2017
includes $44.0 million held by our foreign subsidiaries. A portion of the $44.0 million is considered permanently reinvested in these foreign subsidiaries. If these funds were required to satisfy obligations in the U.S., the repatriation of these funds could cause us to incur additional U.S. income taxes or foreign withholding taxes. Any additional taxes could be offset, in part or in whole, by foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated.
Cash flows used in operating activities.
For the six months ended June 30, 2017, cash used in operating activities was $86.2 million. This use of cash was primarily the result of a reduction in accrued expenses due to cash bonus payments of $137.0 million related to 2016 and prior year cash bonus deferrals with 2017 variable compensation accruals of $58.0 million partially offsetting these payments. Also contributing to the use of cash was an increase in accounts receivable of $28.5 million, net loss of $17.6 million, increase in deferred tax asset of $15.3 million, a $6.5 million payment for Senn Delaney retention awards, and an increase in prepaid expenses of $1.4 million. These uses of cash were partially offset by impairment charges of $39.2 million, depreciation and amortization of $7.6 million, stock compensation expense of $3.7 million, deferred revenue of $3.3 million, a change in net retirement and pension plan assets and liabilities of $2.9 million, and an increase in income taxes payable of $2.0 million.
For the six months ended June 30, 2016, cash used in operating activities was $85.0 million. This use of cash was primarily the result of a reduction in accrued expenses due to cash bonus payments of $145.0 million related to 2015 and prior year cash bonus deferrals with 2016 variable compensation accruals of $60.0 million partially offsetting these payments, an increase in accounts receivable of $30.1 million and the payment of $6.5 million for the retention bonus paid to certain key executives related to the Senn Delaney acquisition. These uses of cash were partially offset by a decrease in net other assets and liabilities of $8.1 million, net income of $8.0 million, depreciation and amortization expense of $7.6 million, stock compensation expense of $3.9 million and an increase in deferred revenue of $3.7 million.
Cash flows used in investing activities.
Cash used in investing activities was $12.1 million for the six months ended June 30, 2017 primarily due to capital expenditures of $10.4 million and purchases of available for sale investments of $2.0 million related to the Company's non-qualified deferred compensation plan.
Cash used in investing activities was $5.6 million for the six months ended June 30, 2016 primarily due to the acquisition of DSI for $9.0 million, net purchases of available for sale securities of $2.0 million and capital expenditures of $1.1 million. These uses of cash were partially offset by a reduction in restricted cash of $6.5 million due to a release of funds for the retention bonus paid to certain key executives related to the Senn Delaney acquisition.
Cash flows used in financing activities.
Cash used in financing activities for the six months ended June 30, 2017 was $12.0 million primarily due to dividend payments of $5.2 million, acquisition earnout payments related to the Co Company and Scambler MacGregor acquisitions of $4.5 million, and employee tax withholding payments on equity transactions of $2.4 million. The Company borrowed and repaid $40.0 million under its line of credit during the six months ended June 30, 2017.
Cash used in financing activities for the six months ended June 30, 2016 was $15.1 million primarily due to earnout payments of $7.5 million related to the Senn Delaney, Scambler MacGregor and Co Company acquisitions, cash dividend payments of $4.9 million and the payment of employee tax withholdings on equity transactions of $2.7 million.
Off-Balance Sheet Arrangements.
We do not have material off-balance sheet arrangements, special purpose entities, trading activities of non-exchange traded contracts or transactions with related parties.
Application of Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared using accounting principles generally accepted in the United States of America. Our significant accounting policies are discussed in Note 2,
Summary of Significant Accounting Policies
, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2016
as filed with the U.S. Securities and Exchange Commission (“SEC”) on
March 23, 2017
, and in Note 2,
Summary of Significant Accounting Policies
, in the Notes to Condensed Consolidated Financial Statements included in Item 1. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. If actual amounts are ultimately different from previous estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes its critical accounting policies that reflect its more significant estimates and assumptions relate to revenue recognition, income taxes, interim effective tax rate and assessment of goodwill and other intangible assets for impairment. See
Application of Critical Accounting Policies and Estimates
in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended
December 31, 2016
, as filed with the SEC on
March 23, 2017
.
Recently Issued Financial Accounting Standards
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-09, Compensation - Stock Compensation, Scope of Modification Accounting, which is intended to provide clarity and reduce both diversity in practice, cost and complexity when implementing a change in the terms or conditions of a share-based payment award. ASU 2017-09 requires that an entity should account for the effects of a modification unless the fair value, vesting conditions, and whether the award is classified as a liability instrument or an equity instrument remain unchanged in the modification. ASU 2017-09 is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted. The Company has not yet determined when it will adopt this guidance. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost, which is intended to improve the consistency, transparency and usefulness of net benefit cost disclosures. ASU 2017-07 requires that an employer report the service cost component of net benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Additionally, the other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. ASU 2017-07 is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted. The Company has not yet determined when it will adopt this guidance. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other, which eliminates Step 2 from the goodwill impairment test. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The Company early adopted ASU 2017-04, during the three months ended June 30, 2017. The Company concluded that ASU 2017-04 is preferable to the current guidance included in ASC 350 due to the simplified process of subsequently measuring goodwill.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore amounts generally described as restricted cash should be included with cash and cash equivalents when recording the beginning of period and end of period total amounts shown on the statement of cash flows. The Company currently does not include restricted cash amounts in the beginning and ending cash amounts and will change the presentation of the cash flow statement to include restricted cash in the beginning and ending cash totals. The standard is effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted.The Company has not yet determined when it will adopt this guidance. If the Company had adopted the guidance as of June 30, 2017, the beginning and ending balance of cash and cash equivalents for the three months ended March 31, 2017 would have each increased by $0.6 million in the Condensed Consolidated Statement of Cash Flows.
In August 2016, the Financial Accounting Standards Board ("FASB") issued accounting Standards Update ("ASU") No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice as to how certain cash receipts and cash payments should be presented and classified. The standard is effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company has evaluated the standard and noted the guidance for contingent consideration payments made after a business combination are applicable to the Condensed Consolidated Statements of Cash Flows. The Company currently classifies all contingent consideration payments as financing activities. The impact of this change is not expected to be significant to the classification of these activities on the Consolidated Statements of Cash Flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases, intended to improve financial reporting about leasing transactions. The new guidance will require entities that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations created by those leases and to disclose key information about the leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments including the recognition of unrealized changes in fair value within net income. The standard is effective for annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The ASU requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for these goods or services. The effective date has been deferred for one year to the interim and annual reporting periods beginning after December 15, 2017. The guidance permits the use of either of the following transition methods: (i) a full retrospective method reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or (ii) a retrospective method with the cumulative effect upon initial adoption recognized at the date of initial application (modified retrospective). The Company will adopt the guidance on January 1, 2018 and will apply the modified retrospective method.
The Company is performing its evaluation of ASU No. 2014-09. The Company is paid a retainer for its executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled. If the actual compensation of a placed candidate exceeds the estimated compensation, the Company is often authorized to bill the client for one-third of the excess. The Company currently recognizes revenue associated with the difference between the estimated compensation and actual compensation at the time this amount is considered fixed and determinable. Under ASU 2014-09, the difference between estimated compensation and actual compensation is considered variable consideration. The Company will be required to estimate the amount of variable consideration for its executive search services at contract inception. The Company is still evaluating the financial impact of this change.
The Company is continuing to evaluate the impacts of adoption of this guidance and its preliminary assessments are subject to change.