NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except share and per share figures)
1. Basis of Presentation
Heidrick & Struggles International, Inc. and subsidiaries (the “Company”) is a leadership advisory firm providing executive search, consulting and on-demand talent services. We help our clients build leadership teams by facilitating the recruitment, management and development of senior executives. The Company operates globally, including Executive Search operating segments in the Americas, Europe and Asia Pacific.
The consolidated financial statements include Heidrick & Struggles International, Inc. and its wholly owned subsidiaries and have been prepared using accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Significant items subject to estimates and assumptions include revenue recognition, allowances for deferred tax assets and liabilities, and the assessment of goodwill, other intangible assets and long-lived assets for impairment. Estimates are subject to a degree of uncertainty and actual results could differ from these estimates.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents.
Marketable Securities
The Company’s marketable securities consist of available-for-sale debt securities with original maturities exceeding three months.
Concentration of Risk
The Company is potentially exposed to concentrations of risk associated with its accounts receivable. However, this risk is limited due to the Company’s large number of clients and their dispersion across many different industries and geographies. At December 31, 2021 and 2020, the Company had no significant concentrations of risk.
Accounts Receivable
The Company’s accounts receivable consists of trade receivables. The Company’s expected credit loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers' trade accounts receivables. These factors may change over time, impacting the allowance level. See Note 4, Credit Losses.
Fair Value of Financial Instruments
Cash equivalents are stated at cost, which approximates fair value. The carrying value for receivables from clients, accounts payable, deferred revenue and other accrued liabilities reasonably approximate fair value due to the nature of the financial instruments and the short-term nature of the items.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the asset or, for leasehold improvements, the shorter of the lease term or the estimated useful life of the asset, as follows:
| | | | | | | | |
Office furniture, fixtures and equipment | | 5–10 years |
Computer equipment and software | | 3–7 years |
Leasehold improvements are depreciated over the lesser of the lease term or life of the asset improvement, which typically range from three to ten years.
Depreciation is calculated for tax purposes using accelerated methods, where applicable.
Other Intangible Assets and Long Lived Assets
The Company reviews its 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.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating Lease Right-of-Use Assets, Operating Lease Liabilities - Current and Operating Lease Liabilities - Non-Current in our Consolidated Balance Sheets. The Company does not have any leases that meet the finance lease criteria.
Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized on the commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, an incremental borrowing rate based on the information available at the commencement date is used in determining the present value of lease payments. The operating lease right-of-use asset also includes any lease payments made in advance and any accrued rent expense balances. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components. For office leases, the Company accounts for the lease and non-lease components as a single lease component. For equipment leases, such as vehicles and office equipment, the Company accounts for the lease and non-lease components separately.
Investments
The Company’s investments consist primarily of available-for-sale investments within the U.S. non-qualified deferred compensation plan (the “Plan”).
Available-for-sale investments are reported at fair value with changes in unrealized gains (losses) and realized gains (losses) recorded as a non-operating expense in Other, net in the Consolidated Statements of Comprehensive Income (Loss).
Goodwill
Goodwill represents the difference between the purchase price of acquired companies and the related fair value of the net assets acquired, which is accounted for by the acquisition method of accounting. The Company performs 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 include a significant change in business climate, attrition of key personnel, changes in financial condition or results of operations, a prolonged decline in the Company’s stock price and market capitalization, competition, and other factors.
The goodwill impairment test compares the fair value of a reporting unit to its carrying amount, including goodwill. The Company operates five reporting units: Americas, Europe (which includes Africa), Asia Pacific (which includes the Middle East), On-Demand Talent and Heidrick Consulting. The goodwill impairment test is completed by comparing the fair value of a reporting unit with its carrying amount. The fair value of each of the Company’s reporting units is determined using a discounted cash flow methodology. An impairment charge is recognized for the amount by which the carrying value of the
reporting unit exceeds its fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit.
Restructuring Charges
The Company accounts for restructuring charges by recognizing a liability at fair value when the costs are incurred.
Revenue Recognition
See Note 3, Revenue.
Cost of Services
Cost of services consists of third-party contractor costs related to the delivery of various services in the Company's On-Demand Talent and Heidrick Consulting operating segments.
Reimbursements
The Company incurs certain out-of-pocket expenses that are reimbursed by its clients, which are accounted for as revenue and expense in its Consolidated Statements of Comprehensive Income (Loss).
Salaries and Benefits
Salaries and benefits consist of compensation and benefits paid to consultants, executive officers, and administrative and support personnel, of which the most significant elements are salaries and annual performance-related bonuses. Other items in this category are expenses related to sign-on bonuses, forgivable employee loans and minimum guaranteed bonuses (often incurred in connection with the hiring of new consultants), restricted stock unit, phantom stock unit and performance share unit amortization, payroll taxes, profit sharing and retirement benefits, and employee insurance benefits.
Salaries and benefits are recognized on an accrual basis. Certain sign-on bonuses, retention awards, and minimum guaranteed compensation are capitalized and amortized in accordance with the terms of the respective agreements.
Historically, a portion of the Company’s consultants’ and management cash bonuses were 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 was recognized on a graded vesting attribution method over the requisite service period. This service period began on January 1 of the respective fiscal year and continued through the deferral date, which coincided 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.
In 2020, the Company terminated the cash bonus deferral for consultants and, in 2021, terminated the cash bonus deferral for management. The Company now pays 100% of the cash bonuses earned by consultants and management in the first quarter of the following year. Consultant and management cash bonuses earned prior to 2020 and 2021, respectively, will continue to be paid under the terms of the cash bonus deferral program. The deferrals are recorded in Accrued salaries and benefits within both Current liabilities and Non-current liabilities in the Consolidated Balance Sheets.
Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the tax differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income by weighted average common shares outstanding for the year. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Common equivalent shares are excluded from the determination of diluted earnings per share in periods in which they have an anti-dilutive effect.
The following table sets forth the computation of basic and diluted earnings (loss) per share:
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
Net income (loss) | $ | 72,572 | | | $ | (37,707) | | | $ | 46,869 | |
Weighted average shares outstanding: | | | | | |
Basic | 19,515 | | | 19,301 | | | 19,103 | |
Effect of dilutive securities: | | | | | |
Restricted stock units | 587 | | | — | | | 285 | |
Performance stock units | 194 | | | — | | | 163 | |
Diluted | 20,296 | | | 19,301 | | | 19,551 | |
Basic earnings (loss) per share | $ | 3.72 | | | $ | (1.95) | | | $ | 2.45 | |
Diluted earnings (loss) per share | $ | 3.58 | | | $ | (1.95) | | | $ | 2.40 | |
Weighted average restricted stock units and performance stock units outstanding that could be converted into approximately 472,000 and 120,000 common shares, respectively, for the year ended December 31, 2020, were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
Translation of Foreign Currencies
The Company generally designates the local currency for all its subsidiaries as the functional currency. The Company translates the assets and liabilities of its subsidiaries into U.S. dollars at the current rate of exchange prevailing at the balance sheet date. Revenue and expenses are translated at a monthly average exchange rate for the period. Translation adjustments are reported as a component of Accumulated other comprehensive income.
Restricted Cash
Periodically, the Company is party to agreements with terms that required the Company to restrict cash through the termination dates of the agreements. Current and non-current restricted cash is included in Other current assets and Other non-current assets, respectively, in the Consolidated Balance Sheets.
The following table provides a reconciliation of the cash and cash equivalents between the Consolidated Balance Sheets and the Consolidated Statement of Cash Flows as of December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
Cash and cash equivalents | $ | 545,225 | | | $ | 316,473 | | | $ | 271,719 | |
| | | | | |
Restricted cash included within other non-current assets | 34 | | | 16 | | | — | |
Total cash, cash equivalents and restricted cash | $ | 545,259 | | | $ | 316,489 | | | $ | 271,719 | |
Reclassifications
Certain prior year amounts have been recast as a result of the Company's presentation of Cost of services in the Condensed Consolidated Statements of Comprehensive Income (Loss). The reclassifications had no impact on net income (loss), net cash flows or stockholders' equity.
Recently Issued Financial Accounting Standards
In March 2020, the 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.
Recently Adopted Financial Accounting Standards
On January 1, 2021, the Company adopted 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 Accounting Standards Codification ("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 adoption had no impact on the Condensed Consolidated Statements of Comprehensive Income (Loss), Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Changes in Stockholders' Equity in any period presented.
3. Revenue
Executive Search
Revenue is recognized as performance obligations are satisfied by transferring a good or service to a client. Generally, each executive search contract contains 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. The Company generally bills 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, the Company is often authorized to bill the client for one-third of the excess compensation. The Company refers to this additional billing as uptick revenue. In most contracts, variable consideration is comprised of uptick revenue and direct expenses. The Company bills its clients for uptick revenue upon completion of the executive search, and direct expenses are billed as incurred.
The Company estimates 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 records 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 the contract is known. Differences between the estimated and actual amounts of variable consideration are recorded when known. The Company does not estimate revenue for direct expenses as it is not materially different than recognizing revenue as direct expenses are incurred.
Revenue from executive search engagement performance obligations is recognized over time as clients simultaneously receive and consume the benefits provided by the Company's 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 the obligations under the executive search contract. Revenue is generally recognized over a period of approximately six months.
The Company's 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 the Company 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 the Company does 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. The Company accounts for the replacement guarantee under the relevant warranty guidance in ASC 460 - Guarantees.
On-Demand Talent
The Company enters into contracts with clients that outline the general terms and conditions of the assignment to provide on-demand consultants for various types of consulting projects, which consultants may be independent contractors or temporary employees. The consideration the Company expects to receive under each contract is dependent on the time-based fees specified in the contract. Revenue from on-demand engagement performance obligations is recognized over time as clients simultaneously receive and consume the benefits provided by the Company's performance. The Company has applied the practical expedient to recognize revenue for these services in the amount to which the Company has a right to invoice the client, as this amount corresponds directly with the value provided to the client for the performance completed to date. For transactions where a third-party contractor is involved in providing the services to the client, the Company reports the revenue and the related direct costs on a gross basis as it has determined that it is the principal in the transaction. The Company is primarily responsible for fulfilling the promise to provide consulting services to its clients and the Company has discretion in establishing the prices charged to clients for the consulting services and is able to contractually obligate the independent service provider to deliver services and deliverables that the Company has agreed to provide to its clients.
Heidrick Consulting
Revenue is recognized as performance obligations are satisfied by transferring a good or service to a client. Heidrick Consulting enters into contracts with clients that outline the general terms and conditions of the assignment to provide succession planning, executive assessment, top team and board effectiveness and culture shaping programs. The consideration the Company expects to receive under each contract is generally fixed. Most of the Company's 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.
The Company enters into enterprise agreements with clients to provide a license for online access, via the Company's Culture Connect platform, to training and other proprietary material related to the Company's culture shaping programs. The consideration the Company expects to receive under the terms of an enterprise agreement is comprised of a single fixed fee. The 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. The Company allocates 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. The Company estimates the likelihood of renewal using a historical analysis of client renewals. Access to Culture Connect represents a right to access the Company’s intellectual property that the client simultaneously receives and consumes as the Company performs under the agreement, and therefore the Company recognizes revenue over time. Given the continuous nature of this commitment, the Company utilizes straight-line ratable revenue recognition over the estimated subscription period as the Company's 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 the Company's revenue.
Contract Balances
Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Contract assets and liabilities are classified as current due to the nature of the Company's contracts, which are completed within one year. Contract assets are included within Other Current Assets on the Consolidated Balance Sheets.
Unbilled receivables: Unbilled revenue represents contract assets from revenue recognized over time in excess of the amount billed to the client and the amount billed to the client is solely dependent upon the passage of time. This amount includes revenue recognized in excess of billed executive search retainers and Heidrick Consulting fees.
Contract assets: Contract assets represent revenue recognized over time in excess of the amount billed to the client and the amount billed to the client is not solely subject to the passage of time. This amount primarily includes revenue recognized for upticks and contingent placement fees in executive search contracts.
Deferred revenue: Contract liabilities consist of deferred revenue, which is equal to billings in excess of revenue recognized.
The following table outlines the changes in our contract asset and liability balances for the years ended:
| | | | | | | | | | | | | | | | | |
| December 31, | | |
| 2021 | | 2020 | | Change |
Contract assets | | | | | |
Unbilled receivables | $ | 17,947 | | | $ | 9,907 | | | $ | 8,040 | |
Contract assets | 18,995 | | | 9,745 | | | 9,250 | |
Total contract assets | 36,942 | | | 19,652 | | | 17,290 | |
| | | | | |
Contract liabilities | | | | | |
Deferred revenue | $ | 51,404 | | | $ | 38,050 | | | $ | 13,354 | |
During the year ended December 31, 2021, we recognized revenue of $35.1 million that was included in the contract liabilities balance at the beginning of the period. The amount of revenue recognized during the year ended December 31, 2021, from performance obligations partially satisfied in previous periods as a result of changes in the estimates of variable consideration was $27.7 million.
Each of the Company's contracts with clients has an expected duration of one year or less. Accordingly, the Company has elected to utilize the available practical expedient related to the disclosure of the transaction price allocated to the remaining performance obligations under its contracts. The Company has also elected the available practical expedients related to adjusting for the effects of a significant financing component and the capitalization of contract acquisition costs. The Company charges and collects from its clients, sales tax and value added taxes as required by certain jurisdictions. The Company has made an accounting policy election to exclude these items from the transaction price in its contracts.
4. Credit Losses
The Company is exposed to credit losses primarily through the provision of its executive search, consulting, and on-demand talent services. The Company’s expected credit loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of amount of accounts receivable that may not be collected is primarily based on historical loss-rate experience. When required, the Company adjusts the loss-rate methodology to account for current conditions and reasonable and supportable expectations of future economic and market conditions. The Company generally assesses future economic conditions for a period of sixty to ninety days, which corresponds with the contractual life of its accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted.
The activity in the allowance for credit losses on the Company's trade receivables is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
Balance at January 1, | | $ | 6,557 | | | $ | 5,140 | | | $ | 3,502 | |
Provision for credit losses | | 4,991 | | | 6,696 | | | 5,900 | |
Write-offs | | (5,730) | | | (5,418) | | | (4,270) | |
Foreign currency translation | | (152) | | | 139 | | | 8 | |
Balance at December 31, | | $ | 5,666 | | | $ | 6,557 | | | $ | 5,140 | |
The fair value and unrealized losses on available for sale debt securities, aggregated by investment category and the length of time the security has been in an unrealized loss position, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | Balance Sheet Classification |
Balance at December 31, 2020 | Fair Value | | Unrealized Loss | | Cash and Cash Equivalents | | Marketable Securities |
U.S. Treasury securities | $ | 31,997 | | | $ | 1 | | | $ | 31,997 | | | $ | — | |
The unrealized loss on one investment in U.S. Treasury securities at December 31, 2020 was caused by fluctuations in market interest rates. The contractual cash flows of these investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the investments would not be settled at a price less than the amortized cost basis. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of the amortized cost basis. There were no investments with unrealized losses at December 31, 2021.
5. Property and Equipment, net
The components of the Company’s property and equipment are as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Leasehold improvements | | $ | 42,252 | | | $ | 40,320 | |
Office furniture, fixtures and equipment | | 14,933 | | | 14,816 | |
Computer equipment and software | | 24,293 | | | 25,544 | |
Property and equipment, gross | | 81,478 | | | 80,680 | |
Accumulated depreciation | | (54,393) | | | (57,188) | |
Property and equipment, net | | $ | 27,085 | | | $ | 23,492 | |
Depreciation expense for the years ended December 31, 2021, 2020 and 2019, was $7.1 million, $8.1 million and $9.5 million, respectively.
As part of the Company's restructuring plan, property and equipment located at certain of the Company's offices was abandoned and the useful life of the assets were shortened to correspond with the cease-use date. As a result of the change in the useful life, approximately $0.9 million and $4.2 million of depreciation expense was accelerated and recorded in Restructuring charges in the Consolidated Statements of Comprehensive Income (Loss) and Depreciation and amortization in the Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020, respectively.
6. Leases
The Company's lease portfolio is comprised of operating leases for office space and equipment. The majority of the Company's leases include both lease and non-lease components, which the Company accounts for differently depending on the underlying class of asset. Certain of the Company's leases include one or more options to renew or terminate the lease at the Company's discretion. Generally, the renewal and termination options are not included in the right-of-use assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates the renewal and termination options and when they are reasonably certain of exercise, includes the renewal or termination option in the lease term.
As most of the Company's leases do not provide an implicit interest rate, the Company utilizes an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The
Company has a centrally managed treasury function and therefore, a portfolio approach is applied in determining the incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a fully collateralized basis over a similar term in an amount equal to the total lease payments in a similar economic environment.
Office leases have remaining lease terms that range from less than one year to 11.5 years, some of which also include options to extend or terminate the lease. Most office leases contain both fixed and variable lease payments. Variable lease costs consist primarily of rent escalations based on an established index or rate and taxes, insurance, and common area or other maintenance costs, which are paid based on actual costs incurred by the lessor. The Company has elected to utilize the available practical expedient to not separate lease and non-lease components for office leases.
Under the Company's restructuring plan, a lease component related to one of the Company's offices was abandoned and the useful life of the associated right-of-use asset was shortened to correspond with the cease-use date. As a result of the change in useful life, approximately $8.7 million of right-of-use asset amortization was accelerated and recorded in Restructuring charges in the Condensed Consolidated Statements of Comprehensive Income (Loss) and Depreciation and amortization in the Condensed Consolidated Statements of Cash Flows during the year ended December 31, 2021. Approximately $13.7 million of right-of-use asset amortization was accelerated and recorded in Restructuring charges in the Condensed Consolidated Statements of Comprehensive Income (Loss) and Depreciation and amortization in the Condensed Consolidated Statements of Cash Flows during the year ended December 31, 2020. In September 2021, the Company entered into a termination and surrender agreement for this lease component. Under the terms of the agreement, the Company made a one-time payment of $11.7 million to release the Company from all remaining obligations under the lease. At the time of payment, the Company had accrued approximately $17.4 million of lease liabilities related to future payments under the remaining lease term. Upon making the one-time payment, the lease liabilities were relieved, resulting in a gain on termination of approximately $5.7 million, which is recorded in Restructuring charges in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2021.
Equipment leases, which are comprised of vehicle and office equipment leases, have remaining terms that range from less than one year to 4.9 years, some of which also include options to extend or terminate the lease. The Company's equipment leases do not contain variable lease payments. The Company separates the lease and non-lease components for its equipment leases. Equipment leases do not comprise a significant portion of the Company's lease portfolio.
Lease cost components included within General and Administrative Expenses in our Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, were as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Operating lease cost | $ | 18,912 | | | $ | 22,227 | |
Variable lease cost | 4,949 | | | 6,047 | |
Total lease cost | $ | 23,861 | | | $ | 28,274 | |
Supplemental cash flow information related to the Company's operating leases for the year ended December 31, is as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 40,473 | | | $ | 31,573 | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | 11,397 | | | $ | 31,829 | |
The weighted average remaining lease term and weighted average discount rate for our operating leases as of December 31, is as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Weighted Average Remaining Lease Term | | | |
Operating leases | 6.4 years | | 6.0 years |
Weighted Average Discount Rate | | | |
Operating leases | 3.22 | % | | 3.5 | % |
The future maturities of the Company's operating lease liabilities for the years ended December 31, is as follows:
| | | | | |
| Operating Lease Maturity |
2022 | $ | 18,444 | |
2023 | 18,634 | |
2024 | 16,562 | |
2025 | 8,528 | |
2026 | 7,164 | |
Thereafter | 25,214 | |
Total lease payments | 94,546 | |
Less: Interest | (9,589) | |
Present value of lease liabilities | $ | 84,957 | |
The Company has an obligation at the end of the lease term to return certain offices to the landlord in its original condition, which is recorded at fair value at the time the liability is incurred. The Company had $3.2 million and $3.3 million of asset retirement obligations as of December 31, 2021 and 2020, respectively, which are recorded within Other current liabilities and Other non-current liabilities in the Consolidated Balance Sheets.
7. Financial Instruments and Fair Value
Cash, Cash Equivalents and Marketable Securities
The Company's investments in marketable debt securities, which consist of U.S. Treasury bills and commercial paper, are classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument's underlying contractual maturity date. Unrealized gains and losses on marketable debt securities classified as available-for-sale are recognized in Accumulated other comprehensive income in the Consolidated Balance Sheets until realized.
The Company's cash, cash equivalents, and marketable securities by significant investment category are as follows:
| | | | | | | | | | | | | | | |
| | | | | |
| | | | | | | | | Cash and Cash Equivalents | | |
Balance at December 31, 2021 | | | | | | | | | | | |
Cash | | | | | | | | | $ | 265,233 | | | |
| | | | | | | | | | | |
Level 1(1): | | | | | | | | | | | |
Money market funds | | | | | | | | | 80,798 | | | |
U.S. Treasury securities | | | | | | | | | 199,194 | | | |
Total Level 1 | | | | | | | | | 279,992 | | | |
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| | | | | | | | | | | |
| | | | | | | | | | | |
Total | | | | | | | | | $ | 545,225 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value | | Balance Sheet Classification |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Marketable Securities |
Balance at December 31, 2020 | | | | | | | | | | | |
Cash | | | | | | | | | $ | 230,490 | | | $ | — | |
| | | | | | | | | | | |
Level 1(1): | | | | | | | | | | | |
Money market funds | | | | | | | | | 53,986 | | | — | |
U.S. Treasury securities | 51,996 | | | 1 | | | (1) | | | 51,996 | | | 31,997 | | | 19,999 | |
Total Level 1 | 51,996 | | | 1 | | | (1) | | | 51,996 | | | 85,983 | | | 19,999 | |
| | | | | | | | | | | |
Total | $ | 51,996 | | | $ | 1 | | | $ | (1) | | | $ | 51,996 | | | $ | 316,473 | | | $ | 19,999 | |
(1)Level 1 – Quoted prices in active markets for identical assets and liabilities.
Investments, Assets Designated for Retirement and Pension Plans and Associated Liabilities
The Company has a U.S. non-qualified deferred compensation plan that consists primarily of U.S. marketable securities and mutual funds. The aggregate cost basis for these investments was $22.9 million and $19.5 million as of December 31, 2021 and December 31, 2020, respectively.
The Company also maintains a pension plan for certain current and former employees in Germany. The pensions are individually fixed Euro amounts that vary depending on the function and the eligible years of service of the employee. The Company’s investment strategy is to support its pension obligations through reinsurance contracts. The BaFin—German Federal Financial Supervisory Authority—supervises the insurance companies and the reinsurance contracts. The BaFin requires each reinsurance contract to guarantee a fixed minimum return. The Company’s pension benefits are fully reinsured by group insurance contracts with ERGO Lebensversicherung AG, and the group insurance contracts are measured in accordance with BaFin guidelines (including mortality tables and discount rates) which are considered Level 2 inputs.
The following tables provide a summary of the fair value measurements for each major category of investments, assets designated for retirement and pension plans and associated liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Balance Sheet Classification |
| | Fair Value | | Other Current Assets | | | | Assets Designated for Retirement and Pension Plans | | Investments | | Other Current Liabilities | | Retirement and Pension Plans |
Balance at December 31, 2021 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | | | | | | |
Level 1(1): | | | | | | | | | | | | | | |
U.S. non-qualified deferred compensation plan | | $ | 36,051 | | | $ | — | | | | | $ | — | | | $ | 36,051 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | |
Level 2(2): | | | | | | | | | | | | | | |
Retirement and pension plan assets | | 14,048 | | | 1,333 | | | | | 12,715 | | | — | | | — | | | — | |
Pension benefit obligation | | (19,594) | | | — | | | | | — | | | — | | | (1,333) | | | (18,261) | |
Total Level 2 | | (5,546) | | | 1,333 | | | | | 12,715 | | | — | | | (1,333) | | | (18,261) | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total | | $ | 30,505 | | | $ | 1,333 | | | | | $ | 12,715 | | | $ | 36,051 | | | $ | (1,333) | | | $ | (18,261) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Balance Sheet Classification |
| | Fair Value | | Other Current Assets | | Goodwill | | Assets Designated for Retirement and Pension Plans | | Investments | | Other Current Liabilities | | Retirement and Pension Plans |
Balance at December 31, 2020 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | | | | | | |
Level 1(1): | | | | | | | | | | | | | | |
U.S. non-qualified deferred compensation plan | | $ | 31,369 | | | $ | — | | | $ | — | | | $ | — | | | $ | 31,369 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | |
Level 2(2): | | | | | | | | | | | | | | |
Retirement and pension plan assets | | 15,859 | | | 1,434 | | | — | | | 14,425 | | | — | | | — | | | — | |
Pension benefit obligation | | (22,351) | | | — | | | — | | | — | | | — | | | (1,434) | | | (20,917) | |
Total Level 2 | | (6,492) | | | 1,434 | | | — | | | 14,425 | | | — | | | (1,434) | | | (20,917) | |
| | | | | | | | | | | | | | |
Measured on a non-recurring basis: | | | | | | | | | | | | | | |
Level 3(3)(4): | | | | | | | | | | | | | | |
Goodwill | | 91,643 | | | | | 91,643 | | | | | | | | | |
| | | | | | | | | | | | | | |
Total | | $ | 116,520 | | | $ | 1,434 | | | $ | 91,643 | | | $ | 14,425 | | | $ | 31,369 | | | $ | (1,434) | | | $ | (20,917) | |
(1)Level 1 – Quoted prices in active markets for identical assets and liabilities.
(2)Level 2 – Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
(3)Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
(4)In accordance with Subtopic 350-20, goodwill with a carrying value of $33.0 million was written down to its implied fair value of zero, during the year ended December 31, 2020, resulting in the revised total goodwill of $91.6 million and an impairment charge of $33.0 million in earnings.
Contingent Consideration
The former owners of the Company's acquisitions are eligible to receive additional cash consideration based on the attainment of certain operating metrics in the periods subsequent to acquisition. Contingent consideration and compensation are valued using significant inputs that are not observable in the market, which are defined as Level 3 inputs pursuant to fair value measurement accounting. The Company determines the fair value of contingent consideration and compensation using discounted cash flow models.
The following table provides a reconciliation of the beginning and ending balance of Level 3 liabilities for the year ended December 31, 2021:
| | | | | | | | | | | | | | |
| | Acquisition Earnout Accruals | | Contingent Compensation Accruals |
| | | | |
Balance at December 31, 2020 | | $ | — | | | $ | (2,390) | |
| | | | |
Acquisition earnout (see Note 8, Acquisitions) | | (23,800) | | | — | |
Earnout accretion | | (486) | | | — | |
Compensation expense | | — | | | (1,973) | |
| | | | |
| | | | |
Fair value adjustment (see Note 8, Acquisitions) | | (11,368) | | | — | |
Foreign currency translation | | — | | | 222 | |
Balance at December 31, 2021 | | $ | (35,654) | | | $ | (4,141) | |
Earnout accruals and contingent compensation accruals are recorded within Other non-current liabilities and non-current Accrued salaries and benefits, respectively, in the Condensed Consolidated Balance Sheets as of December 31, 2021 and 2020.
8. Acquisitions
On April 1, 2021, the Company acquired Business Talent Group, LLC ("BTG"), a market-leader in sourcing high-end, on-demand independent talent. Under the terms of the merger agreement, the Company paid $32.6 million of initial consideration from existing cash for the outstanding equity of BTG. The former owners of BTG are eligible to receive additional cash consideration, which the Company estimated to be between $20.0 million and $30.0 million on the acquisition date, based on the achievement of certain revenue and operating income milestones for the period from acquisition through 2022. When estimating the present value of future cash consideration, the Company accrued $23.8 million as of the acquisition date for the earnout liability. During the year ended December 31, 2021, the Company increased the fair value of the earnout liability by $11.4 million due to BTG outperforming initial revenue and operating income estimates. As of December 31, 2021, the Company has accrued $35.7 million for the earnout liability. The Company recorded $5.8 million for customer relationships, $3.1 million for software, $1.7 million for a trade name and $45.5 million of goodwill. The goodwill is primarily related to the acquired workforce and strategic fit. As of the acquisition date, the Company expects that all of the goodwill will be deductible for tax purposes. Included in the Company's results of operations for the year ended December 31, 2021 are $66.6 million of revenue, and $9.3 million of operating loss, from the acquired entity.
On October 15, 2021, the Company acquired Heidrick & Struggles Finland OY ("H&S Finland"), a Finland-based executive search firm, for initial consideration of $1.6 million with an anticipated future payment to the former owners in 2023, subject to the achievement of certain agreed upon financial performance and operational targets, and continued employment with the Company through the payment date. As of December 31, 2021, the Company has accrued $0.1 million for the contingent payment. The Company previously had an affiliate relationship with H&S Finland, whereby the Company had no financial investment in H&S Finland, but received licensing fees for the use of the Company's name and database. The Company recorded $1.5 million of goodwill. The goodwill is primarily related to the acquired workforce and strategic fit. The Company expects to finalize its estimates of fair value during the three months ended March 31, 2022. Included in the Company's results of operations for the year ended December 31, 2021 are $1.1 million of revenue, and $0.5 million of operating income, from the acquired entity.
9. Goodwill and Other Intangible Assets
Goodwill
The Company's goodwill by segment is as follows:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Executive Search | | | |
Americas | $ | 91,463 | | | $ | 91,643 | |
Europe | 1,532 | | | — | |
| | | |
Total Executive Search | 92,995 | | | 91,643 | |
On-Demand Talent | 45,529 | | | — | |
Total goodwill | $ | 138,524 | | | $ | 91,643 | |
Changes in the carrying amount of goodwill by segment for the years ended December 31, 2021, 2020, and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Executive Search | | | | | | | | |
| Americas | | Europe | | Asia Pacific | | | | | | On-Demand Talent | | Total |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Goodwill | $ | 88,410 | | | $ | 24,924 | | | $ | 8,758 | | | | | | | $ | — | | | $ | 122,092 | |
Accumulated impairment losses | — | | | — | | | — | | | | | | | — | | | — | |
Balance at December 31, 2018 | 88,410 | | | 24,924 | | | 8,758 | | | | | | | — | | | 122,092 | |
| | | | | | | | | | | | | |
2GET acquisition | 3,793 | | | — | | | — | | | | | | | — | | | 3,793 | |
Foreign currency translation | 294 | | | 655 | | | (3) | | | | | | | — | | | 946 | |
Balance at December 31, 2019 | 92,497 | | | 25,579 | | | 8,755 | | | | | | | — | | | 126,831 | |
| | | | | | | | | | | | | |
Impairment | — | | | (24,475) | | | (8,495) | | | | | | | — | | | (32,970) | |
Foreign currency translation | (854) | | | (1,104) | | | (260) | | | | | | | — | | | (2,218) | |
| | | | | | | | | | | | | |
Balance at December 31, 2020 | 91,643 | | | — | | | — | | | | | | | — | | | 91,643 | |
| | | | | | | | | | | | | |
BTG acquisition | — | | | — | | | — | | | | | | | 45,529 | | | 45,529 | |
Finland acquisition | — | | | 1,532 | | | — | | | | | | | — | | | 1,532 | |
Foreign currency translation | (180) | | | — | | | — | | | | | | | — | | | (180) | |
| | | | | | | | | | | | | |
Goodwill | 91,463 | | | 26,007 | | | 8,495 | | | | | | | 45,529 | | | 171,494 | |
Accumulated impairment losses | — | | | (24,475) | | | (8,495) | | | | | | | — | | | (32,970) | |
Balance at December 31, 2021 | $ | 91,463 | | | $ | 1,532 | | | $ | — | | | | | | | $ | 45,529 | | | $ | 138,524 | |
In April 2021, the Company acquired BTG and included $45.5 million of goodwill related to the acquisition in the On-Demand Talent operating segment.
In October 2021, the Company acquired H&S Finland, and included $1.5 million of goodwill related to the acquisition in the Europe operating segment.
During the 2021 fourth quarter, the Company conducted its annual goodwill impairment evaluation as of October 31, 2021 in accordance with ASU No. 2017-04, Intangibles - Goodwill and Other. The goodwill impairment test is completed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value of the reporting unit exceeds its fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit.
The impairment test is considered for each of the Company’s reporting units that has goodwill as defined in the accounting standard for goodwill and intangible assets. The Company operates five reporting units: Americas, Europe (which includes Africa), Asia Pacific (which includes the Middle East), On-Demand Talent, and Heidrick Consulting. As of October 31, 2021, only the Americas, Europe, and On-Demand Talent reporting units had recorded goodwill.
During the impairment evaluation process, the Company used a discounted cash flow methodology to estimate the fair value of each of its reporting units with goodwill. The discounted cash flow approach is dependent on a number of factors, including estimates of future market growth and trends, forecasted revenue and costs, capital investments, appropriate discount rates, certain assumptions to allocate shared costs, assets and liabilities, historical and projected performance of the reporting unit and the macroeconomic conditions affecting each of the Company’s 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; and (4) other factors.
Based on the results of the impairment analysis, the fair values of the Americas, Europe, and On-Demand Talent reporting units exceeded their carrying values by 369%, 97% and 15%, respectively.
During the twelve months ended December 31, 2020, the Company determined that the goodwill within the Europe and Asia Pacific reporting units was impaired, which resulted in impairment charges of $24.5 million and $8.5 million, respectively, to write off all of the goodwill associated with each of the reporting units. The impairment charges are recorded within Impairment charges in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the twelve months ended
December 31, 2020. The impairments were non-cash in nature and did not affect our liquidity, cash flows, borrowing capability or operations, nor did they impact the debt covenants under our credit agreement.
Other Intangible Assets, net
The Company’s other intangible assets, net by segment, are as follows:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
Executive Search | | | | |
Americas | | $ | 103 | | | $ | 225 | |
Europe | | 463 | | | 852 | |
Asia Pacific | | 33 | | | 52 | |
Total Executive Search | | 599 | | | 1,129 | |
On-Demand Talent | | 8,570 | | | — | |
Total Other Intangible Assets, Net | | $ | 9,169 | | | $ | 1,129 | |
In April 2021, the Company acquired BTG and recorded customer relationships, software and trade name intangible assets in the On-Demand Talent operating segment of $5.8 million, $3.1 million and $1.7 million, respectively. The combined weighted-average amortization period for the acquired intangible assets is 7.4 years with amortization periods of 11.0, 3.0 and 3.0 years for the customer relationships, software and trade name, respectively.
The carrying amount of amortizable intangible assets and the related accumulated amortization were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 | | December 31, 2020 |
| | Weighted Average Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Client relationships | | 10.6 | | $ | 22,127 | | | $ | (16,495) | | | $ | 5,632 | | | $ | 16,600 | | | $ | (15,587) | | | $ | 1,013 | |
Trade name | | 3.1 | | 2,441 | | | (1,237) | | | $ | 1,204 | | | 280 | | | (164) | | | 116 | |
Software | | 3.0 | | 3,110 | | | (777) | | | 2,333 | | | — | | | — | | | — | |
Total intangible assets | | 7.7 | | $ | 27,678 | | | $ | (18,509) | | | $ | 9,169 | | | $ | 16,880 | | | $ | (15,751) | | | $ | 1,129 | |
Intangible asset amortization expense for the years ended December 31, 2021, 2020 and 2019, was $2.9 million, $0.7 million and $0.9 million, respectively.
The Company's estimated future amortization expense related to intangible assets as of December 31, 2021 for the years ended December 31, is as follows:
| | | | | |
2022 | 2,822 | |
2023 | 2,733 | |
2024 | 1,154 | |
2025 | 765 | |
2026 | 527 | |
Thereafter | 1,168 | |
Total | 9,169 | |
10. Other Current Assets
The components of other current assets are as follows:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
Contract assets | | $ | 36,942 | | | $ | 19,652 | |
Other | | 4,507 | | | 3,627 | |
Total other current assets | | $ | 41,449 | | | $ | 23,279 | |
11. Line of Credit
On July 13, 2021, the Company entered into a First Amendment to the 2018 Credit Agreement. The Amendment provides the Company with a committed unsecured revolving credit facility in an aggregate amount of $200 million, increased from $175 million as set forth in the 2018 Credit Agreement, which includes a sublimit of $25 million for letters of credit and a sublimit of $10 million for swingline loans, with a $75 million expansion feature. The Amendment matures on July 13, 2026, extended from October 26, 2023 as set forth in the 2018 Credit Agreement.
Borrowings under the Amendment may be used for working capital, capital expenditures, permitted acquisitions, restricted payments and for other general corporate purposes of the Company and its subsidiaries. The obligations under the Amendment are guaranteed by certain of the Company’s subsidiaries.
During the three months ended March 31, 2020, the Company borrowed $100.0 million under the 2018 Credit Agreement. The Company elected to draw down a portion of the available funds from its revolving line of credit as a precautionary measure to increase its cash position and further enhance its financial flexibility in light of the uncertainty in global markets resulting from the COVID-19 outbreak. The Company subsequently repaid $100.0 million during the three months ended September 30, 2020.
As of December 31, 2021, and 2020, the Company had no outstanding borrowings. The Company was in compliance with the financial and other covenants under the Amendment and no event of default existed.
12. Employee Benefit Plans
Qualified Retirement Plan
The Company has a defined contribution retirement plan (the “Plan”) for all eligible employees in the United States. Eligible employees may begin participating in the Plan upon their hire date. The Plan contains a 401(k) provision, which provides for employee pre-tax and/or after-tax contributions, from 1% to 50% of their eligible compensation up to a combined maximum permitted by law. The Company matched employee contributions on a dollar-for-dollar basis per participant up to the greater of $6,000, or 6.0%, of eligible compensation for the years ended December 31, 2021, 2020 and 2019. Employees are eligible for the Company match immediately upon entry into the plan. Those contributions vest annually, provided the employee is employed by the Company on the last day of the Plan year in which the match is made. The Plan also provides for employees who retire, die or become disabled during the Plan year to receive the Company match for that Plan year. The Plan provides that forfeitures will be used to reduce the Company’s contributions. Forfeitures are created annually by participants who terminate employment before becoming entitled to the Company’s matching contribution under the Plan. The Company also has the option of making discretionary contributions. There were no discretionary contributions made for the years ended December 31, 2021, 2020 and 2019. The expense that the Company incurred for matching employee contributions for the years ended December 31, 2021, 2020 and 2019, was $6.8 million, $5.7 million and $6.3 million, respectively.
The Company maintains additional retirement plans in the Americas, Europe and Asia Pacific regions which the Company does not consider as material and, therefore, additional disclosure has not been presented.
Deferred Compensation Plans
The Company has a deferred compensation plan for certain U.S. employees (the “U.S. Plan”) that became effective on January 1, 2006. The U.S. Plan allows participants to defer up to 25% of their base compensation and up to the lesser of $500,000 or 25% of their eligible bonus compensation into several different investment vehicles. These deferrals are immediately vested and are not subject to a risk of forfeiture. In 2021 and 2020, all deferrals in the U.S. Plan were funded. The compensation deferred in the U.S. Plan was $34.9 million and $30.5 million at December 31, 2021 and 2020, respectively. The assets of the U.S. Plan are included in Investments and the liabilities of the U.S. Plan are included in Retirement and pension plans in the Consolidated Balance Sheets as of December 31, 2021 and 2020.
The Company has a Non-Employee Directors Voluntary Deferred Compensation Plan whereby non-employee members of the Company’s Board of Directors may elect to defer up to 100% of the cash component of their directors’ fees into several different investment vehicles. As of December 31, 2021, and 2020, the total amounts deferred under the plan were $1.1 million and $0.9 million, respectively, all of which were funded. The assets of the plan are included in Investments and the liabilities of the plan are included in Retirement and pension plans in the Consolidated Balance Sheets at December 31, 2021 and 2020.
The U.S. and Non-Employee Directors Voluntary Deferred Compensation Plans consist primarily of marketable securities and mutual funds, all of which are valued using Level 1 inputs (See Note 7, Financial Instruments and Fair Value).
13. Pension Plan and Life Insurance Contract
The Company maintains a pension plan for certain current and former employees in Germany. The pensions are individually fixed Euro amounts that vary depending on the function and the eligible years of service of the employee.
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
Benefit obligation at January 1, | | $ | 22,351 | | | $ | 20,918 | |
Interest cost | | 150 | | | 212 | |
Actuarial loss | | (11) | | | 790 | |
Benefits paid | | (1,400) | | | (1,402) | |
Cumulative translation adjustment | | (1,496) | | | 1,833 | |
Benefit obligation at December 31, | | $ | 19,594 | | | $ | 22,351 | |
The benefit obligation amounts recognized in the Consolidated Balance Sheets are as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Current liabilities | | $ | 1,333 | | | $ | 1,434 | |
Noncurrent liabilities | | 18,261 | | | 20,917 | |
Total | | $ | 19,594 | | | $ | 22,351 | |
The components of and assumptions used to determine the net periodic benefit cost are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
Net period benefit cost: | | | | | | |
| | | | | | |
Interest cost | | $ | 150 | | | $ | 212 | | | $ | 338 | |
Amortization of net loss | | 211 | | | 140 | | | 35 | |
Net periodic benefit cost | | $ | 361 | | | $ | 352 | | | $ | 373 | |
Weighted average assumptions | | | | | | |
Discount rate (1) | | 0.72 | % | | 1.03 | % | | 1.71 | % |
Rate of compensation increase | | — | % | | — | % | | — | % |
Assumptions to determine the Company’s benefit obligation are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
Discount rate (1) | | 1.03 | % | | 0.72 | % | | 1.03 | % |
Rate of compensation increase | | — | % | | — | % | | — | % |
Measurement Date | | 12/31/2021 | | 12/31/2020 | | 12/31/2019 |
(1)The discount rates are based on long-term bond indices adjusted to reflect the longer duration of the benefit obligation.
The amounts in Accumulated other comprehensive income as of December 31, 2021 and 2020, that had not yet been recognized as components of net periodic benefit cost were $4.5 million and $5.1 million, respectively. As of December 31, 2021, an insignificant amount of the accumulated other comprehensive income is expected to be recognized as a component of net periodic benefit cost in 2022.
The Company’s investment strategy is to support its pension obligations through reinsurance contracts. The BaFin—German Federal Financial Supervisory Authority—supervises the insurance companies and the reinsurance contracts. The BaFin requires each reinsurance contract to guarantee a fixed minimum return. The Company’s pension benefits are fully reinsured by group insurance contracts with ERGO Lebensversicherung AG, and the group insurance contracts are measured in accordance with BaFin guidelines (including mortality tables and discount rates) which are considered Level 2 inputs (See Note 7, Financial Instruments and Fair Value). The fair value at December 31, 2021 and 2020, was $14.0 million and $15.9 million, respectively.
Since the pension assets are not segregated in trust from the Company’s other assets, the pension assets are not shown as an offset against the pension liabilities in the Consolidated Balance Sheets. These assets are included in the Consolidated Balance Sheets at December 31, 2021 and 2020, as a component of Other current assets and Assets designated for retirement and pension plans.
The benefits expected to be paid in each of the next five years, and in the aggregate for the five years thereafter are as follows:
| | | | | |
2022 | $ | 1,333 | |
2023 | 1,361 | |
2024 | 1,293 | |
2025 | 1,266 | |
2026 | 1,234 | |
2027 through 2031 | $ | 5,519 | |
14. Stock-Based Compensation
On May 28, 2020, the stockholders of the Company approved an amendment to the Company's Second Amended and Restated 2012 Heidrick & Struggles GlobalShare Program (as so amended, the "Third A&R 2012 Program") to increase the number of shares of Common Stock reserved for issuance under the 2012 Program by 500,000 shares. The Third A&R 2012 Program provides for grants of stock options, stock appreciation rights, and other stock-based compensation awards that are valued based upon the grant date fair value of shares. These awards may be granted to directors, selected employees and independent contractors.
As of December 31, 2021, 3,372,653 awards have been issued under the Third A&R 2012 Program, including 744,877 forfeited awards, and 722,224 shares remain available for future awards. The Third A&R 2012 Program provides that no awards can be granted after May 28, 2028.
The Company measures its stock-based compensation costs based on the grant date fair value of the awards and recognizes these costs in the financial statements over the requisite service period. The Company analyzes historical data of forfeited awards to develop an estimated forfeiture rate that is applied to the Company's stock-based compensation expense; however, all stock-based compensation expense is adjusted to reflect actual vestings and forfeitures.
A summary of information with respect to stock-based compensation is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
Salaries and employee benefits (1) | | $ | 20,081 | | | $ | 12,968 | | | $ | 12,857 | |
General and administrative expenses | | 345 | | | 460 | | | 460 | |
Income tax benefit related to stock-based compensation included in net income | | 5,539 | | | 3,571 | | | 3,529 | |
(1) Includes $7.8 million, $3.2 million and $3.0 million of expense related to cash settled restricted stock units for the years ended December 31, 2021, 2020 and 2019, respectively.
Restricted Stock Units
Restricted stock units are generally subject to ratable vesting over a three-year period. Beginning in 2018, a portion of the Company's restricted stock units are subject to ratable vesting over a four-year period. Compensation expense related to service-based restricted stock units is recognized on a straight-line basis over the vesting period.
Restricted stock unit activity for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | |
| | Number of Restricted Stock Units | | Weighted- Average Grant-date Fair Value |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Outstanding on December 31, 2019 | | 598,988 | | | $ | 32.25 | |
Granted | | 329,068 | | | 22.20 | |
Vested and converted to common stock | | (194,921) | | | 29.67 | |
Forfeited | | (25,271) | | | 30.62 | |
Outstanding on December 31, 2020 | | 707,864 | | | 28.35 | |
Granted | | 257,070 | | | 38.89 | |
Vested and converted to common stock | | (218,950) | | | 30.65 | |
Forfeited | | (18,333) | | | 30.80 | |
Outstanding on December 31, 2021 | | 727,651 | | | $ | 31.32 | |
As of December 31, 2021, there was $7.4 million of pre-tax unrecognized compensation expense related to unvested restricted stock units, which is expected to be recognized over a weighted average of 2.3 years.
Performance Stock Units
The Company grants performance stock units to certain of its senior executives. The performance stock units are generally subject to a cliff vesting at the end of a three-year period. The vesting will vary between 0% - 200% based on the attainment of operating income goals over the three-year vesting period. The performance stock units are expensed on a straight-line basis over the three-year vesting period.
Beginning in 2019, performance stock units were granted to certain employees of the Company and are subject to a cliff vesting period of three years and certain other performance conditions. Half of the award is based on the achievement of certain operating margin thresholds and half of the award is based on the Company's total shareholder return, relative to a peer group. The fair value of the awards based on total shareholder return was determined using the Monte-Carlo simulation model. A Monte Carlo simulation model uses stock price volatility and other variables to estimate the probability of satisfying the performance conditions and the resulting fair value of the award.
Performance share unit activity for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | |
| | Number of Performance Stock Units | | Weighted- Average Grant-date Fair Value |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Outstanding on December 31, 2019 | | 179,559 | | | $ | 32.63 | |
Granted | | 105,847 | | | 23.52 | |
Vested and converted to common stock | | (50,472) | | | 26.69 | |
Forfeited | | — | | | — | |
Outstanding on December 31, 2020 | | 234,934 | | | 29.80 | |
Granted | | 106,357 | | | 35.99 | |
Vested and converted to common stock | | (90,284) | | | 30.60 | |
Forfeited | | (18,150) | | | 30.09 | |
Outstanding on December 31, 2021 | | 232,857 | | | $ | 32.29 | |
As of December 31, 2021, there was $5.0 million of pre-tax unrecognized compensation expense related to unvested performance stock units, which is expected to be recognized over a weighted average of 1.8 years.
Phantom Stock Units
Phantom stock units are grants of phantom stock with respect to shares of the Company's common stock that are settled in cash and are subject to various restrictions, including restrictions on transferability, vesting and forfeiture provisions. Shares of phantom stock that do not vest for any reason will be forfeited by the recipient and will revert to the Company.
Phantom stock units are subject to vesting over a period of four years and certain other conditions, including continued service to the Company. As a result of the cash-settlement feature of the awards, the Company considers the awards to be liability awards, which are measured at fair value at each reporting date and the vested portion of the award is recognized as a liability to the extent that the service condition is deemed probable. The fair value of the phantom stock awards on the balance sheet date, was determined using the closing share price of the Company's common stock on that date.
The Company recorded phantom stock-based compensation expense of $7.8 million, $3.2 million and $3.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Phantom stock unit activity for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | |
| | Number of Phantom Stock Units |
| | |
| | |
| | |
| | |
Outstanding on December 31, 2019 | | 266,060 | |
Granted | | 118,596 | |
Vested | | (21,346) | |
Forfeited | | (11,676) | |
Outstanding on December 31, 2020 | | 351,634 | |
Granted | | 63,575 | |
Vested | | (61,539) | |
Forfeited | | (4,807) | |
Outstanding on December 31, 2021 | | 348,863 | |
As of December 31, 2021, there was $4.1 million of pre-tax unrecognized compensation expense related to unvested phantom stock units, which is expected to be recognized over a weighted average of 2.7 years.
15. Restructuring
During the year ended December 31, 2020, the Company implemented a restructuring plan (the "2020 Plan") to optimize future growth and profitability. The primary components of the restructuring included a workforce reduction, a reduction of the Company's real estate expenses and professional fees, and the elimination of certain deferred compensation programs. The Company continued to incur charges related to the 2020 Plan during the year ended December 31, 2021, which primarily related to finalizing a reduction the Company's real estate footprint. The Company does not anticipate incurring any future charges under the 2020 Plan.
Restructuring charges (reversals) for the year ended December 31, 2021 by type of charge (reversal) and operating segment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Executive Search | | | | | | |
| Americas | | Europe | | Asia Pacific | | Heidrick Consulting | | Global Operations Support | | Total |
Employee related | $ | 20 | | | $ | (97) | | | $ | (124) | | | $ | (44) | | | $ | 62 | | | $ | (183) | |
Office related | 3,859 | | | — | | | — | | | 399 | | | (296) | | | 3,962 | |
Other | 3 | | | — | | | — | | | — | | | 10 | | | 13 | |
Total | $ | 3,882 | | | $ | (97) | | | $ | (124) | | | $ | 355 | | | $ | (224) | | | $ | 3,792 | |
Restructuring charges (reversals) for the year ended December 31, 2020 by type of charge (reversal) and operating segment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Executive Search | | | | | | |
| Americas | | Europe | | Asia Pacific | | Heidrick Consulting | | Global Operations Support | | Total |
Employee related | $ | 16,206 | | | $ | 8,353 | | | $ | 4,234 | | | $ | 2,633 | | | $ | 1,354 | | | $ | 32,780 | |
Office related | 14,242 | | | 226 | | | 374 | | | 1,953 | | | 2,115 | | | 18,910 | |
Other | 31 | | | 24 | | | 6 | | | 71 | | | 550 | | | 682 | |
Total | $ | 30,479 | | | $ | 8,603 | | | $ | 4,614 | | | $ | 4,657 | | | $ | 4,019 | | | $ | 52,372 | |
Restructuring charges incurred to date under the 2020 Plan, which includes prior period charges, by type of charge and reportable segment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Executive Search | | | | | | |
| Americas | | Europe | | Asia Pacific | | Heidrick Consulting | | Global Operations Support | | Total |
Employee related | $ | 16,226 | | | $ | 8,256 | | | $ | 4,110 | | | $ | 2,589 | | | $ | 1,416 | | | $ | 32,597 | |
Office related | 18,101 | | | 226 | | | 374 | | | 2,352 | | | 1,819 | | | 22,872 | |
Other | 34 | | | 24 | | | 6 | | | 71 | | | 560 | | | 695 | |
Total | $ | 34,361 | | | $ | 8,506 | | | $ | 4,490 | | | $ | 5,012 | | | $ | 3,795 | | | $ | 56,164 | |
As part of the Company's reduction in real estate expenses under the 2020 Plan, a lease component related to one of the Company's offices was abandoned. In September 2021, the Company entered into a termination and surrender agreement for this lease component. Under the terms of the agreement, the Company made a one-time payment of $11.7 million to release the Company from all remaining obligations under the lease. At the time of payment, the Company had accrued approximately $17.4 million of lease liabilities related to future payments under the remaining lease term. Upon making the one-time payment, the lease liabilities were relieved, resulting in a gain on termination of approximately $5.7 million, which is recorded in Restructuring charges in the Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2021.
During the year ended December 31, 2019, the Company recorded restructuring charges of $4.1 million related to the closing of the Company's legacy Brazil operations due to the acquisition of 2GET Holdings Limited (the "2019 Plan"). The restructuring charges primarily consisted of employee-related costs for the Company's legacy Brazil operations.
Restructuring charges for the year ended December 31, 2019 and restructuring charges incurred to date under the 2019 Plan by type of charge and reportable segment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Executive Search | | | | | | |
| Americas | | Europe | | Asia Pacific | | Heidrick Consulting | | Global Operations Support | | Total |
Employee related | $ | 4,102 | | | $ | — | | | $ | — | | | $ | — | | | $ | 28 | | | $ | 4,130 | |
Total | $ | 4,102 | | | $ | — | | | $ | — | | | $ | — | | | $ | 28 | | | $ | 4,130 | |
Changes in the restructuring accrual for the years ended December 31, 2021, 2020, and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Employee Related | | Office Related | | Other | | Total |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Accrual balance at December 31, 2018 | | 1,269 | | | — | | | 17 | | | 1,286 | |
Restructuring charges | | 4,130 | | | — | | | — | | | 4,130 | |
Cash payments | | (2,213) | | | — | | | — | | | (2,213) | |
Non-cash write-offs | | — | | | — | | | (17) | | | (17) | |
Other | | 4 | | | — | | | — | | | 4 | |
Exchange rate fluctuations | | 55 | | | — | | | — | | | 55 | |
Accrual balance at December 31, 2019 | | 3,245 | | | — | | | — | | | 3,245 | |
Restructuring charges | | 32,780 | | | 18,910 | | | 682 | | | 52,372 | |
Cash payments | | (11,443) | | | (138) | | | (682) | | | (12,263) | |
Non-cash write-offs | | (1,633) | | | (17,823) | | | — | | | (19,456) | |
Other | | (173) | | | — | | | — | | | (173) | |
Exchange rate fluctuations | | (464) | | | 4 | | | — | | | (460) | |
Accrual balance at December 31, 2020 | | 22,312 | | | 953 | | | — | | | 23,265 | |
Restructuring charges | | (183) | | | 3,962 | | | 13 | | | 3,792 | |
Cash payments | | (13,702) | | | (738) | | | (13) | | | (14,453) | |
Non-cash write-offs | | 44 | | | (4,190) | | | — | | | (4,146) | |
| | | | | | | | |
Exchange rate fluctuations | | (77) | | | 13 | | | — | | | (64) | |
Accrual balance at December 31, 2021 | | $ | 8,394 | | | $ | — | | | $ | — | | | $ | 8,394 | |
Restructuring accruals are recorded within Other current liabilities in the Consolidated Balance Sheets with the exception of certain employee related accruals. Accruals associated with the elimination of certain deferred compensation programs of $4.9 million and $3.6 million are recorded within current and non-current Accrued salaries and benefits, respectively, as of December 31, 2021. Accruals associated with the elimination of certain deferred compensation programs of $7.2 million and $11.3 million are recorded within current and non-current Accrued salaries and benefits, respectively, as of December 31, 2020.
16. Income Taxes
The sources of income (loss) before income taxes are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
United States | | $ | 68,122 | | | $ | 11,346 | | | $ | 53,461 | |
Foreign | | 37,907 | | | (42,744) | | | 15,828 | |
Income (loss) before income taxes | | $ | 106,029 | | | $ | (31,398) | | | $ | 69,289 | |
The provision for income taxes are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
Current | | | | | | |
Federal | | $ | 21,200 | | | $ | 4,469 | | | $ | 11,311 | |
State and local | | 9,341 | | | 1,948 | | | 4,422 | |
Foreign | | 9,802 | | | 2,172 | | | 4,423 | |
Current provision for income taxes | | 40,343 | | | 8,589 | | | 20,156 | |
| | | | | | |
Deferred | | | | | | |
Federal | | (3,373) | | | (2,416) | | | 2,031 | |
State and local | | (1,825) | | | (697) | | | 698 | |
Foreign | | (1,688) | | | 833 | | | (465) | |
Deferred provision (benefit) for income taxes | | (6,886) | | | (2,280) | | | 2,264 | |
Total provision for income taxes | | $ | 33,457 | | | $ | 6,309 | | | $ | 22,420 | |
A reconciliation of the provision for income taxes to income taxes at the statutory U.S. federal income tax rate of 21% is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
Income tax provision (benefit) at the statutory U.S. federal rate | | $ | 22,266 | | | $ | (6,594) | | | $ | 14,551 | |
State income tax provision, net of federal tax benefit | | 4,994 | | | 735 | | | 3,509 | |
Nondeductible expenses, net | | 2,833 | | | 6,950 | | | 1,187 | |
Foreign taxes (includes rate differential and changes in foreign valuation allowance) | | 1,910 | | | 4,470 | | | 1,430 | |
Establishment (release) of valuation allowance | | (157) | | | 566 | | | (117) | |
Additional U.S. tax on foreign operations | | 242 | | | 115 | | | 2,201 | |
Current/deferred items | | 1,023 | | | (505) | | | (157) | |
| | | | | | |
Other, net | | 346 | | | 572 | | | (184) | |
Total provision for income taxes | | $ | 33,457 | | | $ | 6,309 | | | $ | 22,420 | |
The deferred tax assets and liabilities are attributable to the following components:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Deferred tax assets attributable to: | | | | |
Operating lease liability and accrued rent | | $ | 16,118 | | | $ | 22,765 | |
Foreign net operating loss carryforwards | | 15,555 | | | 19,721 | |
Accrued compensation and employee benefits | | 25,844 | | | 18,553 | |
Deferred compensation | | 21,289 | | | 17,376 | |
Foreign tax credit carryforwards | | 5,382 | | | 5,196 | |
Other accrued expenses | | 3,083 | | | 4,350 | |
Deferred tax assets, before valuation allowance | | 87,271 | | | 87,961 | |
Valuation allowance | | (20,396) | | | (25,218) | |
Deferred tax assets, after valuation allowance | | 66,875 | | | 62,743 | |
| | | | |
Deferred tax liabilities attributable to: | | | | |
Operating lease, right-of-use, assets | | 12,820 | | | 17,526 | |
Goodwill | | 7,526 | | | 7,625 | |
| | | | |
Depreciation on property and equipment | | 3,169 | | | 1,172 | |
Other | | 1,310 | | | 533 | |
Deferred tax liabilities | | 24,825 | | | 26,856 | |
Net deferred tax assets | | $ | 42,050 | | | $ | 35,887 | |
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. The Company assesses the recoverability of the deferred tax assets on an ongoing basis. In making this assessment, the Company considers 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. Certain of the Company’s deferred tax liabilities, based on jurisdictional netting, of $0.1 million are included in Other non-current liabilities on the Consolidated Balance Sheets at both December 31, 2021 and 2020.
The valuation allowance decreased to $20.4 million at December 31, 2021 from $25.2 million at December 31, 2020. The valuation allowance at December 31, 2021 was related to foreign net operating loss carryforwards, foreign tax credit carryforwards, and certain foreign deferred tax assets. The Company intends to maintain these valuation allowances until sufficient evidence exists to support their reversal.
At December 31, 2021, the Company had a net operating loss carryforward of $111.0 million related to its foreign tax filings. Of the $111.0 million net operating loss carryforward, $64.7 million is subject to a valuation allowance. Depending on the tax rules of the tax jurisdictions, the losses can be carried forward for periods ranging from five to indefinitely. The Company also has a foreign tax credit carryforward of $5.4 million subject to a valuation allowance of $5.4 million.
At December 31, 2020, the Company had a net operating loss carryforward of $128.1 million related to its foreign tax filings. Of the $128.1 million net operating loss carryforward, $87.9 million is subject to a valuation allowance. Depending on the tax rules of the tax jurisdictions, the losses can be carried forward indefinitely or for periods ranging from five to twenty years. The Company also had a foreign tax credit carryforward of $5.2 million subject to a valuation allowance of $5.2 million.
As of December 31, 2021, the Company does not have any unrecognized tax benefits, due to the settlement of all previous unrecognized tax benefits. As of December 31, 2020, the Company had $0.4 million of unrecognized tax benefits.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
Gross unrecognized tax benefits at January 1, | | $ | 416 | | | $ | 130 | | | $ | 1,128 | |
Gross increases for tax positions of prior years | | 6 | | | 500 | | | 389 | |
Gross decreases for tax positions of prior years | | (14) | | | (31) | | | (377) | |
Settlements | | (408) | | | (183) | | | (1,010) | |
| | | | | | |
Gross unrecognized tax benefits at December 31, | | $ | — | | | $ | 416 | | | $ | 130 | |
In many cases the Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant taxable authorities. Years 2018 through 2020 are subject to examination by the state taxing authorities. The years 2018 through 2020 are also subject to examination by the federal taxing authority. There are certain foreign jurisdictions that are subject to examination for years prior to 2018.
The Company is currently under audit by some jurisdictions. It is likely that the examination phase of several of these audits will conclude in the next twelve months. No significant increases or decreases in unrecognized tax benefits are expected to occur by December 31, 2022.
Estimated interest and penalties related to the underpayment of income taxes are classified as a component of the provision for income taxes in the Consolidated Statements of Comprehensive Income (Loss).
The Global Intangible Low-Taxed Income (“GILTI”) provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company will be subject to incremental U.S. tax on GILTI income beginning in 2018, due to expense allocations required by the U.S. foreign tax credit rules. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2021.
The Base Erosion and Anti-Abuse Tax (“BEAT”) provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2021.
17. Changes in Accumulated Other Comprehensive Income
The changes in Accumulated other comprehensive income (“AOCI”) by component for the year ended December 31, 2021, are summarized below:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Foreign Currency Translation | | Pension | | AOCI |
Balance at December 31, 2020 | | | | $ | 6,184 | | | $ | (2,767) | | | $ | 3,417 | |
Other comprehensive income (loss) before classification, net of tax | | | | (1,890) | | | 148 | | | (1,742) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Balance at December 31, 2021 | | | | $ | 4,294 | | | $ | (2,619) | | | $ | 1,675 | |
18. Segment Information
In April 2021, the Company acquired BTG, a market-leader in sourcing high-end, on-demand independent talent. As a result of the acquisition, the Company identified a new operating segment, On-Demand Talent. The Company now has five operating segments. The executive search business operates in the Americas, Europe (which includes Africa) and Asia Pacific (which includes the Middle East), and the Heidrick Consulting and On-Demand Talent businesses operate globally.
For segment purposes, reimbursements of out-of-pocket expenses classified as revenue and other operating income are reported separately and, therefore, are not included in the results of each segment. The Company believes that analyzing trends in revenue before reimbursements (net revenue), analyzing operating expenses as a percentage of net revenue, and analyzing operating income (loss), more appropriately reflect its core operations.
The revenue, operating income (loss), depreciation and amortization, and capital expenditures, by segment, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
Revenue | | | | | | |
Executive Search | | | | | | |
Americas | | $ | 581,440 | | | $ | 361,416 | | | $ | 415,455 | |
Europe | | 170,312 | | | 124,243 | | | 135,070 | |
Asia Pacific | | 117,008 | | | 79,511 | | | 95,827 | |
Total Executive Search | | 868,760 | | | 565,170 | | | 646,352 | |
On-Demand Talent | | 66,636 | | | — | | | — | |
Heidrick Consulting | | 67,605 | | | 56,445 | | | 60,572 | |
Revenue before reimbursements | | 1,003,001 | | | 621,615 | | | 706,924 | |
Reimbursements | | 5,473 | | | 7,755 | | | 18,690 | |
Total revenue | | $ | 1,008,474 | | | $ | 629,370 | | | $ | 725,614 | |
| | | | | | |
Operating income (loss) | | | | | | |
Executive Search | | | | | | |
Americas (1) | | $ | 142,040 | | | $ | 62,806 | | | $ | 100,833 | |
Europe (2) | | 18,424 | | | (22,827) | | | 3,026 | |
Asia Pacific (3) | | 18,167 | | | (6,724) | | | 13,590 | |
Total Executive Search | | 178,631 | | | 33,255 | | | 117,449 | |
On-Demand Talent (4) | | (9,272) | | | — | | | — | |
Heidrick Consulting (5) | | (16,162) | | | (28,369) | | | (18,499) | |
Total segments | | 153,197 | | | 4,886 | | | 98,950 | |
Global Operations Support (6) | | (54,933) | | | (40,415) | | | (35,439) | |
Total operating income (loss) | | $ | 98,264 | | | $ | (35,529) | | | $ | 63,511 | |
| | | | | | |
Depreciation and amortization | | | | | | |
Executive Search | | | | | | |
Americas | | $ | 12,843 | | | $ | 20,937 | | | $ | 4,204 | |
Europe | | 1,802 | | | 2,270 | | | 2,784 | |
Asia Pacific | | 1,399 | | | 1,837 | | | 1,472 | |
Total Executive Search | | 16,044 | | | 25,044 | | | 8,460 | |
On-Demand Talent | | 2,010 | | | — | | | — | |
Heidrick Consulting | | 1,045 | | | 953 | | | 1,079 | |
Total segments | | 19,099 | | | 25,997 | | | 9,539 | |
Global Operations Support | | 461 | | | 659 | | | 832 | |
Total depreciation and amortization | | $ | 19,560 | | | $ | 26,656 | | | $ | 10,371 | |
| | | | | | |
Capital expenditures | | | | | | |
Executive Search | | | | | | |
Americas | | $ | 4,487 | | | $ | 4,258 | | | $ | 1,121 | |
Europe | | 372 | | | 409 | | | 1,070 | |
Asia Pacific | | 209 | | | 2,015 | | | 295 | |
Total Executive Search | | 5,068 | | | 6,682 | | | 2,486 | |
On-Demand Talent | | — | | | — | | | — | |
Heidrick Consulting | | 174 | | | 116 | | | 541 | |
Total segments | | 5,242 | | | 6,798 | | | 3,027 | |
Global Operations Support | | 998 | | | 524 | | | 325 | |
Total capital expenditures | | $ | 6,240 | | | $ | 7,322 | | | $ | 3,352 | |
(1)Includes $3.9 million, $30.5 million and $4.1 million of restructuring charges in 2021, 2020 and 2019, respectively.
(2)Includes a $0.1 million restructuring reversal and $8.6 million of restructuring charges in 2021 and 2020, respectively, and $24.5 million of impairment charges in 2020.
(3)Includes a $0.1 million restructuring reversal and $4.6 million of restructuring charges in 2021 and 2020, respectively, and $8.5 million of impairment charges in 2020.
(4)Includes an $11.4 million earnout fair value adjustment in 2021.
(5)Includes $0.4 million and $4.7 million of restructuring charges in 2021 and 2020, respectively.
(6)Includes a $0.2 million restructuring reversal, $4.0 million of restructuring charges, and less than $0.1 million of restructuring charges in 2021, 2020 and 2019, respectively.
Identifiable assets, and goodwill and other intangible assets, net, by segment, are as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Current assets | | | | |
Executive Search | | | | |
Americas | | $ | 459,077 | | | $ | 284,837 | |
Europe | | 123,865 | | | 84,841 | |
Asia Pacific | | 99,510 | | | 76,523 | |
Total Executive Search | | 682,452 | | | 446,201 | |
On-Demand Talent | | 22,478 | | | — | |
Heidrick Consulting | | 36,640 | | | 24,546 | |
Total segments | | 741,570 | | | 470,747 | |
Global Operations Support | | 3,818 | | | 1,939 | |
Total allocated current assets | | 745,388 | | | 472,686 | |
Unallocated non-current assets | | 213,717 | | | 222,354 | |
Goodwill and other intangible assets, net | | | | |
Executive Search | | | | |
Americas | | 91,566 | | | 91,868 | |
Europe | | 1,995 | | | 852 | |
Asia Pacific | | 33 | | | 52 | |
Total Executive Search | | 93,594 | | | 92,772 | |
On-Demand Talent | | 54,099 | | | — | |
Heidrick Consulting | | — | | | — | |
Total goodwill and other intangible assets, net | | 147,693 | | | 92,772 | |
Total assets | | $ | 1,106,798 | | | $ | 787,812 | |
The only country to account for more than 10% of the Company's net revenue and total long-lived assets is the United States. Net revenue in the United States for the years ended December 31, 2021, 2020 and 2019 was $650.9 million, $377.8 million, and $427.0 million, respectively. Total long-lived assets in the United States as of December 31, 2021 and 2020 were $257.9 million and $203.6 million, respectively.
19. Guarantees
The Company has utilized letters of credit to support certain obligations, primarily for office lease agreements and business license requirements for certain of its subsidiaries in Europe and Asia Pacific. The letters of credit were made to secure the respective agreements and are for the terms of the agreements, which extend through 2033. For each letter of credit issued, the Company would have use cash to fulfill the obligation if the subsidiary defaults on a lease payment. The maximum amount of undiscounted payments the Company would be required to make in the event of default on all outstanding letters of credit is approximately $4.6 million as of December 31, 2021. The Company has not accrued for these arrangements as no event of default exists or is expected to exist.
20. Commitments and Contingencies
Litigation
The Company has contingent liabilities from various pending claims and litigation matters arising in the ordinary course of the Company’s business, some of which involve claims for damages that are substantial in amount. Some of these matters are covered by insurance. Based upon information currently available, the Company believes the ultimate resolution of such claims and litigation will not have a material adverse effect on its financial condition, results of operations or liquidity.
PART II (continued)