Heidrick & Struggles(HSII) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's financial performance and condition for the period ended June 30, 2021 Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for the period ended June 30, 2021 Condensed Consolidated Balance Sheets Total assets increased, primarily driven by goodwill and accounts receivable, leading to growth in total stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $832,066 | $787,812 | | Cash and cash equivalents | $237,832 | $316,473 | | Accounts receivable, net | $168,504 | $88,123 | | Goodwill | $137,401 | $91,643 | | Total Liabilities | $532,513 | $520,210 | | Accrued salaries and benefits (Current) | $198,120 | $217,908 | | Total Stockholders' Equity | $299,553 | $267,602 | Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported a significant turnaround to net income, driven by a substantial 78% increase in revenue for Q2 2021 Key Income Statement Data (in thousands, except per share amounts) | Metric | Q2 2021 | Q2 2020 | 6 Months 2021 | 6 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $259,981 | $145,603 | $453,637 | $317,084 | | Operating Income (Loss) | $28,706 | $(23,986) | $48,314 | $(5,834) | | Net Income (Loss) | $20,765 | $(25,733) | $35,597 | $(17,067) | | Diluted EPS | $1.03 | $(1.33) | $1.76 | $(0.89) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities improved, while investing activities focused on the BTG acquisition and financing used for dividends Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(52,343) | $(124,765) | | Net cash used in investing activities | $(16,031) | $(13,508) | | Net cash (used in) provided by financing activities | $(9,155) | $89,664 | | Net decrease in cash | $(78,641) | $(52,959) | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, the BTG acquisition, goodwill impairment, and restructuring charges - On April 1, 2021, the Company acquired Business Talent Group (BTG) for $32.6 million in initial cash consideration, plus a potential earnout of $20-30 million, adding a new 'On-Demand Talent' operating segment[64] - As a result of the BTG acquisition, the company recorded $45.5 million in goodwill and $10.6 million in other intangible assets (customer relationships, software, trade name)[64][67] - The company implemented a restructuring plan in Q3 2020, incurring $7.1 million in charges in the first six months of 2021, primarily for real estate optimization, with total charges to date of $59.4 million[86][87] - In Q2 2020, the company recorded a non-cash goodwill impairment charge of $33.0 million ($24.5 million in Europe and $8.5 million in Asia Pacific) due to the economic impact of COVID-19[61][96][145] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's strong recovery, segment growth, and the impact of the BTG acquisition, with a positive Q3 outlook - The company's business now comprises three main services: Executive Search, Heidrick Consulting, and the newly added On-Demand Talent service following the acquisition of Business Talent Group (BTG) on April 1, 2021[104][106] - The company forecasts Q3 2021 net revenue to be between $245 million and $255 million, indicating continued strong performance[131] - The company's digital platforms, Heidrick Connect for Executive Search and new digital solutions for Heidrick Consulting, were critical in navigating the remote work environment and contributed to the strong operational recovery[109][123][128] Results of Operations Q2 2021 consolidated net revenue surged 78.6% to $260.0 million, driving a significant shift to operating income Net Revenue by Segment - Three Months Ended June 30 (in thousands) | Segment | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Executive Search | $224,133 | $134,154 | +67.1% | | On-Demand Talent | $18,719 | $— | N/A | | Heidrick Consulting | $17,129 | $11,449 | +49.6% | | Total Net Revenue | $259,981 | $145,603 | +78.6% | Operating Income (Loss) by Segment - Three Months Ended June 30 (in thousands) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | Executive Search | $42,958 | $(7,294) | | On-Demand Talent | $153 | $— | | Heidrick Consulting | $(3,631) | $(8,321) | | Global Operations Support | $(10,774) | $(8,371) | | Total Operating Income (Loss) | $28,706 | $(23,986) | - Executive Search productivity surged, with annualized net revenue per consultant at $2.4 million for Q2 2021, compared to $1.4 million in Q2 2020[140] Liquidity and Capital Resources The company maintained strong cash reserves with no outstanding borrowings, and subsequently increased its credit facility - The company had $237.8 million in cash, cash equivalents, and marketable securities at June 30, 2021, with no outstanding borrowings on its credit facility[217][216] - Cash used in operations for the first six months of 2021 was $52.3 million, mainly due to $200.3 million in cash bonus payments related to 2020 performance[218] - On July 13, 2021, the company amended its credit agreement, increasing the revolving credit facility from $175 million to $200 million and extending the maturity date to July 2026[100] Item 3. Quantitative and Qualitative Disclosures about Market Risk Primary market risk is foreign currency fluctuations, with a 10% change impacting net income by approximately $1.1 million - The company's main market risk is foreign currency exchange rate risk from its operations in the Americas, Europe, and Asia Pacific[228] - A 10% change in average foreign currency exchange rates would have impacted net income by about $1.1 million for the six months ended June 30, 2021[228] Item 4. Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal controls over financial reporting - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[230] - No material changes were made to the internal control over financial reporting during the second quarter of 2021[231] PART II. OTHER INFORMATION This section provides information on legal proceedings, risk factors, and exhibits filed with the Form 10-Q Item 1. Legal Proceedings The company is involved in various claims and litigation, not expected to materially affect financial condition - The company faces various claims and litigation from the ordinary course of business but does not expect them to have a material adverse effect on its financial condition[99][232] Item 1A. Risk Factors A new risk factor concerns potential misclassification of on-demand talent as independent contractors post-BTG acquisition - A new risk factor has been introduced following the BTG acquisition regarding the potential misclassification of on-demand talent as independent contractors[234] - A misclassification determination could result in significant monetary exposure from unpaid taxes, wage and hour claims, and other employee-related liabilities, potentially impacting both the company and its clients[236] Item 6. Exhibits Key exhibits filed include the amended Credit Agreement and CEO/CFO certifications under Sarbanes-Oxley - Key exhibits filed include the First Amendment to the Credit Agreement and CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906[238]