Heidrick & Struggles(HSII) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Condensed Consolidated Financial Statements This section presents unaudited condensed consolidated financial statements, including balance sheets, income statements, equity changes, cash flows, and detailed accounting notes Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time, reflecting its financial position Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | September 30, 2021 | December 31, 2020 | | :-------------------- | :----------------- | :---------------- | | Total Assets | $948,632 | $787,812 | | Total Liabilities | $625,376 | $520,210 | | Total Stockholders' Equity | $323,256 | $267,602 | | Goodwill | $137,047 | $91,643 | | Cash and cash equivalents | $348,292 | $316,473 | | Accounts receivable, net | $181,167 | $88,123 | | Accrued salaries and benefits (current) | $305,186 | $217,908 | - Total assets increased by $160.8 million (20.4%) from December 31, 2020, to September 30, 2021, primarily driven by increases in cash, accounts receivable, and goodwill[9] - Total liabilities increased by $105.2 million (20.2%) over the same period, mainly due to higher accrued salaries and benefits[9] Condensed Consolidated Statements of Comprehensive Income (Loss) This statement details the company's revenues, expenses, and net income or loss over specific periods, including other comprehensive income Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands, except per share) | Metric (in thousands, except per share) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue before reimbursements (net revenue) | $263,825 | $143,544 | $717,462 | $460,628 | | Total Revenue | $265,315 | $144,501 | $721,281 | $467,183 | | Operating income (loss) | $33,342 | $(38,233) | $81,656 | $(44,067) | | Net income (loss) | $24,498 | $(26,178) | $60,095 | $(43,245) | | Basic EPS | $1.25 | $(1.35) | $3.08 | $(2.24) | | Diluted EPS | $1.21 | $(1.35) | $2.97 | $(2.24) | | Cash dividends paid per share | $0.15 | $0.15 | $0.45 | $0.45 | - Net revenue increased by 83.8% for the three months ended September 30, 2021, and by 55.8% for the nine months ended September 30, 2021, compared to the respective prior year periods[11][142][180] - The company reported a significant turnaround from an operating loss of $38.2 million in Q3 2020 to an operating income of $33.3 million in Q3 2021, and from a loss of $44.1 million in 9M 2020 to an income of $81.7 million in 9M 2021[11][149][188] Condensed Consolidated Statements of Changes in Stockholders' Equity This statement outlines changes in the company's equity accounts, including net income, stock-based compensation, and dividends Condensed Consolidated Statements of Changes in Stockholders' Equity (in thousands) | Metric (in thousands) | Balance at Dec 31, 2020 | Balance at Sep 30, 2021 | | :-------------------- | :---------------------- | :---------------------- | | Total Stockholders' Equity | $267,602 | $323,256 | | Net income (9M 2021) | N/A | $60,095 | | Stock-based compensation (9M 2021) | N/A | $8,672 | | Cash dividends declared (9M 2021) | N/A | $(8,760) | - Total stockholders' equity increased by $55.6 million from December 31, 2020, to September 30, 2021, primarily driven by net income and stock-based compensation[12] - Cash dividends declared were $0.15 per share each quarter, totaling $0.45 per share for the nine months ended September 30, 2021[11][12] Condensed Consolidated Statements of Cash Flows This statement reports the cash generated and used by operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by (used in) operating activities | $64,776 | $(72,905) | | Net cash used in investing activities | $(17,215) | $(14,156) | | Net cash used in financing activities | $(12,017) | $(13,358) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $31,837 | $(101,142) | | Cash, cash equivalents and restricted cash at end of period | $348,326 | $170,577 | - Operating cash flow significantly improved, providing $64.8 million in 9M 2021 compared to using $72.9 million in 9M 2020, primarily due to net income and changes in working capital[17][228][229] - Investing activities in 9M 2021 included $32.0 million for the BTG acquisition and $3.9 million in capital expenditures[17][230] - Financing activities in 9M 2021 primarily consisted of $8.9 million in cash dividends paid[17][232] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of the accounting policies, significant transactions, and financial statement line items Note 1. Basis of Presentation of Interim Financial Information This note describes the basis for preparing the unaudited interim financial statements, including compliance with GAAP and management estimates - Unaudited Condensed Consolidated Financial Statements are prepared in conformity with GAAP, requiring management estimates and assumptions[18] Note 2. Summary of Significant Accounting Policies This note details the key accounting policies used in preparing the financial statements, including recent accounting standard adoptions - The company adopted ASU No. 2019-12, Simplifying the Accounting for Income Taxes, on January 1, 2021, with no impact on financial statements[31] - The company is evaluating ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, with the effect not yet known or reasonably estimable[30] Cash and Cash Equivalents (in thousands) | Cash and Cash Equivalents (in thousands) | September 30, 2021 | December 31, 2020 | | :--------------------------------------- | :----------------- | :---------------- | | Cash and cash equivalents | $348,292 | $316,473 | | Restricted cash included within other non-current assets | $34 | $16 | | Total cash, cash equivalents and restricted cash | $348,326 | $316,489 | Note 3. Revenue This note explains the company's revenue recognition policies across its various service lines and details contract balances - Executive Search revenue is recognized over the expected average period of performance (approximately six months) in proportion to estimated personnel time incurred[34] - Heidrick Consulting revenue is recognized over time using both input and output methods, depending on the service type[36] - On-Demand Talent revenue is recognized over time as clients simultaneously receive and consume benefits, based on the right to invoice[38] Contract Balances (in thousands) | Contract Balances (in thousands) | September 30, 2021 | December 31, 2020 | Change | | :------------------------------- | :----------------- | :---------------- | :----- | | Total contract assets | $30,470 | $19,652 | $10,818 | | Deferred revenue | $45,284 | $38,050 | $7,234 | Note 4. Credit Losses This note provides information on the allowance for credit losses, including changes and provisions made for uncollectible receivables Allowance for Credit Losses (in thousands) | Allowance for Credit Losses (in thousands) | Amount | | :--------------------------------------- | :----- | | Balance at December 31, 2020 | $6,557 | | Provision for credit losses | $4,622 | | Write-offs | $(3,523) | | Foreign currency translation | $(94) | | Balance at September 30, 2021 | $7,562 | - The allowance for credit losses on trade receivables increased by $1.005 million from December 31, 2020, to September 30, 2021[46] Note 5. Property and Equipment, net This note details the company's property and equipment, including gross amounts, accumulated depreciation, and net book value Property and Equipment (in thousands) | Property and Equipment (in thousands) | September 30, 2021 | December 31, 2020 | | :------------------------------------ | :----------------- | :---------------- | | Property and equipment, gross | $74,552 | $80,680 | | Accumulated depreciation | $(53,613) | $(57,188) | | Property and equipment, net | $20,939 | $23,492 | - Net property and equipment decreased by $2.55 million from December 31, 2020, to September 30, 2021[48] - Depreciation expense was $1.8 million for Q3 2021 (vs $2.1 million in Q3 2020) and $5.3 million for 9M 2021 (vs $6.2 million in 9M 2020)[48] Note 6. Leases This note provides information on the company's lease arrangements, including lease costs, terms, and discount rates Lease Cost Components (in thousands) | Lease Cost Components (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Operating lease cost | $4,682 | $6,241 | $14,457 | $18,688 | | Variable lease cost | $1,480 | $1,048 | $3,785 | $4,832 | | Total lease cost | $6,162 | $7,289 | $18,242 | $23,520 | - The weighted average remaining lease term for operating leases was 6.5 years at September 30, 2021 (vs 4.4 years in 2020), with a weighted average discount rate of 3.26% (vs 3.75% in 2020)[55] - In September 2021, the company made a one-time payment of $11.7 million to terminate a lease, resulting in a gain on termination of approximately $5.7 million recorded in restructuring charges[53] Note 7. Financial Instruments and Fair Value This note describes the company's financial instruments, their fair value measurements, and related valuation methodologies Cash and Cash Equivalents (in thousands) | Cash and Cash Equivalents (in thousands) | September 30, 2021 | | :--------------------------------------- | :----------------- | | Cash | $165,934 | | Money market funds | $80,161 | | U.S. Treasury securities | $102,197 | | Total | $348,292 | Level 3 Liabilities (in thousands) | Level 3 Liabilities (in thousands) | Balance at Dec 31, 2020 | Acquisition Earnout (9M 2021) | Balance at Sep 30, 2021 | | :--------------------------------- | :---------------------- | :---------------------------- | :---------------------- | | Earnout | $0 | $(23,800) | $(24,163) | | Contingent Compensation | $(2,390) | N/A | $(3,649) | - The U.S. non-qualified deferred compensation plan investments totaled $34.7 million as of September 30, 2021[60][62] Note 8. Acquisitions This note details recent business acquisitions, including consideration paid, goodwill recognized, and their financial contributions - On April 1, 2021, the company acquired Business Talent Group (BTG) for $32.6 million initial consideration, with an estimated earnout liability of $23.8 million[67] - The BTG acquisition resulted in $45.5 million of goodwill and identifiable intangible assets including $5.8 million for customer relationships, $3.1 million for software, and $1.7 million for a trade name[67] - BTG contributed $24.3 million in revenue and $0.9 million in operating income for the three months ended September 30, 2021, and $43.0 million in revenue and $1.0 million in operating income for the nine months ended September 30, 2021[67] Note 9. Goodwill and Other Intangible Assets This note provides details on the company's goodwill and other intangible assets, including changes and amortization expense Goodwill by Segment (in thousands) | Goodwill by Segment (in thousands) | September 30, 2021 | December 31, 2020 | | :--------------------------------- | :----------------- | :---------------- | | Executive Search - Americas | $91,518 | $91,643 | | On-Demand Talent | $45,529 | — | | Total goodwill | $137,047 | $91,643 | Other Intangible Assets, net (in thousands) | Other Intangible Assets, net (in thousands) | September 30, 2021 | December 31, 2020 | | :------------------------------------------ | :----------------- | :---------------- | | Total Executive Search | $703 | $1,129 | | On-Demand Talent | $9,520 | — | | Total other intangible assets, net | $10,223 | $1,129 | - Goodwill increased by $45.4 million, primarily due to the $45.5 million goodwill recorded from the BTG acquisition in the On-Demand Talent segment[68] - Intangible asset amortization expense was $0.8 million for Q3 2021 (vs $0.2 million in Q3 2020) and $1.8 million for 9M 2021 (vs $0.6 million in 9M 2020)[70] Note 10. Other Current Assets This note provides a breakdown of other current assets, primarily focusing on contract assets and other miscellaneous items Other Current Assets (in thousands) | Other Current Assets (in thousands) | September 30, 2021 | December 31, 2020 | | :---------------------------------- | :----------------- | :---------------- | | Contract assets | $30,470 | $19,652 | | Other | $3,977 | $3,627 | | Total other current assets | $34,447 | $23,279 | - Total other current assets increased by $11.17 million from December 31, 2020, to September 30, 2021, primarily due to an increase in contract assets[72] Note 11. Line of Credit This note details the company's revolving credit facility, including its terms, available capacity, and compliance with covenants - The company amended its credit agreement on July 13, 2021, increasing the revolving credit facility to $200 million (from $175 million) and extending its maturity to July 13, 2026[73] - As of September 30, 2021, and December 31, 2020, the company had no outstanding borrowings and was in compliance with all covenants[76] Note 12. Stock-Based Compensation This note outlines the company's stock-based compensation plans, related expenses, and unrecognized compensation costs Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Expense (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :---------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Salaries and benefits | $3,321 | $3,850 | $14,552 | $6,645 | | General and administrative expenses | — | — | $345 | $460 | - As of September 30, 2021, unrecognized compensation expense for unvested restricted stock units was $10.5 million (weighted average 2.6 years), for performance stock units was $5.7 million (weighted average 1.9 years), and for phantom stock units was $6.1 million (weighted average 3.1 years)[82][84][88] Note 13. Restructuring This note describes restructuring activities, including charges, reversals, and the impact on employee and office-related accruals - The company recorded a $3.3 million restructuring reversal during Q3 2021, primarily due to an early termination agreement for an office lease[91][92] - Restructuring charges for the nine months ended September 30, 2021, were $3.8 million, significantly lower than $48.1 million in the prior year, which included workforce reductions and real estate expense reductions[91][187] Restructuring Accruals (in thousands) | Restructuring Accruals (in thousands) | Outstanding on Dec 31, 2020 | Outstanding on Sep 30, 2021 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Employee Related | $22,312 | $8,395 | | Office Related | $953 | $56 | | Other | $0 | $0 | | Total | $23,265 | $8,451 | Note 14. Income Taxes This note provides information on the company's income tax provisions, including effective tax rates and factors influencing them Effective Tax Rate | Effective Tax Rate | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Effective Tax Rate | 27.0% | 28.5% | 31.8% | 0.5% | - The effective tax rate for 9M 2021 was 31.8%, significantly higher than 0.5% in 9M 2020, impacted by one-time items and the mix of income[95] Note 15. Changes in Accumulated Other Comprehensive Income This note details changes in accumulated other comprehensive income, primarily due to foreign currency translation adjustments AOCI Component (in thousands) | AOCI Component (in thousands) | Balance at Dec 31, 2020 | Other Comprehensive Loss (9M 2021) | Balance at Sep 30, 2021 | | :---------------------------- | :---------------------- | :--------------------------------- | :---------------------- | | Foreign Currency Translation | $6,184 | $(1,349) | $4,835 | | Pension | $(2,767) | — | $(2,767) | | Total AOCI | $3,417 | $(1,349) | $2,068 | - Accumulated other comprehensive income decreased by $1.349 million during the nine months ended September 30, 2021, primarily due to foreign currency translation adjustments[96] Note 16. Segment Information This note provides financial data for the company's operating segments, including net revenue and operating income (loss) - The company identified a new operating segment, On-Demand Talent, following the acquisition of Business Talent Group (BTG) in April 2021[97] Segment Net Revenue (in thousands) | Segment Net Revenue (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Executive Search | $221,646 | $129,243 | $625,397 | $418,850 | | On-Demand Talent | $24,287 | — | $43,006 | — | | Heidrick Consulting | $17,892 | $14,301 | $49,059 | $41,778 | Segment Operating Income (Loss) (in thousands) | Segment Operating Income (Loss) (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Executive Search - Americas | $38,972 | $(7,934) | $99,822 | $40,900 | | Executive Search - Europe | $4,795 | $(6,856) | $13,314 | $(26,874) | | Executive Search - Asia Pacific | $4,712 | $(1,726) | $13,241 | $(6,553) | | On-Demand Talent | $881 | — | $1,034 | — | | Heidrick Consulting | $(2,556) | $(9,286) | $(10,897) | $(21,699) | Note 17. Guarantees This note discloses the company's guarantees, primarily letters of credit supporting lease obligations, and potential payment amounts - The company has letters of credit supporting obligations, primarily office lease agreements, with a maximum undiscounted payment of approximately $4.6 million as of September 30, 2021, in case of default[102] Note 18. Commitments and Contingencies This note outlines the company's commitments and contingent liabilities, including pending claims and litigation matters - The company has contingent liabilities from various pending claims and litigation, but management believes their ultimate resolution will not materially adversely affect its financial condition, results of operations, or liquidity[103] Note 19. Subsequent Event This note describes significant events that occurred after the reporting period, such as a recent acquisition - On October 15, 2021, the company acquired Heidrick & Struggles Finland OY for an initial consideration of $1.6 million, with an anticipated future payment in 2023 based on financial performance targets[104] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operational results, key performance indicators, COVID-19 impact, liquidity, and critical accounting policies Cautionary Statement Regarding Forward Looking Statements This statement warns that forward-looking statements are subject to risks and uncertainties, and actual results may differ materially - The report contains forward-looking statements that are subject to inherent uncertainties and factors outside the company's control, and actual results may differ materially[105] - Key risk factors include the ongoing impacts of the COVID-19 pandemic, talent attraction and retention, economic conditions, competition, data security, and the ability to integrate acquisitions[106] Executive Overview This overview describes the company's business model, services, strategic initiatives, and financial outlook, including the impact of acquisitions - Heidrick & Struggles is a leadership advisory firm offering executive search, consulting, and on-demand talent services, with a focus on top-level executives[107] - The acquisition of Business Talent Group (BTG) on April 1, 2021, established the new On-Demand Talent operating segment, which operates globally alongside Heidrick Consulting[109] - The company's digital platform, Heidrick Connect, and new digital solutions for consulting services enabled effective virtual engagement and improved operating performance during the pandemic[112][126] - The company forecasts Q4 2021 net revenue between $255 million and $265 million, acknowledging continued pandemic fluidity[133] - A restructuring plan implemented in Q3 2020 aimed for $30 million to $40 million in annual cost savings, including a workforce reduction and a 20% reduction in leased square footage[128][129] Results of Operations This section analyzes the company's financial performance for the current and prior periods, detailing revenue, expenses, and profitability Consolidated Financial Performance (as % of net revenue) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue before reimbursements (net revenue) | 100.0 % | 100.0 % | 100.0 % | 100.0 % | | Salaries and benefits | 70.5 % | 72.4 % | 71.5 % | 71.6 % | | General and administrative expenses | 11.1 % | 20.1 % | 11.7 % | 19.8 % | | Cost of services | 7.1 % | 0.6 % | 4.9 % | 0.6 % | | Impairment charges | — | — | — | 7.2 % | | Restructuring charges | (1.2)% | 33.5 % | 0.5 % | 10.4 % | | Operating income (loss) | 12.6 % | (26.6)% | 11.4 % | (9.6)% | | Net income (loss) | 9.3 % | (18.2)% | 8.4 % | (9.4)% | Segment-wise Operating Income (Loss) (in thousands) | Segment | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Executive Search - Americas | $38,972 | $(7,934) | $99,822 | $40,900 | | Executive Search - Europe | $4,795 | $(6,856) | $13,314 | $(26,874) | | Executive Search - Asia Pacific | $4,712 | $(1,726) | $13,241 | $(6,553) | | On-Demand Talent | $881 | — | $1,034 | — | | Heidrick Consulting | $(2,556) | $(9,286) | $(10,897) | $(21,699) | | Global Operations Support | $(13,462) | $(12,431) | $(34,858) | $(29,841) | Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020 This section compares the company's financial performance for the three months ended September 30, 2021, against the prior year period - Consolidated total revenue increased by $120.8 million (83.6%) to $265.3 million, driven by an 83.8% increase in net revenue[141][142] - Executive Search net revenue increased by 71.5% due to a 42.0% increase in confirmed searches, while Heidrick Consulting net revenue grew by 25.1% from a 59.3% increase in engagements[142] - The On-Demand Talent segment, acquired in Q2 2021, contributed $24.3 million to net revenue[142] - Operating income significantly improved to $33.3 million (Q3 2021) from an operating loss of $38.2 million (Q3 2020), including a $3.3 million restructuring reversal in 2021 versus $48.1 million in charges in 2020[148][149] - Salaries and benefits expense increased by $82.0 million (78.9%) due to higher variable compensation from increased consultant productivity, but decreased as a percentage of net revenue from 72.4% to 70.5%[144][145] Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020 This section compares the company's financial performance for the nine months ended September 30, 2021, against the prior year period - Consolidated total revenue increased by $254.1 million (54.4%) to $721.3 million, with net revenue increasing by 55.8%[179][180] - Executive Search net revenue increased by 49.3% due to a 44.3% increase in confirmed searches, and Heidrick Consulting net revenue increased by 17.4% from a 56.9% increase in engagements[180] - The On-Demand Talent segment contributed $43.0 million to net revenue[180] - Operating income was $81.7 million (9M 2021) compared to an operating loss of $44.1 million (9M 2020), which included $33.0 million in goodwill impairment charges and $48.1 million in restructuring charges[186][188] - Salaries and benefits expense increased by $183.7 million (55.7%) due to higher variable compensation, remaining stable as a percentage of net revenue at 71.5%[182][183] - General and administrative expenses decreased by $7.2 million (8.0%), and as a percentage of net revenue, decreased from 19.8% to 11.7%[184][185] Liquidity and Capital Resources This section discusses the company's ability to meet its short-term and long-term financial obligations and fund its operations - The company believes its cash balances, operating cash flow, and $200 million revolving credit facility (extended to July 2026) are sufficient to finance operations, dividends, and stock repurchases for the foreseeable future[221][223] - Cash, cash equivalents, and marketable securities totaled $348.3 million at September 30, 2021, including $121.6 million held by foreign subsidiaries[227] - Net cash provided by operating activities was $64.8 million for 9M 2021, a significant improvement from $72.9 million used in 9M 2020[228][229] - Investing activities used $17.2 million in 9M 2021, primarily for the BTG acquisition ($32.0 million) and capital expenditures ($3.9 million)[230] - Financing activities used $12.0 million in 9M 2021, mainly for dividend payments ($8.9 million) and employee tax withholdings on equity transactions ($3.1 million)[232] Application of Critical Accounting Policies and Estimates This section explains the significant accounting policies and estimates that require management's judgment and can impact financial results - The preparation of financial statements requires management to make estimates and assumptions, which are subject to uncertainty and could materially impact financial results[236] - Critical accounting policies include revenue recognition, income taxes, interim effective tax rate, and the assessment of goodwill and other intangible assets for impairment[237] Recently Issued and Adopted Financial Accounting Standards This section outlines new accounting standards that have been issued or adopted and their impact on the company's financial reporting - The company is evaluating ASU No. 2020-04 (Reference Rate Reform) and adopted ASU No. 2019-12 (Simplifying Income Taxes) on January 1, 2021, with no material impact[30][31][238] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to currency market risk due to its international operations, but this risk is largely mitigated by matching revenue and expenses in local currencies. However, the translation of foreign currency financial statements can still lead to fluctuations in asset and liability valuations - The company conducts business in various currencies across its Americas, Europe, and Asia Pacific operations, leading to currency market risk[239] - Currency risk to earnings is reduced by generally matching revenue earned with associated expenses incurred in each country[239] - A 10% change in the average exchange rate for all foreign currencies would have impacted net income by approximately $1.8 million for the nine months ended September 30, 2021[239] Item 4. Controls and Procedures Management, including the principal executive and financial officers, evaluated the effectiveness of the company's disclosure controls and procedures as of September 30, 2021, and concluded they were effective. There were no material changes to internal control over financial reporting during the quarter, and no material impact from the COVID-19 pandemic - The company's disclosure controls and procedures were evaluated as effective as of September 30, 2021[241] - No material changes to internal control over financial reporting occurred during the three months ended September 30, 2021[242] - The COVID-19 pandemic has not materially impacted the company's internal controls over financial reporting[242] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, and exhibits, including details on potential liabilities and recent agreements Item 1. Legal Proceedings The company faces contingent liabilities from various pending claims and litigation in the ordinary course of business. However, based on currently available information, management believes the ultimate resolution of these matters will not have a material adverse effect on its financial condition, results of operations, or liquidity - The company has contingent liabilities from various pending claims and litigation matters[103] - Management believes the ultimate resolution of these legal proceedings will not materially adversely affect the company's financial condition, results of operations, or liquidity[103] Item 1A. Risk Factors This section highlights new risk factors primarily related to the classification of on-demand independent talent following the acquisition of Business Talent Group (BTG). Misclassification of these contractors could lead to significant adverse tax, legal, and other liabilities for the company and its clients - A new risk factor involves potential adverse tax, legal, and other consequences if the independent contractor classification of on-demand talent (from the BTG acquisition) is challenged[245] - Misclassification could result in monetary damages, interest, fines, and penalties related to failure to withhold taxes, unpaid wages, employee benefits, and other employer-employee liabilities[247] - Worker classification laws are complex, fact-sensitive, vary by jurisdiction, and are subject to changing interpretations, creating uncertainty and unpredictability[246] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the First Amendment to the Credit Agreement, a Separation Agreement, various certifications (Section 302 and 906), and Inline XBRL documents - Exhibit 10.2 is the First Amendment to Credit Agreement dated July 13, 2021[249] - Exhibit 10.3 is the Separation Agreement and General Release dated June 30, 2021, with Kamau Coar[249] - The filing includes certifications from the CEO and CFO pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, as well as Inline XBRL documents[249] SIGNATURE This section contains the official signature confirming the submission of the financial report - The report was signed on October 25, 2021, by Stephen A. Bondi, Vice President, Controller, and Chief Accounting Officer, on behalf of Heidrick & Struggles International, Inc[252]