Heidrick & Struggles(HSII) - 2021 Q4 - Annual Report

PART I ITEM 1. BUSINESS Heidrick & Struggles is a global human capital leadership advisory firm offering executive search, consulting, and on-demand talent services Overview Heidrick & Struggles is a human capital leadership advisory firm providing executive search, consulting, and on-demand talent services globally - Heidrick & Struggles is a human capital leadership advisory firm providing executive search, consulting, and on-demand talent services globally[12] - The company operates with over 430 consultants in major cities worldwide and has been a leadership advisor for over 60 years[12] Our Service Offerings The company's services include retained Executive Search, On-Demand Talent, and Heidrick Consulting for human capital development Executive Search Executive Search focuses on placing top-level senior executives, utilizing a relationship-based, data-driven approach with proprietary tools - The company specializes in retained executive search for top-level senior executives, aiming for competitive advantages like access to key decision-makers and higher fees[13][14] - The search process is supported by the Infinity Framework and Heidrick Connect, which facilitate data-driven candidate evaluation and client engagement[15] - Fees are generally based on one-third of the estimated first-year compensation for the position, with additional billing for actual compensation exceeding estimates[16] On-Demand Talent The On-Demand Talent segment, established in April 2021, provides clients with access to high-end independent talent for interim leadership and project-based initiatives - The On-Demand Talent segment was formed in April 2021 with the acquisition of Business Talent Group, LLC (BTG)[18] - This segment provides clients with on-demand access to top independent talent for interim leadership and project-based initiatives[18] - On-Demand Talent represented less than 10% of the company's net revenue in 2021[18] Heidrick Consulting Heidrick Consulting offers human capital development and organizational design solutions, including leadership assessment and diversity & inclusion advisory services - Heidrick Consulting offers solutions for human capital development and organizational design, including leadership assessment, team acceleration, and diversity & inclusion advisory services[19][20] - The segment generated revenue primarily through professional fees based on project size and scope[21] - Heidrick Consulting represented less than 10% of net revenue in 2021 and is focused on increasing scale and improving operating margins[21] Organization The company's global structure is segmented by geography, service offering, and industry/functional practices for comprehensive client service Geographic Structure The company provides services through 48 offices in 28 countries, with Executive Search operating in three distinct geographic segments - The company operates through a network of 48 offices in 28 countries, including affiliates in South Africa and Turkey[23][24] - Executive Search services are divided into three geographic reporting segments: Americas, Europe (including Africa), and Asia Pacific (including the Middle East)[25] - On-Demand Talent and Heidrick Consulting segments operate globally[26] Net Revenue by Segment (2019-2021) | Segment | 2021 (%) | 2020 (%) | 2019 (%) | | :--- | :--- | :--- | :--- | | Executive Search Americas | 58 % | 58 % | 58 % | | Executive Search Europe | 17 % | 20 % | 19 % | | Executive Search Asia Pacific | 11 % | 13 % | 14 % | | On-Demand Talent | 7 % | — % | — % | | Heidrick Consulting | 7 % | 9 % | 9 % | Global Industry Practices The company's executive search and consulting businesses operate across six broad industry groups, with Financial Services and Global Technology & Services being the largest - The company operates in six broad industry groups, with consultants specializing in sub-sectors to provide market intelligence[30] Percentage of Billings by Global Industry Practices (2019-2021) | Global Industry Practices | 2021 (%) | 2020 (%) | 2019 (%) | | :--- | :--- | :--- | :--- | | Financial Services | 27 % | 25 % | 26 % | | Global Technology & Services | 23 | 21 | 21 | | Industrial | 20 | 20 | 21 | | Consumer Markets | 15 | 17 | 17 | | Healthcare & Life Sciences | 13 | 14 | 12 | | Social Impact | 2 | 3 | 3 | Global Functional Practices Executive Search consultants specialize in recruiting for specific 'C-level' functional positions, leveraging global teams for comprehensive client service - Executive Search consultants specialize in 'C-level' functional positions, including CEO & Board of Directors, Human Resources Officers, Financial Officers, and Information and Technology Officers[32][33] - The company uses unified global executive search teams to leverage diversity and market intelligence for better client service[31][34] Client Base The company serves a diverse client base, including Fortune 1000 companies, private equity firms, and not-for-profit organizations - Clients include Fortune 1000 companies, major U.S. and non-U.S. companies, middle market and emerging growth companies, private equity firms, and governmental/not-for-profit organizations[35] - No single client accounted for more than 1% of net revenue in 2021 and 2020, and the top ten clients accounted for approximately 6% of total revenue in 2021[38] Information Management Systems The company relies on proprietary technology like Infinity Framework and Heidrick Connect to enhance search processes, candidate evaluation, and client engagement - Proprietary systems like Infinity Framework and Heidrick Connect are used for executive search to evaluate candidates and provide talent insights[39][40] - Culture Connect is a Web-based system integral to the culture-shaping process for the consulting business, enabling online surveys and virtual delivery of solutions[41] Competition The executive search industry is highly competitive and fragmented, with direct competition from four established global retained firms - The executive search industry is highly competitive, with direct competition from Egon Zehnder International, Korn Ferry, Russell Reynolds Associates, and Spencer Stuart[42] - Competition at the senior executive level relies heavily on reputation, global access, and consultant experience, making it more quality-sensitive than price-sensitive[43] Seasonality The company's business does not exhibit discernible seasonality, but revenue and operating income can vary quarterly due to global economic volatility - There is no discernible seasonality in the company's business[45] - Revenue and operating income can vary quarter-to-quarter due to global economic and business cycle volatility[45] Human Capital Resources The company prioritizes attracting, developing, and retaining diverse talent, emphasizing DEI, formalized values, and continuous learning Employee Summary As of December 31, 2021, the company employed 1,846 individuals globally, including 434 consultants and 575 associates - As of December 31, 2021, the company employed 1,846 individuals globally[47] - The workforce included 434 consultants (365 in Executive Search and 69 in Heidrick Consulting) and 575 associates[47] Diversity Equity and Inclusion The company is committed to fostering an inclusive workforce, with women representing 64% of the overall workforce and 37.5% of the Board of Directors in 2021 - Women represented 64% of the overall workforce in 2021, with 69% of new hires and 65% of promotions being women[50] - People of color represented 26% of the overall workforce in 2021, accounting for 35% of new hires and 21% of promotions[50] - The Board of Directors is 37.5% women and 25% people of color[50] - DEI efforts in 2021 included expanding mentorship programs, launching firm-wide DEI learning content, and implementing HRIS campaigns for voluntary self-identification[52] Our Values The company's core values, formalized in 2015, include client growth, firm unity, integrity, and ownership of results, with 'Respect and value each individual' added in 2020 - The company's values include 'Grow with our clients,' 'Win as one firm,' 'Always act with Integrity,' and 'Own the results'[53] - In 2020, 'Respect and value each individual' was added to articulate commitment to diversity and inclusion[53] Employee Engagement The company conducts biennial Organization Accelerator Questionnaires and pulse surveys to gather employee feedback on organizational agility and individual experiences - The company uses a proprietary Organization Accelerator Questionnaire (OAQ) every two years to gather employee feedback, with 92% participation in 2020[54] - Pulse surveys and 'Voice of Employee' tools provide real-time feedback using machine learning and AI technology[55] Learning and Development The company is committed to continuous professional development, delivering over 12,800 hours of live virtual training in 2021 to build key skills - The company delivered over 12,800 hours of aggregate live virtual training globally in 2021[58] - Programs focus on building leadership, business development, account management, client service, and change leadership skills[57] Participation in our Communities The company encourages employee community involvement through a Global Philanthropic Committee, which organized a Global Day of Service in 2021 - A Global Philanthropic Committee coordinates charitable causes and philanthropic endeavors[60] - In 2021, 442 colleagues in 35 offices participated in the Global Day of Service, supporting 38 non-profit organizations[60] Compensation and Benefits The company offers fair compensation based on performance and a comprehensive benefits program tailored to local market competitiveness - Compensation is based on demonstrated capabilities, achievement, experience, and superior performance, with discretionary bonus awards tied to values[60] - Benefits are administered country-by-country to be competitive and include medical, dental, vision, 401(k), and deferred compensation plans[60] Employee Safety In response to COVID-19, the company implemented flexible workspace guidance and vaccination policies to prioritize employee health and safety - The company implemented 'flexible workspace' guidance across regions, allowing remote work and a phased return to offices due to COVID-19[61] - Vaccination policies were rolled out in the U.S. and Canada in September 2021, requiring proof of vaccination for office visits[62] Ethics The company encourages ethical conduct and provides an independent, anonymous reporting hotline for alleged breaches of legal or ethical obligations - The Heidrick & Struggles EthicsLine is an independent, web-based and telephonic reporting hotline for ethical concerns, financial fraud, or Code of Conduct violations[65] - The EthicsLine allows for anonymous reporting and is operational 24/7[65] Regulation The company is subject to U.S. securities laws and various global regulations, including anti-bribery, privacy, and data protection laws - The company is subject to U.S. securities laws and global regulations, including anti-bribery, privacy, and data protection laws (e.g., GDPR)[66] - A global privacy program is in place to comply with rapidly emerging privacy and data protection laws in countries like Brazil and China, and U.S. states like California[66] Available Information The company makes its SEC filings and corporate governance documents available free of charge on its investor relations website - Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statements are available free of charge on the company's investor relations website[67] - Corporate governance documents, including the certificate of incorporation, by-laws, committee charters, and code of ethics, are also posted online[67] ITEM 1A. RISK FACTORS The company faces various risks, including operational challenges, legal and regulatory issues, aggressive competition, and economic downturns Company Risks Company-specific risks include attracting and retaining talent, maintaining reputation, managing client restrictions, and reliance on information systems Operational Risks Operational risks include dependence on attracting and retaining qualified consultants, potential client loss from consultant departures, and maintaining professional reputation - Success depends on attracting, integrating, developing, managing, and retaining qualified consultants and senior leaders[71] - Risk of consultants taking clients to other firms upon departure, potentially affecting client relationships and business[72] - Maintaining professional reputation and brand name is crucial for securing new engagements and hiring consultants[73] - Client restrictions on recruiting their employees can hinder fulfilling executive searches and obtaining new assignments[74][75] - Heavy reliance on information management systems, with risks related to system improvements, implementation of new technologies, and potential interruptions[76][77] Legal, Regulatory and Compliance Risks Legal, regulatory, and compliance risks include potential service liability, evolving data security laws, and independent contractor reclassification challenges - Exposure to potential claims related to executive search (e.g., confidentiality breaches, malpractice) and new types of claims from consulting services[78] - Evolving data security, privacy, and protection laws (e.g., GDPR, California laws) may limit service use, increase compliance costs, and lead to fines or litigation[79][80][81] - Risk of adverse tax, legal, and other consequences if on-demand independent contractors are challenged and reclassified as employees[82][83][84] - Increased cybersecurity requirements and sophisticated attacks pose risks to systems, networks, solutions, services, and data, potentially leading to reputational damage or financial impact[85] Industry and General Economic Risks Industry and general economic risks include the adverse impact of the COVID-19 pandemic, aggressive competition, economic downturns, and currency fluctuations - The COVID-19 pandemic has caused and could continue to cause severe disruptions, impacting demand for services, lengthening search processes, and affecting client decision-making[86][87][88][89][90][91] - The global executive search industry is highly competitive and fragmented, with competition from large firms, specialty firms, Internet-based firms, and clients' in-house personnel[92][93][94] - Adverse economic conditions, including inflation, can negatively impact demand for services and increase operating expenses[95] - Significant currency fluctuations, particularly an increase in the U.S. dollar's value, could adversely impact operating income, as approximately 40% of 2021 net revenue was generated outside the U.S[96] - Ability to access additional credit could be limited if the company fails to comply with credit agreement covenants[97] General Risks General risks include adverse impacts from multinational operations, geopolitical tensions, tax law changes, and challenges in acquisition integration - Multinational operations are exposed to social, political, regulatory, legal, and economic risks, especially in countries with unsettled and inconsistently applied legal systems[98] - The military incursion by Russia into Ukraine could adversely impact macroeconomic conditions and result in heightened economic sanctions, potentially affecting operations in Europe and Asia Pacific[99] - Unfavorable tax law changes and tax authority rulings, as well as the inability to generate sufficient profits to realize net deferred tax assets, could adversely affect results[100][101] - Failure to align cost structure and headcount with net revenue, especially with inflationary pressures, could negatively impact business[102] - Risk of impairment of goodwill, other intangible assets, and other long-lived assets due to changes in business climate, financial performance, or market conditions[103] - Challenges in executing and integrating future acquisitions, such as BTG, could negatively affect business and profitability[104][105] - Anti-takeover provisions in corporate documents make an acquisition of the company difficult and expensive[106] ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments to report - No unresolved staff comments[107] ITEM 2. PROPERTIES The company's corporate headquarters is in Chicago, Illinois, and it leases office space in 46 cities across 26 countries - Corporate headquarters is in Chicago, Illinois[108] - As of December 31, 2021, the company leased office space in 46 cities in 26 countries[108] - All offices are leased, and existing facilities are considered in good operating condition and suitable for current and future needs[108] ITEM 3. LEGAL PROCEEDINGS The company has contingent liabilities from various pending claims and litigation in the ordinary course of business - The company faces contingent liabilities from pending claims and litigation in the ordinary course of business[109] - The ultimate resolution of these matters is not expected to have a material adverse effect on financial condition, results of operations, or liquidity[109] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - Not applicable[110] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock is listed on Nasdaq, with 19.6 million shares outstanding and a consistent quarterly cash dividend of $0.15 per share Market for our Common Stock The company's common stock is traded on the Nasdaq Stock Market under the symbol 'HSII' - Common stock is listed on the Nasdaq Stock Market under the symbol 'HSII'[114] Holders of Record As of February 14, 2022, the company had 50 holders of record and 19,591,527 shares of common stock outstanding - As of February 14, 2022, there were 50 holders of record of common stock[115] - As of February 25, 2022, there were 19,591,527 shares of Common Stock outstanding[5] Performance Graph The performance graph compares the company's cumulative total stockholder return against the S&P SmallCap 600 and S&P Composite 1500 Human Resource indices - The performance graph compares the company's stock return against the S&P SmallCap 600 Index and the S&P Composite 1500 Human Resource and Employment Services Index[116] - The comparison assumes an initial investment of $100 on December 31, 2016, with dividend reinvestment[116][118] Dividends The company paid a consistent quarterly cash dividend of $0.15 per share from 2019 through 2021, totaling $0.60 per share annually - The company paid a quarterly cash dividend of $0.15 per share in 2019, continuing through 2021[119] - Total cash dividend paid was $0.60 per share in 2021[119] - A quarterly dividend of $0.15 per share was approved in February 2022, payable on March 18, 2022[119] Dividend Equivalent Payments on Restricted Stock Units | Year | Amount (millions) | | :--- | :--- | | 2021 | $0.7 | | 2020 | $0.5 | Issuer Purchases of Equity Securities A $50 million share repurchase authorization from 2008 has $21.7 million remaining, with no repurchases made in 2021 or 2020 - A $50 million share repurchase authorization was announced on February 11, 2008[121] - No shares were repurchased in 2021 or 2020[121] - As of December 31, 2021, $21.7 million remains available under the repurchase authorization[121] ITEM 6. RESERVED This item is reserved and contains no information ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides an overview of the company's business, key performance indicators, compensation model, and financial results Executive Overview The company is a leadership advisory firm specializing in executive search, on-demand talent, and consulting services, with strong 2021 growth Our Business Heidrick & Struggles is a leadership advisory firm providing executive search, on-demand talent, and consulting services globally - The company is a leadership advisory firm offering executive search, on-demand talent, and consulting services[126] - Services are provided to a broad range of clients through over 430 consultants worldwide[129] - Executive search services are primarily on a retained basis, with fees generally one-third of the estimated first-year compensation[129] Key Performance Indicators Key performance indicators include net revenue, operating income, operating margin, Adjusted EBITDA, and consultant headcount - Primary financial and operational measures include net revenue, operating income, operating margin, Adjusted EBITDA (non-GAAP), and Adjusted EBITDA margin (non-GAAP)[131] - Executive Search and Heidrick Consulting performance is also measured by consultant headcount, confirmed search trends, consultant productivity, and average revenue per search[131] Our Compensation Model Consultant compensation includes fixed and variable components tied to net revenue, with cash bonuses now paid 100% in the first quarter of the following year - Consultant compensation includes fixed and variable components, with variable pay tied to net revenue generation and individual performance[134] - The company terminated cash bonus deferrals for consultants in 2020 and for management in 2021, now paying 100% of cash bonuses in the first quarter of the following year[137] Impact of COVID-19 The COVID-19 pandemic caused demand decline and operational disruptions in 2020, but the company adapted with digital solutions, leading to strong 2021 growth - COVID-19 caused a decline in demand for services, lengthening of search processes, and inability to execute in-person engagements in Q2 2020, leading to goodwill impairment in Europe and Asia Pacific[140] - A restructuring plan implemented in Q3 2020 aimed for $30-40 million in annual cost savings through workforce reduction, real estate optimization, and deferred compensation elimination[141][142][143][144] - In 2021, the company mitigated pandemic impacts through innovation, utilizing Heidrick Connect for Executive Search and new digital solutions for Heidrick Consulting[139][145] 2021 Overview In 2021, consolidated net revenue increased by 61.4% to $1.0 billion, driven by strong growth across all segments and a return to profitability Consolidated Financial Performance (2021 vs. 2020) | Metric | 2021 | 2020 | Change (YoY) | | :--- | :--- | :--- | :--- | | Consolidated Net Revenue | $1.0 billion | $621.6 million | +61.4% | | Executive Search Net Revenue | $868.8 million | $565.2 million | +53.7% | | Heidrick Consulting Net Revenue | $67.6 million | $56.4 million | +19.8% | | On-Demand Talent Contribution | $66.6 million | — | N/A | | Operating Income (Loss) | $98.3 million | $(35.5) million | N/A | | Operating Margin | 9.8% | (5.7)% | +15.5 pp | - Executive Search confirmed searches increased by 44.6%, and average revenue per executive search rose to $131,000 in 2021 from $123,200 in 2020[147][149] - Cash, cash equivalents, and marketable securities increased by $208.8 million to $545.2 million at year-end 2021[151] 2022 First Quarter Outlook The company forecasts 2022 first-quarter net revenue between $270 million and $280 million, considering ongoing global instability - Forecasted 2022 first-quarter net revenue is between $270 million and $280 million[152] - The outlook considers the continued fluidity of the COVID-19 pandemic and instability in Ukraine and Russia[152] Results of Operations Consolidated net revenue increased by 61.4% to $1.0 billion in 2021, with operating income recovering significantly to $98.3 million Consolidated Results of Operations (2021 vs. 2020) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net Revenue | $1,003,001 | $621,615 | +61.4% | | Total Revenue | $1,008,474 | $629,370 | +60.2% | | Operating Income (Loss) | $98,264 | $(35,529) | N/A | | Net Income (Loss) | $72,572 | $(37,707) | N/A | | Basic EPS | $3.72 | $(1.95) | N/A | | Diluted EPS | $3.58 | $(1.95) | N/A | Operating Expenses as % of Net Revenue (2021 vs. 2020) | Expense Category | 2021 (%) | 2020 (%) | Change (pp) | | :--- | :--- | :--- | :--- | | Salaries and benefits | 71.5 | 72.5 | -1.0 | | General and administrative expenses | 13.0 | 18.8 | -5.8 | | Cost of Services | 5.3 | 0.7 | +4.6 | | Impairment charges | — | 5.3 | -5.3 | | Restructuring charges | 0.4 | 8.4 | -8.0 | Year ended December 31, 2021 compared to year ended December 31, 2020 Consolidated net revenue increased by $381.4 million (61.4%) to $1.0 billion in 2021, driven by strong segment growth and reduced charges - Consolidated net revenue increased by $381.4 million, or 61.4%, to $1.0 billion in 2021[163] - Executive Search net revenue increased by $303.6 million (53.7%) due to a 44.6% increase in confirmed searches[163] - Heidrick Consulting net revenue increased by $11.2 million (19.8%) due to a 48.1% increase in consulting engagements[163][164] - On-Demand Talent, acquired in Q2 2021, contributed $66.6 million to net revenue[164] - Operating income was $98.3 million in 2021, compared to an operating loss of $35.5 million in 2020, driven by revenue growth and lower impairment/restructuring charges[173] - Salaries and benefits expense increased by $267.0 million (59.3%) due to higher fixed and variable compensation, but decreased as a percentage of net revenue from 72.5% to 71.5%[166][168] - General and administrative expenses increased by $13.8 million (11.8%) but decreased as a percentage of net revenue from 18.8% to 13.0%[169][170] - Cost of services increased by $48.4 million to $52.8 million, primarily due to the On-Demand Talent acquisition and more Heidrick Consulting engagements[170] - Impairment charges decreased from $33.0 million in 2020 to zero in 2021, and restructuring charges decreased from $52.4 million to $3.8 million[171][172] Executive Search The Executive Search segment experienced significant growth across all regions in 2021, returning to operating profitability Executive Search Net Revenue by Region (2021 vs. 2020) | Region | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :--- | :--- | :--- | :--- | | Americas | $581,440 | $361,416 | +60.9% | | Europe | $170,312 | $124,243 | +37.1% | | Asia Pacific | $117,008 | $79,511 | +47.2% | Executive Search Operating Income (Loss) by Region (2021 vs. 2020) | Region | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :--- | :--- | :--- | :--- | | Americas | $142,040 | $62,806 | +$79,234 | | Europe | $18,424 | $(22,827) | +$41,251 | | Asia Pacific | $18,167 | $(6,724) | +$24,891 | Americas Americas Executive Search net revenue increased 60.9% to $581.4 million in 2021, driven by a 57.1% increase in confirmed searches - Americas net revenue increased 60.9% to $581.4 million in 2021, driven by a 57.1% increase in executive search confirmations[178] - Operating income was $142.0 million in 2021, including $3.9 million in restructuring charges, compared to $62.8 million in 2020[182] Europe Europe Executive Search net revenue increased 37.1% to $170.3 million in 2021, returning to an operating income of $18.4 million - Europe net revenue increased 37.1% to $170.3 million in 2021, driven by a 33.6% increase in executive search confirmations[183] - Operating income was $18.4 million in 2021, including a $0.1 million restructuring reversal, compared to an operating loss of $22.8 million in 2020[188] - The 2020 operating loss included $24.5 million in goodwill impairment charges[186][188] Asia Pacific Asia Pacific Executive Search net revenue increased 47.2% to $117.0 million in 2021, achieving an operating income of $18.2 million - Asia Pacific net revenue increased 47.2% to $117.0 million in 2021, driven by a 28.6% increase in executive search confirmations[189] - Operating income was $18.2 million in 2021, including a $0.1 million restructuring reversal, compared to an operating loss of $6.7 million in 2020[194] - The 2020 operating loss included $8.5 million in goodwill impairment charges[192][194] On-Demand Talent The On-Demand Talent segment generated $66.6 million in net revenue in 2021, exceeding expectations despite an operating loss of $9.3 million - On-Demand Talent reported net revenue of $66.6 million in 2021, driven by large account penetration, project wins, and higher average project size[195] - The segment recorded an operating loss of $9.3 million, which included an $11.4 million one-time earnout obligation adjustment due to revenue exceeding expectations[196][197] Heidrick Consulting Heidrick Consulting net revenue increased 19.8% to $67.6 million in 2021, with an improved operating loss reflecting its growth strategy - Heidrick Consulting net revenue increased 19.8% to $67.6 million in 2021, due to a 48.1% increase in consulting confirmations[198] - The operating loss improved to $16.2 million in 2021 (including $0.4 million restructuring charges) from $28.4 million in 2020[202] - The segment continues to build momentum from collaboration within the company and is a critical component of the growth strategy[202] Global Operations Support Global Operations Support expenses increased by $14.5 million (35.9%) to $54.9 million in 2021, primarily due to higher compensation and IT costs - Global Operations Support expenses increased by $14.5 million, or 35.9%, to $54.9 million in 2021[203] - The increase was driven by higher variable compensation, base salaries, payroll taxes, stock compensation, and information technology costs[203][204] - A restructuring reversal of $0.2 million was recorded in 2021 due to an early lease termination agreement[205] Liquidity and Capital Resources The company maintains sufficient liquidity through cash balances, operating cash flows, and a $200 million revolving credit facility General The company believes its cash balances, operating cash flows, and revolving credit facility provide sufficient liquidity for future operations - Available cash, operating cash flows, and the revolving credit facility are expected to be sufficient for operations, dividends, and stock repurchases[206] - Non-deferred annual bonuses are paid in the first quarter following the year they are earned[207] Lines of credit The company has a $200 million committed unsecured revolving credit facility, maturing in July 2026, with no outstanding borrowings - A $200 million committed unsecured revolving credit facility was established in July 2021, maturing in July 2026[208] - No outstanding borrowings as of December 31, 2021 and 2020[212] - The company was in compliance with all financial and other covenants[212] Cash, cash equivalents, and marketable securities Cash, cash equivalents, and marketable securities increased by $208.8 million to $545.2 million at year-end 2021, with a portion held by foreign subsidiaries - Cash, cash equivalents, and marketable securities increased by $208.8 million to $545.2 million at December 31, 2021[213] - Approximately $186.5 million was held by foreign subsidiaries, with a portion permanently reinvested[213] - The company expects to pay approximately $368.2 million in bonuses related to 2021 performance in Q1 2022[213] Cash flows provided by operating activities Cash provided by operating activities was $271.4 million in 2021, primarily from net income and increased accrued expenses - Cash provided by operating activities was $271.4 million in 2021, primarily from net income (net of non-cash charges) and an increase in accrued expenses[214] - In 2020, cash provided by operating activities was $23.4 million[215] Cash flows provided by (used in) investing activities Cash used in investing activities was $21.3 million in 2021, mainly for acquisitions and capital expenditures, partially offset by investment sales - Cash used in investing activities was $21.3 million in 2021[216] - Key uses included $33.5 million for acquisitions (net of cash acquired) and $6.2 million for capital expenditures[216] - Proceeds from the maturity and sale of available-for-sale investments provided $20.8 million[216] Cash flows used in financing activities Cash used in financing activities was $15.5 million in 2021, primarily for cash dividend payments and employee tax withholdings on equity transactions - Cash used in financing activities was $15.5 million in 2021[218] - Major outflows included $12.4 million for cash dividends and $3.1 million for employee tax withholdings on equity transactions[218] Stock repurchase program The company has a $50 million stock repurchase authorization from 2008, with $21.7 million remaining and no repurchases in 2021 or 2020 - A $50 million stock repurchase authorization from 2008 has $21.7 million remaining[220] - No shares were repurchased in 2021 or 2020[220] Off-balance sheet arrangements The company does not have material off-balance sheet arrangements, special purpose entities, or related party transactions Contractual obligations As of December 31, 2021, the company had $94.5 million in operating lease payment obligations and $3.2 million in asset retirement obligations Contractual Obligations (as of December 31, 2021) | Obligation Type | Total Amount (millions) | Within 12 Months (millions) | | :--- | :--- | :--- | | Lease Payment Obligations | $94.5 | $18.4 | | Asset Retirement Obligations | $3.2 | $0.3 | Application of Critical Accounting Policies and Estimates The company's critical accounting policies involve significant estimates for revenue recognition, income taxes, goodwill, and other asset impairment General Financial statement preparation requires management to make estimates and assumptions, which are based on historical experience and believed to be reasonable - Financial statements require management to make estimates and assumptions, which are based on historical experience and various other reasonable assumptions[224] - Critical accounting policies involve estimates highly susceptible to changes in operating results and cash flows[225] Revenue recognition Revenue is recognized as performance obligations are satisfied, involving estimates for variable consideration and various recognition methods across segments - Executive Search revenue is recognized over time, with variable consideration (uptick revenue) estimated at contract inception using a portfolio approach and expected value method[226][227][228] - On-Demand Talent revenue is recognized over time based on time-based fees, with the company acting as the principal in third-party contractor transactions[230] - Heidrick Consulting revenue is recognized over time using input and output methods for various services, and straight-line for enterprise agreements on the Culture Connect platform[231][232] Income taxes Determining income tax expense involves judgment in estimating current tax exposures and the recoverability of deferred tax assets, with annual reassessments - Income tax provision, liabilities, and deferred tax assets/liabilities involve judgment in estimating current tax exposures and recoverability of deferred tax assets[234] - Valuation allowances are established against deferred tax assets when realization is not more likely than not, and reassessed ongoingly[236] - Deferred taxes are recorded for undistributed foreign earnings not permanently reinvested, with annual assessments for distribution[237] Goodwill Goodwill is assessed for impairment at least annually by comparing the fair value of reporting units to their carrying amounts using discounted cash flow methodology - Goodwill is assessed for impairment at least annually or when circumstances indicate non-recoverability[238] - The impairment test compares the fair value of reporting units (Americas, Europe, Asia Pacific, On-Demand Talent, Heidrick Consulting) to their carrying amount[239] - Fair value is determined using a discounted cash flow methodology, dependent on estimates of future market growth, revenue, costs, capital investments, and discount rates[239] Other intangible assets and long-lived assets Other intangible assets and long-lived assets are reviewed for impairment when events or changes suggest their carrying amount may not be recoverable - Other intangible assets and long-lived assets are reviewed for impairment when events or changes indicate non-recoverability[241] - Recoverability is measured by comparing the carrying amount to estimated undiscounted future cash flows[241] Contingent Consideration Contingent consideration for acquisitions is valued using Level 3 fair value measurements based on operating metrics and management's financial projections - Contingent consideration for acquisitions is based on operating metrics and valued using Level 3 fair value measurements (discounted cash flow models)[243] - Fair value is assessed at each balance sheet date, with changes recorded in General and administrative expenses[243] - Estimates rely on financial projections, market participant assumptions for revenue growth/profitability, and risk-adjusted discount rates[243][244] Recently Issued and Adopted Financial Accounting Standards The company is evaluating ASU No. 2020-04 (Reference Rate Reform) and adopted ASU No. 2019-12 (Income Taxes) with no material impact - The company is evaluating the impact of ASU No. 2020-04, 'Facilitation of the Effects of Reference Rate Reform on Financial Reporting,' effective through December 31, 2022[311] - ASU No. 2019-12, 'Simplifying the Accounting for Income Taxes,' was adopted on January 1, 2021, with no impact on the consolidated financial statements[312] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to currency market risk due to multinational operations, with approximately 40% of 2021 net revenue generated outside the U.S - The company is exposed to currency market risk due to operations in the Americas, Europe, and Asia Pacific, with approximately 40% of 2021 net revenue generated outside the U.S[96][246] - A 10% change in the average exchange rate for all foreign currencies would have increased or decreased 2021 net income by approximately $3.2 million[246] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents audited consolidated financial statements, independent auditor's reports, and detailed notes on accounting policies and segment information Report of Independent Registered Public Accounting Firm RSM US LLP issued an unqualified opinion on the company's consolidated financial statements, identifying revenue recognition as a critical audit matter - RSM US LLP issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2021[252] - Revenue recognition from executive search and consulting engagements was identified as a critical audit matter due to significant management estimates for progress over time and uptick revenue[257][258] Report of Independent Registered Public Accounting Firm (Internal Control) RSM US LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting, excluding Business Talent Group, LLC - RSM US LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[262] - Business Talent Group, LLC (acquired in Q2 2021) was excluded from the assessment of internal control over financial reporting[264] Consolidated Balance Sheets Total assets increased to $1,106.8 million in 2021, driven by higher cash, receivables, and goodwill, with corresponding increases in liabilities and equity Consolidated Balance Sheet Highlights (as of December 31) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Assets | $1,106,798 | $787,812 | +$318,986 | | Total Liabilities | $770,778 | $520,210 | +$250,568 | | Total Stockholders' Equity | $336,020 | $267,602 | +$68,418 | | Cash and cash equivalents | $545,225 | $316,473 | +$228,752 | | Accounts receivable, net | $133,750 | $88,123 | +$45,627 | | Goodwill | $138,524 | $91,643 | +$46,881 | | Accrued salaries and benefits (current) | $409,026 | $217,908 | +$191,118 | Consolidated Statements of Comprehensive Income (Loss) The company reported a net income of $72.6 million in 2021, a significant turnaround from a $37.7 million net loss in 2020 Consolidated Statements of Comprehensive Income (Loss) Highlights (Year Ended December 31) | Metric | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Net Revenue | $1,003,001 | $621,615 | $706,924 | | Total Revenue | $1,008,474 | $629,370 | $725,614 | | Operating Income (Loss) | $98,264 | $(35,529) | $63,511 | | Net Income (Loss) | $72,572 | $(37,707) | $46,869 | | Comprehensive Income (Loss) | $70,830 | $(38,114) | $46,631 | | Basic EPS | $3.72 | $(1.95) | $2.45 | | Diluted EPS | $3.58 | $(1.95) | $2.40 | Consolidated Statements of Cash Flows Net cash increased by $228.8 million in 2021, primarily from $271.4 million in operating activities, offset by investing and financing outflows Consolidated Statements of Cash Flows Highlights (Year Ended December 31) | Cash Flow Activity | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $271,401 | $23,353 | $78,645 | | Net cash provided by (used in) investing activities | $(21,259) | $32,626 | $(69,315) | | Net cash used in financing activities | $(15,517) | $(16,402) | $(18,240) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $228,770 | $44,770 | $(8,543) | | Cash, cash equivalents and restricted cash at end of period | $545,259 | $316,489 | $271,719 | Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity increased to $336.0 million in 2021, driven by net income and stock-based compensation, partially offset by dividends Consolidated Statements of Changes in Stockholders' Equity Highlights (Year Ended December 31) | Metric | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Balance at December 31 | $336,020 | $267,602 | $309,115 | | Net income (loss) | $72,572 | $(37,707) | $46,869 | | Stock-based compensation | $12,760 | $10,199 | $10,298 | | Cash dividends declared | $(11,708) | $(11,576) | $(11,461) | Notes to Consolidated Financial Statements The notes provide detailed information on accounting policies, revenue recognition, credit losses, property, leases, financial instruments, acquisitions, and segment data 1. Basis of Presentation The consolidated financial statements are prepared in accordance with GAAP, involving significant estimates for revenue recognition and impairment assessments - Consolidated financial statements are prepared in accordance with GAAP and include Heidrick & Struggles International, Inc. and its wholly-owned subsidiaries[279] - Significant estimates are made for revenue recognition, deferred tax assets, and impairment assessments of goodwill and other intangible assets[279] 2. Summary of Significant Accounting Policies This section outlines the company's accounting policies for cash, receivables, property, leases, goodwill, revenue, compensation, and income taxes - Cash equivalents are highly liquid instruments with original maturities of three months or less[280] - Accounts receivable allowance is based on historical collection experience, economic conditions, and specific customer reviews[283] - Property and equipment are depreciated using the straight-line method over estimated useful lives[285] - Operating leases are recognized on the balance sheet as right-of-use assets and lease liabilities[289] - Goodwill is tested for impairment at least annually using a discounted cash flow methodology[293][294] - Salaries and benefits include fixed and variable compensation, with cash bonus deferrals terminated for consultants in 2020 and management in 2021[300][303] - Deferred tax assets and liabilities are determined based on temporary differences and enacted tax rates, with valuation allowances applied when realization is uncertain[304] - The company adopted ASU No. 2019-12, 'Simplifying the Accounting for Income Taxes,' on January 1, 2021, with no material impact[312] 3. Revenue Revenue is recognized as performance obligations are satisfied across Executive Search, On-Demand Talent, and Heidrick Consulting segments - Executive Search revenue is recognized over time, with variable 'uptick revenue' estimated at contract inception based on historical analysis[313][314][315] - On-Demand Talent revenue is recognized over time based on time-based fees, with the company acting as the principal for third-party contractor services[317] - Heidrick Consulting revenue is recognized over time using input and output methods for services and straight-line for Culture Connect enterprise agreements[318][319] Changes in Contract Asset and Liability Balances (Year Ended December 31, 2021) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Total contract assets | $36,942 | $19,652 | +$17,290 | | Deferred revenue (contract liabilities) | $51,404 | $38,050 | +$13,354 | 4. Credit Losses The company's expected credit loss allowance for accounts receivable is based on historical collection experience and economic conditions - The company's expected credit loss allowance for accounts receivable is based on historical collection experience, current/future economic conditions, and customer status[326] - The COVID-19 pandemic did not significantly impact the estimate of credit losses[326] Allowance for Credit Losses on Trade Receivables (Year Ended December 31) | Metric | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | :--- | | 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) | | Balance at December 31 | $5,666 | $6,557 | $5,140 | 5. Property and Equipment, net Net property and equipment increased to $27.1 million in 2021, with depreciation expense of $7.1 million, including accelerated depreciation from restructuring Property and Equipment, Net (as of December 31) | Category | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Property and equipment, gross | $81,478 | $80,680 | | Accumulated depreciation | $(54,393) | $(57,188) | | Property and equipment, net | $27,085 | $23,492 | - Depreciation expense was $7.1 million in 2021, $8.1 million in 2020, and $9.5 million in 2019[329] - Accelerated depreciation of $0.9 million in 2021 and $4.2 million in 2020 was recorded due to the restructuring plan's impact on office assets[330] 6. Leases The company's lease portfolio consists of operating leases for office space and equipment, with a $5.7 million gain from a lease termination in 2021 - The company's lease portfolio comprises operating leases for office space and equipment; no finance leases[331] - Operating lease right-of-use assets and liabilities are recognized based on the present value of lease payments, using an incremental borrowing rate[290][332] - In 2021, a lease termination resulted in a $5.7 million gain and accelerated right-of-use asset amortization of $8.7 million[335] Lease Cost Components (Year Ended December 31) | Component | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Operating lease cost | $18,912 | $22,227 | | Variable lease cost | $4,949 | $6,047 | | Total lease cost | $23,861 | $28,274 | Future Maturities of Operating Lease Liabilities (as of December 31, 2021) | Year | Amount (in thousands) | | :--- | :--- | | 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 | 7. Financial Instruments and Fair Value The company's financial instruments include marketable securities and deferred compensation plan investments, measured at fair value using Level 1, 2, and 3 inputs - Marketable debt securities (U.S. Treasury bills, commercial paper) are classified as available-for-sale[340] Cash, Cash Equivalents, and Marketable Securities (as of December 31, 2021) | Category | Fair Value (in thousands) | | :--- | :--- | | Cash | $265,233 | | Money market funds (Level 1) | $80,798 | | U.S. Treasury securities (Level 1) | $199,194 | | Total | $545,225 | - U.S. non-qualified deferred compensation plan investments are primarily Level 1 (marketable securities and mutual funds)[343][345] - German pension plan assets are fully reinsured by group insurance contracts, measured using Level 2 inputs[344][345] - Contingent consideration for acquisitions is valued using Level 3 inputs (discounted cash flow models) due to unobservable market data[349] Reconciliation of Level 3 Liabilities (Year Ended December 31, 2021) | Metric | Acquisition Earnout Accruals (in thousands) | Contingent Compensation Accruals (in thousands) | | :--- | :--- | :--- | | Balance at December 31, 2020 | $— | $(2,390) | | Acquisition earnout | $(23,800) | — | | Earnout accretion | $(486) | — | | Compensation expense | — | $(1,973) | | Fair value adjustment | $(11,368) | — | | Foreign currency translation | — | $222 | | Balance at December 31, 2021 | $(35,654) | $(4,141) | 8. Acquisitions In 2021, the company acquired Business Talent Group (BTG) for $32.6 million, recording $45.5 million in goodwill, and Heidrick & Struggles Finland OY for $1.6 million - Acquired Business Talent Group, LLC (BTG) in April 2021 for $32.6 million initial consideration[352] - BTG acquisition resulted in $45.5 million of goodwill and $10.6 million of other intangible assets (customer relationships, software, trade name)[352] - An earnout liability for BTG increased by $11.4 million to $35.7 million due to performance exceeding initial revenue and operating income estimates[352] - Acquired Heidrick & Struggles Finland OY in October 2021 for $1.6 million, adding $1.5 million of goodwill[353] 9. Goodwill and Other Intangible Assets Goodwill increased to $138.5 million in 2021 due to acquisitions, with no impairment in 2021, contrasting with $33.0 million impairment in 2020 Goodwill by Segment (as of December 31) | Segment | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Americas | $91,463 | $91,643 | | Europe | $1,532 | $— | | On-Demand Talent | $45,529 | $— | | Total Goodwill | $138,524 | $91,643 | - Goodwill increased due to $45.5 million from the BTG acquisition and $1.5 million from the H&S Finland acquisition in 2021[356][357] - The 2021 annual goodwill impairment evaluation showed fair values of Americas, Europe, and On-Demand Talent reporting units exceeded carrying values by 369%, 97%, and 15%, respectively[361] - In 2020, goodwill in Europe and Asia Pacific reporting units was impaired by $24.5 million and $8.5 million, respectively, totaling $33.0 million[362] Other Intangible Assets, Net (as of December 31) | Segment | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Executive Search | $599 | $1,129 | | On-Demand Talent | $8,570 | $— | | Total Other Intangible Assets, Net | $9,169 | $1,129 | - BTG acquisition added $5.8 million for customer relationships, $3.1 million for software, and $1.7 million for a trade name[364] - Intangible asset amortization expense was $2.9 million in 2021, $0.7 million in 2020, and $0.9 million in 2019[365] 10. Other Current Assets Other current assets increased to $41.4 million in 2021 from $23.3 million in 2020, primarily due to an increase in contract assets Components of Other Current Assets (as of December 31) | Component | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Contract assets | $36,942 | $19,652 | | Other | $4,507 | $3,627 | | Total other current assets | $41,449 | $23,279 | 11. Line of Credit The company's unsecured revolving credit facility was increased to $200 million in July 2021, with no outstanding borrowings as of December 31, 2021 - The company's unsecured revolving credit facility was increased to $200 million in July 2021, with a matur