Heidrick & Struggles(HSII) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, significant accounting policies, revenue recognition, credit losses, property and equipment, leases, financial instruments, acquisitions, goodwill, other assets/liabilities, line of credit, stock-based compensation, restructuring, income taxes, and segment information for the three months ended March 31, 2024, and 2023 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (March 31, 2024 vs. December 31, 2023) (in thousands) | Item | March 31, 2024 (Unaudited) | December 31, 2023 | | :--------------------------------- | :-------------------------- | :------------------ | | Current Assets | | | | Cash and cash equivalents | $252,831 | $412,618 | | Marketable securities | — | $65,538 | | Accounts receivable, net | $172,953 | $133,128 | | Total current assets | $512,032 | $693,214 | | Non-current Assets | | | | Goodwill | $200,089 | $202,252 | | Total assets | $965,470 | $1,141,591 | | Current Liabilities | | | | Accrued salaries and benefits | $133,735 | $322,744 | | Total current liabilities | $251,878 | $438,691 | | Total Liabilities | $496,685 | $679,313 | | Total Stockholders' Equity | $468,785 | $462,278 | - Total assets decreased from $1.14 billion at December 31, 2023, to $965.5 million at March 31, 2024, primarily driven by a significant reduction in cash and cash equivalents and marketable securities[9] - Total liabilities decreased from $679.3 million to $496.7 million, largely due to a decrease in accrued salaries and benefits[9] Unaudited Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (Three Months Ended March 31, 2024 vs. 2023) (in thousands) | Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue before reimbursements (net revenue) | $265,197 | $239,317 | | Total revenue | $269,098 | $242,119 | | Operating income | $16,274 | $17,771 | | Net income | $14,032 | $15,586 | | Basic EPS | $0.70 | $0.78 | | Diluted EPS | $0.67 | $0.76 | | Cash dividends paid per share | $0.15 | $0.15 | - Total revenue increased by 11.1% to $269.1 million in Q1 2024 from $242.1 million in Q1 2023, however, net income decreased by 10.1% to $14.0 million from $15.6 million[10][124] - Diluted EPS decreased from $0.76 in Q1 2023 to $0.67 in Q1 2024[10] Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (Three Months Ended March 31, 2024) (in thousands) | Item | Balance at Dec 31, 2023 | Net Income | Other Comprehensive Loss | Stock-based Compensation | Vesting of Equity Awards | Cash Dividends Declared | Dividend Equivalents | Balance at Mar 31, 2024 | | :--------------------------------- | :---------------------- | :--------- | :----------------------- | :----------------------- | :----------------------- | :---------------------- | :------------------- | :---------------------- | | Total Stockholders' Equity | $462,278 | $14,032 | $(4,091) | $2,644 | $(2,862) | $(3,018) | $(198) | $468,785 | - Total stockholders' equity increased from $462.3 million at December 31, 2023, to $468.8 million at March 31, 2024, primarily due to net income, partially offset by other comprehensive loss and cash dividends[11] Unaudited Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31, 2024 vs. 2023) (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(203,424) | $(337,031) | | Net cash provided by investing activities | $54,712 | $228,078 | | Net cash used in financing activities | $(6,078) | $(43,199) | | Net decrease in cash, cash equivalents and restricted cash | $(159,787) | $(150,756) | | Cash, cash equivalents and restricted cash at end of period | $252,831 | $204,733 | - Net cash used in operating activities significantly decreased from $(337.0) million in Q1 2023 to $(203.4) million in Q1 2024, mainly due to a smaller decrease in accrued expenses related to bonus payments[14][169][170] - Net cash provided by investing activities decreased substantially from $228.1 million in Q1 2023 to $54.7 million in Q1 2024, primarily due to lower proceeds from sales of marketable securities and the absence of a large acquisition in 2024[14][171][172] Unaudited Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation of Interim Financial Information - The unaudited Condensed Consolidated Financial Statements are prepared in accordance with SEC rules and U.S. GAAP, requiring management estimates and assumptions that may differ from actual results[15] 2. Summary of Significant Accounting Policies - The Company's significant accounting policies are consistent with those in its 2023 Annual Report on Form 10-K, with specific details provided for revenue recognition, cost of services, research and development, marketable securities, restricted cash, earnings per common share, and leases[16][17][18][19][20][22][23][25][26][27] - The FASB issued ASU No. 2023-09 (Income Taxes) and ASU No. 2023-07 (Segment Reporting), effective for annual periods beginning after December 15, 2024, and December 15, 2023 (interim periods after Dec 15, 2024) respectively, which the Company is currently evaluating for impact[28][29] 3. Revenue - Executive Search revenue is recognized over approximately six months, based on estimated personnel time, with fixed retainers and variable 'uptick' revenue estimated at contract inception[31][32][33] - On-Demand Talent and Heidrick Consulting revenues are recognized over time as services are provided, with On-Demand Talent using a right-to-invoice practical expedient and Heidrick Consulting using input methods (cost/time incurred)[35][36] Contract Balances (March 31, 2024 vs. December 31, 2023) (in thousands) | Item | March 31, 2024 | December 31, 2023 | Change | | :------------------ | :------------- | :---------------- | :----- | | Total contract assets | $33,875 | $32,092 | $1,783 | | Deferred revenue | $47,377 | $45,732 | $1,645 | - The Company recognized $31.2 million in revenue from contract liabilities at the beginning of Q1 2024 and $10.1 million from changes in estimates of variable consideration[41] 4. Credit Losses - The allowance for credit losses on trade receivables increased to $7.5 million at March 31, 2024, from $6.9 million at December 31, 2023, with a provision for credit losses of $1.9 million[43][44] 5. Property and Equipment, net Property and Equipment, net (March 31, 2024 vs. December 31, 2023) (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :-------------------------- | :------------- | :---------------- | | Property and equipment, net | $40,452 | $35,752 | - Net property and equipment increased by $4.7 million to $40.5 million at March 31, 2024. Depreciation expense for Q1 2024 was $2.5 million, up from $2.0 million in Q1 2023[45] 6. Leases Lease Costs (Three Months Ended March 31, 2024 vs. 2023) (in thousands) | Lease Cost Component | March 31, 2024 | March 31, 2023 | | :------------------- | :------------- | :------------- | | Operating lease cost | $5,637 | $4,525 | | Variable lease cost | $2,455 | $1,916 | | Total lease cost | $8,092 | $6,441 | - Total lease cost increased to $8.1 million in Q1 2024 from $6.4 million in Q1 2023. The weighted average remaining lease term for operating leases is 7.3 years with a weighted average discount rate of 4.92% as of March 31, 2024[51] 7. Financial Instruments and Fair Value Cash, Cash Equivalents and Marketable Securities (March 31, 2024 vs. December 31, 2023) (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :-------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $252,831 | $412,618 | | Marketable securities | — | $65,538 | | Total | $252,831 | $478,156 | - The Company's U.S. non-qualified deferred compensation plan investments increased to $54.8 million at fair value as of March 31, 2024, from $47.3 million at December 31, 2023[54][56] Level 3 Liabilities Reconciliation (Three Months Ended March 31, 2024) (in thousands) | Item | Earnout Compensation | Contingent Compensation | | :-------------------------- | :------------------- | :---------------------- | | Balance at December 31, 2023 | $(38,601) | $(18,878) | | Earnout accretion | $(466) | — | | Compensation expense | — | $(1,988) | | Payments | — | $4,821 | | Foreign currency translation | $812 | $491 | | Balance at March 31, 2024 | $(38,255) | $(15,554) | 8. Acquisitions - In Q1 2023, the Company acquired Atreus Group GmbH for $33.4 million (plus a $12.1 million adjustment in Q4 2023) and accrued an estimated $32.0 million earnout liability, recognizing $62.4 million in goodwill[60] - In Q2 2023, the Company acquired businessfourzero for $9.5 million (plus a $2.2 million adjustment in Q3 2023) and accrued an estimated $4.3 million earnout liability, recognizing $7.1 million in goodwill[61] 9. Goodwill and Other Intangible Assets Goodwill by Segment (March 31, 2024 vs. December 31, 2023) (in thousands) | Segment | March 31, 2024 | December 31, 2023 | | :---------------- | :------------- | :---------------- | | Executive Search | $93,007 | $93,234 | | On-Demand Talent | $107,082 | $109,018 | | Heidrick Consulting | $7,246 | $7,246 | | Total goodwill | $200,089 | $202,252 | - Total goodwill decreased by $2.2 million to $200.1 million at March 31, 2024, primarily due to foreign currency translation adjustments[62] Other Intangible Assets, net (March 31, 2024 vs. December 31, 2023) (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :-------------------------- | :------------- | :---------------- | | Client relationships | $13,330 | $14,752 | | Trade name | $1,679 | $1,998 | | Software | $3,296 | $4,092 | | Total other intangible assets, net | $18,305 | $20,842 | - Intangible asset amortization expense was $2.3 million in Q1 2024, up from $1.9 million in Q1 2023[64] 10. Other Current and Non-current Assets and Liabilities Other Current Assets (March 31, 2024 vs. December 31, 2023) (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :------------------ | :------------- | :---------------- | | Contract assets | $33,875 | $32,092 | | Other | $14,990 | $15,831 | | Total | $48,865 | $47,923 | Other Non-current Liabilities (March 31, 2024 vs. December 31, 2023) (in thousands) | Item | March 31, 2024 | December 31, 2023 | | :------------------ | :------------- | :---------------- | | Earnout liability | $38,255 | $38,601 | | Other | $2,897 | $3,207 | | Total | $41,152 | $41,808 | 11. Line of Credit - The Company has a committed unsecured revolving credit facility of $200 million, maturing on July 13, 2026, with no outstanding borrowings as of March 31, 2024, and December 31, 2023[66][68] - The interest rate benchmark for borrowings under the Amended Credit Agreement was changed from LIBOR to SOFR in February 2023[66] 12. Stock-Based Compensation and Common Stock - Stockholders approved an increase of 1,060,000 shares for issuance under the Fourth A&R GlobalShare Program in May 2023, with 522,232 shares remaining available as of March 31, 2024[69][70] Stock-Based Compensation Expense (Three Months Ended March 31, 2024 vs. 2023) (in thousands) | Item | March 31, 2024 | March 31, 2023 | | :--------------------------------- | :------------- | :------------- | | Salaries and benefits (stock-based) | $3,441 | $2,597 | | Income tax benefit | $949 | $715 | - Unrecognized compensation expense for unvested restricted stock units is $12.4 million (weighted average 2.6 years) and for performance stock units is $11.1 million (weighted average 2.7 years) as of March 31, 2024[74][78] - The Company has a share repurchase authorization of up to $50 million, with $20.8 million remaining available as of March 31, 2024. No common stock was repurchased in Q1 2023 or Q1 2024[84] 13. Restructuring - The Company did not incur any restructuring charges under its 2020 Plan during the three months ended March 31, 2024, or 2023, and anticipates no future charges[85] 14. Income Taxes - The effective tax rate for Q1 2024 was 38.8% on income before taxes of $22.9 million, compared to 31.7% on $22.8 million in Q1 2023. The increase in 2024 was impacted by non-deductible earnout expenses and income mix[87] 15. Changes in Accumulated Other Comprehensive Income (Loss) Changes in Accumulated Other Comprehensive Income (Loss) (Three Months Ended March 31, 2024) (in thousands) | Component | Balance at Dec 31, 2023 | Other Comprehensive Income (Loss) before Reclassification | Balance at Mar 31, 2024 | | :-------------------------- | :---------------------- | :------------------------------------------------------ | :---------------------- | | Available for Sale Securities | $42 | $(33) | $9 | | Foreign Currency Translation | $647 | $(4,058) | $(3,411) | | Pension | $(560) | — | $(560) | | Total AOCI | $129 | $(4,091) | $(3,962) | - Accumulated other comprehensive income (loss) shifted from a gain of $129 thousand at December 31, 2023, to a loss of $4.0 million at March 31, 2024, primarily due to foreign currency translation adjustments[88] 16. Segment Information - The Company operates five segments: Executive Search (Americas, Europe, Asia Pacific), On-Demand Talent, and Heidrick Consulting. Segment profitability is measured by Adjusted EBITDA[89][90][92] Revenue and Adjusted EBITDA by Segment (Three Months Ended March 31, 2024 vs. 2023) (in thousands) | Segment | Net Revenue 2024 | Net Revenue 2023 | Adjusted EBITDA 2024 | Adjusted EBITDA 2023 | | :---------------- | :--------------- | :--------------- | :------------------- | :------------------- | | Executive Search | $201,481 | $190,487 | $48,419 | $47,772 | | On-Demand Talent | $37,857 | $31,117 | $(921) | $(1,347) | | Heidrick Consulting | $25,859 | $17,713 | $(2,027) | $(2,795) | | Total Net Revenue | $265,197 | $239,317 | $25,868 | $25,627 | - Total Adjusted EBITDA increased slightly to $25.9 million in Q1 2024 from $25.6 million in Q1 2023, but Adjusted EBITDA margin decreased from 10.7% to 9.8%[93][94] 17. Guarantees - The Company has letters of credit totaling approximately $4.8 million as of March 31, 2024, primarily supporting office lease agreements, with no accrued liability as no default exists[95] 18. Commitments and Contingencies - The Company faces contingent liabilities from various pending claims and litigation in the ordinary course of business, but management believes the ultimate resolution will not materially adversely affect its financial condition[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations for the three months ended March 31, 2024, compared to the same period in 2023, covering an executive overview, key performance indicators, compensation model, Q2 2024 outlook, detailed results of operations by segment, liquidity and capital resources, and critical accounting policies Executive Overview - Heidrick & Struggles is a human capital leadership advisory firm offering executive search, consulting, and on-demand talent services globally, focusing on top-level senior executives[100][101][102] - The Company expanded its On-Demand Talent presence in Europe through the Atreus Group GmbH acquisition in February 2023 and enhanced Heidrick Consulting with the businessfourzero acquisition in April 2023[106][107] - Key performance indicators include net revenue, Adjusted EBITDA, Adjusted EBITDA margin, consultant headcount, confirmed search trends, consultant productivity, and average revenue per search[111] Second Quarter 2024 Outlook - The Company expects Q2 2024 consolidated net revenue to be between $255 million and $275 million, subject to external factors like foreign exchange rates, geopolitical conflicts, inflation, and macroeconomic conditions[119] Results of Operations Consolidated Results of Operations (Three Months Ended March 31, 2024 vs. 2023) (in thousands) | Item (as % of net revenue) | 2024 | 2023 | | :------------------------- | :--- | :--- | | Revenue before reimbursements | 100.0% | 100.0% | | Total revenue | 101.5% | 101.2% | | Salaries and benefits | 65.8% | 66.4% | | General and administrative expenses | 15.6% | 14.3% | | Cost of services | 10.3% | 9.5% | | Operating income | 6.1% | 7.4% | | Net income | 5.3% | 6.5% | - Consolidated net revenue increased by 10.8% to $265.2 million in Q1 2024, with foreign exchange positively impacting results by $1.1 million[125] - Executive Search net revenue increased by 5.8% to $201.5 million, driven by an increase in average revenue per search ($136k in 2024 vs $124k in 2023)[125][126] - On-Demand Talent net revenue surged by 21.7% to $37.9 million, primarily due to increased project volume from the Atreus acquisition[125][150] - Heidrick Consulting net revenue grew by 46.0% to $25.9 million, boosted by the businessfourzero acquisition and more leadership assessment engagements[125][155] - Consolidated salaries and benefits expense increased by 9.8% to $174.4 million, mainly due to higher bonus accruals from increased consultant productivity[127] - Consolidated general and administrative expenses rose by 20.5% to $41.4 million, attributed to increases in business development travel, office occupancy, IT, and intangible amortization[129] - Consolidated Adjusted EBITDA increased by 0.9% to $25.9 million, but the Adjusted EBITDA margin declined from 10.7% to 9.8%[134] Liquidity and Capital Resources - The Company believes its cash balances, operational cash flow, and revolving credit facility are sufficient to finance operations for at least the next 12 months[163] - Cash, cash equivalents, and marketable securities decreased to $252.8 million at March 31, 2024, from $478.2 million at December 31, 2023[168] - Cash used in operating activities was $203.4 million in Q1 2024, a significant improvement from $337.0 million in Q1 2023, primarily due to lower bonus payments[169][170] - Cash provided by investing activities decreased to $54.7 million in Q1 2024 from $228.1 million in Q1 2023, mainly due to reduced proceeds from marketable securities sales and no major acquisitions[171][172] - Cash used in financing activities was $6.1 million in Q1 2024, down from $43.2 million in Q1 2023, as the prior year included a $35.9 million earnout payment[173][174] Application of Critical Accounting Policies and Estimates - Critical accounting policies involve significant estimates and assumptions related to revenue recognition, income taxes, interim effective tax rate, and assessment of goodwill and other intangible assets for impairment[179] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses the Company's exposure to market risks, primarily currency market risk, due to its global operations, noting that revenue and expenses are generally matched in local currencies to reduce risk, but translation of foreign currency financial statements can cause fluctuations in asset and liability valuations - A 10% change in average exchange rates for foreign currencies would have impacted net income by approximately $0.4 million for the three months ended March 31, 2024[181] Item 4. Controls and Procedures This section confirms that the Company's management, including the principal executive and financial officers, evaluated the effectiveness of its disclosure controls and procedures as of March 31, 2024, and concluded they were effective, also stating that there were no material changes to internal control over financial reporting during the quarter - The Company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2024[183] - No material changes to internal control over financial reporting occurred during the three months ended March 31, 2024[184] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section incorporates by reference the information on commitments and contingencies from Note 18 of the Condensed Consolidated Financial Statements, which addresses pending claims and litigation - Information regarding legal proceedings is incorporated from Note 18, Commitments and Contingencies, of the Condensed Consolidated Financial Statements[185] Item 1A. Risk Factors This section states that there have been no material changes to the Company's risk factors from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023 - No material changes to the Company's risk factors have occurred since the Annual Report on Form 10-K for the year ended December 31, 2023[186] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report for the period - There were no unregistered sales of equity securities or use of proceeds to report[187] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various forms of stock unit participation agreements, certifications from the CEO and CFO, and Inline XBRL documents - The report includes exhibits such as Performance Stock Unit and Restricted Stock Unit Participation Agreements, CEO/CFO certifications (Sarbanes-Oxley Act), and Inline XBRL documents[188] SIGNATURE This section contains the signature of the registrant, duly authorized by Stephen A. Bondi, Vice President, Controller, and Chief Accounting Officer, on May 6, 2024, certifying the filing of the report - The report was signed on May 6, 2024, by Stephen A. Bondi, Vice President, Controller, and Chief Accounting Officer[192]