Korn Ferry Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2021. The request references 2020 Q4, but the filing is the fiscal 2021 annual report; fourth-quarter information is presented for the quarter ended April 30, 2021.
Business Context
Korn Ferry is a global organizational consulting firm operating through Consulting, Digital, Executive Search, and RPO & Professional Search. It served 13,038 organizations in fiscal 2021, with approximately 90% of engagements performed for clients served during the prior three fiscal years. The Company had 7,889 full-time employees, 101 offices in 53 countries, and generated 54% of fee revenue outside the United States.
COVID-19 reduced demand across most businesses, particularly in the first quarter of fiscal 2021. Management reported substantial sequential improvement thereafter, including fourth-quarter fee revenue of $555.2 million, up 17% from the third quarter.
Financial Performance and Key Metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Fee revenue | $1,810.0 million | $1,932.7 million | Down 6.3% |
| Total revenue | $1,819.9 million | $1,977.3 million | Down 8.0% |
| Operating income | $155.8 million | $176.0 million | Down 11.5% |
| Net income attributable to Korn Ferry | $114.5 million | $104.9 million | Up 9.1% |
| Diluted earnings per share | $2.09 | $1.90 | Up 10.0% |
| Adjusted EBITDA | $286.3 million | $301.0 million | Down 4.9% |
| Adjusted EBITDA margin | 15.8% | 15.6% | Up 0.2 points |
| Operating margin | 8.6% | 9.1% | Down 0.5 points |
| Net margin on fee revenue | 6.3% | 5.4% | Up 0.9 points |
Compensation and benefits expense was essentially flat at $1,297.9 million, while general and administrative expense declined 26% to $191.8 million. Restructuring charges were $30.7 million in fiscal 2021 versus $58.6 million in fiscal 2020. Other income was $37.2 million, primarily reflecting gains in marketable securities, compared with a $2.9 million loss in fiscal 2020. Net interest expense increased to $29.3 million from $22.2 million, primarily because of the 4.625% senior unsecured notes issued in December 2019.
Segment Revenue and Profitability
| Business | Fiscal 2021 Fee Revenue | Year-over-Year Change | Adjusted EBITDA Margin |
|---|---|---|---|
| Consulting | $515.8 million | Down 5% | 15.8% |
| Digital | $287.3 million | Down 2% | 30.0% |
| Executive Search | $637.0 million | Down 13% | 20.1% |
| RPO & Professional Search | $369.9 million | Up 1% | 18.8% |
RPO revenue increased $18.0 million, offsetting a $12.9 million decline in Professional Search revenue. Executive Search weakness was broad-based, with fiscal 2021 fee revenue down 9% in North America, 18% in EMEA, 15% in Asia Pacific, and 40% in Latin America.
Cash Flow, Liquidity and Debt
- Cash provided by operating activities was $251.4 million, compared with $236.3 million in fiscal 2020.
- Cash used in investing activities was $61.4 million, compared with $198.8 million in fiscal 2020, which included $108.6 million for acquisitions.
- Cash used in financing activities was $66.9 million, compared with $43.7 million provided in fiscal 2020.
- Cash and cash equivalents were $850.8 million; total cash, cash equivalents and marketable securities were $1.097 billion.
- After excluding amounts held in trust for deferred compensation plans and accrued bonuses, cash and marketable securities were $642.1 million.
- Working capital increased to $737.1 million from $612.9 million.
- The Company had $394.8 million of carrying-value long-term debt, representing $400.0 million of 4.625% senior unsecured notes due December 2027, net of discount and issuance costs.
- No amounts were outstanding under the $650.0 million revolving credit facility; $646.0 million remained available after letters of credit.
- The Company stated that it was in compliance with debt covenants and expected available liquidity to fund operations, capital expenditures, debt obligations and dividends for the next 12 months.
- Fiscal 2021 share repurchases were $30.4 million and dividends paid were $22.5 million. The Board subsequently increased the quarterly dividend from $0.10 to $0.12 per share effective June 2021.
Material Changes Versus the Prior Comparable Period
- Fee revenue declined 6.3% because of COVID-19-related economic contraction, although sequential revenue improved materially through the year.
- Cost reductions, lower travel and office expenses, and reduced headcount helped offset the revenue decline.
- Average headcount declined 5%; year-end full-time employees declined to 7,889 from 8,198.
- Restructuring charges declined by $27.8 million, while general and administrative expenses declined by $67.2 million.
- Net income increased despite lower revenue, supported by cost savings, lower restructuring charges, and a $40.1 million year-over-year improvement in other income.
- Adjusted EBITDA declined because of lower fee revenue, but the margin improved modestly due to the restructured cost base.
- Cash increased by $161.5 million during the year, and liquidity strengthened despite share repurchases, dividends and capital expenditures.
- The Company introduced Nimble, an integrated recruitment technology solution, and continued investments in Digital, data, intellectual property and technology-enabled services.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal fiscal 2022 revenue or earnings guidance. Management said it believed costs were aligned with current revenue levels but cautioned that the pace of fourth-quarter revenue recovery might not continue because of COVID-19 variants, vaccine effectiveness, renewed restrictions and broader economic uncertainty.
- Principal risks include renewed pandemic disruption, cyclical demand, competition, pricing pressure, consultant retention, utilization and billing rates.
- International operations expose the Company to foreign currency, geopolitical, regulatory, tax and Brexit-related risks. The United Kingdom represented 10.5% of fiscal 2021 fee revenue.
- Cybersecurity, data privacy, intellectual property and third-party technology risks are material, particularly for Digital and technology-enabled recruiting services.
- The Revolver bears variable interest rates, and the phase-out of LIBOR could affect borrowing costs and refinancing terms.
- Goodwill was $626.7 million, approximately 21% of total assets. The January 2021 impairment test indicated no impairment, but future deterioration in operating performance or market conditions could create impairment risk.
- Deferred compensation and retirement-plan obligations totaled $364.8 million, and the Company relied partly on company-owned life insurance and marketable securities to fund these obligations.
- Unrecognized tax benefits were $10.0 million, with tax audits ongoing in Brazil, Germany, Switzerland, Japan and India.
- The Company reported no material pending legal proceedings and no off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Whether the sequential recovery in fee revenue and profitability continued after April 30, 2021.
- Whether Executive Search revenue, particularly in EMEA and Latin America, recovered to pre-pandemic levels.
- Whether RPO growth can offset weakness in Professional Search and cyclical businesses.
- The sustainability of cost savings after salaries were fully reinstated and remaining salary reductions were repaid.
- Compliance with leverage, liquidity and dividend restrictions under the Notes and Revolver.
- The effect of marketable-security gains and deferred-compensation accounting on reported earnings.
- Potential goodwill impairment if economic conditions or operating results weaken.
- The effect of foreign exchange movements, LIBOR transition and global data-privacy requirements on future results.