Korn/Ferry International — Form 10-Q Summary
Business context and reporting period
Korn/Ferry provides executive search, talent and organizational advisory services through Executive Search, Hay Group and Futurestep. The filing covers the three and six months ended October 31, 2016, the second quarter and first half of fiscal 2017. The financial statements are unaudited. The Legacy Hay acquisition, completed in December 2015, materially affects year-over-year comparability.
Key financial metrics
| Metric | Three months ended October 31, 2016 | Six months ended October 31, 2016 |
|---|---|---|
| Fee revenue | $401.9 million | $777.5 million |
| Total revenue | $415.0 million | $807.9 million |
| Operating income | $46.5 million; 11.6% of fee revenue | $51.1 million; 6.6% of fee revenue |
| Net income attributable to Korn/Ferry | $30.2 million; $0.52 diluted EPS | $33.4 million; $0.58 diluted EPS |
| Adjusted EBITDA | $63.3 million; 15.7% of fee revenue | $119.7 million; approximately 15% of adjusted fee revenue |
| Cash flow from operating activities | Not separately provided | $(88.6) million |
| Cash, cash equivalents and marketable securities | $390.0 million at October 31, 2016 |
At October 31, 2016, cash and cash equivalents were $250.0 million, current and non-current marketable securities were $140.0 million, and total assets were $1.95 billion. Total liabilities were $895.9 million and stockholders’ equity was $1.05 billion.
Term-loan debt was $269.8 million at October 31, 2016, compared with $140.0 million under the prior facility at April 30, 2016. The company had no revolving-credit borrowings. The new senior secured credit agreement provides a $275 million term facility and a $125 million revolver, both maturing June 15, 2021. Korn/Ferry reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Second-quarter fee revenue increased 43% from $280.6 million to $401.9 million, primarily because of the Hay Group acquisition and higher Futurestep revenue. Executive Search revenue was essentially flat.
- First-half fee revenue increased 42% from $548.0 million to $777.5 million. Hay Group revenue increased 154% to $363.4 million, Futurestep increased 15% to $111.5 million, and Executive Search declined 2% to $302.6 million.
- Second-quarter operating income increased from $29.0 million to $46.5 million, and net income attributable to Korn/Ferry increased 68% from $18.0 million to $30.2 million.
- First-half operating income declined from $61.9 million to $51.1 million, and net income attributable to Korn/Ferry declined 19% from $41.1 million to $33.4 million. The decline reflected integration costs, restructuring charges, higher compensation, general and administrative expense, cost of services, and depreciation and amortization.
- First-half restructuring charges were $24.5 million, consisting of $11.5 million of severance and $13.0 million for office-space consolidation. No restructuring charges were recorded in the prior-year first half.
- Adjusted EBITDA increased from $46.0 million to $63.3 million in the quarter and from $87.7 million to $119.7 million for the first half, although the first-half adjusted EBITDA margin declined from approximately 16% to approximately 15%.
- Operating cash flow remained negative at $(88.6) million, compared with $(73.4) million in the prior-year period. Investing cash outflow increased to $30.8 million, including $32.3 million of property and equipment purchases.
- Cash and marketable securities declined from $414.7 million at April 30, 2016 to $390.0 million at October 31, 2016. The change reflected bonus payments, capital expenditures, dividends and share repurchases, partly offset by new term-loan financing.
Outlook, commentary, risks and unusual items
Management stated that cash on hand, operating funds and available credit were expected to be sufficient for working capital, capital expenditures, debt service, Legacy Hay retention obligations, dividends and anticipated share repurchases over the next twelve months. Management also noted that a deterioration in economic, credit-market or labor-market conditions could reduce demand, pressure operating cash flow and require use of the revolver or suspension of dividends.
The Legacy Hay integration continued during fiscal 2017, including elimination of redundant positions, consolidation of office space, and integration of go-to-market activities, intellectual property, offerings, systems and processes. A $40 million retention pool remains associated with the acquisition, with portions payable after November 30, 2017 and November 30, 2018.
The company declared a quarterly dividend of $0.10 per share in December 2016. It repurchased approximately $6.9 million of common stock during the quarter, leaving approximately $143.1 million available under the repurchase authorization.
Key risks include dependence on attracting and retaining consultants, economic and political conditions across global markets, foreign-currency fluctuations, competition, client relationship portability, cybersecurity and information-system risks, legal and regulatory exposure, goodwill and intangible-asset impairment, integration execution, utilization and billing rates, seasonality, and the ability to align the cost structure with demand. The filing reported no material changes to the risk factors in the prior Form 10-K and no litigation expected to have a material adverse effect.
Other notable items include $3.5 million of first-half adjusted fee revenue related to deferred revenue accounting for the Legacy Hay acquisition, $5.8 million of first-half integration/acquisition costs, and $3.4 million of other income primarily related to marketable-securities fair-value changes. Foreign-currency translation losses reduced comprehensive income, with accumulated other comprehensive loss of $75.2 million at October 31, 2016.
Important facts for investors to verify
- Whether Hay Group integration produces sustainable revenue and margin benefits after restructuring and acquisition adjustments subside.
- The trend in Executive Search revenue, particularly North America, EMEA and Asia Pacific, where first-half revenue declined.
- Conversion of reported earnings into cash, including receivables growth and the negative first-half operating cash flow.
- Term-loan amortization, variable-rate exposure, leverage-covenant compliance and the effect of higher LIBOR rates.
- The remaining timing and amount of Hay-related restructuring, retention-pool and other integration obligations.
- The extent to which adjusted EBITDA and adjusted fee revenue depend on management-defined exclusions and acquisition-related adjustments.
- Future dividend and share-repurchase capacity under the credit agreement’s leverage and liquidity conditions.