Korn/Ferry International Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2016. The provided filing is a fiscal 2016 annual report, not a 2015 fourth-quarter filing. Korn Ferry operated 150 offices in 52 countries and had 6,947 full-time employees. Its three operating segments were Executive Search, Hay Group and Futurestep.
Financial performance and position
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Fee revenue | $1,292.1 million | $1,028.2 million | +26% |
| Total revenue | $1,346.7 million | $1,066.1 million | +26% |
| Operating income | $52.7 million | $114.0 million | -54% |
| Operating margin | 4.1% | 11.1% | Down 7.0 percentage points |
| Net income attributable to Korn Ferry | $30.9 million | $88.4 million | -65% |
| Diluted EPS | $0.58 | $1.76 | Down $1.18 |
| Adjusted EBITDA | $189.7 million | $161.7 million | +17% |
| Adjusted EBITDA margin | 14.6% | 15.7% | Down 1.1 percentage points |
| Cash flow from operations | $64.1 million | $107.3 million | Down $43.2 million |
| Cash and cash equivalents | $273.3 million | $380.8 million | Down $107.6 million |
| Cash, cash equivalents and marketable securities | $414.7 million | $525.4 million | Down $110.7 million |
Segment performance: Executive Search generated $622.9 million of fee revenue and $131.7 million of operating income, with a 21.1% operating margin. Hay Group generated $471.1 million of fee revenue but recorded a $3.4 million operating loss. Futurestep generated $198.1 million of fee revenue and $26.7 million of operating income, with a 13.5% margin. Corporate expenses produced a $102.3 million operating loss.
Balance sheet and liquidity: Total assets were $1.899 billion and total stockholders’ equity was $1.047 billion at April 30, 2016. Working capital was $188.0 million. The company had $140.0 million outstanding under its term loan, no borrowings under its revolver, and was in compliance with debt covenants at year-end. Marketable securities included $141.4 million held in trust for deferred compensation obligations.
Material changes versus the prior comparable period
- Fee revenue increased $263.9 million, primarily due to the acquisition of Legacy Hay Group and growth in Futurestep and North American Executive Search. Excluding Legacy Hay Group, fee revenue increased 7% on a reported basis.
- Legacy Hay Group was acquired on December 1, 2015 for $476.9 million, consisting of $259.0 million in cash and 5.9 million Korn Ferry shares valued at $217.9 million. It contributed $186.8 million of fiscal 2016 fee revenue and $28.5 million of Adjusted EBITDA.
- Operating profitability declined substantially because of acquisition-related costs, restructuring charges, higher compensation, increased general and administrative expenses, foreign currency losses and the initial operating loss of Legacy Hay Group.
- Fiscal 2016 restructuring charges were $33.0 million, versus $9.5 million in fiscal 2015. The charges primarily related to severance and office consolidation associated with the Hay Group integration.
- Foreign exchange was a significant headwind. Reported fee revenue was reduced by approximately $66.8 million from exchange rates, and the Venezuelan bolivar devaluation generated a $13.7 million pre-tax charge.
- Cash used in investing activities increased to $274.6 million, primarily reflecting $256.1 million of cash consideration for Legacy Hay Group. Cash provided by financing activities was $118.5 million, primarily from the term loan borrowing.
- Shares outstanding increased materially because of the 5.9 million shares issued as acquisition consideration. The company paid $21.8 million of dividends during fiscal 2016 and repurchased no shares under its open-market repurchase program.
Outlook, management commentary, risks and unusual items
Management’s strategy emphasized integration of Legacy Hay Group, expansion of integrated people and organizational advisory solutions, increased use of proprietary intellectual property and analytics, technology investment, cross-selling among business segments and disciplined acquisitions. Management expected the Legacy Hay Group integration to be substantially complete in the first quarter of fiscal 2017, with additional costs of approximately $20 million to $26 million and estimated annualized savings of approximately $17 million to $23 million.
On June 15, 2016, after the reporting date, Korn Ferry entered into a new $400 million senior secured credit agreement comprising a $275 million term loan and a $125 million revolving facility. The company used $140 million of the new term loan to repay the year-end term loan. The new facilities mature June 15, 2021 and provide additional liquidity, subject to leverage, interest coverage and other covenants.
Management believed available cash, operating cash flow and credit capacity would be sufficient for working capital, capital expenditures, debt service, Hay Group retention obligations and dividends over the next twelve months. The filing cautions that weaker economic, credit or labor-market conditions could reduce demand, pricing and operating cash flow.
- Key risks include cyclicality, competition, consultant retention, portability of client relationships, pricing pressure, utilization and billing rates, acquisition integration, goodwill and intangible-asset impairment, foreign currency volatility, cybersecurity, data privacy, intellectual-property protection and legal or employment claims.
- Goodwill and purchased intangible assets represented approximately 31% and 12% of total assets, respectively. No goodwill impairment was recorded, but future impairment remains possible if operating assumptions deteriorate.
- Deferred revenue was $95.9 million at April 30, 2016, compared with $40.5 million a year earlier.
- Contractual obligations totaled approximately $680.4 million, including $446.9 million of operating lease commitments, $140.0 million of term-loan principal, $40.0 million of Legacy Hay Group retention awards and related interest obligations.
- No material litigation was disclosed, and the auditors issued unqualified opinions on the financial statements and internal control over financial reporting. However, the acquired Legacy Hay Group entity was excluded from management’s and the auditor’s year-end internal-control assessment under SEC acquisition guidance.
Important facts for investors to verify
- Separate the underlying performance of the legacy businesses from the reported results, which include only five months of Legacy Hay Group activity and substantial acquisition and restructuring effects.
- Assess whether the projected $17 million to $23 million of annualized integration savings justify the estimated $20 million to $26 million of additional fiscal 2017 integration costs.
- Review the new credit agreement’s leverage and interest-coverage requirements, mandatory amortization, dividend restrictions and available revolving capacity.
- Monitor Hay Group’s return to profitability, corporate expense levels and the sustainability of the 14.6% Adjusted EBITDA margin.
- Evaluate cash conversion, given the decline in operating cash flow to $64.1 million and the significant cash outlay for the acquisition.
- Examine goodwill, trademarks and other acquired intangible assets for impairment sensitivity, particularly if economic conditions or integration results weaken.
- Consider foreign exchange exposure, including the 48% of fee revenue generated outside the United States and the continuing risks in Venezuela and other international markets.