Korn/Ferry International Form 10-Q Summary
Business Context and Reporting Period
Korn/Ferry International provides retained executive recruitment, middle-management recruitment, recruitment process outsourcing, leadership and talent consulting, and related talent-management services through 76 offices in 36 countries. The filing covers the three and six months ended October 31, 2011, the second quarter and first six months of fiscal 2012, with comparisons to the same periods of fiscal 2011.
Key Financial Metrics
| Metric | Three Months Ended October 31, 2011 | Year-over-Year Change | Six Months Ended October 31, 2011 | Year-over-Year Change |
|---|---|---|---|---|
| Fee revenue | $200.1 million | Up 8% | $406.5 million | Up 13% |
| Total revenue | $210.0 million | Up 9% | $424.6 million | Up 13% |
| Operating income | $25.4 million | Up $5.6 million | $51.3 million | Up $12.3 million |
| Operating margin on fee revenue | 12.7% | Up from 10.7% | 12.6% | Up from 10.8% |
| Net income | $15.1 million | Up 11% | $30.6 million | Up 24% |
| Diluted EPS | $0.32 | Up from $0.30 | $0.65 | Up from $0.53 |
| Net cash used in operating activities | Not separately reported | Not applicable | $35.2 million | Compared with $7.7 million used |
Executive Recruitment generated six-month fee revenue of $347.7 million, up 9%, and operating income of $72.5 million, up from $51.6 million. Futurestep generated six-month fee revenue of $58.8 million, up 42%, and operating income of $4.6 million, up from $2.2 million.
At October 31, 2011, cash and cash equivalents were $192.2 million, current marketable securities were $25.9 million, and non-current marketable securities were $100.0 million. Combined cash, cash equivalents, and marketable securities totaled approximately $318.1 million, down from $369.1 million at April 30, 2011. Working capital was approximately $239.1 million.
Total assets were $936.6 million versus $971.7 million at April 30, 2011. Total liabilities were $327.5 million versus $393.3 million. Stockholders’ equity increased to $609.1 million from $578.3 million.
The company had no borrowings under its $50 million senior secured revolving facility. It maintained $10.0 million with the lender as collateral and had $2.9 million of standby letters of credit outstanding. Separately, borrowings against company-owned life insurance policies totaled $73.3 million and were primarily variable-rate obligations.
Material Changes Versus the Prior Comparable Period
- Fee revenue growth reflected an 11% increase in engagements billed during the first six months and a 2% increase in weighted-average fees per engagement. Foreign exchange positively affected six-month fee revenue by approximately $19.0 million.
- Futurestep was the strongest growth contributor, with quarterly fee revenue up 34% and six-month fee revenue up 42%, driven by project-based and middle-management recruitment.
- Operating leverage improved despite higher expenses. Compensation and benefits increased 9% for the six-month period, while general and administrative expenses increased 23%; both increases were more than offset by revenue growth and the absence of $2.1 million of prior-year restructuring charges.
- Compensation and benefits as a percentage of fee revenue declined to 66.1% from 68.8% for the six-month period, primarily due to lower performance-related bonus expense. Futurestep’s compensation ratio increased to 72% from 69%.
- Other income deteriorated to a $4.6 million loss from $1.4 million of income for the six-month period, primarily because trading marketable securities generated a $4.1 million loss versus a $1.7 million gain.
- Cash flow from operations was negative because the company paid $125.0 million of fiscal 2011 bonuses during the first six months. An additional $5.4 million of previously deferred fiscal 2010 bonuses was scheduled for payment in December 2011.
- Investing cash use declined to $17.7 million from $53.5 million, reflecting lower purchases of marketable securities and property and equipment. Share repurchases were limited to tax withholding on vested restricted stock, compared with $13.4 million of repurchases in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quantitative earnings or revenue guidance. Management stated that demand and economic activity improved during fiscal 2011 and the first two quarters of fiscal 2012, but the pace of recovery had slowed and executive-search demand remained below its 2008 peak. Management expects cash on hand and operating funds to cover working capital, capital expenditures, and general corporate requirements for the next twelve months.
Management’s fiscal 2012 strategy emphasizes integrating its multi-service platform, expanding recruitment process outsourcing and leadership and talent consulting, pursuing disciplined acquisitions, and enhancing technology and processes.
- Key risks include economic and labor-market deterioration, reduced demand for executive searches, foreign-currency fluctuations, competition, retention of qualified consultants, client-relationship portability, legal and regulatory exposure, technology and information-system dependence, acquisition integration, and impairment of goodwill or intangible assets.
- The company maintained a $30 million minimum unrestricted cash and marketable-securities covenant under its credit facility, after considering accrued compensation and benefits.
- A restructuring liability of $3.1 million remained at October 31, 2011, primarily for facility costs and severance; no restructuring charge was recorded in the current quarter or six-month period.
- Goodwill and intangible assets had no impairment indicators at October 31, 2011. Available-for-sale securities had $47.5 million of fair value, including $0.2 million of gross unrealized losses; no other-than-temporary impairment was recognized.
- The company reported no material litigation expected to adversely affect its business, financial condition, or results of operations, and no material changes to previously disclosed risk factors.
- Disclosure controls and procedures were determined to be effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm whether revenue growth and margin expansion continue after the favorable foreign-exchange contribution and the absence of prior-year restructuring charges.
- Monitor Futurestep growth against its substantially higher headcount and compensation investment, particularly its 72% compensation-to-fee-revenue ratio.
- Assess recurring operating cash generation after the timing-related fiscal 2011 bonus payments and the December 2011 deferred-bonus payment.
- Distinguish available liquidity from assets held in trust for deferred-compensation obligations, which totaled approximately $78.4 million at fair value.
- Review exposure to variable-rate company-owned life insurance borrowings of $73.3 million and compliance with the revolving-facility covenants.
- Track marketable-security losses, foreign-currency translation effects, receivables collection, and any future goodwill or intangible-asset impairment indicators.