Korn/Ferry International Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended January 31, 2011, compared with the corresponding periods ended January 31, 2010. The filing was signed March 14, 2011. The company provides executive recruitment, Futurestep talent acquisition and recruitment-process outsourcing, leadership and talent consulting, and related services through 76 offices in 36 countries.
Financial performance and liquidity
| Metric | Three months ended Jan. 31, 2011 | Three months ended Jan. 31, 2010 | Nine months ended Jan. 31, 2011 | Nine months ended Jan. 31, 2010 |
|---|---|---|---|---|
| Fee revenue | $186.5 million | $146.7 million | $547.0 million | $403.7 million |
| Total revenue | $194.1 million | $152.9 million | $570.5 million | $422.7 million |
| Operating income (loss) | $20.5 million | $6.4 million | $59.5 million | $(16.4) million |
| Operating margin on fee revenue | 11.0% | 4.3% | 10.9% | (4.1)% |
| Net income (loss) | $14.0 million | $7.9 million | $38.5 million | $(3.6) million |
| Diluted EPS | $0.30 | $0.17 | $0.84 | $(0.08) |
| Cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $26.6 million | $(70.8) million |
- Third-quarter fee revenue increased 27%, driven by an 18% increase in engagements billed and a 7% increase in weighted-average fees per engagement. Nine-month fee revenue increased 35%, driven by 27% more engagements and a 7% increase in average fees.
- Executive recruitment generated $163.1 million of third-quarter fee revenue and $482.1 million for the nine-month period. Futurestep generated $23.3 million and $64.9 million, respectively.
- Third-quarter executive recruitment operating margin improved to 17.8% from 14.3%; Futurestep margin improved to 5.4% from 3.2%. For the nine months, executive recruitment margin was 16.7% versus 4.3%, while Futurestep was 5.3% versus 4.7%.
- Compensation and benefits increased 23% in the quarter and 27% for the nine months, primarily from higher variable compensation and increased headcount. Global headcount was 9% higher year over year in the quarter.
- At January 31, 2011, cash and cash equivalents were $181.3 million and marketable securities were $122.3 million, totaling $303.6 million, compared with $296.5 million at April 30, 2010. Working capital was $183.5 million.
- Nine-month investing cash outflows were $65.9 million, including $22.4 million of property and equipment purchases and $40.9 million of net marketable-securities purchases. Financing cash flow was a $0.4 million outflow.
- The company reported no borrowings under its credit facility and no long-term debt at January 31, 2011. It had $68.5 million of borrowings against company-owned life-insurance cash surrender value, primarily at variable rates.
- Standby letters of credit totaled $8.4 million and were supported by $9.0 million of pledged cash. In March 2011, the company replaced its expiring facility with a senior secured revolving facility providing up to $50 million of availability, subject to borrowing-base requirements.
Material changes versus the prior comparable period
- Revenue growth was broad-based across all regions, with particularly strong third-quarter growth in North America, Asia Pacific, and South America. Futurestep revenue increased 33% in the quarter and 30% for the nine months.
- Nine-month operating results improved substantially from a loss to income, primarily because of higher revenue and an $18.5 million reduction in net restructuring costs. The prior-year period included substantial EMEA restructuring related to the Whitehead Mann acquisition and workforce and facility consolidation.
- Restructuring expense was $2.1 million in the nine months ended January 31, 2011, versus $20.6 million in the prior-year period. The remaining restructuring liability was $6.3 million at January 31, 2011.
- General and administrative expense as a percentage of fee revenue declined to 16% for the nine months from 22%, although bad-debt expense increased by $2.5 million.
- Cash from operations improved by $97.4 million year over year, although cash balances declined during the nine months because of deferred fiscal 2009 bonus payments and other investing activity.
- The company repurchased 724,064 shares for $10.6 million during the nine months; $24.4 million remained available under the repurchase authorization at January 31, 2011.
- A $1.9 million reduction in acquisition-related contingent consideration was recorded in general and administrative expense. Auction-rate securities were redeemed at full value during the nine months.
Outlook, risks, contingencies, and unusual items
Management stated that economic conditions and demand improved during the nine months, but executive-search demand remained below peak levels and further recovery could be gradual. The company intends to integrate its multi-service strategy, expand recruitment-process outsourcing and leadership and talent consulting, pursue disciplined acquisitions, enhance technology and processes, and leverage its brand and intellectual property.
- Management believes cash on hand and operating cash flows will meet anticipated working capital, capital expenditure, and general corporate requirements for the next twelve months.
- Risks include global economic weakness, competition, attracting and retaining qualified consultants, client-relationship portability, political and currency developments, legal and employment liability, technology and systems reliance, off-limits agreements, acquisition integration, cost-structure alignment, goodwill and intangible-asset impairment, and potentially unusable deferred tax assets.
- Future revenue declines could require additional cost reductions or financing. The company reported no material legal proceedings and no material changes to the risk factors in its prior Form 10-K.
- Annual incentive compensation, receivable collectability, deferred compensation, marketable securities, goodwill, intangible assets, and deferred taxes require significant management estimates. A $5.2 million deferred fiscal 2010 bonus liability was payable in December 2011 regardless of continued employment.
- The effective tax rate was approximately 39% in both the quarter and nine-month period. The prior-year tax benefit was affected by a $10.3 million reversal of a tax reserve and other tax-related adjustments.
- The company reported no off-balance-sheet arrangements and stated that disclosure controls were effective. Additional compensation-related internal controls were implemented during the quarter.
Investor verification checklist
- Verify whether revenue growth and engagement volumes remained durable after the January 31, 2011 reporting date, particularly in North America and Futurestep.
- Assess the sustainability of margins as variable compensation and headcount rise with revenue.
- Reconcile operating cash flow with earnings, receivables growth, deferred bonuses, and future bonus payments.
- Review the borrowing-base terms, covenants, collateral requirements, and actual availability under the March 2011 revolving facility.
- Monitor the $68.5 million of company-owned life-insurance borrowings and related variable-rate exposure.
- Evaluate collectability risk, given the increase in receivables and doubtful-account provision.
- Track the remaining $6.3 million restructuring liability, facility commitments, and any additional restructuring charges.
- Confirm the effect of currency movements, tax-rate normalization, deferred compensation investment gains and losses, and potential goodwill or intangible-asset impairment.