Korn/Ferry International 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended October 31, 2002 (Fiscal Q2 2003) and the six months ended October 31, 2002. Korn/Ferry International is a global executive and middle-management recruitment firm operating primarily through two segments: Executive Recruitment and Futurestep. The company continues to implement restructuring initiatives initiated in fiscal 2002 to reduce costs and reposition the business in response to a global economic downturn.
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 2002 | Six Months Ended Oct 31, 2002 |
|---|---|---|
| Fee Revenue | $79.6 million | $163.5 million |
| Total Revenue | $85.7 million | $175.4 million |
| Operating Loss | $(15.9) million | $(14.6) million |
| Net Loss | $(18.0) million | $(18.6) million |
| Net Loss Attributed to Common Shareholders | $(18.3) million | $(19.0) million |
| Basic Loss Per Share | $(0.48) | $(0.50) |
| Cash and Cash Equivalents | $60.5 million | $60.5 million (Ending Balance) |
| Net Cash Used in Operating Activities | N/A | $(4.1) million |
| Long-Term Debt | $41.4 million | $41.4 million |
| Current Liabilities | $76.5 million | $76.5 million |
Note: Revenue includes reimbursed out-of-pocket expenses. Operating loss includes significant restructuring and asset impairment charges.
Material Changes vs. Prior Period
- Revenue Decline: Fee revenue decreased 20% year-over-year for both the three-month and six-month periods, driven by a global economic slowdown affecting all geographic regions (North America, Europe, Asia/Pacific, and South America).
- Restructuring Charges: The company recorded $16.3 million in asset impairment and restructuring charges for the quarter ended October 31, 2002. This is a significant reduction from the $34.8 million recorded in the same period in 2001. The current quarter's charges relate to severance for approximately 130 employees and facility consolidation costs.
- Improved Operating Performance (Adjusted): Excluding restructuring and impairment charges, operating profit improved to a near-break-even position ($0.3 million profit) for the quarter, compared to a loss of $1.9 million in the prior year. This improvement is attributed to a 30% workforce reduction and cost-saving initiatives implemented in fiscal 2002.
- Segment Performance:
- Executive Recruitment: Fee revenue declined 19% year-over-year. Operating profit (excluding charges) decreased slightly due to cost reductions not fully offsetting revenue declines in North America.
- Futurestep: Fee revenue declined 23%. Operating loss (excluding charges) improved significantly (55% reduction) due to a 46% reduction in employee headcount.
Guidance, Outlook, and Risks
- Liquidity and Capital Resources: The company raised $50.0 million in June 2002 via a private placement of convertible notes and preferred stock. The company's credit facility with Bank of America matured in November 2002, and management is considering replacing it. As of October 31, 2002, there were no borrowings outstanding under the credit facility.
- Outlook: Management believes cash on hand and funds from operations will be sufficient to meet working capital and capital expenditure requirements for the foreseeable future. The company expects continued weakness in the global economy to impact demand.
- Accounting Changes:
- Adopted EITF No. 01-14, reclassifying candidate "out-of-pocket" expenses from a net reduction in revenue to gross revenue and expense (no impact on net income).
- Changed accounting for Mexico subsidiaries from consolidation to the equity method (no impact on net income).
- Risks: Key risks include dependence on retaining qualified consultants, portability of client relationships, local political/economic developments, and the ability to manage growth. The company also faces risks related to the growth and results of the Futurestep segment.
Investor Verification Checklist
- Credit Facility Status: Verify the status of the replacement for the Bank of America credit facility that matured in November 2002.
- Restructuring Accruals: Review the remaining accrued liabilities for severance ($3.6 million) and facilities ($16.4 million) and the timeline for their payout.
- Convertible Securities: Assess the impact of the $40 million convertible notes and $10 million preferred stock issued in June 2002, including mandatory redemption terms in 2010 and conversion features.
- Revenue Quality: Analyze the sustainability of the revenue decline and the effectiveness of cost-cutting measures in maintaining margins as the economy recovers.
- COLI Borrowings: Monitor the $60.7 million in borrowings against Company Owned Life Insurance (COLI) policies and their variable interest rate exposure.