KFY

Korn/Ferry International 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for Korn/Ferry International, the world's largest executive recruitment firm, for the period ended January 31, 2000. The company operates globally with 440 consultants in over 70 offices across 40 countries. Its business is divided into two primary segments: traditional executive recruitment and Futurestep, an Internet-based service for middle-management recruitment launched in 1998.

Key Financial Metrics

Note: COLI (Corporate-Owned Life Insurance) borrowings are secured by cash surrender values and do not require principal payments.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 38% ($33.6 million) for the three months and 30% ($78.8 million) for the nine months compared to the prior year. Growth was driven by a 20% increase in executive recruitment engagements and the expansion of Futurestep.
• Profitability: Net income rose 62% for the three months and 215% for the nine months. Operating profit increased 41% for the three months and 124% for the nine months.
• Segment Performance:
  • Executive Recruitment: Strong growth in North America (+44% Q/Q) and Asia/Pacific (+27% Q/Q). Europe grew 8.6% Q/Q. Latin America grew 15% Q/Q but declined 4% for the nine months due to currency devaluation in Brazil.
  • Futurestep: Revenues surged to $9.6 million for the quarter (from $1.6 million) and $19.9 million for the nine months (from $2.3 million). However, the segment reported operating losses of $4.9 million for the quarter and $17.4 million for the nine months due to start-up costs and advertising.
• Acquisitions: The company completed six acquisitions during the nine-month period (four in North America, one in Europe, one in Asia/Pacific) and one Futurestep acquisition (PA Consulting Group's ESS business), totaling $76.6 million in purchase price.

Guidance, Outlook, and Risks

• Futurestep Outlook: Management expects Futurestep to generate net operating profits in fiscal 2001. The segment is currently in an international roll-out phase (U.K., Canada, Australia, Japan, etc.).
• Strategic Direction: The company views strategic acquisitions as a key component of long-term growth and intends to pursue further consolidation in the fragmented search industry.
• Capital Allocation: Proceeds from the February 1999 IPO ($124.3 million net) are being used for Futurestep working capital, acquisitions, and a new financial system installation (expected total cost $13.0 million).
• Recent Events: On March 7, 2000, the Board approved the issuance of a Futurestep tracking stock to fund further expansion; underwriters have not yet been selected.
• Risks: Key risks include dependence on retaining qualified consultants, global economic fluctuations (specifically in Latin America), competition, and the successful integration of acquisitions. The company confirmed all systems are Year 2000 compliant.

Investor Verification Checklist

• Futurestep Profitability Timeline: Verify if the segment can achieve the projected profitability in fiscal 2001 given the current $17.4 million operating loss for the nine-month period.
• Acquisition Integration: Assess the integration progress of the six recent acquisitions and the PA Consulting Group business to ensure expected revenue synergies are realized.
• Latin America Exposure: Monitor the impact of currency fluctuations in Brazil and Mexico on future revenue stability, as this region showed volatility in the nine-month comparison.
• COLI Borrowing Structure: Review the terms and variable interest rates of the $43.7 million in borrowings against life insurance policies to understand potential interest expense volatility.
• Tracking Stock Details: Await further details on the size, timing, and terms of the proposed Futurestep tracking stock offering.