Korn/Ferry International Form 10-Q Summary
Business Context and Reporting Period
Korn/Ferry provides executive recruitment, leadership and talent consulting, recruitment process outsourcing and professional recruitment services through Executive Recruitment, Leadership & Talent Consulting and Futurestep. The company operated 78 offices in 37 countries. The filing covers the three months ended July 31, 2015, the first quarter of fiscal 2016, compared with the three months ended July 31, 2014.
Financial Results and Key Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Fee revenue | $267.4 million | $251.2 million | Up 6% |
| Total revenue | $279.3 million | $260.3 million | Up 7% |
| Operating income | $32.9 million | $18.6 million | Up $14.3 million |
| Operating margin as % of fee revenue | 12.3% | 7.4% | Up 4.9 points |
| Net income | $23.1 million | $14.5 million | Up 59% |
| Net margin as % of fee revenue | 8.6% | 5.8% | Up 2.8 points |
| Diluted EPS | $0.46 | $0.29 | Up $0.17 |
| Adjusted EBITDA | $41.7 million | $37.9 million | Up 10% |
| Adjusted EBITDA margin | 15.6% | 15.1% | Up 0.5 points |
| Net cash used in operating activities | $(90.2) million | $(90.0) million | Essentially unchanged |
Fee revenue growth was driven by Futurestep, LTC and Executive Recruitment. Futurestep fee revenue increased 18% to $46.1 million, LTC increased 9% to $69.2 million, and Executive Recruitment increased 2% to $152.1 million. North America grew 10%, while EMEA declined 10% and Asia Pacific declined 2%.
Operating expenses included $179.5 million of compensation and benefits, $37.5 million of general and administrative expenses, $10.1 million of cost of services, and $7.4 million of depreciation and amortization. No restructuring charges were recorded in Q1 FY2016, compared with $9.9 million in Q1 FY2015.
At July 31, 2015, cash and cash equivalents were $276.5 million and marketable securities were $137.9 million, for total cash and marketable securities of approximately $414.5 million. Working capital was $340.0 million. Client receivables were $199.5 million, with days sales outstanding increasing from 58 days at April 30, 2015 to 64 days.
The company had no borrowings under its revolving credit facility or other long-term debt arrangements. The amended senior unsecured revolving facility provides up to $150.0 million of availability, matures June 3, 2020, and had $2.8 million of standby letters of credit outstanding. Borrowings against company-owned life insurance policies totaled $68.5 million, secured by policy cash surrender values.
Material Changes Versus the Prior Comparable Period
- Fee revenue increased $16.2 million, despite a $16.3 million unfavorable foreign-exchange impact.
- Operating income improved primarily because of revenue growth and the absence of the prior-year $9.9 million restructuring charge. Higher compensation and benefits expense of $10.4 million partially offset the improvement.
- Compensation and benefits expense increased 6%, reflecting higher performance bonuses, salaries, payroll taxes and headcount investments. Average headcount increased 12% overall, including 26% in Futurestep.
- Adjusted EBITDA increased $3.8 million to $41.7 million, with margin improving to 15.6% from 15.1%.
- Cash and marketable securities declined $110.9 million from April 30, 2015, primarily because fiscal 2015 bonuses were paid during the quarter and $5.1 million of dividends were paid.
- Foreign currency translation losses increased accumulated other comprehensive loss to $55.8 million from $40.6 million at April 30, 2015.
- LTC benefited from the March 2015 acquisition of Pivot Leadership, which contributed $5.2 million of consulting revenue during the quarter.
Outlook, Risks, Contingencies and Unusual Items
Management stated that cash on hand and funds from operations should be sufficient for working capital, capital expenditures, corporate requirements and dividend payments over the next twelve months. The company emphasized continued integration of its multi-service strategy, investment in technology and intellectual property, development of new products and services, and disciplined acquisitions.
The company declared a $0.10 per-share quarterly dividend payable October 15, 2015. Future dividends may be amended, suspended or revoked at the board’s discretion. The credit agreement requires at least $50.0 million of domestic liquidity for permitted acquisitions, dividends and share repurchases and limits related activities under specified annual thresholds.
Key risks include economic and labor-market conditions, foreign currency fluctuations, attracting and retaining qualified consultants, competition, client relationship portability, legal and regulatory exposure, cybersecurity and information-system failures, intellectual-property protection, goodwill and intangible-asset impairment, deferred-tax-asset recoverability, acquisition integration, seasonality and the effect of dividends on growth investments.
Management reported no material litigation, no material changes to previously disclosed risk factors, no off-balance-sheet arrangements and no material changes in contractual obligations. Disclosure controls and internal controls over financial reporting were reported as effective, with no material changes during the quarter.
The company is adopting the new revenue-recognition standard in its fiscal year beginning May 1, 2018 and was still evaluating its effect. The filing does not provide a clear quantitative estimate of the adoption impact.
Important Facts for Investors to Verify
- Whether Futurestep and LTC growth, including the Pivot Leadership contribution, remains sustainable as staffing and compensation costs increase.
- The extent to which reported revenue and earnings growth is affected by foreign-exchange movements, particularly in EMEA, Asia Pacific and South America.
- Cash conversion and working-capital trends, including the rise in days sales outstanding and recurring first-quarter bonus payments.
- The obligations supporting deferred compensation plans, including $125.5 million of vested and unvested ECAP obligations and related marketable securities held in trust.
- The terms and limitations of the revolving credit facility, including the $50.0 million domestic-liquidity requirement and restrictions on dividends, acquisitions and repurchases.
- The sustainability of the $0.10 quarterly dividend and the remaining $150.0 million stock-repurchase authorization, subject to credit-agreement restrictions.
- Potential effects of currency volatility, variable-rate COLI borrowings, acquisition integration and future goodwill or intangible-asset impairment testing.