Korn/Ferry International Form 10-Q Summary
Business Context and Reporting Period
Korn/Ferry International provides executive recruitment, outsourced recruiting, leadership and talent consulting, recruitment process outsourcing, and executive coaching through 76 offices in 36 countries. The filing covers the three months ended July 31, 2010, the first quarter of fiscal 2011, compared with the three months ended July 31, 2009.
Financial Performance and Key Metrics
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Fee revenue | $175.1 million | $116.8 million | Up 50% |
| Total revenue | $183.2 million | $123.3 million | Up 49% |
| Operating income (loss) | $19.3 million | $(25.0) million | Improved $44.3 million |
| Net income (loss) | $10.9 million | $(14.3) million | Improved $25.2 million |
| Diluted EPS | $0.24 | $(0.33) | Improved $0.57 |
| Operating margin on fee revenue | 11.0% | (21.4%) | Up 32.4 points |
| Net margin on fee revenue | 6.2% | (12.2%) | Up 18.4 points |
Revenue growth reflected a 43% increase in executive search engagements billed and a 7% increase in weighted-average fees per engagement. Executive recruitment fee revenue increased 53% to $154.9 million, while Futurestep fee revenue increased 30% to $20.2 million.
Operating expenses were $163.9 million, compared with $148.2 million in the prior-year quarter. Compensation and benefits increased 33% to $120.2 million, but declined to 68.7% of fee revenue from 77.4%. General and administrative expense was 16.3% of fee revenue, compared with 24.0%. No restructuring charges were recorded in the current quarter, versus $18.2 million in the prior-year quarter.
- Executive recruitment operating income was $27.7 million, or 17.9% of fee revenue, compared with a $13.1 million loss and negative 13.0% margin.
- Futurestep operating income was $1.0 million, or 4.9% of fee revenue, compared with an $0.8 million loss and negative 5.3% margin.
- Corporate expenses were $9.4 million, compared with $11.0 million.
- Other income declined to a $1.5 million loss from $4.0 million of income, primarily because of lower market values of mutual funds held for deferred compensation obligations.
- The effective tax rate was 38% in the current quarter versus a 34% tax benefit rate in the prior-year quarter.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash used in operating activities was $40.8 million, improving from $66.4 million used in the prior-year quarter. Cash use reflected higher receivables and bonus payments.
- Cash used in investing activities was $22.9 million, including $11.7 million of capital expenditures, $10.4 million of net purchases of marketable securities, and $0.7 million of acquisition earn-out payments.
- Cash used in financing activities was $7.1 million, including $11.1 million of share repurchases, partially offset by $3.0 million from warrant exercises and $1.5 million from employee equity issuances.
- Cash and cash equivalents declined to $146.0 million from $219.2 million at April 30, 2010. Cash plus marketable securities declined to $232.2 million from $296.5 million.
- Working capital increased to $187.8 million. Total assets were $799.3 million and total liabilities were $304.4 million at July 31, 2010.
- The company reported no borrowings under its $50 million senior secured revolving credit facility. The facility had $8.3 million of standby letters of credit, $9.0 million of pledged cash, and a March 14, 2011 maturity date.
- Separate borrowings against company-owned life insurance cash surrender value totaled $67.3 million and carried primarily variable interest rates. The filing also reports no long-term debt in its liquidity discussion; investors should distinguish these policy borrowings from facility borrowings.
- Marketable securities totaled $86.2 million, including $62.4 million held in trust for deferred compensation obligations. Auction-rate securities were redeemed at full value during the quarter.
Management stated that cash on hand and funds from operations were expected to be sufficient for working capital, capital expenditures, and general corporate requirements during the next twelve months.
Material Changes Versus the Prior Comparable Period
- Fee revenue increased $58.3 million, driven by higher engagement volume and average fees across all regions and both operating segments.
- North America executive recruitment fee revenue increased 63%; Asia Pacific and South America each increased 70%; EMEA increased 24%.
- Operating results benefited materially from the absence of the $18.2 million restructuring charge recorded in the prior-year quarter.
- Compensation leverage improved despite higher variable compensation, and the bonus provision declined by $2.0 million because of a change in estimated payouts.
- Net cash declined $73.2 million during the quarter, primarily because of bonus payments, working-capital movements, securities purchases, capital expenditures, and share repurchases.
- The company repurchased 566,639 shares for $8.5 million during the quarter and repurchased an additional 157,425 shares for $2.1 million after quarter-end. Approximately $26.5 million remained available under the repurchase program at July 31, 2010.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantitative earnings or revenue guidance. Management described the recovery in global economic activity and demand for executive searches as improving but gradual, with demand still below peak levels. Fiscal 2011 priorities include cross-selling the company’s services, expanding recruitment process outsourcing and leadership and talent consulting, pursuing disciplined acquisitions, improving technology and processes, and leveraging its brand and intellectual property.
- Key risks include global economic weakness, demand volatility, foreign currency fluctuations, competition, attracting and retaining consultants, client relationship portability, execution of growth initiatives, systems dependence, employment liability, goodwill and intangible-asset impairment, deferred tax asset utilization, and cost-structure alignment.
- Bonus liabilities included $15.9 million of previously earned but deferred bonuses, of which $10.2 million was scheduled for payment in December 2010 and $5.7 million in December 2011.
- Restructuring liabilities declined to $11.5 million from $13.8 million, including facility commitments expected to be paid over as long as eight years.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
- Disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether revenue and engagement growth were sustained beyond the unusually strong first-quarter comparison and whether search demand recovered further.
- Whether the improved operating margin remains durable after excluding the prior-year restructuring charge.
- The timing and cash-flow impact of deferred bonus payments and other restructuring obligations.
- The distinction between the absence of revolving-credit borrowings and the $67.3 million of company-owned life insurance policy borrowings.
- Liquidity after share repurchases, capital expenditures, securities purchases, and future earn-out or acquisition payments.
- Exposure to foreign currency movements, deferred compensation market-value changes, and potential impairment of goodwill, intangible assets, or deferred tax assets.