Korn Ferry Form 10-Q Summary
Business context and reporting period
Korn Ferry is a global organizational consulting firm providing Consulting, Digital, Executive Search, Professional Search & Interim, and Recruitment Process Outsourcing services. The filing covers the quarter and six months ended October 31, 2022, representing fiscal 2023 second-quarter and year-to-date results. Beginning May 1, 2022, the former RPO & Professional Search segment was separated into Professional Search & Interim and RPO.
Key financial metrics
| Metric | Three months ended October 31, 2022 | Six months ended October 31, 2022 |
|---|---|---|
| Fee revenue | $727.8 million, up 14% | $1.424 billion, up 16% |
| Total revenue | $735.7 million, up 14% | $1.439 billion, up 17% |
| Operating income | $119.6 million | $231.2 million |
| Net income attributable to Korn Ferry | $73.5 million, down 3% | $150.8 million, essentially flat |
| Diluted EPS | $1.38 | $2.83 |
| Adjusted EBITDA | $131.1 million; 18.0% margin | $263.3 million; 18.5% margin |
| Cash flow from operating activities | $(98.7) million for the six months |
Reported operating margin was 16.4% for the quarter and 16.2% year to date, based on fee revenue. Net income attributable to Korn Ferry represented 10.1% of fee revenue for the quarter and 10.6% year to date, compared with 11.8% and 12.3%, respectively, in the prior-year periods. The effective tax rate was 27.9% for the quarter and 26.5% year to date, compared with 25.5% and 24.7% in the prior-year periods.
At October 31, 2022, cash and cash equivalents were $593.9 million, current and non-current marketable securities totaled $237.8 million, and total debt was $395.8 million, consisting primarily of $400 million of 4.625% senior unsecured notes due December 2027. No amounts were outstanding under the credit facilities. Total availability under the amended credit facilities was $1.145 billion after standby letters of credit.
Material changes versus the prior comparable period
- Fee revenue growth was led by Professional Search & Interim, which increased 147% in the quarter and 120% year to date, primarily from the Lucas Group, Patina Solutions Group, and ICS acquisitions.
- RPO fee revenue increased 12% in the quarter and 21% year to date; Consulting increased 5% and 8%, respectively; Digital increased 6% and 5%, respectively.
- Executive Search fee revenue declined 7% in the quarter and was approximately flat year to date. North America and Asia Pacific were the principal areas of weakness, reflecting fewer engagements billed.
- Cost of services increased 152% in the quarter and 114% year to date, largely because of the acquired interim business, reducing consolidated Adjusted EBITDA margins from 21.1% to 18.0% for the quarter and from 20.9% to 18.5% year to date.
- Compensation and benefits increased 8% in the quarter and 12% year to date, while average headcount increased 27% and 31%, respectively, primarily because of acquisitions. Compensation as a percentage of fee revenue improved to 63.9% from 67.5% in the quarter and to 65.3% from 67.6% year to date.
- Other income changed to a $9.0 million loss in the quarter and an $8.3 million loss year to date, compared with income of $5.1 million and $9.5 million, respectively, due primarily to declines in the fair value of marketable securities held for deferred compensation obligations.
- Cash declined by $384.2 million during the first six months, primarily because of annual bonus and retention payments, the $99.3 million ICS acquisition, capital expenditures, share repurchases, dividends, interest payments, and foreign-exchange effects.
Guidance, outlook, risks, and unusual items
The filing does not provide a specific numerical earnings or revenue forecast. Management states that current cash, operating funds, and borrowing capacity are expected to be sufficient for working capital, capital expenditures, debt obligations, dividends, and other requirements over the next 12 months. Management also notes that an economic slowdown, recession, inflation, labor-market deterioration, or weaker credit conditions could reduce demand, operating cash flow, and liquidity, potentially requiring additional borrowing or suspension of repurchases and dividends.
- On August 1, 2022, Korn Ferry acquired ICS for $99.3 million net of cash acquired. The preliminary allocation included $68.3 million of goodwill and $16.4 million of intangible assets.
- Integration and acquisition costs were $3.4 million for the quarter and $7.0 million year to date.
- Foreign exchange reduced fee revenue by $34.4 million in the quarter and $58.8 million year to date. A 10% change in relevant currencies could produce an estimated $13.4 million foreign-exchange gain or loss based on October 31 exposures.
- The company repurchased approximately $55.5 million of common stock during the first six months and had $273.6 million remaining under its repurchase authorization at October 31, 2022.
- The quarterly dividend was increased to $0.15 per share. A further $0.15 per-share dividend was declared on December 7, 2022, payable January 13, 2023.
- No impairment charges were recorded in the current period; the prior-year period included $7.4 million of right-of-use asset impairment and $1.9 million of fixed-asset impairment.
- Management reported no material litigation, no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls as of October 31, 2022.
Investor verification points
- Verify whether Professional Search & Interim growth and ICS integration offset weaker Executive Search demand and continued margin pressure.
- Monitor operating cash conversion, receivables growth, and days sales outstanding, which increased from 58 to 71 days.
- Assess liquidity after annual compensation payments, acquisitions, repurchases, dividends, and any future use of the credit facilities.
- Review exposure to foreign exchange, marketable-security volatility, variable-rate COLI borrowings, and potential recession-related demand declines.
- Confirm compliance with credit-facility and senior-note leverage, dividend, and repurchase restrictions.
- Evaluate the preliminary valuation and integration performance of ICS and the previously acquired Lucas Group and Patina Solutions Group.