Korn Ferry Form 10-Q Summary
Business Context and Reporting Period
Korn Ferry is a global organizational consulting firm operating through Advisory, Executive Search, and RPO & Professional Search segments, with Corporate expenses reported separately. This filing covers the three months ended July 31, 2019, the first quarter of fiscal 2020, compared with the three months ended July 31, 2018.
Financial Performance and Position
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Fee revenue | $484.5 million | $465.6 million | Up 4% |
| Total revenue | $496.2 million | $478.4 million | Up 4% |
| Operating income (loss) | $60.3 million | $(55.1) million | Improved $115.4 million |
| Net income (loss) attributable to Korn Ferry | $43.0 million | $(38.6) million | Improved $81.6 million |
| Diluted EPS | $0.76 | $(0.70) | Improved |
| Adjusted EBITDA | $74.9 million | $70.8 million | Up 6% |
| Adjusted EBITDA margin | 15.5% of fee revenue | 15.2% of fee revenue | Up 0.3 points |
| Operating margin | 12.5% of fee revenue | (11.8)% of fee revenue | Improved |
- Segment fee revenue: Advisory was $195.5 million, Executive Search was $193.2 million, and RPO & Professional Search was $95.8 million. RPO & Professional Search increased 24% and was the primary revenue growth driver.
- Segment operating margins: Advisory was 13.2%, Executive Search was 23.6%, and RPO & Professional Search was 15.7%. Corporate expenses were $26.1 million.
- Cash flow: Operating activities used $161.9 million, compared with $117.5 million used in the prior-year quarter. Investing activities used $9.2 million, including $10.7 million of capital expenditures. Financing activities used $24.9 million, including dividends and share repurchases.
- Liquidity: Cash and cash equivalents were $424.6 million at July 31, 2019, down from $626.4 million at April 30, 2019. Cash, cash equivalents, and marketable securities totaled $567.3 million, compared with $767.1 million at April 30, 2019.
- Debt: $226.9 million was outstanding under the $650.0 million senior secured revolving credit facility, leaving $419.9 million available after letters of credit. The revolver matures December 19, 2023. Korn Ferry was in compliance with its debt covenants.
- Working capital and receivables: Working capital was $563.5 million, down from $585.9 million. Days sales outstanding increased from 61 to 69 days, which management stated was consistent with historical experience.
- Dividend and repurchases: The quarterly dividend was $0.10 per share. The company repurchased $12.7 million of common stock during the quarter, leaving approximately $238.0 million under the repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Results benefited substantially from the absence of the $106.6 million non-cash tradename write-off recorded in Q1 FY2019 as part of the One Korn Ferry rebranding plan. Excluding this unusual item, the year-over-year improvement in operating results was considerably more modest.
- Fee revenue increased $18.9 million despite a $11.3 million unfavorable foreign-exchange impact. Advisory and Executive Search revenue were broadly flat, while RPO & Professional Search increased $18.5 million.
- Compensation and benefits expense increased 2% to $328.5 million, primarily because of higher average headcount, partly offset by lower performance-related bonus expense.
- Adjusted EBITDA increased $4.1 million to $74.9 million, while the reported Adjusted EBITDA margin remained approximately 15% of fee revenue.
- Cash declined primarily because of annual bonus payments, sign-on and retention payments, capital expenditures, share repurchases, restricted-stock tax withholdings, and dividends.
- The company adopted ASC 842 lease accounting on May 1, 2019. At adoption, it recognized $236.1 million of operating lease right-of-use assets and $272.3 million of related liabilities. The adoption materially affected the balance sheet but had an immaterial effect on the income statement and cash flows.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a specific quantitative earnings or revenue outlook. Management stated that cash on hand, operating funds, and available borrowing capacity are expected to be sufficient for anticipated working capital, capital expenditures, corporate requirements, debt repayment, dividends, and planned repurchases over the next twelve months.
- Management identified demand for services, economic and labor-market conditions, consultant utilization and billing rates, competition, retention of key personnel, currency movements, political developments, Brexit, automation, cybersecurity, data privacy, intellectual property protection, technology execution, indebtedness, LIBOR phase-out, tax law changes, and impairment of goodwill or intangible assets as significant risks.
- Foreign exchange remains material: management estimated that a 10% change in relevant currencies could produce an approximately $10.4 million gain or loss. A 100-basis-point increase in LIBOR would have increased quarterly interest expense by approximately $0.6 million.
- The company uses foreign-currency forwards and an interest-rate swap to manage market risks. The swap hedges a portion of variable-rate debt through June 2021 at a fixed rate of 1.919%, excluding the credit spread.
- The filing reports no material litigation expected to adversely affect the company, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
- Future dividends and share repurchases remain subject to board discretion, earnings, liquidity, capital requirements, debt terms, and leverage and liquidity covenant conditions.
Important Facts for Investors to Verify
- Separate underlying operating improvement from the prior-year comparison benefit created by the $106.6 million tradename write-off.
- Assess whether RPO & Professional Search growth can offset relatively flat Advisory and Executive Search revenue.
- Monitor operating cash flow, annual bonus payments, receivables collection, and the increase in days sales outstanding.
- Review leverage, revolver utilization, covenant headroom, variable-rate exposure, and the December 2023 maturity.
- Evaluate the sustainability of the $0.10 quarterly dividend and share repurchase activity against cash generation.
- Track foreign-exchange effects, consultant headcount and productivity, compensation costs, and segment margins.
- Consider the balance-sheet effect of lease liabilities and the company’s significant goodwill, intangible assets, deferred compensation, and company-owned life insurance obligations.