Korn/Ferry International Form 10-Q Summary
Business Context and Reporting Period
Korn/Ferry International provides executive recruitment, leadership and talent consulting, recruitment process outsourcing, and middle-management recruiting through 76 offices in 35 countries. The filing covers the three and six months ended October 31, 2012, the second quarter and first six months of fiscal 2013. Beginning in fiscal 2013, the company reported three operating segments: Executive Recruitment, Leadership & Talent Consulting, and Futurestep.
Key Financial Metrics
| Metric | Three months ended October 31 | Six months ended October 31 |
|---|---|---|
| Fee revenue | $196.2 million, down 2% | $382.9 million, down 6% |
| Total revenue | $204.8 million, down 2% | $400.8 million, down 6% |
| Operating income | $2.8 million, down from $25.4 million | $19.8 million, down from $51.3 million |
| Operating margin as percentage of fee revenue | 1.4%, versus 12.7% | 5.2%, versus 12.6% |
| Net income | $1.2 million, versus $15.1 million | $11.6 million, versus $30.6 million |
| Diluted earnings per share | $0.03, versus $0.32 | $0.24, versus $0.65 |
| Net cash used in operating activities | Not separately reported | $43.3 million, versus $35.2 million used |
- Segment income was $18.3 million in the quarter and $35.3 million year to date, compared with $25.4 million and $51.3 million, respectively, in the prior-year periods.
- Quarterly segment fee revenue was $127.7 million for Executive Recruitment, $38.5 million for Leadership & Talent Consulting, and $30.0 million for Futurestep. Executive Recruitment declined 10%, while Leadership & Talent Consulting increased 32% and Futurestep increased 5%.
- For the six-month period, Executive Recruitment fee revenue declined 13% to $255.2 million, Leadership & Talent Consulting increased 20% to $66.8 million, and Futurestep increased 4% to $60.9 million.
- Cash and cash equivalents were $192.9 million at October 31, 2012, compared with $282.0 million at April 30, 2012. Total marketable securities were $138.9 million, producing cash, cash equivalents, and marketable securities of approximately $331.8 million.
- Working capital was approximately $252.5 million, down $25.8 million from April 30, 2012. Accounts receivable days outstanding increased from 64 to 73 days.
- The company had no borrowings under its $50 million senior secured revolving facility. It had $2.9 million of standby letters of credit and was required to maintain $10.0 million with the lender. Separate borrowings against company-owned life insurance policies totaled $73.3 million.
- Total assets were $983.9 million and total liabilities were $341.3 million at October 31, 2012. Goodwill and intangible assets increased to $226.4 million, primarily reflecting the Global Novations acquisition.
Material Changes Versus the Prior Comparable Period
- Fee revenue weakened because engagements billed declined 7% in the quarter and 3% year to date. Foreign exchange reduced quarterly fee revenue by approximately $4.7 million and six-month fee revenue by approximately $12.2 million.
- Executive Recruitment declined across all regions. Quarterly fee revenue fell 11% in North America, 6% in EMEA, 16% in Asia Pacific, and 12% in South America.
- Leadership & Talent Consulting benefited from higher consulting demand and the September 1, 2012 acquisition of Global Novations, which contributed approximately $5.2 million of fee revenue. Excluding Global Novations, quarterly Leadership & Talent Consulting revenue increased approximately 14%.
- Futurestep revenue increased as a result of higher recruitment process outsourcing and middle-management activity.
- Compensation and benefits decreased 3% year to date, primarily due to lower consultant headcount and lower performance-related bonuses. However, compensation and benefits increased as a percentage of fee revenue, particularly in Executive Recruitment.
- The company recorded $15.5 million of net restructuring charges, including $11.3 million of severance and $4.2 million of premises-related costs. The charges reduced quarterly operating margin by approximately 7.9 percentage points of fee revenue.
- Global Novations was acquired for $34.4 million in cash, net of cash acquired, resulting in $20.5 million of preliminary goodwill and $12.2 million of acquired intangible assets.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash on hand and funds from operations should be sufficient for anticipated working capital, capital expenditures, and general corporate requirements during the next 12 months. No formal earnings or revenue guidance was provided.
- Management cited slowing economic recovery and continued uncertainty in global, credit, and labor markets. A prolonged deterioration could reduce demand, produce negative operating cash flow, and require additional financing.
- The company expects approximately $14.5 million of future cash expenditures related to the restructuring plan. The restructuring liability was $16.5 million at October 31, 2012, including facilities commitments extending up to 14 years.
- On December 5, 2012, the company agreed to acquire PDI Ninth House for $80 million in cash, subject to adjustments, plus up to $15 million of contingent consideration. Closing was expected by year-end and remained subject to regulatory and customary conditions.
- Key risks include dependence on qualified consultants, economic and currency volatility, competition, legal and employment liability, client relationship portability, cybersecurity, technology and business-continuity risks, goodwill and intangible-asset impairment, deferred-tax recoverability, acquisition integration, and the effectiveness of cost restructuring.
- The company disclosed a criminal cyber intrusion characterized as an advanced persistent threat. The breach had not materially affected operations as of the filing, but future breaches could result in liability, reputational damage, higher costs, and lost revenue.
- No material adverse legal proceedings, material changes to previously disclosed risk factors, or off-balance-sheet arrangements were reported.
Most Important Facts for Investors to Verify
- Whether the decline in Executive Recruitment demand and engagement volumes continued after October 31, 2012.
- Whether restructuring actions generated the expected cost savings and whether the estimated $14.5 million of cash expenditures changed.
- The closing, final consideration, financing, and integration results of the planned PDI Ninth House acquisition.
- Cash conversion and working-capital trends, including receivables days outstanding and the effect of annual bonus payments.
- The distinction between unrestricted liquidity and assets held to satisfy deferred-compensation obligations, including $93.9 million of trading securities held in trust.
- Exposure and repayment terms for the $73.3 million of company-owned life insurance policy borrowings and compliance with revolving-credit-facility covenants.
- Any subsequent cybersecurity impacts, legal claims, client losses, or regulatory consequences related to the disclosed breach.