Korn/Ferry International — Form 10-Q Summary
Business context and reporting period
Korn/Ferry International provides executive recruitment, middle-management recruitment, recruitment process outsourcing, leadership and talent consulting, and executive coaching through 76 offices in 36 countries. The filing covers the three months ended July 31, 2011, the first quarter of fiscal 2012, compared with the three months ended July 31, 2010.
Key financial metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Fee revenue | $206.3 million | $175.1 million | +18% |
| Total revenue | $214.6 million | $183.2 million | +17% |
| Operating income | $25.9 million | $19.3 million | +35% |
| Operating margin on fee revenue | 12.6% | 11.0% | +160 basis points |
| Net income | $15.4 million | $10.9 million | +41% |
| Diluted EPS | $0.33 | $0.24 | +38% |
| Cash flow from operations | $(83.0) million | $(40.8) million | Greater use of cash |
- Net margin was 7.5% of fee revenue versus 6.2% in the prior-year quarter.
- Executive Recruitment fee revenue increased 14% to $176.1 million, while Futurestep increased 50% to $30.2 million.
- Executive Recruitment operating income rose to $35.6 million from $27.7 million, with margin increasing to 20.2% from 17.9%. Futurestep operating income rose to $2.3 million from $1.0 million, with margin increasing to 7.6% from 4.9%.
- Cash, cash equivalents and marketable securities totaled $281.2 million at July 31, 2011, down from $369.1 million at April 30, 2011. Cash and cash equivalents alone were $156.9 million.
- Total assets were $912.8 million and total stockholders’ equity was $596.9 million at July 31, 2011.
- The company had no borrowings under its $50 million senior secured revolving facility. It maintained $10.0 million with the lender as collateral and had $2.9 million of standby letters of credit outstanding.
- Borrowings against company-owned life insurance policies were $73.3 million, primarily at variable rates, and are distinct from borrowings under the revolving facility.
Material changes versus the prior comparable period
- Fee revenue growth reflected a 12% increase in engagements billed and a 5% increase in weighted-average fees per engagement. Favorable exchange rates contributed approximately $13.4 million to fee revenue growth.
- Revenue increased in every Executive Recruitment region. North America grew 9%, EMEA 19%, Asia Pacific 22%, and South America 17%.
- Futurestep benefited from higher activity with existing clients, a 17% increase in engagements billed, and a 28% increase in weighted-average fees per engagement.
- Compensation and benefits expense increased 14% to $137.4 million, partly because worldwide headcount increased 24%. General and administrative expense increased 22% to $34.8 million.
- Cash used in operating activities increased primarily because the company paid $121.2 million of fiscal 2011 bonuses during the quarter. An additional $5.4 million of previously deferred bonuses is scheduled for payment in December 2011.
- Investing cash use decreased to $9.1 million from $22.9 million, primarily due to lower capital expenditures and improved net proceeds from marketable securities. Financing activities provided $1.1 million versus using $7.1 million in the prior-year quarter.
- The effective tax rate declined to 36% from 38%, reflecting lower international tax rates and greater use of international loss carryforwards.
Guidance, outlook, risks 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 over the next twelve months. No quantitative earnings or revenue guidance was provided.
- Management’s fiscal 2012 strategy emphasizes integrating its services, expanding recruitment process outsourcing and leadership and talent consulting, pursuing disciplined acquisitions, improving technology and processes, and leveraging its brand and thought leadership.
- Management noted that demand improved but executive-search activity remained below its 2008 peak. A deterioration in global economic or credit conditions could reduce demand, revenue, and cash flow and require cost reductions or additional financing.
- Principal risks include attracting and retaining consultants, client relationship portability, competition, political and economic conditions, foreign-currency fluctuations, legal and employment liability, information systems and technology, goodwill and intangible-asset impairment, deferred tax asset utilization, acquisition integration, and cost-structure alignment.
- Other loss, net was $2.0 million, primarily reflecting losses on trading marketable securities. No other-than-temporary impairment of marketable securities, goodwill, or intangible assets was recorded.
- Restructuring liabilities declined to $3.8 million from $4.9 million, including facilities commitments that will be paid over as long as seven years.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether strong revenue growth, particularly at Futurestep, is sustained after separating operating performance from favorable currency effects.
- The timing and cash impact of the remaining deferred bonus payments and the company’s ability to convert earnings into operating cash flow.
- The composition and liquidity of the $124.3 million marketable-securities portfolio, including the $79.2 million held to support deferred-compensation obligations.
- The effect of 24% worldwide headcount growth and rising general and administrative costs on future margins.
- Exposure to variable-rate borrowings against company-owned life insurance policies and compliance with the revolving facility’s liquidity and other covenants.
- Progress toward the stated fiscal 2012 initiatives, including RPO and leadership consulting growth, acquisitions, technology investments, and service integration.