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 and six months ended October 31, 2010, the second quarter and first half of fiscal 2011. Comparisons are with the periods ended October 31, 2009.
Financial Performance and Key Metrics
| Metric | Three Months 2010 | Three Months 2009 | Six Months 2010 | Six Months 2009 |
|---|---|---|---|---|
| Fee revenue | $185.4 million | $140.1 million | $360.5 million | $256.9 million |
| Total revenue | $193.2 million | $146.6 million | $376.4 million | $269.8 million |
| Operating income (loss) | $19.8 million | $2.2 million | $39.0 million | $(22.7) million |
| Net income (loss) | $13.7 million | $2.7 million | $24.6 million | $(11.5) million |
| Diluted EPS | $0.30 | $0.06 | $0.53 | $(0.26) |
| Operating margin as a percentage of fee revenue | 10.7% | 1.6% | 10.8% | (8.8)% |
| Net margin as a percentage of fee revenue | 7.4% | 2.0% | 6.8% | (4.5)% |
- Quarterly fee revenue increased 32%, primarily from a 28% increase in executive search engagements billed and a 4% increase in weighted-average fees per engagement.
- First-half fee revenue increased 40%, driven by a 36% increase in engagements billed and a 4% increase in average fees per engagement.
- Executive recruitment generated $164.1 million of quarterly fee revenue and $319.0 million for the first half. Futurestep generated $21.3 million and $41.5 million, respectively.
- Quarterly executive recruitment operating margin improved to 15% from 8%; first-half margin improved to 16% from a 2% operating loss. Futurestep margins were 6% for the quarter and 5% for the first half.
- Compensation and benefits increased 25% in the quarter and 29% in the first half, largely due to higher variable compensation and increased headcount.
- Cash used in operating activities was $7.7 million in the first half, compared with $68.8 million used in the prior-year period.
- Cash used in investing activities was $53.5 million, including $34.5 million of net marketable-securities purchases and $17.3 million of property and equipment purchases.
- Cash used in financing activities was $8.1 million, including $13.4 million used for common-stock purchases, partially offset by $3.0 million from warrant exercises.
Balance Sheet, Debt, and Liquidity
- At October 31, 2010, cash and cash equivalents were $151.1 million, current and non-current marketable securities totaled $113.6 million, and total liquidity represented by cash and marketable securities was $264.7 million, down from $296.5 million at April 30, 2010.
- Receivables increased to $145.0 million from $107.2 million, while the allowance for doubtful accounts increased to $8.1 million from $6.0 million.
- Total assets were $864.3 million and total stockholders’ equity was $519.1 million at October 31, 2010.
- The company reported no borrowings under its $50 million senior secured revolving credit facility. Borrowing-base availability was $41.5 million, and $8.5 million of standby letters of credit were outstanding, supported by $9.0 million of pledged cash. The facility matures March 14, 2011 and contains financial covenants.
- The company had $67.4 million of borrowings against company-owned life-insurance policies, primarily at variable rates, secured by cash-surrender value of $139.3 million. Management described the company as having no long-term debt in the conventional sense, while these policy borrowings remain outstanding.
- Management stated that cash on hand and funds from operations should be sufficient for anticipated working capital, capital expenditures, and corporate requirements over the next twelve months.
Material Changes, Outlook, Risks, and Unusual Items
- Results benefited materially from improved demand across all executive-recruitment regions and Futurestep. North America and Asia Pacific showed the largest quarterly dollar increases; Asia Pacific fee revenue rose 79% for the quarter.
- The first-half comparison benefited from the sharp reduction in restructuring charges: net restructuring expense fell to $2.1 million from $21.0 million. Prior-year charges primarily reflected EMEA workforce and facility restructuring related to the Whitehead Mann acquisition.
- Current-quarter restructuring expense primarily reflected higher-than-estimated facility lease costs. The remaining restructuring liability was $11.4 million at October 31, 2010, including facility commitments extending over the next eight years.
- A $1.9 million reduction in estimated acquisition-related contingent consideration was recorded in general and administrative expenses during the quarter.
- Cash declined mainly because of annual bonus payments. Compensation and benefits payable included $15.8 million of deferred bonuses, of which $10.2 million was scheduled for payment in December 2010 and $5.6 million in December 2011.
- Management’s fiscal 2011 strategy emphasized cross-selling, growth in recruitment process outsourcing and leadership and talent consulting, disciplined acquisitions, technology, and process improvements. The filing does not provide formal quantitative revenue or earnings guidance.
- Management noted that demand remained below peak levels and that economic recovery could be gradual. Adverse revenue changes could require further cost reductions or additional financing.
- Principal risks include economic and political conditions, foreign-currency fluctuations, competition, retention of consultants and client relationships, technology and systems dependence, employment liability, goodwill and intangible-asset impairment, deferred-tax-asset utilization, acquisition integration, and cost-structure alignment.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify whether engagement volumes and average fees continued to support the reported revenue recovery after October 31, 2010.
- Assess the sustainability of higher variable compensation and the resulting operating-margin improvement.
- Review cash conversion, receivables growth, doubtful-account provisions, and the timing of deferred bonus payments.
- Monitor the March 14, 2011 maturity and covenant requirements of the revolving credit facility, including letters of credit and pledged cash.
- Distinguish unrestricted liquidity from marketable securities held to fund deferred-compensation obligations.
- Evaluate remaining restructuring liabilities, facility commitments, acquisition-related contingent consideration, and potential future charges.
- Consider currency exposure, economic sensitivity, and the absence of formal quantitative guidance in assessing forward earnings expectations.