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Korn/Ferry International: Q1 2010 Financial Summary (Ended July 31, 2009)

Business Context and Reporting Period

This Form 10-Q covers the three-month period ended July 31, 2009. Korn/Ferry International is a global provider of executive search, outsourced recruiting, and leadership consulting. The company operates through two primary segments: Executive Recruitment and Futurestep. The reporting period was significantly impacted by the global economic downturn and the recent acquisition of Whitehead Mann on June 11, 2009.

Key Financial Metrics

Note: The company holds $64.6 million in borrowings against Company Owned Life Insurance (COLI) policies, which are secured by the cash surrender value of those policies.

Material Changes vs. Prior Period

• Revenue Decline: Fee revenue decreased 43% year-over-year to $116.8 million. This was driven by a 33% decrease in the number of engagements billed and a 16% decrease in average fees per engagement due to depressed global economic conditions.
• Operating Loss: The company reported an operating loss of $25.0 million, a swing of $48.8 million from the prior year's operating income of $23.8 million.
• Restructuring Charges: A significant one-time charge of $18.2 million was recorded to eliminate redundancies following the Whitehead Mann acquisition. This included $8.4 million in severance and $9.8 million for facility consolidation.
• Segment Performance:
  • Executive Recruitment: Revenue fell 42% to $101.3 million, resulting in an operating loss of $13.1 million.
  • Futurestep: Revenue fell 50% to $15.5 million, resulting in an operating loss of $0.8 million.
• Cost Reductions: Compensation and benefits expenses decreased 36% to $90.4 million, aided by a 14% reduction in global headcount and lower variable compensation.

Outlook, Risks, and Management Commentary

• Outlook: Management notes that while demand appeared to stabilize, it remains significantly lower than the prior year. The strategic focus for fiscal 2010 includes cross-selling multi-service strategies and disciplined acquisitions.
• Liquidity: The company believes cash on hand and funds from operations are sufficient for the next 12 months. However, continued adverse revenue changes could necessitate additional cost-cutting or financing.
• Investment Risks: The company holds approximately $12.2 million in Auction Rate Securities (ARS). Due to credit market failures, these securities have failed to auction, limiting liquidity. However, the company has a repurchase agreement with an investment firm to sell these at par value between 2010 and 2012.
• Foreign Exchange: Unfavorable exchange rates impacted fee revenue by $8.7 million during the quarter.
• Legal Proceedings: No material legal proceedings are currently pending.

Investor Verification Checklist

• Restructuring Execution: Verify the timeline and cash outflow for the remaining $15.7 million of the $18.2 million restructuring charge (only $2.5 million paid in cash as of July 31).
• ARS Liquidity: Monitor the status of the $12.2 million in Auction Rate Securities and the enforceability of the repurchase agreement with the investment firm.
• Revenue Stabilization: Assess whether the 43% revenue decline is a temporary cyclical dip or a structural shift in demand for executive search services.
• Integration of Whitehead Mann: Evaluate the synergy realization and revenue contribution from the Whitehead Mann acquisition ($5.8 million in fee revenue in the first month).
• Deferred Compensation Liability: Review the volatility in deferred compensation liabilities, which contributed to a $3.3 million expense increase in the Corporate segment.