KFY

Business Context and Reporting Period

Company: Korn/Ferry International (KFY)
Filing Type: Form 10-K (Annual Report)
Period Ended: April 30, 2002
Business Overview: Korn/Ferry is the world's leading recruitment firm with operations in 71 cities across 36 countries. Its primary segments are Executive Recruitment (board and senior executive search) and Futurestep (technology-based middle-management recruitment). The company also provides strategic management assessment and executive coaching services.

Key Financial Metrics

Note: Fiscal 2001 and 2000 data have been restated to reflect the equity method of accounting for Mexico subsidiaries.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 38% to $393.9 million, driven by a global economic slowdown. North America executive recruitment revenue fell 41% ($139.1 million), and Futurestep revenue dropped 45% ($36.8 million).
• Operating Loss: The company reported an operating loss of $105.6 million, a reversal from a $55.1 million profit in the prior year. This includes significant non-recurring charges.
• Restructuring and Impairment Charges: The company recognized $93.2 million in asset impairment and restructuring charges. This included:
  • $42.9 million in goodwill impairment (primarily related to JobDirect and North America executive recruitment).
  • $15.1 million in other asset impairments.
  • $19.1 million in severance costs.
  • $16.1 million in facilities restructuring costs.
• Workforce Reduction: The company reduced its workforce by approximately 25% (over 600 employees) as part of cost-cutting initiatives.
• Exit from JobDirect: The company exited the college recruitment market (JobDirect) in the third quarter of fiscal 2002, resulting in significant write-downs.

Guidance, Outlook, and Risks

• Management Commentary: Management attributes the decline to deteriorating global economic conditions, particularly in the technology and financial services sectors. Restructuring initiatives were implemented to reduce costs and reposition the company for an eventual economic recovery.
• Liquidity and Capital Resources:
  • In June 2002 (subsequent to period end), the company completed a $50 million private placement (convertible notes and preferred stock) with Friedman, Fleischer & Lowe.
  • The company was in default under its credit agreement in early fiscal 2002 but reached an amendment in March 2002 to reduce the facility to $45 million and waive prior defaults. Borrowings of $39 million were outstanding at April 30, 2002.
  • Management believes cash on hand and proceeds from the private placement are sufficient for foreseeable requirements.
• Risks and Contingencies:
  • Futurestep Profitability: Futurestep has incurred cumulative operating losses of $100.1 million since inception and is expected to remain unprofitable through at least fiscal 2003.
  • Accounting Change: The company changed its accounting for Mexico subsidiaries from consolidation to the equity method. While this reduced reported revenue and expenses, it had no impact on net income or EPS.
  • Auditor Change: The company dismissed Arthur Andersen LLP and appointed Ernst & Young LLP as its independent auditor in April 2002. Prior year financial statements audited by Arthur Andersen were restated but not reissued.

Investor Verification Checklist

• Restatement Impact: Verify the specific impact of the Mexico subsidiary accounting change on revenue and expense figures for prior years to ensure accurate trend analysis.
• Futurestep Viability: Assess the timeline and strategy for Futurestep to achieve profitability, given its history of significant losses and the company's expectation of continued losses.
• Restructuring Execution: Monitor the actual cash outflows associated with the $93.2 million in restructuring and impairment charges to confirm the liability estimates.
• Debt Covenants: Review the amended credit facility terms and the company's ability to meet the revised financial covenants (fixed charge coverage, leverage ratio) in the near term.
• Client Concentration: Confirm that no single client accounts for a material portion of revenue, as the filing states the top ten customers represented only 4.7% of revenue in fiscal 2002.