Korn Ferry Form 10-Q Summary
Business context and reporting period
Korn Ferry is a global organizational consulting firm operating through Consulting, Digital, Executive Search, and Recruitment Process Outsourcing (RPO) and Professional Search. The filing covers the fiscal quarter and nine months ended January 31, 2022, compared with the corresponding periods ended January 31, 2021. Although the request identifies “2021 Q3,” the filing is for fiscal third quarter 2022.
Key financial metrics
| Metric | Three months ended January 31 | Change | Nine months ended January 31 | Change |
|---|---|---|---|---|
| Fee revenue | $680.7 million | 43% | $1.906 billion | 52% |
| Total revenue | $685.0 million | 43% | $1.916 billion | 52% |
| Operating income | $126.3 million | 94% | $331.3 million | 376% |
| Net income attributable to Korn Ferry | $84.1 million | 64% | $234.7 million | 386% |
| Diluted EPS | $1.54 | 64% | $4.28 | 386% |
| Adjusted EBITDA | $138.3 million | 43% | $394.5 million | 128% |
| Adjusted EBITDA margin | 20.3% | Flat | 20.7% | Up from 13.8% |
| Operating cash flow | Not separately provided | — | $221.5 million | Up from $54.3 million |
Quarterly fee revenue increased across all lines of business. RPO and Professional Search was the largest growth contributor, rising 98% to $188.7 million, partly reflecting the Lucas Group acquisition. Executive Search fee revenue increased 42% in aggregate, Consulting increased 20%, and Digital increased 19%.
For the quarter, operating margin was 18.6% of fee revenue and net income attributable to Korn Ferry was 12.4% of fee revenue. Compensation and benefits declined to 65.5% of fee revenue from 68.6% in the prior-year quarter. For the nine-month period, compensation and benefits declined to 66.8% from 73.1%.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $846.5 million at January 31, 2022, compared with $850.8 million at April 30, 2021.
- Current and non-current marketable securities totaled $260.7 million, bringing cash, cash equivalents, and marketable securities to $1.107 billion.
- Long-term debt was $395.3 million, consisting of $400 million of 4.625% senior unsecured notes due December 2027, net of unamortized discount and issuance costs.
- No amounts were outstanding under the $650 million revolving credit facility; $645.3 million remained available after letters of credit.
- The company was in compliance with its debt covenants and reported no material off-balance-sheet arrangements.
- Cash dividends were increased to $0.12 per share. The board declared another $0.12 per-share dividend on March 8, 2022.
- The company repurchased $31.5 million of common stock during the nine months and had $96.4 million remaining under its repurchase authorization at January 31, 2022.
Material changes versus the prior comparable period
- Results benefited from improved demand following the pandemic-related weakness in the prior-year period, with management citing increased relevance of its organizational and human-capital solutions.
- On November 1, 2021, Korn Ferry acquired Lucas Group for $90.9 million, net of cash acquired. The acquisition added $76.8 million of preliminary goodwill and was included in RPO and Professional Search.
- Adjusted EBITDA increased substantially in every major business line. Quarterly RPO and Professional Search Adjusted EBITDA rose 125% to $44.1 million, while Executive Search Adjusted EBITDA rose 58% in aggregate to $65.7 million.
- There were no restructuring charges in the current-year periods, compared with $0.8 million in the quarter and $30.7 million in the nine-month prior-year period.
- Other loss, net was $7.3 million in the quarter, compared with $14.9 million of other income in the prior-year quarter, primarily because marketable securities produced losses rather than gains.
- The effective tax rate declined to 24.0% for the quarter and 24.4% for the nine-month period, from 29.1% and 34.2%, respectively.
- The company reduced its real estate footprint and recorded $7.4 million of right-of-use asset impairment and $1.9 million of fixed-asset impairment during the nine months.
- Accumulated other comprehensive loss increased to $80.7 million from $51.8 million, primarily because of unfavorable foreign-currency translation.
Guidance, outlook, commentary, and risks
The filing does not provide specific quantitative revenue, earnings, or margin guidance. Management stated that business conditions had improved substantially over the preceding five quarters and that cash on hand, operating cash flow, and available credit were expected to satisfy working capital, capital expenditures, debt service, dividends, and other requirements for the next 12 months.
Remaining performance obligations on contracts with expected durations greater than one year totaled $958.7 million at January 31, 2022. Management expects to recognize approximately $184.5 million in the remainder of fiscal 2022, $442.6 million in fiscal 2023, $213.4 million in fiscal 2024, and $118.2 million thereafter. These amounts exclude contracts with initial terms of one year or less and are not presented as revenue guidance.
Principal risks include COVID-19 and future pandemic effects, global economic and political conditions, labor-market demand, competition, consultant retention and productivity, currency fluctuations, acquisitions and integration, cybersecurity and data privacy, regulatory and legal exposure, intellectual-property protection, goodwill and intangible-asset impairment, indebtedness, interest-rate and LIBOR transition risk, and the ability to maintain an appropriate cost structure. A 10% change in relevant foreign currencies could produce an estimated $12.8 million foreign-exchange gain or loss based on the company’s reported exposure.
Important facts for investors to verify
- Assess how much of the revenue and profitability growth is organic versus attributable to the Lucas Group acquisition and recovery from the pandemic-affected comparison period.
- Monitor receivables and collection trends: days sales outstanding increased from 57 to 68 days, and net client receivables rose to $603.3 million.
- Review the sustainability of the approximately 20% Adjusted EBITDA margin, including higher bonus, compensation, acquisition, and integration costs.
- Reconcile Adjusted EBITDA with GAAP operating income and evaluate the effect of excluded impairment and acquisition-related charges.
- Consider the liquidity and covenant implications of the $395.3 million net debt, variable-rate COLI borrowings of $79.8 million, and future debt refinancing or redemption decisions.
- Evaluate deferred compensation funding: marketable securities held for the plans had a fair value of $184.1 million against vested obligations of $175.2 million and unvested obligations of $25.9 million.
- Review foreign-currency exposure, marketable-security volatility, acquisition purchase-price allocations, and the company’s assumptions for performance-related compensation.