Korn Ferry 10-Q Summary
Business context and reporting period
Korn Ferry is a global organizational consulting firm operating through Consulting, Digital, Executive Search, and RPO & Professional Search. This Form 10-Q covers the three and six months ended October 31, 2020, corresponding to the second quarter and first six months of fiscal 2021. Results were materially affected by the COVID-19 pandemic, while Digital results benefited from the November 2019 acquisition of Miller Heiman Group, AchieveForum, and Strategy Execution.
Key financial metrics
| Metric | Three months ended Oct. 31, 2020 | Year-over-year change | Six months ended Oct. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Fee revenue | $435.4 million | Down 12% | $779.5 million | Down 20% |
| Total revenue | $437.8 million | Down 13% | $784.7 million | Down 22% |
| Operating income | $48.2 million | Down 22% | $4.4 million | Down $117.8 million |
| Operating margin | 11.1% | Down from 12.6% | 0.6% | Down from 12.5% |
| Net income attributable to Korn Ferry | $27.8 million | Down 35% | $(3.1) million | Down from $85.8 million income |
| Diluted EPS | $0.51 | Down from $0.77 | $(0.06) | Down from $1.54 |
| Adjusted EBITDA | $66.2 million | Down 15% | $76.8 million | Down 50% |
| Adjusted EBITDA margin | 15.2% | Down from 15.9% | 9.8% | Down from 15.7% |
Second-quarter fee revenue improved 27% sequentially from the first quarter, with all lines of business contributing. Executive Search fee revenue declined 21% year over year, Consulting declined 12%, and RPO & Professional Search declined 10%; Digital increased 14%, primarily from the acquired businesses.
Six-month operating cash flow was negative $92.1 million, compared with negative $104.1 million in the prior-year period. Investing cash flow was negative $23.3 million and financing cash flow was negative $37.2 million. Cash and cash equivalents ended at $553.1 million, compared with $689.2 million at April 30, 2020.
Cash, cash equivalents, and marketable securities totaled approximately $747.5 million at October 31, 2020, including assets held in trust for deferred compensation obligations. Net of amounts held for deferred compensation and accrued bonuses, management reported approximately $458.5 million of liquidity.
Debt, liquidity, and capital allocation
- Long-term debt was $394.5 million net of discount and issuance costs, representing $400 million of 4.625% senior unsecured notes due December 2027.
- The $650 million revolving credit facility had no outstanding borrowings and approximately $646 million available after standby letters of credit.
- The company was in compliance with its debt covenants as of October 31, 2020.
- The company paid $11.4 million of dividends and repurchased $22.8 million of common stock during the six months.
- The Board declared a subsequent quarterly dividend of $0.10 per share, payable January 15, 2021.
- Management stated that available cash, securities, operating funds, and revolver capacity should be sufficient for anticipated needs over the next 12 months, subject to the continuing effects of COVID-19.
Material changes versus the prior comparable period
- Revenue contracted sharply because clients reduced demand amid the pandemic and related economic restrictions. Executive Search experienced lower engagement volumes and lower average fees per engagement across all regions.
- Cost reductions partially offset the revenue decline. Average headcount decreased 16% in the second quarter and 11% for the six-month period; general and administrative expense decreased 25% and 27%, respectively.
- Restructuring charges were $2.4 million in the second quarter and $29.9 million year to date, primarily for severance under the COVID-19 cost-reduction plan. No comparable charges were recorded in 2019.
- Interest expense increased to $7.5 million in the quarter and $14.4 million year to date following issuance of the 2027 notes.
- Depreciation and amortization increased 20% in the quarter and 19% year to date, primarily due to the acquired Digital businesses and technology investments.
- The new Consulting and Digital segment presentation separates the former Advisory segment; prior-period information was recast for comparability.
Outlook, commentary, risks, and unusual items
Management reported substantial sequential improvement in the second quarter and said the restructured cost base was aligned with current revenue levels. However, it cautioned that increasing COVID-19 cases and renewed restrictions could prevent the second-quarter revenue recovery from continuing into the quarter ending January 31, 2021. The filing provides no specific quantitative revenue or earnings guidance.
- COVID-19 remains the principal uncertainty, affecting demand, client activity, travel, in-person services, staffing, and cash flow.
- Goodwill and intangible asset reviews identified no impairment as of October 31, 2020, but further deterioration could result in impairment charges; the Consulting reporting unit had the smallest excess fair-value buffer in the prior quantitative review.
- Accounts receivable increased to $435.4 million, and days sales outstanding increased from 70 to 78 days. The allowance for credit losses increased to $27.9 million.
- Foreign currency exposure remained material; management estimated that a 10% currency movement could produce an approximately $12.8 million foreign-exchange gain or loss based on exposed balances.
- Future dividends and share repurchases remain discretionary and are subject to earnings, liquidity, leverage, covenant, and other conditions.
- Management disclosed no material litigation expected to adversely affect the company and no material changes to previously disclosed risk factors.
Facts investors should verify
- Whether the sequential fee-revenue recovery continues as pandemic restrictions and economic conditions evolve.
- Whether cost reductions and restructuring actions are sufficient to protect margins at current or lower revenue levels.
- Executive Search engagement volumes, average fees, and regional recovery trends.
- Cash conversion, receivable collections, bonus payments, and the effect of working-capital needs on liquidity.
- Compliance with the revolving-credit and senior-note leverage covenants before continuing dividends and share repurchases.
- Potential goodwill or intangible-asset impairment if COVID-19 causes sustained underperformance, particularly in Consulting.