Korn/Ferry International — Form 10-Q Summary
Business context and reporting period
Korn/Ferry provides executive recruitment, leadership and talent consulting, recruitment process outsourcing, and professional recruitment services through Executive Recruitment, Leadership & Talent Consulting (LTC), and Futurestep. The filing covers the fiscal quarter and nine months ended January 31, 2015, compared with the same periods ended January 31, 2014. The company operated 84 offices in 37 countries.
Key financial metrics
| Metric | Three months ended Jan. 31, 2015 | Three months ended Jan. 31, 2014 | Nine months ended Jan. 31, 2015 | Nine months ended Jan. 31, 2014 |
|---|---|---|---|---|
| Fee revenue | $249.5 million | $242.2 million | $756.4 million | $708.6 million |
| Total revenue | $258.9 million | $250.9 million | $783.9 million | $734.8 million |
| Operating income | $32.9 million | $27.3 million | $85.9 million | $67.1 million |
| Net income | $22.9 million | $21.3 million | $62.9 million | $51.5 million |
| Diluted EPS | $0.46 | $0.43 | $1.25 | $1.05 |
| Adjusted EBITDA | $39.1 million | $35.2 million | $121.0 million | $103.8 million |
Operating margin was 13.2% of fee revenue in the quarter and 11.4% for the nine-month period, compared with 11.3% and 9.5%, respectively, in the prior-year periods. Net margin was 9.2% for the quarter and 8.3% year to date, compared with 8.8% and 7.3%.
- Quarterly fee revenue increased 3%; nine-month fee revenue increased 7%.
- Quarterly Adjusted EBITDA margin increased to approximately 15.7% from 14.5%; the nine-month margin increased to 16.0% from 14.6%.
- Quarterly fee revenue by business was $143.5 million for Executive Recruitment, $64.3 million for LTC, and $41.8 million for Futurestep.
- Nine-month fee revenue was $440.8 million for Executive Recruitment, $194.3 million for LTC, and $121.3 million for Futurestep.
Cash flow, liquidity, debt, and balance sheet
- Cash provided by operating activities was $18.1 million for the nine months ended January 31, 2015, down from $33.1 million in the prior-year period.
- Cash used in investing activities was $17.5 million, compared with $9.3 million in the prior-year period. Cash used in financing activities was $3.6 million, compared with $6.2 million of cash provided in the prior-year period.
- Cash and cash equivalents were $304.5 million; total marketable securities were $148.9 million. Combined cash, cash equivalents, and marketable securities were $453.3 million versus $468.3 million at April 30, 2014.
- Working capital was approximately $316.0 million. Client receivable days outstanding increased from 57 days at April 30, 2014 to 74 days at January 31, 2015.
- The company had no borrowings under its revolving credit facility and no long-term debt borrowings. Standby letters of credit totaled $2.8 million under the company’s arrangements and $1.3 million with other financial institutions.
- The company had $69.6 million of borrowings against company-owned life insurance policies; these are separate from borrowings under the revolving credit facility.
- The revolving credit facility provides up to $75.0 million, with an option for an additional $50.0 million subject to lender consent, and matures January 18, 2018. The company complied with its financial covenants at January 31, 2015.
- Management stated that cash on hand and operating funds should be sufficient for anticipated working capital, capital expenditures, corporate requirements, and dividend payments over the next twelve months.
Material changes versus the prior comparable period
- Futurestep was the strongest growth contributor, with quarterly fee revenue up 16% and nine-month fee revenue up 22%, supported by recruitment process outsourcing and professional recruitment.
- LTC fee revenue increased 3% in both the quarter and nine-month period, including higher product and consulting revenue.
- Executive Recruitment fee revenue declined slightly in the quarter but increased 5% for the nine-month period. EMEA declined in the quarter, while North America increased.
- Foreign exchange reduced quarterly fee revenue by approximately $9.1 million and nine-month fee revenue by approximately $8.2 million.
- Quarterly compensation and benefits increased 2%; nine-month compensation and benefits increased 7%, primarily due to higher bonuses, salaries, headcount, and outside contractors.
- General and administrative expense declined 1% in the quarter and 7% year to date, partly because of lower legal expenses and cost-control initiatives.
- The company recorded $9.5 million of restructuring charges in the nine-month period, principally severance. The remaining restructuring liability was $1.8 million at January 31, 2015. The quarter included a $0.4 million restructuring recovery.
- Other income declined to a $1.5 million loss in the quarter from $1.1 million of income, reflecting changes in the fair value of marketable securities. Nine-month other income declined to $3.1 million from $7.7 million.
- Operating cash flow was affected by $139.0 million of cash bonus payments related to fiscal 2014, compared with $113.5 million of prior-year bonus payments.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide specific numerical revenue or earnings guidance. Its stated priorities include integrating the multi-service strategy, expanding LTC and RPO, pursuing disciplined acquisitions, enhancing technology and processes, and leveraging the company’s brand and intellectual property.
- The board adopted an intended quarterly dividend policy of $0.10 per share. The first dividend was declared after the reporting date on March 4, 2015. Future dividends remain discretionary and may be amended, suspended, or eliminated.
- The company increased its share repurchase authorization to $150.0 million. Repurchases during the quarter were limited to shares withheld for employee tax obligations.
- After quarter-end, the company agreed to acquire Pivot Leadership for $15.0 million in cash, subject to adjustments, plus up to $6.5 million of contingent consideration. The acquisition closed March 1, 2015.
- Key risks include economic and labor-market conditions, foreign currency volatility, attracting and retaining consultants, competition, client relationship portability, cyber and information-system vulnerabilities, legal and regulatory exposure, acquisition integration, goodwill and intangible-asset impairment, deferred-tax-asset utilization, and seasonality.
- Management reported no material litigation expected to adversely affect the company and no off-balance-sheet arrangements.
- Accumulated other comprehensive loss increased to $43.7 million from $2.4 million, principally because of foreign currency translation losses.
Important facts for investors to verify
- Whether Futurestep’s rapid growth can continue while compensation, contractor, and staffing costs remain elevated.
- The sustainability of improved operating and Adjusted EBITDA margins after restructuring benefits and other unusual items.
- Receivable collection trends, including the increase in days sales outstanding to 74 days.
- The effect of foreign exchange movements on revenue, margins, and accumulated comprehensive loss.
- The distinction between zero revolving-facility borrowings and the $69.6 million of policy loans associated with company-owned life insurance.
- Whether cash generation supports the new dividend policy, the $150.0 million repurchase authorization, and the Pivot Leadership acquisition while maintaining the credit agreement’s $50.0 million domestic liquidity requirement.
- The eventual outcome of the fiscal 2015 goodwill impairment testing and the company’s adoption of the new revenue-recognition standard beginning in fiscal 2018.