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 three and six months ended October 31, 2014, representing fiscal 2015 second-quarter and year-to-date results. The company operated 84 offices in 37 countries.
Financial Performance and Position
| Metric | Three Months Ended October 31, 2014 | Three Months Ended October 31, 2013 | Six Months Ended October 31, 2014 | Six Months Ended October 31, 2013 |
|---|---|---|---|---|
| Fee revenue | $255.7 million | $238.0 million | $506.9 million | $466.4 million |
| Total revenue | $264.7 million | $246.2 million | $525.0 million | $483.8 million |
| Operating income | $34.4 million | $23.2 million | $53.0 million | $39.8 million |
| Net income | $25.4 million | $18.8 million | $39.9 million | $30.2 million |
| Diluted EPS | $0.51 | $0.38 | $0.80 | $0.62 |
| Adjusted EBITDA | $44.0 million | $36.7 million | $81.9 million | $68.6 million |
Fee-revenue growth was 7% for the quarter and 9% for the six-month period. Net income margins, measured against fee revenue, were 9.9% and 7.9% for the quarter and 7.9% and 6.5% year to date, respectively. Operating margins were 13.5% and 9.7% for the quarter and 10.5% and 8.5% year to date.
- Quarterly fee revenue by segment was $148.9 million for Executive Recruitment, $66.4 million for LTC, and $40.4 million for Futurestep.
- Year-to-date fee revenue was $297.3 million for Executive Recruitment, $130.0 million for LTC, and $79.6 million for Futurestep.
- Futurestep was the fastest-growing segment, with fee revenue up 27% in the quarter and 25% year to date.
- At October 31, 2014, cash and cash equivalents were $248.2 million, current marketable securities were $26.0 million, and non-current marketable securities were $125.9 million.
- Total assets were $1.21 billion and stockholders’ equity was $786.6 million.
- The company had no borrowings under its revolving credit facility or other long-term debt arrangements. It had $2.8 million of standby letters of credit under those arrangements and $1.5 million with other financial institutions.
- Borrowings against company-owned life insurance policies totaled $72.2 million and were reflected in the net cash surrender value of those policies.
- Net cash used in operating activities was $52.0 million for the six months, compared with $35.6 million in the prior-year period. Capital expenditures were $11.3 million.
Material Changes Versus the Prior Comparable Period
- Quarterly fee revenue increased $17.7 million, primarily from higher Executive Recruitment and Futurestep activity. Executive Recruitment engagements billed and average fees per engagement each increased 3%; Futurestep engagements billed increased 7% and average fees increased 18%.
- Year-to-date Executive Recruitment fee revenue increased 7%, while LTC increased 3%. Executive Recruitment operating margin declined to 18.2% from 20.4%, primarily because of restructuring charges and higher compensation investments.
- Quarterly operating income increased $11.2 million. General and administrative expense declined $5.7 million, including a $6.2 million insurance reimbursement for prior-period legal fees. Cost of services declined $1.4 million.
- Compensation and benefits increased 8% for the quarter and 9% year to date, driven substantially by higher performance-based bonuses, headcount, contractors, and stock compensation.
- Adjusted EBITDA increased 20% for the quarter and 19% year to date; the corresponding margins improved to approximately 17% and 16% from 15% in each prior comparable period.
- Restructuring charges increased to $9.9 million year to date from $3.7 million, consisting primarily of $9.6 million of severance and $0.3 million of facility consolidation or abandonment costs.
- Cash declined $85.5 million during the six months, mainly because $137.7 million of fiscal 2014 bonuses were paid, compared with $109.4 million in the prior-year period. Foreign-exchange effects reduced cash by $9.9 million.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide specific numerical earnings or revenue guidance in the filing. Management expects cash on hand and funds from operations to cover anticipated working capital, capital expenditures, corporate requirements, planned dividends, and share repurchases over the next twelve months, subject to business and market conditions.
- Fiscal 2015 priorities include integrating the multi-service strategy, expanding LTC and RPO offerings, pursuing disciplined acquisitions, enhancing technology and processes, and leveraging the company’s brand and intellectual property.
- On December 8, 2014, the board adopted a non-binding policy contemplating a $0.10 quarterly cash dividend beginning after the third quarter of fiscal 2015. Dividends remain discretionary and may be amended, suspended, or revoked.
- The board also increased the authorized stock repurchase program to an aggregate of $150.0 million. Approximately $24.4 million remained available under the prior program at October 31, 2014.
- The 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 October 31, 2014.
- Permitted acquisitions, dividends, and share repurchases require maintenance of $50.0 million of unrestricted domestic cash or marketable securities, excluding assets held in trust for deferred compensation obligations.
- Key risks include economic and labor-market cyclicality, foreign-currency volatility, employee retention, competition, client-relationship portability, legal and regulatory exposure, cybersecurity and systems dependence, intellectual-property limitations, acquisition integration, goodwill impairment, tax-asset recoverability, and seasonality.
- Other comprehensive loss increased to $17.7 million from $2.4 million at April 30, 2014, primarily because of a $16.2 million unfavorable foreign-currency translation adjustment.
- The filing states that no litigation was pending that management believed would have a material adverse effect, and no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm whether Futurestep’s rapid revenue and margin growth is sustainable as staffing, contractor, and bonus costs increase.
- Assess the recurring nature of the $6.2 million legal-fee insurance reimbursement and its effect on quarterly margins.
- Separate GAAP operating performance from non-GAAP Adjusted EBITDA, including the effect of $9.9 million of restructuring charges.
- Monitor operating cash conversion, receivables, and days sales outstanding, which increased from 57 to 72 days.
- Review the liquidity implications of the proposed dividend and expanded repurchase authorization, including credit-agreement restrictions and the $50.0 million domestic liquidity requirement.
- Evaluate exposure to foreign-currency movements, deferred compensation obligations, and variable-rate borrowings against company-owned life insurance policies.