Korn/Ferry International Form 10-K Summary
Business Context and Reporting Period
Korn/Ferry International 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 year ended April 30, 2014. Although the request references 2013 Q4, the filing is an annual report for fiscal 2014 and includes unaudited fourth-quarter results for the quarter ended April 30, 2014.
- 84 offices in 37 countries and 3,396 full-time employees at fiscal year-end.
- Fiscal 2014 fee revenue was diversified: Executive Recruitment 59.2%, LTC 26.5% and Futurestep 14.3%.
- 47% of fee revenue was generated outside the United States.
- 80% of fiscal 2014 assignments were performed for clients served during the prior three fiscal years; no single client represented more than 1.5% of fee revenue.
Financial Performance and Liquidity
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Fee revenue | $960.3 million | $812.8 million | +18% |
| Total revenue | $995.6 million | $849.7 million | +17% |
| Operating income | $91.6 million | $43.9 million | +109% |
| Operating margin on fee revenue | 9.5% | 5.4% | +4.1 percentage points |
| Net income | $72.7 million | $33.3 million | +118% |
| Diluted EPS | $1.48 | $0.70 | +$0.78 |
| Adjusted EBITDA | $138.3 million | $97.8 million | +41% |
| Adjusted EBITDA margin | 14.4% | 12.0% | +2.4 percentage points |
| Cash flow from operations | $129.5 million | $61.7 million | +$67.8 million |
Fiscal 2014 fourth-quarter fee revenue was $251.7 million, operating income was $24.5 million and net income was $21.2 million, compared with $227.9 million, $15.4 million and $12.2 million, respectively, in the prior-year fourth quarter.
- Segment operating income was $116.4 million for Executive Recruitment, $23.8 million for LTC and $13.4 million for Futurestep, partially offset by $61.9 million of corporate expenses.
- Executive Recruitment fee revenue increased 9% to $568.9 million, with operating margin improving to 20.5% from 15.5%.
- LTC fee revenue increased 51% to $254.6 million, including contributions from the prior-year PDI and Global Novations acquisitions; reported operating margin improved to 9.4% from 3.8%.
- Futurestep fee revenue increased 12% to $136.8 million, with operating margin improving to 9.8% from 9.0%.
- Cash and cash equivalents were $333.7 million and marketable securities were $134.6 million at April 30, 2014, for total cash and securities of $468.3 million.
- Working capital was $275.0 million, compared with $178.5 million in the prior year.
- The company had no borrowings under its $75.0 million senior unsecured revolving credit facility. It had $72.9 million of borrowings secured by company-owned life insurance policies.
- The company reported no cash dividends since 1996 and no current plans to pay dividends. Approximately $24.4 million remained available under the share repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Growth reflected higher engagement volumes and fees in Executive Recruitment, higher demand in LTC and increased RPO and professional recruitment activity in Futurestep.
- Excluding the PDI and Global Novations acquisitions, fee revenue increased approximately 9% in fiscal 2014.
- Foreign exchange reduced reported fee revenue by approximately $7.5 million.
- Restructuring charges declined to $3.7 million from $22.9 million, substantially benefiting operating income.
- Compensation and benefits increased 16% to $646.9 million, driven principally by higher performance-based bonuses, salaries, headcount and deferred compensation costs.
- General and administrative expense increased 6%, while depreciation and amortization increased to $26.2 million from $19.0 million.
- Cash flow benefited from higher profitability and was partially offset by a $15.0 million contingent-consideration payment to PDI sellers and $28.6 million of property and equipment purchases.
- The company completed no acquisitions during fiscal 2014, following the prior-year acquisitions of PDI and Global Novations.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management described the medium- to long-term talent-management outlook as positive, citing consolidation of providers, skills shortages, demand for human-capital expertise, talent analytics and increased recruitment outsourcing. Fiscal 2015 priorities include integrating the three service lines, expanding LTC and RPO, developing technology and intellectual property, leveraging the brand and pursuing disciplined acquisitions.
- Management expected to implement an additional restructuring plan in fiscal 2015 to capture technology and integration efficiencies. Estimated first-quarter fiscal 2015 restructuring charges were $5.0 million to $6.0 million.
- Fiscal 2014 included a $4.5 million employment-dispute expense, which was settled with no remaining liability at year-end.
- Other income included a $9.5 million increase in the fair value of mutual funds supporting deferred-compensation obligations; the related deferred-compensation liability also increased by $7.8 million.
- The effective tax rate declined to approximately 29% from 35%, supported by the conclusion of an IRS examination, a greater proportion of income from lower-tax jurisdictions and reversal of certain foreign valuation allowances.
- No goodwill impairment was recorded after the January 2014 annual test, but future impairment remains sensitive to revenue, margin, growth and discount-rate assumptions.
- A fiscal 2013 cyber breach was described as limited in scope and not materially adverse to operations or financial reporting; the company incurred additional security costs and acknowledges continuing cybersecurity and data-privacy exposure.
- Principal risks include economic cyclicality, competition and pricing pressure, retention of consultants and client relationships, international operations and currency movements, acquisitions and integration, technology and cybersecurity, legal and employment claims, tax matters, goodwill impairment and the ability to align costs with demand.
- Contractual obligations totaled $255.3 million, including $204.0 million of operating lease commitments, $2.3 million of accrued restructuring obligations and $49.0 million of projected interest on company-owned life-insurance loans.
Most Important Facts for Investors to Verify
- Confirm the effect of PDI and Global Novations on reported growth and assess organic LTC growth separately from acquisition-related growth.
- Evaluate whether improved operating and Adjusted EBITDA margins are sustainable after restructuring benefits and unusually favorable tax items.
- Monitor the planned fiscal 2015 restructuring charges and the realization of expected technology and integration savings.
- Review the distinction between cash and marketable securities available for general corporate purposes and assets held in trust for deferred-compensation obligations.
- Assess exposure to $72.9 million of company-owned life-insurance policy loans and the underlying insurer credit and investment risks.
- Review consultant retention, client concentration, economic sensitivity, currency effects and cybersecurity controls.
- Verify management’s non-GAAP Adjusted EBITDA definition and reconcile it to GAAP operating income and cash flow.
- Review the $203.8 million of undistributed foreign earnings and potential future tax consequences if repatriated outside the company’s stated distribution plan.