Korn/Ferry International — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended July 31, 2012, the first quarter of fiscal 2013. Korn/Ferry provides executive recruitment, Leadership & Talent Consulting, recruitment process outsourcing and other talent-management services through 76 offices in 35 countries. The company reports three operating segments: Executive Recruitment, Leadership & Talent Consulting and Futurestep.
Financial performance and position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Fee revenue | $186.7 million | $206.3 million | Down 10% |
| Total revenue | $196.0 million | $214.6 million | Down 9% |
| Operating income | $17.0 million | $25.9 million | Down $8.9 million |
| Operating margin on fee revenue | 9.1% | 12.6% | Down 3.5 percentage points |
| Net income | $10.4 million | $15.4 million | Down 32% |
| Net margin on fee revenue | 5.6% | 7.5% | Down 1.9 percentage points |
| Diluted EPS | $0.22 | $0.33 | Down $0.11 |
| Cash used in operating activities | $(74.5) million | $(83.0) million | Use improved $8.5 million |
Executive Recruitment fee revenue fell 15% to $127.4 million, with declines in every region. Leadership & Talent Consulting revenue increased 6% to $28.4 million, while Futurestep revenue increased 2% to $30.9 million. Segment operating margins were 17.6% for Executive Recruitment, 15.0% for Leadership & Talent Consulting and 10.3% for Futurestep.
At July 31, 2012, cash and cash equivalents were $196.4 million and marketable securities were $136.5 million, for combined liquidity of approximately $332.9 million, down from $417.7 million at April 30, 2012. Total assets were $931.0 million and total liabilities were $300.0 million. Working capital was approximately $275.8 million.
The company reported no borrowings under its $50 million senior secured revolving facility. It had $73.3 million of borrowings against the cash surrender value of company-owned life insurance policies, offset by a net policy value of $78.9 million. The company maintained $10.0 million with the lender as collateral and had $2.7 million of standby letters of credit outstanding.
Material changes versus the prior comparable period
- Fee revenue declined primarily because the weighted-average fee per engagement decreased 7% and the number of engagements billed decreased 3%. Foreign exchange reduced fee revenue by approximately $7.5 million.
- Executive Recruitment engagement volume decreased 14%, with the largest revenue declines in EMEA and Asia Pacific. Executive Recruitment operating margin declined to 17.6% from 22.1%.
- Compensation and benefits expense decreased 7% to $128.0 million, including a 16% decrease in performance-related bonus expense to $26.4 million.
- General and administrative expense decreased 4% to $33.4 million, while engagement expense increased 5% to $13.8 million and depreciation and amortization increased to $3.7 million from $3.4 million.
- Operating cash outflows remained substantial because the company paid $105.6 million of fiscal 2012 bonuses during the quarter, although bonus payments were lower than in the prior-year quarter.
- The company changed its segment structure to separately report Leadership & Talent Consulting. Prior-period segment data was reclassified, with no effect on consolidated net income or EPS.
- Accumulated other comprehensive income declined from $7.2 million to a loss of $2.6 million, principally due to a $9.9 million unfavorable foreign-currency translation adjustment.
Outlook, commentary, risks and unusual items
Management stated that cash on hand and funds from operations should be sufficient for anticipated working capital, capital expenditures and corporate requirements over the next twelve months. Management was aligning the cost structure with anticipated revenue levels to preserve operational profitability.
Management noted that economic recovery had slowed and that deterioration in global economic, credit or labor-market conditions could reduce demand, operating cash flow and liquidity. Other disclosed risks include foreign-currency volatility, competition, attracting and retaining consultants, legal and regulatory exposure, client relationship portability, cyber and information-system vulnerabilities, technology execution, goodwill and intangible-asset impairment, deferred-tax-asset utilization and acquisition integration.
On September 1, 2012, after the reporting period, the company acquired Global Novations, LLC for $35 million in cash plus up to $5 million contingent on future performance. The business will be included in Leadership & Talent Consulting.
The company reported no material legal proceedings, no material changes to previously disclosed risk factors, no off-balance-sheet arrangements and no material changes in contractual obligations. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the decline in Executive Recruitment volume and regional revenue was temporary or reflected a sustained weakening in demand.
- The effect of continued foreign-exchange movements on revenue, margins, accumulated other comprehensive income and foreign cash balances.
- The conversion of substantial operating cash outflows into positive cash flow after annual bonus payments and ECAP contributions.
- The liquidity impact and integration performance of the Global Novations acquisition, including the potential $5 million contingent payment.
- The relationship between $91.6 million of ECAP obligations and $91.1 million of related trading securities held in trust.
- The company’s ability to maintain facility covenants, including the minimum $30 million of unrestricted cash and marketable securities after accrued compensation.