Korn/Ferry International: Q3 Fiscal 2009 Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended January 31, 2009 (Q3 Fiscal 2009) and the nine months ended January 31, 2009. Korn/Ferry International is a global provider of talent management solutions, operating primarily through two segments: Executive Recruitment and Futurestep (middle-management and outsourced recruitment). The reporting period was significantly impacted by a severe global economic downturn, leading to a material decline in client demand and a strategic restructuring of the company's cost base.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Total Revenue | $144,493 | $212,091 | $561,702 | $615,192 |
| Fee Revenue | $136,210 | $201,156 | $531,243 | $582,366 |
| Operating (Loss) Income | $(11,258) | $21,180 | $33,984 | $71,675 |
| Net (Loss) Income | $(22,356) | $16,256 | $7,108 | $50,465 |
| Cash and Cash Equivalents | $217,486 | $305,296 (Apr 30, 2008) | $217,486 | $232,531 (Apr 30, 2008) |
| Operating Cash Flow (9 Mo) | $(34,954) used | |||
| Restructuring Charges | $16,845 | $0 | $16,845 | $0 |
Material Changes vs. Prior Period
- Revenue Decline: Fee revenue decreased 32% in Q3 2009 compared to the prior year, driven by a 34% drop in the number of executive search engagements and a 17% decrease in average fees per engagement. The decline was global, with significant drops in North America, EMEA, and Asia Pacific.
- Operating Loss: The company reported an operating loss of $11.3 million in Q3 2009, a reversal from an operating income of $21.2 million in Q3 2008. This was primarily due to the revenue decline and the incurrence of $16.8 million in restructuring charges.
- Restructuring: To align costs with the economic environment, the company implemented a restructuring plan reducing the workforce by approximately 400 employees and consolidating premises. This resulted in a one-time charge of $16.8 million ($13.5 million severance, $3.4 million facilities).
- Investment Impairment: The company recorded a non-cash other-than-temporary impairment charge of approximately $15.9 million related to marketable securities held in trust for deferred compensation plans. This charge is included in "Interest and other (loss) income, net."
- Segment Performance:
- Executive Recruitment: Revenue fell 33% in Q3. Operating income dropped to $5.2 million from $29.0 million.
- Futurestep: Revenue fell 30% in Q3. The segment swung to an operating loss of $8.3 million from income of $2.0 million.
Guidance, Outlook, and Risks
- Liquidity Actions: Management drew down $42 million on its existing credit line to maximize financial flexibility. The company expects to incur an additional $10 million to $13 million in restructuring expenses in the fourth quarter (ending April 30, 2009).
- Outlook: Management believes cash on hand and funds from operations will be sufficient to meet requirements for the next 12 months. However, they noted that continued adverse revenue changes could necessitate additional cost-cutting or financing.
- Investment Risks: The company holds approximately $12.4 million in par value of auction rate securities. Due to failed auctions in the credit markets, these assets have diminished liquidity. While the company has a repurchase agreement to sell these at par value between 2010 and 2012, immediate liquidation is not guaranteed.
- Market Risk: The company faces significant exposure to foreign currency fluctuations and global economic conditions. A 15% strengthening of the U.S. dollar against major currencies would result in an estimated exchange loss of $3.4 million.
Investor Verification Checklist
- Restructuring Execution: Verify the progress of the planned workforce reduction and facility consolidation in Q4 to ensure cost savings materialize as projected.
- Auction Rate Securities: Monitor the status of the $12.4 million auction rate securities and the enforceability of the repurchase agreement with the investment firm.
- Deferred Compensation Liability: Confirm that the $15.9 million impairment charge on marketable securities held in trust does not create a funding gap for deferred compensation obligations, as the liability is adjusted to match the asset value.
- Revenue Stabilization: Assess whether the 32% revenue decline in Q3 represents a new baseline or if early signs of stabilization are emerging in the fourth quarter.
- Cash Burn Rate: Review the negative operating cash flow of $35 million for the nine-month period and the drawdown of the credit line to ensure liquidity remains adequate through the fiscal year.