Korn Ferry Form 10-Q Summary
Business context and reporting period
Korn Ferry is a global organizational consulting firm providing Consulting, Digital, Executive Search, and Recruitment Process Outsourcing and Professional Search services. The filing covers the fiscal quarter and six months ended October 31, 2021, with comparisons to the corresponding 2020 periods. The financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2021 | Three months ended Oct. 31, 2020 | Six months ended Oct. 31, 2021 | Six months ended Oct. 31, 2020 |
|---|---|---|---|---|
| Fee revenue | $639.4 million | $435.4 million | $1,224.8 million | $779.5 million |
| Total revenue | $643.4 million | $437.8 million | $1,231.5 million | $784.7 million |
| Operating income | $103.8 million | $48.2 million | $205.0 million | $4.4 million |
| Net income attributable to Korn Ferry | $75.8 million | $27.8 million | $150.6 million | $(3.1) million |
| Diluted EPS | $1.38 | $0.51 | $2.75 | $(0.06) |
| Adjusted EBITDA | $134.9 million | $66.2 million | $256.2 million | $76.8 million |
| Adjusted EBITDA margin | 21.1% | 15.2% | 20.9% | 9.8% |
- Fee revenue increased 47% year over year in the quarter and 57% for the six-month period. Growth occurred across every line of business, led by RPO & Professional Search and Executive Search North America.
- Operating margin, measured against fee revenue, was 16.2% in the quarter and 16.7% for the six-month period, compared with 11.1% and 0.6%, respectively, in the prior-year periods.
- Compensation and benefits represented 67.5% of fee revenue in the quarter and 67.6% for the six-month period, down from 70.5% and 75.8%, respectively. Performance-related bonus expense was $119.2 million in the quarter and $215.2 million for the six-month period.
- Cash used in operating activities was $42.5 million for the six months, improving from $92.1 million used in the prior-year period. The company reported negative operating cash flow despite strong earnings, primarily because receivables increased by $169.0 million and bonus and other working-capital payments were made.
- Cash and cash equivalents were $725.4 million at October 31, 2021. Total cash and marketable securities were approximately $996.9 million, compared with $1,097.1 million at April 30, 2021. Net of amounts held for deferred compensation and accrued bonuses, liquidity was $591.2 million.
- Long-term debt was $395.1 million, consisting primarily of $400 million of 4.625% senior unsecured notes due December 2027. No amounts were outstanding under the $650 million revolving credit facility; $644.5 million remained available after letters of credit.
- The company was in compliance with its debt covenants. It paid $13.5 million of dividends and repurchased $9.4 million of common stock during the six months. The quarterly dividend was increased 20% to $0.12 per share.
Material changes versus the prior comparable period
- Revenue and profitability recovered substantially from the COVID-19-affected prior-year periods. Six-month net income attributable to Korn Ferry improved from a $3.1 million loss to $150.6 million of income.
- Adjusted EBITDA more than doubled in the quarter and increased 234% for the six-month period; consolidated margin expanded to 21.1% in the quarter from 15.2%.
- RPO & Professional Search fee revenue increased 76% in the quarter and 88% for the six-month period. Executive Search North America increased 73% and 85%, respectively.
- No restructuring charges were recorded in either 2021 period, compared with $2.4 million in the 2020 quarter and $29.9 million in the 2020 six-month period.
- The company recorded $7.4 million of right-of-use asset impairment and $1.9 million of fixed-asset impairment in connection with reducing its real estate footprint. It also recorded $1.1 million of integration and acquisition costs.
- Days sales outstanding increased from 57 days at April 30, 2021 to 72 days at October 31, 2021, consistent with historical experience according to management. Net receivables increased to $608.1 million from $448.7 million.
- On November 1, 2021, after the reporting date, Korn Ferry completed the approximately $90 million, net-of-cash acquisition of Lucas Group, a professional search and contracting business.
Guidance, outlook, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. Management stated that business conditions had improved substantially and that current costs were aligned with current revenue levels, but cautioned that the pace of revenue growth may not continue because of COVID-19 variants, vaccine effectiveness, vaccine mandates, potential restrictions, and broader economic uncertainty.
- Management believes available cash, marketable securities and revolver capacity are sufficient for anticipated working capital, capital expenditures, debt service, dividends and general corporate requirements for the next 12 months.
- Key risks include COVID-19 and future pandemics, economic and labor-market conditions, demand volatility, consultant retention and productivity, competition, automation, foreign currency movements, cybersecurity and data privacy, regulatory changes, intellectual-property protection, acquisitions, goodwill impairment, indebtedness and the phase-out of LIBOR.
- Foreign currency exposure remained material; management estimated that a 10% movement in relevant currencies could produce an approximately $14.5 million foreign-exchange gain or loss on exposed balances.
- The company had $80.0 million of borrowings against company-owned life insurance cash surrender value, bearing interest primarily at variable rates. Net cash surrender value was $164.8 million.
- Contracted remaining performance obligations for contracts longer than one year totaled $901.8 million at October 31, 2021, but the filing cautions that this excludes contracts of one year or less and is not a forecast of future revenue.
- No material litigation was disclosed, no material changes to previously disclosed risk factors were reported, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether elevated revenue growth and 21% Adjusted EBITDA margins are sustainable after the COVID-19 recovery period and following the Lucas Group acquisition.
- Receivables collection trends, the increase in days sales outstanding, and the effect of bonus payments and working-capital needs on operating cash flow.
- The treatment and performance of marketable securities held to support deferred compensation obligations, including the distinction between total liquidity and unrestricted liquidity.
- Integration costs, purchase accounting and operating results associated with the Lucas Group acquisition.
- Compliance with leverage, liquidity and interest-coverage covenants, as well as the effect of variable-rate COLI borrowings and the LIBOR transition.
- The impact of COVID-19 variants, labor-market conditions, foreign exchange and consultant retention on future demand and margins.