Korn Ferry Form 10-Q Summary
Business Context and Reporting Period
Korn Ferry is a global organizational consulting firm operating through Consulting, Digital, Executive Search, and RPO & Professional Search segments. The filing covers the three months ended July 31, 2020, the first quarter of fiscal 2021, compared with the three months ended July 31, 2019. Results were materially affected by the COVID-19 pandemic and related reductions in client demand, economic activity, travel, and in-person business activity.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Fee revenue | $344.1 million | $484.5 million | Down 29% |
| Total revenue | $346.9 million | $496.2 million | Down 30% |
| Operating income (loss) | $(43.8) million | $60.3 million | Declined $104.1 million |
| Net income (loss) attributable to Korn Ferry | $(30.8) million | $43.0 million | Declined $73.8 million |
| Diluted EPS | $(0.58) | $0.76 | Declined $1.34 |
| Adjusted EBITDA | $10.6 million | $74.9 million | Down 86% |
| Adjusted EBITDA margin | 3.1% | 15.5% | Down 12.4 percentage points |
| Cash used in operating activities | $(144.3) million | $(161.9) million | Improved $17.6 million |
Operating margin declined to negative 12.7% from positive 12.5%, while net loss attributable to Korn Ferry was approximately 9.0% of fee revenue compared with net income of approximately 8.9% of fee revenue. Restructuring charges of $27.5 million and integration/acquisition costs of $0.7 million were excluded from Adjusted EBITDA.
Segment Performance
| Segment | Q1 FY2021 Fee Revenue | Year-over-Year Change | Operating Result |
|---|---|---|---|
| Consulting | $99.3 million | Down 28% | $(10.9) million |
| Digital | $56.0 million | Down 3% | $(2.6) million |
| Executive Search | $120.1 million | Down 38% | $(12.3) million |
| RPO & Professional Search | $68.7 million | Down 28% | $2.2 million |
Executive Search declines reflected fewer engagements and lower average fees across all regions. Digital revenue was comparatively resilient, partly due to contributions from the November 2019 acquisition of Miller Heiman Group, AchieveForum, and Strategy Execution.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $542.8 million at July 31, 2020, compared with $689.2 million at April 30, 2020.
- Current and non-current marketable securities totaled $190.2 million, resulting in cash and marketable securities of approximately $733.0 million.
- Cash used in investing activities was $13.2 million, including $8.8 million of capital expenditures. Cash used in financing activities was $7.8 million.
- The company had $400.0 million principal amount of 4.625% senior unsecured notes due December 2027, recorded at $394.3 million net of discount and issuance costs.
- No borrowings were outstanding under the $650.0 million revolving credit facility; $646.0 million remained available after standby letters of credit.
- The company reported compliance with debt covenants as of July 31, 2020.
- The quarterly dividend remained $0.10 per share. A further $0.10 dividend was declared on September 2, 2020, payable October 15, 2020.
- No open-market or privately negotiated share repurchases occurred during the quarter. Remaining repurchase authorization was $158.3 million; 161,027 shares were withheld to satisfy taxes on restricted stock vesting.
Management stated that cash on hand, operating funds, and available revolver capacity should be sufficient for anticipated working capital, capital expenditures, debt obligations, dividends, and other requirements over the next 12 months. Net working capital decreased to approximately $602.0 million from $612.9 million, primarily because of annual bonus payments, lower receivables, and lower cash balances.
Material Changes Versus the Prior Comparable Period
- Fee revenue fell $140.4 million, primarily because COVID-19 reduced demand across all business segments and geographies. Foreign exchange movements reduced fee revenue by approximately $8.1 million.
- Compensation and benefits expense decreased 14% to $284.0 million, reflecting an 11% reduction in average headcount, lower contractor usage, and cost-control actions. These savings were partly offset by higher performance-related bonus and deferred compensation expense.
- General and administrative expense decreased 28% to $47.1 million due to lower marketing, office, travel, legal, and professional expenses.
- Restructuring charges of $27.5 million were recorded for severance under a COVID-19-related cost reduction plan. The plan also included employee furloughs, salary reductions, and other cost-saving measures.
- Other income increased to $11.2 million from $1.8 million, primarily because of gains in marketable securities held for deferred compensation obligations.
- Net interest expense increased to $6.9 million from $4.1 million, mainly because the company issued the senior notes in December 2019.
- Operating cash use improved year over year, but the company experienced a $146.5 million quarterly decrease in cash and cash equivalents, largely due to annual bonus payments, retention payments, interest, capital expenditures, and dividends.
Guidance, Outlook, Commentary, and Risks
The filing does not provide clear numerical revenue or earnings guidance. Management indicated that the duration and severity of COVID-19 remain uncertain and that continued or worsening economic disruption could reduce demand, operating cash flow, and liquidity. The company may need to draw on its revolver or suspend share repurchases and dividends if adverse conditions persist.
- Goodwill and intangible asset reviews identified no impairment as of July 31, 2020, but further deterioration in business conditions could reduce the valuation cushion, particularly in Consulting, and result in impairment charges.
- Key risks include COVID-19, global economic and political conditions, demand volatility, competition, retention of qualified consultants and key employees, foreign currency movements, cyber and data privacy risks, legal and regulatory exposure, acquisitions and integration, indebtedness, LIBOR transition, and potential changes in deferred tax asset recoverability.
- The company had no material legal proceedings expected to have a material adverse effect and reported no material changes to the risk factors in its fiscal 2020 Form 10-K.
- Foreign currency exposure was material; management estimated that a 10% movement in relevant currencies could produce an approximately $12.3 million foreign exchange gain or loss based on balances at July 31, 2020.
- Deferred compensation and retirement obligations remain significant. Marketable securities held in trust had a fair value of $151.8 million against vested obligations of $137.4 million and unvested obligations of $24.1 million.
Investor Verification Items
- Verify the pace and sustainability of demand recovery across Executive Search, Consulting, Digital, and RPO & Professional Search.
- Monitor whether restructuring, furloughs, salary reductions, and lower discretionary spending produce sufficient savings without impairing revenue-generating capacity.
- Reconcile Adjusted EBITDA with GAAP operating results and assess the recurring nature of restructuring and acquisition-related costs.
- Track operating cash flow, annual bonus and retention payments, and the decline in unrestricted cash and marketable securities.
- Confirm compliance with leverage, interest coverage, dividend, and share repurchase covenants as earnings fluctuate.
- Assess goodwill and intangible asset impairment sensitivity, especially for the Consulting reporting unit.
- Evaluate the sustainability of the $0.10 quarterly dividend in light of the net loss, negative operating cash flow, and debt restrictions.
- Review the integration and performance of the acquired digital businesses and the company’s ability to convert its digital investments into recurring revenue.