Korn/Ferry International — Fiscal 2015 First Quarter Summary
Reporting period: Three months ended July 31, 2014, compared with the three months ended July 31, 2013. The company provides executive recruitment, leadership and talent consulting, recruitment process outsourcing, and professional recruitment services through 84 offices in 37 countries.
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Fee revenue | $251.2 million | $228.4 million | +10% |
| Total revenue | $260.3 million | $237.6 million | +10% |
| Operating income | $18.6 million | $16.7 million | +12% |
| Operating margin on fee revenue | 7.4% | 7.3% | +0.1 percentage points |
| Net income | $14.5 million | $11.4 million | +27% |
| Diluted EPS | $0.29 | $0.24 | +$0.05 |
| Adjusted EBITDA | $37.9 million | $31.9 million | +19% |
| Adjusted EBITDA margin on fee revenue | 15.1% | 14.0% | +1.1 percentage points |
| Net cash used in operating activities | $90.0 million | $67.3 million | Use increased $22.7 million |
Fee revenue growth was led by Futurestep, up 24% to $39.2 million; Executive Recruitment, up 9% to $148.4 million; and Leadership & Talent Consulting, up 6% to $63.5 million. North America and EMEA grew 11% and 17%, respectively, while Asia Pacific and South America declined 8% and 10%.
Cash, cash equivalents and marketable securities totaled $371.6 million at July 31, 2014, down from $468.3 million at April 30, 2014. The decline primarily reflected payment of $135.5 million of fiscal 2014 bonuses. Working capital was $294.1 million, an increase of $19.1 million from April 30, 2014. Client receivable days outstanding increased from 57 to 69 days.
The company had no borrowings under its revolving credit facility or other long-term debt arrangements. It had $2.8 million of standby letters of credit under its long-term debt arrangements and $1.6 million of additional standby letters of credit with other financial institutions. Separately, borrowings against company-owned life insurance policies totaled $72.2 million and were secured by the policies' cash surrender value.
Material changes versus the prior comparable period
- Fee revenue increased $22.8 million, primarily from higher engagement activity in Executive Recruitment and stronger Futurestep recruitment process outsourcing and professional recruitment revenue.
- Compensation and benefits expense increased 11% to $169.1 million, including higher performance-related bonuses, salaries, contractors and insurance costs. Average headcount increased in Executive Recruitment and Futurestep.
- General and administrative expense declined 6% to $37.4 million, reflecting lower legal, professional, marketing and acquisition-integration costs.
- Restructuring charges increased to $9.9 million from $3.7 million. The current-quarter charge included $9.6 million of severance and $0.3 million of facility consolidation or abandonment costs.
- Executive Recruitment operating margin declined to 16.3% from 20.7%, principally because of restructuring charges and higher compensation costs. LTC margin declined to 5.4% from 7.2%, while Futurestep margin improved to 8.8% from 8.0%.
- Adjusted EBITDA increased despite higher compensation costs; Executive Recruitment adjusted EBITDA was essentially flat, while LTC and Futurestep improved.
- Operating cash flow was negative because bonus payments exceeded cash generation during the quarter. Investing cash use declined to $1.4 million from $3.7 million, partly because the prior year included a $15.0 million contingent-consideration payment related to PDI Ninth House.
Guidance, outlook, risks and unusual items
Management did not provide explicit quantitative earnings or revenue guidance in the filing. Its fiscal 2015 strategy emphasizes integration of the company's multi-service platform, growth in Leadership & Talent Consulting and recruitment process outsourcing, disciplined acquisitions, technology and process enhancements, and increased use of intellectual property and thought leadership.
Management expects cash on hand and funds from operations to satisfy anticipated working capital, capital expenditure and general corporate requirements for the next twelve months. The company was in compliance with its credit-facility covenants at July 31, 2014. Economic weakness, credit-market deterioration or labor-market changes could reduce demand and operating cash flow and potentially require use of the credit facility.
The restructuring liability was $8.6 million at July 31, 2014. Approximately $6.2 million of severance and $1.6 million of facility costs were expected to be paid within twelve months, with $0.8 million of facility costs payable over the following four years. The company stated that no additional restructuring costs beyond those disclosed were expected.
Key risks include attracting and retaining consultants, client relationship portability, competition, economic and political conditions, foreign currency movements, cybersecurity and information-system dependence, legal and employment liabilities, intellectual-property protection, acquisition integration, goodwill and intangible-asset impairment, deferred-tax-asset recoverability, seasonality and changing accounting estimates. Foreign-currency translation reduced accumulated other comprehensive income, and a 15% strengthening or weakening of the U.S. dollar against specified currencies was estimated to affect quarterly exchange gains or losses by $7.4 million.
The company adopted two accounting amendments during the quarter without a financial-statement impact and expects to adopt the new customer-revenue standard in fiscal 2018; its effect was still under evaluation. Disclosure controls were determined to be effective. The SAP Project Systems module was finalized during the quarter, and management found affected internal-control design to be effective.
Important facts for investors to verify
- Whether the restructuring actions produce the expected cost savings and whether the remaining $8.6 million liability represents the complete future cash cost.
- Whether revenue growth, particularly in Futurestep and EMEA, is sustainable and whether Asia Pacific and South America recover.
- Whether higher incentive compensation and headcount investments translate into improved operating margins.
- The effect of bonus payment seasonality and rising receivable days on quarterly operating cash flow and liquidity.
- The distinction between no revolving-facility borrowings and the $72.2 million of variable-rate policy loans secured by company-owned life insurance.
- The extent to which $116.7 million of marketable securities held in trust supports deferred-compensation obligations totaling $118.2 million.
- Potential sensitivity to foreign exchange, acquisition integration, goodwill impairment, deferred-tax-asset utilization and cybersecurity risks.