Korn/Ferry International — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended January 31, 2013, representing fiscal 2013 third quarter and year-to-date results. Korn/Ferry provides executive recruitment, leadership and talent consulting, recruitment process outsourcing and middle-management recruiting through 76 offices in 35 countries.
The company reports three operating segments: Executive Recruitment, Leadership & Talent Consulting, and Futurestep. Beginning in fiscal 2013, Leadership & Talent Consulting was reported separately from Executive Recruitment; prior-period segment information was reclassified without affecting consolidated results.
Financial performance and key metrics
| Metric | Three months ended Jan. 31, 2013 | Three months ended Jan. 31, 2012 | Nine months ended Jan. 31, 2013 | Nine months ended Jan. 31, 2012 |
|---|---|---|---|---|
| Fee revenue | $202.0 million | $186.0 million | $584.9 million | $592.4 million |
| Total revenue | $210.3 million | $194.6 million | $611.1 million | $619.2 million |
| Operating income | $8.7 million | $16.2 million | $28.5 million | $67.5 million |
| Net income | $9.5 million | $11.7 million | $21.1 million | $42.3 million |
| Diluted EPS | $0.20 | $0.25 | $0.44 | $0.90 |
| Operating margin on fee revenue | 4.3% | 8.7% | 4.9% | 11.4% |
| Net margin on fee revenue | 4.7% | 6.3% | 3.6% | 7.1% |
Third-quarter fee revenue increased 9%, including $11.6 million from the PDI and Global Novations acquisitions; excluding those acquisitions, fee revenue increased approximately 2%. Year-to-date fee revenue declined 1%, or 4% excluding the acquired businesses.
- Executive Recruitment: Third-quarter fee revenue declined 1% to $130.5 million; year-to-date revenue declined 9% to $385.7 million. Year-to-date engagement volume fell 7% and weighted-average fees fell 2%, with unfavorable foreign exchange effects of $8.6 million.
- Leadership & Talent Consulting: Third-quarter fee revenue rose 47% to $41.2 million, including acquired revenue; year-to-date revenue rose 29% to $108.0 million. Third-quarter segment income fell to $1.6 million from $5.2 million because of acquisition integration, lower billable hours, slower new business and lower realized revenue per billable hour.
- Futurestep: Third-quarter fee revenue increased 17% to $30.4 million and segment income increased to $3.7 million from $1.6 million. Year-to-date fee revenue increased 8% to $91.2 million and segment income increased to $10.2 million.
Cash flow, liquidity and debt
- Cash and cash equivalents were $168.2 million at January 31, 2013, compared with $282.0 million at April 30, 2012.
- Total marketable securities were $137.1 million, producing cash, cash equivalents and marketable securities of approximately $305.3 million, down from $417.7 million at April 30, 2012.
- Cash used in operating activities was $2.2 million for the nine months, compared with $3.9 million provided in the prior-year period.
- Cash used in investing activities was $110.3 million, principally reflecting $126.9 million of acquisition purchase prices for Global Novations and PDI, partly offset by marketable-securities activity.
- Cash decreased by $113.8 million during the nine months, ending at $168.2 million.
- The company had no borrowings under its revolving credit facility. On January 18, 2013, it entered a new senior unsecured facility with $75 million of availability, an option for an additional $50 million subject to lender consent, and a $15 million letter-of-credit sub-limit. The facility matures January 18, 2018.
- The company had $2.7 million of standby letters of credit and $2.9 million of restricted cash collateral. Separate borrowings against company-owned life insurance totaled $73.3 million and carried primarily variable interest rates.
- The facility requires compliance with financial covenants and maintenance of $50 million of unrestricted cash and marketable securities for certain acquisitions, dividends and share repurchases.
- Accounts receivable days sales outstanding increased from 64 days at April 30, 2012 to 77 days at January 31, 2013.
Material changes and unusual items
- The company acquired Global Novations for $34.5 million in cash and PDI Ninth House for $92.5 million, including $14.9 million of contingent consideration. The acquisitions generated $16.8 million of year-to-date fee revenue and added $84.2 million of preliminary goodwill.
- Restructuring charges were $4.4 million in the third quarter and $19.9 million year to date, primarily for severance and facility consolidation. The restructuring liability was $14.6 million at January 31, 2013, and approximately $12.9 million of future cash expenditures were expected.
- Compensation and benefits expense increased 11% in the third quarter, while compensation as a percentage of fee revenue increased to 69.2% from 67.6%. Year-to-date compensation expense increased 2% despite lower revenue.
- Segment income declined to $13.1 million in the third quarter from $17.1 million and to $48.4 million year to date from $68.4 million. Segment margin decreased to 6.5% from 9.2% in the quarter and to 8.3% from 11.6% year to date.
- Other income was $3.3 million in the third quarter and $3.8 million year to date, primarily reflecting changes in the fair value of mutual funds held for deferred-compensation obligations.
- The quarterly effective tax rate was 24%, compared with 35% in the prior-year quarter, partly due to tax-law and valuation-allowance items. The year-to-date effective tax rate was 36%, compared with 35%.
Guidance, outlook, management commentary and risks
The filing does not provide specific numerical revenue or earnings guidance. Management expects cash on hand and operating funds to satisfy anticipated working capital, capital expenditures and general corporate requirements for the next twelve months, but cautions that a deterioration in economic, credit or labor-market conditions could reduce demand and operating cash flow.
Management’s fiscal 2013 priorities include integrating the acquired businesses, expanding Leadership & Talent Consulting and RPO, pursuing disciplined acquisitions, improving technology and processes, and leveraging intellectual property. Integration complexity and a slowdown in new business adversely affected third-quarter Leadership & Talent Consulting results.
Principal risks include global economic weakness, foreign-exchange fluctuations, dependence on attracting and retaining consultants, competition, client-relationship portability, legal and regulatory exposure, cybersecurity and systems disruptions, intellectual-property limitations, acquisition integration, restructuring execution, and impairment of goodwill or intangible assets. No material changes to previously disclosed risk factors were reported, and no legal proceedings were expected to have a material adverse effect.
Important facts for investors to verify
- Whether the acquired PDI and Global Novations businesses achieve expected synergies and improve Leadership & Talent Consulting profitability.
- Whether Executive Recruitment demand, engagement volumes and international operating trends recover.
- Progress on restructuring, including the $14.6 million liability and approximately $12.9 million of expected future cash expenditures.
- Cash conversion, receivables collection and the increase in days sales outstanding to 77 days.
- Compliance with the new credit facility’s leverage, adjusted EBITDA and $50 million domestic-liquidity requirements.
- Potential future goodwill, intangible-asset or deferred-tax-asset impairment, particularly following the acquisitions.
- The effect of foreign-exchange movements and market values of assets supporting deferred-compensation obligations.