Korn/Ferry International Form 10-Q Summary
Business context and reporting period
Korn/Ferry International provides retained executive recruitment, middle-management recruitment, recruitment process outsourcing, leadership and talent consulting, and executive coaching through 76 offices in 36 countries. The filing covers the three and nine months ended January 31, 2012, the company’s fiscal third quarter of fiscal 2012, compared with the same periods ended January 31, 2011.
Financial performance and position
| Metric | Three months ended January 31, 2012 | Three months ended January 31, 2011 | Nine months ended January 31, 2012 | Nine months ended January 31, 2011 |
|---|---|---|---|---|
| Fee revenue | $186.0 million | $186.5 million | $592.4 million | $547.0 million |
| Total revenue | $194.6 million | $194.1 million | $619.2 million | $570.5 million |
| Operating income | $16.2 million | $20.5 million | $67.5 million | $59.5 million |
| Operating margin on fee revenue | 8.7% | 11.0% | 11.4% | 10.9% |
| Net income | $11.7 million | $14.0 million | $42.3 million | $38.5 million |
| Diluted EPS | $0.25 | $0.30 | $0.90 | $0.84 |
For the nine-month period, Executive Recruitment fee revenue increased 5% to $507.8 million and Futurestep fee revenue increased 30% to $84.6 million. Nine-month operating margins were 19.8% for Executive Recruitment and 6.5% for Futurestep. Corporate expenses were $38.5 million, compared with $24.6 million in the prior-year period.
- Cash provided by operating activities was $3.9 million versus $26.6 million in the prior-year period.
- Cash used in investing activities was $28.4 million versus $65.9 million, reflecting lower purchases of marketable securities and property and equipment.
- Cash and cash equivalents were $218.2 million at January 31, 2012, compared with $246.9 million at April 30, 2011.
- Cash, cash equivalents, and marketable securities totaled $352.4 million, compared with $369.1 million at April 30, 2011.
- Total assets were $952.1 million and total stockholders’ equity was $616.5 million at January 31, 2012.
- The company reported no borrowings under its $50 million senior secured revolving facility. It maintained $10.0 million with the lender as collateral and had $2.9 million of standby letters of credit outstanding.
- Separate borrowings against company-owned life insurance policies totaled $73.3 million and were primarily variable-rate obligations.
Material changes versus the prior comparable period
- Third-quarter fee revenue was essentially flat, declining 0.3%, while total revenue increased 0.3% because reimbursed engagement expenses were higher.
- Third-quarter operating income declined 21%, primarily because of higher general and administrative expenses, a $0.9 million restructuring charge, and slightly lower fee revenue.
- Third-quarter general and administrative expense increased 12% to $35.2 million; corporate general and administrative expense rose to $7.4 million from $4.3 million.
- Third-quarter performance-related bonus expense declined to $23.1 million from $28.0 million, partly offsetting higher salaries, benefits, and headcount costs.
- Futurestep delivered strong revenue growth but lower quarterly profitability: fee revenue rose 10% while operating margin fell to 3.4% from 5.4%, mainly due to increased compensation and administrative costs.
- Nine-month fee revenue increased 8%, and operating income increased 13%. However, other income changed from $3.4 million of income to a $3.0 million loss, primarily because of trading-security losses versus gains in the prior year.
- Operating cash flow fell substantially because the company paid $130.9 million of bonuses during the nine-month period, including previously deferred bonuses.
- Accumulated other comprehensive income declined to $10.7 million from $25.7 million, mainly due to unfavorable foreign-currency translation adjustments.
Guidance, outlook, risks, and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. Its fiscal 2012 strategy emphasizes integration of the company’s multi-service platform, growth in recruitment process outsourcing and leadership and talent consulting, disciplined acquisitions, technology and process improvements, and development of new products and services.
- Management expects cash on hand and operating cash flow to fund working capital, capital expenditures, and general corporate requirements for the next twelve months.
- Management noted that demand for executive searches remained below its 2008 peak and that the pace of economic recovery had slowed.
- Key risks include economic and labor-market weakness, foreign-currency volatility, retention of qualified consultants, competition, client relationship portability, legal and regulatory exposure, technology and information-system risks, goodwill and intangible-asset impairment, deferred-tax-asset utilization, acquisition integration, and cost-structure alignment.
- Restructuring liabilities totaled $3.3 million at January 31, 2012, primarily for facilities commitments; $0.9 million of additional restructuring charges were recorded during the nine months.
- The annual goodwill impairment test was scheduled for the fourth quarter of fiscal 2012; management reported no impairment indicators at January 31, 2012.
- The company stated that it had no material litigation expected to adversely affect its business, financial condition, or results of operations, and no material changes to previously disclosed risk factors.
- Foreign-currency losses were $1.1 million after tax for the nine months ended January 31, 2012, compared with $0.2 million in the prior-year period.
Important facts for investors to verify
- Whether Futurestep’s rapid revenue growth can translate into sustained margin expansion after continued headcount and infrastructure investment.
- The sustainability of the nine-month operating improvement given higher corporate overhead, professional fees, and restructuring costs.
- Operating cash conversion after the unusually large annual bonus payments and the company’s expected remaining fiscal 2012 bonus payments.
- The distinction between no revolver borrowings and the $73.3 million of borrowings against company-owned life insurance policies.
- Exposure to foreign-currency movements, deferred compensation obligations, and the value and liquidity of related marketable securities.
- The outcome of the fiscal 2012 goodwill impairment test and the recoverability of deferred tax assets.
- Whether economic weakness, lower search demand, or sector-specific softness in technology and financial services affects future fee revenue.