Korn/Ferry International: Q2 1999 Financial Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended October 31, 1999, and the six months ended on that date. Korn/Ferry International operates as the world's largest executive search firm with 432 consultants across 72 offices in 40 countries. The company also operates Futurestep, an Internet-based recruitment service for middle-management positions, which continues to incur operating losses as it expands globally.
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 1999 | Six Months Ended Oct 31, 1999 |
|---|---|---|
| Revenues, Net | $116.3 million | $221.1 million |
| Net Income | $6.5 million | $12.1 million |
| Operating Profit | $11.5 million (9.9% margin) | $21.8 million (10.0% margin) |
| Cash and Cash Equivalents | $92.5 million | $92.5 million (Ending Balance) |
| Long-Term Debt | $3.5 million | $3.5 million |
| COLI Policy Borrowings | $43.7 million | $43.7 million |
Note: COLI (Corporate-Owned Life Insurance) borrowings are secured by cash surrender value and do not require principal payments.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 27.6% ($25.1 million) for the quarter and 26% ($45.2 million) for the six months compared to the prior year. Growth was driven by a 7% increase in executive search engagements and a 14% increase in average fees per engagement.
- Profitability: Operating profit surged from $2.3 million to $11.5 million for the quarter. On a comparable basis (excluding Futurestep losses and adjusting for compensation plan changes), operating profit increased 52% to $18.3 million.
- Geographic Performance: North America and Asia/Pacific saw significant revenue growth (34% and 51% respectively for the quarter). Europe remained flat due to foreign currency translation effects, while Latin America declined 10% due to regional economic uncertainty.
- Futurestep Impact: Futurestep generated $6.3 million in revenue for the quarter but contributed a $6.8 million operating loss, primarily due to start-up costs and advertising.
- Compensation: Compensation and benefits expense increased 14% due to headcount growth, partially offset by a revised compensation program that reduced accrued bonus expenses.
Guidance, Outlook, and Risks
- Acquisition Strategy: The company views acquisitions as a key growth component. Recent completed acquisitions include Amrop International (Australia), Levy-Kerson, Pearson Caldwell and Farnsworth, Helstrom Turner & Associates, and Crist Partners. A revised letter of intent was signed to acquire PA Consulting Group's search business for $19.0 million, expected to close in Q3 fiscal 2000.
- Futurestep Outlook: Management expects Futurestep to continue generating net operating losses through the spring of 2000 as it expands internationally.
- Liquidity: The company maintains $92.5 million in cash. Management believes cash on hand and funds from operations are sufficient for working capital and capital expenditures. Capital expenditures increased to $8.9 million for the six months, largely due to a new financial system installation.
- Risks: Key risks include dependence on retaining qualified consultants, global economic conditions (specifically in Latin America), Year 2000 compliance issues (estimated full compliance by Dec 31, 1999), and the success of the Futurestep business model.
Investor Verification Checklist
- Futurestep Viability: Verify the timeline for Futurestep to reach profitability given the projected losses through spring 2000.
- Latin America Exposure: Assess the potential long-term impact of continued economic uncertainty in Latin America on revenue stability.
- Acquisition Integration: Monitor the integration and accretive value of recent acquisitions, particularly the pending PA Consulting Group deal.
- COLI Borrowings: Review the terms and interest rate exposure of the $43.7 million in borrowings against life insurance policies.
- Year 2000 Compliance: Confirm the completion of Year 2000 system upgrades and testing by the stated deadline of December 31, 1999.