Korn Ferry Form 10-Q Summary
Business Context and Reporting Period
Korn Ferry is a global organizational consulting firm operating through Advisory, Executive Search, and RPO & Professional Search segments, plus Corporate. The filing covers the quarter and six months ended October 31, 2019, corresponding to the second quarter of fiscal 2020. Comparative periods ended October 31, 2018. Financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended October 31, 2019 | Year-over-Year Change | Six Months Ended October 31, 2019 | Year-over-Year Change |
|---|---|---|---|---|
| Fee revenue | $492.4 million | Down 1% | $976.9 million | Up 2% |
| Total revenue | $504.2 million | Down 1% | $1,000.4 million | Up 2% |
| Operating income | $61.9 million | Down 13% | $122.2 million | Up $106.3 million |
| Net income attributable to Korn Ferry | $42.8 million | Down 7% | $85.8 million | Up $78.4 million |
| Diluted EPS | $0.77 | Down from $0.81 | $1.54 | Up from $0.13 |
| Adjusted EBITDA | $78.3 million | Down 2% | $153.3 million | Up 1% |
| Adjusted EBITDA margin on fee revenue | 15.9% | Down from 16.2% | 15.7% | Flat versus 15.7% |
Quarterly operating margin was 12.6% of fee revenue, compared with 14.3% in the prior-year quarter. Quarterly net margin attributable to Korn Ferry was 8.7%, compared with 9.3%. The six-month operating margin was 12.5%, compared with 1.7%, and the six-month net margin was 8.8%, compared with 0.8%.
- Quarterly fee revenue declined primarily because of lower Advisory and Executive Search revenue, partly offset by strong RPO & Professional Search growth.
- Six-month fee revenue growth was driven by a 21% increase in RPO & Professional Search revenue, partly offset by declines in Advisory and Executive Search.
- Quarterly Executive Search fee revenue fell 5%; Advisory fell 3%; RPO & Professional Search increased 18%.
- Six-month Executive Search fee revenue fell 2%; Advisory fell 2%; RPO & Professional Search increased 21%.
Cash Flow, Liquidity, Debt and Capital Allocation
- Cash used in operating activities was $104.1 million for the six months, compared with $32.2 million used in the prior-year period. The outflow reflected annual bonuses, sign-on and retention payments, higher receivables and accrued liability changes.
- Cash used in investing activities was $22.8 million, including $23.8 million of capital expenditures.
- Cash used in financing activities was $31.4 million, including $61.9 million of share repurchases, $11.7 million of dividends and $50.0 million of additional Revolver borrowings.
- Cash and cash equivalents were $464.4 million at October 31, 2019, compared with $626.4 million at April 30, 2019. Cash and marketable securities totaled $609.0 million, down from $767.1 million.
- Working capital increased to $599.0 million from $585.9 million. Days sales outstanding increased from 61 to 71 days.
- Long-term debt was $273.3 million, with $276.9 million outstanding under the Revolver before debt issuance cost presentation. The Revolver matures December 19, 2023, and $369.9 million remained available after borrowings and letters of credit.
- The company was in compliance with debt covenants. The credit agreement permits dividends and repurchases subject to a maximum pro forma leverage ratio of 3.25 to 1.00 and minimum domestic liquidity of $50.0 million.
- The company repurchased approximately $61.9 million of common stock during the six months; $188.8 million remained available under the repurchase program at October 31, 2019. The quarterly dividend was $0.10 per share.
Material Changes and Unusual Items
- The prior-year six-month period included a $106.6 million non-cash write-off of Hay Group and Lominger tradename assets following the One Korn Ferry rebranding. This explains most of the year-over-year increase in six-month operating income and net income.
- The company adopted ASC 842 lease accounting in fiscal 2020. At adoption, it recognized $236.1 million of operating lease right-of-use assets and a corresponding $272.3 million liability. The adoption materially affected the balance sheet but had an immaterial effect on income and cash flow.
- On October 29, 2019, the company drew an additional $50.0 million under the Revolver to help finance recently completed acquisitions.
- On November 1, 2019, management adopted an acquisition-integration restructuring plan. Estimated costs are $20.0 million to $26.0 million, including $18.0 million to $22.0 million of severance and $2.0 million to $4.0 million of office consolidation costs. Expected cash expenditures are approximately $18.0 million to $24.0 million, with charges expected from the quarter ending January 31, 2020 through the quarter ending July 31, 2020.
- Remaining performance obligations for contracts with expected durations exceeding one year totaled $608.3 million at October 31, 2019. The company expects to recognize approximately $203.4 million in fiscal 2020, $209.1 million in fiscal 2021, $117.4 million in fiscal 2022 and $78.4 million thereafter; contracts of one year or less are excluded.
Outlook, Commentary and Risks
Management stated that cash on hand, operating funds and available borrowing capacity should be sufficient for anticipated working capital, capital expenditures, corporate needs, debt repayment, dividends and planned repurchases over the next twelve months. No formal revenue or earnings guidance is provided in the filing.
- Management expects benefits from integrating recent acquisitions and rationalizing the cost structure, but the integration plan will generate material restructuring costs.
- Key risks include demand sensitivity to global economic and labor-market conditions, consultant retention and utilization, competition, currency fluctuations, acquisitions and integration, client concentration and portability of relationships, technology and cybersecurity, data privacy, intellectual property protection, goodwill impairment, tax changes, LIBOR phase-out and indebtedness.
- Foreign currency exposure is significant; management estimates that a 10% change in relevant currencies could produce an approximately $10.9 million foreign exchange gain or loss based on exposures at October 31, 2019.
- A 100-basis-point increase in LIBOR would have increased interest expense by approximately $0.6 million for the quarter and $1.2 million for the six-month period.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Most Important Facts to Verify
- Whether Executive Search and Advisory revenue trends stabilize and whether RPO & Professional Search growth continues.
- The timing and total cash cost of the $20.0 million to $26.0 million restructuring plan.
- Acquisition details, purchase accounting, integration progress and realization of expected synergies.
- Operating cash conversion, receivables collection and the increase in days sales outstanding.
- Revolver borrowings, leverage covenant compliance, interest-rate exposure and liquidity after acquisitions, dividends and repurchases.
- Whether the $608.3 million remaining performance obligation balance converts to revenue as expected.
- The effect of foreign exchange, economic conditions and consultant compensation levels on future margins.