Korn/Ferry International 10-Q Summary
Business context and reporting period
Korn/Ferry International provides executive search, leadership and talent consulting, recruitment process outsourcing, professional search and related talent-management services through Executive Search, Hay Group and Futurestep. This fiscal third-quarter report covers the three and nine months ended January 31, 2018, compared with the corresponding periods ended January 31, 2017. The filing is unaudited.
Key financial metrics
| Metric | Three months ended January 31, 2018 | Three months ended January 31, 2017 | Nine months ended January 31, 2018 | Nine months ended January 31, 2017 |
|---|---|---|---|---|
| Fee revenue | $447.6 million | $381.9 million | $1,291.9 million | $1,159.5 million |
| Total revenue | $460.8 million | $394.2 million | $1,331.2 million | $1,202.1 million |
| Operating income | $48.6 million | $30.5 million | $140.6 million | $81.6 million |
| Net income attributable to Korn/Ferry | $27.2 million | $23.9 million | $92.6 million | $57.3 million |
| Diluted EPS | $0.48 | $0.42 | $1.63 | $1.00 |
| Adjusted EBITDA | $70.3 million | $55.3 million | $199.3 million | $174.9 million |
| Adjusted EBITDA margin | 15.7% | 14.5% | 15.4% | 15.0% |
| Operating margin on fee revenue | 10.9% | 8.0% | 10.9% | 7.0% |
| Operating cash flow | Not separately provided | Not separately provided | $59.6 million | $13.7 million |
At January 31, 2018, cash and cash equivalents were $390.0 million and total marketable securities were $139.0 million. Working capital was $425.2 million. Term-loan debt was $244.1 million, with no borrowings under the $125 million revolving facility. The company was in compliance with its debt covenants. The term loan and revolver mature June 15, 2021.
Material changes versus the prior comparable period
- Third-quarter fee revenue increased 17%, with organic growth in all three business lines; favorable foreign exchange contributed approximately $15.8 million.
- Executive Search fee revenue increased 18% to $180.4 million, Hay Group increased 13% to $198.1 million, and Futurestep increased 29% to $69.1 million.
- Nine-month fee revenue increased 11%. Executive Search increased 14%, Hay Group increased 7%, and Futurestep increased 19%. Latin America declined 17% for the nine-month period.
- Operating income improved substantially as revenue growth and lower restructuring charges more than offset higher compensation and benefits expense. Nine-month restructuring charges declined to $0.1 million from $28.3 million.
- Hay Group third-quarter operating margin increased to 13.7% from 9.1%; Futurestep increased to 14.6% from 12.3%. Executive Search margin was broadly stable at 19.0%.
- Compensation and benefits increased 18% in the quarter and 11% year to date, reflecting higher headcount, performance bonuses, deferred compensation and long-term incentive costs.
- Operating cash flow increased by $45.9 million year to date. Financing cash flow changed from a $89.1 million inflow to a $64.6 million outflow, primarily because the prior-year period included $275 million of term-loan proceeds.
- The company repurchased $32.6 million of common stock year to date and paid $17.2 million in shareholder dividends. Approximately $88.6 million remained available under the repurchase authorization at January 31, 2018.
Guidance, outlook, risks and unusual items
The filing does not provide specific revenue or earnings guidance. Management expects cash on hand, operating funds and available credit capacity to satisfy anticipated working capital, capital expenditures, debt repayment, Legacy Hay retention obligations, dividends and share repurchases for the next twelve months.
- The Tax Cuts and Jobs Act produced a provisional $16.3 million transition-tax charge and a $5.8 million deferred-tax remeasurement benefit. The nine-month effective tax rate was 37%, versus 27% in the prior-year period. These amounts remain subject to refinement through December 22, 2018 and could materially change.
- Legacy Hay retention obligations totaled $40 million, of which $23.5 million had been paid; the remaining amount was expected to be payable within 45 days after November 30, 2018.
- Management identified demand sensitivity to economic, labor-market and credit conditions; competition; consultant hiring and retention; client and key-employee relationships; currency movements; cybersecurity and data-privacy obligations; legal and regulatory exposure; technology execution; goodwill and intangible-asset impairment; tax uncertainty; and integration and restructuring risks.
- A 10% change in relevant foreign currencies could produce an estimated foreign-exchange gain or loss of approximately $10.0 million. A 100-basis-point increase in LIBOR would have increased interest expense by approximately $0.6 million for the quarter and $1.9 million year to date.
- The company adopted share-based-payment accounting changes effective May 1, 2017. It planned to adopt the new revenue-recognition standard in fiscal 2019 using the modified retrospective method; initial evaluation identified potential timing differences for executive-search and professional-recruitment uptick revenue.
- The company reported no material litigation, no off-balance-sheet arrangements and no material changes in contractual obligations. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Reconcile reported revenue growth with organic growth, foreign-exchange effects and segment-level engagement volumes and pricing.
- Assess the sustainability of improved margins after the reduction in Hay-related restructuring and integration costs.
- Review the provisional Tax Act accounting, including the transition-tax calculation and deferred-tax remeasurement.
- Monitor receivables and collection performance: days sales outstanding increased from 61 to 69 days, and client receivables reached $397.8 million.
- Evaluate leverage, covenant headroom, variable-rate exposure and the effectiveness of the interest-rate swap covering approximately half of outstanding term debt.
- Confirm future cash requirements for the Legacy Hay retention pool, dividends, share repurchases and planned capital expenditures.