KFY

Korn/Ferry International 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Korn/Ferry International, the world's largest executive search firm, for the period ended January 31, 1999. The company operates 71 offices in 41 countries with 399 consultants. The filing covers the three and nine months ended January 31, 1999, compared to the same periods in 1998. The financial statements are unaudited.

Key Financial Metrics

Note: Operating margins are impacted by non-recurring charges and the launch of the Futurestep internet service.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 11.5% for the quarter and 20% for the nine-month period compared to the prior year. Growth was driven by a 10-12% increase in the average number of consultants and an 11-14% increase in engagements.
• Profitability: Net income surged 222% for the quarter ($5.1M vs $1.6M) and 61% for the nine months ($6.5M vs $4.0M). This was largely due to a revised compensation program reducing bonus expenses by $15.6 million.
• Geographic Performance: North America and Europe saw significant revenue growth. Latin America declined 13.9% in the quarter due to economic uncertainty in Brazil. Asia/Pacific declined 4% for the nine months.
• Non-Recurring Charges: The company recognized $8.4 million in non-recurring charges in the quarter, primarily for staff downsizing ($5.2M) and the resignation of the former CEO ($2.6M).

Guidance, Outlook, and Risks

• Recent IPO: On February 17, 1999, the company completed a public offering of 11.8 million shares at $14.00 per share, raising $130.8 million in net proceeds. Proceeds were used to repay debt ($14.4M), redeem preferred stock ($32.8M), and settle phantom unit obligations ($4.3M).
• Futurestep: The company's internet-based search service, Futurestep, generated $2.3 million in revenue for the nine months but incurred $10.5 million in operating losses. Management expects losses to continue through fiscal 2000.
• Compensation Program: A new compensation program effective May 1, 1998, reduced cash bonus expenses but introduced stock options. A significant non-recurring charge of $77.0 million is expected in the fourth quarter related to the IPO and stock redemptions, which will result in a substantial net loss for fiscal 1999.
• Liquidity: The company secured a new $50.0 million unsecured revolving credit facility in March 1999. As of March 26, 1999, there were no outstanding borrowings under this facility.
• Risks: Key risks include the success of Futurestep, global economic conditions (specifically in Latin America and Asia/Pacific), Year 2000 compliance costs (estimated at $500k for fiscal 1999), and the ability to retain consultants.

Investor Verification Checklist

• Q4 Fiscal 1999 Loss: Verify the impact of the $77.0 million non-recurring compensation charge expected in the fourth quarter on the full-year fiscal 1999 results.
• Futurestep Viability: Monitor the trajectory of Futurestep's operating losses ($10.5M for nine months) against its revenue generation and the $2.9M minimum advertising commitment to The Wall Street Journal.
• Debt Repayment: Confirm the full repayment of the term loan and credit facility indebtedness using IPO proceeds as stated in the "Subsequent Events" section.
• Latin America Exposure: Assess the continued impact of economic uncertainty in Brazil on the Latin America region's revenue, which declined 13.9% in the quarter.
• Stock Split: Note that financial statements have been retroactively restated for a 4-for-1 stock split approved in July 1998 and effective in February 1999.