Korn Ferry Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2020. The request metadata references “2019 Q4,” but the supplied filing is the fiscal 2020 Form 10-K, filed July 15, 2020. The fourth quarter ended April 30, 2020 was materially affected by COVID-19.
Business Context
Korn Ferry is a global organizational consulting firm operating through Consulting, Digital, Executive Search, and RPO & Professional Search. It operated 111 offices in 53 countries and had 8,198 full-time employees at April 30, 2020. Approximately 71% of revenue came from clients using multiple business lines, and 55% of fee revenue was generated outside the United States.
During fiscal 2020, Korn Ferry acquired Miller Heiman Group, AchieveForum, and Strategy Execution for $108.6 million, effective November 1, 2019. The acquisition contributed $53.2 million of fiscal 2020 fee revenue and $155.5 million of total assets. The Company also began reporting Consulting and Digital as separate segments, with prior periods recast.
Financial Metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Fee revenue | $1,932.7 million | $1,926.0 million | 0.3% increase |
| Total revenue | $1,977.3 million | $1,973.9 million | 0.2% increase |
| Operating income | $176.0 million | $140.8 million | 25.0% increase |
| Operating margin | 9.1% | 7.3% | Up 180 basis points |
| Net income attributable to Korn Ferry | $104.9 million | $102.7 million | 2.2% increase |
| Diluted earnings per share | $1.90 | $1.81 | Increase |
| Adjusted EBITDA | $301.0 million | $311.0 million | 3.2% decrease |
| Adjusted EBITDA margin | 15.6% | 16.1% | Down 50 basis points |
| Cash flow from operations | $236.3 million | $258.8 million | 8.7% decrease |
Net income attributable to Korn Ferry was 5.4% of fee revenue, compared with 5.3% in fiscal 2019. The fiscal 2020 effective tax rate was 29.1%, versus 22.0% in fiscal 2019. Interest expense increased to $22.2 million from $16.9 million following the issuance of the 4.625% senior unsecured notes.
Segment Performance
| Segment | FY2020 Fee Revenue | Year-over-Year Change | FY2020 Operating Margin |
|---|---|---|---|
| Consulting | $543.1 million | Down 4% | 3.3% |
| Digital | $292.4 million | Up 16% | 16.0% |
| Executive Search | $732.5 million | Down 5% | 21.4% |
| RPO & Professional Search | $364.8 million | Up 11% | 13.8% |
Executive Search revenue declined in every region, with the largest pressure in North America and EMEA. RPO revenue increased $26.4 million and Professional Search revenue increased $8.3 million. Digital growth primarily reflected the acquired businesses.
Fourth-Quarter Trends
Fiscal fourth-quarter fee revenue was $440.5 million, compared with $490.8 million in the prior-year quarter. Fourth-quarter operating income was $22.2 million, compared with $62.3 million, and net income attributable to Korn Ferry was a loss of $0.8 million, compared with income of $50.3 million. Diluted fourth-quarter EPS was $(0.02), compared with $0.89.
The fourth quarter reflected reduced demand, engagement deferrals, travel and office restrictions, and lower in-person activity resulting from COVID-19.
Cash Flow, Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $689.2 million at April 30, 2020, compared with $626.4 million a year earlier.
- Cash, cash equivalents and marketable securities totaled $863.3 million, compared with $767.1 million at April 30, 2019. Net of amounts held for deferred compensation and accrued bonuses, the comparable amounts were $531.9 million and $382.1 million.
- Cash used in investing activities was $198.8 million, including $108.6 million for the acquisition and $41.5 million for property and equipment.
- Cash provided by financing activities was $43.7 million, reflecting the debt refinancing and offsetting share repurchases and dividends.
- The Company issued $400.0 million of 4.625% senior unsecured notes due December 2027. Long-term debt, net of discount and issuance costs, was $394.1 million at year-end.
- The $650.0 million senior secured revolving facility had $646.0 million available after letters of credit, with no revolver borrowings outstanding at year-end. The Company reported compliance with its debt covenants.
- Fiscal 2020 share repurchases totaled $92.4 million, and dividends paid totaled $22.8 million. The quarterly dividend policy was $0.10 per share, subject to Board approval and debt covenant restrictions.
Management stated that cash on hand, operating cash flow, and available credit were expected to be sufficient for anticipated needs over the next twelve months, while warning that a prolonged or worsening pandemic could reduce operating cash flow and require additional borrowing or suspension of repurchases and dividends.
Material Changes Versus the Prior Period
- Fee revenue was broadly flat because Digital and RPO growth, including the acquisition, offset declines in Consulting and Executive Search.
- Operating income increased despite COVID-19, primarily because fiscal 2019 included a $106.6 million non-cash write-off of Hay Group and Lominger tradenames. Excluding that unusual item, fiscal 2020 operating profitability was weaker.
- Adjusted EBITDA declined $10.0 million, and adjusted EBITDA margin declined to 15.6% from 16.1%, reflecting lower fourth-quarter demand and integration-related costs.
- Fiscal 2020 included $58.6 million of restructuring charges: $18.1 million related to acquisition and operating integration and $40.5 million related to COVID-19 workforce reductions.
- Headcount declined to 8,198 from 8,678, while consultant and execution staff declined to 2,979 from 3,099.
- The Company adopted ASC 842 lease accounting, recognizing $236.1 million of right-of-use assets and $272.3 million of lease liabilities at adoption. The adoption materially affected the balance sheet but had an immaterial income-statement and cash-flow effect.
Outlook, Risks and Unusual Items
Management did not provide quantified fiscal 2021 guidance in the supplied filing. Its outlook emphasized continued uncertainty regarding the duration and economic effects of COVID-19, investment in Digital and technology-enabled delivery, cost management, and the integration of the acquired companies.
- COVID-19 reduced demand across all segments and geographies and could continue to affect utilization, billing rates, client payments, hiring activity, and liquidity.
- The Consulting reporting unit had $173.0 million of goodwill and the smallest excess of fair value over carrying value in the March 31, 2020 impairment review. No goodwill impairment was recorded, but further deterioration could require a material charge.
- Goodwill and purchased intangible assets represented approximately 22% and 4% of total assets, respectively.
- Debt agreements restrict additional indebtedness, dividends, repurchases, investments, liens, and other corporate actions. Covenant compliance and leverage ratios remain important to capital allocation.
- The Company faces foreign-exchange, interest-rate, LIBOR transition, cybersecurity, data privacy, intellectual property, acquisition integration, competition, consultant retention, and international operating risks.
- The Company deferred minimum required contributions for certain Hay qualified pension plans under the CARES Act until January 1, 2021.
- No material adverse legal proceedings were disclosed, and management and the independent auditor concluded that internal control over financial reporting was effective.
Investor Verification Priorities
- Verify the pace and durability of post-pandemic recovery in Executive Search and Consulting, including engagement volumes, utilization, and billing rates.
- Assess whether Digital and RPO growth is organic, acquisition-driven, or both, and whether acquired businesses are meeting expected profitability and integration targets.
- Reconcile GAAP operating income with Adjusted EBITDA and separately evaluate the recurring cost base after the restructuring actions.
- Monitor debt covenant headroom, leverage ratios, interest costs, revolver availability, and the ability to maintain dividends and repurchases.
- Review the sensitivity of Consulting goodwill and other intangible assets to lower revenue, margins, discount rates, and prolonged COVID-19 effects.
- Confirm cash flow conversion after acquisition spending, capital expenditures, restructuring payments, lease obligations, pension obligations, and deferred compensation requirements.
- Review subsequent filings for changes to dividend policy, workforce actions, liquidity, impairment testing, and fiscal 2021 guidance.