Korn Ferry Form 10-Q Summary
Business context and reporting period
Korn Ferry is a global organizational consulting firm operating through Consulting, Digital, Executive Search, and RPO & Professional Search. The filing covers the three and nine months ended January 31, 2020. Although the request identifies “2019 Q3,” the filing is for fiscal third quarter 2020. The financial statements are unaudited.
Beginning November 1, 2019, the former Advisory segment was separated into Consulting and Digital for management and reporting purposes. Prior-period segment information was revised accordingly.
Key financial metrics
| Metric | Three months ended January 31, 2020 | Year-over-year change | Nine months ended January 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Fee revenue | $515.3 million | Up 9% | $1.492 billion | Up 4% |
| Total revenue | $528.0 million | Up 9% | $1.528 billion | Up 4% |
| Operating income | $31.6 million | Down 50% | $153.8 million | Up $75.2 million |
| Operating margin as a percentage of fee revenue | 6.1% | Down from 13.2% | 10.3% | Up from 5.5% |
| Net income attributable to Korn Ferry | $20.0 million | Down 56% | $105.7 million | Up $53.3 million |
| Diluted EPS | $0.36 | Down from $0.80 | $1.90 | Up from $0.92 |
| Adjusted EBITDA | $78.1 million | Up 1% | $231.4 million | Up $2.6 million |
| Adjusted EBITDA margin | 15.2% | Down from 16.4% | 15.5% | Approximately flat |
All dollar amounts are in U.S. dollars. Adjusted EBITDA and related margins are non-GAAP measures.
Revenue and segment trends
- Third-quarter fee revenue growth was led by Digital, up 59% to $99.4 million, primarily due to the acquired companies, and RPO & Professional Search, up 15% to $91.9 million.
- Executive Search fee revenue declined 5% to $183.6 million, with lower revenue in North America, EMEA, Asia Pacific, and Latin America. North American revenue declined 6%, driven by fewer engagements and lower average fees.
- Consulting fee revenue increased 1% in the quarter but declined slightly for the nine-month period.
- For the nine months, RPO & Professional Search fee revenue increased 19% to $282.4 million, while Executive Search declined 3% to $564.6 million.
- Third-quarter adjusted EBITDA increased modestly despite lower margins. Digital adjusted EBITDA rose 23%, Consulting rose 10%, and RPO & Professional Search rose 16%; Executive Search declined 16%.
Cash flow, liquidity, debt, and capital allocation
- Cash provided by operating activities was $57.1 million for the nine months, down from $101.0 million in the prior-year period.
- Cash used in investing activities was $191.1 million, including $108.6 million for acquisitions, $33.8 million for property and equipment, and $39.1 million for marketable securities purchases.
- Cash provided by financing activities was $74.1 million, compared with cash used of $57.8 million in the prior-year period.
- Cash and cash equivalents were $563.7 million at January 31, 2020, compared with $626.4 million at April 30, 2019. Cash and marketable securities totaled $748.5 million versus $767.1 million at April 30, 2019.
- Working capital increased to $636.7 million from $585.9 million. Client receivable days increased from 61 to 72.
- The company issued $400 million of 4.625% senior unsecured notes due December 2027 and used proceeds in part to repay $276.9 million under the prior revolving facility.
- Net long-term debt was $394.0 million at January 31, 2020, compared with $222.9 million at April 30, 2019. No borrowings were outstanding under the new revolver, which had $646.0 million available after letters of credit.
- The company was in compliance with its debt covenants. The new credit agreement matures in December 2024 and includes leverage, interest coverage, dividend, and share-repurchase restrictions.
- The company repurchased $68.1 million of common stock during the nine months and had $182.7 million remaining under its repurchase authorization. Quarterly dividends remained $0.10 per share.
Material changes and unusual items
- On November 1, 2019, Korn Ferry acquired Miller Heiman Group, AchieveForum, and Strategy Execution for $108.6 million, net of cash acquired. The acquisition added $37.5 million of goodwill and $45.4 million of intangible assets and was reported in Digital.
- The company recorded $18.1 million of restructuring charges, primarily severance for redundant positions in Consulting and Digital. Management expects the restructuring actions to be completed by July 31, 2020.
- The company recorded approximately $2.8 million of integration-related costs associated with exiting or impairing 16 office leases.
- The prior-year nine-month results included a $106.6 million non-cash write-off of former Hay Group and Lominger tradename assets. The absence of that charge materially increased current-year operating income and net income comparisons.
- Adoption of the lease accounting standard added operating lease right-of-use assets of $209.2 million and current and non-current operating lease liabilities totaling $247.8 million at January 31, 2020, with an immaterial income-statement impact.
- The interest rate swap was terminated on December 16, 2019 when the prior credit facility was repaid, resulting in $0.5 million of interest expense.
Outlook, commentary, and risks
- Management stated that cash on hand, operating funds, and available credit are expected to be sufficient for working capital, capital expenditures, debt repayment, dividends, and general corporate requirements over the next twelve months.
- Management identified COVID-19 as a potentially significant risk. The filing states that the outbreak could affect all segments and geographies, particularly China and Hong Kong, but that the magnitude and duration could not be determined as of the filing date. Approximately 5% of nine-month fee revenue came from greater China.
- Other principal risks include demand sensitivity to economic and labor-market conditions, consultant retention and utilization, acquisitions and integration, foreign currency movements, cybersecurity and data privacy, intellectual-property protection, goodwill impairment, regulatory developments, seasonality, and competition.
- A 10% change in relevant foreign currencies could result in an estimated foreign-exchange gain or loss of $13.8 million based on exposures at January 31, 2020.
- Variable-rate borrowings under the revolver and company-owned life insurance policy loans expose the company to interest-rate risk. The filing also discusses risks associated with the planned phase-out of LIBOR.
- The Board declared a $0.10-per-share dividend on March 10, 2020, payable April 15, 2020, subject to the Board’s continuing discretion and debt-related restrictions.
- The company reported no material legal proceedings and stated that disclosure controls and procedures were effective.
Important facts for investors to verify
- Confirm that comparisons use fiscal third quarter 2020, ended January 31, 2020, rather than calendar-year 2019 third quarter.
- Assess the sustainability of growth in Digital and RPO & Professional Search following the acquisition, including integration costs and restructuring benefits.
- Separate underlying operating performance from the prior-year $106.6 million tradename write-off and current-year $18.1 million restructuring charge.
- Monitor Executive Search engagement volumes, average fees, regional performance, and the effect of economic conditions on demand.
- Evaluate leverage, debt covenants, dividend and repurchase restrictions, interest costs, and the $646.0 million revolver availability.
- Track receivable days, operating cash flow, and liquidity after the acquisition, bonus payments, capital expenditures, and share repurchases.
- Assess the actual effect of COVID-19, foreign-exchange movements, and potential LIBOR replacement on future results.