Korn/Ferry International — Form 10-Q Summary
Business context and reporting period
Korn/Ferry provides executive search, leadership and talent consulting, recruitment process outsourcing, and professional recruitment services through Executive Search, Hay Group, and Futurestep. The company operated through 128 offices in 52 countries. This filing covers the three months ended July 31, 2016, the first quarter of fiscal 2017, compared with the three months ended July 31, 2015.
Financial performance and key metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Fee revenue | $375.6 million | $267.4 million | Up 40% |
| Total revenue | $392.9 million | $279.3 million | Up 41% |
| Operating income | $4.5 million | $32.9 million | Down $28.4 million |
| Operating margin as a percentage of fee revenue | 1.2% | 12.3% | Down 11.1 points |
| Net income attributable to Korn/Ferry | $3.2 million | $23.1 million | Down 86% |
| Diluted EPS | $0.06 | $0.46 | Down $0.40 |
| Adjusted EBITDA | $56.4 million | $41.7 million | Up $14.7 million |
| Adjusted EBITDA margin | Approximately 14.9% | Approximately 15.6% | Down approximately 0.7 points |
| Cash flow from operations | $(136.0) million | $(90.2) million | Greater use of cash |
Revenue growth primarily reflected the Legacy Hay acquisition, completed in the third quarter of fiscal 2016, and growth in Futurestep. Hay Group fee revenue increased 152% to $174.6 million, while Futurestep increased 19% to $54.7 million. Executive Search declined 4% to $146.4 million.
Compensation and benefits increased 47% to $263.0 million, general and administrative expense increased 48% to $55.3 million, and depreciation and amortization increased 54% to $11.4 million. The company recorded $24.5 million of restructuring charges, consisting of $11.5 million of severance and $13.0 million of office-space consolidation costs. Integration and acquisition costs totaled $8.0 million.
Hay Group reported a $7.7 million operating loss compared with $7.5 million of operating income in the prior-year quarter, primarily because of integration, restructuring, compensation, and acquisition-related costs. Executive Search operating income declined to $26.9 million from $34.9 million, while Futurestep operating income increased to $7.5 million from $6.2 million.
Cash, cash equivalents, and marketable securities totaled $381.1 million at July 31, 2016, compared with $414.7 million at April 30, 2016. Cash decreased primarily because of annual bonus payments, capital expenditures, dividends, and operating working-capital needs. Working capital increased to $316.1 million, and days sales outstanding increased from 55 to 67 days.
Debt, liquidity, and capital allocation
- On June 15, 2016, the company entered into a new $400 million senior secured credit agreement, including a $275 million term loan and a $125 million revolver.
- The company drew $275 million, used $140 million to repay the prior term loan, and had $275 million outstanding under the new term facility at July 31, 2016.
- No borrowings were outstanding under the revolver; $2.8 million of standby letters of credit were issued under the long-term debt arrangements.
- The term loan and revolver mature on June 15, 2021. Term-loan amortization begins September 30, 2016, with annual amortization rates of 7.5%, 7.5%, 10.0%, 10.0%, and 10.0% before the remaining balance is due at maturity.
- The average term-loan interest rate was 2.40% during the quarter. Management stated that the company was in compliance with its debt covenants.
- Management expects cash on hand, operating funds, and available credit to cover working capital, capital expenditures, debt repayment, Legacy Hay retention obligations, and dividends over the next twelve months.
- The company declared a quarterly dividend of $0.10 per share, payable October 14, 2016. Future dividends remain subject to board discretion, earnings, capital requirements, financial condition, and debt terms.
Material changes versus the prior comparable period
- The Legacy Hay acquisition substantially increased revenue, headcount, compensation, facilities, depreciation, and integration costs.
- Fee revenue grew 40%, but operating income fell 86% because expenses and restructuring costs grew faster than revenue.
- Adjusted EBITDA increased 35%, although the adjusted EBITDA margin declined modestly.
- Executive Search performance weakened, particularly in North America and EMEA, due to lower average fees and, in North America, fewer engagements billed.
- Foreign exchange reduced year-over-year fee revenue by approximately $8.4 million.
- The company began consolidating its Mexican subsidiary after obtaining control in fiscal 2016, increasing Latin American revenue and creating $0.9 million of net income attributable to noncontrolling interests in the quarter.
- Accumulated other comprehensive loss increased to $70.6 million, primarily because of a $13.3 million unfavorable foreign-currency translation adjustment.
Guidance, outlook, commentary, and risks
The filing does not provide specific numerical revenue, earnings, or margin guidance. Management stated that the restructuring and integration program was intended to eliminate redundant positions, consolidate office space, and rationalize the cost structure following the Legacy Hay acquisition. Adjusted fee revenue included a $3.5 million deferred-revenue adjustment related to acquisition accounting; management stated that it would no longer make this adjustment after the quarter.
Key risks include economic and labor-market conditions, demand for talent services, retaining qualified consultants, competition, client-relationship portability, currency fluctuations, political and regulatory developments, cybersecurity and information systems, legal liability, intellectual-property protection, seasonality, consultant utilization and billing rates, integration of acquired businesses, and potential impairment of goodwill or intangible assets.
The company has a $40 million Legacy Hay retention pool, with up to $5 million payable within one year of the acquisition closing and the remainder payable in 2017 and 2018. Management reported no material litigation, no material changes to previously disclosed risk factors, and no material changes in contractual obligations. The company reported no off-balance-sheet arrangements and stated that its disclosure controls were effective.
Important facts for investors to verify
- Whether Hay Group integration and restructuring actions produce sustainable cost savings and improve the segment’s operating margin.
- The pace of Executive Search recovery, including engagement volumes, average fees, and North American demand.
- Operating cash flow, receivables collection, and the increase in days sales outstanding.
- Term-loan amortization, interest-rate exposure, covenant compliance, and the company’s ability to fund the Legacy Hay retention pool.
- The sustainability of the $0.10 quarterly dividend and any future share repurchases under the credit agreement.
- The extent to which reported revenue growth reflects the Legacy Hay acquisition versus organic growth.
- Foreign-currency effects, restructuring liabilities, deferred compensation obligations, and potential goodwill or intangible-asset impairment.