Korn/Ferry International Form 10-Q Summary
Business context and reporting period
Korn/Ferry International provides executive recruitment, leadership and talent consulting, recruitment process outsourcing, and other talent acquisition services through Executive Recruitment, Leadership & Talent Consulting (LTC), and Futurestep. The filing covers the three and six months ended October 31, 2013, the company’s fiscal 2014 second quarter and first half. Korn/Ferry operated 87 offices in 37 countries.
Financial performance and liquidity
| Metric | Three months ended October 31, 2013 | Three months ended October 31, 2012 | Six months ended October 31, 2013 | Six months ended October 31, 2012 |
|---|---|---|---|---|
| Fee revenue | $238.0 million | $196.2 million | $466.4 million | $382.9 million |
| Total revenue | $246.2 million | $204.8 million | $483.8 million | $400.8 million |
| Operating income | $23.2 million | $2.8 million | $39.8 million | $19.8 million |
| Net income | $18.8 million | $1.2 million | $30.2 million | $11.6 million |
| Diluted EPS | $0.38 | $0.03 | $0.62 | $0.24 |
| Adjusted EBITDA | $36.7 million | $24.4 million | $68.6 million | $44.8 million |
Operating margin was 9.7% of fee revenue in the quarter and 8.5% for the first six months, compared with 1.4% and 5.2%, respectively, in the comparable periods. Net income margin was 7.9% of fee revenue in the quarter and 6.5% for the first six months, compared with 0.6% and 3.0%.
- Quarterly fee revenue increased 21%; management reported 7% growth excluding revenue from the prior-year PDI and Global Novations acquisitions. Six-month fee revenue increased 22%, or 7% excluding those acquisitions.
- Quarterly fee revenue grew across all major businesses: Executive Recruitment increased 10%, LTC increased 72% primarily from acquisitions, and Futurestep increased 6%.
- Quarterly Adjusted EBITDA margin increased to 15.4% from 12.5%. Executive Recruitment margin improved to 21.9%, while LTC declined to 15.5% from 20.7% and Futurestep declined to 9.3% from 12.1%.
- Cash used in operating activities was $35.6 million for the first six months, compared with $43.3 million used in the prior-year period. Higher profitability was offset primarily by increased receivables.
- Cash used in investing activities was $7.9 million, including $15.0 million of contingent consideration paid to PDI selling stockholders and $11.5 million of property and equipment purchases.
- Cash and cash equivalents were $182.6 million at October 31, 2013. Total cash, cash equivalents, and marketable securities were $314.9 million, down from $366.0 million at April 30, 2013.
- Receivables due from clients increased to $199.2 million from $161.5 million; days sales outstanding increased from 59 to 71 days.
- The company had no borrowings under its $75.0 million senior unsecured revolving credit facility, although $2.7 million of standby letters of credit were outstanding. It also had $73.3 million of borrowings against company-owned life insurance policies.
- Management stated that cash on hand and operating funds were expected to meet working capital, capital expenditure, and general corporate requirements for the next twelve months. The credit facility requires $50.0 million of unrestricted domestic cash or marketable securities for certain acquisitions, dividends, and repurchases.
Material changes versus the prior comparable period
- Profitability improved substantially, driven by higher fee revenue, lower restructuring charges, and operating leverage. Quarterly operating income increased $20.4 million and six-month operating income increased $20.0 million.
- Restructuring charges were zero in the quarter and $3.7 million for the first six months, versus $15.5 million in each comparable prior-year period. The current-year charges primarily related to PDI integration, facilities consolidation, and severance.
- The PDI and Global Novations acquisitions materially increased LTC revenue and expenses. Excluding these acquisitions, LTC fee revenue increased 2% in the quarter and 4% for the first six months.
- Compensation and benefits increased 21% in the quarter and 20% for the first six months, reflecting acquired operations, higher performance-related bonuses, increased headcount, deferred compensation changes, and separation costs.
- Other income increased to $4.4 million in the quarter and $6.6 million for the first six months, mainly due to gains in mutual funds held to support deferred compensation obligations. These gains were partly offset by corresponding increases in deferred compensation liabilities.
- Quarterly and six-month cash balances declined largely because of annual bonus payments, ECAP contributions, the $15.0 million PDI contingent consideration payment, and increased working capital needs.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide explicit quantitative revenue or earnings guidance. Management’s fiscal 2014 priorities include integrating the multi-service strategy, expanding LTC and RPO, developing products and services, pursuing disciplined acquisitions, improving technology and processes, and leveraging the company’s brand and intellectual property.
- The filing identifies risks from economic and labor-market conditions, foreign currency fluctuations, competition, consultant recruitment and retention, client relationship portability, off-limits agreements, legal and employment liability, cybersecurity and information systems, intellectual property protection, technology execution, acquisition integration, seasonality, and potential goodwill or intangible-asset impairment.
- An employment dispute resulted in $2.0 million of expense in the quarter and $4.5 million for the first six months. The dispute was settled, and no liability remained at October 31, 2013.
- The PDI purchase price allocation remained preliminary, particularly regarding income taxes. The company paid $15.0 million of contingent consideration after achievement of specified expense-synergy goals.
- The company had no material litigation expected by management to adversely affect its business, financial position, or results of operations.
- Management stated that there were no material changes to previously disclosed risk factors, no material changes in contractual obligations, and no off-balance-sheet arrangements.
- Disclosure controls and procedures were deemed effective, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated receivables and 71-day days sales outstanding normalize and convert reported earnings into operating cash flow.
- The sustainability of revenue growth excluding PDI and Global Novations, particularly in LTC and Futurestep.
- Whether LTC margins recover from the decline to 10.6% in the quarter and 9.0% for the first six months.
- The future cash requirements of deferred compensation obligations, including $119.3 million of vested and unvested obligations supported by $118.0 million of mutual funds.
- The remaining cost and timing of PDI integration, restructuring, facilities consolidation, and related contingent consideration.
- The impact of foreign exchange movements, acquisition accounting adjustments, and the scheduled January 31, 2014 impairment testing of indefinite-lived intangible assets.
- The distinction between GAAP earnings and management’s non-GAAP Adjusted EBITDA, including the excluded restructuring, separation, integration, and other unusual items.