Korn Ferry Form 10-Q Summary
Business context and reporting period
Korn Ferry is a global organizational consulting firm providing Consulting, Digital, Executive Search, Professional Search & Interim, and Recruitment Process Outsourcing services. The filing covers the three and six months ended October 31, 2023, representing the second quarter and first six months of fiscal 2024. Results are compared with the corresponding fiscal 2023 periods.
Approximately 340 marquee and regional accounts generated about 35% of consolidated fee revenue. Management cited persistent inflation, higher interest rates, global economic uncertainty and weaker demand for permanent-placement services as significant operating conditions.
Financial performance and liquidity
| Metric | Three months ended October 31, 2023 | Prior year | Six months ended October 31, 2023 | Prior year |
|---|---|---|---|---|
| Fee revenue | $704.0 million | $727.8 million | $1,403.2 million | $1,423.8 million |
| Total revenue | $712.4 million | $735.7 million | $1,418.7 million | $1,438.9 million |
| Operating income | $22.8 million | $119.6 million | $79.6 million | $231.2 million |
| Net income attributable to Korn Ferry | $(1.7) million | $73.5 million | $44.9 million | $150.8 million |
| Diluted earnings per share | $(0.04) | $1.38 | $0.86 | $2.83 |
| Adjusted EBITDA | $98.5 million | $131.1 million | $194.2 million | $263.3 million |
| Adjusted EBITDA margin | 14.0% | 18.0% | 13.8% | 18.5% |
Fee revenue declined 3% in the quarter and 1% year to date. Consulting and Digital grew, while Executive Search and RPO declined. Professional Search & Interim revenue increased, primarily from acquired interim businesses, but its lower-margin interim mix increased cost of services.
Cash used in operating activities was $141.9 million in the first six months, compared with $98.7 million used in the prior-year period. Cash used in investing activities was $22.3 million, versus $150.2 million, primarily because the prior year included $99.3 million of acquisition spending. Cash used in financing activities was $38.6 million, versus $96.1 million.
- Cash and cash equivalents: $620.8 million at October 31, 2023, compared with $844.0 million at April 30, 2023.
- Current and non-current marketable securities: $223.0 million at October 31, 2023.
- Cash, cash equivalents and marketable securities: $843.8 million, down from $1,067.9 million at April 30, 2023.
- Working capital: $657.4 million, down from $662.4 million.
- Receivables due from clients: $592.2 million; days sales outstanding increased from 56 to 65 days.
- Long-term debt: $396.6 million net carrying value, consisting primarily of 4.625% senior unsecured notes due December 2027.
- No borrowings were outstanding under the credit facilities; $645.4 million remained available after standby letters of credit.
- Management stated that available cash, operating funds and borrowing capacity are expected to meet anticipated needs for at least the next 12 months.
Material changes versus the prior comparable period
- On October 23, 2023, Korn Ferry initiated a workforce-reduction plan affecting approximately 8% of employees.
- The plan produced $63.5 million of restructuring charges in the quarter and $63.9 million year to date. Management expects annualized cost savings of approximately $110 million to $120 million.
- Adjusted EBITDA fell 25% in the quarter and 26% year to date, while margins declined to 14.0% and 13.8%, respectively.
- Executive Search fee revenue decreased 7% in the quarter and 10% year to date. North America, EMEA and Asia Pacific were the primary areas of weakness.
- RPO fee revenue decreased 18% in the quarter and 17% year to date because of fewer client-requested placements.
- Professional Search & Interim fee revenue increased 3% in the quarter and 20% year to date, driven by interim-service acquisitions, but higher delivery costs reduced margins.
- Cost of services increased 28% in the quarter and 57% year to date, primarily because of acquired interim operations.
- Foreign currency translation reduced accumulated other comprehensive income by approximately $23.2 million year to date.
- The company repurchased $8.6 million of common stock year to date, compared with $55.5 million in the prior-year period.
Guidance, outlook, commentary, risks and unusual items
Management expects near-term fee-revenue slowing or declines due to the macroeconomic environment, particularly in permanent-placement talent acquisition. The workforce plan is intended to align capacity and costs with current demand. The filing does not provide specific quarterly or full-year revenue or earnings guidance.
Unusual items included the workforce restructuring charges, $1.6 million of right-of-use asset impairment, $1.6 million of fixed-asset impairment year to date, and $9.2 million of integration and acquisition costs year to date. The quarter also included a $13.8 million loss on marketable securities held for deferred-compensation obligations.
Key risks include recessionary or labor-market deterioration, inflation and interest rates, foreign exchange movements, consultant retention and utilization, demand for executive and professional recruiting, acquisition integration, cyber and data-security events, legal and regulatory exposure, technology and artificial-intelligence changes, goodwill or intangible-asset impairment, and restrictions under debt agreements. No material changes to previously disclosed risk factors were reported, and no material adverse legal proceedings were identified.
On December 5, 2023, after the reporting date, the board increased the quarterly dividend 83% to $0.33 per share and declared a dividend payable January 12, 2024. Future dividends remain subject to board discretion and debt-covenant compliance.
Important facts for investors to verify
- Whether the workforce plan delivers the expected $110 million to $120 million of annualized savings and the timing of related cash severance payments.
- Whether demand stabilizes in Executive Search, RPO and permanent-placement services.
- Whether interim-service growth can offset its lower margins and elevated cost of services.
- Receivables aging, collection trends and the effect of days sales outstanding rising to 65 days.
- Operating cash flow and liquidity after annual bonus payments, dividends, repurchases and restructuring cash costs.
- Compliance with the senior-notes and revolving-credit covenants following the dividend increase.
- The sustainability of the $0.33 quarterly dividend given lower earnings and negative operating cash flow in the first six months.
- Foreign-exchange exposure, including management’s estimate that a 10% currency movement could produce an approximately $11.3 million gain or loss.
- The reconciliation and ongoing comparability of Adjusted EBITDA, a non-GAAP measure, to GAAP operating results.