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 and interim, and recruitment process outsourcing services. This unaudited Form 10-Q covers the three and nine months ended January 31, 2023, compared with the corresponding periods ended January 31, 2022. Beginning fiscal 2023, the company separately reported Professional Search & Interim and RPO.
Key financial metrics
| Metric | Q3 FY2023 | Q3 FY2022 | Change |
|---|---|---|---|
| Fee revenue | $680.8 million | $680.7 million | Flat |
| Total revenue | $686.8 million | $685.0 million | Up $1.9 million |
| Operating income | $12.5 million | $126.3 million | Down $113.8 million |
| Net income attributable to Korn Ferry | $11.2 million | $84.1 million | Down 87% |
| Diluted EPS | $0.21 | $1.54 | Down $1.33 |
| Adjusted EBITDA | $96.1 million | $138.3 million | Down 31% |
| Adjusted EBITDA margin | 14.1% | 20.3% | Down 6.2 percentage points |
For the nine months, fee revenue increased 10% to $2.105 billion, while net income attributable to Korn Ferry declined 31% to $162.0 million. Adjusted EBITDA declined 9% to $359.4 million, and adjusted EBITDA margin decreased to 17.1% from 20.7%.
Q3 revenue growth was concentrated in Professional Search & Interim, up 31% to $118.0 million, and RPO, up 5% to $103.5 million. Executive Search declined 11% in aggregate, including a 13% decline in North America and a 28% decline in Asia Pacific. Digital revenue declined 6% to $85.1 million, while Consulting was broadly flat.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $771.9 million at January 31, 2023, compared with $978.1 million at April 30, 2022.
- Total marketable securities were $235.9 million, producing cash and marketable securities of approximately $1.008 billion.
- Net cash provided by operating activities for the nine months was $92.8 million, down from $221.5 million in the prior-year period.
- Cash used in investing activities was $165.4 million, including $99.3 million for the ICS acquisition and $54.0 million for property and equipment.
- Cash used in financing activities was $130.1 million, including $82.5 million of common-stock repurchases and $24.9 million of shareholder dividends.
- Long-term debt was $396.0 million, consisting primarily of $400 million of 4.625% senior unsecured notes due December 2027, net of issuance costs.
- No amounts were outstanding under the credit facilities. Available capacity was approximately $1.145 billion, after standby letters of credit.
- The company stated that cash on hand, operating cash flow and borrowing capacity should be sufficient for anticipated needs over the next 12 months. It was in compliance with debt covenants at January 31, 2023.
Material changes versus the prior comparable period
- On January 11, 2023, Korn Ferry initiated a workforce realignment and restructuring plan. The plan generated $41.2 million of restructuring charges in Q3 and is expected to reduce the annualized cost base by approximately $45 million to $55 million after planned re-hiring.
- The company also recorded $5.5 million of right-of-use asset impairments and $4.4 million of fixed-asset impairments related to reducing its real estate footprint.
- Compensation and benefits increased 8% in Q3 to $479.4 million, driven by higher salaries, wage inflation, increased headcount and deferred compensation expense. Compensation and benefits rose to 70.4% of fee revenue from 65.5%.
- Cost of services increased 83% to $57.9 million, primarily because of the higher-cost interim business acquired through Lucas Group, Patina and ICS.
- On August 1, 2022, the company acquired Infinity Consulting Solutions for approximately $99.3 million, adding interim professional placement capabilities and $68.3 million of goodwill.
- On February 1, 2023, after the reporting date, the company completed the acquisition of Salo for approximately $155 million, net of cash acquired.
- Share repurchases totaled approximately $80.5 million during the nine months, compared with $31.5 million in the prior-year period. Approximately $248.6 million remained available under the repurchase program at January 31, 2023.
Outlook, commentary, risks and unusual items
Management attributed weaker Q3 demand in Executive Search and Digital to the global economic slowdown. Foreign exchange reduced Q3 fee revenue by approximately $23.2 million and reduced nine-month fee revenue by approximately $82.0 million. Management cited inflation, potential recession, geopolitical developments, shifting global trade patterns and labor-market conditions as factors that could pressure demand and operating cash flow.
The restructuring plan is intended to align the workforce with business demand, invest in growth areas and address excess capacity. The filing does not provide formal revenue or earnings guidance beyond the stated annualized cost-base reduction target.
The Q3 effective tax rate was 41.8%, compared with 24.0% in the prior-year quarter, due in part to withholding taxes that were not eligible for credit and permanent tax adjustments applied to lower earnings after restructuring charges.
Other income was $13.1 million in Q3 versus a $7.3 million loss in the prior-year quarter, primarily reflecting market gains on investments held to support deferred compensation obligations. The filing states that the company had no material legal proceedings, no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the restructuring plan achieves the projected $45 million to $55 million annualized cost reduction and whether additional restructuring or real-estate charges arise.
- Whether demand weakness in Executive Search and Digital persists, particularly in North America and Asia Pacific.
- The profitability and cash-flow contribution of the acquired interim businesses, including ICS and Salo.
- Whether adjusted EBITDA margins recover from the Q3 decline and how much of the decline reflects mix, wage inflation and acquisition integration.
- Cash conversion, receivables collection trends and days sales outstanding, which increased from 58 days to 71 days.
- The effect of foreign exchange, inflation, recessionary conditions and interest rates on revenue, margins and liquidity.
- Compliance with debt covenants and the continued availability of credit facilities, dividends and share repurchases.
- The company’s ability to fund deferred compensation obligations, given vested obligations of $173.7 million and related trust investments with a fair value of $188.8 million.