KORN FERRY annual report, FY2015

Korn/Ferry International Form 10-K Summary

Reporting period: Fiscal year ended April 30, 2015. The filing also provides unaudited fourth-quarter results for the quarter ended April 30, 2015; the request metadata references 2014 Q4, but the source filing is the fiscal 2015 Form 10-K.

Business Context

Korn/Ferry is a global talent-management services provider operating through three segments: Executive Recruitment, Leadership & Talent Consulting (LTC), and Futurestep, which provides professional search and recruitment-process outsourcing. The company operated 78 offices in 37 countries and had 3,687 full-time employees at April 30, 2015. Approximately 46% of fiscal 2015 fee revenue was generated outside the United States.

Fiscal 2015 fee revenue was diversified across Executive Recruitment, LTC, and Futurestep.
Approximately 60% of revenue came from clients using multiple lines of business, and 79% of assignments were performed for clients served during the prior three fiscal years.
The company acquired Pivot Leadership on March 1, 2015, expanding LTC’s executive-development capabilities.

Financial Performance and Key Metrics

Metric	Fiscal 2015	Fiscal 2014	Change
Fee revenue	$1,028.2 million	$960.3 million	Up 7%
Total revenue	$1,066.1 million	$995.6 million	Up 7%
Operating income	$114.0 million	$91.6 million	Up 24%
Operating margin on fee revenue	11.1%	9.5%	Up 160 basis points
Net income	$88.4 million	$72.7 million	Up 22%
Net margin on fee revenue	8.6%	7.6%	Up 100 basis points
Diluted EPS	$1.76	$1.48	Up 19%
Adjusted EBITDA	$161.7 million	$138.3 million	Up 17%
Adjusted EBITDA margin	15.7%	14.4%	Up 130 basis points
Cash flow from operations	$107.3 million	$129.5 million	Down $22.2 million

Segment fee revenue was $597.4 million for Executive Recruitment, $267.0 million for LTC, and $163.7 million for Futurestep. Segment operating margins were 19.9%, 10.6%, and 12.2%, respectively. Futurestep delivered the fastest fee-revenue growth, increasing 20% year over year; LTC increased 5% and Executive Recruitment increased 5%.

Fiscal 2015 fourth-quarter fee revenue was $271.7 million, operating income was $28.1 million, net income was $25.5 million, and diluted EPS was $0.51. The filing does not provide a separate fourth-quarter cash-flow statement.

Liquidity, Debt, and Capital Allocation

Cash and cash equivalents were $380.8 million at April 30, 2015, compared with $333.7 million a year earlier.
Total cash, cash equivalents, and marketable securities were $525.4 million, up from $468.3 million.
Working capital increased to $335.0 million from $275.0 million.
The company had no borrowings under its revolving credit facility at April 30, 2015 or 2014.
The company had $69.6 million of borrowings secured by company-owned life insurance policies, compared with $72.9 million in 2014.
Cash used in investing activities was $30.6 million, including $15.3 million paid for the Pivot Leadership acquisition and $21.9 million of capital expenditures.
The company paid $5.1 million in dividends during fiscal 2015 and had $150.0 million remaining under its stock-repurchase authorization, although fiscal-year purchases were limited by the credit agreement.
On June 3, 2015, the company amended its credit agreement, increasing revolving availability to $150.0 million and extending maturity to June 3, 2020.

Material Changes Versus the Prior Comparable Period

Revenue growth was broad-based, with particular strength in Futurestep’s RPO and professional-recruitment activities.
Operating leverage improved as general and administrative expense declined 4% and fell to 14.2% of fee revenue from 15.8%.
Compensation and benefits increased 7%, including a $21.0 million increase in performance-related bonus expense and higher average headcount.
Restructuring charges increased to $9.5 million from $3.7 million, primarily reflecting $9.2 million of severance and $0.3 million of facility-related costs.
Foreign exchange adversely affected fiscal 2015 fee revenue by approximately $23.9 million, or 2%.
Comprehensive income was $50.1 million, compared with $72.9 million, primarily because foreign-currency translation adjustments reduced other comprehensive income by $36.5 million.
Fiscal 2015 trends are not fully comparable because of the Pivot Leadership acquisition and the continuing effects of the PDI and Global Novations acquisitions completed in prior periods.

Guidance, Outlook, Commentary, and Unusual Items

Management did not provide specific quantified fiscal 2016 revenue or earnings guidance in the filing. The stated priorities were to integrate the company’s multi-service strategy, expand Korn Ferry’s Four Dimensions of Leadership & Talent platform, grow LTC and RPO, invest in technology, pursue disciplined acquisitions, and leverage the company’s brand and intellectual property.

Management expected cash on hand and operating cash flow to fund working capital, capital expenditures, corporate requirements, and dividends for the following twelve months.
The company recorded a $6.2 million insurance reimbursement for previously incurred legal fees, which reduced fiscal 2015 general and administrative expense.
No goodwill impairment was recorded, and management reported that all reporting units exceeded their carrying values in the January 31, 2015 impairment assessment.
The company reported no material litigation expected to adversely affect its business, financial condition, or results of operations.
The company disclosed a fiscal 2013 cyber breach and continuing cybersecurity investment; it stated that the prior breach did not materially affect operations or financial reporting.

Principal Risks

Demand is cyclical and sensitive to global economic conditions, hiring activity, labor markets, credit conditions, and client budgets.
Competition may create pricing pressure, reduce market share, or enable clients to insource recruiting activities.
The company depends on retaining key consultants and client relationships, which may be portable to competitors.
Cybersecurity incidents, data-protection requirements, technology failures, or intellectual-property disputes could cause financial, legal, and reputational damage.
International operations expose the company to currency fluctuations, regulatory changes, political instability, tax risks, and differing labor practices.
Acquisition integration, goodwill impairment, restructuring, deferred compensation, tax estimates, and revenue-recognition judgments could materially affect reported results.
Operating lease commitments totaled $317.4 million, and total disclosed contractual obligations were $363.2 million.
Dividends and share repurchases remain subject to board discretion, liquidity requirements, and credit-agreement restrictions.

Investor Verification Checklist

Verify the fiscal-period distinction: the filing covers the year ended April 30, 2015, while the fourth-quarter data relates to the quarter ended April 30, 2015.
Reconcile reported Adjusted EBITDA to GAAP operating income and review the company’s exclusions, including restructuring and acquisition-related items.
Assess the sustainability of revenue growth and margins after adjusting for acquisitions, foreign exchange, the insurance reimbursement, and restructuring charges.
Review cash availability after excluding marketable securities held in trust for deferred compensation obligations.
Monitor the $69.6 million of company-owned-life-insurance policy loans, deferred compensation obligations, and related funding assumptions.
Review the amended credit agreement’s $125.0 million annual aggregate limit on acquisitions, dividends, and repurchases, and its $75.0 million aggregate dividend and repurchase limitation.
Evaluate the contribution and integration progress of Pivot Leadership and the continuing impact of the PDI and Global Novations acquisitions.
Review currency exposure, given the 46% international share of fee revenue and the $36.5 million fiscal 2015 foreign-currency translation loss in other comprehensive income.