Korn/Ferry International 2018 Form 10-K Summary
Business context and reporting period
The filing is a Form 10-K for the fiscal year ended April 30, 2018. The request metadata references 2017 Q4, but the filing reports fiscal 2018 annual results and includes fourth-quarter fiscal 2018 comparative data. Korn Ferry is a global organizational consulting firm operating 106 offices in 52 countries with 7,643 full-time employees. Its three reporting segments were Executive Search, Hay Group and Futurestep.
The Company provides executive search, advisory and organizational consulting, leadership and talent solutions, recruitment process outsourcing, professional search and project recruitment services. Approximately 62% of revenue came from clients using multiple lines of business, and 88% of fiscal 2018 assignments were performed for clients served during the prior three fiscal years.
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Fee revenue | $1.767 billion | $1.566 billion | Up 13% |
| Total revenue | $1.820 billion | $1.622 billion | Up 12% |
| Operating income | $203.9 million | $114.4 million | Up 78% |
| Operating margin | 11.5% | 7.3% | Up 4.2 points |
| Net income attributable to Korn Ferry | $133.8 million | $84.2 million | Up 59% |
| Diluted EPS | $2.35 | $1.47 | Up 60% |
| Adjusted EBITDA | $273.8 million | $235.0 million | Up 17% |
| Adjusted EBITDA margin | 15.5% | 15.0% | Up 0.5 points |
Fiscal 2018 fourth-quarter fee revenue was $475.4 million, operating income was $63.3 million, net income attributable to Korn Ferry was $41.2 million and diluted EPS was $0.73. The filing does not provide a separate fourth-quarter adjusted EBITDA value.
- Segment revenue: Executive Search generated $709.0 million, Hay Group $785.0 million and Futurestep $273.2 million.
- Segment operating income: Executive Search contributed $149.3 million, Hay Group $100.9 million and Futurestep $39.4 million; Corporate expenses were $85.7 million.
- Segment margins: Executive Search margin was 21.0%, Hay Group 12.9% and Futurestep 14.4%.
- Cash flow: Operating cash flow was $219.1 million, compared with $106.1 million in fiscal 2017. Investing cash use was $44.8 million and financing cash use was $77.3 million.
- Cash and investments: Cash, cash equivalents and marketable securities totaled $657.9 million at April 30, 2018, versus $530.8 million a year earlier. Excluding amounts held for deferred compensation plans and accrued bonuses, cash and marketable securities were $312.4 million.
- Debt: Term-loan borrowings were $238.9 million, down from $259.5 million. There were no revolving-credit borrowings, and approximately $122.1 million was available under the revolving facility after standby letters of credit.
- Liquidity: Working capital was $455.8 million, up from $385.1 million. Management stated that cash on hand, operating cash flow and available credit were expected to fund anticipated operations, capital expenditures, debt repayment, retention obligations, dividends and share repurchases for the next twelve months.
- Capital returns: The Company declared $0.40 per share of dividends during fiscal 2018 and repurchased approximately $33.1 million of common stock. Approximately $88.1 million remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Fee revenue increased 13%, with favorable foreign-exchange effects of approximately $35.3 million, or 2%.
- Executive Search revenue rose 15%, driven by a 9% increase in engagements billed and a 3% increase in weighted-average fees per engagement in local currency. Latin America declined 11%, while North America, EMEA and Asia Pacific grew.
- Hay Group revenue increased 8%, reflecting higher consulting and products revenue. Hay Group operating margin improved to 12.9% from 6.5%.
- Futurestep revenue increased 22%, led by growth in recruitment process outsourcing and professional search. Its operating margin improved to 14.4% from 13.4%.
- Compensation and benefits increased 12% to $1.204 billion, broadly matching revenue growth as a percentage of fee revenue at 68%. Average consultant headcount increased 9%.
- Restructuring charges declined sharply to $0.1 million from $34.6 million, primarily because the Hay Group integration and office-consolidation program was substantially advanced.
- The effective tax rate increased to approximately 34% from 25%, principally because of the Tax Cuts and Jobs Act. The Company recorded a provisional $18.4 million transition-tax charge and a $5.9 million deferred-tax remeasurement benefit.
- Operating cash flow more than doubled, while financing cash flow shifted from a $64.4 million inflow to a $77.3 million outflow, primarily because fiscal 2017 included term-loan proceeds and fiscal 2018 included debt amortization and share repurchases.
Outlook, commentary, risks and unusual items
Management emphasized continued expansion of integrated, solutions-based selling, greater use of proprietary data and analytics, technology and artificial intelligence, investment in consultants and intellectual property, and selective acquisitions. The Marquee Accounts program represented approximately 20% of global fee revenue at year-end. No specific quantitative revenue, earnings or margin guidance is provided in the filing.
On June 12, 2018, after the fiscal year-end, the Board approved a plan to operate under a single Korn Ferry brand and sunset sub-brands including Hay Group, Futurestep and Lominger. The Company expects to record a one-time, non-cash $106 million intangible-asset impairment charge, or approximately $79 million after tax, in the first quarter of fiscal 2019. The plan also contemplates a holding-company reorganization and segment renaming.
- Demand is cyclical and sensitive to global economic activity, labor markets, client hiring, pricing and credit conditions.
- Key risks include intense competition, technology-enabled disintermediation, automation and artificial intelligence, consultant retention, client-relationship portability and utilization or billing-rate pressure.
- The Company faces foreign-currency, international operating, Brexit, tax, data privacy, cybersecurity, intellectual-property and business-continuity risks.
- Goodwill and intangible assets were significant, representing approximately 26% and 9% of total assets, respectively. No goodwill impairment was recorded as of the January 31, 2018 test date.
- Fixed-fee engagements represented 28% of fiscal 2018 revenue and may produce lower-than-expected margins if costs or completion times are underestimated.
- The Legacy Hay retention pool totaled $40 million, of which $23.5 million had been paid; the remaining balance was expected to be payable within 45 days after November 30, 2018.
- Contractual obligations totaled $708.6 million, including $392.8 million of operating lease commitments and $238.9 million of term-loan principal.
- The Company reported no material litigation, no off-balance-sheet arrangements and effective internal control over financial reporting, with an unqualified audit opinion.
Important facts for investors to verify
- Verify that the fiscal-period comparison is fiscal 2018 versus fiscal 2017, rather than calendar-year 2017 or a standalone 2017 fourth quarter.
- Review the fiscal 2019 impact, timing and cash-tax implications of the $106 million sub-brand impairment charge.
- Assess recurring profitability excluding the unusually low fiscal 2018 restructuring expense and the Tax Act-related tax items.
- Reconcile reported cash and marketable securities with amounts restricted or held in trust for deferred compensation obligations.
- Monitor term-loan amortization, covenant compliance, interest-rate exposure and the June 15, 2021 maturity.
- Evaluate the sustainability of revenue growth, particularly in Hay Group and Futurestep, and the effect of consultant hiring and performance-related compensation on margins.
- Confirm the final accounting for provisional Tax Act amounts and the effect of the new revenue-recognition standard adopted beginning May 1, 2018.