Korn Ferry Form 10-K Summary
Business context and reporting period
Korn Ferry filed its Form 10-K for the fiscal year ended April 30, 2019. The filing includes fourth-quarter fiscal 2019 results, although the request metadata refers to “2018 Q4.” Korn Ferry is a global organizational consulting and talent-services firm operating through Executive Search, Advisory, and RPO & Professional Search. It operated 104 offices in 52 countries and had 8,678 full-time employees at year-end.
Effective January 1, 2019, the Company adopted the single Korn Ferry master brand and sunset sub-brands including Hay Group, Futurestep, and Lominger. The rebranding did not change segment reporting.
Financial performance and key metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Fee revenue | $1,926.0 million | $1,767.2 million | Up 9% |
| Total revenue | $1,973.9 million | $1,819.5 million | Up 8% |
| Operating income | $140.8 million | $208.4 million | Down $67.6 million |
| Net income attributable to Korn Ferry | $102.7 million | $133.8 million | Down $31.1 million |
| Diluted EPS | $1.81 | $2.35 | Down $0.54 |
| Adjusted EBITDA | $311.0 million | $278.0 million | Up 12% |
| Adjusted EBITDA margin | 16.1% | 15.7% | Up 0.4 points |
| Operating margin | 7.3% | 11.8% | Down 4.5 points |
Fee revenue increased in all segments: Executive Search rose 9% to $774.8 million, Advisory rose 5% to $821.0 million, and RPO & Professional Search rose 21% to $330.1 million. Foreign exchange reduced fiscal 2019 fee revenue by approximately $48.3 million.
The reported operating margin and net income were significantly affected by a $106.6 million non-cash impairment charge for the Hay Group and Lominger tradenames that were discontinued as part of the rebranding. Excluding the tradename write-off, Advisory operating margin was approximately 14%, compared with reported operating margin of 0.7%.
Cash flow, liquidity, debt, and capital allocation
- Cash provided by operating activities was $258.8 million, up from $219.1 million in fiscal 2018.
- Cash used in investing activities was $69.5 million, including $46.7 million of property and equipment purchases and $34.9 million of premiums paid on company-owned life insurance policies.
- Cash used in financing activities was $64.6 million. The Company paid $23.5 million of dividends, repurchased $37.4 million of common stock, and paid $238.9 million of term-loan principal while drawing $226.9 million under the new revolving facility.
- Cash and cash equivalents were $626.4 million. Cash, cash equivalents, and marketable securities totaled $767.1 million, compared with $657.9 million at April 30, 2018.
- Working capital increased to $585.9 million from $455.8 million.
- At April 30, 2019, $226.9 million was outstanding under the $650.0 million senior secured revolving credit facility, with $420.2 million available after letters of credit.
- The revolving facility matures December 19, 2023. The Company was in compliance with its debt covenants at year-end.
- The quarterly dividend policy targets $0.10 per share, subject to Board discretion and debt-agreement restrictions. The Company had approximately $250 million of remaining share-repurchase authorization after a March 2019 increase.
Material changes versus the prior comparable period
- Revenue growth continued across all three operating segments, led by 21% growth in RPO & Professional Search.
- Executive Search operating income increased 20% to $179.1 million, and RPO & Professional Search operating income increased 29% to $50.9 million.
- Advisory operating income fell 94% to $5.6 million on the $106.6 million tradename impairment and higher compensation costs. Excluding the impairment, Advisory operating income improved on a comparable basis.
- Compensation and benefits expense increased 9% to $1.31 billion, reflecting 10% growth in average headcount, higher bonuses, commissions, and long-term incentive amortization.
- General and administrative expense increased 48% to $352.0 million, primarily because of the tradename impairment.
- The effective tax rate declined to 22% from 34%, primarily because of the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act and an excess tax benefit related to stock-based compensation.
- The Company adopted ASC 606 using the modified retrospective method, increasing opening retained earnings by $6.7 million, net of tax.
- The Company replaced its prior term-loan structure with a $650.0 million revolving credit facility and used the initial draw to repay the prior term loan.
Fourth-quarter fiscal 2019 results
| Metric | Q4 fiscal 2019 | Q4 fiscal 2018 |
|---|---|---|
| Fee revenue | $490.8 million | $475.4 million |
| Operating income | $62.3 million | $64.2 million |
| Net income attributable to Korn Ferry | $50.3 million | $41.2 million |
| Diluted EPS | $0.89 | $0.73 |
The first quarter of fiscal 2019 included the major tradename impairment and reported an operating loss of $55.1 million; the fourth quarter was profitable and produced the highest quarterly fee revenue in fiscal 2019.
Guidance, outlook, commentary, and risks
Management did not provide a specific numerical fiscal 2020 revenue or earnings forecast in the filing. Management’s stated strategy is to expand the integrated “One Korn Ferry” model, grow cross-selling and marquee accounts, scale technology-enabled products, invest in talent and intellectual property, and pursue selective acquisitions.
- Approximately 70% of revenue came from clients using multiple lines of business, and 90% of fiscal 2019 engagements were for repeat clients.
- Products represented 31% of Advisory revenue, supporting management’s focus on scalable, technology-enabled offerings.
- Remaining performance obligations for contracts longer than one year totaled $539.5 million at April 30, 2019; approximately $307.7 million was expected to be recognized in fiscal 2020. This excludes contracts with initial terms of one year or less.
- Principal risks include economic cyclicality, competition and pricing pressure, retaining consultants and key personnel, utilization and billing rates, foreign exchange, Brexit, automation and artificial intelligence, cybersecurity and data privacy regulation, intellectual-property protection, acquisitions and integration, goodwill impairment, tax-law changes, and variable interest rates including LIBOR transition.
- The Company had $578.3 million of goodwill and $82.9 million of intangible assets at year-end. No goodwill impairment was identified in the annual test, but future deterioration in operating performance or market conditions could require impairment charges.
- Operating lease commitments totaled $300.7 million, including $55.4 million due within one year. The Company expected adoption of the new lease standard in fiscal 2020 to create material right-of-use assets and lease liabilities without a material income-statement impact.
- No material litigation was reported, and management and the independent auditor concluded that internal control over financial reporting was effective.
Important facts for investors to verify
- Reconcile reported operating income and Advisory profitability with the $106.6 million non-cash tradename impairment.
- Assess whether revenue growth, particularly the 21% RPO & Professional Search growth, is sustainable after adjusting for foreign exchange and headcount investment.
- Review the reconciliation and limitations of Adjusted EBITDA, a non-GAAP measure, and compare it with GAAP operating income and cash flow.
- Evaluate debt covenant headroom, the $226.9 million revolver balance, variable-rate exposure, and the December 2023 maturity.
- Monitor consultant hiring, compensation, utilization, retention, and the effect of performance-related bonuses on margins.
- Review the impact of ASC 606 adoption and the timing and quality of the disclosed remaining performance obligations.
- Assess exposure to international markets, including the United Kingdom, foreign exchange, Brexit, GDPR, and other data-protection requirements.
- Consider the Company’s substantial goodwill, deferred compensation obligations, COLI-related borrowings, lease commitments, and future impairment or liquidity risks.