Korn/Ferry International — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2013. The filing also provides unaudited fourth-quarter results for the three months ended April 30, 2013, which is the likely comparable period for the requested “2012 Q4” metadata.
Business context
Korn/Ferry is a global talent-management company operating in 87 offices across 37 countries with 3,272 full-time employees. Its three reportable segments are Executive Recruitment, Leadership & Talent Consulting (LTC), and Futurestep, which provides recruitment process outsourcing and other high-impact recruitment solutions.
The company served 5,228 clients during fiscal 2013, including approximately 42% of the Fortune 500. Executive Recruitment remained the largest segment, but LTC and Futurestep increased their contribution to the business. The company completed the acquisitions of PDI Ninth House and Global Novations during fiscal 2013.
Key financial metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Fee revenue | $812.8 million | $790.5 million | Up 3% |
| Total revenue | $849.7 million | $826.8 million | Up 3% |
| Operating income | $43.9 million | $82.9 million | Down 47% |
| Operating margin on fee revenue | 5.4% | 10.5% | Down 5.1 points |
| Net income | $33.3 million | $54.3 million | Down 39% |
| Diluted earnings per share | $0.70 | $1.15 | Down $0.45 |
| Adjusted EBITDA | $97.8 million | $101.3 million | Down 3% |
| Adjusted EBITDA margin | 12.0% | 12.8% | Down 0.8 points |
| Cash flow from operations | $61.7 million | $71.0 million | Down $9.3 million |
Fiscal 2013 fee revenue benefited from $45.6 million contributed by PDI and Global Novations. Excluding those acquisitions, fee revenue declined approximately 3%. Foreign-exchange movements reduced fee revenue by approximately $15.1 million.
- Executive Recruitment: Revenue of $522.5 million, down 7%; operating income of $81.0 million, down from $109.9 million.
- LTC: Revenue of $168.1 million, up 46%, including acquired revenue; operating income of $6.4 million, down from $16.4 million.
- Futurestep: Revenue of $122.2 million, up 7%; operating income of $11.0 million, up from $8.5 million.
Fourth-quarter fiscal 2013 fee revenue was $227.9 million, operating income was $15.4 million, and net income was $12.2 million, compared with fourth-quarter fiscal 2012 fee revenue of $198.1 million, operating income of $15.4 million, and net income of $12.0 million. Fourth-quarter diluted EPS was $0.25 versus $0.25.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents were $224.1 million at April 30, 2013, down from $282.0 million.
- Total cash, cash equivalents, and marketable securities were $366.0 million, down from $417.7 million.
- Working capital was $178.5 million, down $99.8 million year over year.
- Cash used in investing activities was $116.7 million, primarily reflecting $112.1 million of acquisition payments and $13.1 million of capital expenditures.
- The company had no borrowings under its revolving credit facility at year-end. The facility provides up to $75 million of availability, with an option for an additional $50 million, and matures in January 2018.
- The company had $73.3 million of borrowings against the cash surrender value of company-owned life insurance policies; these borrowings have no scheduled principal repayments.
- The credit facility requires $50 million of unrestricted domestic cash and/or marketable securities for permitted acquisitions, dividends, and share repurchases. The company was in compliance with its financial covenants.
- No cash dividends have been paid on common stock since 1996. The company had $24.4 million remaining under its $50 million share-repurchase authorization, although fourth-quarter purchases were limited to shares withheld for employee tax obligations.
Material changes versus the prior comparable period
- Revenue growth was largely acquisition-driven, while the core business declined. Executive Recruitment revenue fell in every region.
- Executive Recruitment engagement volume declined 4%, and weighted-average fees per engagement declined 3%.
- Futurestep engagement volume increased 14%, while average fees per engagement declined 6%.
- Compensation and benefits increased 4%, engagement expenses increased 18%, and depreciation and amortization increased 36%, partly because of the acquisitions.
- Restructuring charges increased to $22.9 million from $0.9 million, consisting primarily of $16.3 million of severance and $6.5 million of facility-consolidation costs.
- Corporate expenses increased to $54.5 million from $51.9 million, contributing to the decline in consolidated operating income.
- Goodwill increased to $257.3 million from $176.3 million, primarily from the PDI and Global Novations acquisitions. No goodwill impairment was recorded.
- The company changed its segment reporting beginning in the first quarter of fiscal 2013 by separately reporting LTC from Executive Recruitment; prior segment information was reclassified.
Guidance, outlook, risks, and unusual items
Management did not provide specific quantitative fiscal 2014 revenue or earnings guidance in the supplied filing. Management stated that the fiscal 2014 strategy would emphasize integrating the multi-service platform, expanding LTC and RPO, developing products and technology, leveraging intellectual property, and pursuing disciplined acquisitions.
- Management views the mid- to long-term talent-management outlook as positive, but cited low job growth, uneven demand, sovereign-debt concerns, and continuing global economic uncertainty.
- The company recorded $22.8 million of restructuring charges and $3.1 million of acquisition transaction and integration costs in fiscal 2013.
- A criminal data breach occurred during fiscal 2013. Management stated that it was limited in scope and did not materially affect operations or financial reporting, but future breaches could create legal, reputational, and financial exposure.
- PDI and Global Novations integration creates execution, personnel-retention, client-retention, systems, and cost risks. PDI contributed 3% of fiscal 2013 fee revenue and was not included in management’s internal-control assessment because of the timing of the acquisition.
- The company’s business is sensitive to global hiring activity, client spending, competition, consultant retention, pricing, foreign-exchange rates, and the Eurozone economy. Approximately 49% of fee revenue was generated outside the United States.
- Contractual obligations totaled $288.8 million, including $213.3 million of operating lease commitments, $11.0 million of accrued restructuring obligations, $49.4 million of interest payments on COLI loans, and $15.0 million of contingent consideration.
- The company paid the $15.0 million PDI contingent consideration in June 2013 after required post-closing synergies were achieved.
- The SEC completed its inquiry into accounting for certain bonus and related accruals for fiscal 2009–2011 and stated that it did not intend to recommend enforcement action.
- Management and Ernst & Young reported effective internal control over financial reporting, while excluding PDI from the assessment because of the short period since acquisition.
Investor verification checklist
- Verify the extent to which future revenue and margin performance depends on acquired PDI and Global Novations operations versus organic growth.
- Review whether Executive Recruitment volumes and margins recover, particularly in EMEA and Asia Pacific.
- Assess whether restructuring and acquisition-integration savings offset the higher compensation, engagement, and amortization costs.
- Reconcile cash generation after acquisition payments, bonus payments, contingent consideration, and required liquidity reserves.
- Review goodwill, acquired intangible assets, and impairment-test assumptions following the significant increase in acquisition-related balances.
- Monitor the $50 million domestic liquidity covenant and the $75 million revolving credit facility availability.
- Evaluate exposure to consultant departures, client concentration, pricing pressure, cybersecurity events, foreign-exchange movements, and international economic conditions.
- Review subsequent filings for final purchase-price allocations, PDI integration results, contingent consideration payments, and any developments related to the data breach or tax examinations.