Korn Ferry Form 10-Q Summary
Business Context and Reporting Period
Korn Ferry is a global organizational consulting firm operating through Consulting, Digital, Executive Search, and Recruitment Process Outsourcing (RPO) and Professional Search. The report covers the three months ended July 31, 2021, the first quarter of fiscal 2022, with comparison to the three months ended July 31, 2020. Results are unaudited and reflect substantial recovery from the COVID-19-affected prior-year quarter.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Fee revenue | $585.4 million | $344.1 million | Up 70% |
| Total revenue | $588.1 million | $346.9 million | Up 70% |
| Operating income (loss) | $101.3 million | $(43.8) million | Improved $145.1 million |
| Net income (loss) attributable to Korn Ferry | $74.8 million | $(30.8) million | Improved $105.6 million |
| Diluted EPS | $1.37 | $(0.58) | Improved $1.95 |
| Adjusted EBITDA | $121.3 million | $10.6 million | Up $110.7 million |
| Adjusted EBITDA margin | 20.7% | 3.1% | Up 17.6 percentage points |
Operating margin was approximately 17.3% of fee revenue versus negative 12.7% in the prior-year quarter. Net income attributable to Korn Ferry represented 12.8% of fee revenue versus negative 9.0% previously. Compensation and benefits increased 40% to $396.2 million, but declined to 67.7% of fee revenue from 82.5%. Performance-related bonus expense was $96.0 million versus $59.9 million.
- Fee revenue increased across every line of business. RPO and Professional Search increased 103% to $139.3 million; Executive Search increased 80% to $216.9 million; Consulting increased 50% to $148.5 million; and Digital increased 44% to $80.7 million.
- Executive Search North America revenue increased 100%, supported by an 82% increase in engagements billed and a 9% increase in weighted-average fee per engagement in local currency.
- Income tax expense was $23.9 million, with a 23.8% effective tax rate, compared with an $8.7 million tax benefit and a 21.9% rate in the prior-year quarter.
- Other income declined to $4.4 million from $11.2 million, primarily because of lower gains on marketable securities. Net interest expense declined to $5.4 million from $6.9 million.
Cash Flow, Liquidity, Debt and Capital Allocation
- Operating cash flow was negative $160.5 million versus negative $144.3 million in the prior-year quarter, primarily reflecting annual bonus and other compensation payments, higher receivables, unearned compensation and accrued liability movements.
- Investing cash flow was negative $10.4 million, including $9.0 million of capital expenditures. Financing cash flow was negative $23.7 million, including $6.9 million of dividends, $17.6 million of tax withholding payments on vested restricted stock and $2.5 million of share repurchases.
- Cash and cash equivalents were $649.3 million at July 31, 2021, down from $850.8 million at April 30, 2021. Total cash and marketable securities were $904.3 million, down from $1.097 billion.
- After excluding amounts held in trust for deferred compensation and accrued bonuses, cash and marketable securities were $614.2 million.
- Long-term debt consisted primarily of $400 million principal amount of 4.625% senior unsecured notes due December 2027, recorded at $395.0 million net of discount and issuance costs. No amounts were outstanding under the $650 million revolving credit facility; $644.5 million remained available after standby letters of credit.
- The Company stated that it was in compliance with its debt covenants and believed available liquidity was sufficient for anticipated working capital, capital expenditures, debt obligations and dividends over the next 12 months.
- The quarterly dividend was increased 20% to $0.12 per share. The Board declared a $0.12 dividend payable October 15, 2021. Future dividends remain discretionary and subject to financial condition, earnings, capital needs and debt terms.
- Approximately $125.4 million remained available under the share repurchase program at July 31, 2021.
Material Changes Versus the Prior Comparable Period
- The results reflect recovery from the severe COVID-19 disruption in the year-ago quarter, when demand, revenue and profitability were materially reduced.
- Restructuring charges declined to zero from $27.5 million, and prior-year integration and acquisition costs of $0.7 million did not recur.
- Operating leverage improved materially: compensation, general and administrative expenses and depreciation declined as percentages of fee revenue despite absolute expense increases.
- Working capital increased $46.3 million to $783.4 million. Client receivables increased to $512.9 million, and days sales outstanding increased from 57 to 67 days.
- Cash declined despite the return to profitability because of annual bonus payments, retention payments, debt interest, dividends, capital expenditures and working-capital investment.
- Accumulated other comprehensive loss increased to $59.8 million from $51.8 million, primarily due to foreign currency translation losses.
Outlook, Risks, Contingencies and Unusual Items
Management reported substantial improvement in business conditions and stated that costs were aligned with current revenue levels. However, it did not provide specific revenue, earnings or margin guidance. Management cautioned that the pace of revenue growth may not continue because of COVID-19 variants, vaccine effectiveness and possible renewed restrictions.
- Key risks include COVID-19 and broader economic conditions, demand volatility, consultant utilization and billing rates, competition, talent retention, currency fluctuations, cybersecurity and data privacy, technology development, legal and regulatory exposure, intellectual property protection, acquisitions, goodwill impairment, deferred tax asset utilization, LIBOR transition and indebtedness.
- Foreign exchange exposure remained material; management estimated that a 10% movement in relevant currencies could produce approximately a $12.2 million gain or loss.
- The Company had no material legal proceedings expected to have a material adverse effect, no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
- Goodwill and intangible asset reviews identified no impairment indicators as of July 31, 2021.
- The restructuring liability declined to $3.3 million from $7.0 million at April 30, 2021.
- Remaining performance obligations for contracts with expected terms exceeding one year totaled $804.2 million, although management cautioned that this amount is not an indication of future revenue because shorter-term contracts are excluded and contract scope may change.
Most Important Facts for Investors to Verify
- Whether the sharp post-COVID revenue recovery, particularly in Executive Search and RPO, is sustainable after the unusually weak comparison period.
- Whether the 20.7% Adjusted EBITDA margin can be maintained as compensation, bonuses, hiring and other operating costs normalize.
- The conversion of reported earnings into cash, including the effects of annual bonuses, receivables growth and days sales outstanding.
- Cash available for general corporate purposes after excluding deferred-compensation and bonus-related restricted assets.
- Compliance with debt covenants and the terms governing dividends, repurchases, the $400 million senior notes and the $650 million revolver.
- Exposure to renewed COVID-19 restrictions, labor-market conditions, foreign exchange movements, cybersecurity events and changes in client demand.
- The assumptions underlying performance-related bonus accruals, receivable loss allowances, deferred compensation, goodwill, intangible assets and deferred tax assets.