Korn Ferry Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2021, compared with the corresponding periods ended January 31, 2020. The filing was signed March 11, 2021. Korn Ferry is a global organizational consulting firm operating through Consulting, Digital, Executive Search, and RPO & Professional Search.
Financial performance and position
| Metric | Q3 FY2021 | Q3 FY2020 | Change |
|---|---|---|---|
| Fee revenue | $475.4 million | $515.3 million | Down 8% |
| Total revenue | $477.9 million | $528.0 million | Down 9% |
| Operating income | $65.2 million | $31.6 million | Up 106% |
| Operating margin | 13.7% | 6.1% | Up 7.6 percentage points |
| Net income attributable to Korn Ferry | $51.3 million | $20.0 million | Up 157% |
| Diluted EPS | $0.94 | $0.36 | Up $0.58 |
| Adjusted EBITDA | $96.7 million | $78.1 million | Up 24% |
| Adjusted EBITDA margin | 20.3% | 15.2% | Up 5.1 percentage points |
| Metric | Nine months FY2021 | Nine months FY2020 | Change |
|---|---|---|---|
| Fee revenue | $1,254.9 million | $1,492.3 million | Down 16% |
| Operating income | $69.5 million | $153.8 million | Down 55% |
| Operating margin | 5.5% | 10.3% | Down 4.8 percentage points |
| Net income attributable to Korn Ferry | $48.3 million | $105.7 million | Down 54% |
| Diluted EPS | $0.88 | $1.90 | Down $1.02 |
| Adjusted EBITDA | $173.4 million | $231.4 million | Down 25% |
| Adjusted EBITDA margin | 13.8% | 15.5% | Down 1.7 percentage points |
Cash flow and liquidity: Cash provided by operating activities was $54.3 million for the nine months, compared with $57.1 million in the prior-year period. Investing cash use was $30.3 million, versus $191.1 million previously, primarily because the prior-year period included the $108.6 million acquisition of Miller Heiman Group, Achieve Forum and Strategy Execution. Financing cash use was $55.8 million, compared with $74.1 million of financing inflows in the prior-year period.
- Cash and cash equivalents were $694.1 million at January 31, 2021, compared with $689.2 million at April 30, 2020.
- Total marketable securities were $203.0 million, producing cash, cash equivalents and marketable securities of $897.1 million, up from $863.3 million at April 30, 2020.
- After amounts held for deferred compensation plans and accrued bonuses, management reported approximately $534.3 million of cash and marketable securities available for general liquidity needs.
- Working capital increased to $680.2 million from $612.9 million, while receivable days increased from 70 to 72.
- The company had $394.6 million of net long-term debt, consisting primarily of $400 million of 4.625% senior unsecured notes due December 2027.
- The $650 million revolving credit facility had no borrowings and $646.0 million of availability after standby letters of credit. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue remained below prior year due to COVID-19: Q3 fee revenue declined across Consulting, Digital and Executive Search, while RPO & Professional Search increased 4%. Digital revenue declined 24%, Executive Search declined 8%, and Consulting declined 3%.
- Sequential recovery: Management reported fee revenue increased 27% in the second quarter versus the first quarter of fiscal 2021 and another 9% in Q3 to $475.4 million. All lines of business contributed to the sequential Q3 improvement.
- Cost restructuring improved quarterly profitability: Average headcount declined 17% year over year in Q3. Compensation and benefits expense fell 6%, general and administrative expense fell 34%, and cost of services fell 35%.
- Restructuring charges declined: Q3 restructuring charges were $0.8 million versus $18.1 million in the prior-year quarter. Nine-month charges were $30.7 million versus $18.1 million.
- Segment profitability diverged: Q3 operating income increased in Consulting, Digital and RPO & Professional Search, but declined in Executive Search. For the nine months, Executive Search operating income fell 66% and RPO & Professional Search fell 26%, while Consulting increased 7% and Digital fell 21%.
- Other income increased: Other income was $14.9 million in Q3 and $26.4 million for the nine months, largely reflecting gains in marketable securities held in connection with deferred compensation plans.
- Shareholder returns continued: The company repurchased $30.4 million of common stock during the nine months and declared quarterly dividends of $0.10 per share. Approximately $127.9 million remained available under the repurchase program at January 31, 2021.
Guidance, outlook, commentary and risks
- Management did not provide specific numerical revenue or earnings guidance in the filing.
- Management stated that the restructured cost base was aligned with current revenue levels and that liquidity was sufficient for anticipated working capital, capital expenditures, corporate requirements, debt obligations and dividends for the next 12 months.
- Management cautioned that it could not assure that the Q3 rate of revenue improvement would continue into the fourth quarter because of COVID-19 variants, renewed restrictions, vaccine distribution challenges and uncertain economic conditions.
- Employee salaries were fully reinstated beginning January 1, 2021. The company also approved payments restoring reduced third-quarter salaries for named executive officers and reduced retainers for non-employee directors, subject to applicable conditions.
- COVID-19 remains the principal operating risk, affecting demand, client activity, travel, in-person services, staffing and economic conditions. Other disclosed risks include competition, consultant retention, currency fluctuations, cybersecurity and data privacy, intellectual property protection, acquisitions, goodwill impairment, indebtedness, LIBOR phase-out and legal or regulatory developments.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
- Goodwill and intangible asset impairment indicators were not identified as of January 31, 2021, but a prolonged or more severe pandemic could affect future impairment assessments.
Most important facts for investors to verify
- Whether the sequential recovery in fee revenue continues after January 31, 2021, particularly in Executive Search and Digital.
- Whether cost reductions and lower headcount remain sustainable without impairing revenue capacity or consultant retention.
- The effect of COVID-19 variants, renewed restrictions and labor-market conditions on client demand.
- Cash conversion, receivables collection and the increase in days sales outstanding.
- Compliance with the senior notes and revolving credit facility covenants, including leverage and liquidity thresholds governing dividends and repurchases.
- The sustainability and volatility of gains from marketable securities and the related deferred compensation liabilities.
- Potential future restructuring costs, goodwill or intangible asset impairment, and other consequences of the pandemic.
- The company’s ability to maintain its $0.10 quarterly dividend and planned share repurchases under changing earnings and liquidity conditions.