Korn/Ferry International (Korn/Ferry) - Q2 Fiscal 2009 Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended October 31, 2008 (Q2 of Fiscal 2009). Korn/Ferry International is a global provider of talent management solutions, operating primarily through two segments: Executive Recruitment (senior-level search) and Futurestep (middle-management and outsourced recruitment). The company serves approximately 5,120 clients, including nearly half of the Fortune 500.
Key Financial Metrics
| Metric | Q2 2009 (3 Months) | Q2 2008 (3 Months) | YTD 2009 (6 Months) | YTD 2008 (6 Months) |
|---|---|---|---|---|
| Total Revenue | $199.7 million | $206.8 million | $417.2 million | $403.1 million |
| Fee Revenue | $189.3 million | $195.9 million | $395.0 million | $381.2 million |
| Operating Income | $21.5 million | $25.4 million | $45.2 million | $50.5 million |
| Net Income | $13.6 million | $17.1 million | $29.5 million | $34.2 million |
| Diluted EPS | $0.30 | $0.37 | $0.66 | $0.74 |
| Cash & Equivalents | $199.2 million | $305.3 million (Apr 30, 2008) | $199.2 million | $232.5 million (Apr 30, 2007) |
| Long-Term Debt | $0 | $0 | $0 | $0 |
Note: Operating margins for Q2 2009 were 11.4% of fee revenue, down from 13.0% in the prior year period.
Material Changes vs. Prior Period
- Revenue Decline: Fee revenue decreased 3% in Q2 2009 compared to Q2 2008, driven by a 7% decrease in average fees across all regions. Executive Recruitment revenue fell 5%, while Futurestep revenue grew 9%.
- Profitability Pressure: Operating income declined 15% to $21.5 million. This was due to lower revenues and increased compensation costs (driven by a 5% increase in global headcount and 7% increase in consultants).
- Regional Performance:
- North America: Fee revenue down 3% (Executive Recruitment) but up 26.5% (Futurestep YTD).
- Asia Pacific: Significant decline in Executive Recruitment revenue (-14%) due to fewer engagements and lower fees.
- EMEA: Moderate decline in Executive Recruitment revenue (-4%).
- Cash Flow: Net cash used in operating activities was $64.1 million for the six months ended Oct 31, 2008, compared to $43.4 million in the prior year period. This was largely due to a $95.3 million decrease in accounts payable and accrued liabilities.
Outlook, Risks, and Unusual Items
- Auction Rate Securities (ARS): The company holds approximately $18.2 million par value of ARS (student loan portfolios). Due to global credit market failures, these securities have failed to auction. The company entered a settlement agreement to repurchase $13.2 million of these at par value between 2010 and 2012. While credit quality remains high, liquidity is diminished.
- Impairment Charges: The company recorded an other-than-temporary impairment charge of $0.5 million on marketable securities and recognized a $1.6 million unrealized loss on ARS reclassified to trading securities.
- Economic Risks: Management cites global economic deterioration and credit market conditions as primary risks. Demand for services is sensitive to hiring freezes in key industries (financial, technology).
- Stock Repurchases: The company repurchased 417,802 shares in Q2 2009 at an average price of $12.81, with approximately $38.3 million remaining under the $50 million program.
Investor Verification Checklist
- Liquidity of ARS: Verify the status of the remaining $5 million of auction rate securities not covered by the settlement agreement and the timeline for their liquidation.
- Fee Compression: Assess the sustainability of the 7% decline in average fees and whether this trend is reversing in the third quarter.
- Cost Structure: Monitor the impact of the 5% increase in global headcount on future operating margins, particularly if revenue growth does not accelerate.
- Cash Burn: Review the significant use of cash in operating activities ($64M YTD) and its impact on the company's cash position relative to capital expenditure needs.