Korn/Ferry International Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2017. The request metadata identifies “2016 Q4,” but the supplied filing is the fiscal 2017 annual report, including quarterly data for the quarter ended April 30, 2017.
Business Context
Korn Ferry is a global people and organizational advisory firm operating through Executive Search, Hay Group and Futurestep. It operated 114 offices in 53 countries and had 7,232 full-time employees, including 1,330 consultants, at year-end. The company serves clients through executive recruitment, leadership and organizational consulting, rewards, talent analytics, recruitment process outsourcing and related products.
- Approximately 53% of fee revenue was generated outside the United States.
- Approximately 61% of revenue came from clients using multiple lines of business.
- Approximately 82% of fiscal 2017 assignments were for clients served during the prior three fiscal years.
- The Legacy Hay acquisition, completed December 1, 2015, materially affects comparability with earlier periods.
Financial Performance and Key Metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Fee revenue | $1,565.5 million | $1,292.1 million | Up 21% |
| Total revenue | $1,621.7 million | $1,346.7 million | Up 20% |
| Operating income | $114.4 million | $52.7 million | Up 117% |
| Operating margin on fee revenue | 7.3% | 4.1% | Up 3.2 points |
| Net income attributable to Korn Ferry | $84.2 million | $30.9 million | Up 172% |
| Diluted EPS | $1.47 | $0.58 | Up $0.89 |
| Adjusted EBITDA | $235.0 million | $190.2 million | Up 24% |
| Adjusted EBITDA margin | 15.0% | 14.7% | Up 0.3 points |
| Cash flow from operations | $106.1 million | $64.1 million | Up $42.0 million |
| Capital expenditures | $50.1 million | $26.1 million | Up $23.9 million |
Segment results: Executive Search fee revenue was $617.7 million, down 1%, with operating income of $124.3 million and a 20.1% margin. Hay Group fee revenue was $724.2 million, up 54%, with operating income of $47.3 million and a 6.5% margin, compared with an operating loss in fiscal 2016. Futurestep fee revenue was $223.7 million, up 13%, with operating income of $30.0 million and a 13.4% margin.
Compensation and benefits represented 68.4% of fee revenue, compared with 69.4% in fiscal 2016. General and administrative expenses declined to 14.5% of fee revenue from 16.5%, while restructuring charges were $34.6 million, or 2.2% of fee revenue.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $410.9 million at April 30, 2017, compared with $273.3 million a year earlier.
- Cash, cash equivalents and marketable securities totaled $530.8 million, compared with $414.7 million at April 30, 2016. A substantial portion of marketable securities supports deferred compensation obligations.
- Working capital increased to $385.1 million from $188.0 million.
- The company had $259.5 million outstanding under its term loan and no borrowings under its $125 million revolving facility. The term loan and revolver mature June 15, 2021.
- The company was in compliance with debt covenants. Dividends and share repurchases require a pro forma leverage ratio no greater than 2.50-to-1.00 and domestic liquidity of at least $50.0 million.
- Fiscal 2017 cash uses included $50.1 million of capital expenditures, $28.8 million of share repurchases and $23.3 million of dividends.
- The company declared quarterly dividends of $0.10 per share and had $121.2 million remaining under its share repurchase authorization at year-end.
Material Changes Versus the Prior Comparable Period
- Fiscal 2017 benefited from a full-year contribution from Legacy Hay, compared with only five months of contribution in fiscal 2016. Hay Group fee revenue increased $253.1 million, primarily from the acquisition.
- Executive Search revenue declined due primarily to lower North American revenue, lower average fees per engagement and fewer engagements billed.
- Futurestep grew through higher RPO and professional search revenue.
- Hay Group returned to profitability as integration progressed; its operating margin improved from negative 0.7% to 6.5%.
- Corporate operating expenses improved to $87.1 million from $102.3 million, partly because of lower integration and acquisition costs.
- Restructuring charges remained elevated at $34.6 million versus $33.0 million, reflecting severance and office consolidation related to Legacy Hay integration.
- Interest expense increased to $10.3 million from interest income of $0.2 million because of the new term loan.
- The effective tax rate declined to approximately 25.1% from 38.9%, primarily because a greater proportion of taxable income arose in lower-tax foreign jurisdictions and because fiscal 2016 included nondeductible acquisition and Venezuelan currency-related charges.
- Accounts receivable days increased from 55 to 61, warranting monitoring of collections and working-capital efficiency.
Outlook, Management Commentary and Risks
Management intends to continue integrating and simplifying the Legacy Hay portfolio, embed its Superior Performance Model and talent analytics capabilities across offerings, invest in technology and intellectual property, expand cross-selling among the three segments and pursue disciplined acquisitions. Management stated that cash on hand, operating cash flow and available credit were expected to satisfy anticipated operating needs, capital expenditures, debt repayment, retention-pool obligations and dividends for the next twelve months.
The company had no fiscal 2017 acquisitions, but remains committed to a $40.0 million Legacy Hay retention pool, of which $9.0 million had been paid. The remaining amount was scheduled to be paid in two equal portions after November 30, 2017 and November 30, 2018.
- Demand is cyclical and sensitive to global economic activity, labor markets, credit conditions, client hiring levels and pricing pressure.
- Competition includes global search firms, large consulting firms, online recruiting platforms, in-house recruiting functions and RPO providers.
- Results are exposed to foreign exchange movements, political and regulatory uncertainty, including Brexit-related uncertainty, and international tax issues.
- Goodwill and purchased intangibles represented approximately 28% and 11% of total assets, respectively; no impairment was recorded, but impairment could materially reduce future earnings and equity.
- Cybersecurity, data privacy, intellectual property, technology disruption and reliance on third-party service providers could adversely affect operations and reputation.
- The company depends on retaining key consultants and executives because client relationships and revenue can be portable.
- Variable-rate debt creates interest-rate exposure. A 100-basis-point increase in LIBOR was estimated to increase fiscal 2017 interest expense by approximately $2.6 million; an interest-rate swap hedged 50% of outstanding debt.
- No material litigation was disclosed, and management reported effective disclosure controls and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether post-acquisition Hay Group growth and margin improvement can continue after integration benefits normalize.
- The sustainability of the 15.0% adjusted EBITDA margin after excluding restructuring, integration, acquisition and other adjustments.
- Executive Search demand, particularly in North America, including engagement volumes and average fees.
- Accounts receivable aging, collection performance and the increase in days sales outstanding.
- Term-loan amortization, refinancing requirements and compliance with the 2.50-to-1.00 leverage covenant.
- Remaining Legacy Hay retention payments, restructuring obligations and long-term lease commitments totaling $414.8 million.
- Potential goodwill or intangible-asset impairment if economic conditions, margins or market valuations deteriorate.
- The effect of foreign exchange, international tax audits, data-protection requirements and future accounting standards on reported results.