Korn/Ferry International Form 10-Q Summary
Business Context and Reporting Period
Korn/Ferry International provides executive recruitment, leadership and talent consulting, recruitment process outsourcing and other talent acquisition solutions through Executive Recruitment, Leadership & Talent Consulting (LTC) and Futurestep. The company operated through 87 offices in 37 countries.
The filing covers the three months ended July 31, 2013, the first quarter of fiscal 2014, compared with the three months ended July 31, 2012. The financial statements are unaudited.
Financial Performance and Position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Fee revenue | $228.4 million | $186.7 million | Up 22% |
| Total revenue | $237.6 million | $196.0 million | Up 21% |
| Operating income | $16.7 million | $17.0 million | Down $0.4 million |
| Net income | $11.4 million | $10.4 million | Up 10% |
| Diluted EPS | $0.24 | $0.22 | Up $0.02 |
| Adjusted EBITDA | $31.9 million | $20.4 million | Up $11.5 million |
| Operating margin as a percentage of fee revenue | 7.3% | 9.1% | Down 1.8 points |
| Net margin as a percentage of fee revenue | 5.0% | 5.6% | Down 0.6 points |
Adjusted EBITDA margin increased to 14.0% from 10.9%. Adjusted EBITDA is a non-GAAP measure that excludes restructuring charges and certain transaction, integration and separation costs.
- Executive Recruitment fee revenue was $136.7 million, up 7%; operating income was $28.3 million, compared with $22.4 million.
- LTC fee revenue was $60.1 million, up 112%, substantially reflecting the PDI Ninth House and Global Novations acquisitions. Excluding those acquisitions, LTC fee revenue increased 11%. LTC operating income was $4.3 million in both periods, reducing its margin to 7% from 15%.
- Futurestep fee revenue was $31.7 million, up 3%; operating income declined to $2.5 million from $3.2 million.
- Compensation and benefits expense increased 19% to $152.8 million, while general and administrative expense increased 19% to $39.9 million.
- The effective tax rate increased to 40% from 36%, principally because a greater portion of taxable income arose in higher-tax jurisdictions and certain restructuring-related losses did not generate recognized tax benefits.
Cash Flow, Liquidity and Debt
- Cash used in operating activities was $67.3 million, compared with $74.5 million used in the prior-year quarter.
- Cash used in investing activities was $3.7 million, including $5.2 million of capital expenditures and $15.0 million of contingent consideration paid to PDI selling stockholders.
- Cash and cash equivalents declined to $150.4 million from $224.1 million at April 30, 2013. Total cash, cash equivalents and marketable securities declined to $280.4 million from $366.0 million.
- The cash decline primarily reflected payment of fiscal 2013 bonuses, ECAP contributions and the PDI contingent consideration payment.
- Working capital increased by $18.4 million to $196.9 million. Days sales outstanding increased from 65 to 70 days.
- The company had no borrowings under its $75.0 million senior unsecured revolving credit facility and complied with its financial covenants. The facility matures January 18, 2018 and includes a $15.0 million letter-of-credit sub-limit.
- Standby letters of credit totaled $2.7 million. The company had no restricted cash at July 31, 2013, compared with $2.9 million at April 30, 2013.
- The company had $73.3 million of borrowings against the cash surrender value of company-owned life insurance policies; these are distinct from borrowings under the revolving credit facility.
- Management stated that cash on hand and funds from operations should be sufficient for anticipated working capital, capital expenditures and general corporate requirements over the next twelve months.
Material Changes, Outlook and Unusual Items
- Fee revenue increased 22%, but the increase was 7% excluding revenue from the prior-year acquisitions. Foreign exchange reduced fee revenue by approximately $1.8 million.
- Operating income was essentially unchanged despite higher revenue because of acquisition-related expenses, higher compensation, increased cost of services, higher depreciation and amortization, and restructuring charges.
- The company recorded $3.7 million of restructuring charges related principally to consolidating PDI facilities and overhead functions, including $2.9 million of facility costs and $0.8 million of severance. The remaining restructuring liability was $9.8 million at July 31, 2013.
- The company recorded a $2.5 million liability for an employment dispute in compensation and benefits expense.
- The company paid $15.0 million of contingent consideration related to PDI after achievement of specified expense-synergy goals. The PDI purchase price allocation remained preliminary, including with respect to income taxes.
- Management’s fiscal 2014 strategic focus included integrating the multi-service platform, expanding LTC and RPO, pursuing disciplined acquisitions, enhancing technology and processes, and leveraging the company’s brand and intellectual property. No specific quantitative earnings or revenue guidance was provided in the filing.
- Key risks include economic and labor-market weakness, foreign currency fluctuations, retention of qualified consultants, competition, client relationship portability, legal and employment liabilities, cyber and information-system risks, acquisition integration, goodwill and intangible-asset impairment, deferred-tax-asset utilization and the alignment of the cost structure.
- Management reported no litigation that it believes would have a material adverse effect and no material changes to the risk factors disclosed in the fiscal 2013 Form 10-K.
Most Important Facts to Verify
- Whether LTC revenue growth from PDI and Global Novations converts into sustainable operating-margin improvement after integration costs subside.
- The remaining restructuring liability and the timing and amount of future facility, severance and integration payments.
- Cash conversion and working-capital trends, particularly the increase in days sales outstanding and recurring first-quarter bonus and ECAP cash outflows.
- The preliminary PDI purchase price allocation, contingent consideration obligations and any resulting goodwill or tax adjustments.
- Compliance with the revolving credit facility’s liquidity and financial covenants, including the $50 million unrestricted liquidity requirement for acquisitions, dividends and share repurchases.
- Exposure to foreign currency movements, deferred compensation obligations and the $73.3 million of variable-rate borrowings secured by company-owned life insurance policies.