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Korn/Ferry International: Q3 Fiscal 2010 Summary (Period Ended Jan 31, 2010)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended January 31, 2010, and the nine months ended on that date. Korn/Ferry International is a global provider of executive search, outsourced recruiting, and leadership consulting. The company operates through two primary segments: Executive Recruitment and Futurestep (middle-management recruitment and talent acquisition). The reporting period reflects a recovery in the third quarter following a challenging fiscal year driven by global economic conditions.

Key Financial Metrics

Material Changes vs. Prior Period

• Quarterly Recovery: The company returned to profitability in the third quarter, reporting net income of $7.9 million compared to a net loss of $22.4 million in the same period of the prior year. Operating income improved from a loss of $11.3 million to income of $6.4 million.
• Revenue Trends: Fee revenue increased 8% year-over-year in the quarter to $146.7 million, driven by a 13% increase in the number of engagements in Executive Recruitment. However, for the nine-month period, fee revenue declined 24% to $403.7 million due to depressed global economic conditions in the first half of the fiscal year.
• Segment Performance: Executive Recruitment operating income surged 256% to $18.5 million in the quarter. Futurestep also improved, moving from an operating loss of $8.3 million to income of $0.6 million, aided by significant cost reductions.
• Restructuring: The company recorded net restructuring charges of $20.6 million for the nine months ended January 31, 2010, related to workforce reductions and office consolidations following the acquisition of Whitehead Mann. This compares to $16.8 million in the prior year period.
• Investment Gains: Interest and other income improved significantly due to trading gains on marketable securities and the absence of the $15.9 million other-than-temporary impairment charge recorded in the prior year.

Guidance, Outlook, and Risks

• Outlook: Management expects cash on hand and funds from operations to be sufficient for the next twelve months. Strategic focus remains on cross-selling multi-service strategies, particularly in Recruitment Process Outsourcing (RPO) and Leadership and Talent Consulting (LTC).
• Acquisitions: The company acquired Whitehead Mann (June 2009) and SENSA Solutions (January 2010). SENSA contributed $0.8 million in fee revenue in the quarter.
• Liquidity and Debt: The company has a $50 million Senior Secured Revolving Credit Facility with no borrowings outstanding as of January 31, 2010. However, $5.8 million in standby letters of credit were issued. The company holds $66.7 million in borrowings against Company Owned Life Insurance (COLI) policies.
• Risks: Key risks include continued global economic uncertainty affecting client demand, foreign currency fluctuations (which unfavorably impacted expenses in the quarter), and the liquidity of auction rate securities (ARS) held in trust. The company noted that while ARS auctions have failed, they do not anticipate this affecting their ability to execute their business plan.

Investor Verification Checklist

• Revenue Quality: Verify the sustainability of the 8% quarterly revenue growth given the 24% decline over the nine-month period.
• Restructuring Costs: Confirm the remaining liability for restructuring ($16.1 million) and the timeline for cash outflows related to severance and facility closures.
• Deferred Compensation: Review the $64.5 million in marketable securities held in trust for deferred compensation obligations and the associated fair value adjustments.
• Futurestep Turnaround: Assess whether the 27% headcount reduction in Futurestep is sufficient to stabilize margins given the 37% revenue decline in that segment over nine months.
• Tax Position: Note the $10.3 million reversal of a tax reserve due to the expiration of the statute of limitations, which significantly impacted the effective tax rate.