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KFY > SEC Filings for KFY > Form 10-K on 25-Jun-2013All Recent SEC Filings




Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This Annual Report on Form 10-K may contain certain statements that we believe are, or may be considered to be, "forward-looking" statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as "believe," "expect," "anticipate," "intend," "plan," "foresee," "may," "will," "likely," "estimates," "potential," "continue" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statement. The principal risk factors that could cause actual performance and future actions to differ materially from the forward-looking statements include, but are not limited to, dependence on attracting and retaining qualified and experienced consultants, maintaining our brand name and professional reputation, potential legal liability and regulatory developments, portability of client relationships, global and local political or economic developments in or affecting countries where we have operations, currency fluctuations in our international operations, risks related to growth, restrictions imposed by off-limits agreements, competition, reliance on information processing systems, cyber security vulnerabilities, limited protection of our intellectual property, our ability to enhance and develop new technology, our ability to successfully recover from a disaster or business continuity problems, employment liability risk, an impairment in the carrying value of goodwill and other intangible assets, deferred tax assets that we may not be able to use, our ability to develop new products and services, changes in our accounting estimates and assumptions, alignment of our cost structure, risks related to the integration of recently acquired businesses and the matters disclosed under the heading "Risk Factors" in the

Company's Exchange Act reports, including Item 1A included in this Annual Report. Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date of this Annual Report on Form 10-K and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.

The following presentation of management's discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in this Annual Report on Form 10-K.

Executive Summary

Korn/Ferry International (referred to herein as the "Company," "Korn/Ferry," or in the first person notations "we," "our," and "us") is a premier global provider of talent management solutions that helps clients design strategies to assist clients in building and attracting their talent. We are the premier provider of executive recruitment, leadership and talent consulting and talent acquisition solutions with the broadest global presence in the recruitment industry. Our services include Executive Recruitment, consulting and solutions services through Leadership & Talent Consulting ("LTC") and recruitment for non-executive professionals and recruitment process outsourcing ("RPO") through Futurestep. Approximately 75% of the executive recruitment searches we performed in fiscal 2013 were for board level, chief executive and other senior executive and general management positions. Our 5,228 clients in fiscal 2013 included many of the world's largest and most prestigious public and private companies, including approximately 42% of the FORTUNE 500, middle market and emerging growth companies, as well as government and nonprofit organizations. We have built strong client loyalty, with 81% of assignments performed during fiscal 2013 having been on behalf of clients for whom we had conducted assignments in the previous three fiscal years.

In an effort to maintain our long-term strategy of being the leading provider of talent management solutions, our strategic focus for fiscal 2014 centers upon enhancing the integration of our multi-service strategy. We plan to continue to address areas of increasing client demand including LTC and RPO. We further plan to explore new products and services, continue to pursue a disciplined acquisition strategy, enhance our technology and processes and aggressively leverage our brand through thought leadership and intellectual capital projects as a means of delivering world-class service to our clients. During fiscal 2013, nearly 88% of our top 50 clients utilized at least two of our service lines. During fiscal 2013, we completed the acquisitions of Minneapolis-based PDI Ninth House ("PDI"), a leading, globally-recognized provider of leadership assessment and development solutions and Global Novations, LLC, ("Global Novations") a leading provider of diversity and inclusion and leadership development solutions (see Note 12 - Acquisitions for additional information regarding acquisitions completed during fiscal 2013). As a result of the uncertainties and challenges that continue to face the global economy and financial markets, we implemented a restructuring plan in fiscal 2013 in order to align our cost structure with anticipated revenue levels. The Company also implemented a restructuring plan focused on the integration synergies associated with the current year acquisitions. In fiscal 2013, the Company recorded restructuring charges of $22.8 million of which $16.3 million were for severance costs and $6.5 million in facility costs due to the consolidation and elimination of office space around the world.

As previously announced, beginning in the first quarter of fiscal 2013, the Company disaggregated its previously reported business segment, Executive Recruitment, into two business segments, Executive Recruitment and LTC. The Company now operates in three global business segments: Executive Recruitment, LTC and Futurestep. See Note 11 - Business Segments, in the Notes to our Consolidated Financial Statements for discussion of the Company's global business segments. Amounts reported for prior periods in this report have been reclassified to conform to the revised global business segments.

The Company evaluates performance and allocates resources based on the chief operating decision maker's review of (1) fee revenue and (2) earnings before interest, taxes, depreciation and amortization ("EBITDA"), which is further adjusted to exclude restructuring charges, transaction and integration costs, and certain separation costs ("Adjusted EBITDA"). EBITDA and Adjusted EBITDA are non-GAAP financial measures. They have limitations as analytical tools, should not be viewed as substitutes for financial information determined in

accordance with GAAP, and should not be considered in isolation or as substitutes for analysis of the Company's results as reported under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Management believes the presentation of these non-GAAP financial measures provides meaningful supplemental information regarding Korn/Ferry's performance by excluding certain charges and other items that may not be indicative of Korn/Ferry's ongoing operating results. The use of these non-GAAP financial measures facilitate comparisons to Korn/Ferry's historical performance. Korn/Ferry includes these non-GAAP financial measures because management believes they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its evaluation of Korn/Ferry's ongoing operations and financial and operational decision-making. The accounting policies for the reportable segments are the same as those described in the summary of significant accounting policies in the accompanying consolidated financial statements, except that the above noted items are excluded from adjusted EBITDA.

Fee revenue increased $22.3 million, or 3% (3% decrease excluding fee revenue from the recently acquired PDI and Global Novations) in fiscal 2013 to $812.8 million compared to $790.5 million in fiscal 2012, with increases in fee revenue in Futurestep and LTC, offset by decreases in fee revenue in all regions of Executive Recruitment. During fiscal 2013, we recorded operating income of $43.9 million with Executive Recruitment, LTC, and Futurestep segments contributing $81.0 million, $6.4 million, and $11.0 million, respectively, offset by corporate expenses of $54.5 million. Net income for fiscal 2013 and fiscal 2012 was $33.3 million and $54.3 million, respectively. Adjusted EBITDA was $97.8 million with Executive Recruitment, LTC, and Futurestep segments contributing $99.9 million, $22.6 million, and $15.7 million, respectively, offset by corporate expenses of $40.4 million. Adjusted EBITDA decreased $3.5 million in fiscal 2013, from adjusted EBITDA of $101.3 million in fiscal 2012.

Our cash, cash equivalents and marketable securities decreased $51.7 million, or 12%, to $366.0 million at April 30, 2013 compared to $417.7 million at April 30, 2012, mainly due to bonuses earned in fiscal 2012 and paid during the first quarter of fiscal 2013 and the purchase price paid as a result of the acquisitions of Global Novations and PDI during fiscal 2013, partially offset by cash provided by operating activities. As of April 30, 2013, we held marketable securities to settle obligations under our Executive Capital Accumulation Plan ("ECAP") with a cost value of $94.9 million and a fair value of $98.0 million. Our obligations for which these assets were held in trust totaled $99.2 million as of April 30, 2013. Our working capital decreased by $99.8 million to $178.5 million in fiscal 2013. We believe that cash on hand and funds from operations will be sufficient to meet our anticipated working capital, capital expenditures and general corporate requirements in the next twelve months. We had no long-term debt or any outstanding borrowings under our credit facility at April 30, 2013 or 2012. We are required to maintain $2.9 million of restricted cash to provide collateral for the standby letters of credit associated with certain lease premises. As of April 30, 2013 and 2012, we had $2.7 million and $2.9 million, respectively, of standby letters of credit issued under our previous credit facility.

Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. Preparation of our periodic filings requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and assumptions and changes in the estimates are reported in current operations as new information is learned or upon the amounts becoming fixed and determinable. In preparing our consolidated financial statements and accounting for the underlying transactions and balances, we apply our accounting policies as disclosed in the notes to our consolidated financial statements. We consider the policies discussed below as critical to an understanding of our consolidated financial statements because their application places the most significant demands on management's judgment and estimates. Specific risks for these critical accounting policies are described in the following paragraphs. Senior management has discussed the development and selection of the critical accounting estimates with the Audit Committee of the Board of Directors.

Revenue Recognition. Management is required to establish policies and procedures to ensure that revenue is recorded over the performance period for valid engagements and related costs are matched against such revenue. We provide professional services related to executive recruitment activities and recruitment for non-executive professionals, on a retained basis, recruitment process outsourcing and leadership & talent consulting services. For executive recruitment activities and recruitment for non-executive professionals we generally recognize revenue in three monthly installments commencing the month of client acceptance as this is the period over which the recruitment services are performed. Fees earned in excess of the initial contract amount are recognized upon completion of the engagement, which reflect the difference between the final actual compensation of the placed executive and the estimate used for purposes of the previous billings. Since the fees are generally not contingent upon placement of a candidate, our assumptions primarily relate to establishing the period over which such service is performed. These assumptions determine the timing of revenue recognition and profitability for the reported period. If these assumptions do not accurately reflect the period over which revenue is earned, revenue and profit could differ. Any services that are provided on a contingent basis are recognized once the contingency is fulfilled. In addition to recruitment for non-executive professionals, Futurestep provides recruitment process outsourcing services and fee revenue is recognized as services are rendered. Fee revenue from LTC services is recognized as services are rendered for consulting engagements and other time based services, measured by total hours incurred to the total estimated hours at completion. It is possible that updated estimates for the consulting engagement may vary from initial estimates with such updates being recognized in the period of determination. LTC revenue is also derived from the sale of solution services, which includes revenue from licenses and the sale of products. Revenue from licenses is recognized using a straight-line method over the term of the contract (generally 12 months), which begins upon execution and is invoiced in the same month. Products sold by the Company mainly consist of books covering a variety of topics including performance management, team effectiveness, and coaching and development. The Company recognizes revenue for its products when the product has been sold. Furthermore, a provision for doubtful accounts on recognized revenue is established with a charge to general and administrative expenses based on historical loss experience, assessment of the collectability of specific accounts, as well as expectations of future collections based upon trends and the type of work for which services are rendered.

Annual Performance Related Bonuses. Each quarter, management records its best estimate of its annual performance related bonuses, which requires management to, among other things, project annual consultant (employees who originate business) productivity (as measured by engagement fees billed and collected by executive search consultants and revenue for LTC and Futurestep consultants), Company performance including profitability, competitive forces and future economic conditions impact our results. At the end of each fiscal year, annual performance related bonuses take into account final individual consultant productivity, Company results including profitability, the achievement of strategic objectives and the results of individual performance appraisals, and the current economic landscape. Management takes these factors into consideration, and any changes in the estimate are reported in current operations. Because annual performance-based bonuses are communicated and paid only after the Company reports its full fiscal year results, actual performance-based bonus payments may differ from the prior year's estimate. Such changes in the bonus estimates historically have been immaterial and are recorded in current operations in the period in which they are determined.

Deferred Compensation. Estimating deferred compensation requires assumptions regarding the timing and probability of payments of benefits to participants and the discount rate. Changes in these assumptions would significantly impact the liability and related cost on our consolidated balance sheet and statement of income. Management engages an independent actuary to periodically review these assumptions in order to ensure that they reflect the population and economics of our deferred compensation plans in all material respects and to assist us in estimating our deferred compensation liability and the related cost. The actuarial assumptions we use may differ from actual results due to changing market conditions or changes in the participant population. These differences could have a significant impact on our deferred compensation liability and the related cost.

Carrying Values. Valuations are required under U.S. generally accepted accounting principles ("GAAP") to determine the carrying value of various assets. Our most significant assets for which management is required to prepare valuations are carrying value of receivables, marketable securities, goodwill, intangible assets, fair value of contingent consideration, and recoverability of deferred income taxes. Management must identify

whether events have occurred that may impact the carrying value of these assets and make assumptions regarding future events, such as cash flows and profitability. Differences between the assumptions used to prepare these valuations and actual results could materially impact the carrying amount of these assets and our operating results.

Of the assets mentioned above, goodwill is the largest asset requiring a valuation. Fair value of goodwill for purposes of the goodwill impairment test is determined utilizing a discounted cash flow analysis based on forecast cash flows (including estimated underlying revenue and operating income growth rates) discounted using an estimated weighted-average cost of capital for market participants. A market approach, utilizing observable market data such as comparable companies in similar lines of business that are publicly traded or which are part of a public or private transaction (to the extent available), is used to corroborate the discounted cash flow analysis performed at each reporting unit. The Company also reconciles the results of these analyses to its market capitalization. If the carrying amount of a reporting unit exceeds its estimated fair value, goodwill is considered potentially impaired and further tests are performed to measure the amount of impairment loss, if any. We recorded no goodwill impairments in conjunction with our annual goodwill impairment assessment performed as of January 31, 2013. While historical performance and current expectations have resulted in fair values of goodwill in excess of carrying values, if our assumptions are not realized, it is possible that in the future an impairment charge may need to be recorded. However, it is not possible at this time to determine if an impairment charge would result or if such a charge would be material. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future. As of our testing date, the fair value of each reporting unit exceeded its carrying amount and none of the reporting units were considered at risk. As a result, no impairment charge was recognized. There was also no indication of impairment during the fourth quarter of fiscal 2013.

Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the reporting units may include such items as follows:

A prolonged downturn in the business environment in which the reporting units operate especially in EMEA;

An economic recovery that significantly differs from our assumptions in timing or degree; and

Volatility in equity and debt markets.

Results of Operations

The following table summarizes the results of our operations as a percentage of fee revenue:

                                                         Year Ended April 30,
                                                    2013         2012         2011
    Fee revenue                                      100.0 %      100.0 %      100.0 %
    Reimbursed out-of-pocket engagement expenses       4.5          4.6          4.3

    Total revenue                                    104.5        104.6        104.3
    Compensation and benefits                         68.3         67.6         68.2
    General and administrative expenses               17.6         17.5         15.7
    Engagement expenses                                8.1          7.1          6.9
    Depreciation and amortization                      2.3          1.8          1.7
    Restructuring charges, net                         2.8          0.1          0.3

    Operating income                                   5.4         10.5         11.5

    Net income                                         4.1 %        6.9 %        7.9 %

The following tables summarize the results of our operations by business segment:

                                                                Year Ended April 30,
                                            2013                        2012                        2011
                                    Dollars          %          Dollars          %          Dollars          %
                                                               (dollars in thousands)
Fee revenue
Executive Recruitment:
North America                      $ 290,317         35.7 %    $ 305,717         38.7 %    $ 306,180         41.1 %
EMEA                                 128,807         15.9        141,409         17.9        137,398         18.5
Asia Pacific                          73,221          9.0         82,230         10.4         81,951         11.0
South America                         30,134          3.7         31,846          4.0         29,177          3.9

Total Executive Recruitment          522,479         64.3        561,202         71.0        554,706         74.5
LTC                                  168,115         20.7        115,407         14.6         99,352         13.4
Futurestep                           122,237         15.0        113,896         14.4         90,191         12.1

Total fee revenue                    812,831        100.0 %      790,505        100.0 %      744,249        100.0 %

Reimbursed out-of-pocket
engagement expense                    36,870                      36,254                      32,002

Total revenue                      $ 849,701                   $ 826,759                   $ 776,251

                                                                      Year Ended April 30,
                                            2013                              2012                              2011
                                  Dollars         Margin(1)         Dollars         Margin(1)         Dollars         Margin(1)
                                                                     (dollars in thousands)
Operating income (loss)
Executive Recruitment:
North America                    $  58,832              20.3 %     $  75,580              24.7 %     $  70,782              23.1 %
EMEA                                 9,173               7.1          13,288               9.4          12,768               9.3
Asia Pacific                         6,973               9.5          11,859              14.4          13,172              16.1
South America                        5,987              19.9           9,207              28.9           7,539              25.8

Total Executive Recruitment         80,965              15.5         109,934              19.6         104,261              18.8
LTC                                  6,424               3.8          16,360              14.2           5,138               5.2
Futurestep                          10,975               9.0           8,445               7.4           6,955               7.7
Corporate                          (54,488 )                         (51,873 )                         (30,569 )

Total operating income (loss)    $  43,876               5.4 %     $  82,866              10.5 %     $  85,785              11.5 %

(1) Margin calculated as a percentage of fee revenue by business segment.

                                                                                         Year Ended April 30, 2013
                                                         Executive Recruitment
                                    North                        Asia         South
                                   America         EMEA        Pacific       America       Subtotal         LTC          Futurestep       Corporate        Consolidated
                                                                                              (in thousands)
Net income                                                                                                                                                $       33,293
Other income, net                                                                                                                                                 (6,309 )
Interest expense, net                                                                                                                                              2,365
Income tax provision                                                                                                                                              16,637
Equity in earnings of
unconsolidated subsidiaries, net                                                                                                                                  (2,110 )

Operating income (loss)            $ 58,832      $  9,173      $  6,973      $  5,987      $  80,965      $  6,424      $     10,975      $  (54,488 )            43,876
Depreciation and amortization         4,726         2,347         1,546           372          8,991         6,012             1,180           2,821              19,004
Other income (loss), net                466            95           200            32            793           (75 )              51           5,540               6,309
Equity in earnings of
unconsolidated subsidiaries, net        434             -             -             -            434             -                 -           1,676               2,110

EBITDA                               64,458        11,615         8,719         6,391         91,183        12,361            12,206         (44,451 )            71,299
Restructuring charges, net            3,583         3,982           629             -          8,194        10,198             3,527             938              22,857
Transaction and integration
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