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KFY > SEC Filings for KFY > Form 10-Q on 9-Dec-2013All Recent SEC Filings




Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This Quarterly Report on Form 10-Q 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, seasonality and the matters disclosed under the heading "Risk Factors" in the Company's Exchange Act reports, including Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2013 ("Form 10-K"). Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q.

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 a 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 a 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

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diversity and inclusion and leadership development solutions, which are collectively referred to herein as the "prior year acquisitions". As a result, in fiscal 2013, we implemented a restructuring plan focused on integrating the synergies associated with the prior year acquisitions. We continued to implement this plan during the first half of fiscal 2014 and in connection with the plan, recorded restructuring charges of $3.7 million during the six months ended October 31, 2013, of which $2.9 million was for facility costs in order to integrate PDI by consolidating and eliminating redundant office space around the world and severance costs of $0.8 million to consolidate certain overhead functions.

The Company currently operates in three global business segments: Executive Recruitment, LTC and Futurestep. See Note 8 - Business Segments, in the Notes to our Consolidated Financial Statements for discussion of the Company's 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 (net of recoveries), and/or transaction, integration and 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 facilitates 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 $41.8 million, or 21% (7% increase excluding fee revenue from the prior year acquisitions), in the three months ended October 31, 2013 to $238.0 million compared to $196.2 million in the year-ago quarter, with increases in fee revenue in all regions of Executive Recruitment, Futurestep, and LTC. During the three months ended October 31, 2013, we recorded operating income of $23.2 million with Executive Recruitment, LTC, and Futurestep segments contributing $28.1 million, $7.0 million, and $2.6 million, respectively, offset by corporate expenses of $14.5 million. Net income during the three months ended October 31, 2013 and 2012 was $18.8 million and $1.2 million, respectively. Adjusted EBITDA was $36.7 million with Executive Recruitment, LTC, and Futurestep segments contributing $30.7 million, $10.3 million, and $3.0 million, respectively, offset by corporate expenses of $7.3 million during the three months ended October 31, 2013. Adjusted EBITDA increased $12.3 million during the three months ended October 31, 2013, from Adjusted EBITDA of $24.4 million during the three months ended October 31, 2012.

Our cash, cash equivalents and marketable securities decreased $51.1 million, or 14%, to $314.9 million at October 31, 2013 compared to $366.0 million at April 30, 2013, mainly due to bonuses earned in fiscal 2013 and paid during the first quarter of fiscal 2014 and $15.0 million in contingent consideration paid to selling stockholders of PDI, partially offset by cash provided by operating activities. As of October 31, 2013, we held marketable securities to settle obligations under the ECAP with a cost value of $109.4 million and a fair value of $118.0 million. Our vested and unvested obligations for which these assets were held in trust totaled $119.3 million as of October 31, 2013. Our working capital increased by $42.3 million to $220.8 million in the six months ended October 31, 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 October 31, 2013 or April 30, 2013. As of April 30, 2013, under our previous senior secured credit agreement we were required to maintain $2.9 million in restricted cash to provide collateral for the standby letters of credit that were outstanding. There is no restricted cash requirement under our current senior unsecured revolving credit agreement and, as a result, the Company had no restricted cash balance as of October 31, 2013. As of October 31, 2013 and April 30, 2013, there was $2.7 million of standby letters of credit issued under our long-term debt arrangements.

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Results of Operations

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

                                                     Three Months  Ended             Six Months Ended
                                                         October 31,                   October  31,
                                                     2013            2012           2013          2012
Fee revenue                                            100.0 %        100.0 %        100.0 %       100.0 %
Reimbursed out-of-pocket engagement expenses             3.5            4.4            3.7           4.7

Total revenue                                          103.5          104.4          103.7         104.7
Compensation and benefits                               67.8           67.8           67.4          68.2
General and administrative expenses                     15.0           17.0           16.2          17.4
Reimbursed expenses                                      3.5            4.4            3.7           4.7
Cost of services                                         4.7            3.7            4.4           3.1
Depreciation and amortization                            2.8            2.2            2.7           2.1
Restructuring charges, net                                -             7.9            0.8           4.0

Operating income                                         9.7            1.4            8.5           5.2

Net income                                               7.9 %          0.6 %          6.5 %         3.0 %

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

                                                              Three Months Ended October 31,                               Six Months Ended October 31,
                                                            2013                          2012                          2013                          2012
                                                   Dollars          %            Dollars          %            Dollars          %            Dollars          %
                                                                                                (dollars in thousands)
Fee revenue
Executive recruitment:
North America                                     $  75,183           31.6 %    $  69,441           35.4 %    $ 149,330           32.0 %    $ 141,547           37.0 %
EMEA                                                 34,221           14.4         33,142           16.9         68,598           14.7         62,965           16.4
Asia Pacific                                         21,722            9.1         18,338            9.3         42,850            9.2         35,721            9.3
South America                                         8,866            3.7          6,827            3.5         15,869            3.4         14,961            3.9

Total executive recruitment                         139,992           58.8        127,748           65.1        276,647           59.3        255,194           66.6
LTC                                                  66,078           27.8         38,452           19.6        126,140           27.1         66,844           17.5
Futurestep                                           31,898           13.4         30,031           15.3         63,618           13.6         60,887           15.9

Total fee revenue                                   237,968          100.0 %      196,231          100.0 %      466,405          100.0 %      382,925          100.0 %

Reimbursed out-of-pocket engagement expenses          8,269                         8,568                        17,419                        17,897

Total revenue                                     $ 246,237                     $ 204,799                     $ 483,824                     $ 400,822

                                                                 Three Months Ended October 31,                                   Six Months Ended October 31,
                                                              2013                            2012                            2013                            2012
                                                    Dollars       Margin (1)        Dollars       Margin (1)        Dollars       Margin (1)        Dollars       Margin (1)
                                                                                                     (dollars in thousands)
Operating Income
Executive recruitment:
North America                                      $  15,530             20.7 %    $   9,017             13.0 %    $  31,854             21.3 %    $  27,091             19.1 %
EMEA                                                   5,860             17.1           (929 )           (2.8 )       11,820             17.2            859              1.4
Asia Pacific                                           4,472             20.6          1,080              5.9          8,972             20.9          1,578              4.4
South America                                          2,265             25.5          1,217             17.8          3,761             23.7          3,306             22.1

Total executive recruitment                           28,127             20.1         10,385              8.1         56,407             20.4         32,834             12.9
LTC                                                    7,006             10.6          6,252             16.3         11,341              9.0         10,514             15.7
Futurestep                                             2,539              8.0            237              0.8          5,084              8.0          3,419              5.6
Corporate                                            (14,507 )             -         (14,105 )             -         (33,006 )             -         (26,989 )             -

Total operating income                             $  23,165              9.7 %    $   2,769              1.4 %    $  39,826              8.5 %    $  19,778              5.2 %

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

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