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KFY > SEC Filings for KFY > Form 10-Q on 11-Mar-2014All Recent SEC Filings

Show all filings for KORN FERRY INTERNATIONAL

Form 10-Q for KORN FERRY INTERNATIONAL


11-Mar-2014

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 realizing the planned 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 nine months ended January 31, 2014, 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 integration/acquistion 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 $40.2 million, or 20% (12% increase in fee revenue when adjusting for the PDI acquisition), in the three months ended January 31, 2014 to $242.2 million compared to $202.0 million in the year-ago quarter, with increases in fee revenue in all regions of Executive Recruitment, and Futurestep, and LTC. During the three months ended January 31, 2014, we recorded operating income of $27.3 million with Executive Recruitment, LTC, and Futurestep segments contributing $31.6 million, $5.7 million, and $3.9 million, respectively, offset by corporate expenses of $13.9 million. Net income during the three months ended January 31, 2014 and 2013 was $21.3 million and $9.5 million, respectively. Adjusted EBITDA increased $10.0 million in the three months ended January 31, 2014 to $35.2 million from $25.2 million during the three months ended January 31, 2013, with Executive Recruitment, LTC, and Futurestep segments contributing $33.6 million, $8.9 million, and $4.4 million, respectively, offset by corporate expenses of $11.7 million.

Our cash, cash equivalents and marketable securities increased $11.2 million, or 3%, to $377.2 million at January 31, 2014 compared to $366.0 million at April 30, 2013, mainly due to cash provided by operating activities, partially offset by 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. As of January 31, 2014, we held marketable securities to settle obligations under the ECAP with a cost value of $108.0 million and a fair value of $115.1 million. Our vested and unvested obligations for which these assets were held in trust totaled $116.4 million as of January 31, 2014. Our working capital increased by $66.2 million to $244.7 million in the nine months ended January 31, 2014. 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 January 31, 2014 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 January 31, 2014. As of January 31, 2014 and April 30, 2013, there was $2.8 million and $2.7 million of standby letters of credit, respectively, issued under our long-term debt arrangements. We have a total of $0.2 million of standby letters of credits with other financial institutions as of January 31, 2014.


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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             Nine Months Ended
                                                        January 31,                    January 31,
                                                    2014            2013           2014           2013
Fee revenue                                           100.0 %        100.0 %         100.0 %       100.0 %
Reimbursed out-of-pocket engagement expenses            3.6            4.1             3.7           4.5

Total revenue                                         103.6          104.1           103.7         104.5
Compensation and benefits                              67.0           69.2            67.2          68.5
General and administrative expenses                    15.4           17.8            15.9          17.6
Reimbursed expenses                                     3.6            4.1             3.7           4.5
Cost of services                                        3.7            4.0             4.2           3.4
Depreciation and amortization                           2.6            2.5             2.7           2.2
Restructuring charges, net                               -             2.2             0.5           3.4

Operating income                                       11.3            4.3             9.5           4.9

Net income                                              8.8 %          4.7 %           7.3 %         3.6 %

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

                                            Three Months Ended January 31,                        Nine Months Ended January 31,
                                           2014                       2013                       2014                       2013
                                    Dollars         %          Dollars         %          Dollars         %          Dollars         %
                                                                           (dollars in thousands)
Fee revenue
Executive recruitment:
North America                      $  77,208        31.9 %    $  71,259        35.3 %    $ 226,538        32.0 %    $ 212,806        36.4 %
EMEA                                  39,144        16.2         33,600        16.6        107,742        15.2         96,565        16.5
Asia Pacific                          20,213         8.3         18,301         9.1         63,063         8.9         54,022         9.2
South America.                         7,477         3.1          7,334         3.6         23,346         3.3         22,295         3.8

Total executive recruitment          144,042        59.5        130,494        64.6        420,689        59.4        385,688        65.9
LTC                                   62,217        25.7         41,155        20.4        188,357        26.6        107,999        18.5
Futurestep                            35,925        14.8         30,355        15.0         99,543        14.0         91,242        15.6

Total fee revenue                    242,184       100.0 %      202,004       100.0 %      708,589       100.0 %      584,929       100.0 %

Reimbursed out-of-pocket
engagement expenses                    8,753                      8,268                     26,172                     26,165

Total revenue                      $ 250,937                  $ 210,272                  $ 734,761                  $ 611,094

                                                 Three Months Ended January 31,                                       Nine Months Ended January 31,
                                             2014                              2013                              2014                              2013
                                   Dollars        Margin (1)         Dollars        Margin (1)         Dollars        Margin (1)         Dollars        Margin (1)
                                                                                       (dollars in thousands)
Operating Income
Executive recruitment:
North America                     $  19,919              25.8 %     $  14,637              20.5 %     $  51,773              22.9 %     $  41,728              19.6 %
EMEA                                  6,649              17.0           4,177              12.4          18,469              17.1           5,036               5.2
Asia Pacific                          3,922              19.4           1,913              10.5          12,894              20.4           3,491               6.5
South America.                        1,132              15.1             920              12.5           4,893              21.0           4,226              19.0

Total executive recruitment          31,622              22.0          21,647              16.6          88,029              20.9          54,481              14.1
LTC                                   5,651               9.1          (2,798 )            (6.8 )        16,992               9.0           7,716               7.1
Futurestep                            3,925              10.9           3,722              12.3           9,009               9.1           7,141               7.8
Corporate                           (13,896 )              -          (13,865 )              -          (46,902 )              -          (40,854 )              -

Total operating
income                            $  27,302              11.3 %     $   8,706               4.3 %     $  67,128               9.5 %     $  28,484               4.9 %

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


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