KORN FERRY 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, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). 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, the timing of our restructuring plans
and the magnitude and duration of the impact of the global ("COVID-19") pandemic
on our business, employees, customers and our ability to provide services in
affected regions. 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,
those relating to the magnitude and duration of the negative impact of the COVID
-19 pandemic on our business, employees, customers and our ability to provide
services in affected regions, global and local political and /or economic
developments in or affecting countries where we have operations, competition,
changes in demand for our services as a result of automation, dependence on and
costs of attracting and retaining qualified and experienced consultants,
maintaining our relationships with customers and suppliers and retaining key
employees, maintaining our brand name and professional reputation, potential
legal liability and regulatory developments, portability of client
relationships, consolidation of or within the industries we serve, currency
fluctuations in our international operations, risks related to growth, alignment
of our cost structure, restrictions imposed by off-limits agreements, reliance
on information processing systems, cyber security vulnerabilities or events,
changes to data security, data privacy, and data protection laws, dependence on
third parties for the execution of critical functions, limited protection of our
intellectual property ("IP"), our ability to enhance and develop new technology,
our ability to successfully recover from a disaster or other business continuity
problems, employment liability risk, an impairment in the carrying value of
goodwill and other intangible assets, treaties, or regulations on our business
and our Company, deferred tax assets that we may not be able to use, our ability
to develop new products and services, the impact of the United Kingdom's
withdrawal from the European Union , changes in our accounting estimates and
assumptions, the utilization and billing rates of our consultants, seasonality,
the expansion of social media platforms, the ability to effect acquisitions, our
indebtedness, the phase-out of LIBOR, and the matters disclosed under the
heading "Risk Factors" in the Company's Exchange Act reports, including Item 1A
included in the Annual Report on Form 10-K for the fiscal year ended April 30,
2020 ("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. We also make available on the Investor Relations portion of
our website earnings slides and other important information, which we encourage
you to review.
Executive Summary
Korn Ferry (referred to herein as the "Company," or in the first-person
notations "we," "our," and "us") is a global organizational consulting firm. We
help clients synchronize strategy and talent to drive superior performance. We
work with organizations to design their structures, roles and responsibilities.
We help them hire the right people to bring their strategy to life. And we
advise them on how to reward, develop and motivate their people.
We are pursuing a strategy that will help Korn Ferry to focus on clients and
collaborate intensively across the organization. This approach builds on the
best of our past and gives us a clear path to the future with focused
initiatives to increase our client and commercial impact. Korn Ferry is
transforming how clients address their talent management needs. We have evolved
from a mono-line to a diversified business, giving our consultants more frequent
and expanded opportunities to engage with clients.
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We operate through four lines of business:
1. Consulting helps clients synchronize their strategy and their talent by
addressing four fundamental needs: Organizational Strategy, Assessment and
Succession, Leadership and
Benefits. This work is supported and underpinned by a comprehensive range of
some of the world's leading lP and data.
2. Digital leverages an artificial intelligence ("AI") powered platform to
identify structure, roles, capabilities and behaviors needed to drive
business forward. The end-to-end system gives clients one enterprise-wide
talent framework and delivers an achievable blueprint for success, along with
the guidance and tools to deliver it.
3. Executive Search helps organizations recruit board level, chief executive and
other senior executive and general management talent. Behavioral interviewing
and proprietary assessments are used to determine ideal organizational fit,
and salary benchmarking builds appropriate frameworks for compensation and
retention.
4. RPO and Professional Search combines people, process expertise and IP-enabled
technology to deliver enterprise talent acquisition solutions to clients.
Transaction sizes range from single professional searches to team, department
and line of business projects, and global outsource recruiting solutions.
Consulting and Digital are new reporting segments implemented in the third
quarter of fiscal 2020. Previously, these were tracked and reported together as
Korn Ferry Advisory ("Advisory"). Over the past year, we have invested in the
digital business and harmonized the structure of our content and data, building
a technology platform for the efficient delivery of these assets directly to an
end consumer or indirectly through a consulting engagement. These investments
combined with the acquisitions of Miller Heiman Group , AchieveForum and Strategy
Execution (collectively, the "Acquired Companies") in November 2019 from
TwentyEighty, Inc. for $108.6 million , resulted in a reassessment of how we
managed our Advisory business. Therefore, beginning in the third quarter of
fiscal 2020, we separated Advisory into two segments in order to better align
with the Company's strategy (which included the acquisition of the Acquired
Companies) and the decisions of the Company's chief operating decision maker,
who had begun to regularly make resource allocation decisions and assess
performance separately between consulting and digital within Advisory. The
addition of the Acquired Companies has further expanded our vast IP and content
and leveraged the firm's digital delivery platforms. We have invested in our
digital business to digitize and harmonize the structure of our IP content and
data and in building a technology platform for the efficient delivery of these
assets directly to an end consumer or indirectly through a consulting
engagement.
? Approximately 70% of the executive searches we performed in fiscal 2020 were
for board level, chief executive and other senior executive and general
management positions. Our 3,968 search engagement clients in fiscal 2020
included many of the world's largest and most prestigious public and private
companies.
? We have built strong client loyalty, with 90% of the assignments performed
during fiscal 2020 having been on behalf of clients for whom we had conducted
assignments in the previous three fiscal years.
? Approximately 71% of our revenues were generated from clients that utilized
multiple lines of our business.
? A vital pillar of our growth strategy is our Digital business. Our data and
IP are embedded into the core business processes of our clients, helping us
generate long-term relationships through large scale and technology-based
talent programs.
? In fiscal 2020,
the Baker's Dozen list, marking our 13th consecutive year on the list. We
were also named leader on the Everest PEAK Matrix for three years running and
achieved star performer status in fiscal 2020. Through decades of experience,
we have enhanced our RPO solution to deliver quality candidates that drive
our clients' business strategies. We leverage proprietary IP and data sets to
guide clients on the critical skills and competencies to look for,
compensation information to align with market demand, and assessment tools to
ensure candidate fit.
The Impact of COVID-19
InMarch 2020 , COVID-19 was reported to have spread to over 100 countries, territories or areas, worldwide, and in the fourth quarter of fiscal 2020 theWorld Health Organization declared it a pandemic. The negative business impact of the coronavirus outbreak was initially most pronounced in theAsia Pacific region. During the first three quarters of fiscal 2021 the impact has been felt throughout all the geographical areas in which we do business. Governments and companies have implemented social distancing - limiting either travel or in person individual or group face-to-face interaction as well as working from home to adhere to stay at home orders from national, state and city governments. Such restrictions initially impacted our ability to provide our products and services to our clients with such impact lessening in the second and third quarters of fiscal 2021 as the world learned to work in different ways. Further, the outbreak has restricted the level of economic activity in the areas in which we operate and has had an adverse impact on demand for and sales of our products and services. All of our business 29
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[[Image Removed]] segments across all of our geographies have been impacted as fee revenue decreased in the fourth quarter of fiscal 2020 and further decreased in the first quarter of fiscal 2021 due to a decrease in demand as clients responded to the pandemic. As a result of this and, as part of a broader program aimed at further enhancing our strong balance sheet and liquidity position, onApril 20, 2020 , we initiated a plan that was intended to adjust our cost base to the current economic environment and to position us to invest in the recovery. This plan included (i) a reduction in workforce, which was completed by the end of the first quarter of fiscal 2021 and resulted in restructuring charges of$40.5 million and$30.7 million associated with severance during the three months endedApril 30, 2020 and the nine months endedJanuary 31, 2021 , respectively, (ii) the temporary furlough of certain employees, (iii) subject to certain exceptions and legal requirements, salary reductions across the organization throughDecember 31, 2020 , and (iv) other cost saving measures relating to general and administrative expenses. In the third quarter of fiscal 2021, the Company saw business conditions improve substantially from where they were in the second and first quarter with fee revenues increasing 27% in the second quarter of fiscal 2021 compared to the first quarter, and 9% in the third quarter from the second quarter of fiscal 2021 to$475.4 million , with all lines of business contributing to the improvement of fee revenue. As such, no further restructuring actions were taken in the quarter. With the sequential improvement in fee revenue and leveraging the restructured cost base, the Company experienced notably better profitability in the three months endedJanuary 31, 2021 compared to the second quarter of fiscal 2021. As such, and similar to the decision that was made in the second quarter of the Company's 2021 fiscal year, the Company made a decision to pay all colleagues, including our named executive officers, their full salary and non-executive directors their full retainers for the third quarter of the Company's 2021 fiscal year as well. Employees have received such payments, subject in each case to such employee's or director's continued employment or service with the Company on date of payment. Beginning onJanuary 1, 2021 salaries of our employees were fully reinstated. While advances have been made in the science and societal and economic consequences of COVID-19, there remains significant uncertainty about the future impacts of COVID-19. On the positive side, there have been several announcements around vaccines and governments around the world have begun distributing and administering the vaccine to designated high risk individuals. In addition, the world has adopted new ways of working and interacting with substantial acceptance of business being conducted in a virtual world. On the negative side, there have been challenges in manufacturing the vaccines at scale as well as distributing and administrating to the population at large. Since the end of the second quarter of fiscal 2021, we saw governments impose additional restrictions on travel and activities, particularly inEurope and inthe United States , as the number of COVID-19 cases and hospitalizations continued to increase, reaching all-time highs inthe United States . At the end of the third quarter, hospitalizations started to decrease and restrictions are starting to ease in some of the jurisdictions where we operate. However, there are also new, more contagious variants of the virus that preliminarily appear to be more resistant to the vaccines. It is therefore unknown whether the easing of the restrictions will continue or be reversed. With the implementation of the plan discussed above and the improved business activity we experienced in the second and third quarter, we believe our costs are in line with our current revenue levels. However, uncertainties such as whether the new variants of the virus become the dominant strain, or whether new restrictions are imposed (or prior restrictions re-imposed), make us unable to give assurance that the rate of increase in fee revenue during the three months endedJanuary 31, 2021 , will continue in the three months endedApril 30, 2021 . Given the amount available from our current revolver and the amount of cash and cash equivalents and marketable securities net of amounts held in trust for deferred compensation and accrued bonuses, we believe that we have sufficient liquidity to meet our anticipated working capital, capital expenditures, general corporate requirements, repayment of the debt obligations and dividend payments under our dividend policy in the next 12 months. Performance Highlights The Company evaluates performance and allocates resources based on the chief operating decision maker's review of (1) fee revenue and (2) adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"). To the extent that such costs or charges occur, Adjusted EBITDA excludes restructuring charges, integration/acquisition costs, certain separation costs and certain non-cash charges (goodwill, intangible asset and other than temporary impairments of investments). In the nine months endedJanuary 31, 2021 , Adjusted EBITDA excluded$30.7 million of restructuring charges and$0.7 million of integration/acquisition costs. In the three months endedJanuary 31, 2021 , Adjusted EBITDA excluded$0.8 million in restructuring charges, net. Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. They have limitations as analytical tools, should not be viewed as a substitute for financial information determined in accordance withUnited States ("U.S.") generally accepted accounting principles ("GAAP"), and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. In addition, they may not necessarily be 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 regardingKorn Ferry's performance by excluding certain charges, items of income and other items that may not be indicative 30
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[[Image Removed]] ofKorn Ferry's ongoing operating results. The use of these non-GAAP financial measures facilitates comparisons toKorn Ferry's historical performance and the identification of operating trends that may otherwise be distorted by the factors discussed above.Korn Ferry includes these non-GAAP financial measures because management believes it is useful to investors in allowing for greater transparency with respect to supplemental information used by management in its evaluation ofKorn 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 to arrive at Adjusted EBITDA. Management further believes that Adjusted EBITDA is useful to investors because it is frequently used by investors and other interested parties to measure operating performance among companies with different capital structures, effective tax rates and tax attributes and capitalized asset values, all of which can vary substantially from company to company. Fee revenue was$475.4 million during the three months endedJanuary 31, 2021 , a decrease of$39.9 million , or 8%, compared to$515.3 million in the three months endedJanuary 31, 2020 with decreases in fee revenue acrossDigital, Executive Search and Consulting due to a decline in demand for our products and services as a result of COVID-19, partially offset by an increase in fee revenue in RPO and Professional Search. Exchange rates favorably impacted fee revenue by$8.5 million , or 2%, in the three months endedJanuary 31, 2021 compared to the year-ago quarter. During the three months endedJanuary 31, 2021 , we recorded operating income of$65.2 million with the Executive Search, Consulting, Digital and RPO & Professional Search segments contributing income of$26.9 million ,$22.2 million ,$19.2 million , and$18.4 million , respectively, partially offset by Corporate expenses of$21.5 million . Net income attributable toKorn Ferry in the three months endedJanuary 31, 2021 was$51.3 million , an increase of$31.3 million as compared to net income attributable toKorn Ferry of$20.0 million in the year-ago quarter. Adjusted EBITDA in the three months endedJanuary 31, 2021 was$96.7 million , an increase of$18.6 million as compared to$78.1 million in the year-ago quarter. During the three months endedJanuary 31, 2021 , the Executive Search, Consulting, Digital, and RPO & Professional Search segments contributed to Adjusted EBITDA of$41.7 million ,$27.5 million ,$27.1 million and$19.6 million , respectively, partially offset by Corporate expenses net of other income of$19.3 million . Our cash, cash equivalents and marketable securities increased by$33.8 million to$897.1 million atJanuary 31, 2021 , compared to$863.3 million atApril 30, 2020 . This increase was mainly due to cash from operations as a result of cost savings initiatives that were put in place, a positive effect of exchange rate changes on cash and cash equivalents and proceeds from life insurance policies, partially offset by annual bonuses earned in fiscal 2020 and paid during the first quarter of fiscal 2021, retention payments, repurchases of our common stock in the open market, capital expenditures, interest payments on the 4.625% Senior Unsecured Notes due 2027 (the "Notes") and dividends paid to stockholders during the nine months endedJanuary 31, 2021 . As ofJanuary 31, 2021 , we held marketable securities to settle obligations under ourExecutive Capital Accumulation Plan ("ECAP") with a cost value of$145.2 million and a fair value of$164.6 million . Our vested obligations for which these assets were held in trust totaled$147.1 million as ofJanuary 31, 2021 and our unvested obligations totaled$25.4 million . Our working capital increased by$67.3 million to$680.2 million as ofJanuary 31, 2021 , as compared to$612.9 million atApril 30, 2020 . We believe that cash on hand and funds from operations and other forms of liquidity will be sufficient to meet our anticipated working capital, capital expenditures, general corporate requirements, repayment of the debt obligations and dividend payments under our dividend policy in the next 12 months. We had$646.0 million available for borrowing under our current revolver atJanuary 31, 2021 andApril 30, 2020 . As ofJanuary 31, 2021 andApril 30, 2020 , there was$4.0 million of standby letters of credit issued, under our credit agreement. We had a total of$10.7 million and$11.3 million of standby letters of credits with other financial institutions as ofJanuary 31, 2021 andApril 30, 2020 , respectively. 31
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[[Image Removed]] Results of Operations
The following table summarizes the results of our operations as a percentage of fee revenue:
(Numbers may not total exactly due to rounding)
Three Months Ended Nine Months Ended
January 31, January 31,
2021 2020 2021 2020
Fee revenue 100.0 % 100.0 % 100.0 % 100.0 %
Reimbursed out-of-pocket engagement
expenses 0.5 2.5 0.6 2.4
Total revenue 100.5 102.5 100.6 102.4
Compensation and benefits 68.6 67.6 73.1 68.0
General and administrative expenses 9.9 13.8 11.2 13.3
Reimbursed expenses 0.5 2.5 0.6 2.4
Cost of services 4.2 6.0 4.0 4.4
Depreciation and amortization 3.3 2.9 3.7 2.7
Restructuring charges, net 0.2 3.5 2.4 1.2
Operating income 13.7 6.1 5.5 10.3
Net income 10.9 % 4.1 % 3.9 % 7.2 %
Net income attributable to Korn
Ferry 10.8 % 3.9 % 3.8 % 7.1 %
The following tables summarize the results of our operations by segment:
(Numbers may not total exactly due to rounding)
Three Months Ended Nine Months Ended
January 31, January 31,
2021 2020 2021 2020
Dollars % Dollars % Dollars % Dollars %
(dollars in thousands)
Fee revenue
Consulting $ 136,268 28.7 % $ 140,525 27.3 % $ 362,271 28.9 % $ 422,103 28.3 %
Digital 75,791 15.9 99,389 19.3 206,807 16.5 223,097 15.0
Executive Search:
North America 106,002 22.3 106,888 20.7 266,485 21.2 332,428 22.3
EMEA 35,991 7.6 44,301 8.6 97,701 7.8 130,652 8.8
Asia Pacific 21,643 4.6 25,089 4.9 59,702 4.8 78,395 5.3
Latin America 4,468 0.9 7,283 1.4 12,419 1.0 23,140 1.6
Total Executive
Search 168,104 35.4 183,561 35.6 436,307 34.8 564,615 37.8 RPO & Professional Search
95,197 20.0 91,850 17.8 249,511 19.9 282,448 18.9 Total fee revenue 475,360 100.0 % 515,325 100.0 %
1,254,896 100.0 % 1,492,263 100.0 %
Reimbursed
out-of-pocket
engagement expense 2,520 12,654 7,656 36,091
Total revenue $ 477,880 $ 527,979 $ 1,262,552 $ 1,528,354
Three Months Ended Nine Months Ended
January 31, January 31,
2021 2020 2021 2020
Dollars Margin (1) Dollars Margin (1) Dollars Margin (1) Dollars Margin (1)
(dollars in thousands)
Operating income
Consulting $ 22,175 16.3 % $ 2,663 1.9 % $ 25,869 7.1 % $ 24,272 5.8 %
Digital 19,214 25.4 8,463 8.5 32,410 15.7 41,036 18.4
Executive Search:
North America 17,655 16.7 21,808 20.4 32,411 12.2 80,254 24.1
EMEA 3,114 8.7 4,644 10.5 (1,596 ) (1.6 ) 18,466 14.1
Asia Pacific 5,844 27.0 5,070 20.2 9,958 16.7 17,866 22.8
Latin America 264 5.9 1,198 16.4 (578 ) (4.7 ) 2,999 13.0
Total Executive Search 26,877 16.0 32,720 17.8 40,195 9.2 119,585 21.2
RPO & Professional Search 18,360 19.3 14,144 15.4 33,027 13.2 44,279 15.7
Corporate (21,471 ) (26,395 ) (61,969 ) (75,374 )
Total operating income $ 65,155 13.7 % $ 31,595 6.1 % $ 69,532 5.5 % $ 153,798 10.3 %
(1) Margin calculated as a percentage of fee revenue by segment.
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