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, as well as 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 ultimate magnitude and duration of COVID-19 and of any future pandemics or similar outbreaks, and related restrictions and operational requirements that apply to our business and the businesses of our clients, and any related negative impacts 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, changes and developments in governmental laws and regulations, evolving investor and customer expectations with regard to environmental matters, 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 theUnited Kingdom's withdrawal from theEuropean 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 endedApril 30, 2021 (the "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 SummaryKorn 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, operations and talent to drive superior business 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 helpKorn 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 business to a multi-faceted consultancy business, giving our consultants more frequent and expanded opportunities to engage with clients. 27
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Our seven reportable segments operate through the following four lines of business:
1. Consulting aligns organization structure, culture, performance and people to
drive sustainable growth by addressing four fundamental needs: Organizational
Strategy, Assessment and Succession, Leadership and
and Total Rewards. This work is supported by a comprehensive range of some of
the world's leading lP and data.
2. Digital leverages an artificial intelligence ("AI") powered, machine-learning
platform to identify the best structures, roles, capabilities and behaviors
needed to drive business forward. The end-to-end system combines
proprietary data, client data, and external market data to generate insight
and recommend action.
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. Recruitment Process Outsourcing ("RPO") & 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.
The Company has seven reportable segments: Consulting,Digital, Executive Search North America , Executive Search EMEA, Executive Search Asia Pacific, Executive Search Latin America and RPO & Professional Search.
? Approximately 75% of the executive searches we performed in fiscal 2021 were
for board level, chief executive and other senior executive and general
management positions. Our 3,635 search engagement clients in fiscal 2021
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 2021 having been on behalf of clients for whom we had conducted
assignments in the previous three fiscal years.
? Approximately 70% of our revenues were generated from clients that have
utilized multiple lines of our business. ? A vital pillar of our growth strategy is Digital. 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 2021,
the Baker's Dozen list, marking our 14th consecutive year on the list. We
were also named leader on the Everest PEAK Matrix for four years running and
achieved star performer status in 2021, with an improved leader position from
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. In fiscal 2021, we
introduced Nimble, a new, fully integrated recruitment technology solution
incorporating Candidate Relationship Management, AI Assistance & Screening
and Korn Ferry Assessments.
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 from the pandemic was felt throughout all the geographical areas in which we do business during the first quarter of fiscal 2021. Governments and companies 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, third and fourth quarters of fiscal 2021 as the world learned to work in different ways. Starting in the fourth quarter of fiscal 2020 and continuing in the first quarter of fiscal 2021, the outbreak restricted the level of economic activity in the areas in which we operate and had an adverse impact on demand for and sales of our products and services. As a result of this, we initiated a plan inApril 2020 that was intended to adjust our cost base to the economic environment at that time and to position us to invest in the recovery. This plan resulted in restructuring charges of$0.8 million and$30.7 million associated with severance during the three and nine months endedJanuary 31, 2021 , respectively. During the last five quarters, the Company's business conditions improved substantially from where it was in the second and first quarters of fiscal 2021 as demand has increased driven by the relevance of the Company's solutions in helping businesses solve their organizational and human capital issues. 28
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[[Image Removed]] Performance Highlights OnNovember 1, 2021 , we completed the acquisition ofLucas Group for$90.9 million , net of cash acquired.Lucas Group contributes a substantial professional search and contracting expertise that is expected to enhance our search portfolio.Lucas Group is a professional search and contracting staffing firm, targeting middle market businesses. The addition ofLucas Group toKorn Ferry's broader talent acquisition portfolio - spanning Executive Search, Recruitment Process Outsourcing, and Professional Search - is expected to accelerate our ability to capture additional share of this significant market.Lucas Group is included in the RPO & Professional Search segment. 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 charges occur, Adjusted EBITDA excludes restructuring charges, integration/acquisition costs, certain separation costs and certain non-cash charges (goodwill, intangible asset and other impairment charges). For the three months endedJanuary 31, 2022 , Adjusted EBITDA excludes$3.2 million of integration/acquisition costs. For the nine months endedJanuary 31, 2022 , Adjusted EBITDA excluded a$7.4 million impairment of right-of-use assets,$4.3 million of integration/acquisition costs and$1.9 million impairment of fixed assets. Consolidated and the subtotals of Executive Search Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and have limitations as analytical tools. They 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 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$680.7 million during the three months endedJanuary 31, 2022 , an increase of$205.3 million , or 43%, compared to$475.4 million in the three months endedJanuary 31, 2021 , with increases in fee revenue across all lines of business primarily due to the relevance of the Company's solutions. Exchange rates unfavorably impacted fee revenue by$8.1 million , or 2%, in the three months endedJanuary 31, 2022 compared to the year-ago quarter. Net income attributable toKorn Ferry in the three months endedJanuary 31, 2022 was$84.1 million , an increase of$32.8 million as compared to net income attributable toKorn Ferry of$51.3 million in the year-ago quarter. Adjusted EBITDA in the three months endedJanuary 31, 2022 was$138.3 million , an increase of$41.6 million as compared to$96.7 million in the year-ago quarter. During the three months endedJanuary 31, 2022 , the Executive Search, RPO & Professional Search, Consulting, and Digital lines of business contributed$65.7 million ,$44.1 million ,$28.6 million and$28.1 million , respectively, to Adjusted EBITDA, which was offset by Corporate expenses net of other income of$28.2 million . Our cash, cash equivalents and marketable securities increased by$10.2 million to$1,107.3 million atJanuary 31, 2022 , compared to$1,097.1 million atApril 30, 2021 . This increase was primarily due to an inflow of cash from operations, partially offset by cash used for the acquisition ofLucas Group , annual bonuses earned in fiscal 2021 and paid during the first quarter of fiscal 2022, retention payments, capital expenditures, the semi-annual interest payment on the 4.625% Senior Unsecured Notes due 2027 (the "Notes"), dividends paid to stockholders and stock repurchases made during the nine months endedJanuary 31, 2022 . As ofJanuary 31, 2022 , we held marketable securities to settle obligations under our Executive Capital Accumulation Plan ("ECAP") with a cost value of$164.0 million and a fair value of$184.1 million . Our vested obligations for which these assets were held in trust totaled$175.2 million as ofJanuary 31, 2022 and our unvested obligations totaled$25.9 million . Our working capital increased by$79.5 million to$816.6 million as ofJanuary 31, 2022 , as compared to$737.1 million atApril 30, 2021 . 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 debt obligations and dividend payments under our dividend policy in the next 12 months. We had$645.3 million and$646.0 million available for borrowing under our Revolver (as defined herein) atJanuary 31, 2022 andApril 30, 2021 , respectively. As ofJanuary 31, 2022 andApril 30, 2021 , there were$4.7 million and$4.0 million of standby letters of credit issued, respectively, under our long-term debt 29
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arrangements. We had a total of
Results of Operations
The following table summarizes the results of our operations as a percentage of fee revenue: (Numbers may not total exactly due to rounding) Three Months Ended Nine Months Ended January 31, January 31, 2022 2021 2022 2021 Fee revenue 100.0 % 100.0 % 100.0 % 100.0 % Reimbursed out-of-pocket engagement expenses 0.6 0.5 0.6 0.6 Total revenue 100.6 100.5 100.6 100.6 Compensation and benefits 65.5 68.6 66.8 73.1 General and administrative expenses 8.9 9.9 9.2 11.2 Reimbursed expenses 0.6 0.5 0.6 0.6 Cost of services 4.7 4.2 4.1 4.0 Depreciation and amortization 2.4 3.3 2.5 3.7 Restructuring charges, net - 0.2 - 2.4 Operating income 18.6 13.7 17.4 5.5 Net income 12.5 % 10.9 % 12.5 % 3.9 % Net income attributable to Korn Ferry 12.4 % 10.8 % 12.3 % 3.8 %
The following tables summarize the results of our operations: (Numbers may not total exactly due to rounding)
Three Months Ended Nine Months Ended January 31, January 31, 2022 2021 2022 2021 Dollars % Dollars % Dollars % Dollars % (dollars in thousands) Fee revenue Consulting$ 162,889 23.9 %$ 136,268 28.7 %$ 476,260 25.0 %$ 362,271 28.9 % Digital 90,194 13.3 75,791 15.9 259,504 13.6 206,807 16.5 Executive Search: North America 152,597 22.4 106,002 22.3 449,472 23.6 266,485 21.2 EMEA 47,509 7.0 35,991 7.6 132,690 7.0 97,701 7.8 Asia Pacific 31,425 4.6 21,643 4.6 88,385 4.6 59,702 4.8 Latin America 7,468 1.1 4,468 0.9
20,815 1.1 12,419 1.0 Total Executive Search 238,999 35.1 168,104 35.4
691,362 36.3 436,307 34.8 RPO & Professional Search
188,659 27.7 95,197 20.0
478,453 25.1 249,511 19.9 Total fee revenue 680,741 100.0 % 475,360 100.0 %
1,905,579 100.0 % 1,254,896 100.0 % Reimbursed out-of-pocket engagement expense 4,215 2,520 10,873 7,656 Total revenue$ 684,956 $ 477,880 $ 1,916,452 $ 1,262,552 In the tables that follow, the Company presents a subtotal for Executive Search Adjusted EBITDA and a single percentage for Executive Search Adjusted EBITDA margin, which reflects the aggregate of all of the individual Executive Search Regions. These figures are non-GAAP financial measures and are presented as they are consistent with the Company's lines of business and are financial metrics used by the Company's investor base. 30
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