Korn Ferry(KFY) - 2019 Q3 - Quarterly Report

Part I. Financial Information Consolidated Financial Statements Korn Ferry's financial statements for Q3 and nine months ended January 31, 2019, reflect increased fee revenue but a significant net income decline due to a $106.6 million impairment charge Consolidated Balance Sheets As of January 31, 2019, total assets decreased to $2.22 billion from $2.29 billion, primarily due to lower cash and intangible assets Consolidated Balance Sheet Highlights (in thousands) | Account | Jan 31, 2019 (unaudited) | Apr 30, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $489,509 | $520,848 | | Goodwill | $580,021 | $584,222 | | Intangible assets, net | $86,308 | $203,216 | | Total Assets | $2,217,553 | $2,287,914 | | Liabilities & Equity | | | | Compensation and benefits payable | $266,925 | $304,980 | | Long-term debt | $222,662 | $211,311 | | Total Liabilities | $1,010,513 | $1,068,299 | | Total Stockholders' Equity | $1,207,040 | $1,219,615 | Consolidated Statements of Income Q3 FY2019 fee revenue grew 6.0% to $474.5 million, with net income increasing, while nine-month net income fell to $52.4 million due to a significant impairment charge Income Statement Summary (in thousands, except per share data) | Metric | Q3 FY2019 | Q3 FY2018 | Nine Months FY2019 | Nine Months FY2018 | | :--- | :--- | :--- | :--- | :--- | | Fee Revenue | $474,504 | $447,581 | $1,435,277 | $1,291,853 | | Operating Income | $62,683 | $49,846 | $78,551 | $144,249 | | Net Income Attributable to Korn Ferry | $44,964 | $27,247 | $52,387 | $92,619 | | Diluted EPS | $0.80 | $0.48 | $0.92 | $1.63 | | Cash Dividends Declared per Share | $0.10 | $0.10 | $0.30 | $0.30 | Consolidated Statements of Cash Flows For the nine months ended January 31, 2019, net cash from operating activities significantly increased to $101.0 million, while investing and financing activities resulted in net cash outflows Cash Flow Summary for Nine Months Ended Jan 31 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $100,957 | $59,592 | | Net Cash used in Investing Activities | ($59,501) | ($32,184) | | Net Cash used in Financing Activities | ($57,759) | ($64,558) | | Net Decrease in Cash | ($31,339) | ($20,892) | Notes to Consolidated Unaudited Financial Statements Notes detail significant accounting policies, including ASC 606 adoption, a major rebranding resulting in a $106.6 million impairment charge, and a new $650 million credit facility - The company rebranded to a single master brand, "Korn Ferry," sunsetting sub-brands like Futurestep and Hay Group, leading to a non-cash intangible asset impairment charge of $106.6 million for discontinued tradenames[22][47] - The company adopted the new revenue recognition standard, ASC 606, on May 1, 2018, resulting in a cumulative increase to retained earnings of $6.7 million, net of tax[56][57] - On December 19, 2018, the company entered into a new $650 million five-year senior secured revolving credit facility and used a $226.9 million drawdown to pay off its previous term loan[127] - Subsequent to the quarter end, on March 6, 2019, the Board declared a quarterly cash dividend of $0.10 per share and increased the share repurchase program by approximately $200 million, bringing the total authorization to about $250 million[132][133] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 FY2019 performance, highlighting a 6% fee revenue increase to $474.5 million and a 26% operating income rise, despite a $106.6 million tradename write-off impacting nine-month results Executive Summary Korn Ferry unified its market presence under a single brand, resulting in a $106.6 million tradename write-off, while Q3 FY19 fee revenue grew 6% to $474.5 million and Adjusted EBITDA reached $77.7 million - The company is unifying its market strategy under a single "Korn Ferry" master brand, discontinuing sub-brands such as Futurestep, Hay Group, and Lominger[139] - As a result of the rebranding, the company took a one-time, non-cash write-off of tradenames amounting to $106.6 million during the nine months ended January 31, 2019[139] Q3 FY2019 Key Metrics | Metric | Value (in millions) | | :--- | :--- | | Fee Revenue | $474.5 | | Operating Income | $62.7 | | Net Income Attributable to Korn Ferry | $45.0 | | Adjusted EBITDA | $77.7 | Results of Operations Q3 fee revenue increased 6% year-over-year, with operating income rising 26% to $62.7 million, though nine-month operating income fell to $78.6 million due to a $106.6 million tradename impairment Fee Revenue Growth by Segment (Q3 FY2019 vs Q3 FY2018) | Segment | Fee Revenue (Q3'19) | Growth (YoY) | | :--- | :--- | :--- | | Executive Search | $193.4M | 7% | | Advisory | $201.5M | 2% | | RPO & Professional Search | $79.6M | 15% | | Total | $474.5M | 6% | Operating Income (Loss) by Segment (Nine Months Ended Jan 31) | Segment | FY2019 (in millions) | FY2018 (in millions) | | :--- | :--- | :--- | | Executive Search | $137.0 | $102.6 | | Advisory | ($24.4) | $72.5 | | RPO & Professional Search | $36.3 | $27.7 | | Total Operating Income | $78.6 | $144.2 | - The nine-month operating income for the Advisory segment swung to a loss of $24.4 million from an income of $72.5 million in the prior year, primarily due to the $106.6 million tradename write-off; excluding this charge, operating income would have been approximately $82.2 million[214][206] Liquidity and Capital Resources The company maintains a balanced capital allocation strategy, enhanced by a new $650 million credit agreement with $420.2 million available, and increased its share repurchase authorization to approximately $250 million - The company's capital allocation priorities are: 1) investing in growth, 2) returning capital to stockholders via dividends, and 3) opportunistic share repurchases[227] - Entered into a new $650 million Amended and Restated Credit Agreement on December 19, 2018; as of January 31, 2019, $226.9 million was drawn, leaving $420.2 million available[228] - On March 6, 2019, the Board approved a $200 million increase to the share repurchase program, bringing the total available capacity to approximately $250 million[231] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations, where a 10% adverse change could result in a $10.3 million loss, and interest rate changes, partially mitigated by an interest rate swap - The company's primary foreign currency exposures are to the Canadian Dollar, Euro, Pound Sterling, Swiss Franc, Singapore Dollar, Brazilian Real, and Mexican Peso; a hypothetical 10% adverse change in these exchange rates could result in a foreign exchange loss of $10.3 million[259] - Interest rate risk exists on the $226.9 million outstanding under the variable-rate Revolver; this risk is partially mitigated by an interest rate swap with a notional amount of $110.0 million, maturing June 15, 2021, which locks the interest rate at 1.919% (exclusive of credit spread) on that portion of the debt[260][262] Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures are effective, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO have concluded that the company's disclosure controls and procedures are effective as of January 31, 2019[264] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[264] Part II. Other Information Legal Proceedings The company is involved in routine litigation but is not currently engaged in any legal proceedings expected to have a material adverse effect on its business or financial condition - As of the report date, the company is not engaged in any legal proceedings that are expected to have a material adverse effect on its business or financial condition[267] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended April 30, 2018 - No material changes have occurred to the risk factors described in the company's Form 10-K for the year ended April 30, 2018[268] Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities During Q3 FY2019, the company repurchased 503,027 shares for $21.9 million, and subsequently increased its share repurchase authorization by $200 million to approximately $250 million Issuer Purchases of Equity Securities (Quarter Ended Jan 31, 2019) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Publicly Announced Program | | :--- | :--- | :--- | :--- | | Nov 2018 | — | $— | — | | Dec 2018 | 454,023 | $44.05 | 304,500 | | Jan 2019 | 49,004 | $39.59 | 48,300 | | Total | 503,027 | $43.62 | 352,800 | - On March 6, 2019, the Board of Directors approved an increase to the share repurchase program of approximately $200 million, bringing the total available capacity to approximately $250 million[270] Exhibits This section lists exhibits filed with the Form 10-Q, including amendments to corporate documents, the new Credit Agreement, and CEO/CFO certifications - Key exhibits filed include the Amended and Restated Credit Agreement dated December 19, 2018, and CEO/CFO certifications pursuant to Sarbanes-Oxley[271] Signatures The Form 10-Q report was signed on March 11, 2019, by Robert P. Rozek, Executive Vice President, Chief Financial Officer, and Chief Corporate Officer of Korn Ferry - The report was signed on March 11, 2019, by Robert P. Rozek, EVP, CFO, and Chief Corporate Officer[274]