Korn Ferry(US:KFY)2019-12-06 20:28Part I. Financial Information Consolidated Financial Statements This section presents the unaudited consolidated financial statements for the three and six months ended October 31, 2019 and 2018, notably impacted by the new ASC 842 lease accounting standard Consolidated Balance Sheets As of October 31, 2019, total assets increased to $2.49 billion from $2.33 billion due to $214.4 million in operating lease right-of-use assets, while cash and cash equivalents decreased from $626.4 million to $464.4 million Consolidated Balance Sheet Highlights (in thousands) | Account | October 31, 2019 | April 30, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $464,423 | $626,360 | | Total current assets | $1,049,498 | $1,136,810 | | Operating lease right-of-use assets, net | $214,421 | $— | | Goodwill | $578,307 | $578,298 | | Total assets | $2,486,281 | $2,334,852 | | Liabilities & Equity | | | | Total current liabilities | $450,465 | $550,958 | | Operating lease liability, non-current | $200,266 | $— | | Long-term debt | $273,310 | $222,878 | | Total liabilities | $1,227,790 | $1,091,465 | | Total stockholders' equity | $1,258,491 | $1,243,387 | - The company adopted a new lease accounting standard (ASC 842) in fiscal 2020, resulting in the recognition of operating lease right-of-use assets of $214.4 million and corresponding lease liabilities (current and non-current) of $248.8 million as of October 31, 201975253 Consolidated Statements of Income For the three months ended October 31, 2019, fee revenue slightly decreased to $492.4 million, operating income declined to $61.9 million, and net income attributable to Korn Ferry was $42.8 million or $0.77 per diluted share Consolidated Income Statement Summary (in thousands, except per share data) | Metric | Q2 FY2020 (3 mo ended Oct 31, '19) | Q2 FY2019 (3 mo ended Oct 31, '18) | YTD FY2020 (6 mo ended Oct 31, '19) | YTD FY2019 (6 mo ended Oct 31, '18) | | :--- | :--- | :--- | :--- | :--- | | Fee Revenue | $492,389 | $495,205 | $976,938 | $960,773 | | Total Revenue | $504,177 | $506,793 | $1,000,375 | $985,155 | | Operating Income | $61,869 | $70,987 | $122,203 | $15,868 | | Net Income Attributable to Korn Ferry | $42,804 | $46,034 | $85,755 | $7,423 | | Diluted EPS | $0.77 | $0.81 | $1.54 | $0.13 | Consolidated Statements of Cash Flows For the six months ended October 31, 2019, net cash used in operating activities significantly increased to $104.1 million, while net cash used in investing activities decreased to $22.8 million, and financing activities increased to $31.4 million Cash Flow Summary (in thousands) | Activity | Six Months Ended Oct 31, 2019 | Six Months Ended Oct 31, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(104,098) | $(32,189) | | Net cash used in investing activities | $(22,817) | $(53,416) | | Net cash used in financing activities | $(31,421) | $(27,440) | | Net decrease in cash and cash equivalents | $(161,937) | $(133,169) | Notes to Consolidated Unaudited Financial Statements The notes detail accounting policies, segment performance, financial instruments, and key disclosures, including business segments and a subsequent restructuring plan - The company operates through three global segments: Korn Ferry Advisory, Executive Search, and Korn Ferry RPO & Professional Search18 - In the prior year (six months ended Oct 31, 2018), the company recorded a non-cash intangible asset write-off of $106.6 million related to the discontinuation of sub-brands like Hay Group and Lominger as part of its rebranding to a single master brand44 Fee Revenue by Industry (Six Months Ended Oct 31) | Industry | 2019 Fee Revenue (in thousands) | % of Total | 2018 Fee Revenue (in thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Industrial | $278,917 | 28.5% | $279,699 | 29.1% | | Financial Services | $172,333 | 17.6% | $174,405 | 18.2% | | Life Sciences/Healthcare | $170,921 | 17.5% | $162,771 | 16.9% | | Consumer Goods | $147,060 | 15.1% | $150,662 | 15.7% | | Technology | $139,450 | 14.3% | $122,967 | 12.8% | - Subsequent to the quarter end, on November 1, 2019, the company adopted a restructuring plan related to recent acquisitions, with estimated costs of $20.0 million to $26.0 million for severance and office consolidation114116 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 FY2020 performance, highlighting a 1% fee revenue decrease to $492.4 million due to currency headwinds, alongside segment performance, liquidity, and capital allocation Results of Operations For Q2 FY2020, fee revenue decreased 1% year-over-year to $492.4 million, with Advisory and Executive Search declining, while RPO & Professional Search grew 18%, leading to a 13% decrease in operating income to $61.9 million Q2 FY2020 vs Q2 FY2019 Fee Revenue by Segment (in millions) | Segment | Q2 FY2020 | Q2 FY2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Advisory | $209.8 | $217.1 | $(7.3) | -3% | | Executive Search | $187.9 | $197.6 | $(9.7) | -5% | | RPO & Professional Search | $94.8 | $80.5 | $14.3 | +18% | | Total Fee Revenue | $492.4 | $495.2 | $(2.8) | -1% | Q2 FY2020 vs Q2 FY2019 Operating Income & Margin by Segment (in millions) | Segment | Q2 FY2020 Op. Income | Q2 FY2020 Margin | Q2 FY2019 Op. Income | Q2 FY2019 Margin | | :--- | :--- | :--- | :--- | :--- | | Advisory | $28.4 | 13.5% | $29.4 | 13.6% | | Executive Search | $41.2 | 21.9% | $51.5 | 26.0% | | RPO & Professional Search | $15.1 | 15.9% | $12.5 | 15.6% | | Total Operating Income | $61.9 | 12.6% | $71.0 | 14.3% | - For the six months ended October 31, 2018, the company took a one-time, non-cash write-off of tradenames of $106.6 million, which significantly impacted prior-year operating income, particularly in the Advisory segment121184185 Liquidity and Capital Resources The company maintains a balanced capital allocation strategy focused on growth, dividends, and opportunistic share repurchases, with $609.0 million in cash and marketable securities and $369.9 million available under its revolving credit facility - Capital allocation priorities are: 1) investing in growth initiatives (hiring, IP development, M&A), 2) returning capital to shareholders via a regular quarterly dividend, and 3) opportunistic share repurchases205 Liquidity Position as of October 31, 2019 | Item | Amount (in millions) | | :--- | :--- | | Cash and cash equivalents | $464.4 | | Marketable securities | $144.6 | | Total Cash & Marketable Securities | $609.0 | | Revolver Availability | $369.9 | - The company repurchased approximately $61.9 million of its stock in the six months ended October 31, 2019. As of October 31, 2019, $188.8 million remained available under the share repurchase program208239 - On October 29, 2019, the company drew down an additional $50.0 million on its revolver to help finance recently completed acquisitions108206 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency fluctuations and interest rate changes, which are mitigated through forward contracts and an interest rate swap agreement - A hypothetical 10% adverse change in the value of key foreign currencies could result in a foreign exchange loss of $10.9 million. The company uses foreign currency forward contracts to offset these risks230 - The company has $276.9 million outstanding under its variable-rate Revolver. A 100-basis point increase in LIBOR would have increased interest expense by approximately $1.2 million for the six months ended October 31, 2019. This risk is partially mitigated by an interest rate swap with a notional amount of $99.7 million231232 Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of October 31, 2019, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report234 Part II. Other Information Legal Proceedings The company is not currently engaged in any legal proceedings expected to have a material adverse effect on its financial condition or results of operations - As of the report date, the company is not engaged in any legal proceedings expected to have a material adverse effect on its business, financial condition, or operations237 Risk Factors No material changes have occurred in the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended April 30, 2019 - No material changes have occurred in the risk factors described in the company's Annual Report on Form 10-K for the year ended April 30, 2019238 Issuer Purchases of Equity Securities This section details the company's common stock repurchases during the quarter ended October 31, 2019, totaling 1,309,092 shares for approximately $49.2 million under its publicly announced program Issuer Purchases of Equity Securities (Quarter Ended Oct 31, 2019) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Program | Approx. Dollar Value Remaining in Program | | :--- | :--- | :--- | :--- | :--- | | Aug 2019 | 598,592 | $38.06 | 598,592 | $215.2 million | | Sep 2019 | 369,096 | $38.13 | 367,500 | $201.2 million | | Oct 2019 | 344,986 | $36.15 | 343,000 | $188.8 million | | Total | 1,312,674 | $37.58 | 1,309,092 | N/A | Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files