Korn Ferry(KFY) - 2024 Q1 - Quarterly Report

Part I. Financial Information Item 1. Consolidated Financial Statements This section presents Korn Ferry's unaudited consolidated financial statements for Q1 FY2024, highlighting a slight revenue increase, a significant net income decrease, and negative operating cash flow Consolidated Balance Sheets Consolidated Balance Sheets | Balance Sheet Items | July 31, 2023 (unaudited, $ in thousands) | April 30, 2023 ($ in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $562,209 | $844,024 | | Total current assets | $1,366,607 | $1,638,669 | | Goodwill | $910,211 | $909,491 | | Total assets | $3,313,468 | $3,574,444 | | Liabilities & Equity | | | | Compensation and benefits payable | $240,956 | $532,934 | | Total current liabilities | $655,791 | $976,260 | | Long-term debt | $396,379 | $396,194 | | Total liabilities | $1,620,938 | $1,921,439 | | Total stockholders' equity | $1,692,530 | $1,653,005 | - Cash and cash equivalents decreased significantly from $844.0 million at April 30, 2023, to $562.2 million at July 31, 2023, primarily due to a reduction in compensation and benefits payable reflecting annual bonus payments[7] Consolidated Statements of Income Consolidated Statements of Income | Income Statement Items | Three Months Ended July 31, 2023 ($ in thousands, except per share data) | Three Months Ended July 31, 2022 ($ in thousands, except per share data) | | :--- | :--- | :--- | | Fee revenue | $699,189 | $695,903 | | Total revenue | $706,262 | $703,148 | | Operating income | $56,768 | $111,599 | | Net income attributable to Korn Ferry | $46,605 | $77,247 | | Diluted EPS | $0.89 | $1.45 | | Cash dividends declared per share | $0.18 | $0.15 | - Operating income for the quarter fell by nearly 50% year-over-year, from $111.6 million to $56.8 million, primarily due to a significant increase in Cost of Services from $38.0 million to $77.2 million and higher Compensation and Benefits expenses[9] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows | Cash Flow Items | Three Months Ended July 31, 2023 ($ in thousands) | Three Months Ended July 31, 2022 ($ in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | ($274,487) | ($231,886) | | Net cash provided by (used in) investing activities | $11,443 | ($40,418) | | Net cash used in financing activities | ($20,626) | ($51,049) | | Net decrease in cash and cash equivalents | ($281,815) | ($338,286) | - The company experienced a net cash outflow from operating activities of $274.5 million, largely driven by a $321.5 million decrease in accounts payable and accrued liabilities, reflecting payments of annual performance-related bonuses[18] Notes to Consolidated Unaudited Financial Statements These notes detail accounting policies, financial statement breakdowns, core solutions, revenue recognition, segment performance, debt structure, and lease obligations, highlighting revenue shifts and contracted Adjusted EBITDA margins - The company's five core solutions are Organizational Strategy, Assessment and Succession, Leadership and Professional Development, Total Rewards, and Talent Acquisition, delivered through five lines of business: Consulting, Digital, Executive Search, Professional Search & Interim, and RPO[21][25][34] Fee Revenue by Industry | Fee Revenue by Industry | Q1 FY24 ($M) | Q1 FY24 % | Q1 FY23 ($M) | Q1 FY23 % | | :--- | :--- | :--- | :--- | :--- | | Industrial | $201.9 | 28.9% | $195.9 | 28.2% | | Financial Services | $128.3 | 18.3% | $118.8 | 17.1% | | Life Sciences/Healthcare | $119.4 | 17.1% | $133.2 | 19.1% | | Technology | $115.8 | 16.6% | $122.7 | 17.6% | | Consumer Goods | $96.4 | 13.8% | $95.9 | 13.8% | | Education/Non–Profit/General | $37.4 | 5.3% | $29.4 | 4.2% | | Total Fee Revenue | $699.2 | 100.0% | $695.9 | 100.0% | Fee Revenue by Segment | Fee Revenue by Segment | Q1 FY24 ($M) | Q1 FY23 ($M) | YoY Change | | :--- | :--- | :--- | :--- | | Consulting | $168.1 | $166.5 | +1.0% | | Digital | $88.0 | $83.8 | +5.0% | | Executive Search | $205.2 | $232.8 | -11.8% | | Professional Search & Interim | $142.2 | $98.9 | +43.8% | | RPO | $95.7 | $113.9 | -16.0% | | Total | $699.2 | $695.9 | +0.5% | Adjusted EBITDA by Segment | Adjusted EBITDA by Segment | Q1 FY24 ($M) | Q1 FY23 ($M) | YoY Change | | :--- | :--- | :--- | :--- | | Consulting | $25.2 | $29.6 | -14.9% | | Digital | $24.3 | $24.2 | +0.4% | | Executive Search | $42.5 | $62.2 | -31.7% | | Professional Search & Interim | $24.3 | $29.2 | -16.8% | | RPO | $10.5 | $17.7 | -40.7% | | Corporate | ($31.1) | ($30.6) | -1.6% | | Total | $95.7 | $132.2 | -27.6% | - As of July 31, 2023, the company had $396.4 million in long-term debt, primarily from its 4.625% Senior Unsecured Notes due 2027, with no outstanding borrowings under its $650 million revolving credit facility[104][110] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes flat fee revenue to acquisition-driven growth offsetting declines from economic slowdown, with net income and Adjusted EBITDA drops due to higher costs and compensation, while maintaining strong liquidity and a balanced capital allocation strategy Results of Operations Fee revenue remained flat at $699.2 million due to segment shifts, while operating income fell to $56.8 million and Adjusted EBITDA decreased 28% to $95.7 million, driven by revenue mix changes and higher compensation expenses - Fee revenue remained constant primarily due to an increase in the Interim portion of the Professional Search & Interim segment from acquisitions, offset by decreases in Executive Search, RPO, and permanent placements due to a decline in demand driven by the global economic slowdown[142] - Compensation and benefits expense increased by $14.3 million (3%) to $479.9 million, mainly due to higher deferred compensation expenses ($12.8 million) and severance costs ($5.2 million), partially offset by lower performance-related bonus expense ($9.7 million)[151] - Cost of services expense more than doubled to $77.2 million from $38.0 million year-over-year, an increase of $39.2 million, primarily driven by recent acquisitions in the Professional Search & Interim segment's interim services business due to its higher cost structure[172] - Adjusted EBITDA margin decreased from 19.0% to 13.7% year-over-year, primarily due to a change in fee revenue mix from higher-margin Executive Search and Permanent Placement to lower-margin Interim revenue[141][176] Liquidity and Capital Resources The company's liquidity is primarily from operations and credit facilities, with $781.1 million in cash and equivalents and $645.4 million available under its $650 million revolving credit facility, supporting growth investments, dividends, and share repurchases - The company's balanced capital allocation approach includes investing in growth, returning capital to stockholders via dividends, and opportunistic share repurchases[189] - On June 26, 2023, the Board of Directors approved a 20% increase in the quarterly dividend to $0.18 per share[192] - As of July 31, 2023, $231.0 million remained available for common stock repurchases under the company's program, with $4.2 million of stock repurchased during the quarter[193] - The company had $645.4 million available under its Credit Facilities as of July 31, 2023, following the expiration of the $500 million Delayed Draw Facility on June 24, 2023[138][191] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations and interest rate changes, mitigating foreign exchange exposure with forward contracts, while interest rate risk is limited due to fixed-rate debt and undrawn variable-rate facilities - The company's main market risks are foreign currency exchange fluctuations and interest rate changes[205] - A hypothetical 10% increase or decrease in key foreign currency values could result in an $11.6 million foreign exchange gain or loss, which the company offsets using forward contracts[208] - Interest rate risk is limited as the company's $400 million Senior Notes are fixed-rate, with no outstanding balances on its variable-rate credit facilities as of July 31, 2023[190][209] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of July 31, 2023, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of July 31, 2023[211] - No material changes in internal control over financial reporting occurred during the quarter[211] Part II. Other Information Item 1. Legal Proceedings The company is not currently engaged in any legal proceedings expected to have a material adverse effect on its business, financial condition, or results of operations - As of the report date, the company is not involved in any legal proceedings expected to have a material adverse effect on its business[213] Item 1A. 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, 2023 - No material changes have occurred to the risk factors described in the company's most recent Form 10-K[214] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 FY2024, the company repurchased 291,441 shares at an average price of $49.27, including 90,000 shares under its public program for $4.2 million, with $231.0 million remaining for future repurchases Share Repurchase Activity | Period | Total Shares Purchased (Shares) | Average Price Paid ($) | Shares Purchased (Public Program, Shares) | Value Remaining in Program ($) | | :--- | :--- | :--- | :--- | :--- | | May 2023 | 90,000 | $46.48 | 90,000 | $231.0 million | | June 2023 | 514 | $51.55 | 0 | $231.0 million | | July 2023 | 200,927 | $50.51 | 0 | $231.0 million | | Total | 291,441 | $49.27 | 90,000 | $231.0 million | - The share repurchase program has no expiration date, with approximately $231.0 million remaining authorized for repurchases as of July 31, 2023[215] Item 5. Other Information No other material information or Rule 10b5-1 trading arrangements by directors or Section 16 officers were reported for the quarter - During the quarter ended July 31, 2023, no director or Section 16 officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements[216]