Investor Relations

Press Release

Korn Ferry International Announces Third Quarter Fiscal 2016 Results of Operations

March 9, 2016
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Highlights
- Korn Ferry reports record fee revenue. Fee revenue was $344.2 million on a U.S. GAAP basis and $350.1 million on an adjusted basis (includes $5.9 million in deferred revenue adjustment related to the Hay Group acquisition).
- Excluding legacy Hay Group, fee revenue was $272.3 million, an increase of 14.0% on a constant currency basis (9.1% at actual exchange rates) from Q3 FY'15. The increase was driven by continued strong performance in the North America region of Executive Recruitment (20.9% on a constant currency basis) and the Futurestep segment (23.7% on a constant currency basis).
- Legacy Hay Group produced an Adjusted EBITDA margin of 11.0% on a standalone basis. Combined with the legacy Leadership & Talent Consulting segment, the new combined Hay Group segment produced an Adjusted EBITDA margin of 15.6% in Q3 FY'16. Korn Ferry consolidated Adjusted EBITDA margin was 13.6% in Q3 FY'16.
- Q3 FY'16 diluted loss per share was $0.30. Adjusted diluted earnings per share was $0.52 in Q3 FY'16, excluding $58.3 million of restructuring charges, integration/acquisition and separation costs, and a deferred revenue adjustment related to the Hay Group acquisition, compared to diluted earnings per share of $0.46 in Q3 FY'15.
- The Company declared a quarterly dividend of $0.10 per share on March 8, 2016, payable on April 15, 2016 to stockholders of record on March 25, 2016.

LOS ANGELES, March 9, 2016 /PRNewswire/ -- Korn/Ferry International (NYSE: KFY), the preeminent global people and organizational advisory firm, today announced third quarter fee revenue of $344.2 million and adjusted diluted earnings per share of $0.52, excluding $58.3 million of items described above.  On a GAAP basis, diluted loss per share was $0.30 in the three months ended January 31, 2016.

"Despite the threat of economic contagion at the beginning of this calendar year, I am pleased to report 14% year over year growth in fee revenue at constant currency in our third fiscal quarter – excluding the legacy Hay Group business. Combined, adjusted fee revenue for the quarter was $350 million," said Gary D. Burnison, CEO, Korn Ferry.

"We have successfully completed the initial synergy phase of our combination with Hay Group, which is partially reflected in the new combined Hay Group segment Adjusted EBITDA margin of 15.6% in the quarter.  Over the last few weeks, we have launched phase two of our Hay Group unification, which incorporates growth areas such as the expansion of our intellectual property, solutions and offerings.  Our intent is to substantially complete the last phase of our integration activities by July 31, 2016, which will be eight months from the closing date of the transaction. 

"After a short 90 days with Hay Group, I am more confident than ever that we are creating the preeminent global people and organizational advisory firm," Burnison added.

 

Hay Group Integration

The acquisition of Hay Group was completed on December 1, 2015.  In the seasonally weaker months of December and January, legacy Hay Group generated approximately $77.8 million of adjusted fee revenue, or $71.9 million, excluding the deferred revenue adjustment of $5.9 million related to the acquisition.  Also, in the third quarter, we completed a number of restructuring actions targeted at improving the Hay Group's cost base through the elimination of redundant positions and, to a lesser extent, the consolidation of a number of offices.  These actions resulted in charges of $30.6 million and due to the timing, savings were only partially realized in the quarter and resulted in an Adjusted EBITDA margin of 11% for legacy Hay Group.  When combined with the legacy Leadership & Talent Consulting segment, Adjusted EBITDA margin was 15.6%.

In the fourth quarter of FY'16, we estimate that legacy Hay Group will generate approximately $115 million to $119 million of adjusted fee revenue with an Adjusted EBITDA margin of 12% to 13%(1) as the business continues to benefit from the third quarter restructuring actions.  When combined with our legacy Leadership & Talent Consulting business, the FY'16 fourth quarter Adjusted EBITDA margin for the new Hay Group segment is expected to range from 15.5% to 16%.  Exiting the fourth quarter of FY'16, we expect the new Hay Group segment to realize the full benefit of the third quarter restructuring actions at which point, the Adjusted EBITDA margin is estimated to be 16% to 17%. These estimates are subject to the assumptions set forth in the "Outlook" section below.

The integration of Hay Group is an on-going effort and will include the future additional consolidation of office space and the elimination of other redundant operational and general and administrative expenses.  We expect the majority of these restructuring actions to take place in the first quarter of FY'17.  We estimate the cost of these actions to be in the range of $20 million to $26 million, resulting in incremental annualized savings of approximately $17 million to $23 million, of which approximately $15 million to $20 million expected to be realized by the new Hay Group segment.

____________
(1)

 

Q4 FY'16

Legacy Hay Group
Adjusted EBITDA Margin and
EBITDA Margin

  
 

Low

  

High

  
     

Legacy Hay Group Adjusted EBITDA margin

12.0%

  

13.0%

  

  Legacy Hay Group deferred revenue adjustment

(5.2)

  

(4.9)

  

  Integration/acquisition costs

(7.2)

  

(5.1)

  

  Restructuring costs

(1.7)

  

(0.8)

  

  Retention bonuses

(3.6)

  

(3.3)

  

Hay Group EBITDA margin

(5.7)%

  

(1.1)%

  

 

 

 

Selected Financial Results

(dollars in millions, except per share amounts)
 
 

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

Fee revenue

$          344.2

  

$       249.5

  

$      892.2

  

$        756.4

  

Total revenue

$          358.9

  

$       258.9

  

$      929.6

  

$        783.9

  

Operating (loss) income

$         (14.1)

  

$         32.9

  

$        47.8

  

$          85.9

  

Operating margin

(4.1)%

  

13.2%

  

5.4%

  

11.4%

  

Net (loss) income

$          (16.0)

  

$         23.0

  

$        25.1

  

$          62.9

  

Basic (loss) earnings per share

$          (0.30)

  

$         0.46

  

$        0.49

  

$          1.27

  

Diluted (loss) earnings per share

$          (0.30)

  

$         0.46

  

$        0.48

  

$          1.25

  
                 

EBITDA Results (a):

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

EBITDA

$          (10.6)

  

$          39.1

  

$        64.4

  

$        111.1

  

EBITDA margin

(3.1)%

  

15.7%

  

7.2%

  

14.7%

  
         

Adjusted Results (b):

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

Fee revenue

$         350.1

  

$        249.5

  

$       898.1

  

$        756.4

  

EBITDA (a)

$           47.7

  

$          39.1

  

$       135.4

  

$        121.0

  

EBITDA margin (a)

13.6%

  

15.7%

  

15.1%

  

16.0%

  

Net income

$           28.8

  

$          23.0

  

$        78.1

  

$          69.9

  

Basic earnings per share

$           0.53

  

$          0.46

  

$        1.51

  

$          1.41

  

Diluted earnings per share

$           0.52

  

$          0.46

  

$        1.50

  

$          1.39

  

____________

(a)

EBITDA refers to earnings before interest, taxes, depreciation and amortization.  Adjusted EBITDA further adjusts EBITDA to exclude restructuring charges (recoveries), net, integration/acquisition costs, and includes the deferred revenue adjustment related to the Hay Group acquisition and separation costs.  EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures (see attached reconciliations). 

   

(b)

Adjusted results are non-GAAP financial measures that adjust for the following (see attached reconciliations):

 

 

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

Deferred revenue adjustment related to the Hay Group acquisition

 

$                  5.9

  

 

$                 —

  

 

$              5.9

  

$                   —

  
                 

Restructuring charges (recoveries), net

$                30.6

  

$              (0.4)

  

$            30.6

  

$                 9.5

  

Integration/acquisition costs

$                21.1

  

$                0.4

  

$            33.8

  

$                 0.4

  

Separation costs

$                  0.7

  

$                 —

  

$              0.7

  

$                  —

  

 

Adjusted fee revenue was $350.1 million in Q3 FY'16 (including $5.9 million in deferred revenue adjustment related to the Hay Group acquisition), $344.2 million on a U.S. GAAP basis.  Excluding fee revenue related to the Hay Group acquisition, fee revenue was $272.3 million, an increase of $34.9 million, or 14.0%, on a constant currency basis ($22.8 million, or 9.1%, at actual exchange rates) from Q3 FY'15.  The increase was primarily due to increases in fee revenue in the North America region of Executive Recruitment and the Futurestep segment, as well as from Pivot Leadership which was acquired on March 1, 2015.

Compensation and benefit expenses were $242.4 million in Q3 FY'16, an increase of $77.7 million, or 47.2%, compared to the year-ago quarter.  The increase was primarily driven by the acquisition of Hay Group which contributed $50.9 million in compensation and benefit expenses in Q3 FY'16.  The rest of the change is primarily due to integration/acquisition costs of $11.9 million related to the Hay Group acquisition and higher salaries and related payroll taxes of $11.4 million due to a 13.1% increase in the average headcount (excluding legacy Hay Group) in Q3 FY'16 compared to Q3 FY'15.

General and administrative expenses were $57.4 million in Q3 FY'16, an increase of $20.6 million compared to Q3 FY'15.  The increase was primarily driven by the acquisition of Hay Group which contributed $12.3 million in general and administrative expenses in Q3 FY'16.  The rest of the change was driven by integration/acquisition costs of $9.2 million related to the Hay acquisition that were incurred in Q3 FY'16.

In addition to the previously discussed restructuring charges, during the quarter, the Company spent $21.1 million on integration/acquisition costs, which included legal and professional fees associated with the close of transaction and the integration of the operations of Hay Group.

Adjusted EBITDA was $47.7 million in Q3 FY'16, an increase of $8.6 million, or 22.0%, compared to Q3 FY'15.  Adjusted EBITDA margin was 13.6% in Q3 FY'16 and 15.7% in Q3 FY'15.  Excluding Adjusted EBITDA of $8.6 million for the legacy Hay acquisition, Adjusted EBITDA was flat compared to the year-ago quarter.  The market movements in our marketable securities, CSV of COLI and deferred compensation negatively impacted our Adjusted EBITDA by $3.3 million or 100 basis points in the three months ended January 31, 2016.

On a GAAP basis, operating loss was $14.1 million in Q3 FY'16, compared to operating income of $32.9 million in Q3 FY'15, resulting in an operating margin of (4.1)% in Q3 FY'16 compared to 13.2% in the year-ago quarter.  The decrease in operating income was due to $52.4 million of restructuring charges, integration/acquisition costs and separation costs.

Balance Sheet and Liquidity

Cash and marketable securities were $343.3 million at January 31, 2016, compared to $525.4 million at April 30, 2015.  Cash and marketable securities decreased by $182.1 million from April 30, 2015, primarily due to the payment of the cash consideration for the acquisition of Hay Group on December 1, 2015, Q1 FY'16 payments of FY'15 annual bonuses and $16.1 million in dividend payments made to stockholders during the year, partially offset by $150 million in cash borrowed from the Company's term loan facility and cash provided by operating activities.  Net of amounts held in trust for deferred compensation plans and accrued bonuses, cash and marketable securities were $80.9 million and $235.6 million at January 31, 2016 and April 30, 2015, respectively.  As of January 31, 2016 and April 30, 2015, we held $104.9 million and $143.4 million, respectively, of cash and cash equivalents in foreign locations, net of amounts held in trust for deferred compensation plans and bonuses. 

The Company declared a quarterly dividend of $0.10 per share on March 8, 2016, payable on April 15, 2016 to stockholders of record on March 25, 2016.

 

Results by Segment
 

Selected Executive Recruitment Data

(dollars in millions)
 
 

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

Fee revenue

$        154.6

  

$       143.4

  

$       463.2

  

$        440.8

  

Total revenue

$        159.6

  

$       149.0

  

$       479.1

  

$        457.6

  

Operating income

$          34.6

  

$         33.6

  

$       108.7

  

$          87.7

  

Operating margin

22.4%

  

23.4%

  

23.5%

  

19.9%

  
                 

Ending number of consultants

492

  

444

  

492

  

444

  

Average number of consultants

493

  

442

  

472

  

438

  

Engagements billed

2,975

  

3,050

  

6,440

  

6,458

  

New engagements (a)

1,302

  

1,260

  

4,054

  

3,783

  
                 

EBITDA Results (b):

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

EBITDA

$          35.7

  

$        35.2

  

$      113.2

  

$          93.6

  

EBITDA margin

23.0%

  

24.5%

  

24.4%

  

21.2%

  
         

Adjusted Results (c):

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

EBITDA (b)

$          43.0

  

$        35.1

  

$      120.5

  

$          99.0

  

EBITDA margin (b)

27.7%

  

24.4%

  

26.0%

  

22.4%

  

____________

(a)

Represents new engagements opened in the respective period.
   

(b)

EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures (see attached reconciliations).
   

(c)

Adjusted results are non-GAAP financial measures that exclude the following (see attached reconciliations):

 

 

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

Restructuring charges (recoveries), net

$                   7.3

  

$              (0.1)

  

$              7.3

  

$                  5.4

  

 

Executive Recruitment

Fee revenue was $154.6 million in Q3 FY'16, an increase of $11.2 million, or 7.8% ($18.3 million, or 12.8% on a constant currency basis), compared to Q3 FY'15.  The overall increase in fee revenue was primarily attributable to a 10.6% increase in the weighted-average fees billed per engagement in Q3 FY'16 compared to Q3 FY'15.  On a constant currency basis, all regions, with the exception of Asia Pacific, experienced year-over-year growth with North America at 20.9%, South America at 9.1%, and EMEA at 4.6%.

Adjusted EBITDA was $43.0 million and $35.1 million during Q3 FY'16 and Q3 FY'15, respectively.  The increase in Adjusted EBITDA was driven by higher fee revenue and decreases in general and administrative expenses, partially offset by increases in compensation and benefit expenses due to higher salaries and related payroll taxes and an increase in performance related bonus expense in Q3 FY'16 compared to Q3 FY'15.  The decrease in general and administrative expenses was due to lower legal and professional fees in Q3 FY'16 compared to the year-ago quarter.

Operating income was $34.6 million in Q3 FY'16, an increase of $1.0 million, or 3.0%, compared to Q3 FY'15, resulting in operating margin of 22.4% in Q3 FY'16 compared to 23.4% in Q3 FY'15.  Operating income was impacted by all of the above items as well as restructuring charges of $7.3 million incurred in Q3 FY'16 compared to restructuring recoveries of $0.1 million in Q3 FY'15.

 

Selected Hay Group Data

(dollars in millions)
 
 

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

Fee revenue

$         140.6

  

$        64.4

  

$       283.4

  

$        194.3

  

Total revenue

$         146.1

  

$        66.0

  

$       293.5

  

$        199.9

  

Operating (loss) income

$        (21.6)

  

$          8.6

  

$         (6.3)

  

$          19.8

  

Operating margin

(15.3)%

  

13.3%

  

(2.2)%

  

10.2%

  
                 

Ending number of consultants (a)

183

  

140

  

183

  

140

  

Staff utilization (b)

62%

  

65%

  

65%

  

70%

  
                 

EBITDA Results (c):

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

EBITDA

$         (14.7)

  

$        11.7

  

$          7.0

  

$          29.5

  

EBITDA margin

(10.5)%

  

18.3%

  

2.5%

  

15.2%

  
         

Adjusted Results (d):

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

Fee revenue

$        146.5

  

$         64.4

  

$      289.3

  

$        194.3

  

EBITDA (c)

$          22.8

  

$         11.7

  

$        48.2

  

$          32.3

  

EBITDA margin (c)

15.6%

  

18.3%

  

16.7%

  

16.6%

  

____________

(a)

Represents number of employees originating consulting services in legacy Leadership & Talent Consulting.  We are in process of mapping legacy Hay Group personnel to our existing job categories and will include them in future periods upon completion of the mapping.
   

(b)

Calculated by dividing the number of hours our full-time Hay Group professional staff record to engagements during the period, by the total available working hours during the same period.
   

(c)

EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures (see attached reconciliations).
   

(d)

Adjusted results are non-GAAP financial measures that adjust for the following (see attached reconciliations):

 

 

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

Deferred revenue adjustment related to the Hay Group acquisition

$                 5.9

  

$                 —

  

$              5.9

  

$                   —

  
                 

Restructuring charges, net

$               23.2

  

$                 —

  

$            23.2

  

$                  2.8

  

Integration/acquisition costs

$                 8.4

  

$                 —

  

$            12.1

  

$                   —

  

 

Hay Group

Fee revenue was $146.5 million on an adjusted basis, $140.6 million on a U.S. GAAP basis in Q3 FY'16, an increase of $76.2 million on a U.S GAAP basis from the year-ago quarter.  The acquisition of Hay Group contributed $77.8 million in fee revenue on an adjusted basis, $71.9 million on a U.S. GAAP basis in Q3 FY'16.  The rest of the change is primarily attributed to $4.9 million of fee revenue from Pivot Leadership.

Adjusted EBITDA was $22.8 million during Q3 FY'16, an increase of $11.1 million, or 94.9%, compared to Q3 FY'15.  Adjusted EBITDA margin was 15.6% in Q3 FY'16 and 18.3% in Q3 FY'15.  The decrease in Adjusted EBITDA margin was due to the inclusion of legacy Hay Group results, which generated an Adjusted EBITDA margin of 11.0%.

Operating loss was $21.6 million in Q3 FY'16, compared to operating income of $8.6 million in Q3 FY'15, resulting in an operating margin of (15.3)% in the current quarter compared to 13.3% in the year-ago quarter.  The decrease in operating income was due to $31.6 million of restructuring charges and integration/acquisition costs.

 

Selected Futurestep Data

(dollars in millions)
 
 

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

Fee revenue

$             49.0

  

$             41.7

  

$      145.6

  

$         121.3

  

Total revenue

$             53.2

  

$             43.9

  

$      157.0

  

$         126.4

  

Operating income

$               6.6

  

$               5.8

  

$        19.7

  

$           14.4

  

Operating margin

13.5%

  

13.8%

  

13.5%

  

11.8%

  
                 

Engagements billed (a)

824

  

743

  

1,718

  

1,532

  

New engagements (b)

435

  

373

  

1,366

  

1,150

  
                 

EBITDA Results (c):

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

EBITDA

$              7.3

  

$            6.3

  

$        21.6

  

$           15.8

  

EBITDA margin

14.9%

  

14.9%

  

14.8%

  

13.0%

  
                 

Adjusted Results (d):

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

EBITDA (c)

$             7.3

  

$            6.0

  

$        21.6

  

$           16.9

  

EBITDA margin (c)

14.9%

  

14.3%

  

14.8%

  

13.9%

  

____________

(a)

Represents search engagements billed.
   

(b)

Represents new search engagements opened in the respective period.
   

(c)

EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures (see attached reconciliations).
   

(d)

Adjusted results are non-GAAP financial measures that exclude the following (see attached reconciliations):

 

 

Third Quarter

  

Year to Date

  
 

FY'16

  

FY'15

  

FY'16

  

FY'15

  

Restructuring charges (recoveries), net

$                     —

  

$              (0.3)

  

$                —

  

$                  1.1

  

 

Futurestep

Fee revenue was $49.0 million in Q3 FY'16, an increase of $7.3 million, or 17.5% ($9.9 million, or 23.7% on a constant currency basis), compared to the year-ago quarter. The higher fee revenue was driven by a $5.7 million increase in recruitment process outsourcing in Q3 FY'16 compared to Q3 FY'15.  The rest of the increase was due to higher fee revenue of $2.0 million in professional search due to a 10.9% increase in engagements billed in Q3 FY'16 compared to Q3 FY'15.  

Adjusted EBITDA was $7.3 million during Q3 FY'16, an increase of $1.3 million, or 21.7%, compared to Q3 FY'15, due primarily to the increase in fee revenue, partially offset by higher compensation and benefit expenses of $4.8 million driven by higher salaries and related payroll taxes as a result of a 34.3% increase in average headcount in Q3 FY'16 compared to the year-ago quarter.

Operating income was $6.6 million in Q3 FY'16, an increase of $0.8 million, compared to Q3 FY'15, resulting in an operating margin of 13.5% in the current quarter compared to 13.8% in the year-ago quarter.  Operating income was impacted by the items discussed above.

Outlook

Assuming worldwide economic conditions, financial markets and foreign exchange rates remain steady, on a consolidated adjusted basis:

  • Q4 FY'16 fee revenue is expected to be in the range of $385 million and $405 million; and
  • Q4 FY'16 diluted earnings per share is likely to range from $0.50 to $0.58.

On a consolidated basis, measured by U.S. GAAP:

  • Q4 FY'16 fee revenue is expected to be in the range of $379 million and $399 million; and
  • Q4 FY'16 diluted earnings per share is likely to range between $0.11 to $0.26.

 

 

Q4 FY'16
Fee Revenue
Outlook(1)

    

Q4 FY'16
Earnings Per Share
Outlook(2)

  
 

Low

  

High

    

Low

  

High

  
 

(in millions)

            

Korn Ferry consolidated adjusted fee revenue

$     385

  

$      405

  

Adjusted consolidated diluted earnings per share

$         0.50

  

$       0.58

  

Legacy Hay Group deferred revenue adjustment

(6)

  

(6)

  

Legacy Hay Group deferred revenue adjustment

(0.07)

  

(0.07)

  

Korn Ferry consolidated US GAAP fee revenue

$     379

  

$      399

  

Integration/acquisition costs

(0.10)

  

(0.07)

  
         

Restructuring charges

(0.02)

  

(0.01)

  
         

Retention bonuses

(0.05)

  

(0.05)

  
         

Venezuela exchange rate

(0.14)

  

(0.11)

  
         

Tax rate impact

(0.01)

  

(0.01)

  
         

Consolidated US GAAP diluted earnings per share

$         0.11

  

$       0.26

  
   

(1)

Korn Ferry consolidated adjusted fee revenue is a non-GAAP financial measure that excludes the deferred revenue adjustment relating to Hay Group.
   

(2)

Adjusted consolidated diluted earnings per share is a non-GAAP financial measure that excludes the items listed below in the table above.

 

Additionally, in connection with the recently announced devaluation of the Venezuelan currency, the Company expects to take a non-cash charge of $9 million to $12 million.

Earnings Conference Call Webcast

The earnings conference call will be held today at 7:30 AM (EST) and hosted by CEO Gary Burnison, CFO Robert Rozek and SVP Finance Gregg Kvochak.  The conference call will be webcast and available online at www.kornferry.com, accessible through the Investor Relations section.  We will also post to this section of our website earnings slides, which will accompany our webcast, and other important information, and encourage you to review the information that we make available on our website.

About Korn Ferry

Korn Ferry is the preeminent global people and organizational advisory firm.  We help leaders, organizations and societies succeed by releasing the full power and potential of people.  Our nearly 7,000 colleagues deliver services through Korn Ferry and our Hay Group and Futurestep divisions.  Visit www.kornferry.com for more information.

Forward-Looking Statements

Statements in this press release and our conference call that relate to future results and events ("forward-looking statements") are based on Korn Ferry's current expectations.  These statements, which include words such as "believes", "expects" or "likely", include references to our outlook.  Readers are cautioned not to place undue reliance on such statements.  Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties that are beyond the control of Korn Ferry.  The potential risks and uncertainties include those relating to competition, the dependence on attracting and retaining qualified and experienced consultants, our ability to successfully integrate acquired businesses including Hay Group, our ability to recognize the anticipated benefits of the acquisition of Hay Group which may be affected by, among other things, competition, our ability to grow and manage growth profitability, maintain relationships with customers and suppliers and retain key employees, costs related to the acquisition of Hay Group, maintaining our brand name and professional reputation, potential legal liability, the portability of client relationships, global and local political or economic developments in or affecting countries where we have operations, currency fluctuations in our international operations, risks related to growth, alignment of our cost structure with our growth, restrictions imposed by off-limits agreements, reliance on information processing systems, cyber security vulnerabilities, limited protection of our intellectual property, our ability to enhance and develop new technology, our ability to develop new products and services, consolidation of industries we serve, our ability to successfully recover from a disaster or other business continuity problems, changes in our accounting estimates/assumptions, impairment of goodwill and other intangible assets, deferred tax assets, seasonality, our ability to successfully rationalize our cost structure and employment liability risk.  For a detailed description of risks and uncertainties that could cause differences, please refer to Korn Ferry's periodic filings with the Securities and Exchange Commission.  Korn Ferry disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Use of Non-GAAP Financial Measures

This press release contains financial information calculated other than in accordance with U.S. Generally Accepted Accounting Principles ("GAAP").  In particular, it includes:

  • adjusted net income, adjusted to exclude restructuring charges, integration/acquisition costs, separation costs and includes the deferred revenue adjustment related to the Hay Group acquisition, net of income tax effect;
  • adjusted basic and diluted earnings per share, adjusted to exclude restructuring charges, integration/acquisition costs, separation costs and includes the deferred revenue adjustment related to the Hay Group acquisition, net of income tax effect; and in the case of the outlook section, also adjusted for Venezuelan exchange rate and tax rate impact;
  • constant currency amounts that represent the outcome that would have resulted had exchange rates in the reported period been the same as those in effect in the comparable prior year period;
  • EBITDA, or earnings before interest, taxes, depreciation and amortization and EBITDA margin;
  • Adjusted EBITDA, which is EBITDA further adjusted to exclude restructuring charges, integration/acquisition costs, separation costs and includes the deferred revenue adjustment related to the Hay Group acquisition, and Adjusted EBITDA margin;
  • Legacy Hay Group EBITDA, which is EBITDA (as described above) for legacy Hay Group, and legacy Hay Group Adjusted EBITDA, which is Adjusted EBITDA (as described above) for legacy Hay Group, further adjusted to include the deferred revenue adjustment relating to the Hay Group acquisition;
  • Consolidated adjusted fee revenue, which includes the deferred revenue adjustment relating to the Hay Group acquisition; and
  • Legacy Hay Group adjusted fee revenue, which includes the deferred revenue adjustment relating to the Hay Group acquisition;  

This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial information determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Management believes the presentation of non-GAAP financial measures in this press release provides meaningful supplemental information regarding Korn Ferry's performance by excluding certain charges and other items that may not be indicative of Korn Ferry's ongoing operating results.  The use of these non-GAAP financial measures facilitate comparisons to Korn Ferry's historical performance.  Korn Ferry includes these non-GAAP financial measures because management believes they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its evaluation of Korn Ferry's ongoing operations and financial and operational decision-making.  In the case of constant currency amounts, management believes the presentation of such information provides meaningful supplemental information regarding Korn Ferry's performance as excluding the impact of exchange rate changes on Korn Ferry's financial performance allows investors to make more meaningful period-to-period comparisons of the Company's operating results, to better identify operating trends that may otherwise be masked or distorted by exchange rate changes and to perform related trend analysis, and provides a higher degree of transparency of information used by management in its evaluation of Korn Ferry's ongoing operations and financial and operational decision-making.  In the case of legacy Hay Group results, management believes the presentation of such information provides investors with greater visibility into the impact of the Hay Group acquisition without regard to incremental charges and transaction costs.

[Tables attached]

 

KORN FERRY AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF OPERATIONS 

 (in thousands, except per share amounts) 
 
               
 

 Three Months Ended 

  

 Nine Months Ended 
 

 January 31, 

  

 January 31, 
 

2016

  

2015

  

2016

  

2015
 

 (unaudited) 

 Fee revenue 

$ 344,158

  

$ 249,545

  

$ 892,152

  

$ 756,435

 Reimbursed out-of-pocket engagement expenses 

14,721

  

9,326

  

37,401

  

27,478

           Total revenue 

358,879

  

258,871

  

929,553

  

783,913
               

 Compensation and benefits 

242,429

  

164,802

  

610,493

  

508,564

 General and administrative expenses 

57,395

  

36,767

  

139,449

  

104,280

 Reimbursed expenses 

14,721

  

9,326

  

37,401

  

27,478

 Cost of services 

17,494

  

8,653

  

38,850

  

27,824

 Depreciation and amortization 

10,330

  

6,814

  

24,933

  

20,363

 Restructuring charges (recoveries), net 

30,577

  

(418)

  

30,577

  

9,468

           Total operating expenses 

372,946

  

225,944

  

881,703

  

697,977
               

 Operating (loss) income  

(14,067)

  

32,927

  

47,850

  

85,936

 Other (loss) income, net 

(7,092)

  

(1,478)

  

(9,812)

  

3,061

 Interest (expense) income, net 

(372)

  

288

  

(1,215)

  

(1,426)

           (Loss) income before (benefit) provision for income taxes and equity in earnings of unconsolidated subsidiaries 

              

(21,531)

  

31,737

  

36,823

  

87,571

 Equity in earnings of unconsolidated subsidiaries 

181

  

778

  

1,446

  

1,696

 Income tax (benefit) provision  

(5,355)

  

9,576

  

13,211

  

26,392

            Net (loss) income 

$ (15,995)

  

$   22,939

  

$   25,058

  

$   62,875
               

 (Loss) earnings per common share: 

              

      Basic 

$      (0.30)

  

$       0.46

  

$       0.49

  

$       1.27

      Diluted 

$      (0.30)

  

$       0.46

  

$       0.48

  

$       1.25
               

 Weighted-average common shares outstanding: 

              

      Basic 

54,003

  

49,135

  

51,159

  

48,973

      Diluted 

54,003

  

49,724

  

51,683

  

49,663
               

 Cash dividends declared per share: 

$       0.10

  

$            -

  

$       0.30

  

$            -

 

KORN FERRY AND SUBSIDIARIES

FINANCIAL SUMMARY BY SEGMENT

(in thousands)

 (unaudited) 
                                 
         
   

Three Months Ended January 31,

  

Nine Months Ended January 31,
   

2016

      

2015

  

% Change

  

2016

      

2015

  

% Change
                                 

Fee Revenue:

                              

Executive recruitment:

                              
 

North America

$   93,520

      

$   78,026

  

20%

  

$ 276,667

      

$ 243,055

  

14%
 

EMEA 

35,498

      

36,816

  

(4%)

  

108,158

      

113,788

  

(5%)
 

Asia Pacific

19,094

      

20,924

  

(9%)

  

59,307

      

61,615

  

(4%)
 

South America

6,541

      

7,713

  

(15%)

  

19,083

      

22,366

  

(15%)

Total executive recruitment

154,653

      

143,479

  

8%

  

463,215

      

440,824

  

5%

Hay Group

140,508

      

64,313

  

118%

  

283,350

      

194,269

  

46%

Futurestep

48,997

      

41,753

  

17%

  

145,587

      

121,342

  

20%
 

Total fee revenue

344,158

      

249,545

  

38%

  

892,152

      

756,435

  

18%

 Reimbursed out-of-pocket engagement expenses 

14,721

      

9,326

  

58%

  

37,401

      

27,478

  

36%
 

Total revenue

$ 358,879

      

$ 258,871

  

39%

  

$ 929,553

      

$ 783,913

  

19%
                                 

Operating (Loss) Income:

    

Margin

      

Margin

      

Margin

      

Margin

Executive recruitment:

                              
 

North America

$   28,957

  

31.0%

  

$   22,673

  

29.1%

  

$   80,524

  

29.1%

  

$   60,788

  

25.0%
 

EMEA

1,707

  

4.8%

  

5,073

  

13.8%

  

14,912

  

13.8%

  

13,337

  

11.7%
 

Asia Pacific

2,775

  

14.5%

  

4,096

  

19.6%

  

9,668

  

16.3%

  

10,042

  

16.3%
 

South America

1,166

  

17.8%

  

1,741

  

22.6%

  

3,644

  

19.1%

  

3,513

  

15.7%

Total executive recruitment

34,605

  

22.4%

  

33,583

  

23.4%

  

108,748

  

23.5%

  

87,680

  

19.9%

Hay Group

(21,559)

  

(15.3%)

  

8,577

  

13.3%

  

(6,286)

  

(2.2%)

  

19,799

  

10.2%

Futurestep

6,630

  

13.5%

  

5,760

  

13.8%

  

19,715

  

13.5%

  

14,367

  

11.8%

Corporate

(33,743)

      

(14,993)

      

(74,327)

      

(35,910)

    
 

 Total operating (loss) income

$ (14,067)

  

(4.1%)

  

$   32,927

  

13.2%

  

$   47,850

  

5.4%

  

$   85,936

  

11.4%

 

KORN FERRY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 (in thousands, except per share amounts) 
       
       
 

January 31,

  

April 30,
 

2016

  

2015

ASSETS

 (unaudited) 

    

Cash and cash equivalents

$    207,342

  

$    380,838

Marketable securities

9,118

  

25,757

Receivables due from clients, net of allowance for doubtful accounts 

      

of $11,775 and $9,958 respectively

330,687

  

188,543

Income taxes and other receivables

32,549

  

10,966

Prepaid expenses and other assets

43,157

  

31,054

Total current assets

622,853

  

637,158
       

Marketable securities, non-current

126,820

  

118,819

Property and equipment, net

90,150

  

62,088

Cash surrender value of company owned life insurance policies, net of loans

104,837

  

102,691

Deferred income taxes

61,448

  

59,841

Goodwill

575,112

  

254,440

Intangible assets, net

238,889

  

47,901

Investments and other assets

53,191

  

34,863

Total assets

$ 1,873,300

  

$ 1,317,801
       

LIABILITIES AND STOCKHOLDERS' EQUITY

      

Accounts payable

$      25,656

  

$      19,238

Income taxes payable

2,612

  

3,813

Compensation and benefits payable

213,599

  

219,364

Term loan

31,034

  

-

Other accrued liabilities

155,100

  

63,595

Total current liabilities

428,001

  

306,010
       

Deferred compensation and other retirement plans

203,378

  

173,432

Term loan, non-current

116,466

  

-

Deferred tax liability

57,985

  

-

Other liabilities

36,756

  

23,110

Total liabilities

842,586

  

502,552
       

Stockholders' equity

      

Common stock: $0.01 par value, 150,000 shares authorized, 69,951 and 62,863 shares issued and 57,270 and 50,573 shares outstanding, respectively

      

697,397

  

463,839

Retained earnings

401,032

  

392,033

Accumulated other comprehensive loss, net

(67,715)

  

(40,623)

Total stockholders' equity

1,030,714

  

815,249

Total liabilities and stockholders' equity

$ 1,873,300

  

$ 1,317,801

 

KORN FERRY AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF OPERATIONS 

 RECONCILIATION OF AS REPORTED (GAAP) TO AS ADJUSTED (NON-GAAP) 

 (in thousands, except per share amounts) 

 (unaudited) 
                       
                       
 

 Three Months Ended 

  

 Three Months Ended 
 

January 31, 2016

  

January 31, 2015
 

As Reported

  

Adjustments

  

As Adjusted

  

As Reported

  

Adjustments

  

As Adjusted
                       

 Fee revenue 

$       344,158

  

$            5,871

  

$      350,029

  

$       249,545

      

$      249,545

 Reimbursed out-of-pocket engagement expenses 

14,721

      

14,721

  

9,326

      

9,326

           Total revenue 

358,879

  

5,871

  

364,750

  

258,871

  

-

  

258,871
                       

 Compensation and benefits 

242,429

  

(12,716)

  

229,713

  

164,802

      

164,802

 General and administrative expenses 

57,395

  

(9,175)

  

48,220

  

36,767

  

(445)

  

36,322

 Reimbursed expenses 

14,721

      

14,721

  

9,326

      

9,326

 Cost of services 

17,494

      

17,494

  

8,653

      

8,653

 Depreciation and amortization 

10,330

      

10,330

  

6,814

      

6,814

 Restructuring charges (recoveries), net 

30,577

  

(30,577)

  

-

  

(418)

  

418

  

-

           Total operating expenses 

372,946

  

(52,468)

  

320,478

  

225,944

  

(27)

  

225,917
                       

 Operating (loss) income 

(14,067)

  

58,339

  

44,272

  

32,927

  

27

  

32,954
                       

 Other loss, net 

(7,092)

      

(7,092)

  

(1,478)

      

(1,478)

 Interest (expense) income, net 

(372)

      

(372)

  

288

      

288

           (Loss) income before (benefit) provision for income taxes and equity in earnings of unconsolidated subsidiaries 

                      

(21,531)

  

58,339

  

36,808

  

31,737

  

27

  

31,764

 Equity in earnings of unconsolidated subsidiaries 

181

      

181

  

778

      

778

 Income tax (benefit) provision (1) (2) 

(5,355)

  

13,590

  

8,235

  

9,576

  

8

  

9,584

            Net (loss) income 

$       (15,995)

  

$          44,749

  

$        28,754

  

$         22,939

  

$                  19

  

$        22,958
                       

 (Loss) earnings per common share: 

                      

      Basic 

$            (0.30)

      

$             0.53

  

$             0.46

      

$             0.46

      Diluted 

$            (0.30)

      

$             0.52

  

$             0.46

      

$             0.46
                       

 Weighted-average common shares outstanding: 

                      

      Basic 

54,003

      

54,003

  

49,135

      

49,135

      Diluted 

54,003

      

54,433

  

49,724

      

49,724
   

Explanation of Non-GAAP Adjustments 

(1)

The adjustments result in an effective tax rate of 22% and 30% for the as adjusted amounts for the three months ended January 31, 2016 and 2015, respectively. 

(2)

The three months ended January 31, 2016 includes the tax effect on restructuring charges, net, integration/acquisition costs and deferred revenue adjustment associated with the acquisition of Hay Group and separation costs, while the three months ended January 31, 2015 includes the tax effect on restructuring charges, net and acquisition costs. 
                         

 

KORN FERRY AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF INCOME 

 RECONCILIATION OF AS REPORTED (GAAP) TO AS ADJUSTED (NON-GAAP) 

 (in thousands, except per share amounts) 

 (unaudited) 
                       
                       
 

Nine Months Ended

  

 Nine Months Ended 
 

January 31, 2016

  

January 31, 2015
 

As Reported

  

Adjustments

  

As Adjusted

  

As Reported

  

Adjustments

  

As Adjusted
                       

 Fee revenue 

$       892,152

  

$            5,871

  

$      898,023

  

$       756,435

  

$                   -

  

$      756,435

 Reimbursed out-of-pocket engagement expenses 

37,401

      

37,401

  

27,478

      

27,478

           Total revenue 

929,553

  

5,871

  

935,424

  

783,913

  

-

  

783,913
                       

 Compensation and benefits 

610,493

  

(16,355)

  

594,138

  

508,564

      

508,564

 General and administrative expenses 

139,449

  

(18,204)

  

121,245

  

104,280

  

(445)

  

103,835

 Reimbursed expenses 

37,401

      

37,401

  

27,478

      

27,478

 Cost of services 

38,850

      

38,850

  

27,824

      

27,824

 Depreciation and amortization 

24,933

      

24,933

  

20,363

      

20,363

 Restructuring charges, net 

30,577

  

(30,577)

  

-

  

9,468

  

(9,468)

  

-

           Total operating expenses 

881,703

  

(65,136)

  

816,567

  

697,977

  

(9,913)

  

688,064
                       

 Operating income 

47,850

  

71,007

  

118,857

  

85,936

  

9,913

  

95,849
                       

 Other (loss) income, net 

(9,812)

      

(9,812)

  

3,061

      

3,061

 Interest expense, net 

(1,215)

      

(1,215)

  

(1,426)

      

(1,426)

           Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries 

                      

36,823

  

71,007

  

107,830

  

87,571

  

9,913

  

97,484

 Equity in earnings of unconsolidated subsidiaries 

1,446

      

1,446

  

1,696

      

1,696

 Income tax provision (1) (2) 

13,211

  

17,973

  

31,184

  

26,392

  

2,950

  

29,342

            Net income  

$         25,058

  

$          53,034

  

$        78,092

  

$         62,875

  

$            6,963

  

$        69,838
                       

 Earnings per common share: 

                      

      Basic 

$             0.49

      

$             1.51

  

$             1.27

      

$             1.41

      Diluted 

$             0.48

      

$             1.50

  

$             1.25

      

$             1.39
                       

 Weighted-average common shares outstanding: 

                      

      Basic 

51,159

      

51,159

  

48,973

      

48,973

      Diluted 

51,683

      

51,683

  

49,663

      

49,663
                           

Explanation of Non-GAAP Adjustments 

  

(1)

The adjustments result in an effective tax rate of 29% and 30% for the as adjusted amounts for the nine months ended January 31, 2016 and 2015, respectively. 

(2)

The nine months ended January 31, 2016 includes the tax effect on restructuring charges, net, integration/acquisition costs and deferred revenue adjustment associated with the acquisition of Hay Group and separation costs, while the nine months ended January 31, 2015 includes the tax effect on restructuring charges, net and acquisition costs associated with the acquisition of PDI Ninth House. 
                           

 

KORN FERRY AND SUBSIDIARIES

RECONCILIATION OF NET (LOSS) INCOME AND OPERATING (LOSS) INCOME (GAAP) TO

EBITDA AND ADJUSTED EBITDA (NON-GAAP)

(in thousands)

(unaudited)
   
 

 Three Months Ended January 31, 2016 
 

 Executive Recruitment 

                
 

 North America 

  

 EMEA 

  

 Asia Pacific 

  

 South America 

  

 Subtotal 

  

 Hay Group 

  

 Futurestep 

  

 Corporate 

  

 Consolidated 
                                   

 Fee revenue 

$              93,520

  

$ 35,498

  

$       19,094

  

$                 6,541

  

$    154,653

  

$   140,508

  

$         48,997

  

$                  -

  

$           344,158
                                   

 Net loss 

                                

$            (15,995)

       Other loss, net 

                                

7,092

       Interest expense, net 

                                

372

       Equity in earnings of unconsolidated subsidiaries, net 

                                

(181)

       Income tax benefit 

                                

(5,355)

 Operating income (loss) 

$              28,957

  

$   1,707

  

$          2,775

  

$                 1,166

  

$      34,605

  

$    (21,559)

  

$           6,630

  

$     (33,743)

  

(14,067)

       Depreciation and amortization 

812

  

213

  

235

  

73

  

1,333

  

6,722

  

609

  

1,666

  

10,330

       Other (loss) income, net 

(330)

  

77

  

(114)

  

9

  

(358)

  

143

  

79

  

(6,956)

  

(7,092)

       Equity in earnings of unconsolidated subsidiaries, net 

26

  

-

  

-

  

-

  

26

  

-

  

-

  

155

  

181

 EBITDA 

29,465

  

1,997

  

2,896

  

1,248

  

35,606

  

(14,694)

  

7,318

  

(38,878)

  

(10,648)

 EBITDA margin 

31.5%

  

5.6%

  

15.2%

  

19.1%

  

23.0%

  

(10.5%)

  

14.9%

      

(3.1%)
                                   

       Restructuring charges, net 

484

  

5,866

  

577

  

328

  

7,255

  

23,241

  

-

  

81

  

30,577

       Integration/acquisition costs 

-

  

-

  

-

  

-

  

-

  

8,413

  

-

  

12,734

  

21,147

       Deferred revenue adjustment due to acquisition 

-

  

-

  

-

  

-

  

-

  

5,871

  

-

  

-

  

5,871

       Separation costs 

-

  

-

  

-

  

-

  

-

  

-

  

-

  

744

  

744

 Adjusted EBITDA 

$              29,949

  

$   7,863

  

$          3,473

  

$                 1,576

  

$      42,861

  

$     22,831

  

$           7,318

  

$     (25,319)

  

$             47,691

 Adjusted EBITDA margin 

32.0%

  

22.2%

  

18.2%

  

24.1%

  

27.7%

  

15.6%

  

14.9%

      

13.6%
                                   
                                   
 

 Three Months Ended January 31, 2015 
 

 Executive Recruitment 

                
 

 North America 

  

 EMEA 

  

 Asia Pacific 

  

 South America 

  

 Subtotal 

  

 Hay Group 

  

 Futurestep 

  

 Corporate 

  

 Consolidated 
                                   

 Fee revenue 

$              78,026

  

$ 36,816

  

$       20,924

  

$                 7,713

  

$    143,479

  

$     64,313

  

$         41,753

  

$                  -

  

$           249,545
                                   

 Net income 

                                

$             22,939

       Other loss, net 

                                

1,478

       Interest income, net 

                                

(288)

       Equity in earnings of unconsolidated subsidiaries, net 

                                

(778)

       Income tax provision 

                                

9,576

 Operating income (loss) 

$              22,673

  

$   5,073

  

$          4,096

  

$                 1,741

  

$      33,583

  

$        8,577

  

$           5,760

  

$     (14,993)

  

32,927

       Depreciation and amortization 

867

  

431

  

216

  

79

  

1,593

  

3,317

  

469

  

1,435

  

6,814

       Other (loss) income, net 

(225)

  

24

  

25

  

41

  

(135)

  

(156)

  

4

  

(1,191)

  

(1,478)

       Equity in earnings of unconsolidated subsidiaries, net 

103

  

-

  

-

  

-

  

103

  

-

  

-

  

675

  

778

 EBITDA 

23,418

  

5,528

  

4,337

  

1,861

  

35,144

  

11,738

  

6,233

  

(14,074)

  

39,041

 EBITDA margin 

30.0%

  

15.0%

  

20.7%

  

24.1%

  

24.5%

  

18.3%

  

14.9%

      

15.7%
                                   

      Restructuring recoveries, net 

-

  

-

  

-

  

(148)

  

(148)

  

-

  

(270)

  

-

  

(418)

      Acquisition costs 

-

  

-

  

-

  

-

  

-

  

-

  

-

  

445

  

445

 Adjusted EBITDA 

$              23,418

  

$   5,528

  

$          4,337

  

$                 1,713

  

$      34,996

  

$     11,738

  

$           5,963

  

$     (13,629)

  

$             39,068

 Adjusted EBITDA margin 

30.0%

  

15.0%

  

20.7%

  

22.2%

  

24.4%

  

18.3%

  

14.3%

      

15.7%

 

KORN FERRY AND SUBSIDIARIES

RECONCILIATION OF NET INCOME AND OPERATING INCOME (GAAP) TO

EBITDA AND ADJUSTED EBITDA (NON-GAAP)

(in thousands)

(unaudited)
   
 

 Nine Months Ended January 31, 2016 
 

 Executive Recruitment 

                
 

 North America 

  

 EMEA 

  

 Asia Pacific 

  

 South America 

  

 Subtotal 

  

 Hay Group 

  

 Futurestep 

  

 Corporate 

  

 Consolidated 
                                   

 Fee revenue 

$            276,667

  

$ 108,158

  

$       59,307

  

$              19,083

  

$ 463,215

  

$   283,350

  

$    145,587

  

$                 -

  

$    892,152
                                   

 Net income 

                                

$      25,058

       Other loss, net 

                                

9,812

       Interest expense, net 

                                

1,215

       Equity in earnings of unconsolidated subsidiaries, net