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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to ___________

 

Commission File Number 001-14505

 

KORN FERRY

 

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

95-2623879

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

1900 Avenue of the Stars, Suite 2600, Los Angeles, California 90067

(Address of principal executive offices) (Zip Code)

(310552-1834

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share

KFY

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

 

 

Accelerated filer        

 

 

 

 

Non-accelerated filer  

 

 

Smaller reporting company 

 

 

 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No  

 

The number of shares outstanding of our common stock as of September 3, 2019 was 55,975,840 shares.

 

 


KORN FERRY

Table of Contents

Item #

 

Description

 

Page

 

 

 

 

 

 

 

Part I. Financial Information

 

 

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of July 31, 2019 (unaudited) and April 30, 2019

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations (unaudited) for the three months ended July 31, 2019 and 2018

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the three months ended July 31, 2019 and 2018

 

3

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity (unaudited) for three months ended July 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the three months ended July 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Notes to Consolidated Unaudited Financial Statements

 

6

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

35

 

 

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

36

 

 

 

 

 

Item 1A.

 

Risk Factors

 

36

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

36

 

 

 

 

 

Item 6.

 

Exhibits

 

37

 

 

 

 

 

 

 

Signatures

 

38

 

 

 

 

 

 

 


 

Item 1. Consolidated Financial Statements

KORN FERRY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

July 31,

2019

 

 

April 30,

2019

 

 

 

(unaudited)

 

 

 

 

 

 

 

(in thousands, except per share data)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

424,637

 

 

$

626,360

 

Marketable securities

 

 

8,508

 

 

 

8,288

 

Receivables due from clients, net of allowance for doubtful accounts of $21,732 and $21,582 at July 31, 2019 and April 30, 2019, respectively

 

 

432,758

 

 

 

404,857

 

Income taxes and other receivables

 

 

30,529

 

 

 

26,767

 

Unearned compensation

 

 

45,380

 

 

 

42,003

 

Prepaid expenses and other assets

 

 

33,311

 

 

 

28,535

 

Total current assets

 

 

975,123

 

 

 

1,136,810

 

 

 

 

 

 

 

 

 

 

Marketable securities, non-current

 

 

134,148

 

 

 

132,463

 

Property and equipment, net

 

 

137,367

 

 

 

131,505

 

Operating lease right-of-use assets, net

 

 

219,412

 

 

 

 

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

 

 

126,752

 

 

 

126,000

 

Deferred income taxes

 

 

41,191

 

 

 

43,220

 

Goodwill

 

 

578,567

 

 

 

578,298

 

Intangible assets, net

 

 

79,581

 

 

 

82,948

 

Unearned compensation, non-current

 

 

92,365

 

 

 

80,924

 

Investments and other assets

 

 

22,052

 

 

 

22,684

 

Total assets

 

$

2,406,558

 

 

$

2,334,852

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

33,174

 

 

$

39,156

 

Income taxes payable

 

 

19,199

 

 

 

21,145

 

Compensation and benefits payable

 

 

156,208

 

 

 

328,610

 

Operating lease liability, current

 

 

46,854

 

 

 

 

Other accrued liabilities

 

 

156,218

 

 

 

162,047

 

Total current liabilities

 

 

411,653

 

 

 

550,958

 

 

 

 

 

 

 

 

 

 

Deferred compensation and other retirement plans

 

 

269,380

 

 

 

257,635

 

Operating lease liability, non-current

 

 

207,603

 

 

 

 

Long-term debt

 

 

223,094

 

 

 

222,878

 

Deferred tax liabilities

 

 

1,048

 

 

 

1,103

 

Other liabilities

 

 

29,386

 

 

 

58,891

 

Total liabilities

 

 

1,142,164

 

 

 

1,091,465

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Common stock: $0.01 par value, 150,000 shares authorized, 73,076 and 72,442 shares issued and 56,596 and 56,431 shares outstanding at July 31, 2019 and April 30, 2019, respectively

 

 

645,299

 

 

 

656,463

 

Retained earnings

 

 

697,715

 

 

 

660,845

 

Accumulated other comprehensive loss, net

 

 

(82,114

)

 

 

(76,652

)

Total Korn Ferry stockholders' equity

 

 

1,260,900

 

 

 

1,240,656

 

Noncontrolling interest

 

 

3,494

 

 

 

2,731

 

Total stockholders' equity

 

 

1,264,394

 

 

 

1,243,387

 

Total liabilities and stockholders' equity

 

$

2,406,558

 

 

$

2,334,852

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

1


 

KORN FERRY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three Months Ended

July 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands, except per share data)

 

Fee revenue

 

$

484,549

 

 

$

465,568

 

Reimbursed out-of-pocket engagement expenses

 

 

11,649

 

 

 

12,794

 

          Total revenue

 

 

496,198

 

 

 

478,362

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

328,496

 

 

 

321,905

 

General and administrative expenses

 

 

65,807

 

 

 

168,724

 

Reimbursed expenses

 

 

11,649

 

 

 

12,794

 

Cost of services

 

 

17,135

 

 

 

18,327

 

Depreciation and amortization

 

 

12,777

 

 

 

11,731

 

          Total operating expenses

 

 

435,864

 

 

 

533,481

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

60,334

 

 

 

(55,119

)

Other income, net

 

 

1,826

 

 

 

4,520

 

Interest expense, net

 

 

(4,057

)

 

 

(4,103

)

Income (loss) before provision (benefit) for income taxes

 

 

58,103

 

 

 

(54,702

)

Income tax provision (benefit)

 

 

14,453

 

 

 

(16,110

)

Net income (loss)

 

 

43,650

 

 

 

(38,592

)

          Net income attributable to noncontrolling interest

 

 

(699

)

 

 

(19

)

Net income (loss) attributable to Korn Ferry

 

$

42,951

 

 

$

(38,611

)

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share attributable to Korn Ferry:

 

 

 

 

 

 

 

 

     Basic

 

$

0.77

 

 

$

(0.70

)

     Diluted

 

$

0.76

 

 

$

(0.70

)

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

     Basic

 

 

55,266

 

 

 

55,378

 

     Diluted

 

 

55,635

 

 

 

55,378

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share:

 

$

0.10

 

 

$

0.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

2


 

KORN FERRY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

 

 

Three Months Ended

July 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Net income (loss)

 

$

43,650

 

 

$

(38,592

)

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(5,298

)

 

 

(14,556

)

Deferred compensation and pension plan adjustments, net of tax

 

 

495

 

 

 

273

 

Net unrealized (loss) gain on interest rate swap, net of tax

 

 

(595

)

 

 

133

 

Comprehensive income (loss)

 

 

38,252

 

 

 

(52,742

)

Less: comprehensive income attributable to noncontrolling interest

 

 

(763

)

 

 

(25

)

Comprehensive income (loss) attributable to Korn Ferry

 

$

37,489

 

 

$

(52,767

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


 

KORN FERRY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive

 

 

Korn Ferry

 

 

 

 

 

 

Total

 

 

Common Stock

 

 

Retained

 

 

Loss,

 

 

Stockholders'

 

 

Noncontrolling

 

 

Stockholder's

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Net

 

 

Equity

 

 

Interest

 

 

Equity

 

 

(in thousands)

 

Balance as of April 30, 2019

 

56,431

 

 

$

656,463

 

 

$

660,845

 

 

$

(76,652

)

 

$

1,240,656

 

 

$

2,731

 

 

$

1,243,387

 

Net income

 

 

 

 

 

 

 

42,951

 

 

 

 

 

 

42,951

 

 

 

699

 

 

 

43,650

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

(5,462

)

 

 

(5,462

)

 

 

64

 

 

 

(5,398

)

Dividends paid to shareholders

 

 

 

 

 

 

 

(6,081

)

 

 

 

 

 

(6,081

)

 

 

 

 

 

(6,081

)

Purchase of stock

 

(546

)

 

 

(21,329

)

 

 

 

 

 

 

 

 

(21,329

)

 

 

 

 

 

(21,329

)

Issuance of stock

 

711

 

 

 

5,074

 

 

 

 

 

 

 

 

 

5,074

 

 

 

 

 

 

5,074

 

Stock-based compensation

 

 

 

 

5,091

 

 

 

 

 

 

 

 

 

5,091

 

 

 

 

 

 

5,091

 

Balance as of July 31, 2019

 

56,596

 

 

$

645,299

 

 

$

697,715

 

 

$

(82,114

)

 

$

1,260,900

 

 

$

3,494

 

 

$

1,264,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive

 

 

Korn Ferry

 

 

 

 

 

 

Total

 

 

Common Stock

 

 

Retained

 

 

Loss,

 

 

Stockholders'

 

 

Noncontrolling

 

 

Stockholder's

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Net

 

 

Equity

 

 

Interest

 

 

Equity

 

 

(in thousands)

 

Balance as of April 30, 2018

 

56,517

 

 

$

683,942

 

 

$

572,800

 

 

$

(40,135

)

 

$

1,216,607

 

 

$

3,008

 

 

$

1,219,615

 

Net loss

 

 

 

 

 

 

 

(38,611

)

 

 

 

 

 

(38,611

)

 

 

19

 

 

 

(38,592

)

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

(14,156

)

 

 

(14,156

)

 

 

6

 

 

 

(14,150

)

Effect of adopting new accounting standards

 

 

 

 

 

 

 

8,853

 

 

 

(2,197

)

 

 

6,656

 

 

 

 

 

 

6,656

 

Dividends paid to shareholders

 

 

 

 

 

 

 

(6,027

)

 

 

 

 

 

(6,027

)

 

 

 

 

 

(6,027

)

Purchase of stock

 

(200

)

 

 

(13,054

)

 

 

 

 

 

 

 

 

(13,054

)

 

 

 

 

 

(13,054

)

Issuance of stock

 

621

 

 

 

4,803

 

 

 

 

 

 

 

 

 

4,803

 

 

 

 

 

 

4,803

 

Stock-based compensation

 

 

 

 

5,369

 

 

 

 

 

 

 

 

 

5,369

 

 

 

 

 

 

5,369

 

Balance as of July 31, 2018

 

56,938

 

 

$

681,060

 

 

$

537,015

 

 

$

(56,488

)

 

$

1,161,587

 

 

$

3,033

 

 

$

1,164,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4


 

KORN FERRY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Three Months Ended

July 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

43,650

 

 

$

(38,592

)

Adjustments to reconcile net income (loss) to net cash used by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

12,777

 

 

 

11,731

 

Stock-based compensation expense

 

 

5,462

 

 

 

5,714

 

Tradename write-offs

 

 

 

 

 

106,555

 

Provision for doubtful accounts

 

 

3,549

 

 

 

3,707

 

Gain on cash surrender value of life insurance policies

 

 

(2,338

)

 

 

(1,347

)

Gain on marketable securities

 

 

(1,945

)

 

 

(4,001

)

Deferred income taxes

 

 

1,974

 

 

 

(22,564

)

Change in other assets and liabilities:

 

 

 

 

 

 

 

 

Deferred compensation

 

 

11,652

 

 

 

3,021

 

Receivables due from clients

 

 

(31,450

)

 

 

(16,270

)

Income taxes and other receivables

 

 

(3,176

)

 

 

(7,811

)

Prepaid expenses and other assets

 

 

(9,845

)

 

 

(4,356

)

Unearned compensation

 

 

(14,818

)

 

 

(17,463

)

Income taxes payable

 

 

(1,911

)

 

 

1,434

 

Accounts payable and accrued liabilities

 

 

(175,709

)

 

 

(135,405

)

Other

 

 

209

 

 

 

(1,845

)

         Net cash used by operating activities

 

 

(161,919

)

 

 

(117,492

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(10,706

)

 

 

(13,163

)

Purchase of marketable securities

 

 

(1,600

)

 

 

(1,396

)

Proceeds from sales/maturities of marketable securities

 

 

1,599

 

 

 

8,240

 

Premium on company-owned life insurance policies

 

 

(341

)

 

 

(398

)

Proceeds from life insurance policies

 

 

1,673

 

 

 

85

 

Dividends received from unconsolidated subsidiaries

 

 

166

 

 

 

 

          Net cash used in investing activities

 

 

(9,209

)

 

 

(6,632

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(12,738

)

 

 

 

Payments of tax withholdings on restricted stock

 

 

(8,591

)

 

 

(13,054

)

Proceeds from issuance of common stock upon exercise of employee

   stock options and in connection with an employee stock purchase plan

 

 

4,313

 

 

 

4,105

 

Payments on life insurance policy loans

 

 

(943

)

 

 

 

Principal payments on finance leases

 

 

(432

)

 

 

 

Dividends paid to shareholders

 

 

(6,081

)

 

 

(6,027

)

Principal payments on term loan

 

 

 

 

 

(5,156

)

Payment of contingent consideration from acquisitions

 

 

(455

)

 

 

(455

)

          Net cash used in financing activities

 

 

(24,927

)

 

 

(20,587

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(5,668

)

 

 

(10,408

)

Net decrease in cash and cash equivalents

 

 

(201,723

)

 

 

(155,119

)

Cash and cash equivalents at beginning of period

 

 

626,360

 

 

 

520,848

 

Cash and cash equivalents at end of the period

 

$

424,637

 

 

$

365,729

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5


 

KORN FERRY AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

July 31, 2019

 

 

1. Organization and Summary of Significant Accounting Policies

Nature of Business

Korn Ferry, a Delaware corporation (the “Company”), and its subsidiaries currently operate through three global segments: Korn Ferry Advisory (“Advisory”), Executive Search and Korn Ferry RPO and Professional Search (“RPO & Professional Search”). Advisory assists clients to synchronize strategy and talent by addressing four fundamental needs: Organizational Strategy, Assessment and Succession, Leadership Development, and Rewards and Benefits, all underpinned by a comprehensive array of one of the world-leading intellectual property (“IP”), products and tools. Executive Search focuses on recruiting board level, chief executive and other senior executive and general management positions, in addition to research-based interviewing and assessment solutions, for clients predominantly in the consumer goods, financial services, industrial, life sciences/healthcare and technology industries. RPO & Professional Search uses data-backed insight and IP, matched with strategic collaboration and innovative technology, to meet people challenges head-on—and succeed. Solutions span all aspects of Recruitment Process Outsourcing (“RPO”), Professional Search and Project Recruitment.

Basis of Consolidation and Presentation

The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended April 30, 2019 for the Company and its wholly and majority owned/controlled domestic and international subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The preparation of the consolidated financial statements conform with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and prevailing practice within the industry. The consolidated financial statements include all adjustments, consisting of normal recurring accruals and any other adjustments that management considers necessary for a fair presentation of the results for these periods. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year.

Investments in affiliated companies, which are 50% or less owned and where the Company exercises significant influence over operations, are accounted for using the equity method.

The Company has control of a Mexico subsidiary and consolidates the operations of this subsidiary. Noncontrolling interest, which represents the Mexico Partners’ 51% interest in the Mexico subsidiary, is reflected on the Company’s consolidated financial statements.

The Company considers events or transactions that occur after the balance sheet date but before the consolidated financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.

Use of Estimates and Uncertainties

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates, and changes in estimates are reported in current operations as new information is learned or upon the amounts becoming fixed or determinable. The most significant areas that require management’s judgment are revenue recognition, deferred compensation, annual performance-related bonuses, evaluation of the carrying value of receivables, goodwill and other intangible assets, share-based payments, leases, and the recoverability of deferred income taxes.

Revenue Recognition

Substantially all fee revenue is derived from talent and organizational advisory services and the sale of products, fees for professional services related to executive and professional recruitment performed on a retained basis and RPO, either stand-alone or as part of a solution.

Revenue is recognized when control of the goods and services are transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Revenue contracts with customers are evaluated based on the five-step model outlined in Accounting Standard Codification 606 (“ASC 606”): 1) identify the contract with a customer; 2) identify the performance obligation(s) in the contract; 3) determine the transaction price; 4) allocate the transaction price to the separate performance obligation(s); and 5) recognize revenue when (or as) each performance obligation is satisfied.

6


KORN FERRY AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

July 31, 2019 (continued)

 

Consulting fee revenue, primarily generated from Advisory, is recognized as services are rendered, measured by total hours incurred to the total estimated hours at completion. It is possible that updated estimates for consulting engagements may vary from initial estimates with such updates being recognized in the period of determination. Depending on the timing of billings and services rendered, the Company accrues or defers revenue as appropriate.

Product revenue is generated from a range of online tools designed to support human resource processes for pay, talent and engagement, and assessments, as well as licenses to proprietary IP and tangible/digital products. IP subscriptions grant access to proprietary compensation and job evaluation databases. IP subscriptions are considered symbolic IP due to the dynamic nature of the content and, as a result, revenue is recognized over the term of the contract. Functional IP licenses grant customers the right to use IP content via delivery of a flat file. Because the IP content license has significant stand-alone functionality, revenue is recognized upon delivery and when an enforceable right to payment exists. Online assessments are delivered in the form of online questionnaires. A bundle of assessments represents one performance obligation, and revenue is recognized as assessment services are delivered and the Company has a legally enforceable right to payment. Tangible/digital products sold by the Company mainly consist of books and digital files covering a variety of topics including performance management, team effectiveness, and coaching and development. The Company recognizes revenue for its products when sold or shipped, as is the case for books.

Fee revenue from executive and professional search activities is generally one-third of the estimated first-year cash compensation of the placed candidate, plus a percentage of the fee to cover indirect engagement-related expenses. In addition to the search retainer, an uptick fee is billed when the actual compensation awarded by the client for a placement is higher than the estimated compensation. In the aggregate, upticks have been a relatively consistent percentage of the original estimated fee; therefore, the Company estimates upticks using the expected value method based on historical data on a portfolio basis. In a standard search engagement, there is one performance obligation, which is the promise to undertake a search. The Company generally recognizes such revenue over the course of a search and when it is legally entitled to payment as outlined in the billing terms of the contract. Any revenues associated with services that are provided on a contingent basis are recognized once the contingency is resolved, as this is when control is transferred to the customer. These assumptions determine the timing of revenue recognition for the reported period.

RPO fee revenue is generated through two distinct phases: 1) the implementation phase and 2) the post-implementation recruitment phase. The fees associated with the implementation phase are recognized over the period that the related implementation services are provided. The post-implementation recruitment phase represents end-to-end recruiting services to clients for which there are both fixed and variable fees, which are recognized over the period that the related recruiting services are performed.

Reimbursements

The Company incurs certain out-of-pocket expenses that are reimbursed by its clients, which are accounted for as revenue in the consolidated statements of operations.

Allowance for Doubtful Accounts

An allowance is established for doubtful accounts by taking a charge to general and administrative expenses. The amount of the allowance is based on historical loss experience and assessment of the collectability of specific accounts, as well as expectations of future collections based upon trends and the type of work for which services are rendered. After the Company exhausts all collection efforts, the amount of the allowance is reduced for balances identified as uncollectible.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. As of July 31, 2019 and April 30, 2019, the Company’s investments in cash equivalents consisted of money market funds for which market prices are readily available.

Marketable Securities

The Company currently has investments in mutual funds (for which market prices are readily available) that are held in trust to satisfy obligations under the Company’s deferred compensation plans. Such investments are based upon the employees’ investment elections in their deemed accounts in the Executive Capital Accumulation Plan and similar plans in Asia Pacific and Canada (“ECAP”) from a pre-determined set of securities, and the Company invests in marketable securities to mirror these elections. These investments are recorded at fair value with the change in value in the period being reflected in the consolidated statements of operations and are classified as marketable securities in the accompanying consolidated balance sheets. The investments that the Company may sell within the next twelve months are carried as current assets. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis; dividends are recorded as earned on the ex-dividend date. Interest, dividend income and the changes in fair value in marketable securities are recorded in the accompanying consolidated statements of operations in other income, net.

7


KORN FERRY AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

July 31, 2019 (continued)

 

Fair Value of Financial Instruments

Fair value is the price the Company would receive to sell an asset or transfer a liability (exit price) in an orderly transaction between market participants. For those assets and liabilities recorded or disclosed at fair value, the Company determines the fair value based upon the quoted market price, if available. If a quoted market price is not available for identical assets, the fair value is based upon the quoted market price of similar assets. The fair values are assigned a level within the fair value hierarchy as defined below:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

As of July 31, 2019 and April 30, 2019, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included cash, cash equivalents, accounts receivable, marketable securities, foreign currency forward contracts and an interest rate swap. The carrying amount of cash, cash equivalents and accounts receivable approximates fair value due to the short-term maturity of these instruments. The fair values of marketable securities are obtained from quoted market prices, and the fair values of foreign currency forward contracts and the interest rate swap are obtained from a third party, which are based on quoted prices or market prices for similar assets and financial instruments.

Derivative Financial Instruments

The Company has entered into an interest rate swap agreement to effectively convert its variable debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s long-term debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has determined that the interest rate swap qualifies as a cash flow hedge in accordance with Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”). Changes in the fair value of an interest rate swap agreement designated as a cash flow hedge are recorded as a component of accumulated other comprehensive (loss) income within stockholders’ equity and are amortized to interest expense over the term of the related debt.

Foreign Currency Forward Contracts Not Designated as Hedges

The Company has established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures primarily originating from intercompany balances due to cross border work performed in the ordinary course of business. These foreign currency forward contracts are neither used for trading purposes nor are they designated as hedging instruments pursuant to ASC 815. Accordingly, the fair value of these contracts is recorded as of the end of the reporting period in the accompanying consolidated balance sheets, while the change in fair value is recorded to the accompanying consolidated statements of operations.

Business Acquisitions

Business acquisitions are accounted for under the acquisition method. The acquisition method requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity, and recognize and measure goodwill or a gain from the purchase. The acquiree’s results are included in the Company’s consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill, or if the fair value of the assets acquired exceeds the purchase price consideration, a bargain purchase gain is recorded. Adjustments to fair value assessments are generally recorded to goodwill over the measurement period (not longer than twelve months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense as committed and requires the Company to recognize and measure certain assets and liabilities including those arising from contingencies and contingent consideration in a business combination.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of use (“ROU”) assets and current and non-current operating lease liability, in the consolidated balance sheets. Finance leases are included in property and equipment, net, other accrued liabilities and other liabilities in the consolidated balance sheets.

8


KORN FERRY AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

July 31, 2019 (continued)

 

ROU a