10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on September 6, 2019
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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
(Exact Name of Registrant as Specified in its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
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(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 |
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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.
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).
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 ☑ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company |
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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
The number of shares outstanding of our common stock as of September 3, 2019 was
KORN FERRY
Table of Contents
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Description |
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Part I. Financial Information |
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Item 1. |
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Consolidated Balance Sheets as of July 31, 2019 (unaudited) and April 30, 2019 |
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1 |
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Consolidated Statements of Operations (unaudited) for the three months ended July 31, 2019 and 2018 |
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2 |
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3 |
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4 |
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Consolidated Statements of Cash Flows (unaudited) for the three months ended July 31, 2019 and 2018 |
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5 |
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6 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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23 |
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Item 3. |
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34 |
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Item 4. |
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35 |
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Part II. Other Information |
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Item 1. |
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36 |
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Item 1A. |
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36 |
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Item 2. |
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Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
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36 |
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Item 6. |
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37 |
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38 |
Item 1. Consolidated Financial Statements
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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July 31, 2019 |
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April 30, 2019 |
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(unaudited) |
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(in thousands, except per share data) |
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ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Marketable securities |
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Receivables due from clients, net of allowance for doubtful accounts of $ |
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Income taxes and other receivables |
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Unearned compensation |
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Prepaid expenses and other assets |
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Total current assets |
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Marketable securities, non-current |
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Property and equipment, net |
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Operating lease right-of-use assets, net |
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— |
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Cash surrender value of company-owned life insurance policies, net of loans |
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Deferred income taxes |
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Goodwill |
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Intangible assets, net |
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Unearned compensation, non-current |
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Investments and other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Accounts payable |
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$ |
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$ |
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Income taxes payable |
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Compensation and benefits payable |
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Operating lease liability, current |
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— |
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Other accrued liabilities |
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Total current liabilities |
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Deferred compensation and other retirement plans |
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Operating lease liability, non-current |
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— |
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Long-term debt |
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Deferred tax liabilities |
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Other liabilities |
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Total liabilities |
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Stockholders' equity |
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Common stock: $ |
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Retained earnings |
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Accumulated other comprehensive loss, net |
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( |
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Total Korn Ferry stockholders' equity |
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Noncontrolling interest |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
1
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended July 31, |
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2019 |
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2018 |
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(in thousands, except per share data) |
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Fee revenue |
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$ |
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$ |
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Reimbursed out-of-pocket engagement expenses |
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Total revenue |
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Compensation and benefits |
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General and administrative expenses |
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Reimbursed expenses |
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Cost of services |
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Depreciation and amortization |
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Total operating expenses |
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Operating income (loss) |
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Other income, net |
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Interest expense, net |
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( |
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Income (loss) before provision (benefit) for income taxes |
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( |
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Income tax provision (benefit) |
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( |
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Net income (loss) |
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( |
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Net income attributable to noncontrolling interest |
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( |
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Net income (loss) attributable to Korn Ferry |
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$ |
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$ |
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Earnings (loss) per common share attributable to Korn Ferry: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
( |
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Weighted-average common shares outstanding: |
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Basic |
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Diluted |
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Cash dividends declared per share: |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
2
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
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Three Months Ended July 31, |
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2019 |
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2018 |
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(in thousands) |
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Net income (loss) |
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$ |
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$ |
( |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments |
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( |
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Deferred compensation and pension plan adjustments, net of tax |
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Net unrealized (loss) gain on interest rate swap, net of tax |
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Comprehensive income (loss) |
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( |
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Less: comprehensive income attributable to noncontrolling interest |
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( |
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Comprehensive income (loss) attributable to Korn Ferry |
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$ |
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$ |
( |
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The accompanying notes are an integral part of these consolidated financial statements.
3
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
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Accumulated Other |
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Total |
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Comprehensive |
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Korn Ferry |
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Total |
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Common Stock |
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Retained |
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Loss, |
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Stockholders' |
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Noncontrolling |
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Stockholder's |
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Shares |
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Amount |
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Earnings |
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Net |
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Equity |
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Interest |
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Equity |
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(in thousands) |
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Balance as of April 30, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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Other comprehensive (loss) income |
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— |
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— |
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— |
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( |
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( |
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( |
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Dividends paid to shareholders |
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— |
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— |
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( |
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— |
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( |
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— |
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( |
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Purchase of stock |
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( |
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( |
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— |
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— |
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( |
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— |
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( |
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Issuance of stock |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance as of July 31, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Accumulated Other |
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Total |
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Comprehensive |
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Korn Ferry |
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Total |
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Common Stock |
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Retained |
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Loss, |
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Stockholders' |
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Noncontrolling |
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Stockholder's |
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Shares |
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Amount |
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Earnings |
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Net |
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Equity |
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Interest |
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Equity |
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(in thousands) |
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Balance as of April 30, 2018 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Net loss |
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— |
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— |
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( |
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— |
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( |
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( |
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Other comprehensive (loss) income |
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— |
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— |
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— |
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( |
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( |
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( |
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Effect of adopting new accounting standards |
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— |
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— |
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( |
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— |
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Dividends paid to shareholders |
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— |
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— |
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( |
) |
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— |
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( |
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— |
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( |
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Purchase of stock |
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( |
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( |
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— |
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— |
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( |
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— |
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( |
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Issuance of stock |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance as of July 31, 2018 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
4
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Three Months Ended July 31, |
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2019 |
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2018 |
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(in thousands) |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
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$ |
( |
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Adjustments to reconcile net income (loss) to net cash used by operating activities: |
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Depreciation and amortization |
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Stock-based compensation expense |
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Tradename write-offs |
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— |
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Provision for doubtful accounts |
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Gain on cash surrender value of life insurance policies |
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( |
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( |
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Gain on marketable securities |
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( |
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( |
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Deferred income taxes |
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( |
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Change in other assets and liabilities: |
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Deferred compensation |
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Receivables due from clients |
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( |
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( |
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Income taxes and other receivables |
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( |
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( |
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Prepaid expenses and other assets |
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( |
) |
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( |
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Unearned compensation |
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( |
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( |
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Income taxes payable |
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( |
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Accounts payable and accrued liabilities |
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( |
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( |
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Other |
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( |
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Net cash used by operating activities |
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( |
) |
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( |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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( |
) |
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( |
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Purchase of marketable securities |
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( |
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( |
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Proceeds from sales/maturities of marketable securities |
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Premium on company-owned life insurance policies |
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( |
) |
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( |
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Proceeds from life insurance policies |
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Dividends received from unconsolidated subsidiaries |
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— |
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Net cash used in investing activities |
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( |
) |
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( |
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Cash flows from financing activities: |
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Repurchases of common stock |
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( |
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— |
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Payments of tax withholdings on restricted stock |
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( |
) |
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( |
) |
Proceeds from issuance of common stock upon exercise of employee stock options and in connection with an employee stock purchase plan |
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Payments on life insurance policy loans |
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|
( |
) |
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— |
|
Principal payments on finance leases |
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|
( |
) |
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— |
|
Dividends paid to shareholders |
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( |
) |
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( |
) |
Principal payments on term loan |
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— |
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( |
) |
Payment of contingent consideration from acquisitions |
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( |
) |
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( |
) |
Net cash used in financing activities |
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( |
) |
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( |
) |
Effect of exchange rate changes on cash and cash equivalents |
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( |
) |
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( |
) |
Net decrease in cash and cash equivalents |
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|
( |
) |
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( |
) |
Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of the period |
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$ |
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$ |
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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
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
The Company has control of a Mexico subsidiary and consolidates the operations of this subsidiary. Noncontrolling interest, which represents the Mexico Partners’
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:
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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. |
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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. |
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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 |