10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on December 8, 2023
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2023
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
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(310 ) 552-1834
(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 | ||||||
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 o
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 o
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.
Accelerated filer o
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Non-accelerated filer o
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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. o
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 December 4, 2023 was 52,541,126 shares.
KORN FERRY
Table of Contents
Item # | Description | Page | ||||||
Item 1. Consolidated Financial Statements
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 2023 |
April 30, 2023 |
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(unaudited) | |||||||||||
(in thousands, except per share data) | |||||||||||
ASSETS | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Marketable securities | |||||||||||
Receivables due from clients, net of allowance for doubtful accounts of $ |
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Income taxes and other receivables | |||||||||||
Unearned compensation | |||||||||||
Prepaid expenses and other assets | |||||||||||
Total current assets | |||||||||||
Marketable securities, non-current | |||||||||||
Property and equipment, net | |||||||||||
Operating lease right-of-use assets, net | |||||||||||
Cash surrender value of company-owned life insurance policies, net of loans | |||||||||||
Deferred income taxes | |||||||||||
Goodwill | |||||||||||
Intangible assets, net | |||||||||||
Unearned compensation, non-current | |||||||||||
Investments and other assets | |||||||||||
Total assets | $ | $ | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Accounts payable | $ | $ | |||||||||
Income taxes payable | |||||||||||
Compensation and benefits payable | |||||||||||
Operating lease liability, current | |||||||||||
Other accrued liabilities | |||||||||||
Total current liabilities | |||||||||||
Deferred compensation and other retirement plans | |||||||||||
Operating lease liability, non-current | |||||||||||
Long-term debt | |||||||||||
Deferred tax liabilities | |||||||||||
Other liabilities | |||||||||||
Total liabilities | |||||||||||
Stockholders' equity | |||||||||||
Common stock: $ |
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Retained earnings | |||||||||||
Accumulated other comprehensive loss, net | ( |
( |
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Total Korn Ferry stockholders' equity | |||||||||||
Noncontrolling interest | |||||||||||
Total stockholders' equity | |||||||||||
Total liabilities and stockholders' equity | $ | $ |
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 October 31, |
Six Months Ended October 31, |
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2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||||||
Fee revenue | $ | $ | $ | $ | |||||||||||||||||||
Reimbursed out-of-pocket engagement expenses | |||||||||||||||||||||||
Total revenue | |||||||||||||||||||||||
Compensation and benefits | |||||||||||||||||||||||
General and administrative expenses | |||||||||||||||||||||||
Reimbursed expenses | |||||||||||||||||||||||
Cost of services | |||||||||||||||||||||||
Depreciation and amortization | |||||||||||||||||||||||
Restructuring charges, net | |||||||||||||||||||||||
Total operating expenses | |||||||||||||||||||||||
Operating income | |||||||||||||||||||||||
Other loss, net |
( |
( |
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Interest expense, net | ( |
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Income before provision for income taxes | |||||||||||||||||||||||
Income tax provision | |||||||||||||||||||||||
Net income | |||||||||||||||||||||||
Net income attributable to noncontrolling interest | ( |
( |
( |
( |
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Net (loss) income attributable to Korn Ferry |
$ | ( |
$ | $ | $ | ||||||||||||||||||
(Loss) earnings per common share attributable to Korn Ferry: |
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Basic | $ | ( |
$ | $ | $ | ||||||||||||||||||
Diluted | $ | ( |
$ | $ | $ | ||||||||||||||||||
Weighted-average common shares outstanding: | |||||||||||||||||||||||
Basic | |||||||||||||||||||||||
Diluted | |||||||||||||||||||||||
Cash dividends declared per share: | $ | $ | $ | $ |
The accompanying notes are an integral part of these consolidated financial statements.
2
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(unaudited)
Three Months Ended October 31, |
Six Months Ended October 31, |
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2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||||||||||
Other comprehensive (loss) income: |
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Foreign currency translation adjustments | ( |
( |
( |
( |
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Deferred compensation and pension plan adjustments, net of tax | |||||||||||||||||||||||
Net unrealized gain (loss) on marketable securities, net of tax | ( |
( |
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Comprehensive (loss) income |
( |
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Less: comprehensive income attributable to noncontrolling interest | ( |
( |
( |
( |
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Comprehensive (loss) income attributable to Korn Ferry |
$ | ( |
$ | $ | $ |
The accompanying notes are an integral part of these consolidated financial statements.
3
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
Common Stock | Retained Earnings |
Accumulated Other Comprehensive Loss, Net |
Total Korn Ferry Stockholders' Equity |
Noncontrolling Interest |
Total Stockholder's Equity |
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Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||
Balance as of April 30, 2023 | $ | $ | $ | ( |
$ | $ | $ | ||||||||||||||||||||||||||||||||||
Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
— | — | — | ||||||||||||||||||||||||||||||||||||||
Dividends paid to shareholders | — | — | ( |
— | ( |
— | ( |
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Purchase of stock | ( |
( |
— | — | ( |
— | ( |
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Issuance of stock | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of July 31, 2023 | ( |
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Net (loss) income |
— | — | ( |
— | ( |
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Other comprehensive loss |
— | — | — | ( |
( |
( |
( |
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Dividends paid to shareholders | — | — | ( |
— | ( |
— | ( |
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Dividends paid to noncontrolling interest | — | — | — | — | — | ( |
( |
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Purchase of stock | ( |
( |
— | — | ( |
— | ( |
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Issuance of stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of October 31, 2023 | $ | $ | $ | ( |
$ | $ | $ |
Common Stock | Retained Earnings |
Accumulated Other Comprehensive Loss, Net |
Total Korn Ferry Stockholders' Equity |
Noncontrolling Interest |
Total Stockholder's Equity |
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Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||
Balance as of April 30, 2022 | $ | $ | $ | ( |
$ | $ | $ | ||||||||||||||||||||||||||||||||||
Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | ( |
( |
( |
( |
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Dividends paid to shareholders | — | — | ( |
— | ( |
— | ( |
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Purchase of stock | ( |
( |
— | — | ( |
— | ( |
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Issuance of stock | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of July 31, 2022 | ( |
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Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Other comprehensive (loss) income |
— | — | — | ( |
( |
( |
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Dividends paid to shareholders | — | — | ( |
— | ( |
— | ( |
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Dividends paid to noncontrolling interest | — | — | — | — | — | ( |
( |
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Purchase of stock | ( |
( |
— | — | ( |
— | ( |
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Issuance of stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of October 31, 2022 | $ | $ | $ | ( |
$ | $ | $ |
The accompanying notes are an integral part of these consolidated financial statements.
4
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended October 31, |
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2023 | 2022 | ||||||||||
(in thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ |
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$ | ||||||||
Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization | |||||||||||
Stock-based compensation expense | |||||||||||
Provision for doubtful accounts | |||||||||||
Gain on cash surrender value of life insurance policies | ( |
( |
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Impairment of right-of-use assets | |||||||||||
Impairment of fixed assets | |||||||||||
Loss on marketable securities |
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Deferred income taxes | ( |
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Change in other assets and liabilities: | |||||||||||
Accounts payable and accrued liabilities | ( |
( |
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Receivables due from clients | ( |
( |
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Deferred compensation | |||||||||||
Unearned compensation | ( |
( |
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Income taxes and other receivables | ( |
( |
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Prepaid expenses and other assets | ( |
( |
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Income taxes payable | ( |
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Other | ( |
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Net cash used in operating activities |
( |
( |
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Cash flows from investing activities: | |||||||||||
Proceeds from sales/maturities of marketable securities | |||||||||||
Purchase of property and equipment | ( |
( |
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Purchase of marketable securities | ( |
( |
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Proceeds from life insurance policies | |||||||||||
Premium on company-owned life insurance policies | ( |
( |
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Dividends received from unconsolidated subsidiaries | |||||||||||
Cash paid for acquisitions, net of cash acquired | ( |
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Net cash used in investing activities |
( |
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Cash flows from financing activities: | |||||||||||
Dividends paid to shareholders | ( |
( |
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Payments of tax withholdings on restricted stock | ( |
( |
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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 | |||||||||||
Repurchases of common stock | ( |
( |
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Dividends - noncontrolling interest | ( |
( |
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Principal payments on finance leases | ( |
( |
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Payments on life insurance policy loans | ( |
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Net cash used in financing activities | ( |
( |
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Effect of exchange rate changes on cash and cash equivalents | ( |
( |
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Net decrease in cash and cash equivalents | ( |
( |
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Cash and cash equivalents at beginning of period | |||||||||||
Cash and cash equivalents at end of the period | $ | $ |
The accompanying notes are an integral part of these consolidated financial statements.
5
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023
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1. Organization and Summary of Significant Accounting Policies
Nature of Business
Korn Ferry, a Delaware corporation, and its subsidiaries (the “Company”) is a global organizational consulting firm. The Company helps clients synchronize strategy and talent to drive superior performance. The Company works with organizations to design their structures, roles, and responsibilities. The Company helps organizations hire the right people to bring their strategy to life and advise them on how to reward, develop, and motivate their people.
The Company is pursuing a strategy designed to help Korn Ferry focus on clients and collaborate intensively across the organization. This approach is intended to build on the best of the Company’s past and give the Company a clear path to the future with focused initiatives to increase its client and commercial impact. Korn Ferry is transforming how clients address their talent management needs. The Company has evolved from a mono-line to a diversified business, giving its consultants more frequent and expanded opportunities to engage with clients.
The Company services its clients with a core set of solutions that are anchored around talent and talent management – essentially touching every aspect of an employer’s engagement with their employees. Our five core solutions are as follows: Organizational Strategy, Assessment and Succession, Leadership and Professional Development, Total Rewards, and Talent Acquisition. Our colleagues engage with our clients through the delivery of one of our core solutions as a point solution sale or through combining component parts of our core solutions into an integrated solution. In either case, we are solving our clients’ most challenging business and human capital issues.
Further differentiating our service offerings from our competitors is the unique combination of IP, content, and data sets that we have, which permeate all of our solution areas. For many years, we have been accumulating data around assessments of executives and professionals, pay, success profiles, organizational engagement and design, job architecture, and candidates. Integrating this unique collection of data into our service offerings provides our colleagues with differentiated points of view and solutions, as well as the ability to demonstrate the efficacy of all of our offerings.
Over the last three and a half years, we have seen more change in the workplace than we did in the previous 15 years. Today, we find ourselves doing different work and working differently. Employees want to and they are working remotely. People don’t want to be tethered to a single company for their entire career. Rather, they want to have many new and unique experiences across many different employers – a career nomad of sorts. There is growing demand for companies to have responsibilities that go beyond delivering profits to shareholders, covering areas such as Environmental, Social and Governance. The continual advancement of technologies like Generative AI creates a constant demand for workers to be upskilled or reskilled. All of these changes and disruptions lead to opportunities for Korn Ferry and make us more relevant than at any time in our history. We have core and integrated solutions that line up to these issues and help our clients solve their most pressing business and Human Capital challenges.
Leveraging the strong connection between our various service offering and our lines of business, we have an integrated go-to-market strategy. As we drive this strategy, a focal point for us is our Marquee and Regional account program which is comprised of about 340 of our top clients that generate approximately 35 % of our consolidated fee revenue. These accounts have Global Account Leaders assigned who help to orchestrate the delivery of core and integrated solutions that cut across multiple lines of business – effectively making all of the Firm’s resources available as our clients tackle their business and Human Capital issues. Korn Ferry is poised for continued growth. We are capitalizing on the current and growing relevance of our core and integrated solutions which, in combination with the strong connections amongst all of our service offerings and our M&A activities, drives top-line synergies that have resulted in double digit fee revenue growth rates (CAGR) over the past twenty years.
The Company has eight reportable segments that operate through the following five lines of business:
1.Consulting aligns organizational structure, culture, performance and people to drive sustainable growth by addressing four fundamental needs: Organizational Strategy, Assessment and Succession, Leadership and Professional Development, and Total Rewards. This work is enabled by a comprehensive set of Digital Performance Management Tools, based on some of the world’s leading intellectual property (“lP”) and data. The Consulting teams employ an integrated approach across core capabilities and integrated solutions, each one intended to strengthen the work and thinking in the next, to help clients execute their strategy in a digitally enabled world.
2.Digital develops technology-enabled Performance Management Tools that empower our clients. The digital products give clients direct access to Korn Ferry proprietary data, client data and analytics to deliver clear insights with the training and tools needed to align organizational structure with business strategy.
3.Executive Search helps organizations recruit board level, chief executive and other senior executive and general management talent to deliver lasting impact. The Company’s approach to placing talent is bringing together
6
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
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research-based IP, proprietary assessments and behavioral interviewing with practical experience to determine ideal organizational fit. Salary benchmarking then helps the Company build appropriate frameworks for compensation and retention. This business is managed and reported on a geographic basis and represents four of the Company’s reportable segments (Executive Search North America, Executive Search Europe, the Middle East and Africa (“EMEA”), Executive Search Asia Pacific and Executive Search Latin America).
4.Professional Search & Interim delivers enterprise talent acquisition solutions for professional level middle and upper management. The Company helps clients source high-quality candidates at speed and scale globally, covering single-hire to multi-hire permanent placements and interim contractors.
5.Recruitment Process Outsourcing ("RPO") offers scalable recruitment outsourcing solutions leveraging customized technology and talent insights. The Company's scalable solutions, built on science and powered by best-in-class technology and consulting expertise, enable the Company to act as a strategic partner in clients’ quest for superior recruitment outcomes and better candidate fit.
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, 2023 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 Company's different industries. The accompanying 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 or any other period.
The Company has control of a Mexican subsidiary and consolidates the operations of this subsidiary. Noncontrolling interest, which represents the Mexican partners’ 51 % interest in the Mexican 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 materially 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.
Revenue Recognition
Substantially all fee revenue is derived from talent and organizational consulting services and digital sales, stand-alone or as part of a solution, fees for professional services related to executive and professional recruitment performed on a retained basis, interim services 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 Standards Codification (“ASC”) 606 (“ASC 606”), Revenue from Contracts with Customers: 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.
Consulting fee revenue is primarily recognized as services are rendered, measured by total hours incurred as a percentage of 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.
Digital fee revenue is generated from IP platforms enabling large-scale, technology-based talent programs for pay, talent development, engagement, and assessment and is consumed directly by an end user or indirectly through a consulting engagement. Revenue is recognized as services are delivered and the Company has a legally enforceable right to payment. Revenue also comes from the sale of the Company’s proprietary IP subscriptions, which are considered symbolic IP due to the dynamic nature of the content. As a result, revenue is recognized over the term of the contract. Functional IP licenses
7
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
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grant customers the right to use IP content via the 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. Revenue for tangible and digital products sold by the Company, such as books and digital files, is recognized when these products are shipped.
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. In addition to talent acquisition for permanent placement roles, the Professional Search & Interim segment also offers recruitment services for interim roles. Interim roles are short term in duration, generally less than 12 months. Generally, each interim role is a separate performance obligation. The Company recognizes fee revenue over the duration that the interim resources’ services are provided which also aligns to the contracted invoicing plan and enforceable right to payment.
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 Company’s expected credit loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers’ trade accounts receivable. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is primarily based on historical loss-rate experience. When required, the Company adjusts the loss-rate methodology to account for current conditions and reasonable and supportable expectations of future economic and market conditions. The Company generally assesses future economic condition for a period of sixty to ninety days, which corresponds with the contractual life of its accounts receivables. After the Company exhausts all collection efforts, the amount of the allowance is reduced for balances written off 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 October 31, 2023 and April 30, 2023, the Company's investments in cash equivalents consisted of money market funds and as of October 31, 2023 also consisted of commercial paper and U.S. Treasury and Agency securities. The Company maintains its cash and cash equivalents in bank accounts that exceed federally insured FDIC limits. The Company has not experienced any losses in such accounts.
Marketable Securities
The Company currently has investments in marketable securities and mutual funds that are classified as either equity securities or available-for-sale debt securities. The classification of the investments in these marketable securities and mutual funds is assessed upon purchase and reassessed at each reporting period. These investments are recorded at fair value and are classified as marketable securities in the accompanying consolidated balance sheets. The investments that the Company may sell within the next 12 months are carried as current assets.
The Company invests 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 classified as equity securities and mirror 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. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis; dividends are recorded as
8
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
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 loss, net.
The Company also invests cash in excess of its daily operating requirements and capital needs primarily in marketable fixed income (debt) securities in accordance with the Company’s investment policy, which restricts the type of investments that can be made. The Company’s investment portfolio includes commercial paper, corporate notes/bonds and U.S Treasury and Agency securities. These marketable fixed income (debt) securities are classified as available-for-sale securities based on management’s decision, at the date such securities are acquired, not to hold these securities to maturity or actively trade them. The Company carries these marketable debt securities at fair value based on the market prices for these marketable debt securities or similar debt securities whose prices are readily available. The changes in fair values, net of applicable taxes, are recorded as unrealized gains or losses as a component of comprehensive (loss) income unless the change is due to credit loss. A credit loss is recorded in the statements of operations in other loss, net; any amount in excess of the credit loss is recorded as unrealized losses as a component of comprehensive (loss) income. Generally, the amount of the loss is the difference between the cost or amortized cost and its then current fair value; a credit loss is the difference between the discounted expected future cash flows to be collected from the debt security and the cost or amortized cost of the debt security. During the three and six months ended October 31, 2023 and 2022, no amount was recognized as a credit loss for the Company’s available for sale debt securities.
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 October 31, 2023 and April 30, 2023, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included cash equivalents, accounts receivable, marketable securities and foreign currency forward contracts. The carrying amount of cash equivalents and accounts receivable approximates fair value due to the short-term maturity of these instruments. The fair values of marketable securities classified as equity securities are obtained from quoted market prices, and the fair values of marketable securities classified as available-for-sale and foreign currency forward contracts are obtained from a third party, which are based on quoted prices or market prices for similar assets and financial instruments.
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, Derivatives and Hedging. 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 12 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
9
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
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.
ROU assets represent the Company's right to use an underlying asset for the lease term, and the lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term on the commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the periods in which they are incurred.
The Company has lease agreements with lease and non-lease components. For all leases with non-lease components the Company accounts for the lease and non-lease components as a single lease component.
Impairment of Long-Lived Assets
Long-lived assets include property, equipment, ROU assets and software developed or obtained for internal use. In accordance with ASC 360, Property, Plant and Equipment, management reviews the Company’s recorded long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company determines the extent to which an asset may be impaired based upon its expectation of the asset’s future usability, as well as on a reasonable assurance that the future cash flows associated with the asset will be in excess of its carrying amount. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. During the six months ended October 31, 2023, the Company reduced its real estate footprint and as a result, the Company recognized an impairment charge of ROU assets of $1.6 million and an impairment of leasehold improvements and furniture and fixtures of $0.1 million, both recorded in the consolidated statements of operations in general and administrative expenses. During the three and six months ended October 31, 2023, the Company also recognized a $1.5 million software impairment charge in Digital segment which was recorded in the consolidated statements of operations in general and administrative expenses. During the three and six months ended October 31, 2022, there were no impairment charges recorded.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of assets acquired. Goodwill is tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Results of the annual qualitative impairment test performed as of January 31, 2023, indicated that the fair value of each of the reporting units exceeded its carrying amount. As a result, no impairment charge was recognized. As of October 31, 2023 and April 30, 2023, there were no indicators of potential impairment with respect to the Company’s goodwill that would require further testing.
Intangible assets primarily consist of customer lists, non-compete agreements, proprietary databases and IP. Intangible assets are recorded at their estimated fair value at the date of acquisition and are amortized in a pattern in which the asset is consumed, if that pattern can be reliably determined, or using the straight-line method over their estimated useful lives, which range from 24 years. For intangible assets subject to amortization, an impairment loss is recognized if the carrying amount of the intangible assets is not recoverable and exceeds fair value. The carrying amount of the intangible assets is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from use of the asset. The Company reviewed its intangible assets and did not identify any impairment as of October 31, 2023 and April 30, 2023. to
Compensation and Benefits Expense
Compensation and benefits expense in the accompanying consolidated statements of operations consist of compensation and benefits paid to consultants (employees who originate business), executive officers and administrative and support personnel. The most significant portions of this expense are salaries and the amounts paid under the annual performance-related bonus plan to employees. The portion of the expense applicable to salaries is comprised of amounts earned by
10
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
employees during a reporting period. The portion of the expenses applicable to annual performance-related bonuses refers to the Company’s annual employee performance-related bonus with respect to a fiscal year, the amount of which is communicated and paid to each eligible employee following the completion of the fiscal year.
Each quarter, management makes its best estimate of its annual performance-related bonuses, which requires management to, among other things, project annual consultant productivity (as measured by engagement fees billed and collected by Executive Search and Professional Search consultants and revenue and other performance/profitability metrics for Consulting, Digital, Interim and RPO consultants), the level of engagements referred by a consultant in one line of business to a different line of business, and Company performance, including profitability, competitive forces and future economic conditions and their impact on the Company’s results. At the end of each fiscal year, annual performance-related bonuses take into account final individual consultant productivity (including referred work), Company/line of business results, including profitability, the achievement of strategic objectives, the results of individual performance appraisals and the current economic landscape. Accordingly, each quarter the Company reevaluates the assumptions used to estimate annual performance-related bonus liability and adjusts the carrying amount of the liability recorded on the consolidated balance sheet and reports any changes in the estimate in current operations.
Because annual performance-based bonuses are communicated and paid only after the Company reports its full fiscal year results, actual performance-based bonus payments may differ from the prior year’s estimate. Such changes in the bonus estimate historically have not been significant and are recorded in current operations in the period in which they are determined. The performance-related bonus expense was $97.2 million and $189.3 million during the three and six months ended October 31, 2023, respectively, included in compensation and benefits expense in the consolidated statements of operations. The performance-related bonus expense was $99.8 million and $201.6 million during the three and six months ended October 31, 2022, respectively, included in compensation and benefits expense in the consolidated statements of operations.
Other expenses included in compensation and benefits expense are due to changes in deferred compensation and pension plan liabilities, changes in cash surrender value (“CSV”) of company-owned life insurance (“COLI”) contracts, amortization of stock-based compensation awards, commissions, payroll taxes and employee insurance benefits. Unearned compensation on the consolidated balance sheets includes long-term retention awards that are generally amortized over five years . -to-
Restructuring Charges, Net
The Company accounts for its restructuring charges as a liability when the obligations are incurred and records such charges at fair value. Changes in the estimates of the restructuring charges are recorded in the period the change is determined.
Stock-Based Compensation
The Company has employee compensation plans under which various types of stock-based instruments are granted. These instruments principally include restricted stock units, restricted stock and an Employee Stock Purchase Plan (“ESPP”). The Company recognizes compensation expense related to restricted stock units, restricted stock and the estimated fair value of stock purchases under the ESPP on a straight-line basis over the service period for the entire award.
Recently Adopted Accounting Standards
In October 2021, the Financial Accounting Standards Board issued an amendment in accounting for contract assets and contract liabilities from contracts with customers, which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. The amendment of this standard became effective for fiscal years beginning after December 15, 2022 and is to be applied prospectively to business combinations that occur after the effective date. The Company adopted this guidance in its fiscal year beginning May 1, 2023 and the adoption of this guidance did not have a material impact on the consolidated financial statements.
Recently Proposed Accounting Standards - Not Yet Adopted
In November 2023, the Financial Accounting Standards Board issued an amendment in accounting update for all public entities that are required to report segment information in accordance with Topic 280, Segment Reporting. The amendments in this update improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expense. The amendment of this update are effective for fiscal years beginning after December 15, 2023, and interim periods with fiscal years beginning after December 15, 2024. The Company will adopt this guidance in its fiscal year beginning May 1, 2024. The adoption of this guidance is not anticipated to have material impact on the consolidated financial statements.
11
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
2. Basic and Diluted (Loss) Earnings Per Share
ASC 260, Earnings Per Share, requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends prior to vesting as a separate class of securities in calculating (loss) earnings per share. The Company has granted and expects to continue to grant to certain employees under its restricted stock agreements, grants that contain non-forfeitable rights to dividends. Such grants are considered participating securities. Therefore, the Company is required to apply the two-class method in calculating (loss) earnings per share. The two-class method of computing (loss) earnings per share is an earnings allocation formula that determines (loss) earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The dilutive effect of participating securities is calculated using the more dilutive of the treasury method or the two-class method.
Basic (loss) earnings per common share was computed using the two-class method by dividing basic net (loss) earnings attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted (loss) earnings per common share was computed using the two-class method by dividing diluted net (loss) earnings attributable to common stockholders by the weighted-average number of common shares outstanding plus dilutive common equivalent shares. Dilutive common equivalent shares include all in-the-money outstanding options or other contracts to issue common stock as if they were exercised or converted. Financial instruments that are not in the form of common stock, but when converted into common stock increase earnings per share or decrease loss per share, are anti-dilutive and are not included in the computation of diluted (loss) earnings per share. For the three months ended October 31, 2023, the Company is in a net loss position and diluted net loss per share therefore excludes the effects of common equivalents consisting of restricted awards, which are all antidilutive.
During the three and six months ended October 31, 2023, restricted stock awards of 2.1 million shares and 1.2 million shares, respectively, were outstanding but not included in the computation of diluted (loss) earnings per share because they were anti-dilutive. During the three and six months ended October 31, 2022, restricted stock awards of 1.6 million shares and 1.2 million shares, respectively, were outstanding but not included in the computation of diluted (loss) earnings per share because they were anti-dilutive.
The following table summarizes basic and diluted (loss) earnings per common share attributable to common stockholders:
Three Months Ended October 31, |
Six Months Ended October 31, |
||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||||||
Net (loss) income attributable to Korn Ferry |
$ | ( |
$ | $ | $ | ||||||||||||||||||
Less: distributed and undistributed earnings to nonvested restricted stockholders | |||||||||||||||||||||||
Basic net (loss) earnings attributable to common stockholders |
( |
||||||||||||||||||||||
Add: undistributed earnings to nonvested restricted stockholders | |||||||||||||||||||||||
Less: reallocation of undistributed earnings to nonvested restricted stockholders | |||||||||||||||||||||||
Diluted net (loss) earnings attributable to common stockholders |
$ | ( |
$ | $ | $ | ||||||||||||||||||
Weighted-average common shares outstanding: | |||||||||||||||||||||||
Basic weighted-average number of common shares outstanding | |||||||||||||||||||||||
Effect of dilutive securities: | |||||||||||||||||||||||
Restricted stock | |||||||||||||||||||||||
ESPP | |||||||||||||||||||||||
Diluted weighted-average number of common shares outstanding | |||||||||||||||||||||||
Net (loss) earnings per common share: |
|||||||||||||||||||||||
Basic (loss) earnings per share |
$ | ( |
$ | $ | $ | ||||||||||||||||||
Diluted (loss) earnings per share |
$ | ( |
$ | $ | $ |
12
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
3. Comprehensive (Loss) Income
Comprehensive (loss) income is comprised of net (loss) income and all changes to stockholders’ equity, except those changes resulting from investments by stockholders (changes in paid in capital) and distributions to stockholders (dividends) and is reported in the accompanying consolidated statements of comprehensive (loss) income. Accumulated other comprehensive loss, net of taxes, is recorded as a component of stockholders’ equity.
The components of accumulated other comprehensive loss, net were as follows:
October 31, 2023 |
April 30, 2023 |
||||||||||
(in thousands) | |||||||||||
Foreign currency translation adjustments | $ | ( |
$ | ( |
|||||||
Deferred compensation and pension plan adjustments, net of tax | |||||||||||
Marketable securities unrealized loss, net of tax | ( |
( |
|||||||||
Accumulated other comprehensive loss, net | $ | ( |
$ | ( |
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the three months ended October 31, 2023:
Foreign Currency Translation |
Deferred Compensation and Pension Plan |
Unrealized Losses on
Marketable Securities
|
Accumulated Other Comprehensive Loss |
||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance as of July 31, 2023 | $ | ( |
$ | $ | ( |
$ | ( |
||||||||||||||||
Unrealized (losses) gains arising during the period |
( |
( |
|||||||||||||||||||||
Reclassification of realized net losses to net income | |||||||||||||||||||||||
Balance as of October 31, 2023 | $ | ( |
$ | $ | ( |
$ | ( |
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the six months ended October 31, 2023:
Foreign Currency Translation |
Deferred
Compensation
and Pension
Plan
|
Unrealized Losses on
Marketable Securities (1)
|
Accumulated Other Comprehensive Loss |
||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance as of April 30, 2023 | $ | ( |
$ | $ | ( |
$ | ( |
||||||||||||||||
Unrealized (losses) gains arising during the period | ( |
( |
|||||||||||||||||||||
Reclassification of realized net losses to net income | |||||||||||||||||||||||
Balance as of October 31, 2023 | $ | ( |
$ | $ | ( |
$ | ( |
___________________
(1) |
The tax effect on the unrealized gains was $ |
13
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the three months ended October 31, 2022:
Foreign Currency Translation |
Deferred
Compensation
and Pension
Plan
|
Unrealized Losses on
Marketable Securities (2)
|
Accumulated Other Comprehensive Loss |
||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance as of July 31, 2022 | $ | ( |
$ | $ | ( |
$ | ( |
||||||||||||||||
Unrealized losses arising during the period |
( |
( |
( |
||||||||||||||||||||
Reclassification of realized net losses to net income | |||||||||||||||||||||||
Balance as of October 31, 2022 | $ | ( |
$ | $ | ( |
$ | ( |
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the six months ended October 31, 2022:
Foreign Currency Translation |
Deferred
Compensation
and Pension
Plan (1)
|
Unrealized Losses on
Marketable Securities (2)
|
Accumulated Other Comprehensive Loss |
||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance as of April 30, 2022 | $ | ( |
$ | $ | ( |
$ | ( |
||||||||||||||||
Unrealized losses arising during the period |
( |
( |
( |
||||||||||||||||||||
Reclassification of realized net losses to net income | |||||||||||||||||||||||
Balance as of October 31, 2022 | $ | ( |
$ | $ | ( |
$ | ( |
___________________
(1) | The tax effect on the reclassifications of realized net losses was $ |
||||
(2) | The tax effect on the unrealized losses were $ |
4. Employee Stock Plans
Stock-Based Compensation
The following table summarizes the components of stock-based compensation expense recognized in the Company’s consolidated statements of operations for the periods indicated:
Three Months Ended October 31, |
Six Months Ended October 31, |
||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Restricted stock | $ | $ | $ | $ | |||||||||||||||||||
ESPP | |||||||||||||||||||||||
Total stock-based compensation expense | $ | $ | $ | $ |
Stock Incentive Plan
At the Company’s 2022 Annual Meeting of Stockholders, held on September 22, 2022, the Company’s stockholders approved the Korn Ferry 2022 Stock Incentive Plan (the "2022 Plan"), which, among other things, increased the total number of shares of the Company’s common stock available for stock-based awards by 1,700,000 shares, leaving 2,248,284 shares available for issuance, subject to certain changes in the Company’s capital structure and other extraordinary events. The 2022 Plan requires a minimum one-year vesting for all future awards, and provides for the grant of awards to eligible participants, designated as either nonqualified or incentive stock options, restricted stock and restricted stock units, any of which are market-based, and incentive bonuses, which may be paid in cash or stock or a combination thereof.
14
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
Restricted Stock
The Company grants time-based restricted stock awards to executive officers and other senior employees that generally vest over a four-year period. In addition, certain key management members typically receive time-based restricted stock awards upon commencement of employment and may receive them annually in conjunction with the Company’s performance review. Time-based restricted stock awards are granted at a price equal to fair value, which is determined based on the closing price of the Company’s common stock on the grant date. The Company recognizes compensation expense for time-based restricted stock awards on a straight-line basis over the vesting period.
The Company also grants market-based restricted stock units to executive officers and other senior employees. The market-based units vest after three years depending upon the Company’s total stockholder return over the three-year performance period relative to other companies in its selected peer group. The fair value of these market-based restricted stock units are determined by using extensive market data that is based on historical Company and peer group information. The Company recognizes compensation expense for market-based restricted stock units on a straight-line basis over the vesting period.
Restricted stock activity during the six months ended October 31, 2023 is summarized below:
Shares | Weighted- Average Grant Date Fair Value |
||||||||||
(in thousands, except per share data) | |||||||||||
Non-vested, April 30, 2023 | $ | ||||||||||
Granted | $ | ||||||||||
Vested | ( |
$ | |||||||||
Forfeited/expired | ( |
$ | |||||||||
Non-vested, October 31, 2023 | $ |
As of October 31, 2023, there were 0.7 million shares outstanding relating to market-based restricted stock units with total unrecognized compensation totaling $26.5 million.
As of October 31, 2023, there was $86.2 million of total unrecognized compensation cost related to all non-vested awards of restricted stock, which is expected to be recognized over a weighted-average period of 2.5 years. During the three and six months ended October 31, 2023, 7,848 shares and 209,289 shares of restricted stock totaling $0.4 million and $10.6 million, respectively, were repurchased by the Company, at the option of employees, to pay for taxes related to the vesting of restricted stock. During the three and six months ended October 31, 2022, 3,969 shares and 369,433 shares of restricted stock totaling $0.2 million and $22.1 million, respectively, were repurchased by the Company, at the option of employees, to pay for taxes related to the vesting of restricted stock.
Employee Stock Purchase Plan
The Company has an ESPP that, in accordance with Section 423 of the Internal Revenue Code, allows eligible employees to authorize payroll deductions of up to 15 % of their salary to purchase shares of the Company’s common stock. On June 3, 2020, the Company amended the plan so that the purchase price of the shares purchased could not be less than 85 % or more than 100 % of the fair market price of the common stock on the last day of the enrollment period. This amendment became effective July 1, 2020. At the Company’s 2022 Annual Meeting of Stockholders, held on September 22, 2022, the Company’s stockholders approved the Korn Ferry Amended and Restated Employee Stock Purchase Plan, which, among other things, increased the total number of shares of the Company’s common stock that may be purchased thereunder by 1,500,000 shares. Employees may not purchase more than $25,000 in stock during any calendar year. The maximum number of shares that may be issued under the ESPP is 4.5 million shares. No shares were purchased under the ESPP during the three months ended October 31, 2023 and 2022. During the six months ended October 31, 2023 and 2022, employees purchased 105,311 shares at $44.59 per share and 83,704 shares at $55.22 per share, respectively. As of October 31, 2023, the ESPP had approximately 1.7 million shares remaining available for future issuance.
Common Stock
During the three and six months ended October 31, 2023, the Company repurchased (on the open market or through privately negotiated transactions) 92,500 shares and 182,500 shares of the Company’s common stock for $4.4 million and $8.6 million, respectively. During the three and six months ended October 31, 2022, the Company repurchased (on the open market or through privately negotiated transactions) 622,500 shares and 992,367 shares of the Company's common stock for $33.1 million and $55.5 million, respectively.
15
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
5. Financial Instruments
The following tables show the Company’s financial instruments and balance sheet classification as of October 31, 2023 and April 30, 2023:
October 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurement | Balance Sheet Classification | ||||||||||||||||||||||||||||||||||||||||||||||
Cost | Unrealized Gains |
Unrealized Losses |
Fair Value |
Cash and Cash Equivalents |
Marketable Securities, Current |
Marketable Securities, Non- current |
Other
Accrued
Liabilities
|
||||||||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Changes in Fair Value Recorded in | |||||||||||||||||||||||||||||||||||||||||||||||
Other Comprehensive (Loss) Income |
|||||||||||||||||||||||||||||||||||||||||||||||
Level 2: | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial paper | $ | $ | $ | ( |
$ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
Corporate notes/bonds | ( |
||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and Agency Securities | ( |
||||||||||||||||||||||||||||||||||||||||||||||
Total debt investments | $ | $ | $ | ( |
$ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
Changes in Fair Value Recorded in | |||||||||||||||||||||||||||||||||||||||||||||||
Net Income (Loss) |
|||||||||||||||||||||||||||||||||||||||||||||||
Level 1: | |||||||||||||||||||||||||||||||||||||||||||||||
Mutual funds (1)
|
$ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
Total equity investments | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
Cash | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
Money market funds | |||||||||||||||||||||||||||||||||||||||||||||||
Level 2: | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency forward contracts | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | ( |
16
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
April 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurement | Balance Sheet Classification | ||||||||||||||||||||||||||||||||||||||||||||||
Cost | Unrealized Gains |
Unrealized Losses |
Fair Value |
Cash and Cash Equivalents |
Marketable Securities, Current |
Marketable Securities, Non-current |
Income Taxes
& Other Receivables
|
||||||||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Changes in Fair Value Recorded in | |||||||||||||||||||||||||||||||||||||||||||||||
Other Comprehensive Loss | |||||||||||||||||||||||||||||||||||||||||||||||
Level 2: | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial paper | $ | $ | $ | ( |
$ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
Corporate notes/bonds | ( |
||||||||||||||||||||||||||||||||||||||||||||||
Total debt investments | $ | $ | $ | ( |
$ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
Changes in Fair Value Recorded in | |||||||||||||||||||||||||||||||||||||||||||||||
Net Income | |||||||||||||||||||||||||||||||||||||||||||||||
Level 1: | |||||||||||||||||||||||||||||||||||||||||||||||
Mutual funds (1)
|
$ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
Total equity investments | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
Cash | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
Money market funds | |||||||||||||||||||||||||||||||||||||||||||||||
Level 2: | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ |
___________________
(1) | These investments are held in trust for settlement of the Company’s vested obligations of $ |
As of October 31, 2023, available-for-sale marketable securities had remaining maturities ranging from 1 month to 24 months. During the three and six months ended October 31, 2023, there were $9.0 million and $26.2 million in sales/maturities of available-for-sale marketable securities, respectively. During the three and six months ended October 31, 2022, there were $18.6 million and $33.0 million in sales/maturities of available-for-sale marketable securities, respectively. Investments in marketable securities that are held in trust for settlement of the Company’s vested obligations under the ECAP are equity securities and are based upon the investment selections the employee elects from a pre-determined set of securities in the ECAP and the Company invests in equity securities to mirror these elections. As of October 31, 2023 and April 30, 2023, the Company’s investments in equity securities consisted of mutual funds for which market prices are readily available. Unrealized gains recorded for the period that relate to equity securities still held as of October 31, 2023 were $0.4 million. Unrealized losses recorded for the period that relate to equity securities still held as of October 31, 2022 were $10.7 million.
17
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
Foreign Currency Forward Contracts Not Designated as Hedges
The fair value of derivatives not designated as hedge instruments are as follows:
October 31, 2023 |
April 30, 2023 |
||||||||||
(in thousands) | |||||||||||
Derivative assets: | |||||||||||
Foreign currency forward contracts | $ | $ | |||||||||
Derivative liabilities: | |||||||||||
Foreign currency forward contracts | $ | $ |
As of October 31, 2023, the total notional amounts of the forward contracts purchased and sold were $107.4 million and $29.9 million, respectively. As of April 30, 2023, the total notional amounts of the forward contracts purchased and sold were $112.7 million and $41.1 million, respectively. The Company recognizes forward contracts as a net asset or net liability on the consolidated balance sheets as such contracts are covered by master netting agreements. During the three and six months ended October 31, 2023, the Company incurred losses of $3.2 million and $1.5 million, respectively, related to forward contracts which are recorded in general and administrative expenses in the accompanying consolidated statements of operations. During the three and six months ended October 31, 2022, the Company incurred losses of $1.5 million and $2.1 million, respectively, related to forward contracts which are recorded in general and administrative expenses in the accompanying consolidated statements of operations. These foreign currency losses related to forward contracts offset foreign currency gains that result from transactions denominated in a currency other than the Company’s functional currency. The cash flows related to foreign currency forward contracts are included in cash flows from operating activities.
6. Deferred Compensation and Retirement Plans
The Company has several deferred compensation and retirement plans for eligible consultants and vice presidents that provide defined benefits to participants based on the deferral of current compensation or contributions made by the Company subject to vesting and retirement or termination provisions. Among these plans is a defined benefit pension plan for certain employees in the U.S. The assets of this plan are held separately from the assets of the sponsor in self-administered funds. All other defined benefit obligations from other plans are unfunded.
The components of net periodic benefit costs are as follows:
Three Months Ended October 31, |
Six Months Ended October 31, |
||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||||||||||
Interest cost | |||||||||||||||||||||||
Amortization of actuarial loss | |||||||||||||||||||||||
Expected return on plan assets (1)
|
( |
( |
( |
( |
|||||||||||||||||||
Net periodic service credit amortization | ( |
( |
( |
( |
|||||||||||||||||||
Net periodic benefit costs (2)
|
$ | $ | $ | $ |
___________________
(1) | The expected long-term rate of return on plan assets was |
(2) | The service cost, interest cost and the other components of net periodic benefit costs are included in compensation and benefits expense, interest expense, net and other loss, net, respectively, on the consolidated statements of operations. |
The Company purchased COLI contracts insuring the lives of certain employees eligible to participate in the deferred compensation and pension plans as a means of setting aside funds to cover such plans. The gross CSV of these contracts of $279.2 million and $275.1 million as of October 31, 2023 and April 30, 2023, respectively, was offset by outstanding policy loans of $77.1 million and $77.1 million in the accompanying consolidated balance sheets as of October 31, 2023 and April 30, 2023, respectively. The CSV value of the underlying COLI investments increased by $2.0 million and $3.9 million during the three and six months ended October 31, 2023, respectively, and was recorded as a decrease in compensation and benefits expense in the accompanying consolidated statements of operations. The CSV value of the underlying COLI
18
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
investment increased by $2.9 million and $4.9 million during the three and six months ended October 31, 2022, respectively, and was recorded as a decrease in compensation and benefits expense in the accompanying consolidated statements of operations.
The Company’s ECAP is intended to provide certain employees an opportunity to defer their salary and/or bonus on a pre-tax basis. In addition, the Company, as part of its compensation philosophy, makes discretionary contributions into the ECAP and such contributions may be granted to key employees annually based on the employee’s performance. Certain key members of management may also receive Company ECAP contributions upon commencement of employment. The Company amortizes these contributions on a straight-line basis over the service period, generally a five year period. Participants have the ability to allocate their deferrals among a number of investment options and may receive their benefits at termination, retirement or ‘in service’ either in a lump sum or in quarterly installments over -to-15 years. The ECAP amounts that are expected to be paid to employees over the next 12 months are classified as a current liability included in compensation and benefits payable on the accompanying consolidated balance sheets.
The ECAP is accounted for whereby the changes in the fair value of the vested amounts owed to the participants are adjusted with a corresponding charge (or credit) to compensation and benefits costs. During the three months ended October 31, 2023, deferred compensation liability decreased; therefore, the Company recognized a reduction in compensation expense of $12.3 million. Offsetting the decrease in compensation and benefits expense was a decrease in the fair value of marketable securities (held in trust to satisfy obligations of the ECAP liabilities) of $13.8 million during the three months ended October 31, 2023, recorded in other loss, net on the consolidated statements of operations. During the three and six months ended October 31, 2022, deferred compensation liability decreased; therefore, the Company recognized a reduction in compensation expense of $9.5 million and $8.6 million, respectively. Offsetting the decreases in compensation and benefits expense was a decrease in the fair value of marketable securities (held in trust to satisfy obligations of the ECAP liabilities) of $9.7 million during both the three and six months ended October 31, 2022, recorded in other loss, net on the consolidated statements of operations. (see Note 5—Financial Instruments).
7. Fee Revenue
Contract Balances
A contract asset (unbilled receivables) is recorded when the Company transfers control of products or services before there is an unconditional right to payment. A contract liability (deferred revenue) is recorded when cash is received in advance of performance of the obligation. Deferred revenue represents the future performance obligations to transfer control of products or services for which we have already received consideration. Deferred revenue is presented in other accrued liabilities on the consolidated balance sheets.
The following table outlines the Company’s contract asset and liability balances as of October 31, 2023 and April 30, 2023:
October 31, 2023 | April 30, 2023 | ||||||||||
(in thousands) | |||||||||||
Contract assets-unbilled receivables | $ | $ | |||||||||
Contract liabilities-deferred revenue | $ | $ |
During the six months ended October 31, 2023, we recognized revenue of $143.9 million that was included in the contract liabilities balance at the beginning of the period.
Performance Obligations
The Company has elected to apply the practical expedient to exclude the value of unsatisfied performance obligations for contracts with a duration of one year or less, which applies to all executive search, professional search and to most of the fee revenue from the interim business. As of October 31, 2023, the aggregate transaction price allocated to the performance obligations that are unsatisfied for contracts with an expected duration of greater than one year at inception was $1,050.0 million. Of the $1,050.0 million of remaining performance obligations, the Company expects to recognize approximately $362.0 million in the remainder of fiscal 2024, $406.3 million in fiscal 2025, $173.5 million in fiscal 2026 and the remaining $108.2 million in fiscal 2027 and thereafter. However, this amount should not be considered an indication of the Company’s future revenue as contracts with an initial term of one year or less are not included. Further, our contract terms and conditions allow for clients to increase or decrease the scope of services and such changes do not increase or decrease a performance obligation until the Company has an enforceable right to payment.
Disaggregation of Revenue
The Company disaggregates its revenue by line of business and further by region for Executive Search. This information is presented in Note 10—Segments.
19
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2023 (continued)
|
The following table provides further disaggregation of fee revenue by industry:
Three Months Ended October 31, | |||||||||||||||||||||||
2023 | 2022 | ||||||||||||||||||||||
Dollars | % | Dollars | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Industrial | $ | % | $ | % | |||||||||||||||||||
Life Sciences/Healthcare | |||||||||||||||||||||||
Financial Services | |||||||||||||||||||||||
Technology | |||||||||||||||||||||||
Consumer Goods |