10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on March 8, 2024
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 January 31, 2024
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 March 4, 2024 was 52,180,239 shares.
KORN FERRY
Table of Contents
Item # | Description | Page | ||||||
Item 1. Condensed Consolidated Financial Statements
KORN FERRY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 2024 |
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 condensed consolidated financial statements.
1
KORN FERRY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended January 31, |
Nine Months Ended January 31, |
||||||||||||||||||||||
2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
(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 income, 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 income attributable to Korn Ferry |
$ | $ | $ | $ | |||||||||||||||||||
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 condensed consolidated financial statements.
2
KORN FERRY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended January 31, |
Nine Months Ended January 31, |
||||||||||||||||||||||
2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||||||||||
Other comprehensive 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 on marketable securities, net of tax |
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Comprehensive income |
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Less: comprehensive income attributable to noncontrolling interest | ( |
( |
( |
( |
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Comprehensive income attributable to Korn Ferry |
$ | $ | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
KORN FERRY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
CONDENSED 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 |
||||||||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||
Balance as of April 30, 2023 | $ | $ | $ | ( |
$ | $ | $ | ||||||||||||||||||||||||||||||||||
Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
— | — | — | ||||||||||||||||||||||||||||||||||||||
Dividends paid to shareholders | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Purchase of stock | ( |
( |
— | — | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of stock | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of July 31, 2023 | ( |
||||||||||||||||||||||||||||||||||||||||
Net (loss) income |
— | — | ( |
— | ( |
||||||||||||||||||||||||||||||||||||
Other comprehensive loss |
— | — | — | ( |
( |
( |
( |
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Dividends paid to shareholders | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Dividends paid to noncontrolling interest | — | — | — | — | — | ( |
( |
||||||||||||||||||||||||||||||||||
Purchase of stock | ( |
( |
— | — | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of October 31, 2023 | ( |
||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Dividends paid to shareholders | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Dividends paid to noncontrolling interest | — | — | — | — | — | ( |
( |
||||||||||||||||||||||||||||||||||
Purchase of stock | ( |
( |
— | — | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of stock | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of January 31, 2024 | $ | $ | $ | ( |
$ | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
KORN FERRY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
CONDENSED 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 |
||||||||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||
Balance as of April 30, 2022 | $ | $ | $ | ( |
$ | $ | $ | ||||||||||||||||||||||||||||||||||
Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | ( |
( |
( |
( |
||||||||||||||||||||||||||||||||||
Dividends paid to shareholders | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Purchase of stock | ( |
( |
— | — | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of stock | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of July 31, 2022 | ( |
||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Other comprehensive (loss) income |
— | — | — | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Dividends paid to shareholders | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Dividends paid to noncontrolling interest | — | — | — | — | — | ( |
( |
||||||||||||||||||||||||||||||||||
Purchase of stock | ( |
( |
— | — | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of October 31, 2022 | ( |
||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Dividends paid to shareholders | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Dividends paid to noncontrolling interest | — | — | — | — | — | ( |
( |
||||||||||||||||||||||||||||||||||
Purchase of stock | ( |
( |
— | — | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of stock | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of January 31, 2023 |
$ | $ | $ | ( |
$ | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
KORN FERRY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended January 31, |
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2024 | 2023 | ||||||||||
(in thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ |
|
$ | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization | |||||||||||
Stock-based compensation expense | |||||||||||
Provision for doubtful accounts | |||||||||||
Gain on marketable securities |
( |
( |
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Deferred income taxes | ( |
( |
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Gain on cash surrender value of life insurance policies | ( |
( |
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Impairment of right-of-use assets | |||||||||||
Impairment of fixed assets | |||||||||||
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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Income taxes payable | ( |
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Prepaid expenses and other assets | ( |
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Other | ( |
( |
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Net cash provided by operating activities |
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Cash flows from investing activities: | |||||||||||
Purchase of property and equipment | ( |
( |
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Purchase of marketable securities | ( |
( |
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Proceeds from sales/maturities of marketable securities | |||||||||||
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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Repurchases of common stock | ( |
( |
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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 | |||||||||||
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 condensed consolidated financial statements.
6
KORN FERRY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS January 31, 2024 |
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. Korn Ferry's five core solutions are as follows: Organizational Strategy, Assessment and Succession, Leadership and Professional Development, Total Rewards, and Talent Acquisition. The Company's colleagues engage with clients through the delivery of one of the Company's core solutions as a point solution sale or through combining component parts of the Company's core solutions into an integrated solution. In either case, Korn Ferry is solving clients’ most challenging business and human capital issues.
Basis of Consolidation and Presentation
The accompanying condensed 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 condensed consolidated financial statements conform with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X and prevailing practice within the Company's different industries. The accompanying condensed 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 periods are not necessarily indicative of the results for the entire fiscal year or any other period.
The Company considers events or transactions that occur after the balance sheet date but before the condensed 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 condensed 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 condensed 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.
7
KORN FERRY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS January 31, 2024 (continued) |
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 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.
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 January 31, 2024 and April 30, 2023, the Company's investments in cash equivalents consisted of money market funds and commercial paper and as of January 31, 2024 also consisted of 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 condensed 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 CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
January 31, 2024 (continued)
|
earned on the ex-dividend date. Interest, dividend income and the changes in fair value in marketable securities are recorded in the accompanying condensed consolidated statements of operations in other income, 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 income unless the change is due to credit loss. A credit loss is recorded in the condensed consolidated statements of income in other income, net; any amount in excess of the credit loss is recorded as unrealized losses as a component of comprehensive 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 nine months ended January 31, 2024 and 2023, 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 January 31, 2024 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.
Impairment of Long-Lived Assets
Long-lived assets include property, equipment, right-of-use ("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 nine months ended January 31, 2024, 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 condensed consolidated statements of income in general and administrative expenses. During the nine months ended January 31, 2024, the Company also recognized a $1.5 million software impairment charge in the Digital segment, which was recorded in the condensed consolidated statements of income in general and administrative expenses. During the three and nine months ended January 31, 2023, the Company reduced its real estate footprint and as a result, the Company recorded an impairment charge of ROU assets of $5.5 million and an impairment of leasehold improvements and furniture and fixtures of $4.4 million, both recorded in the condensed consolidated statements of income in general and administrative expenses.
9
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
January 31, 2024 (continued)
|
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, 2024, 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 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 January 31, 2024 and April 30, 2023. 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.
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 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 earnings per share. The two-class method of computing earnings per share is an earnings allocation formula that determines 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 earnings per common share was computed using the two-class method by dividing basic net earnings attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per common share was computed using the two-class method by dividing diluted net 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, are anti-dilutive and are not included in the computation of diluted earnings per share.
Recent 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 amendments in 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 a material impact on the condensed consolidated financial statements.
In December 2023, the Financial Accounting Standards Board issued an amendment in accounting update for income taxes disclosures. The new amendments provide improvements to income tax disclosures by requiring specific categories in the rate reconciliation and disaggregated information for income taxes paid. The amendments of this update are effective for annual periods beginning after December 15, 2024, and should be applied on a prospective basis. The Company will adopt this guidance in its fiscal year beginning May 1, 2025. The adoption of this guidance is not anticipated to have a material impact on the condensed consolidated financial statements.
10
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
January 31, 2024 (continued)
|
2. Basic and Diluted Earnings Per Share
The following table summarizes basic and diluted earnings per common share attributable to common stockholders:
Three Months Ended January 31, |
Nine Months Ended January 31, |
||||||||||||||||||||||
2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||||||
Net income attributable to Korn Ferry |
$ | $ | $ | $ | |||||||||||||||||||
Less: distributed and undistributed earnings to nonvested restricted stockholders | |||||||||||||||||||||||
Basic net earnings attributable to common stockholders |
|||||||||||||||||||||||
Add: undistributed earnings to nonvested restricted stockholders | |||||||||||||||||||||||
Less: reallocation of undistributed earnings to nonvested restricted stockholders | |||||||||||||||||||||||
Diluted net 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 earnings per common share: |
|||||||||||||||||||||||
Basic earnings per share |
$ | $ | $ | $ | |||||||||||||||||||
Diluted earnings per share |
$ | $ | $ | $ |
During the three and nine months ended January 31, 2024, restricted stock awards of 0.9 million shares and 1.0 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. During the three and nine months ended January 31, 2023, restricted stock awards of 1.2 million shares and 1.2 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.
3. Comprehensive Income
Comprehensive income is comprised of net 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 condensed consolidated statements of comprehensive 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:
January 31, 2024 |
April 30, 2023 |
||||||||||
(in thousands) | |||||||||||
Foreign currency translation adjustments | $ | ( |
$ | ( |
|||||||
Deferred compensation and pension plan adjustments, net of tax | |||||||||||
Marketable securities unrealized gain (loss), net of tax |
( |
||||||||||
Accumulated other comprehensive loss, net | $ | ( |
$ | ( |
11
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
January 31, 2024 (continued)
|
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the three months ended January 31, 2024:
Foreign Currency Translation |
Deferred Compensation and Pension Plan |
Unrealized (Losses) Gains
on Marketable Securities (1)
|
Accumulated Other Comprehensive Loss |
||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance as of October 31, 2023 |
$ | ( |
$ | $ | ( |
$ | ( |
||||||||||||||||
Unrealized gains arising during the period |
|||||||||||||||||||||||
Reclassification of realized net losses to net income | |||||||||||||||||||||||
Balance as of January 31, 2024 |
$ | ( |
$ | $ | $ | ( |
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the nine months ended January 31, 2024:
Foreign Currency Translation |
Deferred
Compensation
and Pension
Plan (2)
|
Unrealized (Losses) Gains
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 January 31, 2024 |
$ | ( |
$ | $ | $ | ( |
___________________
(1) |
The tax effect on the unrealized gains were $ |
||||
(2) | The tax effect on the reclassifications of realized net losses was $ |
12
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
January 31, 2024 (continued)
|
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the three months ended January 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 October 31, 2022 |
$ | ( |
$ | $ | ( |
$ | ( |
||||||||||||||||
Unrealized gains arising during the period |
|||||||||||||||||||||||
Reclassification of realized net losses to net income | |||||||||||||||||||||||
Balance as of January 31, 2023 |
$ | ( |
$ | $ | ( |
$ | ( |
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the nine months ended January 31, 2023:
Foreign Currency Translation |
Deferred
Compensation
and Pension
Plan (2)
|
Unrealized Losses on
Marketable Securities
|
Accumulated Other Comprehensive Loss |
||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance as of April 30, 2022 | $ | ( |
$ | $ | ( |
$ | ( |
||||||||||||||||
Unrealized (losses) gains arising during the period |
( |
( |
|||||||||||||||||||||
Reclassification of realized net losses to net income | |||||||||||||||||||||||
Balance as of January 31, 2023 |
$ | ( |
$ | $ | ( |
$ | ( |
___________________
(1) | The tax effect on the unrealized gains was $ |
||||
(2) | The tax effect on the reclassifications of realized net losses was $ |
4. Employee Stock Plans
Stock-Based Compensation
The following table summarizes the components of stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the periods indicated:
Three Months Ended January 31, |
Nine Months Ended January 31, |
||||||||||||||||||||||
2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Restricted stock | $ | $ | $ | $ | |||||||||||||||||||
ESPP | |||||||||||||||||||||||
Total stock-based compensation expense | $ | $ | $ | $ |
Common Stock
During the three and nine months ended January 31, 2024, the Company repurchased (on the open market or through privately negotiated transactions) 382,500 shares and 565,000 shares of the Company’s common stock for $21.0 million and $29.6 million, respectively. During the three and nine months ended January 31, 2023, the Company repurchased (on the open market or through privately negotiated transactions) 462,500 shares and 1,454,867 shares of the Company's common stock for $25.0 million and $80.5 million, respectively.
13
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
January 31, 2024 (continued)
|
5. Financial Instruments
The following tables show the Company’s financial instruments and balance sheet classification as of January 31, 2024 and April 30, 2023:
January 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||
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 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 |
|||||||||||||||||||||||||||||||||||||||||||||||
Level 1: | |||||||||||||||||||||||||||||||||||||||||||||||
Mutual funds (1)
|
$ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
Total equity investments | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
Cash | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
Money market funds | |||||||||||||||||||||||||||||||||||||||||||||||
Level 2: | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ |
14
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
January 31, 2024 (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 January 31, 2024, available-for-sale marketable securities had remaining maturities ranging from 1 month to 21 months. During the three and nine months ended January 31, 2024, there were $4.4 million and $30.6 million in sales/maturities of available-for-sale marketable securities, respectively. During the three and nine months ended January 31, 2023, there were $14.3 million and $47.3 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 January 31, 2024 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 January 31, 2024 were $20.9 million. Unrealized losses recorded for the period that relate to equity securities still held as of January 31, 2023 were $2.8 million.
15
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
January 31, 2024 (continued)
|
Foreign Currency Forward Contracts Not Designated as Hedges
The fair value of derivatives not designated as hedge instruments are as follows:
January 31, 2024 |
April 30, 2023 |
||||||||||
(in thousands) | |||||||||||
Derivative assets: | |||||||||||
Foreign currency forward contracts | $ | $ | |||||||||
Derivative liabilities: | |||||||||||
Foreign currency forward contracts | $ | $ |
As of January 31, 2024, the total notional amounts of the forward contracts purchased and sold were $84.1 million and $33.7 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 condensed consolidated balance sheets as such contracts are covered by master netting agreements. During the three and nine months ended January 31, 2024, the Company incurred gains of $2.4 million and $0.9 million, respectively, related to forward contracts which are recorded in general and administrative expenses in the accompanying condensed consolidated statements of income. During the three and nine months ended January 31, 2023, the Company incurred gains of $3.3 million and $1.2 million, respectively, related to forward contracts which are recorded in general and administrative expenses in the accompanying condensed consolidated statements of income. These foreign currency gains related to forward contracts offset foreign currency losses 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 January 31, |
Nine Months Ended January 31, |
||||||||||||||||||||||
2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
(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 income, net, respectively, on the condensed consolidated statements of income. |
16
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
January 31, 2024 (continued)
|
The Company purchased company-owned life insurance ("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 cash surrender value ("CSV") of these contracts of $293.4 million and $275.1 million as of January 31, 2024 and April 30, 2023, respectively, was offset by outstanding policy loans of $77.0 million and $77.1 million in the accompanying condensed consolidated balance sheets as of January 31, 2024 and April 30, 2023, respectively. The CSV value of the underlying COLI investments increased by $2.5 million and $6.4 million during the three and nine months ended January 31, 2024, respectively, and was recorded as a decrease in compensation and benefits expense in the accompanying condensed consolidated statements of income. The CSV value of the underlying COLI investment increased by $2.5 million and $7.4 million during the three and nine months ended January 31, 2023, respectively, and was recorded as a decrease in compensation and benefits expense in the accompanying condensed consolidated statements of income.
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 condensed 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 and nine months ended January 31, 2024, deferred compensation liability increased; therefore, the Company recognized an increase in compensation expense of $22.5 million and $22.7 million, respectively. Offsetting the increases in compensation and benefits expense was an increase in the fair value of marketable securities (held in trust to satisfy obligations of the ECAP liabilities) of $23.8 million and $22.8 million during the three and nine months ended January 31, 2024, recorded in other income, net on the condensed consolidated statements of income. During the three and nine months ended January 31, 2023, deferred compensation liability increased; therefore, the Company recognized an increase in compensation expense of $12.1 million and $3.5 million, respectively. Offsetting the increases in compensation and benefits expense was an increase in the fair value of marketable securities (held in trust to satisfy obligations of the ECAP liabilities) of $12.7 million and $3.0 million during the three and nine months ended January 31, 2023, recorded in other income, net on the condensed consolidated statements of income. (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 condensed consolidated balance sheets.
The following table outlines the Company’s contract asset and liability balances as of January 31, 2024 and April 30, 2023:
January 31, 2024 | April 30, 2023 | ||||||||||
(in thousands) | |||||||||||
Contract assets-unbilled receivables | $ | $ | |||||||||
Contract liabilities-deferred revenue | $ | $ |
During the nine months ended January 31, 2024, we recognized revenue of $175.1 million that was included in the contract liabilities balance at the beginning of the period.
17
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
January 31, 2024 (continued)
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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 January 31, 2024, 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 $1,081.3 million. Of the $1,081.3 million of remaining performance obligations, the Company expects to recognize approximately $212.5 million in the remainder of fiscal 2024, $523.1 million in fiscal 2025, $212.3 million in fiscal 2026 and the remaining $133.4 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.
The following table provides further disaggregation of fee revenue by industry:
Three Months Ended January 31, | |||||||||||||||||||||||
2024 | 2023 | ||||||||||||||||||||||
Dollars | % | Dollars | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Industrial | $ | % | $ | % | |||||||||||||||||||
Financial Services |