10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on September 6, 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 July 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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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 September 3, 2024 was 52,010,644 shares.
KORN FERRY
Table of Contents
Item # | Description | Page | ||||||
Item 5. | ||||||||
Item 1. Condensed Consolidated Financial Statements
KORN FERRY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 2024 |
April 30, 2024 |
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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)
Three Months Ended July 31, |
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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 | |||||||||||
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: | |||||||||||
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)
Three Months Ended July 31, |
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2024 | 2023 | ||||||||||
(in thousands) | |||||||||||
Net income | $ | $ | |||||||||
Other comprehensive income (loss): |
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Foreign currency translation adjustments | |||||||||||
Deferred compensation and pension plan adjustments, net of tax | ( |
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Net unrealized gain on marketable securities, net of tax |
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Comprehensive income | |||||||||||
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)
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, 2024 |
$ | $ | $ | ( |
$ | $ | $ | ||||||||||||||||||||||||||||||||||
Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income (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, 2024 |
$ | $ | $ | ( |
$ | $ | $ |
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 | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Purchase of stock | ( |
( |
— | — | ( |
— | ( |
||||||||||||||||||||||||||||||||||
Issuance of stock | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balance as of July 31, 2023 |
$ | $ | $ | ( |
$ | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
KORN FERRY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended July 31, |
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2024 | 2023 | ||||||||||
(in thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ |
|
$ | ||||||||
Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization | |||||||||||
Stock-based compensation expense | |||||||||||
Deferred income taxes | |||||||||||
Provision for doubtful accounts | |||||||||||
Impairment of right-of-use assets | |||||||||||
Impairment of fixed assets | |||||||||||
Gain on marketable securities | ( |
( |
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Gain on cash surrender value of life insurance policies | ( |
( |
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Change in other assets and liabilities: | |||||||||||
Deferred compensation | |||||||||||
Receivables due from clients | ( |
( |
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Income taxes and other receivables | ( |
( |
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Prepaid expenses and other assets | ( |
( |
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Unearned compensation | ( |
( |
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Income taxes payable | ( |
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Accounts payable and accrued liabilities | ( |
( |
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Other | ( |
( |
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Net cash used in 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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Net cash (used in) provided by investing activities |
( |
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Cash flows from financing activities: | |||||||||||
Dividends paid to stockholders |
( |
( |
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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 in connection with an employee stock purchase plan |
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Principal payments on finance leases | ( |
( |
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Net cash used in financing activities | ( |
( |
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Effect of exchange rate changes on cash and cash equivalents | |||||||||||
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.
5
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024
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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 leading 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 our colleagues focus on clients, by bringing all of our resources together to solve their human capital issues. 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 – touching nearly 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 helping solve our 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, 2024 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 period 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 Recruitment Process Outsourcing ("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.
6
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
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Digital fee revenue is generated from intellectual property ("IP") based software products enabling large-scale 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 product 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
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 recognized as current assets.
7
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
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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 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 income 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 months ended July 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 July 31, 2024 and April 30, 2024, 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. 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 three months ended July 31, 2024, there were no impairment charges recorded. During the three months ended July 31, 2023, the Company reduced its real estate footprint and as a result, the Company recorded 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.
8
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
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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 quantitative impairment test performed as of February 1, 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 July 31, 2024 and April 30, 2024, 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 indicators of impairment as of July 31, 2024 and April 30, 2024. to
Earnings Per Share
The Company treats 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 amendment in this update improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expense. The amendment in this update is 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 fiscal 2025 and in interim periods beginning in fiscal 2026. 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 amendment provides improvements to income tax disclosures by requiring specific categories in the rate reconciliation and disaggregated information for income taxes paid. The amendment of this update is 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.
9
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
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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 July 31, |
|||||||||||
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 | |||||||||||
Employee Stock Purchase Plan ("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 months ended July 31, 2024 and 2023, restricted stock awards of 0.9 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:
July 31, 2024 |
April 30, 2024 |
||||||||||
(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 | $ | ( |
$ | ( |
10
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
|
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the three months ended July 31, 2024:
Foreign Currency Translation |
Deferred Compensation and Pension Plan |
Unrealized (Losses) Gains
on Marketable Securities
|
Accumulated Other Comprehensive Loss |
||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance as of April 30, 2024 |
$ | ( |
$ | $ | ( |
$ | ( |
||||||||||||||||
Unrealized gains arising during the period | |||||||||||||||||||||||
Reclassification of realized net gains to net income |
( |
( |
|||||||||||||||||||||
Balance as of July 31, 2024 |
$ | ( |
$ | $ | $ | ( |
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the three months ended July 31, 2023:
Foreign Currency Translation |
Deferred Compensation and Pension Plan |
Unrealized Losses on Marketable Securities |
Accumulated Other Comprehensive Loss |
||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance as of April 30, 2023 |
$ | ( |
$ | $ | ( |
$ | ( |
||||||||||||||||
Unrealized gains arising during the period |
|||||||||||||||||||||||
Reclassification of realized net losses to net income | |||||||||||||||||||||||
Balance as of July 31, 2023 |
$ | ( |
$ | $ | ( |
$ | ( |
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 July 31, |
|||||||||||
2024 | 2023 | ||||||||||
(in thousands) | |||||||||||
Restricted stock | $ | $ | |||||||||
ESPP | |||||||||||
Total stock-based compensation expense | $ | $ |
Restricted Stock
Restricted stock activity during the three months ended July 31, 2024 is summarized below:
Shares | Weighted- Average Grant Date Fair Value |
||||||||||
(in thousands, except per share data) | |||||||||||
Non-vested, April 30, 2024 |
$ | ||||||||||
Granted | $ | ||||||||||
Vested | ( |
$ | |||||||||
Forfeited/expired | ( |
$ | |||||||||
Non-vested, July 31, 2024 |
$ |
11
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
|
As of July 31, 2024, there were 0.8 million shares outstanding relating to market-based restricted stock units with total unrecognized compensation totaling $39.2 million.
As of July 31, 2024, there was $101.1 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 2.8 years. During the three months ended July 31, 2024 and 2023, 252,622 shares and 201,441 shares of restricted stock totaling $16.6 million and $10.2 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
During the three months ended July 31, 2024 and 2023, employees purchased 70,309 shares at $60.43 per share and 105,311 shares at $44.59 per share, respectively. As of July 31, 2024, the ESPP had approximately 1.5 million shares remaining available for future issuance.
Common Stock
During the three months ended July 31, 2024 and 2023, the Company repurchased (on the open market or through privately negotiated transactions) 351,250 shares of the Company’s common stock for $23.5 million and 90,000 shares for $4.2 million, respectively.
5. Financial Instruments
The following tables show the Company’s financial instruments and balance sheet classification as of July 31, 2024 and April 30, 2024:
July 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 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
12
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
|
April 30, 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 |
Other
Accrued
Liabilities
|
||||||||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Changes in Fair Value Recorded in | |||||||||||||||||||||||||||||||||||||||||||||||
Other Comprehensive Loss | |||||||||||||||||||||||||||||||||||||||||||||||
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 | $ | $ | $ | $ | $ | ( |
___________________
(1) | These investments are held in trust for settlement of the Company’s vested obligations of $ |
As of July 31, 2024, available-for-sale marketable securities had remaining maturities ranging from 1 month to 23 months. During the three months ended July 31, 2024 and 2023, there were $6.9 million and $17.2 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 July 31, 2024 and April 30, 2024, the Company’s investments in equity securities consisted of mutual funds for which market prices are readily available. Unrealized gains that relate to equity securities still held as of July 31, 2024 and 2023 were $11.7 million and $11.9 million respectively.
Foreign Currency Forward Contracts Not Designated as Hedges
The fair value of derivatives not designated as hedge instruments are as follows:
July 31, 2024 |
April 30, 2024 |
||||||||||
(in thousands) | |||||||||||
Derivative assets: | |||||||||||
Foreign currency forward contracts | $ | $ | |||||||||
Derivative liabilities: | |||||||||||
Foreign currency forward contracts | $ | $ |
13
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
|
As of July 31, 2024, the total notional amounts of the forward contracts purchased and sold were $79.1 million and $30.3 million, respectively. As of April 30, 2024, the total notional amounts of the forward contracts purchased and sold were $82.9 million and $34.0 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 months ended July 31, 2024 and 2023, the Company incurred losses of $0.2 million and gains of $1.7 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 losses and gains offset foreign currency gains and 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 July 31, |
|||||||||||
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. |
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 $311.7 million and $295.9 million as of July 31, 2024 and April 30, 2024, respectively, was offset by outstanding policy loans of $77.0 million in the accompanying condensed consolidated balance sheets as of both July 31, 2024 and April 30, 2024. The CSV value of the underlying COLI investments increased by $2.2 million and $2.0 million during the three months ended July 31, 2024 and 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.
14
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
|
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 July 31, 2024 and 2023, deferred compensation liability increased; therefore, the Company recognized an increase in compensation expense of $13.6 million and $12.5 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 $14.2 million and $12.8 million during the three months ended July 31, 2024 and 2023, respectively, 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 July 31, 2024 and April 30, 2024:
July 31, 2024 | April 30, 2024 | ||||||||||
(in thousands) | |||||||||||
Contract assets-unbilled receivables | $ | $ | |||||||||
Contract liabilities-deferred revenue | $ | $ |
During the three months ended July 31, 2024, we recognized revenue of $83.7 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 July 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 $997.3 million. Of the $997.3 million of remaining performance obligations, the Company expects to recognize approximately $422.8 million in the remainder of fiscal 2025, $324.7 million in fiscal 2026, $164.3 million in fiscal 2027 and the remaining $85.5 million in fiscal 2028 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.
15
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
|
The following table provides further disaggregation of fee revenue by industry:
Three Months Ended July 31, | |||||||||||||||||||||||
2024 | 2023 | ||||||||||||||||||||||
Dollars | % | Dollars | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Industrial | $ | % | $ | % | |||||||||||||||||||
Financial Services | |||||||||||||||||||||||
Life Sciences/Healthcare | |||||||||||||||||||||||
Technology | |||||||||||||||||||||||
Consumer Goods | |||||||||||||||||||||||
Education/Non–Profit/General | |||||||||||||||||||||||
Fee Revenue | $ | % | $ | % |
8. Credit Losses
The activity in the allowance for credit losses on the Company's trade receivables is as follows:
(in thousands) | |||||
Balance at April 30, 2024 |
$ | ||||
Provision for credit losses | |||||
Write-offs | ( |
||||
Recoveries of amounts previously written off | |||||
Foreign currency translation | ( |
||||
Balance at July 31, 2024 |
$ |
The fair value and unrealized losses on available for sale debt securities, aggregated by investment category and the length of time the security has been in an unrealized loss position, are as follows:
Less Than 12 Months | 12 Months or longer | Balance Sheet Classification | |||||||||||||||||||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Cash and Cash Equivalent |
Marketable Securities, Current |
Marketable Securities, Non- Current |
|||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||
Balance at July 31, 2024 | |||||||||||||||||||||||||||||||||||||||||
Commercial paper | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Corporate notes/bonds | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
U.S. Treasury and Agency Securities | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Balance at April 30, 2024 | |||||||||||||||||||||||||||||||||||||||||
Commercial paper | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Corporate notes/bonds | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
U.S. Treasury and Agency Securities | $ | $ | $ | $ | $ | $ | $ |
The Company only purchases high grade bonds that have a maturity from the date of purchase of no more than two years . The Company monitors the credit worthiness of its investments on a quarterly basis. The Company does not intend to sell the investments and does not believe it will be required to sell the investments before the investments mature and therefore recover the amortized cost basis.
16
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
|
9. Income Taxes
The provision for income tax was $22.4 million in the three months ended July 31, 2024, with an effective tax rate of 25.8 %, compared to $18.4 million in the three months ended July 31, 2023, with an effective tax rate of 28.1 %. In addition to the impact of U.S. state income taxes and the jurisdictional mix of earnings, which generally create variability in our effective tax rate over time, the lower effective tax rate for the three months ended July 31, 2024 was primarily due to the windfall from stock-based awards that vested during the three months ended July 31, 2024, which was greater than the benefit recorded for the three months ended July 31, 2023 in connection with the windfall from stock-based awards that vested during the year-ago quarter. The windfall is the amount by which the Company’s tax deduction for these awards, based on the fair market value of the awards on the date of vesting, is greater than the expense recorded in the Company’s financial statements over the awards’ vesting period.
10. Segments
The Company has eight reportable segments: Consulting, Digital, Executive Search North America, Executive Search Europe, the Middle East and Africa ("EMEA"), Executive Search Asia Pacific, Executive Search Latin America, Professional Search & Interim and RPO.
The Company evaluates performance and allocates resources based on the Company’s chief operating decision maker (“CODM”) review of 1) fee revenue and 2) adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”). To the extent that such costs or charges occur, Adjusted EBITDA excludes restructuring charges, integration/acquisition costs, certain separation costs and certain non-cash charges (goodwill, intangible asset and other impairment charges). The CODM is not provided asset information by reportable segment.
Financial highlights are as follows:
Three Months Ended July 31, | |||||||||||
2024 | 2023 | ||||||||||
Consolidated | |||||||||||
(in thousands) | |||||||||||
Fee revenue | $ | $ | |||||||||
Total revenue | $ | $ | |||||||||
Net income attributable to Korn Ferry | $ | $ | |||||||||
Net income attributable to noncontrolling interest | |||||||||||
Other income, net | ( |
( |
|||||||||
Interest expense, net | |||||||||||
Income tax provision | |||||||||||
Operating income | |||||||||||
Depreciation and amortization | |||||||||||
Other income, net | |||||||||||
Integration/acquisition costs | |||||||||||
Impairment of fixed assets | |||||||||||
Impairment of right-of-use assets | |||||||||||
Restructuring charges, net | |||||||||||
Adjusted EBITDA(1)
|
$ | $ |
___________________
(1) |
Adjusted EBITDA refers to earnings before interest, taxes, depreciation and amortization, further excludes integration/acquisition costs, impairment of fixed assets, impairment of right-of-use assets, and restructuring charges, net when applicable. |
17
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
|
Financial highlights by reportable segments are as follows:
Three Months Ended July 31, | |||||||||||||||||||||||||||||||||||
2024 | 2023 | ||||||||||||||||||||||||||||||||||
Fee revenue | Total revenue | Adjusted EBITDA | Fee revenue | Total revenue | Adjusted EBITDA | ||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||
Consulting | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Digital | |||||||||||||||||||||||||||||||||||
Executive Search: | |||||||||||||||||||||||||||||||||||
North America | |||||||||||||||||||||||||||||||||||
EMEA | |||||||||||||||||||||||||||||||||||
Asia Pacific | |||||||||||||||||||||||||||||||||||
Latin America | |||||||||||||||||||||||||||||||||||
Professional Search & Interim | |||||||||||||||||||||||||||||||||||
RPO | |||||||||||||||||||||||||||||||||||
Corporate | ( |
( |
|||||||||||||||||||||||||||||||||
Consolidated | $ | $ | $ | $ | $ | $ |
11. Long-Term Debt
Long-term debt, at amortized cost, consisted of the following:
In thousands | July 31, 2024 |
April 30, 2024 |
||||||||||||
Senior Unsecured Notes | $ | $ | ||||||||||||
Less: Unamortized discount and issuance costs | ( |
( |
||||||||||||
Long-term borrowings, net of unamortized discount and debt issuance costs | $ | $ |
Credit Facilities
On June 24, 2022, the Company entered into an amendment (the “Amendment”) to its December 16, 2019 Credit Agreement (the “Credit Agreement”; as amended by the Amendment, the “Amended Credit Agreement”) with a syndicate of banks and Bank of America, National Association as administrative agent. The Amended Credit Agreement provides for five-year senior secured credit facilities comprised of a $650.0 million revolving credit facility (the “Revolver”).
As of July 31, 2024 and April 30, 2024, there was no outstanding liability under the Revolver, and the Company was in compliance with its debt covenants. The Company had a total of $645.4 million and $645.5 million available under the Revolver after $4.6 million and $4.5 million of standby letters of credit were issued as of July 31, 2024 and April 30, 2024, respectively. The Company had a total of $12.3 million and $13.2 million of standby letters with other financial institutions as of July 31, 2024 and April 30, 2024, respectively. The standby letters of credit were generally issued as a result of entering into office premise leases.
12. Leases
The Company’s lease portfolio is comprised of operating leases for office space and equipment and finance leases for equipment. Equipment leases are comprised of vehicles and office equipment. No impairment charge of the ROU assets was recorded during the three months ended July 31, 2024. During the three months ended July 31, 2023, the Company reduced its real estate footprint and as a result recorded an impairment charge of the ROU assets of $1.6 million in the condensed consolidated statements of income.
18
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
|
The components of lease expense are as follows:
Three Months Ended July 31, |
|||||||||||
2024 | 2023 | ||||||||||
(in thousands) | |||||||||||
Finance lease cost | |||||||||||
Amortization of ROU assets | $ | $ | |||||||||
Interest on lease liabilities | |||||||||||
Operating lease cost | |||||||||||
Short-term lease cost | |||||||||||
Variable lease cost | |||||||||||
Lease impairment cost | |||||||||||
Sublease income | ( |
( |
|||||||||
Total lease cost | $ | $ |
Supplemental cash flow information related to leases was as follows:
Three Months Ended July 31, |
|||||||||||
2024 | 2023 | ||||||||||
(in thousands) | |||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
Operating cash flows from operating leases | $ | $ | |||||||||
Financing cash flows from finance leases | $ | $ | |||||||||
ROU assets obtained in exchange for lease obligations: | |||||||||||
Operating leases | $ | $ | |||||||||
Finance leases | $ | $ |
Maturities of lease liabilities were as follows:
Year Ending April 30, | Operating | Financing | |||||||||
(in thousands) | |||||||||||
2025 (excluding the three months ended July 31, 2024) | $ | $ | |||||||||
2026 | |||||||||||
2027 | |||||||||||
2028 | |||||||||||
2029 | |||||||||||
Thereafter | |||||||||||
Total lease payments | |||||||||||
Less: imputed interest | |||||||||||
Total | $ | $ |
19
KORN FERRY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
July 31, 2024 (continued)
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13. Subsequent Event
Quarterly Dividend Declaration
On September 4, 2024, the Board of Directors of the Company declared a cash dividend of $0.37 per share with a payment date of October 15, 2024 to holders of the Company’s common stock of record at the close of business on September 19, 2024. The declaration and payment of future dividends under the quarterly dividend policy will be at the discretion of the Board of Directors and will depend upon many factors, including the Company’s earnings, capital requirements, financial condition, the terms of the Company’s indebtedness and other factors that the Board of Directors may deem to be relevant. The Board of Directors may amend, revoke, or suspend the dividend policy at any time and for any reason.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain certain statements that we believe are, or may be considered to be, “forward-looking” statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally can be identified by use of statements that include phrases such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “may,” “will,” “likely,” “estimates,” “potential,” “continue” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals, including the timing and anticipated impacts of our business strategy, expected demand for and relevance of our products and services, and expected results of our business diversification strategy, are also forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statement. The principal risk factors that could cause actual performance and future actions to differ materially from the forward-looking statements include, but are not limited to, those relating to global and local political and or economic developments in or affecting countries where we have operations, such as inflation, global slowdowns, or recessions, competition, geopolitical tensions, shifts in global trade patterns, changes in demand for our services as a result of automation, dependence on and costs of attracting and retaining qualified and experienced consultants, impact of inflationary pressures on our profitability, maintaining our relationships with customers and suppliers and retaining key employees, maintaining our brand name and professional reputation, potential legal liability and regulatory developments, portability of client relationships, consolidation of or within the industries we serve, changes and developments in governmental laws and regulations, evolving investor and customer expectations with regard to environmental, social and governance matters, currency fluctuations in our international operations, risks related to growth, alignment of our cost structure, including as a result of workforce, real estate, and other restructuring initiatives, restrictions imposed by off-limits agreements, reliance on information processing systems, cybersecurity vulnerabilities or events, changes to data security, data privacy, and data protection laws, dependence on third parties for the execution of critical functions, limited protection of our intellectual property (“IP”), our ability to enhance and develop new technology, including artificial intelligence ("AI"), our ability to successfully recover from a disaster or other business continuity problems, employment liability risk, an impairment in the carrying value of goodwill and other intangible assets, treaties, or regulations on our business and our Company, deferred tax assets that we may not be able to use, our ability to develop new products and services, changes in our accounting estimates and assumptions, the utilization and billing rates of our consultants, seasonality, the expansion of social media platforms, the ability to effect acquisitions and integrate acquired businesses, resulting organizational changes, our indebtedness, the ultimate magnitude and duration of any future pandemics or similar outbreaks, and related restrictions and operational requirements that apply to our business and the businesses of our clients, and any related negative impacts on our business, employees, customers and our ability to provide services in affected regions, and the matters disclosed under the heading “Risk Factors” in the Company’s Exchange Act reports, including Item 1A included in the Annual Report on Form 10-K for the fiscal year ended April 30, 2024 (the “Form 10-K”). Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.
The following presentation of management’s discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. We also make available on the Investor Relations portion of our website earnings slides and other important information, which we encourage you to review.
Executive Summary
Korn Ferry (referred to herein as the “Company” or in the first-person notations “we,” “our” and “us”) is a leading global organizational consulting firm. We help clients synchronize strategy, operations and talent to drive superior business performance. We work with organizations to design their structures, roles and responsibilities. We help them hire the right people to bring their strategy to life. And we advise them on how to reward, develop and motivate their people.
We are pursuing a strategy designed to help our colleagues focus on clients, by bringing all of our resources together to solve their human capital issues. This approach is intended to build on the best of our past and give us a clear path to the future with focused initiatives to increase our client and commercial impact. Korn Ferry is transforming how clients address their talent management needs. We have evolved from a mono-line business to a multi-faceted consultancy business, giving our consultants more frequent and expanded opportunities to engage with clients.
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The Company services its clients with a core set of solutions that are anchored around talent and talent management – touching nearly 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 helping to solve 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 throughout 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.
Our vision remains unchanged to become the premier organizational consulting firm. We believe our household brand, unparalleled IP, and diversification strategy will continue to positively influence our performance and accelerate the trajectory of thousands of organizations. Indeed, Korn Ferry is uniquely positioned as a firm relentlessly focused on synchronizing strategy, operations and talent and a firm that offers increasingly relevant solutions in a rapidly changing world. The continual advancement of technologies like generative AI creates a constant demand for workers to be upskilled or reskilled. We expect these changes and disruptions will lead to opportunities for Korn Ferry and make us more relevant than at any time in our history.
Leveraging the strong connection between our various service offerings 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 more than 340 of our top clients. 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. Despite near-term headwinds, such as economic uncertainty, we believe 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 our service offerings and our acquisition activities, drives top-line synergies that have resulted in double digit fee revenue growth rates (CAGR) over the past twenty years.
Our eight reportable segments operate through the following five lines of business:
1.Consulting aligns organizational structure, culture, performance, development and people to drive sustainable growth by addressing four fundamental organizational and talent needs: Organizational Strategy, Assessment and Succession, Leadership and Professional Development, and Total Rewards. The Consulting teams work across our core capabilities, architecting integrated solutions and technology products to help clients execute their strategy in a digitally enabled world.
2.Digital develops IP and science-based talent technology products that empower our clients. Our talent products and talent platform support our clients in making critical talent decisions across the continuum from talent acquisition to talent development.
3.Executive Search helps organizations recruit board level, chief executive and other C-suite/senior executive and general management talent to deliver lasting impact. Our approach to placing talent brings together our research-based IP, proprietary assessments, and behavioral interviewing with our practical experience to determine the ideal organizational fit. Salary benchmarking then helps us build appropriate frameworks for compensation and attraction. 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 (“APAC”), and Executive Search Latin America).
4.Professional Search & Interim delivers enterprise talent acquisition solutions for permanent placements at the professional level middle and upper management, and, for interim, those same levels plus senior executives. We help clients source high-quality candidates at speed and scale globally, covering single-hire to multi-hire permanent placements and interim contractors (that are focused on senior executive, information technology ("IT"), Finance & Accounting and human resources roles).
5.Recruitment Process Outsourcing (“RPO”) offers scalable recruitment outsourcing and project solutions leveraging a customized technology enabled service delivery platform and talent insights. Our scalable solutions, built on our IP, science, and data and powered by best-in-class technology and consulting expertise, enable us to act as a strategic partner in clients’ quest for superior recruitment outcomes and better candidate fit.
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Q1 FY'25 Performance Highlights
•We reported Q1 FY'25 fee revenue of $674.9 million, a year-over-year decrease of 3%.
◦Executive Search fee revenue grew 2% year-over-year.
◦Fee revenue for Consulting and Digital was flat year-over-year, continuing to demonstrate stability in a challenging market.
•Net income attributable to Korn Ferry was $62.6 million with a margin of 9.3%, a 260bps increase compared to the year-ago quarter, while diluted earnings per share was $1.17 in Q1 FY'25.
•Operating income was $76.1 million and Adjusted EBITDA was $111.2 million.
•Operating margin increased 320bps year-over-year to 11.3%. Adjusted EBITDA margin of 16.5%, a 280bps increase compared to the year-ago quarter, and our fifth consecutive quarter of sequential improvement.
The Company evaluates performance and allocates resources based on the chief operating decision maker’s review of (1) fee revenue and (2) adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”). To the extent that such charges occur, Adjusted EBITDA excludes restructuring charges, integration/acquisition costs, certain separation costs and certain non-cash charges (goodwill, intangible asset and other impairments charges). For the three months ended July 31, 2024, Adjusted EBITDA excluded $1.1 million of integration/acquisition costs. For the three months ended July 31, 2023, Adjusted EBITDA excluded $4.1 million of integration/acquisition costs, $1.6 million impairment of right-of-use assets, $0.4 million of restructuring charges, net and $0.1 million impairment of fixed assets.
Consolidated and the subtotals of Executive Search Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and have limitations as analytical tools. They should not be viewed as a substitute for financial information determined in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP. In addition, they may not necessarily be comparable to non-GAAP performance measures that may be presented by other companies.
Management believes the presentation of these non-GAAP financial measures provides meaningful supplemental information regarding Korn Ferry’s performance by excluding certain charges, items of income and other items that may not be indicative of Korn Ferry’s ongoing operating results. The use of these non-GAAP financial measures facilitates comparisons to Korn Ferry’s historical performance and the identification of operating trends that may otherwise be distorted by the factors discussed above. Korn Ferry includes these non-GAAP financial measures because management believes it is useful to investors in allowing for greater transparency with respect to supplemental information used by management in its evaluation of Korn Ferry’s ongoing operations and financial and operational decision-making. The accounting policies for the reportable segments are the same as those described in the summary of significant accounting policies in the accompanying condensed consolidated financial statements, except that the above noted items are excluded to arrive at Adjusted EBITDA. Management further believes that Adjusted EBITDA is useful to investors because it is frequently used by investors and other interested parties to measure operating performance among companies with different capital structures, effective tax rates and tax attributes and capitalized asset values, all of which can vary substantially from company to company.
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Results of Operations
The following table summarizes the results of our operations as a percentage of fee revenue:
(Numbers may not total exactly due to rounding)
Three Months Ended July 31, |
|||||||||||
2024 | 2023 | ||||||||||
Fee revenue | 100.0 | % | 100.0 | % | |||||||
Reimbursed out-of-pocket engagement expenses | 1.2 | 1.0 | |||||||||
Total revenue | 101.2 | 101.0 | |||||||||
Compensation and benefits | 66.9 | 68.6 | |||||||||
General and administrative expenses | 8.9 | 9.4 | |||||||||
Reimbursed expenses | 1.2 | 1.0 | |||||||||
Cost of services | 10.0 | 11.0 | |||||||||
Depreciation and amortization | 2.9 | 2.7 | |||||||||
Restructuring charges, net | — | 0.1 | |||||||||
Operating income | 11.3 | 8.1 | |||||||||
Net income | 9.5 | % | 6.7 | % | |||||||
Net income attributable to Korn Ferry | 9.3 | % | 6.7 | % |
The following tables summarize the results of our operations:
(Numbers may not total exactly due to rounding)
Three Months Ended July 31, |
|||||||||||||||||||||||
2024 | 2023 | ||||||||||||||||||||||
Dollars | % | Dollars | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Fee revenue | |||||||||||||||||||||||
Consulting | $ | 167,870 | 24.9 | % | $ | 168,088 | 24.0 | % | |||||||||||||||
Digital | 88,180 | 13.1 | 87,986 | 12.6 | |||||||||||||||||||
Executive Search: | |||||||||||||||||||||||
North America | 134,752 | 20.0 | 127,498 |