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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to ___________
Commission File Number
(Exact Name of Registrant as Specified in its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on Which Registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares outstanding of our common stock as of September 2, 2022 was
KORN FERRY
Table of Contents
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Item # |
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Description |
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Page |
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Part I. Financial Information |
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Item 1. |
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Consolidated Balance Sheets as of July 31, 2022 (unaudited) and April 30, 2022 |
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1 |
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Consolidated Statements of Income (unaudited) for the three months ended July 31, 2022 and 2021 |
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2 |
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3 |
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4 |
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Consolidated Statements of Cash Flows (unaudited) for the three months ended July 31, 2022 and 2021 |
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5 |
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6 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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25 |
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Item 3. |
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37 |
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Item 4. |
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38 |
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Part II. Other Information |
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Item 1. |
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39 |
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Item 1A. |
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39 |
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Item 2. |
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39 |
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Item 6. |
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40 |
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41 |
Item 1. Consolidated Financial Statements
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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July 31, 2022 |
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April 30, 2022 |
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(unaudited) |
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(in thousands, except per share data) |
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ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Marketable securities |
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Receivables due from clients, net of allowance for doubtful accounts of $ |
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Income taxes and other receivables |
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Unearned compensation |
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Prepaid expenses and other assets |
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Total current assets |
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Marketable securities, non-current |
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Property and equipment, net |
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Operating lease right-of-use assets, net |
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Cash surrender value of company-owned life insurance policies, net of loans |
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Deferred income taxes |
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Goodwill |
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Intangible assets, net |
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Unearned compensation, non-current |
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Investments and other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Accounts payable |
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$ |
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$ |
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Income taxes payable |
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Compensation and benefits payable |
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Operating lease liability, current |
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Other accrued liabilities |
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Total current liabilities |
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Deferred compensation and other retirement plans |
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Operating lease liability, non-current |
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Long-term debt |
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Deferred tax liabilities |
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Other liabilities |
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Total liabilities |
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Stockholders' equity |
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Common stock: $ |
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Retained earnings |
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Accumulated other comprehensive loss, net |
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( |
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( |
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Total Korn Ferry stockholders' equity |
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Noncontrolling interest |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
1
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
|
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Three Months Ended July 31, |
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|||||
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2022 |
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2021 |
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(in thousands, except per share data) |
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|||||
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Fee revenue |
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$ |
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$ |
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Reimbursed out-of-pocket engagement expenses |
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Total revenue |
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Compensation and benefits |
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General and administrative expenses |
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Reimbursed expenses |
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Cost of services |
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Depreciation and amortization |
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Total operating expenses |
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Operating income |
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Other income, net |
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Interest expense, net |
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( |
) |
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( |
) |
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Income before provision for income taxes |
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Income tax provision |
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Net income |
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Net income attributable to noncontrolling interest |
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( |
) |
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( |
) |
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Net income attributable to Korn Ferry |
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$ |
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$ |
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Earnings per common share attributable to Korn Ferry: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted-average common shares outstanding: |
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Basic |
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Diluted |
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Cash dividends declared per share: |
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$ |
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$ |
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|
The accompanying notes are an integral part of these consolidated financial statements.
2
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
|
|
|
Three Months Ended July 31, |
|
|||||
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2022 |
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2021 |
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||
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(in thousands) |
|
|||||
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Net income |
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$ |
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$ |
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Other comprehensive (loss) income: |
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Foreign currency translation adjustments |
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( |
) |
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( |
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Deferred compensation and pension plan adjustments, net of tax |
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Net unrealized (loss) gain on marketable securities, net of tax |
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( |
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Comprehensive income |
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Less: comprehensive income attributable to noncontrolling interest |
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( |
) |
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|
( |
) |
|
Comprehensive income attributable to Korn Ferry |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
|
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Accumulated Other |
|
|
Total Korn Ferry |
|
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|
Total |
|
|||
|
|
Common Stock |
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|
Retained |
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|
Comprehensive |
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Stockholders' |
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Noncontrolling |
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Stockholder's |
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||||||||||
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Shares |
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Amount |
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|
Earnings |
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Loss, Net |
|
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Equity |
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Interest |
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|
Equity |
|
|||||||
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|
(in thousands) |
|
|||||||||||||||||||||||||
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Balance as of April 30, 2022 |
|
|
|
|
$ |
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|
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$ |
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|
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$ |
( |
) |
|
$ |
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$ |
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$ |
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|
Net income |
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— |
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|
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— |
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|
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— |
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Other comprehensive loss |
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— |
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— |
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— |
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( |
) |
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( |
) |
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( |
) |
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( |
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Dividends paid to shareholders |
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— |
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— |
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( |
) |
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— |
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( |
) |
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— |
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( |
) |
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Purchase of stock |
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( |
) |
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( |
) |
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— |
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— |
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( |
) |
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— |
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( |
) |
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Issuance of stock |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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|
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— |
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— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Balance as of July 31, 2022 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
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$ |
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$ |
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Accumulated Other |
|
|
Total Korn Ferry |
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Total |
|
|||
|
|
Common Stock |
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Retained |
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Comprehensive |
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Stockholders' |
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Noncontrolling |
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Stockholder's |
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||||||||||
|
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Shares |
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Amount |
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|
Earnings |
|
|
Loss, Net |
|
|
Equity |
|
|
Interest |
|
|
Equity |
|
|||||||
|
|
(in thousands) |
|
|||||||||||||||||||||||||
|
Balance as of April 30, 2021 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
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|
|
$ |
|
|
|
Net income |
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— |
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|
|
— |
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|
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|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Other comprehensive loss |
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— |
|
|
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— |
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|
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— |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Dividends paid to shareholders |
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Purchase of stock |
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
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— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Issuance of stock |
|
|
|
|
|
|
|
|
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— |
|
|
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— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Stock-based compensation |
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Balance as of July 31, 2021 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
Three Months Ended July 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to net cash used by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts |
|
|
|
|
|
|
|
|
|
Gain on cash surrender value of life insurance policies |
|
|
( |
) |
|
|
( |
) |
|
Gain on marketable securities |
|
|
( |
) |
|
|
( |
) |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
Change in other assets and liabilities: |
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
|
|
|
|
|
|
|
|
Receivables due from clients |
|
|
( |
) |
|
|
( |
) |
|
Income taxes and other receivables |
|
|
( |
) |
|
|
|
|
|
Prepaid expenses and other assets |
|
|
( |
) |
|
|
( |
) |
|
Unearned compensation |
|
|
|
|
|
|
( |
) |
|
Income taxes payable |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
( |
) |
|
|
( |
) |
|
Other |
|
|
( |
) |
|
|
|
|
|
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
( |
) |
|
|
( |
) |
|
Purchase of marketable securities |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from sales/maturities of marketable securities |
|
|
|
|
|
|
|
|
|
Premium on company-owned life insurance policies |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from life insurance policies |
|
|
|
|
|
|
|
|
|
Dividends received from unconsolidated subsidiaries |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Payments of tax withholdings on restricted stock |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from issuance of common stock upon exercise of employee stock options and in connection with an employee stock purchase plan |
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders |
|
|
( |
) |
|
|
( |
) |
|
Principal payments on finance leases |
|
|
( |
) |
|
|
( |
) |
|
Repurchases of common stock |
|
|
( |
) |
|
|
( |
) |
|
Payments on life insurance policy loans |
|
|
( |
) |
|
|
— |
|
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
|
Net decrease in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 |
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 to 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. In the past year, the Company has acquired companies that have added critical mass to our existing professional search and interim executive operations, as described in Note 10. This provided us with the opportunity to reassess how we manage our Recruitment Process Outsourcing (“RPO”) & Professional Search segment. Therefore, beginning in fiscal 2023, we separated RPO & Professional Search into two segments to align with the Company’s strategy and the decisions of the Company’s chief operating decision maker, who has begun to regularly make separate resource allocation decisions and assess performance separately between Professional Search & Interim and RPO.
The Company now has
|
1. |
Consulting aligns organization structure, culture, performance and people to drive sustainable growth by addressing four fundamental needs: Organizational Strategy, Assessment and Succession, Leadership and Professional Development, and Total Rewards. This work is supported by a comprehensive range of some of the world’s leading intellectual property (“lP”) and data. The Consulting teams employ an integrated approach across core solutions each one strengthening our work and thinking of the next, to help clients execute their strategy in a digitally enabled world. |
|
2. |
Digital delivers scalable tech-enabled solutions that identify the best structures, roles, capabilities and behaviors to drive businesses forward. Powered by the Korn Ferry Intelligence Cloud, the end-to-end system combines Korn Ferry proprietary data, client data and external market data to deliver clear insights with the training and tools needed to align organizational structure with business strategy. |
|
3. |
Executive Search helps organizations recruit board level, chief executive and other senior executive and general management talent to deliver lasting impact. Korn Ferry’s approach to placing talent brings together our research-based IP, proprietary assessments and behavioral interviewing with our practical experience to determine ideal organizational fit. Salary benchmarking then builds appropriate frameworks for compensation and retention. This business is managed and reported on a geographic basis and represents four of the Company’s reportable segments (Executive Search North America, Executive Search Europe, the Middle East and Africa (“EMEA”), Executive Search Asia Pacific and Executive Search Latin America). |
|
4. |
Professional Search & Interim delivers enterprise talent acquisition solutions for professional level middle and upper management. The Company helps clients source high-quality candidates at speed and at scale globally, covering single hire to multi hire permanent placements and interim contractors. |
|
5. |
RPO offers scalable recruitment outsourcing solutions leveraging customized technology and talent insights. Our scalable solutions, built on science 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. |
Basis of Consolidation and Presentation
The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended April 30, 2022 for the Company and its wholly and majority owned/controlled domestic and international subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The preparation of the consolidated financial statements conform with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and prevailing practice within our different industries. The consolidated financial statements include all adjustments, consisting of normal recurring accruals and any other adjustments
6
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
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.
The Company has control of a Mexican subsidiary and consolidates the operations of this subsidiary. Noncontrolling interest, which represents the Mexican partners’
The Company considers events or transactions that occur after the balance sheet date but before the consolidated financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.
Use of Estimates and Uncertainties
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates, and changes in estimates are reported in current operations as new information is learned or upon the amounts becoming fixed or determinable. The most significant areas that require management’s judgment are revenue recognition, deferred compensation, annual performance-related bonuses, evaluation of the carrying value of receivables, goodwill and other intangible assets, share-based payments, leases and the recoverability of deferred income taxes.
Revenue Recognition
Substantially all fee revenue is derived from talent and organizational 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 and RPO, either stand-alone or as part of a solution.
Revenue is recognized when control of the goods and services are transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Revenue contracts with customers are evaluated based on the five-step model outlined in Accounting Standards Codification (“ASC”) 606 (“ASC 606”), Revenue from Contracts with Customers: 1) identify the contract with a customer; 2) identify the performance obligation(s) in the contract; 3) determine the transaction price; 4) allocate the transaction price to the separate performance obligation(s); and 5) recognize revenue when (or as) each performance obligation is satisfied.
Consulting fee revenue is primarily recognized as services are rendered, measured by total hours incurred as a percentage of the total estimated hours at completion. It is possible that updated estimates for consulting engagements may vary from initial estimates with such updates being recognized in the period of determination. Depending on the timing of billings and services rendered, the Company accrues or defers revenue as appropriate.
Digital fee revenue is generated from IP platforms enabling large-scale, technology-based talent programs for pay, talent development, engagement, and assessment and is consumed directly by an end user or indirectly through a consulting engagement. Revenue is recognized as services are delivered and the Company has a legally enforceable right to payment. Revenue also comes from the sale of the Company’s proprietary IP subscriptions, which are considered symbolic IP due to the dynamic nature of the content. As a result, revenue is recognized over the term of the contract. Functional IP licenses 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.
7
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
RPO fee revenue is generated through two distinct phases: 1) the implementation phase and 2) the post-implementation recruitment phase. The fees associated with the implementation phase are recognized over the period that the related implementation services are provided. The post-implementation recruitment phase represents end-to-end recruiting services to clients for which there are both fixed and variable fees, which are recognized over the period that the related recruiting services are performed.
Reimbursements
The Company incurs certain out-of-pocket expenses that are reimbursed by its clients, which are accounted for as revenue in the consolidated statements of income.
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 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 July 31, 2022 and April 30, 2022, the Company’s investments in cash equivalents consisted of money market funds, and as of April 30, 2022 also consisted of commercial paper with initial maturity of less than 90 days for which market prices are readily available.
Marketable Securities
The Company currently has investments in marketable securities and mutual funds that are classified as either equity securities or available-for-sale debt securities. The classification of the investments in these marketable securities and mutual funds is assessed upon purchase and reassessed at each reporting period. These investments are recorded at fair value and are classified as marketable securities in the accompanying consolidated balance sheets. The investments that the Company may sell within the next 12 months are carried as current assets.
The Company invests in mutual funds (for which market prices are readily available) that are held in trust to satisfy obligations under the Company’s deferred compensation plans. Such investments are classified as equity securities and mirror the employees’ investment elections in their deemed accounts in the Executive Capital Accumulation Plan and similar plans in Asia Pacific and Canada (“ECAP”) from a pre-determined set of securities. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis; dividends are recorded as earned on the ex-dividend date. Interest, dividend income and the changes in fair value in marketable securities are recorded in the accompanying consolidated statements of 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 US 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 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, 2022 and 2021,
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
8
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
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, 2022 and April 30, 2022, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included cash, cash equivalents, accounts receivable, marketable securities and foreign currency forward contracts. The carrying amount of cash, cash equivalents and accounts receivable approximates fair value due to the short-term maturity of these instruments. The fair values of marketable securities classified as equity securities are obtained from quoted market prices, and the fair values of marketable securities classified as available-for-sale and foreign currency forward contracts are obtained from a third party, which are based on quoted prices or market prices for similar assets and financial instruments.
Foreign Currency Forward Contracts Not Designated as Hedges
The Company has established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures primarily originating from intercompany balances due to cross border work performed in the ordinary course of business. These foreign currency forward contracts are neither used for trading purposes nor are they designated as hedging instruments pursuant to ASC 815, Derivatives and Hedging. Accordingly, the fair value of these contracts is recorded as of the end of the reporting period in the accompanying consolidated balance sheets, while the change in fair value is recorded to the accompanying consolidated statements of income.
Business Acquisitions
Business acquisitions are accounted for under the acquisition method. The acquisition method requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity, and recognize and measure goodwill or a gain from the purchase. The acquiree’s results are included in the Company’s consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill, or if the fair value of the assets acquired exceeds the purchase price consideration, a bargain purchase gain is recorded. Adjustments to fair value assessments are generally recorded to goodwill over the measurement period (not longer than 12 months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense as committed and requires the Company to recognize and measure certain assets and liabilities including those arising from contingencies and contingent consideration in a business combination.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and current and non-current operating lease liability, in the consolidated balance sheets. Finance leases are included in property and equipment, net, other accrued liabilities and other liabilities in the consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term, and the lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term on the commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the periods in which they are incurred.
The Company has lease agreements with lease and non-lease components. For all leases with non-lease components the Company accounts for the lease and non-lease components as a single lease component.
9
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
Impairment of Long-Lived Assets
Long-lived assets include property, equipment, ROU assets and software developed or obtained for internal use. In accordance with ASC 360, Property, Plant and Equipment, management reviews the Company’s recorded long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company determines the extent to which an asset may be impaired based upon its expectation of the asset’s future usability, as well as on a reasonable assurance that the future cash flows associated with the asset will be in excess of its carrying amount. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. During the three months ended July 31, 2022 and 2021 there were
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, 2022, indicated that the fair value of each of the reporting units exceeded its carrying amount and no reporting units were at risk of failing the impairment test. As a result, no impairment charge was recognized. As of July 31, 2022 and April 30, 2022, there were
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
Compensation and Benefits Expense
Compensation and benefits expense in the accompanying consolidated statements of income consist of compensation and benefits paid to consultants (employees who originate business), executive officers and administrative and support personnel. The most significant portions of this expense are salaries and the amounts paid under the annual performance-related bonus plan to employees. The portion of the expense applicable to salaries is comprised of amounts earned by employees during a reporting period. The portion of the expenses applicable to annual performance-related bonuses refers to the Company’s annual employee performance-related bonus with respect to a fiscal year, the amount of which is communicated and paid to each eligible employee following the completion of the fiscal year.
Each quarter, management makes its best estimate of its annual performance-related bonuses, which requires management to, among other things, project annual consultant productivity (as measured by engagement fees billed and collected by Executive Search and Professional Search consultants and revenue and other performance/profitability metrics for Consulting, Digital, Interim and RPO consultants), the level of engagements referred by a consultant in one line of business to a different line of business, and Company performance, including profitability, competitive forces and future economic conditions and their impact on the Company’s results. At the end of each fiscal year, annual performance-related bonuses take into account final individual consultant productivity (including referred work), Company/line of business results, including profitability, the achievement of strategic objectives, the results of individual performance appraisals and the current economic landscape. Accordingly, each quarter the Company reevaluates the assumptions used to estimate annual performance-related bonus liability and adjusts the carrying amount of the liability recorded on the consolidated balance sheet and reports any changes in the estimate in current operations.
Because annual performance-based bonuses are communicated and paid only after the Company reports its full fiscal year results, actual performance-based bonus payments may differ from the prior year’s estimate. Such changes in the bonus estimate historically have been immaterial and are recorded in current operations in the period in which they are determined. The performance-related bonus expense was $
Other expenses included in compensation and benefits expense are due to changes in deferred compensation and pension plan liabilities, changes in cash surrender value (“CSV”) of company-owned life insurance (“COLI”) contracts, amortization of stock-based compensation awards, commissions, payroll taxes and employee insurance benefits. Unearned compensation on the consolidated balance sheets includes long-term retention awards that are generally amortized over four-to-
10
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
Stock-Based Compensation
The Company has employee compensation plans under which various types of stock-based instruments are granted. These instruments principally include restricted stock units, restricted stock and an Employee Stock Purchase Plan (“ESPP”). The Company recognizes compensation expense related to restricted stock units, restricted stock and the estimated fair value of stock purchases under the ESPP on a straight-line basis over the service period for the entire award.
Reclassifications
Certain reclassifications have been made to the amounts in the prior periods in order to conform to the current period’s presentation.
Recently Proposed Accounting Standards - Not Yet Adopted
In October 2021, the Financial Accounting Standards Board (“FASB”) issued an amendment in accounting for contract assets and contract liabilities from contracts with customers, which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. The amendment of this standard becomes effective in fiscal years beginning after December 15, 2022. The amendment should be applied prospectively to business combinations that occur after the effective date. The Company will adopt this guidance in its fiscal year beginning May 1, 2023. The Company is currently evaluating the impact of this accounting guidance but does not anticipate that it will have a material impact on the consolidated financial statements.
2. Basic and Diluted 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.
During the three months ended July 31, 2022 and 2021, restricted stock awards of
11
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
The following table summarizes basic and diluted earnings per common share attributable to common stockholders:
|
|
|
Three Months Ended July 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(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 |
|
$ |
|
|
|
$ |
|
|
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 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, 2022 |
|
|
April 30, 2022 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Foreign currency translation adjustments |
|
$ |
( |
) |
|
$ |
( |
) |
|
Deferred compensation and pension plan adjustments, net of tax |
|
|
|
|
|
|
|
|
|
Marketable securities unrealized loss, net of tax |
|
|
( |
) |
|
|
( |
) |
|
Accumulated other comprehensive loss, net |
|
$ |
( |
) |
|
$ |
( |
) |
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the three months ended July 31, 2022:
|
|
|
Foreign Currency Translation |
|
|
Deferred Compensation and Pension Plan |
|
|
Unrealized Losses on Marketable Securities |
|
|
Accumulated Other Comprehensive Loss |
|
||||
|
|
|
(in thousands) |
|
|||||||||||||
|
Balance as of April 30, 2022 |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Unrealized losses arising during the period |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Reclassification of realized net losses to net income |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Balance as of July 31, 2022 |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
12
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the three months ended July 31, 2021:
|
|
|
Foreign Currency Translation |
|
|
Deferred Compensation and Pension Plan (1) |
|
|
Unrealized Losses on Marketable Securities |
|
|
Accumulated Other Comprehensive Loss |
|
||||
|
|
|
(in thousands) |
|
|||||||||||||
|
Balance as of April 30, 2021 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Unrealized (losses) gains arising during the period |
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
Reclassification of realized net losses to net income |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 31, 2021 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
(1) |
|
4. Employee Stock Plans
Stock-Based Compensation
The following table summarizes the components of stock-based compensation expense recognized in the Company’s consolidated statements of income for the periods indicated:
|
|
|
Three Months Ended July 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Restricted stock |
|
$ |
|
|
|
$ |
|
|
|
ESPP |
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
|
|
|
$ |
|
|
Stock Incentive Plan
At the Company’s 2019 Annual Meeting of Stockholders, held on October 3, 2019, the Company’s stockholders approved an amendment and restatement to the Korn Ferry Amended and Restated 2008 Stock Incentive Plan (the 2019 amendment and restatement being the “Fourth A&R 2008 Plan”), which, among other things, eliminated the fungible share counting provision and decreased the total number of shares of the Company’s common stock available for stock-based awards by
Restricted Stock
The Company grants time-based restricted stock awards to executive officers and other senior employees generally vesting over a period. In addition, certain key management members typically receive time-based restricted stock awards upon commencement of employment and may receive them annually in conjunction with the Company’s performance review. Time-based restricted stock awards are granted at a price equal to fair value, which is determined based on the closing price of the Company’s common stock on the grant date. The Company recognizes compensation expense for time-based restricted stock awards on a straight-line basis over the vesting period.
The Company also grants market-based restricted stock units to executive officers and other senior employees. The market-based units vest after
13
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
Restricted stock activity during the three months ended July 31, 2022 is summarized below:
|
|
|
Shares |
|
|
Weighted- Average Grant Date Fair Value |
|
||
|
|
|
(in thousands, except per share data) |
|
|||||
|
Non-vested, April 30, 2022 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
$ |
|
|
|
Vested |
|
|
( |
) |
|
$ |
|
|
|
Forfeited/expired |
|
|
( |
) |
|
$ |
|
|
|
Non-vested, July 31, 2022 |
|
|
|
|
|
$ |
|
|
As of July 31, 2022, there were
As of July 31, 2022, there was $
Employee Stock Purchase Plan
The Company has an ESPP that, in accordance with Section 423 of the Internal Revenue Code, allows eligible employees to authorize payroll deductions of up to
Common Stock
During the three months ended July 31, 2022 and 2021, the Company repurchased (on the open market or through privately negotiated transactions)
14
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
5. Financial Instruments
The following tables show the Company’s financial instruments and balance sheet classification as of July 31, 2022 and April 30, 2022:
|
|
|
July 31, 2022 |
|
|||||||||||||||||||||||||||||
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
April 30, 2022 |
|
|||||||||||||||||||||||||||||
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
15
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
|
(1) |
|
Investments in marketable securities classified as available-for-sale securities are made based on the Company’s investment policy, which restricts the types of investments that can be made. As of July 31, 2022 and April 30, 2022, marketable securities classified as available-for-sale consisted of commercial paper, corporate notes/bonds and US Treasury and Agency securities, for which market prices for similar assets are readily available. Investments that have an original maturity of 90 days or less and are considered highly liquid investments are classified as cash equivalents. As of July 31, 2022, available-for-sale marketable securities had remaining maturities ranging from
Foreign Currency Forward Contracts Not Designated as Hedges
The fair value of derivatives not designated as hedge instruments are as follows:
|
|
|
July 31, 2022 |
|
|
April 30, 2022 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
$ |
|
|
|
$ |
|
|
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
$ |
|
|
|
$ |
|
|
As of July 31, 2022, the total notional amounts of the forward contracts purchased and sold were $
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, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(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) |
|
$ |
|
|
|
$ |
|
|
16
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
|
(1) |
|
|
(2) |
|
The Company purchased COLI contracts insuring the lives of certain employees eligible to participate in the deferred compensation and pension plans as a means of setting aside funds to cover such plans. The gross CSV of these contracts of $
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 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
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, 2022 and 2021, deferred compensation liability increased; therefore, the Company recognized compensation expense of $
7. Fee Revenue
Contract Balances
A contract asset (unbilled receivables) is recorded when the Company transfers control of products or services before there is an unconditional right to payment. A contract liability (deferred revenue) is recorded when cash is received in advance of performance of the obligation. Deferred revenue represents the future performance obligations to transfer control of products or services for which we have already received consideration. Deferred revenue is presented in other accrued liabilities on the consolidated balance sheets.
The following table outlines the Company’s contract asset and liability balances as of July 31, 2022 and April 30, 2022:
|
|
|
July 31, 2022 |
|
|
April 30, 2022 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Contract assets-unbilled receivables |
|
$ |
|
|
|
$ |
|
|
|
Contract liabilities-deferred revenue |
|
$ |
|
|
|
$ |
|
|
During the three months ended July 31, 2022, we recognized revenue of $
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, 2022, 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 $
17
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
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 July 31, |
|
|||||||||||||
|
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
|
Dollars |
|
|
% |
|
|
Dollars |
|
|
% |
|
||||
|
|
|
(dollars in thousands) |
|
|||||||||||||
|
Industrial |
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
|
Life Sciences/Healthcare |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Goods |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education/Non–Profit/General |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Revenue |
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
8. Credit Losses
The Company is exposed to credit losses primarily through its services it provides. 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 receivables. 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 conditions for a period of sixty to ninety days, which corresponds with the contractual life of its accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.
The activity in the allowance for credit losses on the Company's trade receivables is as follows:
|
|
|
(in thousands) |
|
|
|
Balance at April 30, 2022 |
|
$ |
|
|
|
Provision for credit losses |
|
|
|
|
|
Write-offs |
|
|
( |
) |
|
Recoveries of amounts previously written off |
|
|
|
|
|
Foreign currency translation |
|
|
( |
) |
|
Balance at July 31, 2022 |
|
$ |
|
|
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, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
$ |
|
|
$ |
— |
|
|
Corporate notes/bonds |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
$ |
|
|
$ |
|
|
|
U.S. Treasury and Agency Securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
$ |
|
|
$ |
— |
|
|
Balance at April 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
Corporate notes/bonds |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
$ |
|
|
$ |
|
|
|
U.S. Treasury and Agency Securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
$ |
|
|
$ |
— |
|
18
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
The unrealized losses on
9. Income Taxes
The provision for income tax was an expense of $
10. Segments
In the past year, the Company has allocated capital to build out its Professional Search and Interim operations through the acquisition of Lucas Group and Patina. These acquisitions provided the Company with the opportunity to reassess how it manages its RPO & Professional Search segment. Given the Company’s strategy and development of separate financial and operational metrics for the Professional Search & Interim and RPO operations, the Company’s chief operating decision maker has begun to regularly make separate resource allocation decisions between Professional Search & Interim and RPO. Therefore, on May 1, 2022, the Company changed the composition of its global segments and under the new reporting format, the RPO & Professional Search segment has been separated into two segments; Professional Search & Interim and RPO. Revenues are directly attributed to a segment and expenses not directly associated with a specific segment are allocated based on the most relevant measures applicable, including revenues, headcount and other factors. Due to this change, the Company completed a quantitative assessment for potential goodwill impairment both prior and subsequent to the aforementioned change and determined there was
The Company now has
The Company’s
|
|
1. |
Consulting aligns organization structure, culture, performance and people to drive sustainable growth by addressing four fundamental needs: Organizational Strategy, Assessment and Succession, Leadership and Professional Development and Total Rewards. This work is supported by a comprehensive range of some of the world’s leading lP and data. The Consulting teams employ an integrated approach across our core capabilities and integrated solutions, each one intended to strengthen our work and thinking in the next, to help clients execute their strategy in a digitally enabled world. |
|
|
2. |
Digital delivers scalable tech-enabled solutions designed to identify the best structures, roles, capabilities and behaviors to drive businesses forward. Our digital products give clients direct access to our proprietary data, client data, and analytics to deliver clear insights with the training and tools needed to align organizational structure with business strategy. |
|
|
3. |
Executive Search helps organizations recruit board level, chief executive and other senior executive and general management talent to deliver lasting impact. The Company’s approach to placing talent that brings together research -based IP, proprietary assessments, behavioral interviewing with practical experience to determine the ideal organizational fit. Salary benchmarking then builds appropriate frameworks for compensation and retention. This business is managed and reported on a geographic basis and represents four of the Company’s reportable segments (Executive Search North America, Executive Search EMEA, Executive Search Asia Pacific and Executive Search Latin America). |
|
|
4. |
Professional Search & Interim delivers enterprise talent acquisition solutions for professional level middle and upper management. The Company helps clients source high-quality candidates at speed and at scale globally, covering single hire to multi hire permanent placements and interim contractors. |
19
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
|
|
5. |
RPO offers scalable recruitment outsourcing solutions leveraging customized technology and talent insights. Our scalable solutions, built on science 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. |
Executive Search is managed by geographic regional leaders. Worldwide operations for Consulting, Digital, Professional Search & Interim and RPO are managed by their Chief Executive Officers. The Executive Search geographic regional leaders and the Chief Executive Officers of Consulting, Digital, Professional Search & Interim and RPO report directly to the Chief Executive Officer of the Company. The Company also operates Corporate to record global expenses.
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, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
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 |
|
|
|
|
|
— |
|
|
Adjusted EBITDA(1) |
$ |
|
|
|
$ |
|
|
|
(1) |
Adjusted EBITDA refers to earnings before interest, taxes, depreciation and amortization and further excludes integration/acquisition costs. |
Financial highlights by reportable segments are as follows:
|
|
Three Months Ended July 31, |
|
|||||||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||||||
|
|
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 |
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
20
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
11. Long-Term Debt
4.625% Senior Unsecured Notes due 2027
On December 16, 2019, the Company completed a private placement of
|
Year |
|
Percentage |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 and thereafter |
|
|
|
The Notes allow the Company to pay $
Long-term debt, at amortized cost, consisted of the following:
|
In thousands |
|
July 31, 2022 |
|
|
April 30, 2022 |
|
||
|
Senior Unsecured Notes |
|
$ |
|
|
|
$ |
|
|
|
Less: Unamortized discount and issuance costs |
|
|
( |
) |
|
|
( |
) |
|
Long-term borrowings, net of unamortized discount and debt issuance costs |
|
$ |
|
|
|
$ |
|
|
Credit Facility
On
Extensions of credit under the Delayed Draw Facility are available to the Company in up to two advances through June 24, 2023. Any amounts undrawn under the Delayed Draw Facility as of June 24, 2023 will no longer be available to the Company. The Amended Credit Agreement contains certain customary affirmative and negative covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, grant liens and make certain acquisitions, investments, asset
21
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
dispositions and restricted payments. In addition, the Amended Credit Agreement contains a covenant that requires the Company to maintain a maximum consolidated secured leverage ratio of
The principal balance of the Delayed Draw Facility, if any, is subject to annual term loan amortization of
Amounts outstanding under the Amended Credit Agreement will bear interest at a rate equal to, at the Company’s election, either Term SOFR plus a SOFR adjustment of
As of July 31, 2022 and April 30, 2022, there was
The Company had a total of $
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. The majority of the Company’s leases include both lease and non-lease components. Non-lease components primarily include maintenance, insurance, taxes and other utilities. The Company combines fixed payments for non-lease components with its lease payments and accounts for them as a single lease component, which increases its ROU assets and lease liabilities. Some of the leases include one or more options to renew or terminate the lease at the Company’s discretion. Generally, the renewal and termination options are not included in the ROU assets and lease liabilities as they are not reasonably certain of exercise. The Company has elected not to recognize a ROU asset or lease liability for leases with an initial term of 12 months or less.
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of the future minimum lease payments. The Company applies the portfolio approach when determining the incremental borrowing rate since it has a centrally managed treasury function. The Company’s incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments in a similar economic environment.
Operating leases contain both office and equipment leases and have remaining terms that range from less than
22
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
The components of lease expense were as follows:
|
|
|
Three Months Ended July 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Finance lease cost |
|
|
|
|
|
|
|
|
|
Amortization of ROU assets |
|
$ |
|
|
|
$ |
|
|
|
Interest on lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost |
|
|
|
|
|
|
|
|
|
Short-term lease cost |
|
|
|
|
|
|
|
|
|
Variable lease cost |
|
|
|
|
|
|
|
|
|
Sublease income |
|
|
( |
) |
|
|
( |
) |
|
Total lease cost |
|
$ |
|
|
|
$ |
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
Three Months Ended July 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(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 |
|
$ |
|
|
|
$ |
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
July 31, 2022 |
|
|
April 30, 2022 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Finance Leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost |
|
$ |
|
|
|
$ |
|
|
|
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
Property and equipment, net |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities |
|
$ |
|
|
|
$ |
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
Total finance lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease terms: |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
||
|
Finance leases |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate: |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
% |
|
|
|
% |
|
Finance leases |
|
|
|
% |
|
|
|
% |
23
|
|
KORN FERRY AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2022 (continued) |
Maturities of lease liabilities were as follows:
|
Year Ending April 30, |
|
Operating |
|
|
Financing |
|
||
|
|
|
(in thousands) |
|
|||||
|
2023 (excluding the three months ended July 31, 2022) |
|
$ |
|
|
|
$ |
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
2025 |
|
|
|
|
|
|
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
2027 |
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
Total lease payments |
|
|
|
|
|
|
|
|
|
Less: imputed interest |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
13. Subsequent Event
Quarterly Dividend Declaration
On
24
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 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 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, global and local political and or economic developments in or affecting countries where we have operations, competition, 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, restrictions imposed by off-limits agreements, reliance on information processing systems, cyber security 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, 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 resulting organizational changes, our indebtedness, 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, 2022 (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 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 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 Korn Ferry to focus on clients and collaborate intensively across the organization. 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.
Our eight reportable segments operate through the following five lines of business:
|
|
1. |
Consulting aligns organization structure, culture, performance and people to drive sustainable growth by addressing four fundamental needs: Organizational Strategy, Assessment and Succession, Leadership and Professional Development, and Total Rewards. We support this work with a comprehensive range of some of the world’s leading lP and data. The Consulting teams employ an integrated approach across core solutions, each one intended to strengthen our work and thinking in the next, to help clients execute their strategy in a digitally enabled world. |
25
|
|
2. |
Digital delivers scalable tech-enabled solutions designed to identify the best structures, roles, capabilities and behaviors to drive businesses forward. Our digital products give clients direct access to our proprietary data, client data and analytics to deliver clear insights with the training and tools needed to align organizational structure with business strategy. |
|
|
3. |
Executive Search helps organizations recruit board level, chief executive and other senior executive and general management talent to deliver lasting impact. Our approach to placing talent that brings together research-based IP, proprietary assessments, and behavioral interviewing with our practical experience to determine the ideal organizational fit. Salary benchmarking then builds appropriate frameworks for compensation and retention. This business is managed and reported on a geographical 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 professional level middle and upper management. We to help clients source high-quality candidates at speed and at scale globally, covering single hire to multi hire permanent placements and interim contractors. |
|
|
5. |
Recruitment Process Outsourcing (“RPO”) offers scalable recruitment outsourcing solutions leveraging customized technology and talent insights. Our scalable solutions, built on science 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. |
Professional Search & Interim and RPO were formerly referred to, and reported together, as Korn Ferry RPO & Professional Search (“RPO & Professional Search”). Over the past year we acquired companies that have added critical mass to our professional search and interim operations. These acquisitions provided us the opportunity to reassess how we manage our RPO & Professional Search segment. Therefore, beginning in fiscal 2023, we separated RPO & Professional Search into two segments to align with the Company’s strategy and the decisions of the Company’s chief operating decision maker, who has begun to regularly make separate resource allocation decisions and assess performance separately between our Professional Search & Interim business and RPO business.
Highlights of our performance in fiscal 2022 include:
|
|
▪ |
Approximately 76% of the executive searches we performed in fiscal 2022 were for board level, chief executive and other senior executive and general management positions. Our more than 4,300 search engagement clients in fiscal 2022 included many of the world’s largest and most prestigious public and private companies. |
|
|
▪ |
We have built strong client loyalty, with nearly 90% of the assignments performed during fiscal 2022 having been on behalf of clients for whom we had conducted assignments in the previous three fiscal years. |
|
|
▪ |
Approximately 70% of our revenues were generated from clients that have utilized multiple lines of our business. |
|
|
▪ |
In fiscal 2022, we acquired the Lucas Group and Patina Solutions Group (the “Acquired Companies”). The Lucas Group brings substantial professional search and interim placement expertise to Korn Ferry and has enhanced our industry-leading search portfolio. Patina Solutions Group, an interim executive search firm brings access to a vast network of C-suite, top-tier, and professional interim talent. |
Performance Highlights
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, 2022, Adjusted EBITDA excluded $3.6 million of integration/acquisition costs. For the three months ended July 31, 2021, there was no adjustments.
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
26
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 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.
Fee revenue was $695.9 million during the three months ended July 31, 2022, an increase of $110.5 million, or 19%, compared to $585.4 million in the three months ended July 31, 2021, with increases in fee revenue across all lines of business. Exchange rates unfavorably impacted fee revenue by $24.4 million, or 4%, in the three months ended July 31, 2022 compared to the year-ago quarter. Net income attributable to Korn Ferry in the three months ended July 31, 2022 was $77.2 million, an increase of $2.4 million as compared to $74.8 million in the year-ago quarter. Adjusted EBITDA in the three months ended July 31, 2022 was $132.2 million, an increase of $10.9 million as compared to $121.3 million in the year-ago quarter. During the three months ended July 31, 2022, the Executive Search, Consulting, Professional Search & Interim, Digital and RPO lines of business contributed $62.2 million, $29.6 million, $29.2 million, $24.2 million and $17.7 million, respectively, to Adjusted EBITDA, which was offset by Corporate expenses net of other income of $30.6 million.
Our cash, cash equivalents and marketable securities decreased by $314.7 million to $896.4 million at July 31, 2022, compared to $1,211.1 million at April 30, 2022. This decrease was mainly due to annual bonuses earned in fiscal 2022 and paid during the first quarter of fiscal 2023, retention payments, the semi-annual interest payment on the 4.625% Senior Unsecured Notes due 2027 (the “Notes”), capital expenditures, stock repurchases and dividends paid to stockholders during the three months ended July 31, 2022. As of July 31, 2022, we held marketable securities to settle obligations under our Executive Capital Accumulation Plan (“ECAP”) with a cost value of $172.9 million and a fair value of $177.0 million. Our vested obligations for which these assets were held in trust totaled $178.8 million as of July 31, 2022 and our unvested obligations totaled $17.5 million.
Our working capital increased by $35.5 million to $811.2 million as of July 31, 2022, as compared to $775.7 million at April 30, 2022. We believe that cash on hand and funds from operations and other forms of liquidity will be sufficient to meet our anticipated working capital, capital expenditures, general corporate requirements, repayment of debt obligations and dividend payments under our dividend policy in the next 12 months. We had a total of $1,145.3 million under the Credit Facilities (defined in Liquidity and Capital Resources) and $645.3 million available under the previous credit facilities after $4.7 million of standby letters of credit issued as of both July 31, 2022 and April 30, 2022. We had a total of $10.3 million and $10.0 million of standby letters of credit with other financial institutions as of July 31, 2022 and April 30, 2022, respectively. The standby letters of credit were generally issued as a result of entering into office premise leases.
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, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Fee revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Reimbursed out-of-pocket engagement expenses |
|
|
1.0 |
|
|
|
0.5 |
|
|
Total revenue |
|
|
101.0 |
|
|
|
100.5 |
|
|
Compensation and benefits |
|
|
66.9 |
|
|
|
67.7 |
|
|
General and administrative expenses |
|
|
9.3 |
|
|
|
8.6 |
|
|
Reimbursed expenses |
|
|
1.0 |
|
|
|
0.5 |
|
|
Cost of services |
|
|
5.5 |
|
|
|
3.8 |
|
|
Depreciation and amortization |
|
|
2.3 |
|
|
|
2.7 |
|
|
Operating income |
|
|
16.0 |
|
|
|
17.3 |
|
|
Net income |
|
|
11.3 |
% |
|
|
13.1 |
% |
|
Net income attributable to Korn Ferry |
|
|
11.1 |
% |
|
|
12.8 |
% |
27
The operating results prior to May 1, 2022 have been revised to conform to the new segment reporting.
The following tables summarize the results of our operations:
(Numbers may not total exactly due to rounding)
|
|
|
Three Months Ended July 31, |
|
|||||||||||||
|
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
|
Dollars |
|
|
% |
|
|
Dollars |
|
|
% |
|
||||
|
|
|
(dollars in thousands) |
|
|||||||||||||
|
Fee revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting |
|
$ |
166,484 |
|
|
|
23.9 |
% |
|
$ |
148,478 |
|
|
|
25.3 |
% |
|
Digital |
|
|
83,761 |
|
|
|
12.0 |
|
|
|
80,671 |
|
|
|
13.8 |
|
|
Executive Search: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
151,544 |
|
|
|
21.8 |
|
|
|
138,678 |
|
|
|
23.7 |
|
|
EMEA |
|
|
47,056 |
|
|
|
6.8 |
|
|
|
42,747 |
|
|
|
7.3 |
|
|
Asia Pacific |
|
|
26,381 |
|
|
|
3.8 |
|
|
|
28,703 |
|
|
|
4.9 |
|
|
Latin America |
|
|
7,808 |
|
|
|
1.1 |
|
|
|
6,776 |
|
|
|
1.2 |
|
|
Total Executive Search |
|
|
232,789 |
|
|
|
33.5 |
|
|
|
216,904 |
|
|
|
37.1 |
|
|
Professional Search & Interim |
|
|
98,947 |
|
|
|
14.2 |
|
|
|
51,837 |
|
|
|
8.9 |
|
|
RPO |
|
|
113,922 |
|
|
|
16.4 |
|
|
|
87,505 |
|
|
|
14.9 |
|
|
Total fee revenue |
|
|
695,903 |
|
|
|
100.0 |
% |
|
|
585,395 |
|
|
|
100.0 |
% |
|
Reimbursed out-of-pocket engagement expense |
|
|
7,245 |
|
|
|
|
|
|
|
2,703 |
|
|
|
|
|
|
Total revenue |
|
$ |
703,148 |
|
|
|
|
|
|
$ |
588,098 |
|
|
|
|
|
In the tables that follow, the Company presents a subtotal for Executive Search Adjusted EBITDA and a single percentage for Executive Search Adjusted EBITDA margin, which reflects the aggregate of all of the individual Executive Search Regions. These figures are non-GAAP financial measures and are presented as they are consistent with the Company’s lines of business and are financial metrics used by the Company’s investor base.
|
|
Three Months Ended July 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
Consolidated |
|
|||||
|
|
(in thousands) |
|
|||||
|
Fee revenue |
$ |
695,903 |
|
|
$ |
585,395 |
|
|
Total revenue |
$ |
703,148 |
|
|
$ |
588,098 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Korn Ferry |
$ |
77,247 |
|
|
$ |
74,823 |
|
|
Net income attributable to noncontrolling interest |
|
1,289 |
|
|
|
1,574 |
|
|
Other income, net |
|
(775 |
) |
|
|
(4,447 |
) |
|
Interest expense, net |
|
7,612 |
|
|
|
5,426 |
|
|
Income tax provision |
|
26,226 |
|
|
|
23,879 |
|
|
Operating income |
|
111,599 |
|
|
|
101,255 |
|
|
Depreciation and amortization |
|
16,229 |
|
|
|
15,644 |
|
|
Other income, net |
|
775 |
|
|
|
4,447 |
|
|
Integration/acquisition costs |
|
3,605 |
|
|
|
— |
|
|
Adjusted EBITDA |
$ |
132,208 |
|
|
$ |
121,346 |
|
|
Adjusted EBITDA margin |
|
19.0 |
% |
|
|
20.7 |
% |
28
|
|
Three Months Ended July 31, |
|
|||||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||||
|
|
Fee revenue |
|
Total revenue |
|
Adjusted EBITDA |
|
Adjusted EBITDA margin |
|
|
Fee revenue |
|
Total revenue |
|
Adjusted EBITDA |
|
Adjusted EBITDA margin |
|
||||||||
|
|
(dollars in thousands) |
|
|||||||||||||||||||||||
|
Consulting |
$ |
166,484 |
|
$ |
168,735 |
|
$ |
29,550 |
|
|
17.7 |
% |
|
$ |
148,478 |
|
$ |
149,007 |
|
$ |
26,841 |
|
|
18.1 |
% |
|
Digital |
|
83,761 |
|
|
83,815 |
|
|
24,178 |
|
|
28.9 |
% |
|
|
80,671 |
|
|
80,681 |
|
|
25,632 |
|
|
31.8 |
% |
|
Executive Search: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
151,544 |
|
|
152,884 |
|
|
43,749 |
|
|
28.9 |
% |
|
|
138,678 |
|
|
139,300 |
|
|
43,330 |
|
|
31.2 |
% |
|
EMEA |
|
47,056 |
|
|
47,329 |
|
|
8,515 |
|
|
18.1 |
% |
|
|
42,747 |
|
|
42,843 |
|
|
7,585 |
|
|
17.7 |
% |
|
Asia Pacific |
|
26,381 |
|
|
26,452 |
|
|
7,351 |
|
|
27.9 |
% |
|
|
28,703 |
|
|
28,732 |
|
|
8,320 |
|
|
29.0 |
% |
|
Latin America |
|
7,808 |
|
|
7,809 |
|
|
2,617 |
|
|
33.5 |
% |
|
|
6,776 |
|
|
6,779 |
|
|
2,354 |
|
|
34.7 |
% |
|
Total Executive Search |
|
232,789 |
|
|
234,474 |
|
|
62,232 |
|
|
26.7 |
% |
|
|
216,904 |
|
|
217,654 |
|
|
61,589 |
|
|
28.4 |
% |
|
Professional Search & Interim |
|
98,947 |
|
|
100,052 |
|
|
29,161 |
|
|
29.5 |
% |
|
|
51,837 |
|
|
51,932 |
|
|
19,439 |
|
|
37.5 |
% |
|
RPO |
|
113,922 |
|
|
116,072 |
|
|
17,709 |
|
|
15.5 |
% |
|
|
87,505 |
|
|
88,824 |
|
|
14,528 |
|
|
16.6 |
% |
|
Corporate |
|
— |
|
|
— |
|
|
(30,622 |
) |
|
|
|
|
|
— |
|
|
— |
|
|
(26,683 |
) |
|
|
|
|
Consolidated |
$ |
695,903 |
|
$ |
703,148 |
|
$ |
132,208 |
|
|
19.0 |
% |
|
$ |
585,395 |
|
$ |
588,098 |
|
$ |
121,346 |
|
|
20.7 |
% |
Three Months Ended July 31, 2022 Compared to Three Months Ended July 31, 2021
Fee Revenue
Fee Revenue. Fee revenue increased by $110.5 million, or 19%, to $695.9 million in the three months ended July 31, 2022 compared to $585.4 million in the year-ago quarter. Exchange rates unfavorably impacted fee revenue by $24.4 million, or 4%, in the three months ended July 31, 2022 compared to the year-ago quarter. The higher fee revenue was attributable to increases in all lines of business primarily due to the increased demand for the Company’s integrated service offerings and the acquisitions of the Acquired Companies in the Professional Search & Interim segment.
Consulting. Consulting reported fee revenue of $166.5 million, an increase of $18.0 million, or 12%, in the three months ended July 31, 2022 compared to $148.5 million in the year-ago quarter. The increase in fee revenue was mainly driven by increased demand from large workforce transformation initiatives delivered through our Organization Strategy, Assessment and Succession, and Leadership Development solutions. We also saw significant growth in Organization Design, Change Management, and Workforce Sales Compensation demand as clients aligned their structures to new market opportunities and addressed compensation and retention issues associated with labor market dislocation. Exchange rates unfavorably impacted fee revenue by $7.2 million, or 5%, in the three months ended July 31, 2022 compared to the year-ago quarter.
Digital. Digital reported fee revenue of $83.8 million, an increase of $3.1 million, or 4%, in the three months ended July 31, 2022 compared to $80.7 million in the year-ago quarter. The increase in fee revenue was primarily due to growth in Total Rewards and Leadership Development offerings as companies try to reward and retain employees in a changing labor market and invest in sales effectiveness tools to enable their commercial teams to maximize revenue growth. Exchange rates unfavorably impacted fee revenue by $4.7 million, or 6%, in the three months ended July 31, 2022 compared to the year-ago quarter.
Executive Search North America. Executive Search North America reported fee revenue of $151.5 million, an increase of $12.8 million, or 9%, in the three months ended July 31, 2022 compared to $138.7 million in the year-ago quarter. North America’s fee revenue was higher due to an 18% increase in the weighted-average fee billed per engagement (calculated using local currency) offset by a 7% decrease in the number of engagements billed during the three months ended July 31, 2022 compared to the year-ago quarter.
Executive Search EMEA. Executive Search EMEA reported fee revenue of $47.1 million, an increase of $4.4 million, or 10%, in the three months ended July 31, 2022 compared to $42.7 million in the year-ago quarter. Exchange rates unfavorably impacted fee revenue by $4.3 million, or 10%, in the three months ended July 31, 2022 compared to the year-ago quarter. The increase in fee revenue was due to a 14% increase in the weighted-average fee billed per engagement (calculated using local currency) and an 8% increase in the number of engagements billed during the three months ended July 31, 2022 compared to the year-ago quarter. Performance in France, Belgium, the United Arab Emirates, and Germany were the primary contributors to the increase in fee revenue in the three months ended July 31, 2022 compared to the year-ago quarter.
29
Executive Search Asia Pacific. Executive Search Asia Pacific reported fee revenue of $26.4 million, a decrease of $2.3 million, or 8%, in the three months ended July 31, 2022 compared to $28.7 million in the year-ago quarter. Exchange rates unfavorably impacted fee revenue by $1.6 million, or 6%, in the three months ended July 31, 2022 compared to the year-ago quarter. The decrease in fee revenue was due to a 3% decrease in the number of engagements billed during the three months ended July 31, 2022 compared to the year-ago quarter. The performance in China, Australia and Korea were the primary contributors to the decrease in fee revenue in the three months ended July 31, 2022 compared to the year-ago quarter, partially offset by increase in fee revenue in Malaysia and India.
Executive Search Latin America. Executive Search Latin America reported fee revenue of $7.8 million, an increase of $1.0 million, or 15%, in the three months ended July 31, 2022 compared to $6.8 million in the year-ago quarter. Exchange rates unfavorably impacted fee revenue by $0.1 million, or 1%, in the three months ended July 31, 2022 compared to the year-ago quarter. The increase in fee revenue was due to a 9% increase in the number of engagements billed and a 7% increase in the weighted-average fees billed per engagement (calculated using local currency) during the three months ended July 31, 2022 compared to the year-ago quarter. The increase in fee revenue was due to higher fee revenue in Mexico and Chile in the three months ended July 31, 2022 compared to the year-ago quarter.
Professional Search & Interim. Professional Search & Interim reported fee revenue of $98.9 million, an increase of $47.1 million, or 91%, in the three months ended July 31, 2022 compared to $51.8 million in the year-ago quarter. Exchange rates unfavorably impacted fee revenue by $2.0 million, or 4%, in the three months ended July 31, 2022 compared to the year-ago quarter. The increase in fee revenue was due to an increase in interim fee revenue and permanent placement fee revenue of $24.8 million and $22.3 million, respectively, primarily due to the Acquired Companies.
RPO. RPO reported fee revenue of $113.9 million, an increase of $26.4 million, or 30%, in the three months ended July 31, 2022 compared to $87.5 million in the year-ago quarter. Exchange rates unfavorably impacted fee revenue by $4.3 million, or 5%, in the three months ended July 31, 2022 compared to the year-ago quarter. The increase in fee revenue was due to wider adoption of RPO services in the market in combination with our differentiated solutions.
Compensation and Benefits
Compensation and benefits expense increased by $69.4 million, or 18%, to $465.6 million in the three months ended July 31, 2022 from $396.2 million in the year-ago quarter. Exchange rates favorably impacted compensation and benefits by $14.7 million, or 4%, in the three months ended July 31, 2022 compared to the year-ago quarter. The increase in compensation and benefits expense was due to increases in salaries and related payroll taxes of $49.8 million, performance-related bonus expense of $5.8 million, employee insurance of $4.9 million and amortization of long-term incentive awards of $1.4 million. These increases were due to the increase in fee revenue growth from an increase in average headcount of 33% in the three months ended July 31, 2022 compared to the year-ago quarter. Also contributing to higher compensation and benefit expense was an increase in commission expense of $9.8 million due to higher fee revenue and integration/acquisition costs of $1.3 million, partially offset by a decrease in deferred compensation expenses of $2.5 million as a result of a smaller increase in the fair value of participants' accounts in the three months ended July 31, 2022 compared to the year-ago quarter. Compensation and benefits expense, as a percentage of fee revenue, decreased to 67% in the three months ended July 31, 2022 from 68% in the year-ago quarter.
Consulting compensation and benefits expense increased by $11.6 million, or 11%, to $113.8 million in the three months ended July 31, 2022 from $102.2 million in the year-ago quarter. Exchange rates favorably impacted compensation and benefits by $4.6 million, or 5%, in the three months ended July 31, 2022 compared to the year-ago quarter. The increase in compensation and benefits expense was primarily due to increases in salaries and related payroll taxes of $7.8 million, employee insurance of $0.7 million and performance-related bonus expense of $2.1 million. These increases were due to the segment’s revenue growth with an increase in average headcount of 15% in the three months ended July 31, 2022 compared to the year-ago quarter. Consulting compensation and benefits expense, as a percentage of fee revenue, decreased to 68% in the three months ended July 31, 2022 from 69% in the year-ago quarter.
Digital compensation and benefits expense increased by $2.9 million, or 7%, to $43.7 million in the three months ended July 31, 2022 from $40.8 million in the year-ago quarter. Exchange rates favorably impacted compensation and benefits by $2.1 million, or 5%, in the three months ended July 31, 2022 compared to the year-ago quarter. The increase in compensation and benefits expense was due to increases in salaries and related payroll taxes of $2.2 million and performance-related bonus expense of $0.6 million associated with the increased investment made on product development initiatives and an increase in commercial salesforce. Digital compensation and benefits expense, as a percentage of fee revenue, increased to 52% in the three months ended July 31, 2022 from 51% in the year-ago quarter.
Executive Search North America compensation and benefits expense increased by $6.4 million, or 7%, to $97.9 million in the three months ended July 31, 2022 compared to $91.5 million in the year-ago quarter. Exchange rates favorably impacted compensation and benefits by $0.2 million, in the three months ended July 31, 2022 compared to the year-ago quarter. The change was due to increases in performance-related bonus expense of $5.3 million and salaries and related payroll taxes of
30
$4.0 million. These increases were due to the segment’s revenue growth with an increase in average headcount of 19% in the three months ended July 31, 2022 compared to the year-ago quarter. The increase was partially offset by a decrease in deferred compensation expenses of $3.4 million as a result of a smaller increase in the fair value of participants’ accounts in the three months ended July 31, 2022 compared to the year-ago quarter. Executive Search North America compensation and benefits expense, as a percentage of fee revenue, decreased to 65% in the three months ended July 31, 2022 from 66% in the year-ago quarter.
Executive Search EMEA compensation and benefits expense increased by $3.7 million, or 12%, to $34.6 million in the three months ended July 31, 2022 compared to $30.9 million in the year-ago quarter. Exchange rates favorably impacted compensation and benefits by $2.9 million, or 9%, in the three months ended July 31, 2022 compared to the year-ago quarter. The increase in compensation and benefits expense was due to increases in performance-related bonus expense of $2.5 million and amortization of long-term incentive awards of $0.7 million. These increases were due to the segment’s revenue growth in the three months ended July 31, 2022 compared to the year-ago quarter. Executive Search EMEA compensation and benefits expense, as a percentage of fee revenue, increased to 74% in the three months ended July 31, 2022 from 72% in the year-ago quarter.
Executive Search Asia Pacific compensation and benefits expense decreased by $1.3 million, or 7%, to $16.7 million in the three months ended July 31, 2022 compared to $18.0 million in the year-ago quarter. Exchange rates favorably impacted compensation and benefits by $0.9 million, or 5%, in the three months ended July 31, 2022 compared to the year-ago quarter. The decrease in compensation and benefits expense was due to a decrease in performance-related bonus expense of $1.2 million in the three months ended July 31, 2022 compared to the year-ago quarter due to lower segment fee revenue. Executive Search Asia Pacific compensation and benefits expense, as a percentage of fee revenue, was 63% for both the three months ended July 31, 2022 and 2021.
Executive Search Latin America compensation and benefits expense decreased by $0.3 million, or 6%, to $4.7 million in the three months ended July 31, 2022 compared to $5.0 million in the year-ago quarter. Exchange rates did not have an impact in the three months ended July 31, 2022 compared to the year-ago quarter. Executive Search Latin America compensation and benefits expense, as a percentage of fee revenue, decreased to 60% in the three months ended July 31, 2022 from 74% in the year-ago quarter.
Professional Search & Interim compensation and benefits expense increased by $22.5 million, or 82%, to $50.0 million in the three months ended July 31, 2022 from $27.5 million in the year-ago quarter. Exchange rates favorably impacted compensation and benefits by $0.8 million, or 3%, in the three months ended July 31, 2022 compared to the year-ago quarter. The increase was primarily due to higher salaries and related payroll taxes of $13.1 million, commission expense of $9.9 million, employee insurance of $1.4 million and integration/acquisition costs of $1.3 million due to the acquisition of the Acquired Companies which resulted in a 117% increase in the average headcount in the three months ended July 31, 2022 compared to the year-ago quarter. The increase in compensation and benefits expense was partially offset a decrease in performance-related bonus expense of $3.9 million. Professional Search & Interim compensation and benefits expense, as a percentage of fee revenue, decreased to 51% in the three months ended July 31, 2022 from 53% in the year-ago quarter.
RPO compensation and benefits expense increased by $22.8 million, or 35%, to $88.4 million in the three months ended July 31, 2022 from $65.6 million in the year-ago quarter. Exchange rates favorably impacted compensation and benefits by $3.2 million, or 5%, in the three months ended July 31, 2022 compared to the year-ago quarter. The increase was primarily due to higher salaries and related payroll taxes of $21.0 million as a result of the segment’s fee revenue growth with an increase in average headcount of 51% in the three months ended July 31, 2022 compared to the year-ago quarter. RPO compensation and benefits expense, as a percentage of fee revenue, increased to 78% in the three months ended July 31, 2022 from 75% in the year-ago quarter.
Corporate compensation and benefits expense increased by $0.9 million, or 6%, to $15.7 million in the three months ended July 31, 2022 from $14.8 million in the year-ago quarter. The increase was due to higher performance-related bonus expense of $1.0 million and higher salaries and related payroll taxes of $1.3 million due to a 25% increase in the average headcount in the three months ended July 31, 2022 compared to the year-ago quarter. These were partially offset by an increase in the cash surrender value (“CSV”) of company-owned life insurance (“COLI”) of $1.5 million as a result of increased death benefits in the three months ended July 31, 2022 compared to the year-ago quarter.
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General and Administrative Expenses
General and administrative expenses increased by $14.2 million, or 28%, to $64.5 million in the three months ended July 31, 2022 from $50.3 million in the year-ago quarter. Exchange rates favorably impacted general and administrative expenses by $2.8 million, or 6%, in the three months ended July 31, 2022 compared to the year-ago quarter. The increase in general and administrative expenses was due to higher marketing and business development expenses of $4.3 million, which contributed to the increase in fee revenue in the three months ended July 31, 2022, as well as an increase in legal and other professional fees of $3.3 million and premise and office expenses of $3.0 million due to technology cost associated with an increase in headcount. In addition, the Company incurred integration/acquisition costs of $2.3 million due to the acquisition of the Acquired Companies. General and administrative expenses, as a percentage of fee revenue, was 9% in both the three months ended July 31, 2022 and 2021.
Consulting general and administrative expenses increased by $0.9 million, or 8%, to $12.9 million in the three months ended July 31, 2022 compared to $12.0 million in the year-ago quarter. The increase in general and administrative expenses was primarily due to an increase of $0.6 million in foreign exchange losses in the three months ended July 31, 2022 compared to the year-ago quarter. Consulting general and administrative expenses, as a percentage of fee revenue, were 8% for both the three months ended July 31, 2022 and 2021.
Digital general and administrative expenses increased by $2.0 million, or 28%, to $9.1 million in the three months ended July 31, 2022 from $7.1 million in the year-ago quarter. The increase in general and administrative expenses was primarily due to higher marketing and business development expenses of $1.0 million and increases in technology cost of $0.4 million associated with an increase in headcount and legal and other professional fees of $0.3 million. Digital general and administrative expenses, as a percentage of fee revenue, increased to 11% in the three months ended July 31, 2022 from 9% in the year-ago quarter.
Executive Search North America general and administrative expenses increased by $1.7 million, or 25%, to $8.4 million in the three months ended July 31, 2022 compared to $6.7 million in the year-ago quarter. The increase in general and administrative expenses was primarily due to higher business development expenses of $0.6 million and legal and other professional fees of $0.7 million. Executive Search North America general and administrative expenses, as a percentage of fee revenue, increased to 6% in the three months ended July 31, 2022 from 5% in the year-ago quarter.
Executive Search EMEA general and administrative expenses decreased by $0.5 million, or 12%, to $3.8 million in the three months ended July 31, 2022 from $4.3 million in the year-ago quarter. The decrease in general and administrative expenses was due to a decrease in premise and office expense of $0.6 million from the reduction of the Company’s real estate footprint in fiscal 2022. Executive Search EMEA general and administrative expenses, as a percentage of fee revenue, decreased to 8% in the three months ended July 31, 2022 from 10% in the year-ago quarter.
Executive Search Asia Pacific general and administrative expenses were $2.5 million in the three months ended July 31, 2022 compared to $2.6 million in the year-ago quarter, essentially flat. Executive Search Asia Pacific general and administrative expenses, as a percentage of fee revenue, were 9% for both the three months ended July 31, 2022 and 2021.
Executive Search Latin America recognized an increase in general and administrative expenses of $2.0 million in the three months ended July 31, 2022 compared to the year-ago quarter. The increase in general and administrative expenses was primarily due to a gain recorded in the three months ended July 31, 2021 due to the termination of a lease agreement Mexico thereby increasing premise and office of $1.5 million and a decrease in foreign currency gains of $0.3 million in the three months ended July 31, 2022 compared to the year-ago quarter.
Professional Search & Interim general and administrative expenses increased by $3.5 million, or 125%, to $6.3 million in the three months ended July 31, 2022 compared to $2.8 million in the year-ago quarter. The increase in general and administrative expense was primarily due to higher bad debt expense of $1.0 million, premise and office expenses of $1.0 million and integration/acquisition costs of $1.2 million. Profession Search & Interim general and administrative expenses, as a percentage of fee revenue, increased to 6% in the three months ended July 31, 2022 from 5% in the year-ago quarter.
RPO general and administrative expenses increased by $0.7 million, or 17%, to $4.8 million in the three months ended July 31, 2022 compared to $4.1 million in the year-ago quarter. The increase in general and administrative expenses was primarily due to an increase in technology cost of $0.7 million associated with an increase in headcount. RPO general and administrative expenses, as a percentage of fee revenue, decreased to 4% in the three months ended July 31, 2022 from 5% in the year-ago quarter.
Corporate general and administrative expenses increased by $4.1 million, or 34%, to $16.2 million in the three months ended July 31, 2022 compared to $12.1 million in the year-ago quarter. The increase was primarily due to higher legal and other professional fees of $2.1 million and increases in marketing expenses and integration/acquisition costs of $1.2 million and $1.1 million, respectively, during the three months ended July 31, 2022 compared to the year-ago quarter.
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Cost of Services Expense
Cost of services expense consist of contractor and product costs related to delivery of various services and products through Consulting, Digital, Professional Search & Interim and RPO. Cost of services expense increased by $16.0 million, or 73%, to $38.0 million in the three months ended July 31, 2022 compared to $22.0 million in the year-ago quarter. The increase of $14.0 million is from Professional Search & Interim which is due the acquisition of the Acquired Companies which includes a significant amount of interim business as part of the services they perform that has higher cost of service expense. The rest of the increase is from Consulting due to an increase in fee revenue in that segment. Cost of services expense, as a percentage of fee revenue, increased to 5% in the three months ended July 31, 2022 from 4% in the three months ended July 31, 2021.
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $16.2 million, an increase of $0.6 million, or 4%, in the three months ended July 31, 2022 compared to $15.6 million in the year-ago quarter. The increase was primarily due to the amortization of intangible assets due to the acquisition of the Acquired Companies.
Net Income Attributable to Korn Ferry
Net income attributable to Korn Ferry increased by $2.4 million, or 3%, to $77.2 million in the three months ended July 31, 2022, as compared to $74.8 million in the year-ago quarter. The increase in net income attributable to Korn Ferry was driven by the increase in fee revenue, which was driven by the factors discussed above. The increase in fee revenue was partially offset by increases in compensation and benefits expense and cost of services expense associated with the higher levels of business demand and increases in general and administrative expenses and income tax provision in the three months ended July 31, 2022 compared to the year-ago quarter. Net income attributable to Korn Ferry, as a percentage of fee revenue, was 11% and 13% in the three months ended July 31, 2022 and 2021, respectively.
Adjusted EBITDA
Adjusted EBITDA increased by $10.9 million, or 9%, to $132.2 million in the three months ended July 31, 2022 as compared to $121.3 million in the year-ago quarter. The increase in Adjusted EBITDA was driven by an increase in fee revenue, partially offset by increases in compensation and benefits expense (excluding integration/acquisition costs), cost of services expense, and general and administrative expenses (excluding integration/acquisition costs). Adjusted EBITDA, as a percentage of fee revenue, was 19% in the three months ended July 31, 2022 compared to 21% in the year-ago quarter.
Consulting Adjusted EBITDA was $29.6 million in the three months ended July 31, 2022, an increase of $2.8 million, or 10%, as compared to $26.8 million in the year-ago quarter. This increase in Adjusted EBITDA was driven by higher fee revenue in the segment, partially offset by increases in compensation and benefits expense, cost of services expense and general and administrative expenses. Consulting Adjusted EBITDA, as a percentage of fee revenue, was 18% in both the three months ended July 31, 2022 and 2021.
Digital Adjusted EBITDA was $24.2 million in the three months ended July 31, 2022, a decrease of $1.4 million, or 5%, as compared to $25.6 million in the year-ago quarter. This decrease in Adjusted EBITDA was mainly driven by increases in compensation and benefits expense and general and administrative expenses partially offset by an increase in fee revenue in the segment, during the three months ended July 31, 2022 compared to the year-ago quarter. Digital Adjusted EBITDA, as a percentage of fee revenue, was 29% and 32% in the three months ended July 31, 2022 and 2021, respectively.
Executive Search North America Adjusted EBITDA increased by $0.4 million, or 1%, to $43.7 million in the three months ended July 31, 2022 compared to $43.3 million in the year-ago quarter. The increase was driven by higher fee revenue in the segment, partially offset by an increase in compensation and benefits expense and general and administrative expenses. Executive Search North America Adjusted EBITDA, as a percentage of fee revenue, was 29% and 31% in the three months ended July 31, 2022 and 2021, respectively.
Executive Search EMEA Adjusted EBITDA increased by $0.9 million, or 12%, to $8.5 million in the three months ended July 31, 2022 compared to $7.6 million in the year-ago quarter. The increase in Adjusted EBITDA was driven by higher fee revenue in the segment, partially offset by an increase in compensation and benefits expense. Executive Search EMEA Adjusted EBITDA, as a percentage of fee revenue, was 18% in both the three months ended July 31, 2022 and 2021.
Executive Search Asia Pacific Adjusted EBITDA decreased $0.9 million, or 11%, to $7.4 million in the three months ended July 31, 2022 compared to $8.3 million in the year-ago quarter. The decrease in Adjusted EBITDA was driven by lower fee revenue in the segment, partially offset by a decrease in compensation and benefits expense. Executive Search Asia Pacific Adjusted EBITDA, as a percentage of fee revenue, was 28% and 29% in the three months ended July 31, 2022 and 2021, respectively.
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Executive Search Latin America Adjusted EBITDA increased by $0.2 million to $2.6 million in the three months ended July 31, 2022 compared to $2.4 million in the year-ago quarter. Executive Search Latin America Adjusted EBITDA, as a percentage of fee revenue, was 34% and 35% in the three months ended July 31, 2022 and 2021, respectively.
Professional Search & Interim Adjusted EBITDA was $29.2 million in the three months ended July 31, 2022, an increase of $9.8 million, or 51%, as compared to $19.4 million in the year-ago quarter. The increase in Adjusted EBITDA was mainly driven by higher fee revenue in the segment as a result of the acquisitions of the Acquired Companies, partially offset by increases in compensation and benefits expense (excluding integration/acquisition costs), cost of services expense, and general and administrative expenses (excluding integration/acquisition costs). Professional Search & Interim Adjusted EBITDA, as a percentage of fee revenue, was 29% and 38% in the three months ended July 31, 2022 and 2021, respectively.
RPO Adjusted EBITDA was $17.7 million in the three months ended July 31, 2022, an increase of $3.2 million, or 22%, as compared to $14.5 million in the year-ago quarter. The increase in Adjusted EBITDA was mainly driven by higher fee revenue in the segment, partially offset by increases in compensation and benefits expense and general and administrative expenses. RPO Adjusted EBITDA, as a percentage of fee revenue, was 16% and 17% in the three months ended July 31, 2022 and 2021, respectively.
Other Income, Net
Other income, net was $0.8 million in the three months ended July 31, 2022 compared to $4.4 million in the year-ago quarter. The difference was primarily due to smaller gains from the fair value of our marketable securities during the three months ended July 31, 2022 compared to the year-ago quarter.
Interest Expense, Net
Interest expense, net primarily relates to the Notes issued in December 2019 and borrowings under COLI policies, which are partially offset by interest earned on cash and cash equivalent balances. Interest expense, net was $7.6 million in the three months ended July 31, 2022 compared to $5.4 million in the year-ago quarter. Interest expense, net increased due to smaller interest income earned as a result of death benefits received from our COLI policies in three months ended July 31, 2022 compared to the year-ago quarter.
Income Tax Provision
The provision for income tax was $26.2 million in the three months ended July 31, 2022, with an effective tax rate of 25.0%, compared to $23.9 million in the three months ended July 31, 2021, with an effective rate of 23.8%. 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 effective tax rate in the three months ended July 31, 2022 was affected by a tax expense recorded for withholding taxes that are not eligible for credit.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest represents the portion of a subsidiary’s net earnings that are attributable to shares of such subsidiary not held by Korn Ferry that are included in the consolidated results of operations. Net income attributable to noncontrolling interest for the three months ended July 31, 2022 was $1.3 million, as compared to $1.6 million in the three months ended July 31, 2021.
Liquidity and Capital Resources
The Company and its Board of Directors endorse a balanced approach to capital allocation. The Company’s long-term priority is to invest in growth initiatives, such as the hiring of consultants, the continued development of IP and derivative products and services and the investment in synergistic, accretive merger and acquisition transactions that are expected to earn a return that is superior to the Company's cost of capital. Next, the Company’s capital allocation approach contemplates the return of a portion of excess capital to stockholders, in the form of a regular quarterly dividend, subject to the factors discussed below and in the “Risk Factors” section of the Form 10-K. Additionally, the Company considers share repurchases on an opportunistic basis and subject to the terms of our Amended Credit Agreement (defined below), as well as using excess cash to repay the Notes.
On August 1, 2022, we completed the acquisition of Infinity Consulting Solutions (“ICS”) for approximately $100 million, net of cash acquired. ICS will be part of our rapidly growing Interim business, which is a part of our Professional Search & Interim segment.
On December 16, 2019, we completed a private placement of the Notes with a $400 million principal amount pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Notes were issued with a $4.5 million discount and will mature December 15, 2027, with interest payable semi-annually in arrears on June 15 and December 15 of each year, that commenced on June 15, 2020. The Notes represent senior unsecured obligations that rank equally in right of payment to
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all existing and future senior unsecured indebtedness. We may redeem the Notes prior to maturity, subject to certain limitations and premiums defined in the indenture governing the Notes. The Notes are guaranteed by each of our existing and future wholly owned domestic subsidiaries to the extent such subsidiaries guarantee our obligations under the Amended Credit Agreement (defined below). The indenture governing the Notes requires that, upon the occurrence of both a Change of Control and a Rating Decline (each as defined in the indenture), we shall make an offer to purchase all of the Notes at
On June 24, 2022, we entered into an Amendment to the Credit Agreement (as amended by the Amendment, the “Amended Credit Agreement”) with the lenders party thereto and Bank of America, National Association as administrative agent, to, among other things (i) extend the existing maturity date of the revolving facility to June 24, 2027, (ii) provide for a new delayed draw term loan facility as described below, (iii) replace the London interbank offered rate with Term SOFR, and (iv) replace the existing financial covenants with financial covenants described below. The Amended Credit Agreement provides for five-year senior secured credit facilities in an aggregate amount of $1,150 million comprised of a $650.0 million revolving credit facility (the “Revolver”) and a $500 million delayed draw term loan facility (the “Delayed Draw Facility”, and together with the Revolver, the “Credit Facilities”). The Amended Credit Agreement also provides that, under certain circumstances, the Company may incur term loans or increase the aggregate principal amount of revolving commitments by an aggregate amount of up to $250 million plus an unlimited amount subject to a consolidated secured net leverage ratio of 3.25 to 1.00. See Note 11 —Long-Term Debt for a further description of the Amended Credit Agreement. The Company had a total of $1,145.3 million available under the Credit Facilities and $645.3 million available under the previous credit facilities after $4.7 million of standby letters of credit have been issued as of both July 31, 2022 and April 30, 2022, respectively. The Company had a total of $10.3 million and $10.0 million of standby letters with other financial institutions as of July 31, 2022 and April 30, 2022, respectively. The standby letters of credit were generally issued as a result of entering into office premise leases.
On December 8, 2014, the Board of Directors adopted a dividend policy to distribute to our stockholders a regular quarterly cash dividend of $0.10 per share. Every quarter since the adoption of the dividend policy, the Company has declared a quarterly dividend. On June 21, 2021, the Board of Directors increased the quarterly dividend to $0.12 per share. On June 21, 2022, the Board of Directors approved a 25% increase in the quarterly dividend, which increased the quarterly dividend to $0.15 per share. The Amended Credit Agreement permits us to pay dividends to our stockholders and make share repurchases so long as there is no default under the Amended Credit Agreement, our total funded debt to adjusted EBITDA ratio (as set forth in the Amended Credit Agreement, the “consolidated net leverage ratio”) is no greater than 5.00 to 1.00, and we are in pro forma compliance with our financial covenant. Furthermore, our Notes allow us to pay $25 million of dividends per fiscal year with no restrictions plus an unlimited amount of dividends so long as our consolidated total leverage ratio is not greater than 3.50 to 1.00, and there is no default under the indenture governing the Notes. The declaration and payment of future dividends under the quarterly dividend program will be at the discretion of the Board of Directors and will depend upon many factors, including our earnings, capital requirements, financial conditions, the terms of our indebtedness and other factors our Board of Directors may deem to be relevant. Our Board of Directors may, however, amend, revoke or suspend our dividend policy at any time and for any reason.
On June 21, 2022, our Board of Directors approved an increase to the share repurchase program of approximately $300 million, which at the time brought our available capacity to repurchase shares in the open market or privately negotiated transactions to $318 million. The Company repurchased approximately $22.4 million and $2.5 million of the Company’s stock during three months ended July 31, 2022 and 2021, respectively. As of July 31, 2022, $306.7 million remained available for common stock repurchases under our share repurchase program. Any decision to continue to execute our currently outstanding share repurchase program will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board of Directors.
Our primarily source of liquidity is the fee revenue generated from our operations, supplemented by our borrowing capacity under our Amended Credit Agreement. Our performance is subject to the general level of economic activity in the geographic regions and the industries we service. We believe, based on current economic conditions, that our cash on hand and funds from operations and the Amended Credit Agreement will be sufficient to meet anticipated working capital, capital expenditures, general corporate requirements, debt repayments, share repurchases and dividend payments under our dividend policy during the next 12 months. However, if the national or global economy, credit market conditions and/or labor markets were to deteriorate in the future, including as a result of ongoing macroeconomic uncertainty due to inflation and a potential recession, such changes could put negative pressure on demand for our services and affect our operating cash flows. If these conditions were to persist over an extended period of time, we may incur negative cash flows and it might require us to access additional borrowings under the Amended Credit Agreement to meet our capital needs and/or discontinue our share repurchases and dividend policy.
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Cash and cash equivalents and marketable securities were $896.4 million and $1,211.1 million as of July 31, 2022 and April 30, 2022, respectively. Net of amounts held in trust for deferred compensation plans and accrued bonuses, cash and marketable securities were $613.9 million and $605.4 million at July 31, 2022 and April 30, 2022, respectively. As of July 31, 2022 and April 30, 2022, we held $414.4 million and $416.7 million, respectively of cash and cash equivalents in foreign locations, net of amounts held in trust for deferred compensation plans and to pay accrued bonuses. Cash and cash equivalents consist of cash and highly liquid investments purchased with original maturities of three months or less. Marketable securities consist of mutual funds and investments in commercial paper, corporate notes/bonds and U.S. Treasury and Agency securities. The primary objectives of our investment in mutual funds are to meet the obligations under certain of our deferred compensation plans, while the commercial paper, corporate notes/bonds and U.S. Treasury and Agency securities are available for general corporate purposes.
As of July 31, 2022 and April 30, 2022, marketable securities of $256.7 million and $233.0 million, respectively, included equity securities of $177.0 million (net of gross unrealized gains of $10.0 million and gross unrealized losses of $5.9 million) and $168.7 million (net of gross unrealized gains of $10.7 million and gross unrealized losses of $6.1 million), respectively, were held in trust for settlement of our obligations under certain deferred compensation plans, of which $166.5 million and $158.7 million, respectively, are classified as non-current. These marketable securities were held to satisfy vested obligations totaling $178.8 million and $160.8 million as of July 31, 2022 and April 30, 2022, respectively. Unvested obligations under the deferred compensation plans totaled $17.5 million and $24.0 million as of July 31, 2022 and April 30, 2022, respectively.
The net increase in our working capital of $35.5 million as of July 31, 2022 compared to April 30, 2022 is primarily attributable to a decrease in compensation and benefits payable and an increase in accounts receivable, partially offset by a decrease in cash and cash equivalents. The decrease in cash and cash equivalents and compensation and benefits payable was primarily due to payments of annual bonuses earned in fiscal 2022 and paid during the first quarter of fiscal 2023. The increase in accounts receivable was due to an increase in fee revenue and an increase in days of sales outstanding, which went from 58 days to 69 days (which is consistent with historical experience) from April 30, 2022 to July 31, 2022. Cash used by operating activities was $231.9 million in the three months ended July 31, 2022, an increase in cash used of $71.4 million, compared to $160.5 million in the three months ended July 31, 2021.
Cash used in investing activities was $40.4 million in the three months ended July 31, 2022 compared to $10.4 million in the year-ago quarter. An increase in cash used in investing activities was primarily due to an increase in the purchase of marketable securities net of sale/maturities of $20.2 million, an increase in purchase of property, plant and equipment of $7.6 million and $2.2 million less in proceeds from life insurance policies during the three months ended July 31, 2022 compared to the year-ago quarter.
Cash used in financing activities was $51.0 million in the three months ended July 31, 2022 compared to $23.7 million in the three months ended July 31, 2021. The increase in cash used in financing activities was primarily due to increase in repurchases of the Company’s common stock of $21.9 million, $4.2 million more in cash used to repurchase shares of common stock to satisfy tax withholding requirements upon the vesting of restricted stock and increase in dividends paid to shareholders of $1.8 million in the three months ended July 31, 2022 compared to the year-ago quarter.
Cash Surrender Value of Company-Owned Life Insurance Policies, Net of Loans
We purchased COLI policies or contracts insuring the lives of certain employees eligible to participate in the deferred compensation and pension plans as a means of funding benefits under such plans. As of July 31, 2022 and April 30, 2022, we held contracts with gross cash surrender value (“CSV”) of $264.5 million and $263.2 million, respectively. Total outstanding borrowings against the CSV of COLI contracts was $79.8 million as of July 31, 2022 and April 30, 2022. Such borrowings do not require annual principal repayments, bear interest primarily at variable rates and are secured by the CSV of COLI contracts. At July 31, 2022 and April 30, 2022, the net cash surrender value of these policies was $184.7 million and $183.3 million, respectively.
Other than the factors discussed in this section, we are not aware of any other trends, demands or commitments that would materially affect liquidity or those that relate to our resources as of July 31, 2022.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements and have not entered into any transactions involving unconsolidated, special purpose entities. We had no material changes in contractual obligations as of July 31, 2022, as compared to those disclosed in our table of contractual obligations included in our Annual Report.
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Critical Accounting Policies
Preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and assumptions and changes in the estimates are reported in current operations as new information is learned or upon the amounts becoming fixed or determinable. In preparing our interim consolidated financial statements and accounting for the underlying transactions and balances, we apply our accounting policies as disclosed in the notes to our consolidated financial statements. We consider the policies related to revenue recognition, performance related bonuses, deferred compensation, carrying values of receivables, goodwill, intangible assets, leases and recoverability of deferred income taxes as critical to an understanding of our interim consolidated financial statements because their application places the most significant demands on management’s judgment and estimates. Specific risks for these critical accounting policies are described in the Form 10-K. There have been no material changes in our critical accounting policies since the end of fiscal 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of our global operating activities, we are exposed to certain market risks, including foreign currency exchange fluctuations and fluctuations in interest rates. We manage our exposure to these risks in the normal course of our business as described below.
Foreign Currency Risk
Substantially all our foreign subsidiaries’ operations are measured in their local currencies. Assets and liabilities are translated into U.S. dollars at the rates of exchange in effect at the end of each reporting period and revenue and expenses are translated at daily rates of exchange during the reporting period. Resulting translation adjustments are reported as a component of accumulated other comprehensive loss, net on our consolidated balance sheets.
Transactions denominated in a currency other than the reporting entity’s functional currency may give rise to foreign currency gains or losses that impact our results of operations. Historically, we have not realized significant foreign currency gains or losses on such transactions. During the three months ended July 31, 2022 and 2021, we recorded foreign currency losses of $0.3 million and $0.2 million, respectively, in general and administrative expenses in the consolidated statements of income.
Our exposure to foreign currency exchange rates is primarily driven by fluctuations involving the following currencies — U.S. Dollar, Pound Sterling, Canadian Dollar, Singapore Dollar, Euro, Swiss Franc, Mexican Peso, Danish Krone, Brazilian Real, South African Rand, Polish Zloty and Korean Won. Based on balances exposed to fluctuation in exchange rates between these currencies as of July 31, 2022, a 10% increase or decrease in the value of these currencies could result in a foreign exchange gain or loss of $13.8 million. We have a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. These foreign currency forward contracts are neither used for trading purposes nor are they designated as hedging instruments pursuant to Accounting Standards Codification 815, Derivatives and Hedging.
Interest Rate Risk
Our exposure to interest rate risk is limited to our Credit Facilities, borrowings against the CSV of COLI contracts and to a lesser extent our fixed income debt securities. As of July 31, 2022, there were no amounts outstanding under the Credit Facilities. At our option, loans issued under the Amended Credit Agreement bear interest at either Term SOFR or an alternate base rate, in each case plus the applicable interest rate margin. The interest rate applicable to loans outstanding under the Amended Credit Agreement may fluctuate between Term SOFR plus a SOFR adjustment of 0.10%, plus 1.125% per annum to 2.00% per annum, in the case of Term SOFR borrowings (or between the alternate base rate plus 0.125% per annum and the alternate base rate plus 1.00% per annum, in the alternative), based upon our total funded debt to adjusted EBITDA ratio (as set forth in the Amended Credit Agreement, the “consolidated net leverage ratio”) at such time. In addition, we are required to pay the lenders a quarterly commitment fee ranging from 0.175% to 0.300% per annum on the average daily unused amount of the Revolver, based upon our consolidated net leverage ratio at such time, a ticking fee of 0.20% per annum on the actual daily unused portion of the Delayed Draw Facility during the availability period of the Delayed Draw Facility, and fees relating to the issuance of letters of credit.
We had $79.8 million of borrowings against the CSV of COLI contracts as of both July 31, 2022 and April 30, 2022, bearing interest primarily at variable rates. The risk of fluctuations in these variable rates is minimized by the fact that we receive a corresponding adjustment to our borrowed funds crediting rate, which has the effect of increasing the CSV on our COLI contracts.
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Item 4. Controls and Procedures
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a) |
Evaluation of Disclosure Controls and Procedures. |
As of the end of the period covered by this Quarterly Report on Form 10-Q, management, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures and internal controls over financial reporting. Based on their evaluation of our disclosure controls and procedures conducted as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934 (the “Exchange Act”)) were effective as of July 31, 2022.
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b) |
Changes in Internal Control over Financial Reporting. |
There were no changes in our internal control over financial reporting during the three months ended July 31, 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in litigation both as a plaintiff and a defendant, relating to claims arising out of our operations. As of the date of this report, we are not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or results of operations.
Item 1A. Risk Factors
In our Form 10-K, we described the material factors, events, and uncertainties that make an investment in our securities risky. Those risk factors should be considered carefully, together with all other information in that Form 10-K and our subsequent filings with the SEC. It does not address all of the risks that we face, and additional risks not presently known to us or that we currently deem immaterial may also arise and impair our business operations. As of the date of this report, there have been no material changes to the risk factors described in our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table summarizes common stock repurchased by us during the quarter ended July 31, 2022:
|
|
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid Per Share |
|
|
Total Number of Shares Purchased as Part of Publicly- Announced Programs |
|
|
Approximate Dollar Value of Shares That May Yet be Purchased Under the Programs (2) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1, 2022— May 31, 2022 |
|
|
174,120 |
|
|
$ |
61.61 |
|
|
|
174,120 |
|
|
$18.4 million |
|
June 1, 2022— June 30, 2022 |
|
|
41,227 |
|
|
$ |
57.52 |
|
|
|
40,000 |
|
|
$316.1 million |
|
July 1, 2022— July 31, 2022 |
|
|
519,984 |
|
|
$ |
59.96 |
|
|
|
155,747 |
|
|
$306.7 million |
|
Total |
|
|
735,331 |
|
|
$ |
60.21 |
|
|
|
369,867 |
|
|
|
|
(1) |
Represents withholding of 365,464 shares to cover taxes on vested restricted shares, in addition to shares purchased as part of a publicly announced program. |
|
(2) |
On June 21, 2022, our Board of Directors approved an increase to the share repurchase program of $300 million. The shares can be repurchased in open market transactions or privately negotiated transactions at the Company’s discretion. The share repurchase program has no expiration date. We repurchased approximately $22.4 million of the Company’s common stock under the program during the first quarter of fiscal 2023. |
Our Amended Credit Agreement permits us to pay dividends to our stockholders and make share repurchases so long as there is no default under our Amended Credit Agreement, the consolidated net leverage ratio, which uses adjusted EBITDA, is no greater than 5.00 to 1.00 and we are in pro forma compliance with our financial covenant. Furthermore, our Notes allow the Company to pay $25 million of dividends per fiscal year with no restrictions plus an unlimited amount of dividends so long as the Company’s consolidated total leverage ratio is not greater than 3.50 to 1.00 and the Company is not in default under the indenture governing the Notes.
39
Item 6. Exhibits
|
Exhibit Number |
|
Description |
|
|
3.1* |
|
|
|
|
3.2* |
|
|
|
|
10.1* |
|
|
|
|
31.1 |
|
Chief Executive Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act. |
|
|
31.2 |
|
Chief Financial Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act.
|
|
|
32.1 |
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document. |
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
104 |
|
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2022, has been formatted in Inline XBRL and included as Exhibit 101. |
|
|
* |
Incorporated herein by reference. |
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Korn Ferry |
||
|
Date: September 8, 2022 |
|
|
|
|
|
By: |
|
/s/ Robert P. Rozek |
|
|
|
|
Robert P. Rozek |
|
|
|
|
Executive Vice President, Chief Financial Officer and Chief Corporate Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer) |
41