Korn Ferry Announces Second Quarter Fiscal 2014 Results of Operations

LOS ANGELES, Dec. 4, 2013 /PRNewswire/ -- Korn Ferry (NYSE: KFY), a single source of leadership and talent consulting services, today announced record second quarter results with fee revenue of $238.0 million and adjusted diluted earnings per share of $0.41, excluding separation charges of $2.0 million.  Including such charges, diluted earnings per share was $0.38 in the three months ended October 31, 2013.

"I am extremely proud of what Korn Ferry has accomplished.  The second quarter represented the strongest top line results in the company's history and represents a 23% year over year increase in fee revenue, or 8% excluding the prior year acquisitions, on a constant currency basis.   Once again, we delivered strong margin expansion and earnings per share growth in the quarter.  Our firm's alignment to broad talent management offerings is taking hold, as evidenced by our non-Search businesses generating 41% of the revenue mix aided by the performance of the prior year acquisitions – an all-time high," said Gary D. Burnison, CEO of Korn Ferry.  "In the current economy, the winning companies will be those that can find and develop outperforming leaders in an underperforming economy.  This environment is creating an opportunity for Korn Ferry – as we help clients drive growth by more effectively linking their business and talent strategies."

Fee revenue was $238.0 million in Q2 FY'14, an increase of $41.8 million, or 23% on a constant currency basis (21% at actual exchange rates), compared to Q2 FY'13, primarily due to an increase of $27.6 million and $12.3 million in fee revenue in Leadership & Talent Consulting and Executive Recruitment, respectively.  The overall fee revenue increase was driven by fee revenue growth in the life science/healthcare, industrial, technology and financial services sectors.  Excluding the PDI Ninth House and Global Novations acquisitions (the "prior year acquisitions"), fee revenue increased 7% in Q2 FY'14 compared to the year-ago quarter (8% on a constant currency basis) to $204.7 million in Q2 FY'14 from $191.0 million in Q2 FY'13.

Compensation and benefit expenses were $161.3 million in Q2 FY'14, an increase of $28.2 million, or 21%, compared to Q2 FY'13.  The prior year acquisitions contributed $14.5 million to the increase in compensation and benefit expenses.  The remainder of the increase was due to an increase in performance related bonus expense, salaries and related payroll taxes and an increase in expense associated with company contributions to deferred compensation plans.  The increase in the performance related bonus expense resulted from an increase in fee revenue and profitability. The increase in salaries and related payroll taxes was due to an increase in the headcount in both Futurestep and Leadership & Talent Consulting.

General and administrative expenses were $35.8 million in Q2 FY'14, an increase of $2.4 million, or 7%, compared to Q2 FY'13.  The prior year acquisitions contributed $3.6 million to the increase in general and administrative expenses in Q2 FY'14 compared to Q2 FY'13.  Excluding the costs from the prior year acquisitions, there was a decline in general and administrative expenses of $1.2 million during the same period.  The decline was due to a gain as a result of favorable exchange rates in Q2 FY'14 compared to Q2 FY'13 and a decrease in business development expenses.

Adjusted EBITDA was $36.7 million in Q2 FY'14, an increase of $12.3 million, or 50%, compared to Q2 FY'13.  Adjusted EBITDA margin was 15.4% and 12.5% in Q2 FY'14 and Q2 FY'13, respectively. 

On a GAAP basis, operating income was $23.2 million in Q2 FY'14, an increase of $20.4 million, or 729%, compared to Q2 FY'13 resulting in a margin of 9.7% in the current quarter compared to 1.4% in the year-ago quarter. 

Balance Sheet and Liquidity

Cash and marketable securities were $314.9 million at October 31, 2013, compared to $366.0 million at April 30, 2013.  Cash and marketable securities include $118.0 million held in trust for deferred compensation plans at October 31, 2013, compared to $98.0 million at April 30, 2013.  Cash and marketable securities decreased by $51.1 million from April 30, 2013, mainly due to Q1 FY'14 payments of FY'13 annual bonuses and contingent consideration paid to selling shareholders of PDI Ninth House partially offset by cash provided by operating activities.

Executive Recruitment

Fee revenue was $140.1 million in Q2 FY'14, an increase of $12.3 million, or 11% on a constant currency basis (10% at actual exchange rates), compared to Q2 FY'13.  The increase in fee revenue was driven by fee revenue increases in all regions with the largest increases in North America and Asia.  This increase is primarily attributed to a 12% increase in the number of executive recruitment engagements billed, partially offset by a 2% decrease in the weighted-average fee billed per engagement compared to the year-ago quarter. 

Adjusted EBITDA was $30.7 million during Q2 FY'14, an increase of $7.5 million, or 32%, compared to Q2 FY'13.  Adjusted EBITDA margin was 21.9%, in Q2 FY'14 compared to 18.2% in Q2 FY'13.  This increase is primarily attributed to the $12.3 million increase in fee revenue in Q2 FY'14 as compared to Q2 FY'13, combined with a decrease of $1.1 million in general and administrative expenses, partially offset by an increase of $6.8 million in compensation and benefit expenses driven primarily by an increase in performance related bonus expense. 

On a GAAP basis, operating income was $28.1 million in Q2 FY'14, an increase of $17.6 million, or 168% ($6.9 million, or 33% on an adjusted basis), compared to Q2 FY'13, resulting in an operating margin of 20.1% in the current quarter compared to 8.1% in the year-ago quarter. 

Leadership & Talent Consulting

Fee revenue was $66.0 million in Q2 FY'14, an increase of $27.6 million, or 73% on a constant currency basis (72% at actual exchange rates), from the year-ago quarter.  Excluding the prior year acquisitions, fee revenue was essentially flat on a constant currency basis, in Q2 FY'14 compared to Q2 FY'13, but up 3% sequentially.  

Adjusted EBITDA was $10.3 million during Q2 FY'14, an increase of $2.3 million, or 29%, compared to Q2 FY'13.  Adjusted EBITDA margin was 15.5% compared to 20.7% in Q2 FY'13.  The increase in adjusted EBITDA is due to an increase in fee revenue, partially offset by an increase in compensation and benefit expenses, both primarily related to the prior year acquisitions. 

On a GAAP basis, operating income was $7.0 million in Q2 FY'14, an increase of $0.8 million, or 13%, compared to Q2 FY'13 driven by an increase in productivity as measured by staff utilization.  Operating margin was 10.6% in the current quarter compared to 16.3% in the year-ago quarter.

Futurestep

Fee revenue was $31.9 million in Q2 FY'14, an increase of $1.9 million, or 8% on a constant currency basis (6% at actual exchange rates), compared to the year-ago quarter.  The increase in fee revenue was driven by a 4% increase in the number of engagements billed and a 2% increase in weighted-average fee billed per engagement in Q2 FY'14 compared to Q2 FY'13 driven by increases in recruitment process outsourcing and non-executive and other professional recruitment.

Adjusted EBITDA was $3.0 million during Q2 FY'14, a decrease of $0.6 million, or 17%, compared to Q2 FY'13.  Adjusted EBITDA margin decreased to 9.3% in Q2 FY'14 compared to 12.1% in Q2 FY'13.  The decrease in Adjusted EBITDA and Adjusted EBITDA margin was primarily due to an increase of $1.9 million in compensation and benefit expenses, an increase in cost of services expense of $0.4 million, and an increase in general and administrative of $0.2 million, partially offset by an increase in fee revenue of $1.9 million.  The increase in compensation and benefit expenses was driven by an increase in salaries and related payroll taxes due to a 13% increase in the average headcount primarily associated with an increase in staffing to accommodate a number of larger recruitment process outsourcing contracts won by the Company in the quarter and for which delivery will occur in subsequent periods. 

On a GAAP basis, operating income was $2.6 million in Q2 FY'14, an increase of $2.4 million, compared to Q2 FY'13 resulting in an operating margin of 8.0% in the current quarter compared to 0.8% in the year-ago quarter. 

Outlook          

The third quarter is our seasonal low quarter due to the heavy concentration of holidays which results in lower productivity.  Given this and assuming worldwide economic conditions, financial markets and foreign exchange rates remain steady, fee revenue is expected to be in the range of $221 million to $237 million in Q3 FY'14 and diluted earnings per share are likely to be in the range of $0.30 to $0.38.

Earnings Conference Call Webcast

The earnings conference call will be held today at 5:00 PM (EST) and hosted by CEO Gary Burnison, CFO Robert Rozek and SVP Finance Gregg Kvochak.  The conference call will be webcast and available online at www.kornferry.com, accessible through the Investor Relations section.

About Korn Ferry

At Korn Ferry, we design, build, attract and ignite talent.  Since our inception, clients have trusted us to help recruit world-class leadership.  Today, we are a single source for leadership and talent consulting services to empower businesses and leaders to reach their goals.  Our solutions range from executive recruitment and leadership development programs, to enterprise learning, succession planning and recruitment process outsourcing (RPO).  Visit www.kornferry.com for more information on Korn Ferry, and www.kornferryinstitute.com for thought leadership, intellectual property and research.

Forward-Looking Statements

Statements in this press release and our conference call that relate to future results and events ("forward-looking statements") are based on Korn Ferry's current expectations.  These statements, which include words such as "believes", "expects" or "likely" include references to our outlook.  Readers are cautioned not to place undue reliance on such statements.  Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties that are beyond the control of Korn Ferry.  The potential risks and uncertainties include those relating to competition, the dependence on attracting and retaining qualified and experienced consultants, our ability to successfully integrate acquired businesses, maintaining our brand name and professional reputation, potential legal liability, the portability of client relationships, global and local political or economic developments in or affecting countries where we have operations, currency fluctuations in our international operations, risks related to the growth, alignment of our cost structure with our growth, restrictions imposed by off-limits agreements, reliance on information processing systems, cyber security vulnerabilities, limited protection of our intellectual property, our ability to enhance and develop new technology, our ability to develop new products and services, consolidation of industries we serve, our ability to successfully recover from a disaster or other business continuity problems, changes in our accounting estimates/assumptions, impairment of goodwill and other intangible assets, deferred tax assets, seasonality and employment liability risk.  For a detailed description of risks and uncertainties that could cause differences, please refer to Korn Ferry's periodic filings with the Securities and Exchange Commission.  Korn Ferry disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Use of Non-GAAP Financial Measures

This press release contains financial information calculated other than in accordance with U.S. Generally Accepted Accounting Principles ("GAAP").  In particular, it includes:

• adjusted operating income and operating margin, adjusted to exclude restructuring (net of recoveries) and/or transaction, integration/acquisition and separation costs;
• adjusted net income, adjusted to exclude restructuring (net of recoveries) and/or transaction, integration/acquisition and separation costs, net of income tax effect;
• adjusted basic and diluted earnings per share, adjusted to exclude restructuring (net of recoveries) and/or transaction,  integration/acquisition and separation costs, net of income tax effect;
• constant currency amounts that represent the outcome that would have resulted had exchange rates in the reported period been the same as those in effect in the comparable prior year period;
• EBITDA, or earnings before interest, taxes, depreciation and amortization and EBITDA margin; and
• adjusted EBITDA, which is EBITDA further adjusted to exclude restructuring (net of recoveries) and/or transaction, integration/acquisition and separation costs, and adjusted EBITDA margin.

This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial information determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Management believes the presentation of non-GAAP financial measures in this press release provides meaningful supplemental information regarding Korn Ferry's performance by excluding certain charges and other items that may not be indicative of Korn Ferry's ongoing operating results.  The use of these non-GAAP financial measures facilitate comparisons to Korn Ferry's historical performance.  Korn Ferry includes these non-GAAP financial measures because management believes they are 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.  In the case of constant currency amounts, management believes the presentation of such information provides meaningful supplemental information regarding Korn Ferry's performance as excluding the impact of exchange rate changes on Korn Ferry's financial performance allows investors to make more meaningful period-to-period comparisons of the Company's operating results, to better identify operating trends that may otherwise be masked or distorted by exchange rate changes and to perform related trend analysis, and provides a higher degree of transparency of information used by management in its evaluation of Korn Ferry's ongoing operations and financial and operational decision-making.

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SOURCE Korn Ferry