Korn/Ferry International Announces Third Quarter Fiscal 2013 Results of Operations

LOS ANGELES, March 6, 2013 /PRNewswire/ -- Korn/Ferry International (NYSE: KFY), a premier global provider of talent management solutions, announced third quarter adjusted diluted earnings per share of $0.31 compared to adjusted diluted earnings per share of $0.26 in the three months ended January 31, 2012, excluding restructuring, transaction and integration, and separation costs, of $7.5 million and $0.9 million, respectively.  Including such costs, diluted earnings per share was $0.20 and $0.25 in the three months ended January 31, 2013 and 2012, respectively.

"I am pleased with the results of our fiscal 2013 third quarter, which once again included year over year growth within our broader talent management offerings," said Gary D. Burnison, CEO of Korn/Ferry International.  "Korn/Ferry continues to evolve from finding great people, to finding out 'who they are,' to helping companies design, build and develop winning teams through the right combination of talent. As the world continues to evolve, we are at the forefront—agile and committed to defining who we are, one client, one candidate at a time."

As a global provider of talent management solutions, Korn/Ferry contributes to the success of its clients by more efficiently and effectively linking their business and talent strategies.  Korn/Ferry helps create high performing organizations through three broad categories: Talent Strategy Design, Talent Development and Talent Attraction.

As part of its talent strategy design capabilities, Korn/Ferry offers organizational design, strategy and talent alignment and integrated talent management solutions.  In helping clients build and develop talent capability, Korn/Ferry offers board effectiveness, succession planning, CEO and top team effectiveness, assessment, leadership and employee development, diversity and inclusion consulting and on-line and branded learning products and offerings.  Talent attraction solutions include board, executive, professional and project recruitment; recruitment process outsourcing; on-boarding; and, talent communications and employer branding.

Results for the three months ended January 31, 2013

Fee revenue was $202.0 million in the three months ended January 31, 2013, an increase of $16.1 million, or 9%, compared to the year-ago quarter, due to a $13.1 million and $4.5 million increase in fee revenue in Leadership & Talent Consulting and Futurestep, respectively, partially offset by a decrease in fee revenue of $1.5 million in Executive Recruitment.  The increase in fee revenue was driven by increases in the majority of market sectors with the largest increases in financial services, life science/healthcare, consumer and technology sectors, partially offset by a decrease in the industrial sector. 

Excluding PDI Ninth House and Global Novations, fee revenue was $190.4 million in the three months ended January 31, 2013, an increase of $4.5 million, or 2% compared to the year-ago quarter.  This increase in fee revenue was primarily attributable to an increase in Futurestep fee revenue and to a lesser extent, an increase in Leadership & Talent Consulting fee revenue, offset by a decrease in Executive Recruitment fee revenue as described in the following results for each segment below.

Compensation and benefit expenses were $139.8 million in three months ended January 31, 2013, an increase of $14.1 million, or 11%, compared to the year-ago quarter.  The acquisitions of PDI Ninth House and Global Novations contributed 7% to the increase in compensation and benefit expenses.  Compensation and benefit expenses were also higher due to an increase in performance related bonus expense.  Also included in compensation and benefit expenses was a decrease in salaries and related payroll taxes due to lower consultant headcount in Executive Recruitment and Futurestep mainly due to our restructuring efforts in Q2 FY'13. This decrease was primarily offset by an increase in outside contractor expense (temporary service personnel) and an increase in the fair value of amounts owed under certain deferred compensation plans, which was partially offset by an increase in the fair value of marketable securities classified as trading recorded in other income (loss).

General and administrative expenses were $35.9 million in the three months ended January 31, 2013, an increase of $0.7 million, or 2%, from the year-ago quarter.  PDI Ninth House and Global Novations contributed $2.0 million to the increase in general and administrative expenses for the three months ended January 31, 2013 and the Company incurred transaction and integration cost of $2.5 million as a result of the acquisition of PDI Ninth House.  These increases in general and administrative expenses were offset by a decrease in legal and other professional service fees and a foreign exchange gain in the current quarter compared to a foreign exchange loss in the year-ago quarter.

As previously disclosed, during the three months ended January 31, 2013, the Company took steps to integrate PDI Ninth House. As a result, the Company recorded restructuring charges of $4.4 million in order to eliminate redundant positions.

Excluding restructuring, transaction and integration, and separation costs, adjusted operating income was $16.2 million, during the three months ended January 31, 2013, a decrease of $0.9 million, or 5%, compared to the year-ago quarter.  Adjusted operating margin declined by 1.2 percentage points primarily due to a change in mix of fee revenues and various expense items described above.  On a GAAP basis, including restructuring, transaction and integration, and separation charges, operating income was $8.7 million in three months ended January 31, 2013, a decrease of $7.5 million, or 46%, compared to the year-ago quarter. 

Balance Sheet and Liquidity

Cash and marketable securities were $305.3 million and $352.4 million at January 31, 2013 and 2012, respectively, compared to $417.7 million at April 30, 2012.  Cash and marketable securities include $95.8 million and $80.5 million held in trust for deferred compensation plans at January 31, 2013 and 2012, respectively, compared to $82.2 million at April 30, 2012.  Cash and marketable securities decreased by $112.4 million from April 30, 2012, mainly due to the payment of FY'12 annual bonuses in Q1 FY'13 and the payment for the acquisitions of PDI Ninth House and Global Novations in the nine months ended January 31, 2013, partially offset by cash provided by operating activities.

Results by Segment

In Q1 FY'13, the Company began reporting its Leadership & Talent Consulting business as a separate segment.  The Company reports its results in three global business segments: Executive Recruitment, Leadership & Talent Consulting and Futurestep.  This change has no impact on previously reported consolidated net income or earnings per share.

Results for the three months ended January 31, 2013 – Executive Recruitment

Within our Executive Recruitment segment, we offer Board of Director and C-level recruitment as well as a robust set of research-based interviewing and onboarding solutions. Our industry leading executive recruitment offering is backed by the strength of our statistically validated assessment tools, which have been proven to improve candidate fit as well as the results of our search process. Korn/Ferry provides its offerings in over 75 offices on six continents.

Fee revenue was $130.5 million in the three months ended January 31, 2013, a decrease of $1.5 million, or 1%, when compared with the year-ago quarter.  Fee revenue decreased slightly in Europe and North America while Asia and Latin America were relatively flat compared to the year-ago quarter.  The decrease in fee revenues was due to a 2% decrease in the number of executive recruitment engagements billed, offset by a 1% increase in the weighted-average fee billed per engagement compared to the year-ago quarter.

Excluding restructuring and separation charges, adjusted operating income was $22.2 million in the three months ended January 31, 2013, a decrease of $0.9 million, or 4%, compared year-ago quarter.  This decrease is primarily attributable to an increase in compensation and benefits expense of $1.9 million in the three months ended January 31, 2013 compared to the year-ago quarter and a decrease in fee revenue of $1.5 million, offset by a decrease in general and administrative expense of $3.2 million. The increase in compensation and benefits expense primarily resulted from an increase in performance related bonus expense and an increase in the fair value of amounts owed under certain compensation plans during the period, offset by a decrease salaries and related payroll taxes due to lower consultant headcount. The decrease in general and administrative expenses was primarily due to favorable foreign exchange rates in the current quarter compared to the year-ago quarter, a decrease in bad debt expense due to a decline in historical bad debt trends, and a reduction in premise expense due to our restructuring in Q2 FY'13.

Results for the three months ended January 31, 2013 – Leadership & Talent Consulting

As a preeminent leadership firm, we help teams and organizations drive accelerated business results and achieve sustainable change. Our Leadership & Talent Consulting segment, operating in 19 countries around the world with 979 colleagues, includes both consulting services and product revenue.  Service and product offerings in this segment include: Leadership Strategy, Board, CEO and Top Team Effectiveness, Succession Planning, Assessment, Leadership and Employee Development, Diversity and Inclusion as well as a rich library of online and blended learning modules.

Fee revenue was $41.2 million in the three months ended January 31, 2013, an increase of $13.1 million, or 47%, from the year-ago quarter.  The improvement in fee revenue was driven by the acquisitions of PDI Ninth House and Global Novations.  Also contributing to the increase in fee revenue was an increase in product revenue and consulting fee revenue due to an increase in consulting fee revenue per client.  Excluding PDI Ninth House and Global Novations, the fee revenue increased 5%, which was driven by increases in fee revenue in North America and Asia.

Excluding restructuring charges, adjusted operating income was $1.6 million in the three months ended January 31, 2013, a decrease of $3.6 million, or 69%, compared to the year-ago quarter.  The decrease is primarily attributed to lower billable hours resulting from the ongoing integration activities associated with integrating both PDI Ninth House and Global Novations into our legacy Leadership & Talent Consulting business. Fee revenues and operating income were also adversely affected by lower realized revenue per billable hour and lower new business volumes. In addition, amortization increased by $0.9 million due to the acquisitions of PDI Ninth House and Global Novations, bad debt expense increased and the use of contractors increased due to the mix of work in the current quarter compared to the year earlier quarter.  On a GAAP basis, and thus including restructuring charges of $4.4 million in the three months January 31, 2013, operating loss was $2.8 million, a decrease of $8.0 million compared to the year-ago quarter. 

Results for the three months ended January 31, 2013 – Futurestep

Futurestep is a global industry leader in high impact enterprise wide consulting and recruitment solutions. Operating in 17 countries with 792 colleagues, Futurestep can meet a variety of workforce requirements; from Recruitment Process Outsourcing (RPO) and project recruitment to professional and knowledge worker search to talent consulting offerings. This segment also includes revenue from helping organizations design and develop their Employer Brand as well as build robust pools of future employees through our Talent Communities and Communications offering.

Fee revenue was $30.3 million in the three months ended January 31, 2013, an increase of $4.5 million, or 17%, compared to the year-ago quarter.  The improvement in fee revenue was driven by a 14% increase in the number of engagements billed and a 2% increase in the weighted average fee per engagement.  The increase in fee revenue was due to an increase in recruitment process outsourcing and middle management recruitment. 

Excluding restructuring charges, adjusted operating income was $3.7 million in the three months ended January 31, 2013, an increase of $2.1 million, or 131%, compared to the year-ago quarter.  The increase in operating income was due primarily to the increase in fee revenue, partially offset by an increase in compensation and benefit expenses of $1.3 million due in large part to the increase in performance related bonus expense. 

Outlook

In looking ahead to Q4 FY'13, assuming worldwide economic conditions, financial markets and foreign exchange rates remain steady, Q4 FY'13 fee revenue is likely to be in the range of $210 million to $230 million.  In Q4 FY'13, as we drive the next phase of our worldwide integration with PDI-Ninth House which involves the consolidation and elimination of redundant office space around the world, lease termination, fixed asset write-offs and other charges associated with the consolidation are estimated to be in the range of $3.5 million to $5.5 million and are estimated to result in $2.0 million to $3.0 million of annual savings starting primarily in FY'14.  Excluding these estimated charges, adjusted diluted earnings per share in the fourth quarter are likely to be in the range of $0.28 to $0.34 with diluted earnings per share as measured by generally accepted accounting principles likely to be in the range of $0.21 to $0.29.  

Earnings Conference Call Webcast

The earnings conference call will be held today at 4:30 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.

Korn/Ferry International (NYSE: KFY), with a presence throughout the Americas, Asia Pacific, Europe, the Middle East and Africa, is a premier global provider of talent management solutions.  Based in Los Angeles, the firm delivers an array of solutions that help clients to attract, deploy, develop and reward their talent.  Visit www.kornferry.com for more information on the Korn/Ferry International family of companies, 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, 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 successfully integrate acquired businesses, including PDI Ninth House, our ability to develop new products and services, 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 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, transaction and integration and separation costs;
• adjusted net income, adjusted to exclude restructuring, transaction and integration and separation costs, net income tax effect;
• adjusted basic and diluted earnings per share, adjusted to exclude restructuring, transaction and integration and separation costs;
• EBITDA, or earnings before interest, taxes, depreciation and amortization and EBITDA margin; and
• adjusted EBITDA, which is EBITDA further adjusted to exclude restructuring, transaction and integration 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. 

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SOURCE Korn/Ferry International