Korn Ferry International Announces First Quarter Fiscal 2015 Results of Operations

LOS ANGELES, Sept. 8, 2014 /PRNewswire/ -- Korn/Ferry International (NYSE: KFY), a single source of leadership and talent consulting services, today announced first quarter fee revenue of $251.2 million and adjusted diluted earnings per share of $0.43, excluding restructuring charges of $9.9 million.  Including such costs, diluted earnings per share was $0.29 in the three months ended July 31, 2014.

"I'm pleased with Korn Ferry's performance during the quarter and our continued profitability.  I am especially proud that all three service lines showed growth during the quarter resulting in a fee revenue increase of 10%, with an adjusted diluted earnings per share of $0.43, up 30% year over year," said Gary D. Burnison, CEO of Korn Ferry.  "The needs of global organizations are rapidly changing.  While finding and recruiting the right executives is critical, companies are also seeking our expertise and offerings to help redefine their business through talent."

Fee revenue was $251.2 million in Q1 FY'15, an increase of $22.8 million, or 10.0% (8.9% on a constant currency basis), compared to Q1 FY'14, primarily driven by an $11.8 million, $7.5 million, and a $3.5 million increase in fee revenue in Executive Recruitment, Futurestep and Leadership & Talent Consulting, respectively.  The overall fee revenue increase was driven by fee revenue growth in all of our major markets - industrial, life science/healthcare, technology, financial services, and consumer.

Compensation and benefit expenses were $169.1 million in Q1 FY'15, an increase of $16.3 million, or 10.7%, compared to the year-ago quarter.  The increase was due to an increase in performance related bonus expense resulting from the increase in fee revenue and profitability, as well as an increase in salaries and related payroll taxes. These increases were partially offset by $2.5 million in management separation charges recorded in Q1 FY'14 with no such charge in Q1 FY'15. The increase in salaries and related payroll taxes was due to an increase in the average headcount in Executive Recruitment and Futurestep in Q1 FY'15 compared to Q1 FY'14, reflecting our continued growth-related investments back into our business. 

General and administrative expenses were $37.4 million in Q1 FY'15, a decrease of $2.5 million, or 6.3%, from Q1 FY'14, primarily due to a decrease of $2.5 million in legal and other professional fees, a decrease in marketing and business development expenses of $1.5 million, and a decrease in integration/acquisition costs of $0.4 million, partially offset by an increase of $0.8 million in foreign exchange loss in Q1 FY'15 compared to the year-ago quarter.

As previously disclosed, during Q1 FY'15, the Company took actions to rationalize its cost structure as a result of efficiencies obtained from prior year technology investments that enabled further integration of our legacy business and our recent acquisitions as well as other cost saving initiatives.  As a result, the Company recorded net restructuring charges of $9.9 million in Q1 FY'15 compared to restructuring charges of $3.7 million in Q1 FY'14.  Adjusted EBITDA was $37.9 million in Q1 FY'15, an increase of $6.0 million, or 18.8%, compared to Q1 FY'14.  Adjusted EBITDA margin was 15.1% and 14.0% in Q1 FY'15 and Q1 FY'14, respectively. 

On a GAAP basis, operating income was $18.6 million in Q1 FY'15 and $16.6 million in Q1 FY'14 resulting in an operating margin of 7.4% in the current quarter compared to 7.3% in the year-ago quarter.  Operating income was impacted by all of the above items, including an increase in depreciation and amortization of $0.9 million in Q1 FY'15 compared to Q1 FY'14.

Balance Sheet and Liquidity

Cash and marketable securities were $371.6 million at July 31, 2014, compared to $468.3 million at April 30, 2014.  Cash and marketable securities include $116.7 million held in trust for deferred compensation plans at July 31, 2014, compared to $116.2 million at April 30, 2014.  Cash and marketable securities decreased by $96.7 million from April 30, 2014, primarily due to the payment of bonuses earned in fiscal 2014 and paid during the first quarter of fiscal 2015, partially offset by cash provided by operating activities.

Executive Recruitment

Fee revenue was $148.4 million in Q1 FY'15, an increase of $11.8 million, or 8.6% (7.6% on a constant currency basis), compared to Q1 FY'14.  The increase in fee revenue was driven by increases in North America of $8.2 million or 11.1% and Europe of $5.9 million or 17.2%, partially offset by decreases in Asia Pacific of $1.6 million or 7.6% and Latin America of $0.7 million or 10.0%.  This overall increase is primarily attributed to an 8.7% increase in the number of executive recruitment engagements billed in Q1 FY'15 compared to the Q1 FY'14. 

Adjusted EBITDA was $31.9 million and $31.8 million during Q1 FY'15 and Q1 FY'14, respectively.  Adjusted EBITDA remained flat year over year in spite of the increase in fee revenue primarily due to an increase in compensation and benefits expense of $9.5 million associated with the investments in headcount to grow our business (an increase in the average headcount of 85 positions), as well as increased demand in our incentive compensation resulting from the continued adoption of our strategy, including referrals between lines of business.  In addition, general and administrative expenses are up $1.9 million in Q1 FY'15 compared to Q1 FY'14, partially due to increased levels of business activity as well as other increases such as foreign exchange loss and premise and office costs. 

On a GAAP basis, operating income was $24.2 million in Q1 FY'15, a decrease of $4.1 million, or 14.5%, compared to Q1 FY'14, resulting in an operating margin of 16.3% in the current quarter compared to 20.7% in the year-ago quarter.  The decline in operating income was due to an increase in restructuring charges of $4.2 million as well as the factors impacting Adjusted EBITDA as discussed above.

Leadership & Talent Consulting

Fee revenue was $63.6 million in Q1 FY'15, an increase of $3.5 million, or 5.8% (5.0% on a constant currency basis), from the year-ago quarter.  The increase in fee revenue was primarily driven by an increase in fee revenue in North America.  This increase is primarily attributed to an increase in consulting fee revenue of $2.7 million and an increase in product revenue of $0.8 million in Q1 FY'15 compared to Q1 FY'14.

Adjusted EBITDA was $9.7 million during Q1 FY'15, an increase of $1.3 million, or 15.5%, compared to Q1 FY'14.  Adjusted EBITDA margin was 15.2% in Q1 FY'15 compared to 14.0% in Q1 FY'14 due to an increase in fee revenue of $3.5 million, a decrease in cost of services and general and administrative expenses of $1.4 million and $0.8 million, respectively, partially offset by an increase in compensation and benefit expense of $4.6 million.  The decrease in cost of services primarily relates to an increased focus on the utilization of internal resources versus outside contractors as evidenced by the 500 basis points increase in our staff utilization.  The decrease in general and administrative expenses related to lower marketing and business development expenses in Q1 FY'15 compared to  Q1 FY'14, as last year's quarter included higher than normal costs related to the integration of the PDI Ninth House and Global Novations LLC acquisitions into the Leadership & Talent Consulting business.  The increase in compensation and benefit expenses was due to an increase in performance related bonus expense resulting from higher fee revenue, profitability, and the continued adoption of the company's integrated go-to market strategy across all three of our lines of businesses.

On a GAAP basis, operating income was $3.4 million in Q1 FY'15, a decrease of $0.9 million compared to the year-ago quarter, resulting in an operating margin of 5.4% in the current quarter compared to 7.2% in the year-ago quarter.  The decline in operating income was due to an increase in restructuring charges of $1.6 million as well as the factors impacting Adjusted EBITDA as discussed above.

Futurestep

Fee revenue was $39.2 million in Q1 FY'15, an increase of $7.5 million, or 23.7% (21.8% on a constant currency basis), compared to the year-ago quarter.  The increase in fee revenue was driven by a 23.3% increase in the weighted average fees billed per engagement in Q1 FY'15 compared to Q1 FY'14 resulting from a 48% increase in fee revenue from recruitment process outsourcing and a 13% increase in professional recruitment.

Adjusted EBITDA was $5.3 million during Q1 FY'15, an increase of $0.6 million, or 12.8%, compared to Q1 FY'14, due primarily to the increase in fee revenue of $7.5 million, offset by an increase in compensation and benefit expenses of $5.4 million due to an increase in salaries and related payroll taxes and performance related bonus expense, both related to an increase in profitability and headcount as well as the continued adoption of our strategy, including referrals between lines of business.  In addition, the use of outside contractors (cost of services expense) increased $1.1 million driven by the growth in our recruitment process outsourcing business and a decrease in other income of $0.6 million in Q1 FY'15 compared to the year-ago quarter.

On a GAAP basis, operating income was $3.5 million in Q1 FY'15, an increase of $1.0 million, compared to Q1 FY'14, resulting in an operating margin of 8.8% in the current quarter compared to 8.0% in the year-ago quarter.  Operating income and operating margin for Q1 FY'15 were negatively impacted by a $0.2 million increase in restructuring charges as compared to Q1 FY'14, as well as the items from above, except other income. 

Outlook                                                        

Assuming worldwide economic conditions, financial markets and foreign exchange rates remain steady, and factoring in the impact of the Q1 restructuring, fee revenue is expected to be in the range of $244 million to $254 million in Q2 FY'15 and diluted earnings per share are likely to be in the range of $0.42 to $0.48.

Earnings Conference Call Webcast

The earnings conference call will be held today at 4:30 PM (EDT) 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.  We will also post to this section of our website earnings slides, which will accompany our webcast, and other important information, and encourage you to review the information that we make available on our website.

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, our ability to successfully rationalize our cost structure 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, integration/acquisition and separation costs;
• adjusted net income, adjusted to exclude restructuring, integration/acquisition and separation costs, net of income tax effect;
• adjusted basic and diluted earnings per share, adjusted to exclude restructuring, 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, 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

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