Korn Ferry International Announces Second Quarter Fiscal 2016 Results of Operations

LOS ANGELES, Dec. 9, 2015 /PRNewswire/ -- Korn/Ferry International (NYSE: KFY), the preeminent global people and organizational advisory firm, today announced second quarter fee revenue of $280.6 million and adjusted diluted earnings per share of $0.51, excluding integration/acquisition costs of $12.0 million.  On a GAAP basis, diluted earnings per share was $0.35 in the three months ended October 31, 2015.

"In our recently completed second fiscal quarter, I am proud to report that Korn Ferry generated the strongest topline results in the Company's history, representing a 16% year-over-year increase in fee revenue on a constant currency basis," said Gary D. Burnison, CEO, Korn Ferry.  "Now with the close of our acquisition of Hay Group, we have unified two great organizations to create the preeminent advisor for an organization and its people.  As a combined firm, we have an unrivaled ability to address the entire talent continuum, a move that affirms the critical role that people and leadership play in driving organization performance."

Fee revenue was $280.6 million in Q2 FY'16, an increase of $24.9 million, or 9.7% ($41.3 million, or 16.2% on a constant currency basis), compared to Q2 FY'15, primarily due to increases of $10.1 million, $7.5 million, and $7.3 million in fee revenue in Futurestep, Executive Recruitment, and Leadership & Talent Consulting, respectively.  The overall fee revenue increase was driven by fee revenue growth in certain of our major markets – financial services, life science/healthcare, technology and education/non-profit, partially offset by a decline in industrial and consumer goods.

Compensation and benefit expenses were $188.6 million in Q2 FY'16, an increase of $13.9 million, or 8.0%, compared to the year-ago quarter.  The increase was driven, in part, by higher salaries (increase of $9.3 million) due to a 19.9% increase in the average consultant headcount in Q2 FY'16 compared to Q2 FY'15 and $3.3 million in integration costs associated with the Hay Group acquisition.

General and administrative expenses were $44.6 million in Q2 FY'16, an increase of $14.5 million compared to Q2 FY'15.  The increase was driven by acquisition costs of $8.6 million that were incurred in Q2 FY'16 related to the Hay Group acquisition and from the fact that in Q2 FY'15, the Company received a $6.2 million insurance reimbursement that reduced legal fees in Q2 FY'15.  Neutralizing the effect of these items, general and administrative expenses were essentially flat year-over-year.

Adjusted EBITDA was $46.0 million in Q2 FY'16, an increase of $2.0 million, or 4.5%, compared to Q2 FY'15.  Adjusted EBITDA margin was 16.4% in Q2 FY'16 and 17.2% in Q2 FY'15.  Adjusted EBITDA margin for Q2 FY'15 was favorably impacted (by approximately 90 basis points) by the insurance reimbursement discussed above, partially offset by higher other professional fees and additional performance-related bonus expense.

On a GAAP basis, operating income was $29.0 million in Q2 FY'16 and $34.4 million in Q2 FY'15, resulting in an operating margin of 10.3% in Q2 FY'16 compared to 13.5% in the year-ago quarter.  The decrease in operating income was due to the increases in compensation and benefit expenses and general and administrative expenses as discussed above, offset by an increase in fee revenue.

Balance Sheet and Liquidity

Cash and marketable securities were $417.7 million at October 31, 2015, compared to $525.4 million at April 30, 2015.  Cash and marketable securities decreased by $107.7 million from April 30, 2015, primarily due to Q1 FY'16 payments of FY'15 annual bonuses and $10.3 million in dividend payments made to stockholders during the year, partially offset by cash provided by operating activities.  Net of amounts held in trust for deferred compensation plans and accrued bonuses, cash and marketable securities were $186.2 million and $235.6 million at October 31, 2015 and April 30, 2015, respectively.  As of October 31, 2015 and April 30, 2015, we held $121.6 million and $143.4 million, respectively, of cash and cash equivalents in foreign locations, net of amounts held in trust for deferred compensation plans and bonuses. 

The Company declared a quarterly dividend of $0.10 per share on December 8, 2015, payable on January 15, 2016 to stockholders of record on December 21, 2015.

Executive Recruitment

Fee revenue was $156.5 million in Q2 FY'16, an increase of $7.5 million, or 5.0% ($16.6 million, or 11.1% on a constant currency basis), compared to Q2 FY'15.  The overall increase in fee revenue was primarily attributable to a 3.2% increase in the number of engagements billed and a 1.6% increase in the weighted-average fees billed per engagement in Q2 FY'16 compared to Q2 FY'15.  On a regional basis, the fee revenue increase was driven by a $10.1 million increase in North America, partially offset by a $2.3 million decrease in South America.  On a constant currency basis, all regions, with the exception of South America, experienced year-over-year growth with North America at 13.3%, EMEA at 11.2% and Asia Pacific at 9.9%.

Adjusted EBITDA was $40.6 million and $32.0 million during Q2 FY'16 and Q2 FY'15, respectively.  The increase in Adjusted EBITDA was driven by higher fee revenue and decreases in compensation and benefit expenses of $1.2 million and general and administrative expenses of $1.0 million.

Operating income was $39.2 million in Q2 FY'16, an increase of $9.3 million, or 31.1%, compared to Q2 FY'15, resulting in operating margin of 25.1% in Q2 FY'16 compared to 20.1% in Q2 FY'15.  Operating income was impacted by all of the above items.

Leadership & Talent Consulting

Fee revenue was $73.6 million in Q2 FY'16, an increase of $7.3 million, or 11.0% ($10.4 million, or 15.7% on a constant currency basis), from the year-ago quarter.  This increase is primarily attributed to higher consulting fee revenue of $7.3 million in Q2 FY'16 compared to Q2 FY'15.  The increase in consulting fee revenue includes $6.5 million of fee revenue from Pivot Leadership which was acquired on March 1, 2015.

Adjusted EBITDA was $14.7 million during Q2 FY'16, an increase of $3.8 million (excluding integration costs of $3.3 million), or 34.9%, compared to Q2 FY'15 due to higher fee revenue, partially offset by an increase in compensation and benefit expenses of $3.5 million due to an increase in salaries and related payroll taxes primarily as a result of higher average consultant headcount in Q2 FY'16 compared to the year-ago quarter.

Operating income was $7.8 million in both Q2 FY'16 and Q2 FY'15, resulting in an operating margin of 10.6% in the current quarter compared to 11.7% in the year-ago quarter.  Operating income was impacted by all of the above items as well as integration costs of $3.3 million incurred in Q2 FY'16.

Futurestep

Fee revenue was $50.5 million in Q2 FY'16, an increase of $10.1 million, or 25.0% ($14.3 million, or 35.4% on a constant currency basis), compared to the year-ago quarter.  The higher fee revenue was driven by an increase in professional search of $5.6 million due to a 25.6% increase in engagements billed in Q2 FY'16 compared to Q2 FY'15 and a 5.4% increase in the weighted average fees billed per engagements.  The rest of the increase was due to $4.5 million in higher fee revenue in recruitment process outsourcing in Q2 FY'16 compared to Q2 FY'15.

Adjusted EBITDA was $7.5 million during Q2 FY'16, an increase of $1.9 million, or 33.9%, compared to Q2 FY'15, due primarily to the increase in fee revenue, partially offset by higher compensation and benefit expenses of $7.0 million and an increase in general and administrative expenses of $1.0 million.  The increase in compensation and benefit expenses was the result of a 33.5% increase in average headcount and an increase in the use of outside contractors, both related to the higher levels of fee revenue.

Operating income was $6.9 million in Q2 FY'16, an increase of $1.8 million, compared to Q2 FY'15, resulting in an operating margin of 13.6% in the current quarter compared to 12.8% in the year-ago quarter.  Operating income was impacted by the items discussed above.

Outlook

Assuming worldwide economic conditions, financial markets and foreign exchange rates remain steady, and excluding the impact of the Hay Group acquisition on Korn Ferry consolidated results:

• Q3 FY'16 stand-alone fee revenue is expected to range from $268 million to $278 million; and
• Q3 FY'16 stand-alone adjusted diluted earnings per share is likely to range from $0.50 to $0.56.

With respect to the legacy Hay Group, for the months of December and January, which are generally seasonal low points, we expect operating results to be as follows:

• Adjusted fee revenue between $75 million and $81 million ($68 million to $74 million including deferred revenue purchase accounting adjustments); and
• Adjusted EBITDA between $6 million and $8 million (negative EBITDA between $38 million to $49 million including deferred revenue purchase accounting adjustments, integration/acquisition costs, restructuring charges and retention bonuses).⁽¹⁾

On a combined adjusted basis:

• Q3 FY'16 adjusted combined fee revenue is expected to be in the range of $343 million and $359 million; and
• Q3 FY'16 adjusted combined diluted earnings per share is likely to range from $0.48 to $0.56.

On a combined basis, measured by U.S. GAAP:

• Q3 FY'16 combined fee revenue is expected to be in the range of $336 million and $352 million; and
• Q3 FY'16 combined diluted loss per share is likely to range between ($0.16) to breakeven.

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As previously disclosed, the integration of Hay Group will involve workforce alignment, consolidation of office space and the elimination of redundant general and administrative expenses.  In order to achieve these cost synergies, we expect to incur restructuring charges in Q3 FY'16 of approximately $20 million to $25 million and expect savings of $25 million to $30 million on a run-rate basis.  We believe that at the conclusion of this restructuring plan early in our next fiscal year, the combined Hay Group and legacy LTC Adjusted EBITDA margins will range between 14% to 18%.

Earnings Conference Call Webcast

The earnings conference call will be held today at 7:30 AM (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.  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

Korn Ferry is the preeminent global people and organizational advisory firm.  We help leaders, organizations and societies succeed by releasing the full power and potential of people.  Our nearly 7,000 colleagues deliver services through Korn Ferry and our Hay Group and Futurestep divisions.  Visit www.kornferry.com for more information.

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 and the acquisition of Hay Group.  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 including Hay Group, our ability to recognize the anticipated benefits of the acquisition of Hay Group which may be affected by, among other things, competition, our ability to grow and manage growth profitability, maintain relationships with customers and suppliers and retain key employees, costs related to the acquisition of Hay Group, 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 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 net income, adjusted to exclude restructuring charges and integration/acquisition costs, net of income tax effect;
• adjusted basic and diluted earnings per share, adjusted to exclude restructuring charges and integration/acquisition 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;
• adjusted EBITDA, which is EBITDA further adjusted to exclude restructuring charges, and integration/acquisition costs, and adjusted EBITDA margin;
• Hay Group EBITDA, which is EBITDA (as described above) for Hay Group, and Hay Group adjusted EBITDA, which is adjusted EBITDA (as described above) for Hay Group, further adjusted to exclude the deferred revenue write-off relating to Hay Group;
• Korn Ferry stand-alone fee revenue, which excludes Hay Group fee revenue and the deferred revenue write-off relating to Hay Group, and Hay Group adjusted fee revenue and adjusted combined fee revenue, which exclude the deferred revenue write-off relating to Hay Group;
• Korn Ferry stand-alone adjusted diluted earnings per share, which excludes Hay Group contribution to earnings per share, increase in amortization expense relating to the additional intangible assets acquired on the acquisition date, increase in common stock issued as part of the acquisition purchase price, incremental charges relating to Hay Group purchase accounting (deferred revenue write-off), and incremental charges associated with the acquisition (the "incremental acquisition charges"), including integration/acquisition costs, restructuring charges, retention bonuses and impact from the change in tax rate; and
• adjusted combined diluted earnings per share, adjusted to exclude the incremental acquisition charges.

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.  In the case of adjusted stand-alone results, management believes the presentation of such information provides investors with the ability to make period-to-period comparisons of Korn Ferry's operating results, net of the acquisition of Hay Group.  Management believes the presentation of adjusted consolidated combined diluted earnings per share provides investors with greater visibility into the impact of the Hay Group acquisition without regard to incremental charges and transaction costs.

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