UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended April 30, 20162019
OR
☐ | 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 001-14505
KORN/KORN FERRY INTERNATIONAL
(Exact Name of Registrant as Specified in its Charter)
Delaware | ||
95-2623879 | ||
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification | |
1900 Avenue of the Stars, Suite 2600, Los Angeles, California | 90067 | |
(Address of | (Zip |
(310) 552-1834
(Registrant’s telephone number, including area code)Telephone Number, Including Area Code)
Securities registered pursuantRegistered Pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock, par value $0.01 per share | KFY | New York Stock Exchange |
Securities registered pursuantRegistered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x☑ No ¨☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x☑
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. Yes x☑ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x☑ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☑ | Accelerated filer | ☐ | |||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||
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 ¨☐ No x☑
The number of shares outstanding of our common stock as of June 22, 201621, 2019 was 57,304,20256,436,120 shares. The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant on October 31, 2015,2018, the last business day of the registrant’s most recently completed second fiscal quarter (assuming that the registrant’s only affiliates are its officers, directors and 10% or greater stockholders) was approximately $1,896,696,482$2,029,075,004 based upon the closing market price of $36.37$45.14 on that date of a share of common stock as reported on the New York Stock Exchange.
DOCUMENTS INCORPORATED BY REFERENCEDocuments incorporated by reference
Portions of the registrant’s definitive Proxy Statement for its 20162019 Annual Meeting of Stockholders scheduled to be held on October 6, 20163, 2019 are incorporated by reference into Part III of this Form 10-K.
Index to Annual Report on Form 10-K for the Fiscal Year Ended April 30, 20162019
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Item 1B | 23 | |||||
Item 2 | 23 | |||||
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Item 5 | 25 | |||||
Item 6 | 27 | |||||
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 | ||||
Item 7A | 49 | |||||
Item 8 | 50 | |||||
Item 9 | Changes in and Disagreements | 50 | ||||
Item 9A | 50 | |||||
Item 9B | 50 | |||||
Item 10 | 51 | |||||
Item 11 | 51 | |||||
Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 51 | ||||
Item 13 | Certain Relationships and Related Transactions, and Director Independence | 51 | ||||
Item 14 | 51 | |||||
Item 15 | 52 | |||||
Item 16 | 54 | |||||
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F-1 |
PART I.
About
ABOUT KORN FERRY
Korn Ferry
Korn/Ferry International (referred to herein as the “Company,” “Korn Ferry,”“Company” or in the first person notations “we,” “our,” and “us”) is the preeminenta global peopleorganizational consulting firm, synchronizing our clients’ strategy and organizational advisory firm. talent to drive superior business performance.
We opened our first office in Los Angeles in 1969 and currently operate in 150104 offices in 52 countries. We have the abilitycountries, enabling us to deliver our solutions on a global basis, wherever our clients do business. As of April 30, 2016,2019, we had 6,9478,678 full-time employees, including 488 Executive Search, 562 Hay Group (formerly known as Leadership & Talent Consulting (“Legacy LTC”) which was combined with HG (Luxembourg) S.à.r.l (“Legacy Hay Group”) in December 2015), and 114 Futurestep1,448 consultants who are primarily responsible for originating client services.
During fiscal 2019, we partnered with 13,834 client organizations. Our clients include many of the world’s largest and most prestigious public and private companies, middle market and emerging growth companies, as well as government and nonprofit organizations.organizations, including 98% of the Fortune 100 and 93% of the Financial Times Stock Exchange 100. We have built strong client loyalty, with 84%90% of our assignments performed duringengagements in fiscal 20162019 being completed on behalf of clients for whom we had conducted assignmentsengagements in the previous three fiscal years (without giving effect to Legacy Hay Group assignments). years.
We have made significant investments in Korn Ferry Hay Group with the acquisitions PDI Ninth House and Global Novations in fiscal 2013, Pivot Leadership in fiscal 2015, and Legacy Hay Group in fiscal 2016. These acquisitionsour business that have strengthened our intellectual property (“IP”), enhanced our geographical presence, added complimentary capabilitiescomplementary offerings to further leverage searchdeepen client relationships and broadened theour capabilities foraround talent acquisition, organizational strategy, assessment, development and development. They also improvedrewards. Approximately 70% of our ability to support the global business community not only in attracting top talent and designing compensation and reward incentives, but also with an integrated approach to the entire leadership and people continuum.revenue comes from clients that utilize multiple lines of our business.
We were originally formed as a California corporation in November 1969 and reincorporated as a Delaware corporation in fiscal 2000.
TheOn June 12, 2018, the Board of Directors of Korn Ferry Opportunity
Historically, the HR industry has offered piecemeal views of people based on inconsistent processes, technologies and measurement. Korn Ferry is disrupting the traditional approach and has assembled intellectual property which we bringapproved a plan (the “Plan”) to go to market throughunder a holistic framework that sits atsingle, master brand architecture and to simplify the intersectionCompany’s organizational structure by eliminating and/or consolidating certain legal entities and implementing a rebranding of an organization’s strategythe Company to offer the Company’s current products and services using the “Korn Ferry” name, branding and trademarks. In connection with the Plan, (i) the Company has sunset all sub-brands, including Futurestep, Hay Group and Lominger, among others, and (ii) effective as of January 1, 2019, the Company has been renamed “Korn Ferry.” The Company is continuing to harmonize under one brand to help the firm position itself as a preeminent organizational consulting firm and bring more client awareness to its broad range of talent management solutions. While the rebranding has not impacted the Company’s segment financial reporting, the Company renamed its Hay Group segment as Advisory and its people.
Superior performance happens when an organization establishes the conditions for success and when the right people are enabled and engaged, sitting in the right seats and are developed and rewarded. We can help operationalize a client’s complete strategy or address any combination of six broad categories:
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About Our Intellectual Property and Technology
Korn Ferry is increasingly a knowledge-based company with deep intellectual property (“IP”) and research that allow us to deliver meaningful outcomes for our clients. We understand what makes a great leader, the competencies they possess that distinguish them from others,Futurestep segment as well as the potential shortcomings that can damage their careers as well as their organization’s performance. Today, our talent data includes over 4.4 million assessments and profiles of seven million candidates. This database provides the insight and intelligence for Korn Ferry’s team of social scientists to determine the true drivers of leadership and performance and how any individual or organization measures up. With the addition of Legacy Hay Group, we can now expand our solutions which incorporates IP about people with data about organizations and rewards. These solutions help to deliver on Korn Ferry’s holistic framework that sits at the intersection of an organization’s strategy and its people.
Our vast library of proprietary tools and techniques has been developed through research by our scientists, statisticians and IP development specialists. It underpins all of our services, giving us unique insight into how strategic talent decisions help contribute to competitive advantage and success. We continue to add more discipline and scientific research into the recruitment and talent management process, with emphasis shifting from candidate identification to candidate assessment, fit and attraction and now adding the Legacy Hay Group focus on organizations and rewards. Driving this focus is our enhanced technology, as the power of the Internet, databases and online talent communities make it possible to efficiently identify greater numbers of qualified candidates. Innovative technology, when combined with world-class intellectual property and thought leadership, creates a compelling set of tools to manage the process of identifying, assessing and recruiting the most desirable candidates.
In the fiscal year ahead, we will continue to place a strong focus on our talent intelligence engine introduced in 2015 — Korn Ferry’s Four Dimensions of LeadershipRPO & Talent, which harnesses all of our IP and provides organizations with robust diagnostics at both the individual and enterprise levels. We will focus on integrating the assessment and leadership development IP from Legacy Hay Group into the KF4D talent intelligence engine. We have identified four crucial areas that matter most for individual and organizational success.Professional Search. The analytics we collect enable us to help organizations accentuate strengths and identify areas to develop, as well as understand how they stack up against their competition:
Korn Ferry’s Four Dimensions of Leadership & Talent will serve as the assessment engine for the Company’s executive search and professional recruiting processes, leadership development and consulting, and recruitment process outsourcing engagements, as well as internal hiring and leadership development efforts.
We will also begin to integrate rewards and measurement data from Legacy Hay Group into our recruiting solutions and offer to provide a unique and differentiating perspective on organizations, reward and leaders to Korn Ferry clients.
About Our Business Segments
Korn Ferry solutions and intellectual property are delivered through the following business segments:
Executive Search: Korn Ferry Executive Search helps clients attract the best executive talent for moving their companies in the right direction. The business is managed by geographical region leaders who focus on recruiting board-level, chief executive and other senior executive positions for clients predominantly in the consumer, financial services, industrial, life sciences/healthcare provider, technology and educational/not-for-profit industries. The relationships that we develop through this business allow us to add incremental value to our clients through the delivery of our other people and organizational advisory solutions.
Our executive search services concentrate on searches for positions with annual compensation of $300,000 or more, or comparable in foreign locations, which may involve board-level, chief executive and other senior executive positions. The industry is comprised of retained and contingency recruitment firms. Retained firms, such as Korn Ferry, typically charge a fee for their services equal to approximately one-third of the first year annual compensation for the position being filled regardless of whether the position is filled. Contingency firms generally work on a non-exclusive basis and are compensated only upon successfully placing a recommended candidate.
Hay Group:Korn Ferry Hay Group helps an organization to align its people to their strategy – developing, engaging, and rewarding them to reach new heights. The business segment is divided into two areas – Advisory and Productized Services. Our Advisory business addresses how people work, and how to reward, develop, engage and motivate them so that strategies succeed. We deliver solutions that capitalize on the breadth of our intellectual property, service offerings and expertise to do what is right for the client. Our Productized Services business combines our proven methodology and decades of insight and packages them into a range of new tools, supporting recurring HR processes in the domains of Pay, Talent, and Engagement. Our Hay Group services are delivered by an experienced team of consultants and the richest and most comprehensive people data and insights in the world.
Futurestep: Korn Ferry Futurestep draws from Korn Ferry’s four decades of recruitment experience to offer fully scalable, flexible services that help organizations attract top people while reducing expenses and time to hire. Our portfolio of services includes Recruitment Process Outsourcing (“RPO”), Project Recruitment, Professional Search, Talent Consulting and Talent Communications.name remains unchanged.
We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (the “SEC”), pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. Our reports, proxy statements and other documents filed electronically with the SEC are available at the website maintained by the SEC atwww.sec.gov.
We also make available, free of charge on the Investor Relations portion of our website atwww.kornferry.comhttp://ir.kornferry.com, our annual, quarterly, and current reports, and, if applicable, amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC.SEC at www.sec.gov.
We also make available on the Investor Relations portion of our website atwww.kornferry.comhttp://ir.kornferry.com press releases and related earnings presentationpresentations and other important information, which we encourage you to review.
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters of the Audit Committee, Compensation and Personnel Committee, and Nominating and Corporate Governance Committee of our Board of Directors are also posted on the Investor Relations portion of our website athttp://ir.kornferry.com. Stockholders may request copies of these documents by writing to our Corporate Secretary at 1900 Avenue of the Stars, Suite 2600, Los Angeles, California 90067.
THE KORN FERRY OPPORTUNITY
Aligned around our vision to be the preeminent organizational consulting firm, we are pursuing an ambitious strategy that will help us to focus relentlessly on clients and collaborate intensively across the organization. This approach builds on the best of our past and gives us a clear path to the future with focused initiatives to increase our client and commercial impact.
Industry TrendsKorn Ferry is transforming how clients address their talent management needs. We have evolved from a mono-line business to a global organizational consulting firm, giving our consultants more frequent and expanded opportunities to engage with clients.
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While most organizations can develop a sound strategy, they often struggle with how to make it stick. That is where we come in: synchronizing an organization’s strategy with its talent to drive superior performance. We help companies design their organization—the structure, roles and responsibilities—to seize these opportunities. In addition, we help organizations select and hire the talent they need to execute their strategy—and show them the best way to compensate, develop and motivate their people.
We do this through our five core solution sets:
Core Solutions
Organizational Strategy | We map talent strategy to business strategy by designing operating models and organizational structures that align to them, helping organizations put their plans into action. We make sure they have the right people, in the right roles, engaged and enabled to do the right things. |
Assessment and Succession | We provide actionable, research-backed insights that allow organizations to understand the true capabilities of their people so they can make decisions that ensure the right leaders are ready—when and where they are needed—now and in the future. |
Talent Acquisition | From executive search to recruitment process outsourcing, we integrate scientific research with our practical experience and industry-specific expertise to recruit professionals of all levels and functions for client organizations. |
Leadership Development | We help leaders at all levels of an organization achieve their vision, purpose and strategy. We combine expertise, science and proven techniques with forward thinking and creativity to build leadership experiences that help entry to senior level leaders grow and deliver superior results. |
Rewards and Benefits | We help organizations design rewards to achieve their strategic objectives. We help them pay their people fairly for doing the right things—with rewards they value—at a cost the organization can afford. |
Integrated Solutions
Additionally, we deliver differentiated approaches for our clients through our integrated market offerings, which bring together our best thinking from across our core solutions. These offerings target specific client needs, guided by an ever-changing business environment.
One such strategic growth area is transaction services related to mergers and acquisitions (M&A) and divestitures. A key differentiator with this service is our ability to help organizations drive growth by aligning leadership, talent and culture to the investment thesis during the integration process—from the C-suite through all employee levels. We also help companies develop and execute cost optimization strategies around rewards, organization design and workforce planning, to prepare them for potential market volatility.
Other integrated offerings focus on our clients’ transformational challenges. Our digital transformation service helps clients execute on a digital operating model, including the introduction and integration of new agile ways of working. Rich proprietary data enables our clients to better deliver the right value proposition to attract, retain and engage digital talent. In addition, we help specific functional areas, such as HR, develop their future-state model within a digital environment.
Our diversity and inclusion (“D&I”) service helps clients innovate and grow by creating an inclusive culture and diverse workforce. Organizations are in different places on their D&I journeys, ranging from compliance-driven, values-driven, talent performance driven, and beyond. Therefore, we combine our insights into a single offering that can be tailored to different markets and buyers.
From core through integrated, across our solution portfolio, we have the advantage of best-in-class solutions, products and talent, coupled with deep market expertise, to deliver a seamless approach to organization, talent and rewards strategies. Our change management capabilities further support our clients, through the successful execution of their transformational strategies and the effective implementation of their people and culture programs.
OUR INTELLECTUAL PROPERTY AND TECHNOLOGY
We know what good looks like: We bring together the industry knowledge, assessments, and data to benchmark clients against the best. We offer a complete view of the talent they need and the talent they have. We know if their rewards are fair and effective. And we align their structures, role profiles, and people to support the strategy so that clients know where to focus their efforts to create lasting change in the organization.
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At the core of our approach is deep IP and research that allows us to deliver meaningful business outcomes for our clients. We house all of this data inside our Talent Hub. With more than four billion data points in total, including 69 million assessments, profiles of eight million candidates, rewards data on 20 million professionals and engagement data on more than seven million professionals, our Talent Hub is the science-based engine that uses this rich data set to fuel all of our services, solutions and products, connecting dots to drive meaningful change.
Advanced Analytics
Core IP data and assets include proprietary leadership assessment, recruitment and development models, emotional and social competencies, human motives and values, job grading, engagement and rewards systems. We integrate and build upon our data sets using advanced modeling and artificial intelligence (“AI”) to produce predictive insights and deliver demonstrable client impact.
The Korn Ferry Institute
The Korn Ferry Institute, our research and analytics arm, unites three areas: agile client execution; applied research and analytics; and breakthrough innovation. These teams work together to help business and public-sector leaders understand the key trends and drivers of human and organizational performance, so that they make better, science-based decisions on critical leadership, people, management and policy issues.
At the highest level, the Korn Ferry Institute explores three themes:
1. | People, organization and technology innovation; |
2. | Data analytics for human and business performance; and |
3. | New demographic trends. |
In the fiscal year ahead, we will continue to innovate and simplify our IP for greater leverage of our data set, driving even greater business impact.
INDUSTRY TRENDS
In this competitive global economic environment, our clients are seeking new pathways to drive sustainable profitable growth. CEOsoperational excellence and superior performance outcomes. This trend is attractive to our sector, as organizations are increasingly demanding an agile workforce that can innovate and drive growth across borders. We believeturning to partners like Korn Ferry is uniquely positioned to help leaders and organizations succeed by releasing the full power and potential of people.
Consolidation of Talent Management Solution Providers – In choosing recruitment and human resource service providers, we believe:
synchronize their strategy with their talent as an answer to today’s most pressing business challenges, specifically:
▪ | Achieving growth and cost synergies from M&A transactions without destroying employee engagement. |
▪ | Having the right people, mindsets and structures to achieve successful digital transformations. |
▪ | Managing potential market volatility by reducing cost in their reward structures and workforce mix. |
▪ | Creating cultures of inclusion where diversity is intrinsically valued; where every individual is able to contribute fully; and where all talented people can advance through the organization regardless of their gender, background or other identifying factors. |
▪ | Changing ingrained ways of thinking and building strategies that energize employees and drive performance in the face of disruptive change. |
▪ | Improving the quality of service delivery in core functions to create strategic competitive advantage. |
Skills Gaps — There are not enough highly “skilled” people coming into the labor market to fill open jobs. Particularly at the senior management levels, the available talent pool is inadequate. New leaders must step into bigger, more complex, and more global roles faster — and with less experience — than their predecessors. Given this, learning agility — one’s ability to solve complex problems, easily adapt in a constantly changing world and drive change — is more important than ever. We believe employers will increasingly seek service providers who can help them find, develop and retain highly qualified, learning agile talent that secures a competitive advantage.
Human Capital Is One of the Top CEO Challenges —The people, the minds, the alliances and the culture that can create and then nurture innovative ideas — are seen as central to CEOs. In fact, according to the Conference Board, human capital — how best to develop, engage, manage and retain talent — is the single biggest challenge facing CEOs in 2016.
Talent Analytics —Companies are increasingly leveraging big data and predictive analytics to measure the influence of activities across all aspects of their business, including HR. They expect their service providers to deliver superior metrics and better ways of communicating results. Korn Ferry’s go-to-market approach is increasingly focused on talent analytics. Leveraging a large set of data on talent accumulated over decades of research, we have cataloged the elements of talent and isolated the most potent facets. The result, Korn Ferry’s Four Dimensions of Leadership & Talent, is the talent intelligence engine that powers many of our solutions and products. Through our combination with Legacy Hay Group, we now also possess several of the richest HR databases in the world, so our clients can benchmark salaries, performance, leadership and other HR data by industry at a global and country level.
Increased Outsourcing of Recruitment Functions — More companies are focusing on core competencies and outsourcing non-core, back-office functions to providers who can provide efficient, high-quality services. Third-party providers can apply immediate and long-term approaches for improving all aspects of talent acquisition. Advantages to outsourcing part or all of the recruitment function include:
Other Industry Trends — In addition, to the industry trends mentioned above, we believe the following factors will have a long-term positive impact on the talent managementour industry:
| ▪ | Companies are actively in search of trusted advisors that can offer a full suite of organizational consulting products and solutions, to manage the multiple needs of their business on a global scale using a common language. |
▪ | Over the next decade, demand for skilled workers will outstrip supply, resulting in a global talent shortage. Organizations must make talent strategy a key priority and take steps now to educate, train, and upskill their existing workforces. |
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▪ | There is an increasing demand for professionals with not just the right experience, but also the right leadership competencies, traits and drivers to meet the requirements of the position and organizational culture today and prepare it for tomorrow. |
▪ | Executive management tenure continues to hover at historically low levels. |
▪ | The balance of power is shifting from the employer to the employee, as more people take charge of their own careers and the gig economy continues to grow in popularity. |
▪ | Talent mobility is being recognized as a critical driver in the recruitment, development and retention of an organization’s people, particularly their early career professionals. |
▪ | Succession planning remains under heightened scrutiny amidst pressure to generate growth, shorter CEO tenures and the emphasis being placed on making succession planning a systemic governance process within global organizations. |
▪ | Executive pay is under a perpetual spotlight, making it imperative that organizations get this right to ensure the public trust and establish a functional compensation strategy that starts right at the top. |
▪ | Companies are more determined than ever to close the gender gap on pay and advancement to leadership roles. |
▪ | More companies are maintaining strategic focus by choosing to outsource non-core functions like talent acquisition to RPO providers who can offer efficient, high-quality services. |
Growth StrategyGROWTH STRATEGY
Our objective is to expand our position as the preeminent global people and organizational advisoryconsulting firm. In order to meet this objective, we will continue to pursue five strategic initiatives:our multi-pronged strategy:
1. Drive an Integrated, Solutions-Baseda One Korn Ferry Go-to-Market Strategy
Differentiating Client Value Proposition— Korn Ferry offers its clients a total approach to talent. Historically, the HR industry has offered piecemeal views of people based on inconsistent processes, technologies and measurement. Korn Ferry seeks to disrupt the traditional approach and has assembled intellectual property that we bring to market through a holistic framework that sits at the intersection of an organization’s strategy and its people.
In analyzing talent management across the entire value chain, Korn Ferry has developed a robust suite of offerings and leverages our market-leading position in executive search to extend the value we bring our clients through our diversified capabilities along the rest of the talent lifecycle through our Hay Group and Futurestep businesses.
Our synergistic go-to-market strategy, utilizing all three ofbringing together our business segments,core solutions, is driving more integrated, scalable client relationships, while accelerating our evolution to a consultative solutions-based organization.relationships. This is evidenced by the fact that approximately 62%70% of our revenues come from clients that utilize multiple lines of our business.
We are an increasingly diversified enterprise Additionally, our Net Promoter Score, a metric used to gauge customer loyalty, has increased by three points compared to last year. To better compete in the worldmarket, we will continue to evolve from our traditional line of human capital servicesbusiness segmentation to integrated solutions and products, an industry that represents an estimated $600 billion global market opportunity.
In an effort to gain operational efficiencies and drive superior performance, we expect that multinational clients increasingly will turn to strategic partners who can manage their people and organizational advisory needs on a centralized basis. This will require vendors with a global network of offices and technological support systems to manage engagements across geographical regions. We established ourOur Marquee Accounts program to act asis a catalyst for change as we transformcore pillar of our Company from individual operators to an integrated talent solutions provider, in an effort to drivego-to-market strategy. This program drives major global and regional strategic account development, as well asin addition to provideproviding a framework for all of our client development activities as we move our firm to deeper client relationships. Our Marquee Accounts program now comprises 21% of our global fee revenues. In the year ahead, we will continue to grow and expand our account management activities. Today,This includes driving consistent account selection, assignment, planning and execution; implementing account-based marketing efforts; optimizing the pipeline and opportunity process; integrating our best thinking across solutions; and hiring additional dedicated account leaders. We will also expand this successful go-to-market program consiststo the next level of global colleagues from every lineaccounts—our Regional Accounts program.
Another pillar of business and geography. We are cascading this methodology throughout every market, country and office.
2. Deliver Unparalleled Client Excellence
World-class Intellectual Property —Korn Ferry continues toour growth strategy is the Products business. In fiscal 2019, product sales comprised 31% of our Advisory revenue. Our subscription services delivered online help us generate long-term relationships with our clients through large scale and more deeply embed our industry-leading intellectual property within the talent management processes oftechnology-based human resources (“HR”) programs. We continue to seek ways to further scale these highly profitable products to our global clients.
Deliver Client Excellence and Innovation
Technology is positioned to reshape the future of work and with it, the workforce as we know it today. Market innovations contribute to more accurate, faster, cost-effective and impactful business and human decisions. Our firm is well positioned in that context. We have a set of assets that are critical to such decisions: deep science on organization and human motivation, data on talent, work and rewards, and proven products and solutions.
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We are combining our IP and technology into a unified single platform to allow clients to make faster, better talent decisions. Our IP-driven tools and services are being utilized by our clients for everything from organizational development and job profiling to selection, training, individual and team development, succession planning, M&A, D&I, digital transformation and more. Our subscription services that
Enhancements to our Talent Hub platform, including Korn Ferry Listen, Assess, Perform and Pay, will allow us to embed analytics directly into our clients’ user experience, providing actionable insights. In fiscal 2019, we collaborated with experience management (XM) software leader Qualtrics, whereby Korn Ferry is building a global delivery and advisory service to improve employee experience programs at scale.
New Offerings—More than 63,000 consumers have registered and are delivered on-lineusing Korn Ferry Advance, our new business-to-consumer offering, since it launched in the United States (the “U.S.”) in July 2017. We are products that help us generate long-term relationships with our clients through large scaleexpanding and technology-based HR programs on an annuity basis. We continue to seek ways to scale our productenhancing the offering to our global clients.
Global organizations utilizing our Company’s validated assessment capability are realizing the power and benefits of Korn Ferry IP inprovide more focused assistance to people looking to make their people processes. Our assessment capability is currently utilized by more than 70% of our Executive Search clients. We have observed that candidates who utilize our on-line assessment tools stay longer with an organization and are promoted more frequently.
Our IP orientation is further expanded by our acquisitions of Legacy Hay Group, Pivot Leadership, PDI Ninth House and Global Novations. By acquiring these firms, we now offer a variety of pay, leadership development, coaching and assessment solutions for different organizational levels,next career move, as well as technology-driven talent management solutions. We possess several of the richest HR databases in the world, spanning 114 countries — including reward data on 20 million professionals, engagement data on 6.0 million professionals and assessment data on 4.4 million professionals.
Technology— Information technology is a critical element of all of our businesses. In fiscal 2016, we continued to invest in enhanced tools and knowledge managementprovide tailored career services to gain a competitive advantage. We enhanced our technology platform to support delivery ofKorn Ferry’s Four Dimensions of Leadership (“KF4D”), our newest and most robust assessment for Executive Search, Hay Group and Futurestep. We enhanced our global SAP and Salesforce enterprise systems to support the integration of Legacy Hay Group intoan organization’s people. Korn Ferry providing globally consistent finance, HR, business development and operations processes. We continued to invest in our IT security infrastructure in an effort to protect the Company’s assets against today’s cyber-security threats.
In fiscal 2016, we further enhanced our scalable intellectual property content repository, which we are leveraging across all products and services. This enables us toAdvance will continue to integrate services provided across the entire Hay Group portfolio,leverage cutting-edge technology as well as Executive Search and Futurestep, andthe greatest asset we have continued work on a unified talent analytics layer to support Korn Ferry’s strategy to address this key industry trend.
Information technology is a key driver of Futurestep’s growth in RPO, project recruitment and search. Database technology and the Internet have greatly improved capabilities in identifying, targeting and reaching potential candidates. In fiscal 2016, we continued the integration of advanced, Internet-based sourcing, assessment and selection technologies into the engagement workflow. We expanded the use ofForesight, have—our data aggregation warehouse for analytical reporting of Futurestep recruiting activities across internal systems and clients’ external applicant tracking systems.
We will continue to enhance our technology in order to strengthen our relationships with clients, expand our markets through new delivery channels and maintain a competitive advantage in offering the full range of executive talent management services.
3. Extend and Elevate theconsultants. Korn Ferry Advance is also being used to augment our Korn Ferry Advisory offerings, primarily in Leadership Development and Coaching.
Create the Top-of-Mind Brand in Organizational Consulting
Next to our people, the Korn Ferry brand is the strongest asset of the Company. Since inception,Positioning Korn Ferry has always maintained an aggressive stance in buildingas the preeminent global organizational consultancy and demonstrating our ability to drive business performance through people remains the goal of our global presence and supporting our vision and ongoing growth through a comprehensive marketing approach. At the highest level, we will continue to extend and elevate theprogram.
The Korn Ferry brand is brought to raise awarenessmarket via two distinct channels: business-to-business (“B2B”) and drive higher market share within each ofbusiness-to-consumer (“B2C”). In both instances, we communicate key core values about what we do, expressing that we are ‘more than’ as well as inspiring action in the way our lines of business.
Our leadershipcustomers run their businesses and in executive search enables us to growthe way they approach their careers. We are executing against our business by increasing the number of recruitment assignments we handle for existing clients. We also believe that our strong relationships and well-recognized brand name will enable us to bring a broader base of solutions and services to our existing client base and to potential new clients, while allowing us to build communities of candidates to whom we can directly market our services.
For example, we will leverage the work our Board & CEO Services practice — recently enhanced by the addition of Legacy Hay Group’s Executive Pay and Governance capabilities — performs at the top of our clients’ organizations to promote awareness of our various solutions. We believestrategy with these engagements will create “trickle-down” revenue opportunities across all of our lines of business and lead to the expansion of other high-level, consultative relationships within the board and CEO community.priorities in mind:
▪ | One Korn Ferry—We will partner with internal and external stakeholders to advance a differentiated one Korn Ferry story and brand that minimizes operational risks, engages our employees, resonates in the broader market and becomes a platform for differentiation and sustainable growth. |
▪ | Generate Demand—We will assess market trends, liaise with clients, and partner with internal stakeholders to develop a steady cadence of thought leadership-based, campaigns, public relations and demand generation activities that engage clients and prospects in meaningful conversations. |
We drive additional awareness and brand equity through a global marketing program that leverages Korn Ferry Institute-generated thought leadership (whitepapers, bylined articles, and our award-winningBriefings periodical), aggressive media relations, social media, a sophisticated demand generation platform and other vehicles that include sponsorships, speaking opportunities, advertising and events.
4. Advance Korn Ferry as a Premier Career Destination
As our business strategy evolves, so should our talent strategyWe continue to invest in order to drive the growth we need and the culture we want, atbuilding a pace we can absorb. Our talent strategyworld-class organization that is what allows us to build and attract the best talent for ourselves (and, by extension, for our clients) to achieve our business potential.
Our goal is to become the premier career destination for top talent through offering a client-focused culture, promotional/developmental opportunities and compensation that aligns employee behavior to corporate strategy.
In fiscal 2017, we will launch a new professional development program calledReimaginefor our consultants and client-facing practitioners to train them on our strategy, our various solutions and a systematic approach for broadening the conversations, and subsequently, the relationships with our clients. Additional initiatives include aligning workforce and leadership competenciesaligned to our strategy enhancing performance practices, continuing to develop succession slates across the Company, and evolving our rewards system.is staffed by a capable, motivated and agile workforce. A few key initiatives in this area include:
▪ | Onboarding—In fiscal 2019, we increased our headcount by 1,035. To support this growth, we have launched a standardized, global onboarding experience for all Korn Ferry new hires using a common platform, materials and resources to ensure all new hires are effectively integrated into the Company with reduced ramp-up time to full productivity. We are also taking a programmatic approach to onboarding through our Talent Academy and StartUp early career cohort trainings. |
▪ | Career Paths and Mobility—Under the Korn Ferry enterprise-wide career model, we are defining and will roll out career paths that enable and encourage talent mobility across all areas of our business along with self-directed development. In fiscal 2019, we promoted more than 800 colleagues across our three segments. |
▪ | Talent Development—Our growth plans require a learning, agile organization. To facilitate this, we use a learning management system (iAcademy) to serve as a Center of Excellence focused on the growth and development of our colleagues through rich, personalized content. |
▪ | Mentoring—As our firm continues to expand in size and offerings, our colleagues face increasingly complex client and career issues, all while learning how to work together as One Korn Ferry. The need to connect, collaborate and help each other has never been more pronounced. In the year ahead, we will roll out a firm-wide mentorship program to empower our colleagues to learn, connect and advance. Paired through the Korn Ferry Advance platform, Mentors and Mentees will be matched based on proximity and career goals and focus. |
▪ | Benefits—We are nearing completion of our global benefits harmonization work. We are setting our sights on the next phase of our benefits strategy, which is the modernization and optimization of our benefits programs around the world. We will ensure we have benefits that are culturally relevant, market prevalent and personally impactful. We create balance between cost effectiveness and competitiveness to align with our financial goals and talent strategy. |
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5. Pursue Transformational Opportunities Alongat the Broad Human Resources SpectrumIntersection of Talent and Strategy
We have an unrivaled ability to address the entire talent continuum, delivering solutions and products in the following areas:
We will continue to internally develop and add new products and services that our clients demand while pursuing a disciplined acquisition strategy. We have developed a core competency in the identification, acquisitionidentifying, acquiring and integration ofintegrating M&A targets that play a significant role inhave the attainment ofpotential to further our strategic objectives. As we look forward, we will continue building Korn Ferry as the leading authority on driving business performance through people.objectives and enhance shareholder value. Our disciplined approach to M&A will continue to play a vitalcritical role in this journey.the ongoing evolution of Korn Ferry into an industry specialized, business outcomes oriented solutions provider at the intersection of talent and strategy. While we will continue to execute on our targeted organic growth pathways, M&A will be a vital component of our future growth and capital deployment strategies.
Our Services and Organization
OrganizationOUR ORGANIZATION
The Company operates inthrough its three global business segments: Executive Search, Hay Group,Advisory, and Futurestep.RPO & Professional Search. Our executive searchExecutive Search business is managed and reported on a geographic basis throughout our four regions: North America, Europe, the Middle East and Africa (“EMEA”), Asia Pacific and Latin America. Hay GroupAdvisory and FuturestepRPO & Professional Search are managed on a global basis with operations in North America, Europe,EMEA, Asia Pacific and Latin America.
We address the people and organizational advisory needs of our clients through our three business segments:
Executive Search
Overview—Korn Ferry Executive Search helps clients attract the best executive talent for movingand hire leaders who fit with their companies in the right direction.organization and make it stand out. Our services are typically used to fill executive-level positions, such as board directors, chief executive officers, chief financial officers, chief operating officers, chief information officers, chief human resource officers and other senior executive officers.
Our Executive Search services concentrate on searches for positions with average annual cash compensation of $360,000 or more, or comparable compensation in foreign locations. The industry is comprised of retained and contingency recruitment firms. Retained firms, such as Korn Ferry, typically charge a fee for their services equal to approximately one-third of the first-year annual cash compensation for the position being filled regardless of whether the position is filled. Contingency firms generally work on a non-exclusive basis and are compensated only upon successfully placing a recommended candidate.
As part of being retained by a client to conduct a search, we assemble a team comprised of consultants with appropriate geographic, industry and functional expertise. We utilize a standardized and differentiated approach to placing talent that integrates our research-based IP with our practical experience. Our search consultants serve as management advisors who work closely with the client in identifying, assessing and placing qualified candidates. In fiscal 2016,2019, we executed 8,3756,790 new executive search assignments.
We utilize a standardized approach to placing talent that integrates research based IP with our practical experience. Providing a more complete view of the candidate than is otherwise possible, we believe our proprietary tools generate better results in attracting the right person for the position.
We emphasize a close working relationship with the client and a comprehensive understanding of the client’s business issues, strategy and culture. The search team consults with its established network of resources and searches our databases containing profiles of approximately five million executives to assist in identifying individuals with the right background, cultural fit and abilities. Through this process, an original list of candidates is carefully screened through phone interviews, video conferences and in-person meetings. Client and candidates completeKorn Ferry’s Four Dimensional Executive Assessment. Launched in fiscal 2015 and powered by Korn Ferry’s Four Dimensions of Leadership & Talent, this tool gives clients insights about each candidate’s competencies, personality traits, drivers, and past experiences that are aligned to the role. We conduct due diligence and background verification of the candidates throughout this process, at times with the assistance of an independent third party. Beginning in fiscal 2017, we will offer Hay Group’s industry standard job grading, job description and salary benchmark methodologies in the executive search process.
Industry Specialization—Consultants in our five global markets and one regional specialty practice groupssix industries bring an in-depth understanding of the market conditions and strategic management issues faced by clients within their specific industryindustries and geography.geographies. We are continually looking to expand our specialized expertise through internal development and strategic hiring in targeted growth areas.
Percentage of Fiscal 20162019 Assignments Opened by Industry Specialization
Global | ||||
Industrial | 31 | % | ||
Financial Services | 20 | % | ||
Life Sciences/Healthcare Provider | ||||
| 16 | % | ||
Consumer | 15 | % | ||
Technology | 13 | % | ||
Regional Specialties (United States): | ||||
Education/Not-for-Profit | 5 | % |
Functional Expertise—We have organized executive search centers of functional expertise, composed of consultants who have extensive backgrounds in placing executives in certain functions, such as board directors, CEOs and other senior executive officers. Our Board & CEO Services group, for example, focuses exclusively on placing CEOs and board directors in organizations around the world. This is a dedicated team from the most senior ranks of the Company. Their work is with CEOs and in the board room,boardroom, and their expertise is organizational leadership and governance. They conduct hundreds of engagements every year, tapping talent from every corner of the globe. This work spans all ranges of organizational scale and purpose. Members of functional groups are located throughout our regions and across our industry groups.
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Percentage of Fiscal 20162019 Assignments Opened by Functional Expertise
Board Level/CEO/CFO/Senior Executive and General Management | 71 | % | ||
Finance and Control | 9 | % | ||
Marketing and Sales | 6 | % | ||
| 5 | % | ||
Manufacturing/Engineering/Research and Development/Technology | 5 | % | ||
| 4 | % |
Regions
Regions
North America— We currently have 23 officesAs of April 30, 2019, we had operations in 19 cities throughout the United States and Canada. In fiscal 2016,2019, the region generated fee revenue of $371.4$455.8 million and opened 2,5082,901 new engagements with an average of 222256 consultants.
EMEA— We currently have 18 officesAs of April 30, 2019, we had operations in 1623 cities in 20 countries throughout the region. In fiscal 2016,2019, the region generated fee revenue of $144.3$182.8 million and opened 1,5692,011 new engagements with an average of 130166 consultants.
Asia Pacific— We currently have 19 officesAs of April 30, 2019, we had operations in 18 cities in 10 countries throughout the region. In fiscal 2016,2019, the region generated fee revenue of $80.5$104.3 million and opened 9831,303 new engagements with an average of 9096 consultants.
Latin America— We currently operate a networkAs of 11 officesApril 30, 2019, we had operations in 89 cities in 7 countries covering the entire Latin AmericanAmerica region. TheIn fiscal 2019, the region generated fee revenue of $26.7$31.9 million in fiscal 2016 and opened 457575 new engagements with an average of 2836 consultants. In the fourth quarter of fiscal 2016, we obtained control of our Mexico subsidiary and began to consolidate the operations.
Client Base—Our 5,5753,993 Search engagement clients in fiscal 2019 include many of the world’s largest and most prestigious public and private companies, and 54% of FORTUNE 500 companies were clients in fiscal 2016. companies.
Competition—In fiscal 2016, only two clients represented more than 1% of fee revenue,Executive Search, we compete with those clients representing a combined 2.6% of fee revenue.
Competition— Other multinationalother global executive search firms include Egon Zehnder International, Heidrick & Struggles International, Inc., Russell Reynolds Associates and Spencer Stuart.firms. Although these firms are our largest competitors, in executive search, we also compete with smaller boutique firms that specialize in specific regional, industry or functional searches. We believe our brand name, differentiated business model, systematic approach to client service, cutting-edge technology, unique IP, global network, prestigious clientele, strong specialty practices and high-caliber colleagues are recognized worldwide. We also believe our long-term incentive compensation arrangements, as well as other executive benefits, distinguish us from most of our competitors and are important in attracting and retaining our key consultants.
Hay GroupAdvisory
Overview—Korn Ferry Hay Group helps align an organizationclients design their organization—the structure, roles and responsibilities—and shows them the best way to itscompensate, develop and motivate their people. Our focus is on making change happen and helping people – developing, engaging, and rewarding themorganizations exceed their potential. Through our talented colleagues, robust solutions and intellectual property, our consultants are able to reach new heights.solve the most disruptive and challenging organizational and talent problems facing clients.
Hay Group is divided into two areas – Advisory and Productized Services. Our Advisory business addressesteam is comprised of top leadership and organizational advisory consultants and thought leaders, working in 85 cities in 49 countries. Our consultants are predominately recruited from local markets, so they are sensitive to local issues, but work together in global teams, resulting in larger opportunities with greater client and commercial impact.
We are an advisory leader and many of the world’s most admired organizations choose to partner with us because of our track record delivering successful outcomes, our ability to listen, and our focus on putting our clients first. We accomplish this through a combination of solution, consulting and other products that address how people work and show how to reward, develop, engage and motivatenurture them so that their strategies succeed. We deliver solutions that capitalize on the breadth of our intellectual property,IP, service offerings and expertise to do what is right for the client. Our Productized Services business combinesclient—transforming ideas into actionable insights. Clients can depend on our proven methodologyproducts and decadesplatforms to be data backed, market tested and agile.
Korn Ferry is known for creating and owning one of insight and packages them into a range of new tools, supporting recurring HR processes in the domains of Pay, Talent, and Engagement.
We have made significant investments in these service areas with the acquisitions of Lominger Limited, Inc., Lominger Consulting (“Lominger”) and LeaderSource in fiscal 2007, Lore International in fiscal 2009, SENSA Solutions in fiscal 2010, PDI and Global Novations in fiscal 2013, Pivot Leadership in fiscal 2015, and Legacy Hay Group in fiscal 2016.
Regions— Hay Group solutions are delivered by an experienced team of consultants and the richest and most comprehensive people and pay data sets in the world, including the most widely used job evaluation methodology. We have helped clients assess and develop hundreds of thousands of managers and executives. In addition, we have built a database of organizational management information that enables our clients to benchmark themselves against the best performers in their industries on any multitude of dimensions.
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Within Advisory, we offer the following core go-to-market solutions:
Organizational Strategy: We provide end-to-end support to organizations that want to transform their business. Strategy becomes operationalized by aligning the tangible elements of the organization—people, structure and process—and the intangible elements—motivations, relationships and culture.
Assessment and Succession: We provide actionable, research-backed insight and products that allow organizations to understand the talent they have, benchmarked against the talent they need to deliver on the business strategy, and we help them close any gaps.
Leadership Development: We develop leaders at every stage of the leadership journey, from first time manager to CEO, with a spectrum of high-touch and high-tech leadership development experiences that are tightly aligned with succession and talent processes. Our solutions are backed by tools and techniques that are delivered by hundreds of dedicated leadership development experts across the globe.
Rewards and Benefits: We help organizations design rewards to achieve their strategic objectives, to pay their people fairly for doing the right things—with rewards they value—at a cost the organization can afford. Our advice is backed by the quality and quantity of our pay data and insightswidely used job evaluation methodology.
These solutions are often bundled into integrated market offerings (e.g., Digital Transformation, M&A) that integrate our best thinking across our solutions, enabling us to develop innovative and differentiated approaches to our clients’ most pressing business challenges.
These solutions are also enhanced, enabled and optimized through various products, allowing clients to resolve people challenges consistently and cost effectively. Some are delivered by our accredited experts; others through our powerful digital tools.
Consulting fee revenue was $568.3 million, $540.5 million and $497.7 million in fiscal 2019, 2018 and 2017, respectively. This represented 30%, 31% and 32% of the world. Company’s total fee revenue in fiscal 2019, 2018 and 2017, respectively.
Products fee revenue was $252.7 million, $244.5 million and $226.5 million in fiscal 2019, 2018 and 2017, respectively.
Regions—As of April 30, 2016,2019, we had Hay GroupAdvisory operations in 2123 cities in North America, 3533 in Europe, 19EMEA, 20 in Asia Pacific, and 109 in Latin America.
Client Base—During fiscal 2016, Hay Group2019, the Advisory segment partnered with 9,903approximately 10,000 clients across the globe including 60%and 15% of Advisory’s fiscal 2019 fee revenue was referred from Korn Ferry’s Executive Search and RPO & Professional Search segments. Our clients come from the FORTUNE 500.private, public and not-for-profit sectors, across every major industry and represent diverse business challenges.
Competition—The people and organizational consulting market is extremely competitive, as companies are increasingly seeking ways to synchronize their strategy and talent to drive superior business performance. Our main competitors include consulting organizations affiliated with accounting, insurance, information systems, executive search and staffing firms, like Aon Hewitt, Willis Towers Watson, Deloitte, McKinsey, RHR International, Development Dimensions International, Center for Creative Leadership, Right Management, Mercer and SHL, a subsidiary of Corporate Executive Board.as well as strategy consulting firms. Although these firms are our largest competitors, we also compete with smaller boutique firms that specialize in specific regional, industry or functional aspects of leadership and organizational advisory services.HR consulting.
FuturestepSuccessful strategy implementation is 90% about execution, and successful execution is 90% about getting the people, organization and cultural aspects right. This is where we have an edge over our competition. We focus on making change happen. In a world of constant disruption, it is critical that we build our clients’ capability to keep on changing—embedding it into every consulting project.
We also believe our products and IP, utilized every day and embedded into the core business processes of the world’s most admired companies, are a major competitive differentiator.
RPO & Professional Search
Overview—Korn Ferry Futurestep offers clients a portfolio ofcombines people, process expertise and IP enabled technology to deliver enterprise talent acquisition solutions to our clients. Our recruiting solutions have breadth, including all functional talent segments—IT, Marketing, R&D, Commercial Sales, HR, Supply Chain, Finance and Legal. We also have depth, with the ability to deliver transaction sizes ranging from single professional searches to team, department and line of business projects, and enterprise global professional recruiting solutions. Our global capabilities deliver 1-10,000 or more new hires to address our clients’ employment needs.
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RPO: In fiscal 2019, Korn Ferry was recognized as a top five RPO Project Recruitment, Professional Search, Talent Consultingprovider in the Baker’s Dozen list, marking our 12th consecutive year on the list. Through decades of experience, we have enhanced our RPO solution to deliver quality candidates that drive our clients’ business strategies. We leverage proprietary IP and Employee Communications. Each Futurestep engagement leverages a global recruitment processdata sets to guide clients on the critical skills and best-in-class technologycompetencies to maximizelook for, compensation Information to align with market demand, and measure quality.assessment tools to ensure candidate fit.
Futurestep combinesWe combine traditional recruitment expertise with a multi-tiered portfolio of talent acquisition solutions. Futurestep consultants,Consultants, based in 1830 countries, have access to our databases of pre-screened, mid-level professionals. Our global candidate pool complements our international presence and multi-channel sourcing strategy to aidprovide speed, efficiency and quality service for clients worldwide.
Futurestep’s customizableProject Recruitment: We are able to deliver the same talent acquisition services as we would in an end-to-end RPO solution, combines our recruiting expertisebut within a defined project start and end date. Our Project Recruitment solution is seamless and aligned with state-of-the-art technologiesthe client’s broader talent acquisition strategy. Clients enjoy the same benefits around reduced time to hire, reduced cost per hire and improved candidate quality that they would with a full RPO solution, but via an on-demand model to manage short-term or specialized needs.
Professional Search: We are positioned to help companies streamline recruitment processes, enhance candidate experience,organizations identify and improve qualityattract professionals at the middle to upper levels of hire.
INDUSTRIES: ▪ Consumer | FUNCTIONAL EXPERTISE: ▪ Finance & Accounting |
▪ Financial Services | ▪ Human Resources |
▪ Industrial | ▪ Information Technology |
▪ Life Sciences/Healthcare | ▪ Sales, Marketing & Digital |
▪ Technology | ▪ Supply Chain Management |
▪ Education/Not-for-Profit |
Project Recruitment services offer a proven, outsourced approach for delivering the right talent in the right numbers and in the right location — within a specific timeframe.
In terms of Search, Futurestep’s brand association with Korn Ferry has helped us become regarded by today’s industry leaders as a trusted resource for securing professional and specialized talent.
Talent Consulting services support clients with the wider aspects of the talent lifecycle including talent acquisition advisory, and candidate assessment and selection.
Talent Communications services help clients create a compelling employer brand experience. We use the latest research techniques to identify each client’s unique Employer Value Proposition and then bring it to life across the full range of traditional and digital media.
Regions— We openedOur innovative search process mirrors our first Futurestep office in Los Angeles in May 1998. In January 2000, we acquired the Executive Search & Selection businesssolution, offering access to active and passive candidate pools, the industry’s richest data on salaries and employee engagement, and proprietary tools such as Four Dimensional Executive Assessment and Executive Snapshot. A wealth of PA Consulting with operationsassessment data defines the traits needed for success in Europeeach role we recruit and Asia Pacific. matches candidates against best-in-class profiles while also gauging cultural fit.
Regions—As of April 30, 2016,2019, we had FuturestepRPO & Professional Search operations in 13 cities in North America, 813 in Europe, 15EMEA, 18 in Asia Pacific, and 29 in Latin America.
Client Base—During fiscal 2016, Futurestep2019, the RPO & Professional Search segment partnered with 1,5782,093 clients across the globe and 42%44% of Futurestep’sRPO & Professional Search’s fiscal 20162019 fee revenue was referred from Korn Ferry’s Executive Search and Hay GroupAdvisory segments.
Competition— FuturestepWe primarily competescompete for RPO business with other global RPO providers such as Cielo Talent, Alexander Mann Solutions, Hays, Kenexa, Spherion, KellyOCG and ADP, and competescompete for search assignments with regional contingency recruitment firms and large national retained recruitment firms. We believe our competitive advantage is distinct. We are strategic, working with clients to hire best-fit candidates using our assessment IP, proprietary technology and professional recruiters. We also work under the One Korn Ferry umbrella to help clients plan for their broader talent acquisition needs as part of their business strategy planning.
Professional Staff and Employees
We have assembled a wealth of talent at our disposal.that is rewarded based on performance. Our Company brings together the best and brightest from a wide range of disciplines and professions — professions—everything from academic research and technology development to executive recruiting, consulting, and business leadership. We are also a culturally diverse organization. Our people come from all over the world and speak a multitude of languages. For us, this diversity is a key source of strength. It means we have people who are able to challenge convention, offer unique perspectives, and generate innovative ideas. Equally important, it means we can think and act globally — globally—just like our clients.
As of April 30, 2016,2019, we had a total of 6,9478,678 full-time employees. Of this, 1,6821,960 were Executive Search employees consisting of 488565 consultants and 1,1941,395 associates, researchers, administrative and support staff. Hay GroupOur Advisory segment had 3,6263,603 employees as of April 30, 2016,2019, consisting of 562579 consultants and 3,0643,024 associates, researchers, administrative and support staff. FuturestepOur RPO & Professional Search segment had 1,5302,942 employees as of April 30, 2016,2019, consisting of 114304 consultants and 1,4162,638 administrative and support staff. Corporate had 109173 professionals atas of April 30, 2016.2019. We are not party to a collective bargaining agreement and consider our relations with our employees to be good. Korn Ferry is an equal opportunity employer.
In Executive Search, senior associates, associates and researchers support the efforts of our consultants with candidate sourcing and identification, but do not generally lead assignments. These colleagues are developed through our training and professional development programs. Promotion to senior client partner is based on a variety of factors, including demonstrated superior execution and business development skills, the ability to identify solutions to complex issues, personal and professional ethics, a thorough understanding of the market and the ability to develop and help build effective teams. In addition, we have a program for recruiting experienced professionals into our Company.9
The following table provides information relating to each of our business segments for fiscal 2016. Financial information regarding our business segments for fiscal 2015 and 2014 and additional information for
fiscal 2016 is contained in Note 11 –Business Segments, in the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K, which is incorporated herein by reference.
Fee Revenue | Operating Income (Loss) | Number of Consultants as of April 30, 2016 | ||||||||||
(dollars in thousands) | ||||||||||||
Executive Search: | ||||||||||||
North America | $ | 371,345 | $ | 100,381 | 230 | |||||||
EMEA | 144,319 | 20,607 | 131 | |||||||||
Asia Pacific | 80,506 | 12,572 | 94 | |||||||||
Latin America | 26,744 | (1,854 | ) | 33 | ||||||||
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| |||||||
Total Executive Search | 622,914 | 131,706 | 488 | |||||||||
Hay Group (1) | 471,145 | (3,415 | ) | 562 | ||||||||
Futurestep | 198,053 | 26,702 | 114 | |||||||||
Corporate | — | (102,301 | ) | — | ||||||||
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| |||||||
Total | $ | 1,292,112 | $ | 52,692 | 1,164 | |||||||
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The following table provides information on fee revenues for each of the last three fiscal years attributable to the regions in which the Company operates:
Year Ended April 30, | ||||||||||||
2016 (1) | 2015 | 2014 | ||||||||||
(in thousands) | ||||||||||||
Fee Revenue: | ||||||||||||
United States | $ | 669,585 | $ | 557,024 | $ | 507,280 | ||||||
Canada | 40,401 | 39,252 | 38,113 | |||||||||
EMEA | 343,460 | 248,865 | 232,329 | |||||||||
Asia Pacific | 187,631 | 145,625 | 145,452 | |||||||||
Latin America | 51,035 | 37,386 | 37,127 | |||||||||
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Total | $ | 1,292,112 | $ | 1,028,152 | $ | 960,301 | ||||||
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Additional financial information regarding the regions in which the Company operates can be found in Note 11 —Business Segments, in the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K.
The risks described below are the material risks facing our Company. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be materially adversely affected by any of these risks.
Competition in our industries could result in our losing market share and/or require us to charge lower prices for services, which could reduce our revenue.
WeWhile we are continuing to evolve to One Korn Ferry integrated approach in an effort to better compete in the market, we continue to face significant competition to each of our services offerings. The human resource consulting market has been traditionally fragmented and a number of large consulting firms, such as Ernst & Young, McKinsey, Willis Towers Watson and Deloitte are building businesses in human resource management consulting to serve these needs. Our advisory business line continues to face competition from human resource consulting businesses. Many of these competitors are significantly larger than Korn Ferry and have considerable resources at their disposal, allowing for executive search business with numerouspotentially significant investment to grow their human resource consulting business. Increased competition, whether as a result of professional and social networking website providers, traditional executive search firms, sole proprietors and in-house human resource professionals (as noted above) or larger consulting firms building human resources consulting businesses, may lead to pricing pressures that could negatively impact our business. For example, increased competition could require us to charge lower prices, and/or cause us to lose market share, each of which could reduce our fee revenue.
Our executive search services face competition from both traditional and non-traditional competitors that provide job placement services, including other large global executive search firms, smaller specialty firms and web-based firms. In recent years, we have also begun facing increased competition from sole proprietors and in-house human resource professionals whose ability to provide job placement services has been enhanced by professional profiles made available on the internet and enhanced social media-based search tools. The continued growth of the shared economy and related freelancing platform sites may also negatively impact demand for our services by allowing employers seeking services to connect with employees in real time and without any significant cost. Traditional executive search competitors include Egon Zehnder, International, Heidrick & Struggles International, Inc.,
Russell Reynolds Associates and Spencer Stuart. In each of our markets, one or more of our competitors may possess greater resources, greater name recognition, lower overhead or other costs and longer operating histories than we do, which may give them an advantage in obtaining future clients, capitalizing on new technology and attracting qualified professionals in these markets. Additionally, specialty firms can focus on regional or functional markets or on particular industries and executive search firms that have a smaller client base may be subject to fewer off-limits arrangements. There are no extensive barriers to entry into the executive search industry and new recruiting firms continue to enter the market.
We believe the continuing development and increased availability of information technology will continue to attract new competitors, especially web-enabled professional and social networking website providers, and these providers may be facilitating a company’s ability to insource their recruiting capabilities. Competitors in these fields include SmashFly, iCIMS, Yello, Indeed, Google for Jobs and Jobvite. As these providers continue to evolve, they may develop offerings similar to or more expansive than ours, thereby increasing competition for our services or more broadly causing disruption in the executive search industry.
The human resource consulting business has been traditionally fragmented Further, as technology continues to develop and a numberthe shared economy continues to grow, we expect that the use of large consulting firms, such as Accenture, Aon Hewitt and Willis Towers Watson are building businesses in human resource management consulting to serve these needs. Increased competition, whether asfreelancing platform sites will become more prevalent. As a result, of these professional and social networking website providers, traditional executive search firms, or sole proprietors and in-house human resource professionals (as noted above),companies may leadturn to pricing pressures thatsuch sites for their talent needs, which could negatively impact demand for the services we offer.
Our RPO & Professional Search services primarily competes for business with other RPO providers such as Cielo, Alexander Mann Solutions, Kenexa, Spherion, and Kelly Services, and competes for mid-level professional search assignments with regional contingency recruitment firms and large national retained recruitment firms. In addition, some organizations have developed or may develop internal solutions to address talent acquisition that may be competitive with our solutions. This is a highly competitive and developing industry with numerous specialists. To compete successfully and achieve our growth targets for our talent acquisition business, we must continue to support and develop assessment and analytics solutions, maintain and grow our proprietary database, deliver demonstrable return on investment to clients, support our products and services globally, and continue to provide consulting and training to support our assessment products. Our failure to compete effectively with our competitors could adversely affect our operating results and future growth.
Consolidation in the industries that we serve could harm our business. For example,
Companies in the industries that we serve may seek to achieve economies of scale and other synergies by combining with or acquiring other companies. If two or more of our clients merge or consolidate and combine their operations, we may experience a decrease in the amount of services we perform for these clients. If one of our clients merges or consolidates with a company that relies on another provider for its services, we may lose work from
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that client or lose the opportunity to gain additional work. The increased competitionmarket power of larger companies could require us to charge lower prices, and/or cause us to lose market share, eachalso increase pricing and competitive pressures on us. Any of whichthese possible results of industry consolidation could reduceharm our fee revenue.business, results of operations and financial condition.
If we fail to attract and retain qualified and experienced consultants, our revenue could decline and our business could be harmed.
We compete with other executive and professional search and consulting firms for qualified and experienced consultants. These other firms may be able to offer greater compensation and benefits or more attractive lifestyle choices, career paths or geographic locations than we do. Attracting and retaining consultants in our industry is particularly important because, generally, a small number of consultants have primary responsibility for a client relationship. Because client responsibility is so concentrated, the loss of key consultants may lead to the loss of client relationships. In fiscal 2016,2019, for example, our top three executive searchExecutive Search and Advisory consultants had primary responsibility for generating business equal to approximately 1% and 2% of our netfee revenues, respectively, and our top ten executive searchExecutive Search and Advisory consultants had primary responsibility for generating business equal to approximately 3%2% and 5% of our net revenues.fee revenues, respectively. This risk is heightened due to the general portability of a consultant’s business;business: consultants have in the past, and will in the future, terminate their employment with our Company. Any decrease in the quality of our reputation, reduction in our compensation levels relative to our peers or restructuring of our compensation program, whether as a result of insufficient revenue, a decline in the market price of our common stock or for any other reason, could impair our ability to retain existing consultants or attract additional qualified consultants with the requisite experience, skills and established client relationships. Our failure to retain our most productive consultants, whether in Executive Search, Hay GroupAdvisory or Futurestep,RPO & Professional Search, or maintain the quality of service to which our clients are accustomed, andas well as the ability of a departing consultant to move business to his or her new employer, could result in a loss of clients, which could in turn cause our fee revenue to decline and our business to be harmed. We may also lose clients if the departing executive search, Hay GroupExecutive Search, Advisory or FuturestepRPO & Professional Search consultant has widespread name recognition or a reputation as a specialist in his or her line of business in a specific industry or management function. We could also lose additional consultants if they choose to join the departing Executive Search, Hay GroupAdvisory or FuturestepRPO & Professional Search consultant at another executive search or consulting firm. If we fail to limit departing consultants from moving business or recruiting our consultants to a competitor, our business, financial condition and results of operations could be adversely affected.
Acquisitions, or our inability to effect acquisitions,We may have an adverse effect on our business.
We have completed several strategic acquisitions of businessesbe limited in the last several years, including our acquisitions of Legacy Hay Group in fiscal 2016, Pivot Leadership in fiscal 2015 and PDI and Global Novations in fiscal 2013. Targeted acquisitions have been part of our growth strategy, and we may in the future selectively acquire businesses that are complementary to our existing service offerings. However, we cannot be certain that
we will be able to continue to identify appropriate acquisition candidates or acquire them on satisfactory terms. Our ability to consummate such acquisitions on satisfactory terms will depend on:
Our ability to make strategic acquisitions may also be conditioned on our ability to fund such acquisitions through the incurrence of debt or the issuance of equity. Our credit agreement dated as of June 15, 2016 limits us from consummating permitted acquisitions unless we are in pro forma compliance with our financial covenants, our pro forma leverage ratio is no greater than 2.50 to 1.00, and domestic liquidity after giving effect to the acquisition is at least $50.0 million. If we are required to incur substantial indebtedness in connection with an acquisition, and the results of the acquisition are not favorable, the increased indebtedness could decrease the value of our equity. In addition, if we need to issue additional equity to consummate an acquisition, doing so would cause dilution to existing stockholders.
If we are unable to make strategic acquisitions, or the acquisitions we do make are not on terms favorable to us or not effected in a timely manner, it may impede the growth of our business, which could adversely impact our profitability and our stock price.
We may not be able to successfully integrate or realize the expected benefitsrecruit candidates from our acquisitions.
Our future success may depend in part onclients, and we could lose search opportunities to our ability to complete the integration of acquisition targets successfully into our operations. The process of integrating an acquired business, including the ongoing integration of Legacy Hay Group, may subject us to a number of risks, including:
If our acquisitions are not successfully integrated, our business, financial condition and results of operations, as well as our professional reputation, could be materially adversely affected.
Further, we cannot assure that acquisitions will result in the financial, operational or other benefits that we anticipate. Some acquisitions, including the Legacy Hay Group acquisition, may not be immediately accretive to earnings and some expansion may result in significant expenditures.
Businesses we acquire may have liabilities or adverse operating issuescompetition, which could harm our operating results.business.
BusinessesEither by agreement with clients, or for client relations or marketing purposes, we acquiresometimes refrain from, for a specified period of time, recruiting candidates from a client when conducting searches on behalf of other clients. These off-limit agreements can generally remain in effect for up to two years following the completion of an assignment. The duration and scope of the off-limit agreement, including whether it covers all operations of the client and its affiliates or only certain divisions of a client, generally are subject to negotiation or internal policies and may depend on factors such as the scope, size and complexity of the client’s business, the length of the client relationship and the frequency with which we have liabilities or adverse operating issues, or both,been engaged to perform executive and professional searches for the client. If a prospective client believes that we either failare overly restricted by these off-limit agreements from recruiting employees of our existing clients, these prospective clients may not engage us to discover through due diligenceperform their executive searches. Therefore, our inability to recruit candidates from these clients may make it difficult for us to obtain search assignments from, or underestimate prior to the consummation of the acquisition. These liabilities
and/fulfill search assignments for, other companies in that client’s industry. We cannot ensure that off-limit agreements will not impede our growth or issues may include the acquired business’ failureour ability to comply with, or other violations of, applicable laws, rules, or regulations or contractual or other obligations or liabilities. As the successor owner, we may be financially responsible for,attract and may suffer harm to our reputationserve new clients, or otherwise be adversely affected by,harm our business.
We incur substantial costs to hire and retain our professionals, and we expect these costs to continue and to grow.
Our success depends on attracting and retaining professional employees. To attract and retain such liabilities and/or issues. An acquired business alsoemployees in a competitive marketplace, we must provide a competitive compensation package. As such, we may pay hiring bonuses and annual retention bonuses to secure the services of new hires and retain our professional employees. Such payments have problems with internal controls over financial reporting, which couldtaken the form of long-term deferred compensation, restricted stock, and unsecured cash payments in turn cause us the form of promissory notes. The aggregate amount of these awards to haveemployees is significant deficiencies or material weaknessesand as competition in our own internal controls over financial reporting. These and any other costs, liabilities, issues, and/or disruptions associated with any past or future acquisitions, and the related integration, could harm our operating results.
As a resultindustry intensifies, we expect to continue issuing these types of our acquisitions, we have substantial amounts of goodwill and intangible assets, and changes in business conditions could cause these assets to become impaired, requiring write-downs that would adversely affect our operating results.
All of our acquisitions have been accounted for as purchases and involved purchase prices well in excess of tangible asset values, resulting in the creation of a significant amount of goodwill and other intangible assets. As of April 30, 2016, goodwill and purchased intangibles accounted for approximately 31% and 12%, respectively, of our total assets. Under U.S. generally accepted accounting principles (“GAAP”), we do not amortize goodwill and intangible assets acquired in a purchase business combination that are determined to have indefinite useful lives, but instead review them annually (or more frequently if impairment indicators arise) for impairment. Although we have to date determined that such assets have not been impaired, future events or changes in circumstances that result in an impairment of goodwill or other intangible assets would have a negative impact on our profitability and operating results.
We are a cyclical Company whose performance is tied to local and global economic conditions.
Demand for our services is affected by global economic conditions and the general level of economic activity in the geographic regions and industries in which we operate. When conditions in the global economy, including the credit markets, deteriorate, or economic activity slows, many companies hire fewer permanent employees and some companies, as a cost-saving measure, choose to rely on their own human resources departments rather than third-party search firms to find talent, which negatively affects our financial condition and results of operations, as evidenced by our results of operations during the Great Recession of 2008 and 2009 that continued to impact our results of operations through fiscal 2010. We may also experience more competitive pricing pressure during periods of economic decline. While the economic activity in the regions and industries in which we operate has shown improvement, general market uncertainty continues to exist.long-term incentive awards. If such uncertainty persists, if the national or global economy and/or credit market conditionslabor markets were to deteriorate in general deteriorate, or if the unemployment rate increases,future, such uncertainty or changes couldwould put negative pressure on demand for our services, andthereby negatively affecting our pricing, generation of future revenues, but we would continue to incur the cost of these long-term awards, resulting in lower cash flows and a negative effect on our business, financial condition and results of operations. In addition, some of our clients may experience reduced access to credit and lower revenues resulting in their inability to meet their payment obligations to us.
If we are unable to retain our executive officers and key personnel or integrate new members of our senior management who are critical to our business, we may not be able to successfully manage our business in the future.
Our future success depends upon the continued service of our executive officers and other key management personnel. Competition for qualified personnel is intense, and we may compete with other companies that have greater financial and other resources than we do. If we lose the services of one or more of our executives or key
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employees, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, or if we are unable to integrate new members of our senior management who are critical to our business, we may not be able to successfully manage our business or achieve our business objectives.
If we are unable to maintain our professional reputation and brand name, our business will be harmed.
We depend on our overall reputation and brand name recognition to secure new engagements and to hire qualified professionals. Our success also depends on the individual reputations of our professionals. We obtain a majority of our new engagements from existing clients or from referrals by those clients. Any client who is dissatisfied with our services can adversely affect our ability to secure new engagements.
If any factor, including poor performance or negative publicity, whether or not true, hurts our reputation, we may experience difficulties in competing successfully for both new engagements and qualified consultants. Failing to maintain our professional reputation and the goodwill associated with our brand name could seriously harm our business.
The expansion of social media platforms presents new risks and challenges that can cause damage to our brand and reputation.
The inappropriate and/or unauthorized use of certain media vehicles could cause damage to our brand or information leakage that could lead to legal implications, including improper collection and/or dissemination of personally identifiable information of candidates and clients. In addition, negative or inaccurate posts or comments about us on any social networking website could damage our reputation, brand image and goodwill.
We are subject to potential legal liability from clients, employees and candidates for employment. Insurance coverage may not be available to cover all of our potential liability and available coverage may not be sufficient to cover all claims that we may incur.
Our ability to obtain liability insurance, its coverage levels, deductibles and premiums are all dependent on market factors, our loss history and insurers’ perception of our overall risk profile. We are exposed to potential claims with respect to the executive search process. For example, a client could assert a claim for matters such as breach of an off-limit agreement or recommending a candidate who subsequently proves to be unsuitable for the position filled. Further, the current employer of a candidate whom we placed could file a claim against us alleging interference with an employment contract, a candidate could assert an action against us for failure to maintain the confidentiality of the candidate’s employment search, and a candidate or employee could assert an action against us for alleged discrimination, violations of labor and employment law or other matters. Also, in various countries, we are subject to data protection laws impacting the processing of candidate information and other regulatory requirements.
Additionally, as part of our Hay Group services, we often send a team of leadership consultants to our client’s workplaces. Such consultants generally have access to client information systems and confidential information. An inherent risk of such activity includes possible claims of misuse or misappropriation of client intellectual property, confidential information, funds, or other property; harassment; criminal activity; torts; or other claims. Such claims may result in negative publicity, injunctive relief, criminal investigations and/or charges, payment by us of monetary damages or fines, or other material adverse effects on our business.
We cannot ensure that our insurance will cover all claims or that insurance coverage will be available at economically acceptable rates. Our insurance may also require us to meet a deductible. Significant uninsured liabilities could have a material adverse effect on our business, financial condition and results of operations.
We rely heavily on our information systems and if we lose that technology, or fail to further develop our technology, our business could be harmed.
Our success depends in large part upon our ability to store, retrieve, process, manage and protect substantial amounts of information. To achieve our strategic objectives and to remain competitive, we must continue to develop and enhance our information systems. This may require the acquisition of equipment and software and the development of new proprietary software, either internally or through independent consultants. If we are
unable to design, develop, implement and utilize, in a cost-effective manner, information systems that provide the capabilities necessary for us to compete effectively, or for any reason any interruption or loss of our information processing capabilities occurs, this could harm our business, results of operations and financial condition. Although we have disaster recovery procedures in place and insurance to protect against the effects of a disaster on our information technology, we cannot be sure that insurance or these services will continue to be available at reasonable prices, cover all our losses or compensate us for the possible loss of clients occurring during any period that we are unable to provide business services.
Cyber security vulnerabilities could lead to improper disclosure of information obtained from our clients, candidates and employees that could result in liability and harm our reputation.
We use information technology and other computer resources to carry out operational and marketing activities and to maintain our business records. The continued occurrence of high-profile data breaches against various entities and organizations provides evidence of an external environment increasingly hostile to information security. This environment demands that we continuously improve our design and coordination of security controls across our business groups and geographies in order to protect information that we develop or that is obtained from our clients, candidates and employees. Despite these efforts, given the ongoing and increasingly sophisticated attempts to access the information of entities, our security controls over this information, our training of employees, and other practices we follow may not prevent the improper disclosure of such information. We have incurred costs to bolster our security against attacks; such efforts and expenditures, however, cannot provide absolute assurance that future data breaches will not occur. We depend on our overall reputation and brand name recognition to secure new engagements. Perceptions that we do not adequately protect the privacy of information could inhibit attaining new engagements and qualified consultants, and could potentially damage currently existing client relationships.
Limited protection of our intellectual property could harm our business, and we face the risk that our services or products may infringe upon the intellectual property rights of others.
We cannot guarantee that trade secret, trademark and copyright law protections are adequate to deter misappropriation of our intellectual property (which has become an increasingly important part of our business). Existing laws of some countries in which we provide services or products may offer only limited protection of our intellectual property rights. Redressing infringements may consume significant management time and financial resources. Also, we may be unable to detect the unauthorized use of our intellectual property and take the necessary steps to enforce our rights, which may have a material adverse impact on our business, financial condition or results of operations. We cannot be sure that our services and products, or the products of others that we offer to our clients, do not infringe on the intellectual property rights of third parties, and we may have infringement claims asserted against us or our clients. These claims may harm our reputation, result in financial liability and prevent us from offering some services or products.
We have invested in specialized technology and other intellectual property for which we may fail to fully recover our investment or which may become obsolete.
We have invested in developing specialized technology and intellectual property, including proprietary systems, processes and methodologies, such as Searcher Express and KF Insight, that we believe provide us a competitive advantage in serving our current clients and winning new engagements. Many of our service and product offerings rely on specialized technology or intellectual property that is subject to rapid change, and to the extent that this technology and intellectual property is rendered obsolete and of no further use to us or our clients, our ability to continue offering these services, and grow our revenues, could be adversely affected. There is no assurance that we will be able to develop new, innovative or improved technology or intellectual property or that our technology and intellectual property will effectively compete with the intellectual property developed by our competitors. If we are unable to develop new technology and intellectual property or if our competitors develop better technology or intellectual property, our revenues and results of operations could be adversely affected.
We face risks associated with social and political instability, legal requirements, economic conditions and currency fluctuations in our international operations.
We operate in 52 countries and during the year ended April 30, 2016, generated 48% of our fee revenue from operations outside of the United States. We are exposed to the risk of changes in social, political, legal and economic conditions inherent in international operations. Examples of risks inherent in transacting business worldwide that we are exposed to include:
We cannot ensure that one or more of these factors will not harm our business, financial condition or results of operations.
Foreign currency exchange rate risks may adversely affect our results of operations.
A material portion of our revenue and expenses are generated by our operations in foreign countries, and we expect that our foreign operations will account for a material portion of our revenue and expenses in the future. Most of our international expenses and revenue are denominated in foreign currencies. As a result, our financial results could be affected by factors, such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which we have operations. Fluctuations in the value of those currencies in relation to the United States dollar have caused and will continue to cause dollar-translated amounts to vary from one period to another. Given the volatility of exchange rates, we may not be able to manage effectively our currency translation or transaction risks, which may adversely affect our financial condition and results of operations.
We may be limited in our ability to recruit candidates from our clients and we could lose those opportunities to our competition, which could harm our business.
Either by agreement with clients, or for client relations or marketing purposes, we sometimes refrain from, for a specified period of time, recruiting candidates from a client when conducting searches on behalf of other clients. These off-limit agreements can generally remain in effect for up to two years following completion of an assignment. The duration and scope of the off-limit agreement, including whether it covers all operations of the client and its affiliates or only certain divisions of a client, generally are subject to negotiation or internal policies and may depend on factors such as the scope, size and complexity of the client’s business, the length of the client relationship and the frequency with which we have been engaged to perform executive searches for the client. If a prospective client believes that we are overly restricted by these off-limit agreements from recruiting employees of our existing clients, these prospective clients may not engage us to perform their executive searches. Therefore, our inability to recruit candidates from these clients may make it difficult for us to obtain search assignments from, or to fulfill search assignments for, other companies in that client’s industry. We cannot ensure that off-limit agreements will not impede our growth or our ability to attract and serve new clients, or otherwise harm our business.
Consolidation in the industries that we serve could harm our business.
Companies in the industries that we serve may seek to achieve economies of scale and other synergies by combining with or acquiring other companies. If two or more of our clients merge or consolidate and combine their operations, we may experience a decrease in the amount of services we perform for these clients. If one of our clients merges or consolidates with a company that relies on another provider for its services, we may lose work from that client or lose the opportunity to gain additional work. The increased market power of larger companies could also increase pricing and competitive pressures on us. Any of these possible results of industry consolidation could harm our business, results of operations and financial condition.
We have provisions that make an acquisition of us more difficult and expensive.
Anti-takeover provisions in our Certificate of Incorporation, our Bylaws and under Delaware law make it more difficult and expensive for us to be acquired in a transaction that is not approved by our Board of Directors. Some of the provisions in our Certificate of Incorporation and Bylaws include:
These provisions could discourage an acquisition attempt or other transaction in which stockholders could receive a premium over the current market price for the common stock.
Unfavorable tax laws, tax law changes and tax authority rulings may adversely affect results.
We are subject to income taxes in the United States and in various foreign jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings among countries with differing statutory tax rates or changes in tax laws. The amount of income taxes and other taxes are subject to ongoing audits by United States federal, state and local tax authorities and by non-United States authorities. If these audits result in assessments different from estimated amounts recorded, future financial results may include unfavorable tax adjustments.
We have deferred tax assets that we may not be able to use under certain circumstances.
If we are unable to generate sufficient future taxable income in certain jurisdictions, or if there is a significant change in the time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowances against our deferred tax assets. This would result in an increase in our effective tax rate, and an adverse effect on our future operating results. In addition, changes in statutory tax rates may also change our deferred tax assets or liability balances, with either a favorable or unfavorable impact on our effective tax rate. Our deferred tax assets may also be impacted by new legislation or regulation.
An impairment in the carrying value of goodwill and other intangible assets could negatively impact our consolidated results of operations and net worth.
Goodwill is initially recorded as the excess of amounts paid over the fair value of net assets acquired. While goodwill is not amortized, it is reviewed for impairment at least annually or more frequently if impairment indicators are present. In assessing the carrying value of goodwill, we make qualitative and quantitative assumptions and estimates about revenues, operating margins, growth rates and discount rates based on our business plans, economic projections, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors. Goodwill valuations have been calculated using an income approach based on the present value of future cash flows of each reporting unit and a market approach. We could be required to evaluate the carrying value of goodwill prior to the annual assessment, if we experience unexpected significant declines in operating results or sustained market capitalization declines. These types of events and the resulting analyses could result in goodwill impairment charges in the future. Impairment charges could substantially affect our results of operations and net worth in the periods of such charges.
We may not be able to align our cost structure with our revenue level which in turn may require additional financing in the future that may not be available at all or may be available only on unfavorable terms.
We continuously evaluate our cost base in relation to projected near to mid-term demand for our services in an effort to align our cost structure with the current realities of our markets. If actual or projected fee revenues are negatively impacted by weakening customer demand, we may find it necessary to take cost cutting measures so that we can minimize the impact on our profitability. There is, however, no guarantee that if we do take such measures that such measures will properly align our cost structure to our revenue level. Any failure to maintain a balance between our cost structure and our revenue could adversely affect our business, financial condition, and results of operations and lead to negative cash flows, which in turn might require us to obtain additional financing to meet our capital needs. If we are unable to secure additional financing on favorable terms, or at all, our ability to fund our operations could be impaired, which could have a material adverse effect on our results of operations.
We invest in marketable securities classified as trading and if the market value of these securities declines materially, they could have an adverse effect on our financial position and results of operations.
Marketable securities consist of mutual funds. The primary objectives of the mutual funds are to meet the obligations under certain of our deferred compensation plans. If the financial markets in which these securities trade were to materially decline in value, the unrealized losses and potential realized losses could negatively impact the Company’s financial position and results of operations.
Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.
Should we experience a disaster or other business continuity problem, such as an earthquake, hurricane, terrorist attack, pandemic, security breach, power loss, telecommunications failure or other natural or man-made
disaster, our continued success will depend, in part, on the availability of our personnel, our office facilities, and the proper functioning of our computer, telecommunication and other related systems and operations. In such an event, we could experience near-term operational challenges with regard to particular areas of our operations. In particular, our ability to recover from any disaster or other business continuity problem will depend on our ability to protect our technology infrastructure against damage from business continuity events that could have a significant disruptive effect on our operations. We could potentially lose client data or experience material adverse interruptions to our operations or delivery of services to our clients in a disaster. We will continue to regularly assess and take steps to improve upon our business continuity plans. However, a disaster on a significant scale or affecting certain of our key operating areas within or across regions, or our inability to successfully recover should we experience a disaster or other business continuity problem, could materially interrupt our business operations and cause material financial loss, loss of human capital, regulatory actions, reputational harm, damaged client relationships or legal liability.
As we develop new services, clients and practices, enter new lines of business, and focus more of our business on providing a full range of client solutions, the demands on our business and our operating risks may increase.
As part of our corporate strategy, we are attempting to leverage our research and advisory services to sell a full range of services across the life cycle of a policy, program, project or initiative, and we are regularly searching for ways to provide new services to clients. This strategy, even if effectively executed, may prove insufficient in light of changes in market conditions, technology, competitive pressures or other external factors. In addition, we plan to extend our services to new clients, into new lines of business, and into new geographic locations. As we focus on developing new services, clients, practice areas and lines of business; open new offices; and engage in business in new geographic locations, our operations may be exposed to additional as well as enhanced risks.
In particular, our growth efforts place substantial additional demands on our management and staff, as well as on our information, financial, administrative and operational systems. We may not be able to manage these demands successfully. Growth may require increased recruiting efforts, opening new offices, increased business development, selling, marketing and other actions that are expensive and entail increased risk. We may need to invest more in our people and systems, controls, compliance efforts, policies and procedures than we anticipate. Therefore, even if we do grow, the demands on our people and systems, controls, compliance efforts, policies and procedures may exceed the benefits of such growth, and our operating results may suffer, at least in the short-term, and perhaps in the long-term.
Efforts involving a different focus, new services, new clients, new practice areas, new lines of business, new offices and new geographic locations entail inherent risks associated with our inexperience and competition from mature participants in those areas. Our inexperience may result in costly decisions that could harm our profit and operating results. In particular, new or improved services often relate to the development, implementation and improvement of critical infrastructure or operating systems that our clients may view as “mission critical,” and if we fail to satisfy the needs of our clients in providing these services, our clients could incur significant costs and losses for which they could seek compensation from us. Finally, asAs our business continues to evolve and we provide a wider range of services, we will become increasingly dependent upon our employees, particularly those operating in business environments less familiar to us. Failure to identify, hire, train and retain talented employees who share our values could have a negative effect on our reputation and our business.Finally, even if effectively executed, our strategy may prove insufficient in light of changes in market conditions, technology competitive pressures or other external factors.
Our rebranding plan may take a significant amount of time, involve substantial costs and may not be favorably received by our clients.
On June 12, 2018, the Company’s Board of Directors approved a rebranding Plan for the Company. This Plan includes going to market under a single, master brand architecture, solely as Korn Ferry, and sunsetting of all the Company’s sub-brands, including Futurestep, Hay Group and Lominger, among others. The Company is harmonizing under one brand to help accelerate the firm’s positioning as the preeminent organizational consultancy and bring more client awareness to its broad range of talent management solutions
We may incur substantial costs as a result of rebranding our products and services and may not be able to achieve or maintain brand name recognition or status that is comparable to the recognition and status previously enjoyed by certain of our sub-brands. The failure of our rebranding initiatives could adversely affect our ability to attract and retain clients, which could cause us not to realize some or all of the anticipated benefits contemplated by the rebranding.
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We are subject to potential legal liability from clients, employees, candidates for employment, stockholders and others. Insurance coverage may not be available to cover all of our potential liability and available coverage may not be sufficient to cover all claims that we may incur.
We are exposed to potential claims with respect to the executive search process and the consulting services performed by Advisory. For example, a client could assert a claim for matters such as breach of an off-limit agreement or recommending a candidate who subsequently proves to be unsuitable for the position filled. Further, the current employer of a candidate whom we placed could file a claim against us alleging interference with an employment contract; a candidate could assert an action against us for failure to maintain the confidentiality of the candidate’s employment search; and a candidate or employee could assert an action against us for alleged discrimination, violations of labor and employment law or other matters. Also, in various countries, we are subject to data protection laws impacting the processing of candidate information and other regulatory requirements that could give rise to liabilities/claims. Client dissatisfaction with the consulting services provided by our Advisory consultants may also lead to claims against us.
Additionally, as part of our Advisory services, we often send a team of leadership consultants to our clients’ workplaces. Such consultants generally have access to client information systems and confidential information. An inherent risk of such activity includes possible claims of misuse or misappropriation of client IP, confidential information, funds or other property, as well as harassment, criminal activity, torts, or other claims. Such claims may result in negative publicity, injunctive relief, criminal investigations and/or charges, payment by us of monetary damages or fines, or other material adverse effects on our business.
From time to time, we may also be subject to legal actions or claims brought by our stockholders, including securities, derivative and class actions, for a variety of matters related to our operations, such as significant business transactions, cybersecurity incidents, volatility in our stock, and our responses to stockholder activism, among others. Such actions or claims and their resolution may result in defense costs, as well as settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. The payment of any such costs, settlements, fines or judgments that are not insured could have a material adverse effect on our business. In addition, such matters may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and expose us to increased risks that would be uninsured.
We cannot ensure that our insurance will cover all claims or that insurance coverage will be available at economically acceptable rates. Our ability to obtain insurance, its coverage levels, deductibles and premiums, are all dependent on market factors, our loss history and insurers’ perception of our overall risk profile. Our insurance may also require us to meet a deductible. Significant uninsured liabilities could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to align our cost structure with our revenue level, which in turn may require additional financing in the future that may not be available at all or may be available only on unfavorable terms.
We continuously evaluate our cost base in relation to projected near to mid-term demand for our services in an effort to align our cost structure with the current realities of our markets. If actual or projected fee revenues are negatively impacted by weakening customer demand, we may find it necessary to take cost cutting measures so that we can minimize the impact on our profitability. There is, however, no guarantee that if we do take such measures that such measures will properly align our cost structure to our revenue level. Any failure to maintain a balance between our cost structure and our revenue could adversely affect our business, financial condition, and results of operations and lead to negative cash flows, which in turn might require us to obtain additional financing to meet our capital needs. If we are unable to secure such additional financing on favorable terms, or at all, our ability to fund our operations could be impaired, which could have a material adverse effect on our results of operations.
Our financial results could suffer if we are unable to achieve or maintain adequate utilization and suitable billing rates for our consultants.
Our profitability depends, to a large extent, on the utilization and billing rates of our professionals. Utilization of our professionals is affected by a number of factors, including:
the timing of the commencement, completion and termination of engagements. For example, the commencement or termination of multiple RPO engagements could have a significant impact on our
▪ | the number and size of client engagements; |
▪ | the timing of the commencement, completion and termination of engagements (for example, the commencement or termination of multiple RPO engagements could have a significant impact on our business, including significant fluctuations in our fee revenue, since these types of engagements are generally larger, in terms of both staffing and fee revenue generated, than our other engagements); |
▪ | our ability to transition our consultants efficiently from completed engagements to new engagements; |
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▪ | the hiring of additional consultants because there is generally a transition period for new consultants that results in a temporary drop in our utilization rate; |
▪ | unanticipated changes in the scope of client engagements; |
▪ | our ability to forecast demand for our services and thereby maintain an appropriate level of consultants; and |
▪ | conditions affecting the industries in which we practice as well as general economic conditions. |
The billing rates of our consultants that we are able to charge are also affected by a number of factors, including:
▪ | our clients’ perception of our ability to add value through our services; |
▪ | the market demand for the services we provide; |
▪ | an increase in the number of clients in the government sector in the industries we serve; |
▪ | the introduction of new services by us or our competitors; |
▪ | our competition and the pricing policies of our competitors; and |
▪ | current economic conditions. |
If we are unable to achieve and maintain adequate overall utilization, as well as maintain or increase the billing rates for our consultants, our financial results could materially suffer. In addition, our consultants oftentimes perform services at the physical locations of our clients. If there are natural disasters, disruptions to travel and transportation or problems with communications systems, our ability to perform services for, and interact with, our clients at their physical locations may be negatively impacted, which could have an adverse effect on our business and results of operations.
The profitability of our fixed-fee engagements with clients may not meet our expectations if we underestimate the cost of these engagements when pricing them.
When making proposals for fixed-fee engagements, we estimate the costs and timing for completing the engagements. These estimates reflect our best judgment regarding the efficiencies of our methodologies and consultants as we plan to deploy them on engagements. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-fee engagements, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which would have an adverse effect on our profit margin. For the years ended April 30, 2019, 2018, and 2017, fixed-fee engagements represented 27%, 28%, and 29% of our revenues, respectively.
Changes in our accounting estimates and assumptions could negatively affect our financial position and results of operations.
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements. We are also required to make certain judgments that affect the reported amounts of revenues and expenses during each reporting period. We periodically evaluate our estimates and assumptions including those relating to revenue recognition, restructuring, deferred compensation, goodwill and other intangible assets, contingent consideration, annual performance relatedperformance-related bonuses, allowance for doubtful accounts, share-based payments and deferred income taxes. We base ourActual results could differ from the estimates we make based on historical experience and various assumptions that we believe believed to be reasonable based on specific circumstances. Actual results could differ from these estimates,circumstances, and changes in accounting standards could have an adverse impact on our future financial position and results of operations.
Foreign currency exchange rate risks may adversely affect our results of operations.
A material portion of our revenue and expenses are generated by our operations in foreign countries, and we expect that our foreign operations will account for a material portion of our revenue and expenses in the future. Most of our international expenses and revenue are denominated in foreign currencies. As a result, our financial results could be affected by changes in foreign currency exchange rates or weak economic conditions in foreign markets in which we have operations, among other factors. Fluctuations in the value of those currencies in relation to the U.S. dollar have caused and will continue to cause dollar-translated amounts to vary from one period to another. Given the volatility of exchange rates, we may not be able to manage effectively our currency translation or transaction risks, which may adversely affect our financial condition and results of operations.
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Unfavorable tax laws, tax law changes and tax authority rulings may adversely affect results.
We are subject to income taxes in the U.S. and in various foreign jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings among countries with differing statutory tax rates or changes in tax laws. The amount of income taxes and other taxes are subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from estimated amounts recorded, future financial results may include unfavorable tax adjustments.
Future changes in tax laws, treaties or regulations, and their interpretations or enforcement, may be unpredictable, particularly as taxing jurisdictions face an increasing number of political, budgetary and other fiscal challenges. Tax rates in the jurisdictions in which we operate may change as a result of macroeconomic and other factors outside of our control, making it increasingly difficult for multinational corporations like ourselves to operate with certainty about taxation in many jurisdictions. As a result, we could be materially adversely affected by future changes in tax law or policy (or in their interpretation or enforcement) in the jurisdictions where we operate, including the United States, which could have a material adverse effect on our business, cash flow, results of operations, financial condition, as well as our effective income tax rate.
Technical guidance on a broad range of topics related to the Tax Cuts and Jobs Act could have a material impact on our business and our company.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, making significant changes to the taxation of U.S. business entities. The most significant impacts of the Tax Act on the Company include (1) a reduction in the U.S. corporate federal statutory income tax rate from 35.0% to 21.0% effective January 1, 2018, and (2) a one-time tax on accumulated foreign earnings (the “Transition Tax”), which is applicable at a rate of 15.5% on cash and other specified assets and 8% on other residual earnings. We finalized our computation of the Transition Tax and remeasurement of deferred tax balances in accordance with our current understanding of the Tax Act and currently available guidance. For additional information regarding the Tax Act and the tax amounts recorded in our consolidated financial statements, see Note 8—Income Taxes. While our financial statements as of and for the year ended April 30, 2019 reflect the impact due to the Tax Act, further technical guidance on a broad range of topics related to the Tax Act is expected and may have a material adverse effect on our business, cash flow, results from operations, financial condition, as well as our effective income tax rate.
We have deferred tax assets that we may not be able to use under certain circumstances.
If we are unable to generate sufficient future taxable income in certain jurisdictions, or if there is a significant change in the time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowances against our deferred tax assets. This would result in an increase in our effective tax rate, and an adverse effect on our future operating results. In addition, changes in statutory tax rates may also change our deferred tax assets or liability balances, with either a favorable or unfavorable impact on our effective tax rate. Our deferred tax assets may also be impacted by new legislation or regulation.
Our indebtedness could impair our financial condition and reduce funds available to us for other purposes and our failure to comply with the covenants contained in our debt instruments could result in an event of default that could adversely affect our operating results.operations and financial condition.
On November 23, 2015, the Company borrowed $150 million from its term loan facility with Wells Fargo Bank, National Association, dated as of January 18, 2013 (as amended, the “Credit Agreement”). As of April 30,
2016, the amount outstanding was $140.0 million. On June 15, 2016,December 19, 2018, the Company entered into a new senior secured $400$650.0 millionAmended and Restated Credit Agreement with a syndicate of banks made up of $275 million term loan and $125 million of secured revolving loans. We drew down $275 million on the term loan and used $140 million of the proceeds to pay-off the term loan that was outstanding asbanks. As of April 30, 2016. The remaining funds will be used for working capital and general corporate purposes.2019, $226.9 million was outstanding under the revolving loan.
If we do not generate sufficient cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans. We cannot ensure that we wouldwill be able to refinance our debt or enter into alternative financing plans in adequate amounts on commercially reasonable terms, terms acceptable to us or at all, or that such plans guarantee that we would be able to meet our debt obligations.
Our existing debt agreements contain financial and restrictive covenants that limit the total amount of debt that we may incur and may limit our ability to engage in other activities that we may believe are in our long-term best interests, including the disposition or acquisition of assets or other companies or the payment of dividends to our shareholders.stockholders. Our failure to comply with these covenants may result in an event of default, which, if not cured or waived, could accelerate the maturity of our indebtedness or prevent us from accessing additional funds under our revolving credit facility. If the maturity of our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations, and we may not be able to continue our operations as planned.
The expansion of social media platforms presents new risks and challenges that can cause damage to our brand and reputation.
There has been a marked increase in the use of social media platforms, including weblogs (or blogs), social media websites and other forms of Internet-based communications, which allow individuals access to a broad audience of
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consumers and other interested persons. The inappropriate and/or unauthorized use of such media vehicles by our clients or employees could increase our costs, cause damage to our brand, lead to litigation or result in information leakage, including the improper collection and/or dissemination of personally identifiable information of candidates and clients. In addition, negative or inaccurate posts or comments about us on any social networking platforms could damage our reputation, brand image and goodwill.
Technological advances may significantly disrupt the labor market and weaken demand for human capital at a rapid rate.
Our success is directly dependent on our customers’ demands for talent. As technology continues to evolve, more tasks currently performed by people may be replaced by automation, robotics, machine learning, artificial intelligence and other technological advances outside of our control. The human resource industry has been and continues to be impacted by significant technological changes, enabling companies to offer services competitive with ours. Many of those technological changes may (i) reduce demand for our services, (ii) enable the development of competitive products or services, or (iii) enable our current customers to reduce or bypass the use of our services, particularly in lower-skill job categories. Additionally, rapid changes in artificial intelligence and block chain-based technology are increasing the competitiveness landscape. We may not be successful in anticipating or responding to these changes and demand for our services could be further reduced by advanced technologies being deployed by our competitors. The effort to gain technological expertise and develop new technologies in our business may require us to incur significant expenses. In some cases, we depend on key vendors and partners to provide technology and other support. If these third parties fail to perform their obligations or cease to work with us, our ability to execute on our strategic initiatives could be adversely affected.
Limited protection of our intellectual property could harm our business, and we face the risk that our services or products may infringe upon the intellectual property rights of others.
We cannot guarantee that trade secrets, trademark and copyright law protections are adequate to deter misappropriation of our IP (which has become an important part of our business). Existing laws of some countries in which we provide services or products may offer only limited protection of our IP rights. Redressing infringements may consume significant management time and financial resources. Also, we may be unable to detect the unauthorized use of our IP and take the necessary steps to enforce our rights, which may have a material adverse impact on our business, financial condition or results of operations. We cannot be sure that our services and products, or the products of others that we offer to our clients, do not infringe on the IP rights of third parties, and we may have infringement claims asserted against us or our clients. These claims may harm our reputation, result in financial liability and prevent us from offering some services or products.
We have invested in specialized technology and other intellectual property for which we may fail to fully recover our investment, or which may become obsolete.
We have invested in developing specialized technology and IP, including proprietary systems, processes and methodologies, such as Searcher Express and KF Insight, that we believe provide us a competitive advantage in serving our current clients and winning new engagements. Many of our service and product offerings rely on specialized technology or IP that is subject to rapid change, and to the extent that this technology and IP is rendered obsolete and of no further use to us or our clients, our ability to continue offering these services, and grow our revenues, could be adversely affected. There is no assurance that we will be able to develop new, innovative or improved technology or IP or that our technology and IP will effectively compete with the IP developed by our competitors. If we are unable to develop new technology and IP or if our competitors develop better technology or IP, our revenues and results of operations could be adversely affected.
We rely heavily on our information systems and if we lose that technology, or fail to further develop our technology, our business could be harmed.
Our success depends in large part upon our ability to store, retrieve, process, manage and protect substantial amounts of information. To achieve our strategic objectives and to remain competitive, we must continue to develop and enhance our information systems. This may require the acquisition of equipment and software and the development of new proprietary software, either internally or through independent consultants. If we are unable to design, develop, implement and utilize, in a cost-effective manner, information systems that provide the capabilities necessary for us to compete effectively, or for any reason any interruption or loss of our information processing capabilities occurs, this could harm our business, results of operations and financial condition. We cannot be sure that our insurance against the effects of a disaster regarding our information technology or our disaster recovery procedures currently in place will continue to be available at reasonable prices, cover all our losses or compensate us for the possible loss of clients occurring during any period that we are unable to provide business services.
We are subject to risk as it relates to software that we license from third parties.
We license software from third parties, much of which is integral to our systems and our business. The licenses are generally terminable if we breach our obligations under the license agreements. If any of these relationships were terminated or if any of these parties were to cease doing business or cease to support the applications we currently
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utilize, we may be forced to spend significant time and money to replace the licensed software. However, we cannot assure you that the necessary replacements will be available on reasonable terms, if at all.
We are increasingly dependent on third parties for the execution of critical functions.
We do not maintain all of our technology infrastructure, and we have outsourced certain other critical applications or business processes to external providers, including cloud-based services. The failure or inability to perform on the part of one or more of these critical suppliers or partners could cause significant disruptions and increased costs. We are also dependent on security measures that some of our third-party vendors and customers are taking to protect their own systems and infrastructures. If our third-party vendors do not maintain adequate security measures, do not require their sub-contractors to maintain adequate security measures, do not perform as anticipated and in accordance with contractual requirements, or become targets of cyber-attacks, we may experience operational difficulties and increased costs, which could materially and adversely affect our business.
Cyber security vulnerabilities and incidents could lead to the improper disclosure of information obtained from our clients, candidates and employees that could result in liability and harm to our reputation.
We use information technology and other computer resources to carry out operational and marketing activities and to maintain our business records.We rely on information technology systems to process, transmit, and store electronic information and to communicate among our locations around the world and with our clients, partners, and employees. The breadth and complexity of this infrastructure increases the potential risk of security breaches which could lead to potential unauthorized disclosure of confidential information.
Our systems and networks are vulnerable to computer viruses, malware, worms, hackers and other security issues, including physical and electronic break-ins, router disruption, sabotage or espionage, disruptions from unauthorized access and tampering (including through social engineering such as phishing attacks), impersonation of authorized users and coordinated denial-of-service attacks. For example, in the past we have experienced cyber security incidents resulting from unauthorized access to our systems, which to date have not had a material impact on our business or results of operations; however, there is no assurance that such impacts will not be material in the future.
The continued occurrence of high-profile data breaches against various entities and organizations provides evidence of an external environment that is increasingly hostile to information security. This environment demands that we continuously improve our design and coordination of security controls across our business groups and geographies in order to protect information that we develop or that is obtained from our clients, candidates and employees. Despite these efforts, given the ongoing and increasingly sophisticated attempts to access the information of entities, our security controls over this information, our training of employees, and other practices we follow may not prevent the improper disclosure of such information. Our efforts and the costs incurred to bolster our security against attacks cannot provide absolute assurance that future data breaches will not occur. We depend on our overall reputation and brand name recognition to secure new engagements. Perceptions that we do not adequately protect the privacy of information could inhibit attaining new engagements, qualified consultants and could potentially damage currently existing client relationships.
Data security, data privacy and data protection laws, such as the European Union General Data Protection Regulation (“GDPR”), and other evolving regulations and cross-border data transfer restrictions, may limit the use of our services, increase our costs and adversely affect our business.
We are subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect client, colleague, supplier and company data, such as the GDPR, which became effective in May 2018, and requires companies to meet stringent requirements regarding the handling of personal data, including its use, protection and transfer and the ability of persons whose data is stored to correct or delete such data about themselves. Complying with the enhanced obligations imposed by the GDPR has resulted and may continue to result in additional costs to our business and has required and may further require us to amend certain of our business practices. Failure to meet the GDPR requirements could result in significant penalties, including fines up to 4% of annual worldwide revenue. The GDPR also confers a private right of action on certain individuals and associations.
Laws and regulations in this area are evolving and generally becoming more stringent. For example, the New York State Department of Financial Services has issued cybersecurity regulations that outline a variety of required security measures for protection of data. Other U.S. states, including California and South Carolina, have also recently enacted cybersecurity laws requiring certain security measures of regulated entities that are broadly similar to GDPR requirements, and we expect that other states will continue to do so. As these laws continue to evolve, we may be required to make changes to our services, solutions and/or products so as to enable the Company and/or our clients to meet the new legal requirements, including by taking on more onerous obligations in our contracts, limiting our storage, transfer and processing of data and, in some cases, limiting our service and/or solution offerings in certain locations. Changes in these laws, or the interpretation and application thereof, may also increase our potential exposure through significantly higher potential penalties for non-compliance. The costs of compliance with, and other burdens imposed by, such laws and regulations and client demand in this area may limit the use of, or demand for, our services, solutions and/or products, make it more difficult and costly to meet client expectations, or lead to significant fines, penalties or liabilities for noncompliance, any of which could adversely affect our business, financial condition, and results of operations.
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In addition, due to the uncertainty and potentially conflicting interpretations of these laws, it is possible that such laws and regulations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us to comply with applicable laws or satisfactorily protect personal information could result in governmental enforcement actions, litigation, or negative publicity, any of which could inhibit sales of our services, solutions and/or products.
Further, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase. It is possible that future enactment of more restrictive laws, rules or regulations and/or future enforcement actions or investigations could have an adverse impact on us through increased costs or restrictions on our businesses and noncompliance could result in regulatory penalties and significant legal liability.
Acquisitions, or our inability to effect acquisitions, may have an adverse effect on our business.
We have completed several strategic acquisitions of businesses in the last several years, including our acquisition of Hay Group in fiscal 2016. Targeted acquisitions have been part of our growth strategy, and we may in the future selectively acquire businesses that are complementary to our existing service offerings. However, we cannot be certain that we will be able to continue to identify appropriate acquisition candidates or acquire them on satisfactory terms. Our ability to consummate such acquisitions on satisfactory terms will depend on:
▪ | the extent to which acquisition opportunities become available; |
▪ | our success in bidding for the opportunities that do become available; |
▪ | negotiating terms that we believe are reasonable; and |
▪ | regulatory approval, if required. |
Our ability to make strategic acquisitions may also be conditioned on our ability to fund such acquisitions through the incurrence of debt or the issuance of equity. Our credit agreement dated as of December 19, 2018 limits us from consummating acquisitions unless we are in pro forma compliance with our financial covenants, and our pro forma domestic liquidity after giving effect to the acquisition is at least $50.0 million, and certain other conditions are met. If we are required to incur substantial indebtedness in connection with an acquisition, and the results of the acquisition are not favorable, the increased indebtedness could decrease the value of our equity. In addition, if we need to issue additional equity to consummate an acquisition, doing so would cause dilution to existing stockholders.
If we are unable to make strategic acquisitions, or the acquisitions we do make are not on terms favorable to us or not effected in a timely manner, it may impede the growth of our business, which could adversely impact our profitability and our stock price.
We have provisions that make an acquisition of us more difficult and expensive.
Anti-takeover provisions in our Certificate of Incorporation, our Bylaws and under Delaware law make it more difficult and expensive for us to be acquired in a transaction that is not approved by our Board of Directors. Some of the provisions in our Certificate of Incorporation and Bylaws include:
▪ | limitations on stockholder actions; |
▪ | advance notification requirements for director nominations and actions to be taken at stockholder meetings; and |
▪ | the ability to issue one or more series of preferred stock by action of our Board of Directors. |
These provisions could discourage an acquisition attempt or other transaction in which stockholders could receive a premium over the current market price for the common stock.
We may not be able to successfully integrate or realize the expected benefits from our acquisitions.
Our future success may depend in part on our ability to complete the integration of acquisition targets successfully into our operations. The process of integrating an acquired business may subject us to a number of risks, including:
▪ | diversion of management attention; |
▪ | amortization of intangible assets, adversely affecting our reported results of operations; |
▪ | inability to retain and/or integrate the management, key personnel and other employees of the acquired business; |
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▪ | inability to establish uniform standards, disclosure controls and procedures, internal control over financial reporting and other systems, procedures and policies in a timely manner; |
▪ | inability to retain the acquired company’s clients; |
▪ | exposure to legal claims for activities of the acquired business prior to acquisition; and |
▪ | incurrence of additional expenses in connection with the integration process. |
If our acquisitions are not successfully integrated, our business, financial condition and results of operations, as well as our professional reputation, could be materially adversely affected.
Further, we cannot assure that acquisitions will result in the financial, operational or other benefits that we anticipate. Some acquisitions may not be immediately accretive to earnings and some expansion may result in significant expenditures.
Businesses we acquire may have liabilities or adverse operating issues which could harm our operating results.
Businesses we acquire may have liabilities or adverse operating issues, or both, that we either fail to discover through due diligence or underestimate prior to the consummation of the acquisition. These liabilities and/or issues may include the acquired business’ failure to comply with, or other violations of, applicable laws, rules or regulations or contractual or other obligations or liabilities. As the successor owner, we may be financially responsible for, and may suffer harm to our reputation or otherwise be adversely affected by, such liabilities and/or issues. An acquired business also may have problems with internal controls over financial reporting, which could in turn cause us to have significant deficiencies or material weaknesses in our own internal controls over financial reporting. These and any other costs, liabilities, issues, and/or disruptions associated with any past or future acquisitions, and the related integration, could harm our operating results.
As a result of our acquisitions, we have substantial amounts of goodwill and intangible assets, and changes in business conditions could cause these assets to become impaired, requiring write-downs that would adversely affect our operating results.
All of our acquisitions have been accounted for as purchases and involved purchase prices well in excess of tangible asset values, resulting in the creation of a significant amount of goodwill and other intangible assets. As of April 30, 2019, goodwill and purchased intangibles accounted for approximately 25% and 4%, respectively, of our total assets. Under U.S. GAAP, we do not amortize goodwill and intangible assets acquired in a purchase business combination that are determined to have indefinite useful lives, but instead review them annually (or more frequently if impairment indicators arise) for impairment. As discussed above, in connection with the Plan, the Company now offers substantially all of the Company’s current products and services using the “Korn Ferry” name, branding and trademarks, and has sunset substantially all sub-brands, including Futurestep, Hay Group and Lominger, among others. The Hay Group and Lominger brands came to the Company through acquisitions and, in connection with the accounting for those acquisitions, $106.6 million of the purchase price was allocated to indefinite lived tradename intangible assets. On June 12, 2018, the Company concluded that as a result of the decision to discontinue the use of such sub-brands in the near term, the Company was required under U.S. generally accepted accounting principles to record in the first quarter of fiscal 2019 a one-time, non-cash intangible asset impairment charge of $106.6 million. The discontinuation of such brands could adversely affect our business. Further, although we have to date determined that none of our other assets have been impaired, future events or changes in circumstances that result in an impairment of goodwill or other intangible assets would have a negative impact on our profitability and operating results.
An impairment in the carrying value of goodwill and other intangible assets could negatively impact our consolidated results of operations and net worth.
Goodwill is initially recorded as the excess of amounts paid over the fair value of net assets acquired. While goodwill is not amortized, it is reviewed for impairment at least annually or more frequently if impairment indicators are present. In assessing the carrying value of goodwill, we make qualitative and quantitative assumptions and estimates about revenues, operating margins, growth rates and discount rates based on our business plans, economic projections, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors. Goodwill valuations have been calculated using an income approach based on the present value of future cash flows of each reporting unit and a market approach. We could be required to evaluate the carrying value of goodwill prior to the annual assessment if we experience
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unexpected, significant declines in operating results or sustained market capitalization declines. These types of events and the resulting analyses could result in goodwill impairment charges in the future. Impairment charges, such as the impairment charge that we recorded in the first quarter of fiscal 2019 related to the discontinuation of the Hay Group and Lominger brands, could substantially affect our results of operations and net worth in the periods of such charges.
We are a cyclical Company whose performance is tied to local and global economic conditions.
Demand for our services is affected by global economic conditions and the general level of economic activity in the geographic regions and industries in which we operate. When conditions in the global economy, including the credit markets deteriorate, or economic activity slows, many companies hire fewer permanent employees and some companies, as a cost-saving measure, choose to rely on their own human resources departments rather than third-party search firms to find talent, and under these conditions, companies may cut back on human resource initiatives, all of which negatively affects our financial condition and results of operations. We may also experience more competitive pricing pressure during periods of economic decline. If the geopolitical uncertainties result in a reduction in business confidence, if the national or global economy or credit market conditions in general deteriorate, the unemployment rate increases or any changes occur in U.S. trade policy (including any increases in tariffs that result in a trade war), such uncertainty or changes could put negative pressure on demand for our services and our pricing, resulting in lower cash flows and a negative effect on our business, financial condition and results of operations. In addition, some of our clients may experience reduced access to credit and lower revenues resulting in their inability to meet their payment obligations to us.
We face risks associated with social and political instability, legal requirements and economic conditions in our international operations.
We operate in 52 countries and, during the year ended April 30, 2019, generated 55% of our fee revenue from operations outside of the U.S. We are exposed to the risk of changes in social, political, legal and economic conditions inherent in international operations. Examples of risks inherent in transacting business worldwide that we are exposed to include:
▪ | uncertainties and instability in economic and market conditions caused by the United Kingdom’s (the “U.K.”) vote to exit the E.U. (“Brexit”); |
▪ | uncertainty regarding how the U.K.’s access to the E.U. Single Market and the wider trading, legal, regulatory and labor environments, especially in the U.K. and E.U., will be impacted by Brexit, including the resulting impact on our business and that of our clients; |
▪ | changes in and compliance with applicable laws and regulatory requirements, including U.S. laws affecting the activities of U.S. companies abroad, including the Foreign Corrupt Practices Act of 1977 and sanctions programs administered by the U.S. Department of the Treasury Office of Foreign Assets Control, and similar foreign laws such as the U.K. Bribery Act, as well as the fact that many countries have legal systems, local laws and trade practices that are unsettled and evolving, and/or commercial laws that are vague and/or inconsistently applied; |
▪ | difficulties in staffing and managing global operations, which could impact our ability to maintain an effective system of internal control; |
▪ | difficulties in building and maintaining a competitive presence in existing and new markets; |
▪ | social, economic and political instability; |
▪ | differences in cultures and business practices; |
▪ | statutory equity requirements; |
▪ | differences in accounting and reporting requirements; |
▪ | repatriation controls; |
▪ | differences in labor and market conditions; |
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▪ | multiple regulations concerning pay rates, benefits, vacation, statutory holiday pay, workers’ compensation, union membership, termination pay, the termination of employment, and other employment laws; and |
▪ | the introduction of greater uncertainty with respect to trade policies, tariffs, disputes or disruptions, the termination or suspension of treaties, boycotts and government regulation affecting trade between the U.S. and other countries. |
We cannot ensure that one or more of these factors will not harm our business, financial condition or results of operations.
The United Kingdom’s withdrawal from the E.U. may adversely impact our operations in the United Kingdom and elsewhere.
In fiscal 2019, 10.5% of our fee revenue was recorded in the U.K. The British government and the E.U. continue to negotiate the terms of the U.K.'s future relationship with the E.U. While many separation issues have been resolved, significant uncertainty remains. The uncertainties surrounding the timing and terms of the U.K.’s exit and its consequences could adversely impact customer and investor confidence, result in additional market volatility and adversely affect our businesses and results of operations. Completion of a so-called “hard/no-deal Brexit,” whereby the U.K. exits the E.U. with no negotiated market access or agreements on issues such as customs and citizen mobility, would likely cause economic, logistical, and legal disruptions. These impacts, and others that we cannot currently anticipate, could result in delays or reductions in contract awards, canceled contracts, changes in exchange rates, difficulty in recruiting or in gaining permission to employ existing staff, or less favorable payment terms. At this time, we cannot predict the impact that an actual exit from the E.U. will have on our business generally and our UK and European operations more specifically, and no assurance can be given that our operating results, financial condition and prospects would not be adversely impacted by the result.
The interest rates under our Credit Agreement and related interest rate swap may be impacted by the phase-out of the London Interbank Offered Rate (“LIBOR”).
LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rates on loans globally. We generally use LIBOR as a reference rate to calculate interest rates under our credit facility. In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate (“SOFR”), calculated using short-term repurchase agreements backed by Treasury securities. Whether or not SOFR, or another alternative reference rate, attains market traction as a LIBOR replacement tool remains in question. If LIBOR ceases to exist, we may need to amend our Credit Agreement and related interest rate swap to replace LIBOR with an agreed upon replacement index, and certain of the interest rates under our Credit Agreement may change. The new rates may not be as favorable to us as those in effect prior to any LIBOR phase-out.
You may not receive the level of dividends provided for in the dividend policy our Board of Directors has adopted or any dividends at all.
We are not obligated to pay dividends on our common stock. Our Board of Directors adopted a dividend policy on December 8, 2014, that reflects an intention to distribute to our stockholders a regular quarterly cash dividend of $0.10 per share of common stock. WeAlthough the Company paid our first dividend under this program on April 9, 2015 and has declared a quarterly dividend every quarter since the adoption of the dividend policy, the Company has declared a quarterly dividend. The declaration and payment of all future dividends to holders of our common stock are subject to the discretion of our Board of Directors, which may amend, revoke or suspend our dividend policy at any time and for any reason, including earnings, capital requirements, financial conditions and other factors our Board of Directors may deem relevant. The terms of our indebtedness may also restrict us from paying cash dividends on our common stock under certain circumstances. See below “—Our ability to pay dividends will be restricted by agreements governing our debt, including our credit agreement, and by Delaware law.”
Over time, our capital and other cash needs may change significantly from our current needs, which could affect whether we pay dividends and the level of any dividends we may pay in the future. If we were to use borrowings under our credit facility to fund our payment of dividends, we would have less cash and/or borrowing capacity available for future dividends and other purposes, which could negatively affect our financial condition, our results of operations, our liquidity and our ability to maintain and expand our business. Accordingly, you may not receive dividends in the intended amounts, or at all. Any reduction or elimination of dividends may negatively affect the market price of our common stock.
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Our ability to pay dividends will be restricted by agreements governing our debt, including our credit agreement, and by Delaware law.
Our credit agreement restricts our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Operations—Liquidity and Capital Resources, — Long-Term Debt”” where we describe the terms of our indebtedness, including provisions limiting our ability to declare and pay dividends. As a result of such restrictions, we may be limited in our ability to pay dividends unless we amend our credit agreement or otherwise obtain a waiver from our lenders. In addition, as a result of general economic conditions, conditions in the lending markets, the results of our business or for any other reason, we may elect or be required to amend or refinance our senior credit facility, at or prior to maturity, or enter into additional agreements for indebtedness. Any such amendment, refinancing or additional agreement may contain covenants which could limit in a significant manner or entirely our ability to pay dividends to you.
Additionally, under the Delaware General Corporation Law (“DGCL”), our Board of Directors may not authorize payment of a dividend unless it is either paid out of surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
If, as a result of these restrictions, we are required to reduce or eliminate the payment of dividends, a decline in the market price or liquidity, or both, of our common stock could result. This may in turn result in losses by you.
Our dividend policy may limit our ability to pursue growth opportunities.
If we pay dividends at the level currently anticipated under our dividend policy, we may not retain a sufficient amount of cash to finance growth opportunities, meet any large unanticipated liquidity requirements or fund our operations in the event of a significant business downturn. In addition, because a portion of cash available will be distributed to holders of our common stock under our dividend policy, our ability to pursue any material expansion of our business, including through acquisitions, increased capital spending or other increases of our expenditures, will depend more than it otherwise would on our ability to obtain third party financing. We cannot assure you that such financing will be available to us at all, or at an acceptable cost. If we are unable to take timely advantage of growth opportunities, our future financial condition and competitive position may be harmed, which in turn may adversely affect the market price of our common stock.
We may be subject to the actions of activist shareholders.
Our Board of Directors and management team are committed to acting in the best interest of all of our shareholders. We value constructive input from investors and regularly engage in dialogue with our shareholders regarding strategy and performance. Activist shareholders who disagree with the composition of the Board of Directors, our strategy or the way the Company is managed may seek to effect change through various strategies and channels. Responding to shareholder activism can be costly and time-consuming, disrupt our operations, and divert the attention of management and our employees from our strategic initiatives. Activist campaigns can create perceived uncertainties as to our future direction, strategy, or leadership and may result in the loss of potential business opportunities, harm our ability to attract new employees, investors, and customers, and cause our stock price to experience periods of volatility or stagnation.
Our business could be disrupted as a result of actions of certain stockholders.
If any of our stockholders commence a proxy contest, advocate for change, make public statements critical of our performance or business, or engage in other similar activities, then our business could be adversely affected because we may have difficulty attracting and retaining clients due to perceived uncertainties as to our future direction and negative public statements about our business; responding to proxy contests and other similar actions by stockholders is likely to result in us incurring substantial additional costs and significantly divert the attention of management and our employees; and, if individuals are elected to our Board with a specific agenda, the execution of our strategic plan may be disrupted or a new strategic plan altogether may be implemented, which could have a material adverse impact on our business, financial condition or results of operations. Further, any of these matters or any such actions by stockholders may impact and result in volatility of the price of our common stock.
Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.
Should we experience a disaster or other business continuity problem, such as an earthquake, hurricane, terrorist attack, pandemic, security breach, power loss, telecommunications failure or other natural or man-made disaster, our continued success will depend, in part, on the availability of our personnel, our office facilities, and the proper functioning of our computer, telecommunication and other related systems and operations. In such an event, we could experience near-term operational challenges with regard to particular areas of our operations. In particular, our
22
ability to recover from any disaster or other business continuity problem will depend on our ability to protect our technology infrastructure against damage from business continuity events that could have a significant disruptive effect on our operations. We could potentially lose client data or experience material adverse interruptions to our operations or delivery of services to our clients in a disaster. A disaster on a significant scale or affecting certain of our key operating areas within or across regions, or our inability to successfully recover should we experience a disaster or other business continuity problem, could materially interrupt our business operations and cause material financial loss, loss of human capital, regulatory actions, reputational harm, damaged client relationships or legal liability.
Item 1B. Unresolved Staff Comments
Not applicable.
Our corporate office is located in Los Angeles, California. We lease our corporate office and all 150104 of our Executive Search, Hay Group,Advisory, and FuturestepRPO & Professional Search offices located in North America, EMEA, Asia Pacific and Latin America. As of April 30, 2016,2019, we leased an aggregate of approximately 1,641,4491.4 million square feet of office space. The leases generally have remaining terms of one to 1411 years and contain customary terms and conditions. We believe that our facilities are adequate for our current needs, and we do not anticipate any difficulty replacing such facilities or locating additional facilities to accommodate any future growth.
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 4. Mine Safety Disclosures
Not applicable.
Information about our Executive Officers of the Registrant
Name | Age as of April 30, 2019 | Position | ||||
Gary D. Burnison | 58 | President and Chief Executive Officer | ||||
Robert P. Rozek | 58 | Executive Vice President, Chief Financial Officer and Chief Corporate Officer | ||||
| 58 | Chief Executive Officer, | ||||
Byrne Mulrooney | 58 | Chief Executive Officer, |
Our executive officers serve at the discretion of our Board of Directors. There is no family relationship between any executive officer or director. The following information sets forth the business experience for at least the past five years for each of our executive officers.
Gary D. Burnisonhas been President and Chief Executive Officer since July 2007. He was Executive Vice President and Chief Financial Officer from March 2002 until June 30, 2007, and Chief Operating Officer from November 2003 until June 30, 2007. Prior to joining Korn Ferry, Mr. Burnison was Principal and Chief Financial Officer of Guidance Solutions, a privately held consulting firm, from 1999 to 2001. Prior to that, he served as an executive officer and a member of the boardBoard of directorsDirectors of Jefferies and Company, Inc., the principal operating subsidiary of Jefferies Group, Inc. from 1995 to 1999. Earlier, Mr. Burnison was a partnerPartner at KPMG Peat Marwick. Mr. Burnison earned a bachelor’s degree in business administration from the University of Southern California.
Robert P. Rozekjoined the Company in February 2012 as our Executive Vice President and Chief Financial Officer and, in December 2015, also became our Chief Corporate Officer. Prior to joining Korn Ferry, he served as Executive Vice President and Chief Financial Officer of Cushman & Wakefield, Inc., a privately held commercial real estate services firm, from June 2008 to February 2012. Prior to joining Cushman & Wakefield, Inc., Mr. Rozek served as Senior Vice President and Chief Financial Officer of Las Vegas Sands Corp,Corp., a leading global developer of destination properties (integrated resorts) that feature premium accommodations, world-class gaming and entertainment, convention and exhibition facilities and many other amenities, from 2006 to 2008. Prior to that, Mr. Rozek held senior leadership positions at Eastman Kodak, and spent five years as a partnerPartner with PricewaterhouseCoopers LLP. Mr. Rozek is a graduate of Canisius College in New York with a bachelor’s degree in accounting.
Stephen Kayewas appointed23
Mark Arian joined the Company as CEOChief Executive Officer of Korn Ferry’s Hay GroupAdvisory segment in December 2015 concurrent with the Company’s acquisition of Legacy Hay Group.April 2017. Prior to the acquisition,Korn Ferry, Mr. KayeArian served as presidenta Managing Principal at Ernst and CEOYoung LLP, a multinational professional services firm that provides audit, tax, business risk, technology and security risk services, and human capital services worldwide, from March 2014 until March of Legacy Hay Group from May 2013 until2017. In that capacity, he led the timePeople Advisory Services—Financial Services Sector, and his responsibilities included commercial, people and key account leadership. Between 2008 and 2014, Mr. Arian held various leadership positions at AON and AON Hewitt, a provider of acquisition. Between 1998insurance, reinsurance, human capital and 2013,management consulting services, serving as an Executive Vice President and leading its strategic Mergers and Acquisitions (“M&A”) and business transformation offering globally. Mr. Kaye servedArian has also held various leadership positions at Towers Perrin (now Wills Towers Watson) including serving as Chief Financial Officerthe Global M&A and Global Change Management leader, and Hewitt Associates, where Mr. Arian built and led the Corporate Restructuring and Change Practice. Mr. Arian is a graduate of Legacy Hay Group. Mr. KayeDuke University and holds a Bachelor of Science in Engineeringjuris doctorate from Imperial College in the United Kingdom and is a Fellow of the Institute of Chartered Accountants in England and Wales.Columbia University.
Byrne Mulrooney joined the Company in April 2010 as Chief Executive Officer of Futurestep.RPO & Professional Search. Prior to joining Korn Ferry, he was President and Chief Operating Officer of Flynn Transportation Services, a third partythird-party logistics company, from 2007 to 2010. Prior to that, he led Spherion’s workforce solutions business in North America, which provides workforce solutions in professional services and general staffing, including recruitment process outsourcing and managed services, from 2003 to 2007. Mr. Mulrooney held executive positions for almost 20 years at EDS and IBM in client services, sales, marketing and operations. Mr. Mulrooney is a graduate of Villanova University in Pennsylvania. He holds a master’s degree in management from Northwestern University’s J.L. Kellogg Graduate School of Management.
24
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our common stock is listed on the New York Stock Exchange under the symbol “KFY”‘KFY’. The following table sets forth the high and low sales price per share of the common stock for the periods indicated, as reported on the New York Stock Exchange:
High | Low | |||||||
Fiscal Year Ended April 30, 2016 | ||||||||
First Quarter | $ | 36.34 | $ | 30.73 | ||||
Second Quarter | $ | 36.74 | $ | 32.02 | ||||
Third Quarter | $ | 38.93 | $ | 28.69 | ||||
Fourth Quarter | $ | 31.27 | $ | 25.21 | ||||
Fiscal Year Ended April 30, 2015 | ||||||||
First Quarter | $ | 32.78 | $ | 27.55 | ||||
Second Quarter | $ | 31.78 | $ | 24.13 | ||||
Third Quarter | $ | 29.85 | $ | 25.57 | ||||
Fourth Quarter | $ | 33.72 | $ | 27.89 |
On June 22, 2016,21, 2019, the last reported sales price on the New York Stock Exchange for the Company’s common stock, was $22.23$40.05 per share and there were approximately 17,78024,047 beneficial stockholders of the Company’s common stock.
Performance Graph
We have presented below a graph comparing the cumulative total stockholder return on the Company’s shares with the cumulative total stockholder return on (1) the Standard & Poor’s 500 Stock Index and (2) a company-established peer group. Cumulative total return for each of the periods shown in the performance graph is measured assuming an initial investment of $100 on April 30, 20112014 and the reinvestment of any dividends paid by the Company and any company in the peer group on the date the dividends were paid.
In fiscal 2011, we established a newOur peer group which the Company continues to use today,is comprised of a broad number of publicly traded companies, which are principally or in significant part involved in either professional staffing or consulting. The peer group is comprised of the following 1513 companies: CBIZ, Inc. (CBZ), FTI Consulting, Inc. (FCN), Heidrick & Struggles International, Inc. (HSII), Huron Consulting Group Inc. (HURN), ICF International, Inc. (ICFI), Insperity, Inc. (NSP), Kelly Services, Inc. (KELYA), Kforce Inc. (KFRC), Navigant Consulting, Inc. (NCI), Resources Connection, Inc. (RECN), Robert Half International, Inc. (RHI), CEB, Inc. (CEB), The Dun & Bradstreet Corporation (DNB), Willis Towers Watson (WLTW) and TrueBlue, Inc. (TBI). We believe this group of professional services firms is reflective of similar sized companies in terms of our market capitalization, revenue or profitability, and therefore provides a more meaningful comparison of stock performance. The returns of each company have been weighted according to their respective stock market capitalization at the beginning of each measurement period for purposes of arriving at a peer group average.
The stock price performance depicted in this graph is not necessarily indicative of future price performance. This graph will not be deemed to be incorporated by reference by any general statement incorporating this Annual Report on Form 10-K into any filing by us under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate this information by reference and shall not otherwise be deemed soliciting material or deemed filed under the Securities Act of 1933 or the Securities Exchange Act of 1934.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN(*)
Among Korn Ferry, the S&P 500 Index, and a Peer Group
Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved.
(*) | $100 invested on |
Copyright© 2016, S&P, a division of McGraw-Hill Financial. All rights reserved.25
The Company and its Board of Directors endorse a balanced approach to capital allocation. The Company’s first priority is to invest in growth initiatives, such as the hiring of consultants, the continued development of intellectual propertyIP and derivative products and services, and the investment in synergistic accretive M&A transactions that earn a return superior to the Company’sCompany's cost of capital. Next, the Company’s capital allocation approach contemplates the planned return of a portion of excess capital to stockholders, in the form of a regular quarterly dividend, subject to the factors discussed below under “Dividends” and in more detail in the “Risk Factors” section of this Annual Report onForm 10-K. Additionally, the Company considers share repurchases on an opportunistic basis and subject to the terms of our credit agreement.Credit Agreement. See Note 10— Long Term Debt for a description of the Credit Agreement.
Dividends
On December 8, 2014, the Board of Directors adopted a dividend policy, reflecting an intention to distribute to our stockholders a regular quarterly cash dividendsdividend of $0.10 per share. In fiscal 2015, the Board of Directors declared the following dividends:
Declaration Date | Dividend Per Share | Record Date | Total Amount (in thousands) | Payment Date | ||||
March 4, 2015 | $0.10 | March 25, 2015 | $5,105 | April 9, 2015 |
In fiscal 2016, the Board of Directors declared the following dividends:
Declaration Date | Dividend Per Share | Record Date | Total Amount (in thousands) | Payment Date | ||||
June 10, 2015 | $0.10 | June 25, 2015 | $5,115 | July 15, 2015 | ||||
September 7, 2015 | $0.10 | September 25, 2015 | $5,174 | October 15, 2015 | ||||
December 8, 2015 | $0.10 | December 21, 2015 | $5,770 | January 15, 2016 | ||||
March 8, 2016 | $0.10 | March 25, 2016 | $5,774 | April 15, 2016 |
The declaration and payment of future dividends under the quarterly dividend policy will be at the discretion of the Board of Directors and will depend upon many factors, including the Company’s earnings, capital requirements, financial conditions, the terms of the Company’s indebtedness and other factors that the Board of Directors may deem to be relevant. The Board of Directors may amend, revoke or suspend the dividend policy at any time and for any reason.
Our new senior secured revolving credit agreement, dated June 15, 2016, permits us to pay dividends to our stockholders and make share repurchases so long as our pro forma leverage ratio, defined as, the ratio of consolidated funded indebtedness to consolidated adjusted EBITDA, is no greater than 2.50 to 1.00, and our pro forma domestic liquidity is at least $50.0 million.
Stock Repurchase Program
On December 8, 2014,March 6, 2019, the Board of Directors approved an increase in the Company’s stock repurchase program of approximately $200 million, which brings our available capacity to an aggregate of $150repurchase shares in the open market or privately negotiated transactions to approximately $250 million. Common stock may be repurchased from time to time in open market or privately negotiated transactions at the Company’s discretion subject to market conditions and other factors. AsDuring the second quarter of April 30, 2016, nofiscal 2017, the Company began to repurchase shares have been repurchased underthrough this program. Our dividend policy as well as anyThe Company repurchased approximately $37.4 million, $33.1 million and $28.8 million of the Company’s common stock during fiscal 2019, 2018 and 2017, respectively. Any decision to execute on our currently outstanding issuerstock repurchase program will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board of Directors. Our New Credit Agreementcredit agreement permits us to pay dividends to our stockholders and make share repurchases so long as our pro forma leverage ratio is no greater than 2.503.25 to 1.00, and our pro forma domestic liquidity is at least $50.0 million.million, including the revolving credit commitment minus amounts outstanding on the revolver, issued letters of credit and swing loans.
Issuer Purchases of Equity Securities
The following table summarizes common stock repurchased by us during the fourth quarter of fiscal 2016:2019:
Shares Purchased (1) | Average Price Paid Per Share | Shares Purchased as Part of Publicly- Announced Programs (2) | Approximate Dollar Value of Shares that May Yet be Purchased under the Programs (2) | |||||||||||||
February 1, 2016 — February 29, 2016 | 22,540 | $ | 30.10 | — | $ | 150.0 million | ||||||||||
March 1, 2016 — March 31, 2016 | 797 | $ | 28.29 | — | $ | 150.0 million | ||||||||||
April 1, 2016 — April 30, 2016 | — | $ | — | — | $ | 150.0 million | ||||||||||
|
|
|
| |||||||||||||
Total | 23,337 | $ | 30.04 | — | $ | 150.0 million | ||||||||||
|
|
|
|
|
| Shares Purchased (1) |
|
| Average Price Paid Per Share |
|
| Shares Purchased as Part of Publicly- Announced Programs (2) |
|
| Approximate Dollar Value of Shares that May Yet be Purchased under the Programs (2) | |||
February 1, 2019 — February 28, 2019 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $50.7 million |
March 1, 2019 — March 31, 2019 |
|
| 3,245 |
|
| $ | 48.66 |
|
|
| — |
|
| $250.7 million |
April 1, 2019 — April 30, 2019 |
|
| 904 |
|
| $ | 46.50 |
|
|
| — |
|
| $250.7 million |
Total |
|
| 4,149 |
|
| $ | 48.19 |
|
|
| — |
|
|
|
(1) | Represents withholding of a portion of restricted shares to cover taxes |
(2) | On |
26
The following selected financial data are qualified by reference to, and should be read together with, our “Audited Consolidated Financial Statements and Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. The selected statementstatements of income data set forth below for the fiscal years ended April 30, 2016, 20152019, 2018 and 20142017 and the selected balance sheetsheets data as of April 30, 20162019 and 20152018 are derived from our audited consolidated financial statements, audited by Ernst & Young LLP, appearing elsewhere in this Annual Report on Form 10-K. The selected balance sheetsheets data as of April 30, 2014, 20132017, 2016 and 20122015 and the selected statement of income data set forth below for the fiscal years ended April 30, 20132016 and 20122015 are derived from audited consolidated financial statements and notes thereto which are not included in this Annual Report on Form 10-K report and were audited by Ernst & Young LLP.10-K.
Year Ended April 30, | ||||||||||||||||||||
2016 (1) | 2015 (2) | 2014 | 2013 (3) | 2012 | ||||||||||||||||
(in thousands, except per share data and other operating data) | ||||||||||||||||||||
Selected Statement of Income Data: | ||||||||||||||||||||
Fee revenue | $ | 1,292,112 | $ | 1,028,152 | $ | 960,301 | $ | 812,831 | $ | 790,505 | ||||||||||
Reimbursed out-of-pocket engagement expenses | 54,602 | 37,914 | 35,258 | 36,870 | 36,254 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total revenue | 1,346,714 | 1,066,066 | 995,559 | 849,701 | 826,759 | |||||||||||||||
Compensation and benefits | 897,345 | 691,450 | 646,889 | 555,346 | 534,186 | |||||||||||||||
General and administrative expenses | 213,018 | 145,917 | 152,040 | 142,771 | 138,872 | |||||||||||||||
Reimbursed expenses | 54,602 | 37,914 | 35,258 | 36,870 | 36,254 | |||||||||||||||
Cost of services | 59,824 | 39,692 | 39,910 | 28,977 | 19,635 | |||||||||||||||
Depreciation and amortization | 36,220 | 27,597 | 26,172 | 19,004 | 14,017 | |||||||||||||||
Restructuring charges, net (4) | 33,013 | 9,468 | 3,682 | 22,857 | 929 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total operating expenses | 1,294,022 | 952,038 | 903,951 | 805,825 | 743,893 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Operating income | 52,692 | 114,028 | 91,608 | 43,876 | 82,866 | |||||||||||||||
Other (loss) income, net | (4,167 | ) | 7,458 | 9,769 | 6,309 | (271 | ) | |||||||||||||
Interest income (expense), net | 237 | (1,784 | ) | (2,363 | ) | (2,365 | ) | (1,791 | ) | |||||||||||
Equity in earnings of unconsolidated subsidiaries, net | 1,631 | 2,181 | 2,169 | 2,110 | 1,850 | |||||||||||||||
Income tax provision | 18,960 | 33,526 | 28,492 | 16,637 | 28,351 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income | 31,433 | 88,357 | 72,691 | 33,293 | 54,303 | |||||||||||||||
Net income attributable to noncontrolling interest | (520 | ) | — | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income attributable to Korn/Ferry International | $ | 30,913 | $ | 88,357 | $ | 72,691 | $ | 33,293 | $ | 54,303 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Basic earnings per share | $ | 0.58 | $ | 1.78 | $ | 1.51 | $ | 0.71 | $ | 1.17 | ||||||||||
Diluted earnings per share | $ | 0.58 | $ | 1.76 | $ | 1.48 | $ | 0.70 | $ | 1.15 | ||||||||||
Basic weighted average common shares outstanding | 52,372 | 49,052 | 48,162 | 47,224 | 46,397 | |||||||||||||||
Diluted weighted average common shares outstanding | 52,929 | 49,766 | 49,145 | 47,883 | 47,261 | |||||||||||||||
Cash dividends declared per common share | $ | 0.40 | $ | 0.10 | $ | — | $ | — | $ | — | ||||||||||
Other Operating Data: | ||||||||||||||||||||
Fee revenue by business segment: | ||||||||||||||||||||
Executive search: | ||||||||||||||||||||
North America | $ | 371,345 | $ | 330,634 | $ | 306,768 | $ | 290,317 | $ | 305,717 | ||||||||||
EMEA | 144,319 | 153,465 | 147,917 | 128,807 | 141,409 | |||||||||||||||
Asia Pacific | 80,506 | 84,148 | 84,816 | 73,221 | 82,230 | |||||||||||||||
Latin America | 26,744 | 29,160 | 29,374 | 30,134 | 31,846 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total executive search | 622,914 | 597,407 | 568,875 | 522,479 | 561,202 | |||||||||||||||
Hay Group | 471,145 | 267,018 | 254,636 | 168,115 | 115,407 | |||||||||||||||
Futurestep | 198,053 | 163,727 | 136,790 | 122,237 | 113,896 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total fee revenue | $ | 1,292,112 | $ | 1,028,152 | $ | 960,301 | $ | 812,831 | $ | 790,505 | ||||||||||
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, |
| ||||||||||||||||||||||||||||||||||||||
Year Ended April 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 (1) |
|
| 2015 |
| |||||||||||||||||||||||||
2016 (1) | 2015 (2) | 2014 | 2013 (3) | 2012 |
| (in thousands, except per share data and other operating data) |
| |||||||||||||||||||||||||||||||||
Selected Consolidated Statements of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Fee revenue |
| $ | 1,926,033 |
|
| $ | 1,767,217 |
|
| $ | 1,565,521 |
|
| $ | 1,292,112 |
|
| $ | 1,028,152 |
| ||||||||||||||||||||
Reimbursed out-of-pocket engagement expenses |
|
| 47,829 |
|
|
| 52,302 |
|
|
| 56,148 |
|
|
| 54,602 |
|
|
| 37,914 |
| ||||||||||||||||||||
Total revenue |
|
| 1,973,862 |
|
|
| 1,819,519 |
|
|
| 1,621,669 |
|
|
| 1,346,714 |
|
|
| 1,066,066 |
| ||||||||||||||||||||
(in thousands, except per share data and other operating data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Number of offices (at period end) (5) | 150 | 78 | 84 | 87 | 76 | |||||||||||||||||||||||||||||||||||
Compensation and benefits |
|
| 1,311,240 |
|
|
| 1,199,057 |
|
|
| 1,065,659 |
|
|
| 891,472 |
|
|
| 685,411 |
| ||||||||||||||||||||
General and administrative expenses |
|
| 351,991 |
|
|
| 237,390 |
|
|
| 226,232 |
|
|
| 213,018 |
|
|
| 145,917 |
| ||||||||||||||||||||
Reimbursed expenses |
|
| 47,829 |
|
|
| 52,302 |
|
|
| 56,148 |
|
|
| 54,602 |
|
|
| 37,914 |
| ||||||||||||||||||||
Cost of services |
|
| 75,487 |
|
|
| 73,658 |
|
|
| 71,482 |
|
|
| 59,824 |
|
|
| 39,692 |
| ||||||||||||||||||||
Depreciation and amortization |
|
| 46,489 |
|
|
| 48,588 |
|
|
| 47,260 |
|
|
| 36,220 |
|
|
| 27,597 |
| ||||||||||||||||||||
Restructuring charges, net (2) |
|
| — |
|
|
| 78 |
|
|
| 34,600 |
|
|
| 33,013 |
|
|
| 9,468 |
| ||||||||||||||||||||
Total operating expenses |
|
| 1,833,036 |
|
|
| 1,611,073 |
|
|
| 1,501,381 |
|
|
| 1,288,149 |
|
|
| 945,999 |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Operating income |
|
| 140,826 |
|
|
| 208,446 |
|
|
| 120,288 |
|
|
| 58,565 |
|
|
| 120,067 |
| ||||||||||||||||||||
Other income (loss), net |
|
| 10,094 |
|
|
| 11,119 |
|
|
| 10,328 |
|
|
| (6,409 | ) |
|
| 4,408 |
| ||||||||||||||||||||
Interest expense, net |
|
| (16,891 | ) |
|
| (13,832 | ) |
|
| (14,607 | ) |
|
| (3,394 | ) |
|
| (4,773 | ) | ||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net |
|
| 311 |
|
|
| 297 |
|
|
| 333 |
|
|
| 1,631 |
|
|
| 2,181 |
| ||||||||||||||||||||
Income tax provision |
|
| 29,544 |
|
|
| 70,133 |
|
|
| 29,104 |
|
|
| 18,960 |
|
|
| 33,526 |
| ||||||||||||||||||||
Net income |
|
| 104,796 |
|
|
| 135,897 |
|
|
| 87,238 |
|
|
| 31,433 |
|
|
| 88,357 |
| ||||||||||||||||||||
Net income attributable to noncontrolling interest |
|
| (2,145 | ) |
|
| (2,118 | ) |
|
| (3,057 | ) |
|
| (520 | ) |
|
| — |
| ||||||||||||||||||||
Net income attributable to Korn Ferry |
| $ | 102,651 |
|
| $ | 133,779 |
|
| $ | 84,181 |
|
| $ | 30,913 |
|
| $ | 88,357 |
| ||||||||||||||||||||
Basic earnings per share |
| $ | 1.84 |
|
| $ | 2.39 |
|
| $ | 1.48 |
|
| $ | 0.58 |
|
| $ | 1.78 |
| ||||||||||||||||||||
Diluted earnings per share |
| $ | 1.81 |
|
| $ | 2.35 |
|
| $ | 1.47 |
|
| $ | 0.58 |
|
| $ | 1.76 |
| ||||||||||||||||||||
Basic weighted average common shares outstanding |
|
| 55,311 |
|
|
| 55,426 |
|
|
| 56,205 |
|
|
| 52,372 |
|
|
| 49,052 |
| ||||||||||||||||||||
Diluted weighted average common shares outstanding |
|
| 56,096 |
|
|
| 56,254 |
|
|
| 56,900 |
|
|
| 52,929 |
|
|
| 49,766 |
| ||||||||||||||||||||
Cash dividends declared per common share |
| $ | 0.40 |
|
| $ | 0.40 |
|
| $ | 0.40 |
|
| $ | 0.40 |
|
| $ | 0.10 |
| ||||||||||||||||||||
Other Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Fee revenue by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Executive search: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
North America |
| $ | 455,826 |
|
| $ | 408,098 |
|
| $ | 356,625 |
|
| $ | 371,345 |
|
| $ | 330,634 |
| ||||||||||||||||||||
EMEA |
|
| 182,829 |
|
|
| 173,725 |
|
|
| 146,506 |
|
|
| 144,319 |
|
|
| 153,465 |
| ||||||||||||||||||||
Asia Pacific |
|
| 104,291 |
|
|
| 96,595 |
|
|
| 80,169 |
|
|
| 80,506 |
|
|
| 84,148 |
| ||||||||||||||||||||
Latin America |
|
| 31,896 |
|
|
| 30,624 |
|
|
| 34,376 |
|
|
| 26,744 |
|
|
| 29,160 |
| ||||||||||||||||||||
Total executive search |
|
| 774,842 |
|
|
| 709,042 |
|
|
| 617,676 |
|
|
| 622,914 |
|
|
| 597,407 |
| ||||||||||||||||||||
Advisory |
|
| 821,048 |
|
|
| 785,013 |
|
|
| 724,186 |
|
|
| 471,145 |
|
|
| 267,018 |
| ||||||||||||||||||||
RPO & Professional Search |
|
| 330,143 |
|
|
| 273,162 |
|
|
| 223,659 |
|
|
| 198,053 |
|
|
| 163,727 |
| ||||||||||||||||||||
Total fee revenue |
| $ | 1,926,033 |
|
| $ | 1,767,217 |
|
| $ | 1,565,521 |
|
| $ | 1,292,112 |
|
| $ | 1,028,152 |
| ||||||||||||||||||||
Number of offices (at period end) (3) |
|
| 104 |
|
|
| 106 |
|
|
| 114 |
|
|
| 150 |
|
|
| 78 |
| ||||||||||||||||||||
Number of consultants (at period end) | 1,164 | 694 | 646 | 607 | 522 |
|
| 1,448 |
|
|
| 1,392 |
|
|
| 1,330 |
|
|
| 1,164 |
|
|
| 694 |
| |||||||||||||||
Number of new engagements opened | 7,430 | 6,755 | 6,483 | 6,126 | 6,776 |
|
| 9,725 |
|
|
| 9,149 |
|
|
| 8,126 |
|
|
| 7,430 |
|
|
| 6,755 |
| |||||||||||||||
Number of full-time employees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Executive search | 1,682 | 1,562 | 1,566 | 1,471 | 1,471 |
|
| 1,960 |
|
|
| 1,865 |
|
|
| 1,791 |
|
|
| 1,682 |
|
|
| 1,562 |
| |||||||||||||||
Hay Group | 3,626 | 894 | 794 | 886 | 291 | |||||||||||||||||||||||||||||||||||
Futurestep | 1,530 | 1,147 | 958 | 835 | 826 | |||||||||||||||||||||||||||||||||||
Advisory |
|
| 3,603 |
|
|
| 3,454 |
|
|
| 3,598 |
|
|
| 3,626 |
|
|
| 894 |
| ||||||||||||||||||||
RPO & Professional Search |
|
| 2,942 |
|
|
| 2,188 |
|
|
| 1,710 |
|
|
| 1,530 |
|
|
| 1,147 |
| ||||||||||||||||||||
Corporate | 109 | 84 | 78 | 80 | 66 |
|
| 173 |
|
|
| 136 |
|
|
| 133 |
|
|
| 109 |
|
|
| 84 |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total full-time employees | 6,947 | 3,687 | 3,396 | 3,272 | 2,654 |
|
| 8,678 |
|
|
| 7,643 |
|
|
| 7,232 |
|
|
| 6,947 |
|
|
| 3,687 |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Selected Balance Sheet Data as of April 30: | ||||||||||||||||||||||||||||||||||||||||
Selected Consolidated Balance Sheets Data as of April 30: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Cash and cash equivalents | $ | 273,252 | $ | 380,838 | $ | 333,717 | $ | 224,066 | $ | 282,005 |
| $ | 626,360 |
|
| $ | 520,848 |
|
| $ | 410,882 |
|
| $ | 273,252 |
|
| $ | 380,838 |
| ||||||||||
Marketable securities (6) | 141,430 | 144,576 | 134,559 | 141,916 | 135,734 | |||||||||||||||||||||||||||||||||||
Marketable securities (4) |
|
| 140,751 |
|
|
| 137,085 |
|
|
| 119,937 |
|
|
| 141,430 |
|
|
| 144,576 |
| ||||||||||||||||||||
Working capital | 188,010 | 331,148 | 270,535 | 175,038 | 267,513 |
|
| 585,852 |
|
|
| 455,799 |
|
|
| 385,095 |
|
|
| 188,010 |
|
|
| 331,148 |
| |||||||||||||||
Total assets | 1,898,600 | 1,317,801 | 1,233,666 | 1,115,229 | 1,014,689 |
|
| 2,334,852 |
|
|
| 2,287,914 |
|
|
| 2,062,898 |
|
|
| 1,898,600 |
|
|
| 1,317,801 |
| |||||||||||||||
Long-term obligations | 375,035 | 196,542 | 191,197 | 182,210 | 163,489 |
|
| 540,507 |
|
|
| 509,839 |
|
|
| 517,271 |
|
|
| 375,035 |
|
|
| 196,542 |
| |||||||||||||||
Total stockholders’ equity | 1,047,301 | 815,249 | 755,536 | 664,468 | 629,476 |
|
| 1,243,387 |
|
|
| 1,219,615 |
|
|
| 1,087,048 |
|
|
| 1,047,301 |
|
|
| 815,249 |
|
(1) | Due to the acquisition of |
27
(2) | During fiscal 2018 and 2017, the |
(3) | The number of offices |
(4) | As of April 30, 2019, 2018, 2017, 2016, |
28
Forward-looking Statements
This Annual Report on Form 10-K 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.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 also are forward-looking statements. All of 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, changes in demand for our services as a result of automation, dependence on attracting and retaining qualified and experienced consultants, maintaining our relationships with customers and suppliers and retaining key employees, maintaining our brand name and professional reputation, the expected timing of the consummation of the Plan, the impact of the rebranding on the Company’s products and services, the costs of the Plan, potential legal liability and regulatory developments, 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, restrictions imposed by off-limits agreements, competition, consolidation in industries, reliance on information processing systems, cyber security vulnerabilities, changes to data security, data privacy, and data protection laws, limited protection of our intellectual property (“IP”), our ability to enhance and develop new technology, our ability to successfully recover from a disaster or business continuity problems, employment liability risk, an impairment in the carrying value of goodwill and other intangible assets, the effects of the Tax Cuts and Jobs Act (the “Tax Act”) and other future changes in tax laws, 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, the impact of the withdrawal of the United Kingdom from the European Union, changes in our accounting estimates and assumptions, alignment of our cost structure, risks related to the integration of recently acquired businesses, the utilization and billing rates of our consultants, seasonality, the phase-out of LIBOR, and the matters disclosed under the heading “Risk Factors” in the Company’s Exchange Act reports, including Item 1A included in this Annual Report.Report on Form 10-K. Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date of this Annual Report on Form 10-K 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 Annual Report on Form 10-K.
Executive Summary
Korn/Korn Ferry International (referred to herein as the “Company,” “Korn Ferry,”“Company” or in the first person notations “we,” “our,” and “us”) is the preeminent a global people and organizational advisory firm. Our services includeconsulting firm. We currently operate through three global segments: Executive Search, advisory solutionsKorn Ferry Advisory (Advisory) and products through Hay GroupKorn Ferry RPO and recruitment for non-executive professionals and recruitment process outsourcingProfessional Search (“RPO”RPO & Professional Search”) through Futurestep. Approximately 73% of the executive searches we performed in fiscal 2016 were for. Executive Search focuses on recruiting board level, chief executive and other senior executive and general management positions.positions, in addition to research-based interviewing and assessment solutions, for clients predominantly in the consumer goods, financial services, industrial, life sciences/healthcare and technology industries. Our 5,575 search engagementAdvisory segment assists clients in fiscal 2016 included manyto synchronize strategy and talent by addressing four fundamental needs: Organizational Strategy, Assessment and Succession, Leadership Development, and Rewards and Benefits, all underpinned by a comprehensive array of world-leading intellectual property, products and tools. RPO & Professional Search uses data-backed insight and IP, matched with strategic collaboration and innovative technology, to meet people challenges head-on—and succeed. Solutions span all aspects of Recruitment Process Outsourcing (“RPO”), Professional Search and Project Recruitment. We also operate a Corporate segment to record global expenses of the Company.
▪ | Approximately 71% of the executive searches we performed in fiscal 2019 were for board level, chief executive and other senior executive and general management positions. Our 3,993 search engagement clients in fiscal 2019 included many of the world’s largest and most prestigious public and private companies. |
▪ | We have built strong client loyalty, with 90% of the assignments performed during fiscal 2019 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 utilize multiple lines of our business. |
29
▪ | In fiscal 2019, Korn Ferry was recognized as a top five RPO provider in the Baker’s Dozen list, marking our 12th consecutive year on the list. Through decades of experience, we have enhanced our RPO solution to deliver quality candidates that drive our clients’ business strategies. We leverage proprietary IP and data sets to guide clients on the critical skills and competencies to look for, compensation Information to align with market demand, and assessment tools to ensure candidate fit. |
While most organizations can develop a sound strategy, they often struggle with how to make it stick. That is where we come in: synchronizing an organization’s strategy with its talent to drive superior performance. We help companies design their organization—the structure, roles and most prestigious publicresponsibilities—to seize these opportunities. In addition, we help organizations select and private companies, including approximately 54% ofhire the FORTUNE 500, middle market talent they need to execute their strategy—and emerging growth companies, as well as governmentshow them the best way to compensate, develop and nonprofit organizations. motivate their people.
We have built strong client loyalty, with 84% of assignments performed (without giving effect to Legacy Hay Group assignments) during fiscal 2016 having been on behalf of clients for whom we had conducted assignments in the previous three fiscal years. Approximately 62% ofdo this through our revenues were generated from clients that utilize multiple lines of business.
Superior performance comes from having the right conditions for success in two key areas — the organization and its people. Organizational conditions encourage people to put forth their best effort and invest their energy towards achieving the organization’s purpose. We can help operationalize a client’s complete strategy or address any combination of six broad categories:five core solution sets:
Organizational Strategy | We map talent strategy to business strategy by designing operating models and | |
Assessment and Succession | We provide actionable, research-backed
| |
Talent Acquisition |
| |
Leadership Development | We help leaders at all levels of an organization achieve their vision, purpose and strategy. We combine expertise, science and proven techniques with forward thinking and creativity to build leadership experiences that help | |
Rewards and Benefits | We help organizations design rewards to achieve their strategic objectives. We help them pay their people fairly for doing the right things—with rewards they value—at a cost the organization can afford. |
DuringOn June 12, 2018, the Company’s Board of Directors approved the One Korn Ferry rebranding plan for the Company (the “Plan”). This Plan includes going to market under a single, master brand architecture, solely as Korn Ferry and sunsetting all the Company’s sub-brands, including Futurestep, Hay Group and Lominger, among others. This integrated go-to-market approach was a key driver in our fee revenue growth in fiscal 2016, we implemented a restructuring plan in order to rationalize our cost structure in order to eliminate redundant positions and real estate that were created dueyear 2018, which led to the acquisition of Legacy Hay Group. In particular, the majority of our efforts in fiscal 2016, were focused on activities associated with integration ofdecision to further integrate our go-to-market activities our intellectual propertyunder one master brand — Korn Ferry. As a result, the Company discontinued the use of all sub-brands and content, our solution setschanged its name, effective January 1, 2019, to “Korn Ferry.” Two of the Company’s sub-brands, Hay Group and service offerings, and our back office systems and business processes.Lominger came to Korn Ferry through acquisitions. In connection with the accounting for these acquisitions, $106.6 million of the purchase price was allocated to indefinite-lived tradename intangible assets. As a result of these efforts throughout the year, we recorded $33.0 million of restructuring charges with $32.1 million relatingdecision to severance costs and $0.9 million relating to the consolidation/abandonment of premises during fiscal 2016. During fiscal 2015,discontinue their use, the Company took actions to rationalize its cost structure as a resultone-time, non-cash write-off of efficiencies obtained from prior year technology investments that enabled further integrationtradenames of the legacy business and previous year acquisitions (PDI and Global Novations, LLC) as well as other cost saving initiatives. As a result, we recorded $9.5$106.6 million in restructuring charges, net in fiscal 2015, of which $9.2 million relates to severance and $0.3 million related to consolidation/abandonment of premises. As previously disclosed, the integration of Legacy Hay Group will be substantially complete in the first quarter of fiscal 2017, which will include additional consolidation of office space and the elimination of other redundant operational and general and administrative expenses. We estimate the cost of these actions to be in the range of $20 million to $26 million, resulting in incremental annualized savings of approximately $17 million to $23 million.2019.
The Company currently operates inthrough three global business segments: Executive Search, Hay Group and Futurestep.segments. See Note 11 —Business 11—Segments, in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K,for additional discussion of the Company’s global business segments. 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 than temporary impairment). For the year ended April 30, 2016, adjustedfiscal 2017, Adjusted EBITDA includesincluded a deferred revenue adjustment related to the Legacy Hay Groupa previous acquisition, reflecting revenue that Hay GroupAdvisory would have realized if not for business combination accounting that requiresrequired a company to record the acquisition balance sheet at fair value and write-off deferred revenue where no future services are required to be performed to earn that revenue. Management willFor fiscal 2019 and 2018, management no longer havehad adjusted fee revenue after Q1 FY’17.revenue.
30
EBITDA, Adjusted EBITDA, is aand Adjusted EBITDA margin are non-GAAP financial measure. It hasmeasures. They have limitations as an analytical tool,tools, 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, itthey may not necessarily be comparable to non-GAAP performance measures that may be presented by other companies.
Management believes the presentation of thisthese non-GAAP financial measuremeasures 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 thisthese non-GAAP financial measuremeasures facilitates comparisons to Korn Ferry’s historical performance and the identification of operating trends that may otherwise be distorted by certain charges and other items that may not be indicative of Korn Ferry’s ongoing operating results.the factors discussed above. Korn Ferry includes thisthese non-GAAP financial measuremeasures 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 from EBITDA to arrive at Adjusted EBITDA. Management further believes that 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.
Similarly, adjusted fee revenue, which includes revenue that Advisory would have realized over the ensuing year after the acquisition if not for business combination accounting that requires a company to record the acquisition balance sheet at fair value and write-off deferred revenue where no future services are required to be performed to earn that revenue, is a non-GAAP financial measure. Adjusted fee revenue is not a measure that substitutes an individually tailored revenue recognition or measurement method for those of GAAP; rather, it is an adjustment for a short period of time provides better comparability between fiscal 2017 and subsequent periods. Management believes the presentation of adjusted fee revenue assists management in its evaluation of ongoing operations and provides useful information to investors because it 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 distorted by write-offs required under business combination accounting 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.
Fee revenue increased $263.9was $1,926.0 million during fiscal 2019, an increase of $158.8 million, or 26% in fiscal 2016 to $1,292.1 million9%, compared to $1,028.2$1,767.2 million in fiscal 2015,2018, with increases in fee revenue in all business segments. The acquisition of Legacy Hay Group contributed $186.8 million in fee revenue in fiscal 2016. During fiscal 2016,2019, we recorded operating income of $52.7$140.8 million with the Executive Search, Advisory and FuturestepRPO & Professional Search segments contributing $131.7$179.1 million, $5.6 million (net of $106.6 million impairment charge previously discussed) and $26.7$50.9 million, respectively, offset by the operating losses from Hay Group and Corporate segmentsexpenses of $3.4 million and $102.3 million, respectively.$94.8 million. Net income forattributable to Korn Ferry decreased by $31.1 million during fiscal 2016 and 2015 was $30.92019 to $102.7 million and $88.4from $133.8 million respectively.in fiscal 2018. Adjusted EBITDA was $189.7$311.0 million, foran increase of $33 million during fiscal 2016 with2019, from Adjusted EBITDA of $278.0 million in the year-ago period. During fiscal 2019, the Executive Search, Hay GroupAdvisory and FuturestepRPO & Professional Search segments contributing $151.7contributed $193.8 million, $78.9$151.0 million and $29.5$54.4 million, respectively, offset by corporateCorporate expenses net of other income and equity in earnings of unconsolidated subsidiaries of $70.4$88.2 million. Adjusted EBITDA increased $28.0 million during fiscal 2016, from Adjusted EBITDA of $161.7 million during fiscal 2015.
Our cash, cash equivalents and marketable securities decreased $110.7increased by $109.2 million or 21%, to $414.7$767.1 million at April 30, 2016,2019, compared to $525.4$657.9 million at April 30, 2015.2018. This decrease isincrease was mainly due to $256.1proceeds from our Revolver of $226.9 million used to acquire Legacy Hay Group,and cash provided by operating activities, offset by annual bonuses earned in fiscal 20152018 and paid during fiscal 2019, sign-on and retention payments, $238.9 million in principal payments on our term loan, $46.7 million in payments for the first quarterpurchase of fiscal 2016property and $21.8equipment, $37.4 million in stock repurchases in the open market, $20.7 million paid in tax withholding on restricted stock vestings and $23.5 million in dividends paid during fiscal 2016, partially offset by $140.0 million in cash borrowed from the term facility, net of principal payments and cash provided by operating activities.2019. As of April 30, 2016,2019, we held marketable securities to settle obligations under our Executive Capital Accumulation Plan (“ECAP”) with a cost value of $142.6$135.4 million and a fair value of $141.4$140.8 million. Our vested and unvested obligations for which these assets were held in trust totaled $138.8$122.3 million as of April 30, 2016.2019 and our unvested obligations totaled $24.6 million.
Our working capital decreasedincreased by $143.1$130.1 million to $188.0$585.9 million in fiscal 2016.2019. 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 theour debt obligations incurred in connection with the Legacy Hay Group acquisition, the retention pool obligations pursuant to the Legacy Hay Group acquisition and dividend payments under our dividend policy in the next twelve months. We had no outstanding borrowings$420.2 million available for borrowing under our revolving credit facilityRevolver at April 30, 2016 or 2015. However, on November 23, 2015 the Company borrowed $150 million from its term loan facility with Wells Fargo Bank, to finance a portion
of the Legacy Hay Group acquisition purchase price.2019. As of April 30, 20162018, we had no borrowings under our previous revolver. As of April 30, 2018, we had a total of $122.1 million available under the previous revolver after issued letters of credit. As of April 30, 2019 and 2015,2018, there was $2.8$2.9 million of standby letters of credit issued under our long-term debt arrangements. We havehad a total of $6.4$8.5 million and $1.6$7.4 million of standby letters of credits with other financial institutions as of April 30, 20162019 and 2015,2018, respectively. On June 15, 2016, the Company entered into a new senior secured $400 million Credit Agreement with a syndicate of banks made up of $275 million term loan and $125 million of secured revolving loans. We drew down $275 million on the term loan and used $140 million of the proceeds to pay-off the term loan that was outstanding as of April 30, 2016. The remaining funds will be used for working capital and general corporate purposes.
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. Preparation of our periodic filings requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of
31
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 and determinable. In preparing our 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 discussed below as critical to an understanding of our 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 following paragraphs. Senior management has discussed the development, selection and key assumptions of the critical accounting estimates with the Audit Committee of the Board of Directors.
Revenue Recognition. Management is required to establish policies and procedures to ensure thatRecognition. Substantially all fee revenue is recorded over the performance periodderived from fees for valid engagements and related costs are matched against such revenue. We provide professional services related to executive searchand professional recruitment performed on a retained basis, recruitment for non-executive professionals, recruitment process outsourcing, leadership & talent consultingand organizational advisory services and the sale of productizedproduct services, 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 that we expect 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 Standard Codification 606 (“ASC 606”): 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.
Fee revenue from executive and non-executive professional search activities and recruitment for non-executive professionals is generally one-third of the estimated first year compensation of the placed executive or non-executive professional, as applicable,candidate plus a percentage of the fee to cover indirect engagement related expenses. The Company generally recognizes revenueIn 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, we estimate upticks using the expected value method based on historical data on a straight-line basis overportfolio basis. In a three-month period, commencing upon client acceptance, as thisstandard search engagement, there is one performance obligation which is the periodpromise to undertake a search. We generally recognize such revenue over which the recruitment services are performed. Fees earnedcourse of a search and when it is legally entitled to payment as outlined in excessthe billing terms of the initial contract amount are recognized upon completion of the engagement, which reflect the difference between the final actual compensation of the placed executive and the estimate used for purposes of the previous billings. Since the initial fees are typically not contingent upon placement of a candidate, our assumptions primarily relate to establishing the period over which such service is performed. These assumptions determine the timing of revenue recognition and profitability for the reported period. If these assumptions do not accurately reflect the period over which revenue is earned, revenue and profit could differ. contract. Any revenuerevenues associated with services that are provided on a contingent basis isare recognized once the contingency is resolved. In additionresolved as this is when control is transferred to recruitmentthe customer. These assumptions determine the timing of revenue recognition for non-executive professionals, Futurestep provides the reported period.
RPO services and 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.
Consulting fee revenue, primarily generated from Advisory, is recognized as services are rendered, and/or as milestones are achieved. Fee revenue from Hay Group services is recognized as services are rendered for consulting engagements and other time based services, measured by total hours incurred to the total estimated hours at completion. It is possible that updated estimates for the consulting engagementengagements 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 accrueswe accrue or defersdefer revenue as appropriate. Hay Group
Product revenue is also derivedgenerated from a range of online tools designed to support human resource processes for pay, talent and engagement, and assessments, as well as licenses to proprietary intellectual property (“IP”) and tangible/digital products. IP subscriptions grant access to proprietary compensation and job evaluation databases. IP subscriptions are considered symbolic IP due to the saledynamic nature of productized services, which includesthe content and, as a result, revenue from licenses and from the sale of products. Revenue from licenses is recognized using a straight-line method over the term of the contract (generally 12 months). Undercontract. Functional IP licenses grant customers the fixed term licenses, the Company is obligated to provide the licensee with access to any updates to the underlying intellectual property that are made by the Company during the term of the license. Once the term of the agreement expires, the client’s right to access or
use IP content via delivery of a flat file. Because the intellectual property expires and the CompanyIP content license has no further obligations to the client under the license agreement. Revenue from perpetual licensessignificant stand-alone functionality, revenue is recognized upon delivery and when an enforceable right to payment exists. Online assessments are delivered in the licenseform of online questionnaires. A bundle of assessments represents one performance obligation, and revenue is sold since the Company’s only obligation isrecognized as assessment services are delivered and we have a legally enforceable right to provide the client access to the intellectual property but is not obligated to provide maintenance, support, updates or upgrades. Productspayment. Tangible/digital products sold by the Companyus mainly consist of books and automated servicesdigital files covering a variety of topics including performance management, team effectiveness, and coaching and development. The Company recognizesWe recognize revenue for itsour products when the product has been sold or shipped, inas is the case offor books. Furthermore, a provision for doubtful accounts on recognized revenue is established with a charge to general and administrative expenses based on historical loss experience, assessment of the collectability of specific accounts, as well as expectations of future collections based upon trends and the type of work for which services are rendered.
Annual Performance Related Bonuses.Performance-Related Bonuses. 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 consultants and revenue and other performanceperformance/profitability metrics for Hay GroupAdvisory and FuturestepRPO & Professional Search consultants), the level of engagements referred by a fee earnerconsultant in one line of business to a different line of business, Companyour performance including profitability, competitive forces and future economic conditions and their impact on our results. At the end of each fiscal year, annual performance related bonuses take into account final individual consultant productivity (including referred work), CompanyCompany/line of business results including profitability, the achievement of strategic
32
objectives and the results of individual performance appraisals, and the current economic landscape. Accordingly, each quarter we reevaluate the assumptions used to estimate annual performance related bonus liability and adjust the carrying amount of the liability recorded on the consolidated balance sheets and report any changes in the estimate in current operations. Because annual performance-based bonuses are communicated and paid only after the Company reports itswe report our 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.
Deferred Compensation.Compensation. Estimating deferred compensation requires assumptions regarding the timing and probability of payments of benefits to participants and the discount rate. Changes in these assumptions could significantly impact the liability and related cost on our consolidated balance sheetsheets and statementstatements of income, respectively. For certain deferred compensation plans, management engages an independent actuary to periodically review these assumptions in order to confirm that they reflect the population and economics of our deferred compensation plans in all material respects and to assist us in estimating our deferred compensation liability and the related cost. The actuarial assumptions we use may differ from actual results due to changing market conditions or changes in the participant population. These differences could have a significant impact on our deferred compensation liability and the related cost.
Carrying Values.Values. Valuations are required under GAAP to determine the carrying value of various assets. Our most significant assets for which management is required to prepare valuations are carrying value of receivables, goodwill, intangible assets fair value of contingent consideration, and recoverability of deferred income taxes. Management must identify whether events have occurred that may impact the carrying value of these assets and make assumptions regarding future events, such as cash flows and profitability. Differences between the assumptions used to prepare these valuations and actual results could materially impact the carrying amount of these assets and our operating results.
Of the assets mentioned above, goodwill is the largest asset requiring a valuation. Fair value of goodwill for purposes of the goodwill impairment test is determined utilizing 1)(1) a discounted cash flow analysis based on forecastforecasted cash flows (including estimated underlying revenue and operating income growth rates) discounted using an estimated weighted-average cost of capital for market participants and 2)(2) a market approach, utilizing observable market data such as comparable companies in similar lines of business that are publicly traded or which are part of a public or private transaction (to the extent available). The CompanyWe also reconcilesreconcile the results of these analyses to its market capitalization. If the carrying amount of a reporting unit exceeds its estimated fair value, goodwill is considered potentially impaired and further tests are performed to measure the amount of impairment loss, if any. We recorded no goodwill impairment in conjunction with our annual goodwill impairment assessment performed as of January 31, 2016.2019. While historical performance and current expectations
have resulted in fair values of goodwill in excess of carrying values, if our assumptions are not realized, it is possible that in the future an impairment charge may need to be recorded. However, it is not possible at this time to determine if an impairment charge would result or if such a charge would be material. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future. As of our testing date, the fair value of each reporting unit exceeded its carrying amount and no reporting units were at risk of failing the impairment test. As a result, no impairment charge was recognized. There was also no indication of potential impairment during the fourth quarter of fiscal 20162019 that would have required further testing.
Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the reporting units may include such items as follows:
▪ | A prolonged downturn in the business environment in which the reporting units operate; |
▪ | An economic climate that significantly differs from our future profitability assumptions in timing or degree; |
▪ | The deterioration of the labor markets; |
▪ | Volatility in equity and debt markets; and |
▪ | Competition and disruption in our core business. |
33
The following table summarizes the results of our operations as a percentage of fee revenue:
Year Ended April 30, |
| Year Ended April 30, |
| |||||||||||||||||||||
2016 | 2015 | 2014 |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||||||||||
Fee revenue | 100.0 | % | 100.0 | % | 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % | ||||||
Reimbursed out-of-pocket engagement expenses | 4.2 | 3.7 | 3.7 |
|
| 2.5 |
|
|
| 3.0 |
|
|
| 3.6 |
| |||||||||
|
|
| ||||||||||||||||||||||
Total revenue | 104.2 | 103.7 | 103.7 |
|
| 102.5 |
|
|
| 103.0 |
|
|
| 103.6 |
| |||||||||
Compensation and benefits | 69.4 | 67.2 | 67.4 |
|
| 68.1 |
|
|
| 67.9 |
|
|
| 68.0 |
| |||||||||
General and administrative expenses | 16.5 | 14.2 | 15.8 | |||||||||||||||||||||
General and administrative expenses (1) |
|
| 18.3 |
|
|
| 13.4 |
|
|
| 14.5 |
| ||||||||||||
Reimbursed expenses | 4.2 | 3.7 | 3.7 |
|
| 2.5 |
|
|
| 3.0 |
|
|
| 3.6 |
| |||||||||
Cost of services | 4.6 | 3.9 | 4.2 |
|
| 3.9 |
|
|
| 4.2 |
|
|
| 4.6 |
| |||||||||
Depreciation and amortization | 2.8 | 2.7 | 2.7 |
|
| 2.4 |
|
|
| 2.7 |
|
|
| 3.0 |
| |||||||||
Restructuring charges, net | 2.6 | 0.9 | 0.4 |
|
| — |
|
|
| — |
|
|
| 2.2 |
| |||||||||
|
|
| ||||||||||||||||||||||
Operating income | 4.1 | 11.1 | 9.5 |
|
| 7.3 |
|
|
| 11.8 |
|
|
| 7.7 |
| |||||||||
|
|
| ||||||||||||||||||||||
Net income | 2.4 | % | 8.6 | % | 7.6 | % |
|
| 5.4 | % |
|
| 7.7 | % |
|
| 5.6 | % | ||||||
|
|
| ||||||||||||||||||||||
Net income attributable to Korn/Ferry International | 2.4 | % | 8.6 | % | 7.6 | % | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net income attributable to Korn Ferry |
|
| 5.3 | % |
|
| 7.6 | % |
|
| 5.4 | % |
(1) | General and administrative expenses for fiscal 2019 includes write-off of tradenames of $106.6 million. |
The following tables summarize the results of our operations by business segment:
(Numbers may not total exactly due to rounding)
Year Ended April 30, |
| Year Ended April 30, |
| |||||||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||||||||||||||||||||||
Dollars | % | Dollars | % | Dollars | % |
| Dollars |
|
| % |
|
| Dollars |
|
| % |
|
| Dollars |
|
| % |
| |||||||||||||||||||||||||
(dollars in thousands) |
| (dollars in thousands) |
| |||||||||||||||||||||||||||||||||||||||||||||
Fee revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Executive Search: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
North America | $ | 371,345 | 28.7 | % | $ | 330,634 | 32.2 | % | $ | 306,768 | 31.9 | % |
| $ | 455,826 |
|
|
| 23.7 | % |
| $ | 408,098 |
|
|
| 23.1 | % |
| $ | 356,625 |
|
|
| 22.8 | % | ||||||||||||
EMEA | 144,319 | 11.2 | 153,465 | 14.9 | 147,917 | 15.4 |
|
| 182,829 |
|
|
| 9.5 |
|
|
| 173,725 |
|
|
| 9.8 |
|
|
| 146,506 |
|
|
| 9.4 |
| ||||||||||||||||||
Asia Pacific | 80,506 | 6.2 | 84,148 | 8.2 | 84,816 | 8.8 |
|
| 104,291 |
|
|
| 5.4 |
|
|
| 96,595 |
|
|
| 5.5 |
|
|
| 80,169 |
|
|
| 5.1 |
| ||||||||||||||||||
Latin America | 26,744 | 2.1 | 29,160 | 2.8 | 29,374 | 3.1 |
|
| 31,896 |
|
|
| 1.7 |
|
|
| 30,624 |
|
|
| 1.7 |
|
|
| 34,376 |
|
|
| 2.2 |
| ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total Executive Search | 622,914 | 48.2 | 597,407 | 58.1 | 568,875 | 59.2 |
|
| 774,842 |
|
|
| 40.2 |
|
|
| 709,042 |
|
|
| 40.1 |
|
|
| 617,676 |
|
|
| 39.5 |
| ||||||||||||||||||
Hay Group | 471,145 | 36.5 | 267,018 | 26.0 | 254,636 | 26.5 | ||||||||||||||||||||||||||||||||||||||||||
Futurestep | 198,053 | 15.3 | 163,727 | 15.9 | 136,790 | 14.3 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Advisory |
|
| 821,048 |
|
|
| 42.6 |
|
|
| 785,013 |
|
|
| 44.4 |
|
|
| 724,186 |
|
|
| 46.3 |
| ||||||||||||||||||||||||
RPO & Professional Search |
|
| 330,143 |
|
|
| 17.1 |
|
|
| 273,162 |
|
|
| 15.5 |
|
|
| 223,659 |
|
|
| 14.3 |
| ||||||||||||||||||||||||
Total fee revenue | 1,292,112 | 100.0 | % | 1,028,152 | 100.0 | % | 960,301 | 100.0 | % |
|
| 1,926,033 |
|
|
| 100.0 | % |
|
| 1,767,217 |
|
|
| 100.0 | % |
|
| 1,565,521 |
|
|
| 100.0 | % | |||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||
Reimbursed out-of-pocket engagement expense | 54,602 | 37,914 | 35,258 |
|
| 47,829 |
|
|
|
|
|
|
| 52,302 |
|
|
|
|
|
|
| 56,148 |
|
|
|
|
| |||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||
Total revenue | $ | 1,346,714 | $ | 1,066,066 | $ | 995,559 |
| $ | 1,973,862 |
|
|
|
|
|
| $ | 1,819,519 |
|
|
|
|
|
| $ | 1,621,669 |
|
|
|
|
| ||||||||||||||||||
|
|
|
Year Ended April 30, |
| Year Ended April 30, |
| |||||||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||||||||||||||||||||||
Dollars | Margin (1) | Dollars | Margin (1) | Dollars | Margin (1) |
| Dollars |
|
| Margin(1) |
|
| Dollars |
|
| Margin(1) |
|
| Dollars |
|
| Margin(1) |
| |||||||||||||||||||||||||
(dollars in thousands) |
| (dollars in thousands) |
| |||||||||||||||||||||||||||||||||||||||||||||
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Executive Search: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
North America | $ | 100,381 | 27.0 | % | $ | 80,818 | 24.4 | % | $ | 70,256 | 22.9 | % |
| $ | 120,754 |
|
|
| 26.5 | % |
| $ | 100,397 |
|
|
| 24.6 | % |
| $ | 81,621 |
|
|
| 22.9 | % | ||||||||||||
EMEA | 20,607 | 14.3 | 18,867 | 12.3 | 23,168 | 15.7 |
|
| 29,974 |
|
|
| 16.4 |
|
|
| 26,768 |
|
|
| 15.4 |
|
|
| 27,854 |
|
|
| 19.0 |
| ||||||||||||||||||
Asia Pacific | 12,572 | 15.6 | 14,631 | 17.4 | 17,274 | 20.4 |
|
| 24,364 |
|
|
| 23.4 |
|
|
| 18,425 |
|
|
| 19.1 |
|
|
| 8,580 |
|
|
| 10.7 |
| ||||||||||||||||||
Latin America | (1,854 | ) | (6.9 | ) | 4,704 | 16.1 | 5,654 | 19.2 |
|
| 3,998 |
|
|
| 12.5 |
|
|
| 4,022 |
|
|
| 13.1 |
|
|
| 6,268 |
|
|
| 18.2 |
| ||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||
Total Executive Search | 131,706 | 21.1 | 119,020 | 19.9 | 116,352 | 20.5 |
|
| 179,090 |
|
|
| 23.1 |
|
|
| 149,612 |
|
|
| 21.1 |
|
|
| 124,323 |
|
|
| 20.1 |
| ||||||||||||||||||
Hay Group | (3,415 | ) | (0.7 | ) | 28,175 | 10.6 | 23,847 | 9.4 | ||||||||||||||||||||||||||||||||||||||||
Futurestep | 26,702 | 13.5 | 19,940 | 12.2 | 13,352 | 9.8 | ||||||||||||||||||||||||||||||||||||||||||
Advisory |
|
| 5,617 |
|
|
| 0.7 |
|
|
| 100,535 |
|
|
| 12.8 |
|
|
| 47,429 |
|
|
| 6.5 |
| ||||||||||||||||||||||||
RPO & Professional Search |
|
| 50,884 |
|
|
| 15.4 |
|
|
| 39,396 |
|
|
| 14.4 |
|
|
| 29,995 |
|
|
| 13.4 |
| ||||||||||||||||||||||||
Corporate | (102,301 | ) | (53,107 | ) | (61,943 | ) |
|
| (94,765 | ) |
|
|
|
|
|
| (81,097 | ) |
|
|
|
|
|
| (81,459 | ) |
|
|
|
| ||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||
Total operating income (loss) | $ | 52,692 | 4.1 | % | $ | 114,028 | 11.1 | % | $ | 91,608 | 9.5 | % | ||||||||||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||
Total operating income |
| $ | 140,826 |
|
|
| 7.3 | % |
| $ | 208,446 |
|
|
| 11.8 | % |
| $ | 120,288 |
|
|
| 7.7 | % |
(1) | Margin calculated as a percentage of fee revenue by |
Fee revenue Deferred revenue adjustment due to acquisition Adjusted fee revenue Total revenue Net income Other loss, net Interest income, net Equity in earnings of unconsolidated subsidiaries, net Income tax provision Operating income (loss) Depreciation and amortization Other (loss) income, net Equity in earnings of unconsolidated subsidiaries, net Net income attributable to noncontrolling interest EBITDA Restructuring charges, net Integration/acquisition costs Venezuelan foreign currency loss Deferred revenue adjustment due to acquisition Separation costs Adjusted EBITDA Operating margin Adjusted EBITDA margin Year Ended April 30, 2016 Executive Search North
America EMEA Asia
Pacific Latin
America Subtotal Hay
Group Futurestep Corporate Consolidated (in thousands) $ 371,345 $ 144,319 $ 80,506 $ 26,744 $ 622,914 $ 471,145 $ 198,053 $ — $ 1,292,112 — — — — — 10,967 — — 10,967 $ 371,345 $ 144,319 $ 80,506 $ 26,744 $ 622,914 $ 482,112 $ 198,053 $ — $ 1,303,079 $ 386,256 $ 148,285 $ 83,206 $ 26,781 $ 644,528 $ 488,217 $ 213,969 $ — $ 1,346,714 $ 31,433 4,167 (237 ) (1,631 ) 18,960 $ 100,381 $ 20,607 $ 12,572 $ (1,854 ) $ 131,706 $ (3,415 ) $ 26,702 $ (102,301 ) 52,692 3,267 1,029 941 312 5,549 21,854 2,386 6,431 36,220 (147 ) 433 21 312 619 (868 ) 364 (4,282 ) (4,167 ) 437 — — — 437 — — 1,194 1,631 — — — (491 ) (491 ) (29 ) — — (520 ) 103,938 22,069 13,534 (1,721 ) 137,820 17,542 29,452 (98,958 ) 85,856 499 5,807 577 322 7,205 25,682 49 77 33,013 — — — — — 17,607 — 27,802 45,409 — — — 6,635 6,635 7,085 — — 13,720 — — — — — 10,967 — — 10,967 — — — — — — — 744 744 $ 104,437 $ 27,876 $ 14,111 $ 5,236 $ 151,660 $ 78,883 $ 29,501 $ (70,335 ) $ 189,709 27.0 % 14.3 % 15.6 % (6.9 )% 21.1 % (0.7 )% 13.5 % 4.1 % 28.1 % 19.3 % 17.5 % 19.6 % 24.3 % 16.4 % 14.9 % 14.6 %
Fee revenue Total revenue Net income Other income, net Interest expense, net Equity in earnings of unconsolidated subsidiaries, net Income tax provision Operating income (loss) Depreciation and amortization Other income (loss), net Equity in earnings of unconsolidated subsidiaries, net EBITDA Restructuring charges, net Acquisition costs Adjusted EBITDA Operating margin Adjusted EBITDA margin Year Ended April 30, 2015 Executive Search North
America EMEA Asia
Pacific Latin
America Subtotal Hay
Group Futurestep Corporate Consolidated (in thousands) $ 330,634 $ 153,465 $ 84,148 $ 29,160 $ 597,407 $ 267,018 $ 163,727 $ — $ 1,028,152 $ 344,913 $ 158,052 $ 87,142 $ 29,218 $ 619,325 $ 275,220 $ 171,521 $ — $ 1,066,066 $ 88,357 (7,458 ) 1,784 (2,181 ) 33,526 $ 80,818 $ 18,867 $ 14,631 $ 4,704 $ 119,020 $ 28,175 $ 19,940 $ (53,107 ) 114,028 3,515 1,764 1,045 350 6,674 13,427 1,882 5,614 27,597 288 83 369 109 849 (22 ) 54 6,577 7,458 426 — — — 426 — — 1,755 2,181 85,047 20,714 16,045 5,163 126,969 41,580 21,876 (39,161 ) 151,264 1,151 3,987 17 229 5,384 2,758 1,154 172 9,468 — — — — — — — 959 959 $ 86,198 $ 24,701 $ 16,062 $ 5,392 $ 132,353 $ 44,338 $ 23,030 $ (38,030 ) $ 161,691 24.4 % 12.3 % 17.4 % 16.1 % 19.9 % 10.6 % 12.2 % 11.1 % 26.1 % 16.1 % 19.1 % 18.5 % 22.2 % 16.6 % 14.1 % 15.7 %
Year Ended April 30, 2014 | ||||||||||||||||||||||||||||||||||||
Executive Search | ||||||||||||||||||||||||||||||||||||
North America | EMEA | Asia Pacific | Latin America | Subtotal | Hay Group | Futurestep | Corporate | Consolidated | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Fee revenue | $ | 306,768 | $ | 147,917 | $ | 84,816 | $ | 29,374 | $ | 568,875 | $ | 254,636 | $ | 136,790 | $ | — | $ | 960,301 | ||||||||||||||||||
Total revenue | $ | 321,473 | $ | 152,525 | $ | 87,606 | $ | 29,586 | $ | 591,190 | $ | 262,962 | $ | 141,407 | $ | — | $ | 995,559 | ||||||||||||||||||
Net income | $ | 72,691 | ||||||||||||||||||||||||||||||||||
Other income, net | (9,769 | ) | ||||||||||||||||||||||||||||||||||
Interest expense, net | 2,363 | |||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | (2,169 | ) | ||||||||||||||||||||||||||||||||||
Income tax provision | 28,492 | |||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Operating income (loss) | $ | 70,256 | $ | 23,168 | $ | 17,274 | $ | 5,654 | $ | 116,352 | $ | 23,847 | $ | 13,352 | $ | (61,943 | ) | $ | 91,608 | |||||||||||||||||
Depreciation and amortization | 3,579 | 2,727 | 1,383 | 323 | 8,012 | 12,491 | 1,797 | 3,872 | 26,172 | |||||||||||||||||||||||||||
Other income, net | 631 | 632 | 203 | 303 | 1,769 | 106 | 583 | 7,311 | 9,769 | |||||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | 383 | — | — | — | 383 | — | — | 1,786 | 2,169 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
EBITDA | 74,849 | 26,527 | 18,860 | 6,280 | 126,516 | 36,444 | 15,732 | (48,974 | ) | 129,718 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Restructuring charges, net | 816 | 460 | 60 | — | 1,336 | 1,149 | 1,134 | 63 | 3,682 | |||||||||||||||||||||||||||
Separation costs | — | — | — | — | — | — | — | 4,500 | 4,500 | |||||||||||||||||||||||||||
Integration costs | — | — | — | — | — | — | — | 394 | 394 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Adjusted EBITDA | $ | 75,665 | $ | 26,987 | $ | 18,920 | $ | 6,280 | $ | 127,852 | $ | 37,593 | $ | 16,866 | $ | (44,017 | ) | $ | 138,294 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Operating margin | 22.9 | % | 15.7 | % | 20.4 | % | 19.2 | % | 20.5 | % | 9.4 | % | 9.8 | % | 9.5 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Adjusted EBITDA margin | 24.7 | % | 18.2 | % | 22.3 | % | 21.4 | % | 22.5 | % | 14.8 | % | 12.3 | % | 14.4 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
| Year Ended April 30, 2019 |
| |||||||||||||||||||||||||||||||||
|
| Executive Search |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| North America |
|
| EMEA |
|
| Asia Pacific |
|
| Latin America |
|
| Subtotal |
|
| Advisory |
|
| RPO & Professional Search |
|
| Corporate |
|
| Consolidated |
| |||||||||
|
| (in thousands) |
| |||||||||||||||||||||||||||||||||
Fee revenue |
| $ | 455,826 |
|
| $ | 182,829 |
|
| $ | 104,291 |
|
| $ | 31,896 |
|
| $ | 774,842 |
|
| $ | 821,048 |
|
| $ | 330,143 |
|
| $ | — |
|
| $ | 1,926,033 |
|
Total revenue |
| $ | 469,743 |
|
| $ | 186,131 |
|
| $ | 105,543 |
|
| $ | 31,960 |
|
| $ | 793,377 |
|
| $ | 838,620 |
|
| $ | 341,865 |
|
| $ | — |
|
| $ | 1,973,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Korn Ferry |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 102,651 |
|
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,145 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (10,094 | ) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 16,891 |
|
Equity in earnings of unconsolidated subsidiaries, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (311 | ) |
Income tax provision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 29,544 |
|
Operating income (loss) |
| $ | 120,754 |
|
| $ | 29,974 |
|
| $ | 24,364 |
|
| $ | 3,998 |
|
| $ | 179,090 |
|
| $ | 5,617 |
|
| $ | 50,884 |
|
| $ | (94,765 | ) |
| $ | 140,826 |
|
Depreciation and amortization |
|
| 3,890 |
|
|
| 1,254 |
|
|
| 1,428 |
|
|
| 410 |
|
|
| 6,982 |
|
|
| 29,057 |
|
|
| 3,255 |
|
|
| 7,195 |
|
|
| 46,489 |
|
Other income (loss), net |
|
| 6,388 |
|
|
| 432 |
|
|
| 281 |
|
|
| 322 |
|
|
| 7,423 |
|
|
| 3,198 |
|
|
| 268 |
|
|
| (795 | ) |
|
| 10,094 |
|
Equity in earnings of unconsolidated subsidiaries, net |
|
| 311 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 311 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 311 |
|
EBITDA |
|
| 131,343 |
|
|
| 31,660 |
|
|
| 26,073 |
|
|
| 4,730 |
|
|
| 193,806 |
|
|
| 37,872 |
|
|
| 54,407 |
|
|
| (88,365 | ) |
|
| 197,720 |
|
Integration/acquisition costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,559 |
|
|
| — |
|
|
| 187 |
|
|
| 6,746 |
|
Tradename write-offs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 106,555 |
|
|
| — |
|
|
| — |
|
|
| 106,555 |
|
Adjusted EBITDA |
| $ | 131,343 |
|
| $ | 31,660 |
|
| $ | 26,073 |
|
| $ | 4,730 |
|
| $ | 193,806 |
|
| $ | 150,986 |
|
| $ | 54,407 |
|
| $ | (88,178 | ) |
| $ | 311,021 |
|
Operating margin |
|
| 26.5 | % |
|
| 16.4 | % |
|
| 23.4 | % |
|
| 12.5 | % |
|
| 23.1 | % |
|
| 0.7 | % |
|
| 15.4 | % |
|
|
|
|
|
| 7.3 | % |
Adjusted EBITDA margin |
|
| 28.8 | % |
|
| 17.3 | % |
|
| 25.0 | % |
|
| 14.8 | % |
|
| 25.0 | % |
|
| 18.4 | % |
|
| 16.5 | % |
|
|
|
|
|
| 16.1 | % |
|
| Year Ended April 30, 2018 |
| |||||||||||||||||||||||||||||||||
|
| Executive Search |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| North America |
|
| EMEA |
|
| Asia Pacific |
|
| Latin America |
|
| Subtotal |
|
| Advisory |
|
| RPO & Professional Search |
|
| Corporate |
|
| Consolidated |
| |||||||||
|
| (in thousands) |
| |||||||||||||||||||||||||||||||||
Fee revenue |
| $ | 408,098 |
|
| $ | 173,725 |
|
| $ | 96,595 |
|
| $ | 30,624 |
|
| $ | 709,042 |
|
| $ | 785,013 |
|
| $ | 273,162 |
|
| $ | — |
|
| $ | 1,767,217 |
|
Total revenue |
| $ | 421,260 |
|
| $ | 177,234 |
|
| $ | 98,062 |
|
| $ | 30,717 |
|
| $ | 727,273 |
|
| $ | 801,005 |
|
| $ | 291,241 |
|
| $ | — |
|
| $ | 1,819,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Korn Ferry |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 133,779 |
|
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,118 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (11,119 | ) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 13,832 |
|
Equity in earnings of unconsolidated subsidiaries, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (297 | ) |
Income tax provision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 70,133 |
|
Operating income (loss) |
| $ | 100,397 |
|
| $ | 26,768 |
|
| $ | 18,425 |
|
| $ | 4,022 |
|
| $ | 149,612 |
|
| $ | 100,535 |
|
| $ | 39,396 |
|
| $ | (81,097 | ) |
| $ | 208,446 |
|
Depreciation and amortization |
|
| 3,930 |
|
|
| 1,689 |
|
|
| 1,408 |
|
|
| 455 |
|
|
| 7,482 |
|
|
| 31,527 |
|
|
| 3,054 |
|
|
| 6,525 |
|
|
| 48,588 |
|
Other income, net |
|
| 845 |
|
|
| 168 |
|
|
| 373 |
|
|
| 181 |
|
|
| 1,567 |
|
|
| 2,501 |
|
|
| 152 |
|
|
| 6,899 |
|
|
| 11,119 |
|
Equity in earnings of unconsolidated subsidiaries, net |
|
| 297 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 297 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 297 |
|
EBITDA |
|
| 105,469 |
|
|
| 28,625 |
|
|
| 20,206 |
|
|
| 4,658 |
|
|
| 158,958 |
|
|
| 134,563 |
|
|
| 42,602 |
|
|
| (67,673 | ) |
|
| 268,450 |
|
Restructuring charges (recoveries), net |
|
| — |
|
|
| — |
|
|
| 313 |
|
|
| — |
|
|
| 313 |
|
|
| (241 | ) |
|
| 6 |
|
|
| — |
|
|
| 78 |
|
Integration/acquisition costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,151 |
|
|
| — |
|
|
| 279 |
|
|
| 9,430 |
|
Adjusted EBITDA |
| $ | 105,469 |
|
| $ | 28,625 |
|
| $ | 20,519 |
|
| $ | 4,658 |
|
| $ | 159,271 |
|
| $ | 143,473 |
|
| $ | 42,608 |
|
| $ | (67,394 | ) |
| $ | 277,958 |
|
Operating margin |
|
| 24.6 | % |
|
| 15.4 | % |
|
| 19.1 | % |
|
| 13.1 | % |
|
| 21.1 | % |
|
| 12.8 | % |
|
| 14.4 | % |
|
|
|
|
|
| 11.8 | % |
Adjusted EBITDA margin |
|
| 25.8 | % |
|
| 16.5 | % |
|
| 21.2 | % |
|
| 15.2 | % |
|
| 22.5 | % |
|
| 18.3 | % |
|
| 15.6 | % |
|
|
|
|
|
| 15.7 | % |
35
| Year Ended April 30, 2017 |
| ||||||||||||||||||||||||||||||||||
|
| Executive Search |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| North America |
|
| EMEA |
|
| Asia Pacific |
|
| Latin America |
|
| Subtotal |
|
| Advisory |
|
| RPO & Professional Search |
|
| Corporate |
|
| Consolidated |
| |||||||||
|
| (in thousands) |
| |||||||||||||||||||||||||||||||||
Fee revenue |
| $ | 356,625 |
|
| $ | 146,506 |
|
| $ | 80,169 |
|
| $ | 34,376 |
|
| $ | 617,676 |
|
| $ | 724,186 |
|
| $ | 223,659 |
|
| $ | — |
|
| $ | 1,565,521 |
|
Deferred revenue adjustment due to acquisition |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,535 |
|
|
| — |
|
|
| — |
|
|
| 3,535 |
|
Adjusted fee revenue |
| $ | 356,625 |
|
| $ | 146,506 |
|
| $ | 80,169 |
|
| $ | 34,376 |
|
| $ | 617,676 |
|
| $ | 727,721 |
|
| $ | 223,659 |
|
| $ | — |
|
| $ | 1,569,056 |
|
Total revenue |
| $ | 369,803 |
|
| $ | 150,113 |
|
| $ | 81,744 |
|
| $ | 34,533 |
|
| $ | 636,193 |
|
| $ | 741,533 |
|
| $ | 243,943 |
|
| $ | — |
|
| $ | 1,621,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Korn Ferry |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 84,181 |
|
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,057 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (10,328 | ) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 14,607 |
|
Equity in earnings of unconsolidated subsidiaries, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (333 | ) |
Income tax provision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 29,104 |
|
Operating income (loss) |
| $ | 81,621 |
|
| $ | 27,854 |
|
| $ | 8,580 |
|
| $ | 6,268 |
|
| $ | 124,323 |
|
| $ | 47,429 |
|
| $ | 29,995 |
|
| $ | (81,459 | ) |
| $ | 120,288 |
|
Depreciation and amortization |
|
| 3,812 |
|
|
| 1,030 |
|
|
| 1,060 |
|
|
| 483 |
|
|
| 6,385 |
|
|
| 32,262 |
|
|
| 2,818 |
|
|
| 5,795 |
|
|
| 47,260 |
|
Other income (loss), net |
|
| 844 |
|
|
| (15 | ) |
|
| 300 |
|
|
| 684 |
|
|
| 1,813 |
|
|
| 1,900 |
|
|
| (91 | ) |
|
| 6,706 |
|
|
| 10,328 |
|
Equity in earnings of unconsolidated subsidiaries, net |
|
| 333 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 333 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 333 |
|
EBITDA |
|
| 86,610 |
|
|
| 28,869 |
|
|
| 9,940 |
|
|
| 7,435 |
|
|
| 132,854 |
|
|
| 81,591 |
|
|
| 32,722 |
|
|
| (68,958 | ) |
|
| 178,209 |
|
Restructuring charges, net |
|
| 1,719 |
|
|
| 629 |
|
|
| 1,495 |
|
|
| 773 |
|
|
| 4,616 |
|
|
| 29,663 |
|
|
| 101 |
|
|
| 220 |
|
|
| 34,600 |
|
Integration/acquisition costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,440 |
|
|
| — |
|
|
| 7,939 |
|
|
| 22,379 |
|
Deferred revenue adjustment due to acquisition |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,535 |
|
|
| — |
|
|
| — |
|
|
| 3,535 |
|
Separation costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 609 |
|
|
| — |
|
|
| — |
|
|
| 609 |
|
Adjusted EBITDA |
| $ | 88,329 |
|
| $ | 29,498 |
|
| $ | 11,435 |
|
| $ | 8,208 |
|
| $ | 137,470 |
|
| $ | 129,838 |
|
| $ | 32,823 |
|
| $ | (60,799 | ) |
| $ | 239,332 |
|
Operating margin |
|
| 22.9 | % |
|
| 19.0 | % |
|
| 10.7 | % |
|
| 18.2 | % |
|
| 20.1 | % |
|
| 6.5 | % |
|
| 13.4 | % |
|
|
|
|
|
| 7.7 | % |
Adjusted EBITDA margin |
|
| 24.8 | % |
|
| 20.1 | % |
|
| 14.3 | % |
|
| 23.9 | % |
|
| 22.3 | % |
|
| 17.8 | % |
|
| 14.7 | % |
|
|
|
|
|
| 15.3 | % |
Fiscal 20162019 Compared to Fiscal 20152018
Fee Revenue
Fee Revenue.Fee revenue increased $263.9by $158.8 million, or 26%9%, to $1,292.1$1,926.0 million in fiscal 20162019 compared to $1,028.2$1,767.2 million in fiscal 2015.2018. Exchange rates unfavorably impacted fee revenue by $66.8$48.3 million, or 6%3%, in fiscal 2016. Adjusting for the Legacy Hay Group acquisition, fee revenue increased $77.1 million, or 7%,2019 compared to fiscal 2015. Thisthe year-ago period. The increase in fee revenue was attributable to higher fee revenueorganic growth in Futurestep, North America region of Executive Search and Legacy LTC.all solution areas.
Executive Search.Executive Search reported fee revenue of $622.9$774.8 million, an increase of $25.5$65.8 million, or 4%9%, in fiscal 20162019 compared to $597.4$709.0 million in fiscal 2015.the year-ago period. As detailed below, Executive Search fee revenue was higher in the North America region, partially offset by decreases in fee revenue in EMEA, Asia Pacific and Latin Americaall regions in fiscal 20162019 as compared to fiscal 2015.2018. The higher fee revenue in Executive Search was mainly due to a 6% increase in the number of engagements billed and a 5% increase in the weighted-average fees billed per engagement offset by a 1% decrease(calculated using local currency) in engagements billed during fiscal 2016 as2019 compared to fiscal 2015.the year-ago period. Exchange rates unfavorably impacted fee revenue by $29.5$14.8 million, or 5%2%, in fiscal 2016.2019 as compared to the year-ago period.
North America reported fee revenue of $371.4$455.8 million, an increase of $40.8$47.7 million, or 12%, in fiscal 20162019 compared to $330.6$408.1 million in fiscal 2015.the year-ago period. North America’s fee revenue was higher due to a 9% increase in the number of engagements billed and a 3% increase in the weighted-average fees billed per engagement (calculated using local currency) in fiscal 2019 compared to the year-ago period. Technology, industrial and financial services were the main sectors contributing to the increase in fee revenue is primarilyin fiscal 2019 as compared to the year-ago period. The effect of exchange rates on fee revenue was minimal in fiscal 2019 as compared to the year-ago period.
EMEA reported fee revenue of $182.8 million, an increase of $9.1 million, or 5%, in fiscal 2019 compared to $173.7 million in fiscal 2018. Exchange rates unfavorably impacted fee revenue by $5.7 million, or 3%, in fiscal 2019, compared to the year-ago period. The increase in fee revenue was due to an 8%a 5% increase in the number of engagements billed and a 4% increase in the weighted-average fees billed per engagement during(calculated using local
36
currency) in fiscal 2016 as2019 compared to fiscal 2015.the year-ago period. The overall increase in fee revenue was primarily driven by growth in the financial services, life sciences/healthcare, technology and education/non-profit sectors as compared to fiscal 2015, partially offset by a decrease in the industrial and consumer goods sectors. Exchange rates unfavorably impacted fee revenue by $2.8 million, or 1%, in fiscal 2016.
EMEA reported fee revenue of $144.3 million, a decrease of $9.2 million, or 6%, in fiscal 2016 compared to $153.5 million in fiscal 2015. Exchange rates unfavorably impacted fee revenue by $13.8 million, or 9%, in fiscal 2016. The decline in fee revenue was due to a 4% decrease in the number of engagements billed and a 2% decrease in the weighted-average fees billed per engagement during fiscal 2016 as compared to fiscal 2015. The performance in existing offices in the United Kingdom, France, SwitzerlandGermany, United Arab Emirates, and GermanyFrance were the primary contributors to the decreaseincrease in fee revenue in fiscal 20162019 compared to the year-ago period, offset by an increase in fee revenue in United Arab Emirates and Belgium.period. In terms of business sectors, financial services, industrial and technology experiencedhad the largest decreasesincrease in fee revenue in fiscal 2016 as2019 compared to fiscal 2015,the year-ago period, partially offset by an increasea decrease in fee revenue in the life sciences/healthcare and consumer goods sector.sectors.
Asia Pacific reported fee revenue of $80.5$104.3 million, a decreasean increase of $7.7 million, or 8%, in fiscal 2019 compared to $96.6 million in fiscal 2018. Exchange rates unfavorably impacted fee revenue by $3.6 million, or 4%, in fiscal 20162019, compared to $84.1the year-ago period. The increase in fee revenue was due to a 10% increase in the number of engagements billed and a 2% increase in the weighted-average fees billed per engagement (calculated using local currency) in fiscal 2019 compared to the year-ago period. The performance in Hong Kong, Australia, Singapore, and New Zealand were the primary contributors to the increase in fee revenue in fiscal 2019 compared to the year-ago period. Technology, education/non-profit, consumer goods, and financial services were the main sectors contributing to the increase in fee revenue in fiscal 2019 as compared to the year-ago period.
Latin America reported fee revenue of $31.9 million, an increase of $1.3 million, or 4%, in fiscal 2019 compared to $30.6 million in fiscal 2015.2018. Exchange rates unfavorably impacted fee revenue by $6.2$4.6 million, or 7%15%, in fiscal 2016.2019, compared to the year-ago period. The declineincrease in fee revenue was due to a 4% decrease in the number of engagements billed in fiscal 2016 compared to fiscal 2015. The performance in Singapore, Hong Kong and Australia were the primary contributors to the decrease in fee revenue in fiscal 2016 compared to fiscal 2015, offset by higher fee revenue in India. Life sciences/healthcare, consumerPeru, Colombia and Brazil in fiscal 2019, compared to the year-ago period. Consumer goods and industrialfinancial services were the main sectors contributing to the decreaseincrease in fee revenue in fiscal 2016 as2019, compared to fiscal 2015,the year-ago period, partially offset by higher fee revenuea decrease in the education/non-profit sector.life sciences/healthcare and industrial sectors.
Latin AmericaAdvisory. Advisory reported fee revenue of $26.7 million, a decrease of $2.5 million, or 9%, in fiscal 2016 compared to $29.2 million in fiscal 2015. In the fourth quarter of fiscal 2016, we obtained control of our equity investment in our Mexican subsidiary which is included in our consolidated results. The Mexican subsidiary contributed $3.6 million in fee revenue in fiscal 2016. Excluding fee revenue from our Mexican subsidiary, fee revenue in Latin America decreased $6.1 million, or 21%, compared to fiscal 2015. Exchange rates unfavorably impacted fee revenue for South America by $6.1 million, or 21%, in fiscal 2016. The decline in fee revenue was due to a 41% decrease in the number of engagements billed, offset by a 36% increase in weighted-average fees billed per engagement in fiscal 2016 compared to fiscal 2015. The performance in Brazil, Colombia and Chile
were the primary contributors to the decline in fee revenue in fiscal 2016 compared to fiscal 2015, partially offset by the growth in Venezuela. Industrial was the main sector contributing to the decrease in fee revenue in fiscal 2016 compared to fiscal 2015, partially offset by an increase in fee revenue in the consumer goods sector during the same period.
Hay Group.Hay Group reported fee revenue of $471.1$821.0 million, an increase of $204.0$36.0 million, or 76%5%, in fiscal 20162019 compared to $267.1$785.0 million in fiscal 2015.2018. Exchange rates unfavorably impacted fee revenue by $25.3$24.8 million, or 9%, in fiscal 2016. Adjusting for the Legacy Hay Group acquisition, fee revenue increased $17.2 million, or 6%3%, compared to fiscal 2015.the year-ago period. Fee revenue increased due tofrom consulting services was higher consulting fee revenue of $16.6by $27.8 million or 8%, in fiscal 20162019 compared to fiscal 2015the year-ago period, with the restremaining increase of the increase due to higher fee revenue from products. The acquisition of Pivot Leadership on March 1, 2015 contributed $22.4$8.2 million and $3.7 million in consulting fee revenue during fiscal 2016 and fiscal 2015, respectively.generated by our products business.
Futurestep.FuturestepRPO & Professional Search. RPO & Professional Search reported fee revenue of $198.1$330.1 million, an increase of $34.4$56.9 million, or 21%, in fiscal 20162019 compared to $163.7$273.2 million in fiscal 2015.2018. Exchange rates unfavorably impacted fee revenue by $12.0$8.7 million, or 7%3%, compared to the year-ago period. Higher fee revenues in fiscal 2016. TheRPO and professional search of $33.0 million and $23.9 million, respectively, drove the increase in fee revenue was primarily driven by higher fee revenues in professional search and RPO of $18.1 million and $17.4 million, respectively. The increase in fee revenue in professional search was due to a 16% increase in the weighted average fees billed per engagement in fiscal 2016 compared to fiscal 2015 and 9% increase in the number of engagements billed during the same period.revenue.
Compensation and Benefits
Compensation and benefits expense increased $205.9$112.1 million, or 30%9%, to $897.4$1,311.2 million in fiscal 20162019 from $691.5$1,199.1 million in fiscal 2015.2018. Exchange rates favorably impacted compensation and benefits expenses by $42.8$29.6 million, or 6%2%, duringin fiscal 2016. Excluding $128.6 million2019 compared to the year-ago period. The increase in compensation and benefits relatingwas due to the Legacy Hay Group acquisition and $22.1a 10% increase in average headcount, which contributed $41.4 million in integration/acquisition costs and separation charges, compensation and benefits increased $55.2 million, or 8%, compared to fiscal 2015. This increase was due in large part to an increase of $35.9 million, $4.7 million, $3.6 million and $2.9 million inhigher salaries and related payroll taxes performance related bonus expense, stock based compensation and outside contractors, respectively.The higher level of salaries and related payroll expense was due to ana $13.5 million increase in average headcountamortization of 11% in fiscal 2016 compared to fiscal 2015, and reflects our continued growth-related investments back into the business. The increase in performance related bonus expense was due to an increase in fee revenue and profitability.long-term incentive awards. Also contributing to the increase was higher performance-related bonus expense of $36.9 million, higher commission expense of $5.5 million and an increase in compensationthe use of outside contractors of $5.5 million all due to the need to service higher fee revenues from increased business. Compensation and benefits expense, as a percentage of fee revenue, was a change68% in the cash surrender value (“CSV”) of company owned life insurance (“COLI”). The change in CSV of COLI increased compensationboth fiscal 2019 and benefits expense by $6.5 million in fiscal 2016 compared to fiscal 2015 due to a smaller increase in the market value of the underlying investments due to market changes. COLI is held to fund other deferred compensation retirement plans (see Note 6 — Deferred Compensation and Retirement Plans, included in the Notes to our Consolidated Financial Statements).2018.
The changes in the fair value of vested amounts owed under certain deferred compensation plans decreased compensation and benefits expense by $1.7 million in fiscal 2016 compared to an increase of $5.9 million in fiscal 2015. Offsetting these changes in compensation and benefits expense was a decrease in the fair value of marketable securities classified as trading (held in trust to satisfy obligations under certain deferred compensation plan liabilities) of $3.3 million in fiscal 2016 compared to an increase of $8.8 million in fiscal 2015, recorded in other (loss) income, net on the consolidated statement of income.
Executive Search compensation and benefits expense increased $7.6by $33.8 million, or 7%, to $400.9$502.4 million in fiscal 20162019 compared to $393.3$468.6 million in fiscal 2015.2018. Exchange rates favorably impacted compensation and benefits by $9.4 million, or 2%, in fiscal 2019 compared to the year-ago period. The changeincrease was driven bydue to higher performance-related bonus expense of $17.7 million due to the increase in fee revenue. Also contributing to the increase was a 5% increase in average headcount, which contributed $13.0 million in higher salaries and related payroll taxes, of $7.7 million. The higher level of salaries and related payroll expense was due to ana $8.2 million increase in average consultant headcountamortization of 6%long-term incentive awards in fiscal 20162019 compared to fiscal 2015, and reflects our continued growth-related investments back into the business.year-ago period. Executive Search compensation and benefits expense, as a percentage of fee revenue, was 64%decreased to 65% in fiscal 2016 compared to2019 from 66% in fiscal 2015.
Hay GroupAdvisory compensation and benefits expense increased $156.3by $26.8 million, or 98%5%, to $315.2$524.1 million in fiscal 20162019 from $158.9$497.3 million in fiscal 2015. Excluding $128.62018. Exchange rates favorably impacted compensation and benefits by $14.2 million, or 3%, in fiscal 2019 compared to the year-ago period. The change was primarily due to $6.4 million in higher performance-related bonus expense, an increase of $5.4 million in commission expense and $2.2 million in outside contractors due to the need to accommodate the growth in fee revenue. The rest of the increase in compensation and benefits relating to the Legacy Hay Group acquisition and $16.1 million in integration/acquisition costs, compensation and benefits increased $11.6 million, or 7%, compared to fiscal 2015. The increase was driven by an increase in salaries and related payroll taxes of $8.5 million and an increase of $3.8 million in performance related bonus expense. The higher level of salaries and related payroll expense was due to an increase in amortization of long-term incentive awards of $4.1 million and $2.4 million more in salaries and related payroll taxes resulting from a 2% increase in the average consultant headcount of 14% in fiscal 20162019 compared to fiscal 2015. Hay Groupthe year-ago period. Advisory compensation and benefits expense, as a percentage of fee revenue, increased to 67%64% in fiscal 20162019 from 60% in fiscal 2015. Excluding integration/acquisition costs, compensation and benefits expense as a percentage of fee revenue was 63% in fiscal 2016.the year-ago period.
FuturestepRPO & Professional Search compensation and benefits expense increased $24.3by $41.4 million, or 22%21%, to $136.1$234.6 million in fiscal 20162019 from $111.8$193.2 million in fiscal 2015.2018. Exchange rates favorably impacted compensation and benefits by $5.9 million, or 3%, in fiscal 2019 compared to the year-ago period. The increase was primarily driven by an increase of $19.0 million in due to higher
37
salaries and related payroll taxes $2.9of $23.9 million in outside contractors and $1.2 million in insurance costs for employees. The increase in salaries and related payroll taxes and insurance costs provided for employees was due toresulting from a 27%32% increase in the average headcount.headcount in fiscal 2019 compared to fiscal 2018. The higher average headcount and the $2.3 million increase in utilizationthe use of outside contractors werewas primarily driven by the need to service an increase in fee revenue in both our professional searchthe RPO business. Also contributing to the increase in compensation and benefits was a higher performance-related bonus expense of $10.7 million. RPO businesses. Futurestep& Professional Search compensation and benefits expense, as a percentage of fee revenue, was 69%71% in both fiscal 2016 compared to 68% in fiscal 2015.2019 and 2018.
Corporate compensation and benefits expense increased $17.7by $10.1 million, or 64%25%, to $45.2$50.1 million in fiscal 20162019 from $27.5$40.0 million in fiscal 2015. Excluding $6.02018. The increase was primarily due to higher performance-related bonus expense, higher salaries and related payroll taxes, an increase in the use of outside contractors, higher stock-based compensation expense and an increase in amortization of long-term incentive awards of $2.0 million, of integration/acquisition costs$2.2 million, $1.1 million, $0.9 million and separation charges, compensation and benefits expense increased $11.7$0.6 million, respectively, in fiscal 2016 as2019 compared to fiscal 2015. Thisthe year-ago period. The rest of the increase was mainly due to thea change in the CSV of COLI. The change in CSVcash surrender value (“CSV”) of COLI reducedthat increased compensation and benefits expense by $4.0 million and $10.5$1.6 million in fiscal 2016 and 2015, respectively. The decrease in CSV of COLI was due2019 compared to a decrease in the market value of investments underlying the COLI. COLI is held to fund other deferred compensation retirement plans (see Note 6 — Deferred Compensation and Retirement Plans, included in the Notes to our Consolidated Financial Statements). The rest of the change was due to increases in stock based compensation of $2.9 million.year-ago period.
General and Administrative Expenses
General and administrative expenses increased $67.1$114.6 million, or 46%48%, to $213.0$352.0 million in fiscal 20162019 compared to $145.9$237.4 million in fiscal 2015.2018. Exchange rates favorably impacted general and administrative expenses by $10.1$8.3 million, or 7%3%, duringin fiscal 2016. Excluding $25.5 million2019 compared to the year-ago period. The increase in general and administrative expenses relating to the Legacy Hay Group acquisition, integration/acquisition costs of $23.2 million and $13.7 million foreign currency losswas due to the devaluationwrite-off of tradenames of $106.6 million related to the Venezuelan currency, generalPlan, an increase of $3.0 million in legal and administrativeother professional expenses, increased $4.7higher marketing and business development expenses of $2.4 million or 3%,and an increase in premise and office expense of $1.2 million in fiscal 2019 as compared to fiscal 2015. Fiscal 2015 generalthe year-ago period. General and administrative expenses benefitted from a one-time insurance reimbursement that reduced legal fees in that year. Administrative expenses, as a percentage of fee revenue, was 16%18% in fiscal 20162019 as compared to 14%13% in fiscal 2015.the year-ago period. Excluding integration/acquisition costs and the Venezuelan foreign currency loss,tradename write-offs, general and administrationadministrative expenses as a percentage of fee revenue were 14%was 13% in fiscal 2016.2019.
Executive Search general and administrative expenses increased $3.8by $4.4 million, or 5%6%, to $75.3$82.1 million in fiscal 20162019 from $71.5$77.7 million in fiscal 2015. Excluding the Venezuelan foreign currency loss of $6.6 million,2018. The increase in general and administrative expenses decreased $2.8 million, or 4%, compared to fiscal 2015. The decrease was mainly due to favorable exchange rates that reduced general$1.8 million more in premise and administrative expenses by $1.1office expense and an increase of $0.9 million and lowerin legal and other professional feesexpenses. Also contributing to the increase were increases to travel-related expenses and marketing and business development expenses of $0.6 million.$1.3 million and $0.7 million, respectively, in order to support the higher fee revenues generated in fiscal 2019 as compared to the year-ago period. Executive Search general and administrative expenses, as a percentage of fee revenue, were 12%was 11% in both fiscal 20162019 and 2015.2018.
Hay GroupAdvisory general and administrative expenses increased $30.3by $105.9 million, or 86%108%, to $65.6$204.3 million in fiscal 2016 from $35.32019 compared to $98.4 million in fiscal 2015. Excluding $25.5 million relating to the Legacy Hay Group acquisition, $1.5 millionyear-ago period. The increase in integration/acquisition costs and $7.1 million in foreign currency loss due to the devaluation of
the Venezuelan currency, general and administrative expenses decreased $3.8was mainly due to the write-off of tradenames of $106.6 million or 11%,in fiscal 2019 compared to fiscal 2015. The decrease was due to favorable exchange rates that reduced general and administrative expenses by $1.5 million. The rest of the change was due to lower legal and other professional fees of $1.3 million and a reduction of bad debt expense of $1.1 million due to better collections. Hay Groupyear-ago period. Advisory general and administrative expenses, as a percentage of fee revenue, was 14%25% in fiscal 20162019 as compared to 13% in fiscal 2015.the year-ago period. Excluding integration/acquisition costs and the Venezuelan foreign currency loss,tradename write-offs, general and administrative expenses as a percentage of fee revenue werewas 12% in fiscal 2016. We do not believe that further weakening of the Bolivar will materially impact our results of operations.2019.
FuturestepRPO & Professional Search general and administrative expenses increased $2.1by $1.4 million, or 11%5%, to $21.4$28.1 million in fiscal 2016 compared to $19.32019 from $26.7 million in fiscal 2015. Higher2018. The increase was due primarily to increases in premise and office expensesexpense of $1.5$1.1 million, contributedin fiscal 2019 compared to the increase in general and administrative expenses. Futurestepyear-ago period. RPO & Professional Search general and administrative expenses, as a percentage of fee revenue, were 11%was 9% in fiscal 20162019 compared to 12%10% in fiscal 2015.the year-ago period.
Corporate general and administrative expenses increased $30.9by $2.9 million, or 8%, to $50.7$37.5 million in fiscal 20162019 compared to $19.8$34.6 million in fiscal 2015. Excluding $21.7 million in integration/acquisition costs, general and administrative expenses increased $9.2 million, or 46%, compared to fiscal 2015, although fiscal 2015 benefitted from a one-time insurance reimbursement that lowered legal and professional fees by that amount.2018. The rest of the increase was due primarily to unfavorable exchange rates that resultedincreases in an increase in generallegal and administrativeother professional expenses and software licenses of $2.2 million duringand $1.7 million, respectively, in fiscal 20162019 compared to the year-ago period. This was offset by a foreign exchange gain of $1.0 million in fiscal 2015.2019 compared to a foreign exchange loss of $1.2 million in fiscal 2018.
Cost of Services Expense
Cost of services expense consistconsists primarily of non-billable contractor and product costs related to the delivery of various services and products, primarily in FuturestepRPO & Professional Search and Hay Group.Advisory. Cost of services expense increased $20.1 million, or 51%, to $59.8was $75.5 million in fiscal 20162019 compared to $39.7$73.7 million in fiscal 2015. Adjusting for the Legacy Hay Group acquisition, the cost of services increased $5.1 million, or 13%, compared to fiscal 2015. The increase is mainly due to higher fee revenue in Legacy LTC and Futurestep.2018. Cost of services expense, as a percentage of fee revenue, was 5% in fiscal 2016 compared to 4% in both fiscal 2015.2019 and 2018.
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $36.2$46.5 million, a decrease of $2.1 million, or 4%, in fiscal 2019 compared to $48.6 million in fiscal 2016, an increase2018. The decrease was due to lower amortization expense associated with intangible assets as some of $8.6our intangible assets became fully amortized.
38
Operating income was $140.8 million, compared to $27.6a decrease of $67.6 million, in fiscal 2015. Adjusting for the Legacy Hay Group acquisition, depreciation and amortization expenses increased $0.7 million, or 3%,2019 compared to fiscal 2015. The increase relates primarily to technology investments that were made in the current and prior year and intangible assets.
Restructuring Charges, Net
During fiscal 2016, we implemented a restructuring plan in order to rationalize our cost structure, eliminate redundant positions and consolidate office space relating to the acquisition of Legacy Hay Group. As a result, we recorded $33.0 million of restructuring charges with $32.1 million of severance costs to eliminate redundant positions and $0.9 million relating to the consolidation/abandonment of premises both of which were due to the integration of Legacy Hay Group during fiscal 2016. During fiscal 2015, we took actions to rationalize our cost structure as a result of efficiencies obtained from prior year technology investments that enabled further integration of our legacy businesses and the previous year’s acquisitions of PDI and Global Novations, LLC, as well as other cost saving initiatives. As a result, we recorded $9.5 million in restructuring charges, net in fiscal 2015, of which $9.2 million related to severance and $0.3 million related to consolidation/abandonment of premises.
Operating Income
Operating income decreased $61.3 million, or 54%, to $52.7$208.4 million in fiscal 2016 as compared to $114.0 million in fiscal 2015. Adjusting for the $32.4 million operating loss of Legacy Hay Group, operating income
decreased $28.9 million, or 25%, compared to the year-ago period. This2018. The decrease in operating income resulted fromwas primarily driven by the write-off of tradenames of $106.6 million, an increase of $65.5$112.1 million in compensation and benefits expense, (which included $9.4and $8.0 million in integration/acquisition costs and separation charges), $34.0 millionmore in general and administrative expenses (which included $30.2 million in integration/acquisition costs and Venezuelan foreign currency loss due to the devaluation(excluding write-off of their currency)tradenames), and $5.1 million in cost of services expense. These changes were offset by higher fee revenue of $77.1 million during fiscal 2016 as compared to fiscal 2015. The Legacy Hay Group operating loss of $32.4 million included integration/acquisition costs of $12.5 million, $6.9 million in foreign currency loss as a result of the devaluation of the Venezuelan Bolivar and restructuring charges of $22.9$158.8 million. Operating margin was 4.1% in fiscal 2016, as compared to 11.1% in fiscal 2015.
Executive Search operating income increased $12.7by $29.5 million, or 11%20%, to $131.7$179.1 million in fiscal 2016 as2019 compared to $119.0$149.6 million in fiscal 2015.2018. The increase in Executive Search operating income is primarily attributable to higherwas driven by an increase in fee revenue of $25.5$65.8 million, offset by an increase of $7.6 million, $3.8 million and $1.9 millionincreases in compensation and benefits expense and general and administrative expenses of $33.8 million and restructuring charges, net,$4.4 million, respectively. The increase in compensation and benefits expense was driven by higher salaries and related payroll expense due to an increase in average consultant headcount. General and administrative expenses increased due to Venezuelan foreign currency loss of $6.6 million offset by favorable exchange rates in other currencies and reductions in premise and office expense and legal and other professional fees during fiscal 2016 compared to fiscal 2015. Executive Search operating income, as a percentage of fee revenue, was 23% and 21% in fiscal 20162019 and 2018, respectively.
Advisory operating income was $5.6 million, a decrease of $94.9 million, or 94% in fiscal 2019 compared to 20% in fiscal 2015.
Hay Group operating loss was $3.4$100.5 million in fiscal 2016 as2018. The change was primarily due to the write-off of tradenames of $106.6 million and an increase of $26.8 million in compensation and benefits expense in fiscal 2019 compared to operating income of $28.2 million in fiscal 2015. Adjusting for the $32.4 million operating loss of Legacy Hay Group, operating income increased $0.8 million, or 3%, compared to fiscal 2015. The increase in Legacy LTC operating income was due to $17.2 million inyear-ago period, offset by higher fee revenue which was partially offset by an increaseof $36.0 million and a decrease in compensationdepreciation and benefitamortization expense of $15.9$2.5 million. The higher compensation and benefit expense was driven mainly by increases in salaries and related payroll taxes due to an increase in average consultant headcount and performance related bonus expense. Hay GroupAdvisory operating lossincome, as a percentage of fee revenue was 1% in fiscal 20162019 compared to operating income as a percentage of fee revenue of 11%13% in fiscal 2015.
Futurestep operating income increased by $6.8 million to $26.7 million in fiscal 2016 from $19.9 million in fiscal 2015. The increase in Futurestep operating income was primarily due to higher fee revenues of $34.4 million. These changes were partially offset by an increase in compensation and benefits expense of $24.3 million and a $2.1 million increase in general and administrative expenses during fiscal 2016 as compared to fiscal 2015. Futurestepthe year-ago period. Excluding the tradename write-offs, operating income as a percentage of fee revenue was 13%14% in fiscal 2016 as2019.
RPO & Professional Search operating income was $50.9 million, an increase of $11.5 million, or 29%, in fiscal 2019 compared to 12%$39.4 million in fiscal 2015.2018. The increase in operating income was driven by higher fee revenue of $56.9 million, offset by increases in compensation and benefits expense, cost of services expense and general and administrative expenses of $41.4 million, $2.4 million and $1.4 million, respectively. RPO & Professional Search operating income, as a percentage of fee revenue, was 15% in fiscal 2019 compared to 14% in the year-ago period.
Net Income Attributable to Korn Ferry
Net income attributable to Korn Ferry decreased $57.5by $31.1 million or 65%, to $30.9$102.7 million in fiscal 20162019 compared to $88.4$133.8 million in fiscal 2015.2018. The decrease was due to an increase inprimarily driven by higher operating expenses of $341.9$221.9 million mainly due to the tradename write-off of $106.6 million and an $11.7higher compensation and benefits expense of $112.1 million, decline in other income,partially offset by an increase inhigher total revenue of $154.4 million and a lower income tax provision of $40.6 million compared to the year-ago period. Net income attributable to Korn Ferry, as a percentage of fee revenue, of $263.9 million.was 5% in fiscal 2019 compared to 8% in the year-ago period.
Adjusted EBITDA
Adjusted EBITDA increased $28.0by $33.0 million or 17%, to $189.7$311.0 million in fiscal 20162019 compared to $161.7$278.0 million in fiscal 2015. Adjusting for2018. This increase was driven by higher fee revenue of $158.8 million, offset by an increases of $114.8 million in compensation and benefits expense (excluding integration costs), $8.0 million in general and administrative expenses (excluding write-off on tradenames), $1.8 million in cost of services and a decrease in other income, net of $1.0 million, primarily due to changes in the Legacy Hay Group acquisition, Adjusted EBITDA decreased $0.5 millionfair value of our marketable securities in fiscal 2019 compared to the year-ago period. Adjusted EBITDA, as a percentage of fee revenue, was 15% in fiscal 2016, as compared to 16% in both fiscal 2015.2019 and 2018.
Executive Search Adjusted EBITDA was $151.7increased by $34.5 million, and $132.4or 22%, to $193.8 million in fiscal 2016 and 2015, respectively. Adjusted EBITDA increased $19.3 million during fiscal 2016 as2019 compared to $159.3 million in fiscal 20152018. The increase was driven by higher fee revenue of $65.8 million and an increase in other income, net of $5.9 million, primarily due to
$25.5 million increase changes in fee revenue,the fair value of our marketable securities in fiscal 2019 compared to the year-ago period, offset by an increaseincreases of $7.6$33.8 million in compensation and benefits expense, and $3.8$4.4 million in general and administrative expenses. Executive Search Adjusted EBITDA, as a percentage of fee revenue, was 24%25% in fiscal 20162019 as compared to 22% in fiscal 2015.the year-ago period.
Hay GroupAdvisory Adjusted EBITDA increased by $34.5was $151.0 million, an increase of $7.5 million, or 5%, in fiscal 2019 compared to $78.9$143.5 million in fiscal 2016 as compared to $44.4 million in fiscal 2015. Adjusting for the Legacy Hay Group acquisition, Adjusted EBITDA increased $6.0 million, or 14%, compared to fiscal 2015. This2018. The increase was due todriven by higher fee revenue of $17.2$36.0 million, offset by an increaseincreases of $29.4 million in compensation and benefitbenefits expense (excluding integration costs) in fiscal 2019 compared to the year-ago period. Advisory Adjusted EBITDA, as a percentage of $11.6 million.fee revenue, was 18% in both fiscal 2019 and 2018.
RPO & Professional Search Adjusted EBITDA was $54.4 million, an increase of $11.8 million, or 28%, in fiscal 2019 compared to $42.6 million in fiscal 2018. The increase was driven by higher fee revenue of $56.9 million, offset by increases of $41.4 million in compensation and benefitbenefits expense, was driven mainly by increases$2.4 million in salariescost of services and related payroll taxes due$1.4 million in general and administrative expenses, in fiscal 2019 compared to an increase in average headcount and an increase in performance related bonus expense. Hay Groupthe year-ago period. RPO & Professional Search Adjusted EBITDA, as a percentage of fee revenue, was 16% in both fiscal 20162019 and 2018.
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Other income, net was $10.1 million in the fiscal 2019 compared to 17% in fiscal 2015. Adjusting for the Legacy Hay Group acquisition, Adjusted EBITDA as of percentage of fee revenue was 18%.
Futurestep Adjusted EBITDA increased by $6.5 million to $29.5$11.1 million in fiscal 2016 as compared to $23.0 million in fiscal 2015.the year-ago period. The increase in Futurestep Adjusted EBITDAdecrease was primarily due to higher fee revenue of $34.4 million, offset by an increase of $24.3 million in compensation and benefits expense and $2.1 million in general and administrative expenses during fiscal 2016 as compared to fiscal 2015. Futurestep Adjusted EBITDA as a percentage of fee revenue was 15% in fiscal 2016 as compared to 14% in fiscal 2015.
Other (Loss) Income, Net
Other loss, net was $4.2 million in fiscal 2016 as compared to other income, net of $7.5 million in fiscal 2015. The change in other (loss) income, net is primarily due to the decrease in the fair value of our marketable securities during fiscal 2016 compared to the increasesmaller gains in the fair value of our marketable securities in fiscal 2015, which resulted in a change in other (loss) income, net of $12.1 million during fiscal 20162019 compared to fiscal 2015.
Interest Income (Expense), Netthe year-ago period.
Interest income (expense),Expense, Net
Interest expense, net primarily relates to our credit agreement and borrowings under our COLI policies, which was partially offset by interest earned on cash and cash equivalents, offset by interestequivalent balances. Interest expense, related to borrowings under our COLI policies and term loan facility. Interest income, net was $0.3$16.9 million in the fiscal 2016 as2019 compared to interest expense, net of $1.8$13.8 million in fiscal 2015 for a change of $2.1 million. The change was primarily due to better than expected collections of accounts receivable acquired in the acquisition of Legacy Hay Group that are required to be recorded at fair value on the acquisition date with subsequent collections recorded as interest income (expense), offset by an increase in interest expense associated with the term loan facility.year-ago period.
Equity in Earnings of Unconsolidated Subsidiaries
Equity in earnings of unconsolidated subsidiaries is comprised of our less than 50% interest in our Mexican subsidiary and IGroup, LLC, which is engaged in organizing, planning and conducting conferences and training programs throughout the world for directors, chief executive officers, other senior level executives and business leaders. We report our interest in earnings of our Mexican subsidiary for the nine months ended January 31, 2016 and IGroup, LLC for fiscal 2016 on the equity basis as a one-line adjustment to net income. In the fourth quarter of fiscal 2016, we obtained control of our Mexico subsidiary and began to consolidate the operations. Equity in earnings was $1.6 million in fiscal 2016 as compared to $2.2 million in fiscal 2015.
Income Tax Provision
The provision for income taxestax was $19.0$29.5 million in the fiscal 20162019 compared to $33.5$70.1 million in fiscal 2015, reflectingthe year-ago period. This reflects a 39%22% and 28% effective tax rate, respectively. The34% effective tax rate for fiscal 20162019 and 2018, respectively. The difference in the effective tax rate is higherprimarily due to the impact of non-deductible expenses incurred in connection with the acquisition of Legacy Hay Group, the
non-deductible charges related to the devaluationenactment of the Venezuelan currency andTax Act which reduced the post-acquisition allocation of income and losses in jurisdictions with differentU.S. corporate federal statutory tax rates. This was offset partially by the benefit recorded in connection with the conclusion of the IRS audit of the Company’s consolidated federal income tax return forrate from 35% to 21%, as well as the excess tax benefit on stock-based awards that vested in fiscal year ended April 30, 2013 and a reversal of valuation allowances previously recorded against deferred tax assets of subsidiaries that have returned to profitability in recent years.2019.
Net Income Attributable to Non-ControllingNoncontrolling Interest
Net income attributable to non-controllingnoncontrolling 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 includeincluded in the consolidated results of operations. In the fourth quarter of fiscal 2016, we obtained control of our Mexico subsidiary and began to consolidate the operations. Net income attributable to non-controllingnoncontrolling interest forwas $2.1 million in both fiscal 2016 was $0.5 million.2019 and 2018.
Fiscal 20152018 Compared to Fiscal 20142017
Fee Revenue
Fee Revenue.Fee revenue went up by $67.9$201.7 million, or 7%13%, to $1,028.2$1,767.2 million in fiscal 20152018 compared to $960.3$1,565.5 million in fiscal 2014. This increase was attributable to higher fee revenue in Executive Search, Futurestep and Legacy LTC.2017. Exchange rates unfavorablyfavorably impacted fee revenue by $23.9$35.3 million, or 2%, in fiscal 2015, when2018 compared to fiscal 2014.the year-ago period. The higher fee revenue was attributable to organic growth in all lines of business.
Executive Search.Executive Search reported fee revenue of $597.4$709.0 million, an increase of $28.5$91.3 million, or 5%15%, in fiscal 20152018 compared to $568.9$617.7 million in fiscal 2014.the year-ago period. As detailed below, Executive Search fee revenue was higher in the North America, EMEA and EMEA regions,Asia Pacific, partially offset by small decreases inlower fee revenue in Asia Pacific andthe Latin America regionsregion in fiscal 20152018 as compared to fiscal 2014.2017. The higher fee revenue in Executive Search was mainly due to a 4%9% increase in the number of Executive Search engagements billed and a 1%3% increase in the weighted-average fees billed per engagement (calculated using local currency) during fiscal 2015 as2018 compared to the prior year.year-ago period. Exchange rates unfavorablyfavorably impacted fee revenue by $15.0$12.3 million, or 3%2%, in fiscal 2015, when comparing2018, compared to fiscal 2014.the year-ago period.
North America reported fee revenue of $330.6$408.1 million, an increase of $23.8$51.5 million, or 8%14%, in fiscal 20152018 compared to $306.8$356.6 million in fiscal 2014.the year-ago period. North America’s fee revenue was higher primarily due to a 4%an 11% increase in both the number of engagements billed and a 3% increase in the weighted-average fees billed per engagement (calculated using local currency) during fiscal 20152018 compared to fiscal 2014. The overall increasethe year-ago period. All business sectors contributed to the growth in fee revenue was driven by growth in the consumer goods, industrial, life sciences/healthcare, and financial services sectorsfiscal 2018 as compared to fiscal 2014, partially offset by a decline in the2017, with industrial, technology and education/non-profit sectors. Exchangefinancial services contributing the most. The effect of exchange rates unfavorably impactedon fee revenue by $2.1 million, or 1%,was minimal in fiscal 2015, when2018, compared to fiscal 2014.the year-ago period.
EMEA reported fee revenue of $153.5$173.7 million, an increase of $5.6$27.2 million, or 4%19%, in fiscal 20152018 compared to $147.9$146.5 million in fiscal 2014. Exchange2017. The favorable effect of exchange rates unfavorably impactedon fee revenue by $7.1was $8.8 million, or 5%6%, in fiscal 2015, when2018, compared to fiscal 2014.the year-ago period. The higherincrease in fee revenue was primarily driven bydue to a 5%10% increase in the number of engagements billed, partially offset by a 1% decline2% decrease in the weighted-average fees billed per engagement in(calculated using local currency) during fiscal 2015 as2018 compared to fiscal 2014.the year-ago period. The performance in existing offices in the Sweden, Switzerland, France, United Kingdom, Germany, and SpainFrance were the primary contributors to the increase in fee revenue in fiscal 20152018 compared to the year-ago period. All business sectors contributed to the growth in fee revenue in fiscal 2014,2018 as compared to the year-ago period, with industrial, financial services and consumer goods contributing the most.
Asia Pacific reported fee revenue of $96.6 million, an increase of $16.4 million, or 20%, in fiscal 2018 compared to $80.2 million in fiscal 2017. The increase in fee revenue was due to an 8% increase in the number of engagements billed and an 8% increase in the weighted-average fees billed per engagement (calculated using local currency) in fiscal 2018 compared to the year-ago period. The performance in China, Australia, Singapore, and Japan were the primary contributors to the increase in fee revenue in fiscal 2018 compared to the year-ago period, partially offset by a decrease in fee revenue in Germany, Belgium, and the Netherlands. In terms ofNew Zealand. All business sectors industrial, financial services, and life sciences/healthcare experiencedcontributed to the largest growth in fee revenue in fiscal 20152018 as compared to fiscal 2014, partially offset by a decrease in the consumer goodsyear-ago period, with financial services, life sciences/healthcare, and technology sectors.
Asia Pacific reported fee revenuecontributing the most. The favorable effect of $84.1 million, a slight decrease of $0.7 million, or 1%, in fiscal 2015 compared to $84.8 million in fiscal 2014. Exchangeexchange rates unfavorably impacted fee revenue by $2.6 million, or
3%, in fiscal 2015, when compared to fiscal 2014. The decline inon fee revenue was mainly due to a 7% decrease in weighted-average fees billed per engagement, partially offset by a 6% increase in the number of engagements billed in fiscal 2015$2.3 million, or 3%, compared to fiscal 2014. The performance in Singapore and Japan were the primary contributors to the decrease in fee revenue in fiscal 2015 compared to fiscal 2014, partially offset by an increase in fee revenue in Hong Kong, China, and India. Life sciences/healthcare and consumer goods were the main sectors contributing to the decrease in fee revenue in fiscal 2015 as compared to fiscal 2014, partially offset by an increase in fee revenue in the financial services sector.year-ago period.
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Latin America reported fee revenue of $29.2$30.6 million, a slight decrease of $0.2 million, or 1%, in fiscal 2015 compared to $29.4 million in fiscal 2014. Exchange rates unfavorably impacted fee revenue for Latin America by $3.2$3.8 million, or 11%, in fiscal 2015, when2018 compared to $34.4 million in fiscal 2014.2017. The declinedecrease in fee revenue was mainly due to a 1% decrease in weighted-average fees billed per engagement in fiscal 2015 compared to fiscal 2014. The performance in Brazil was the primary contributor to lower fee revenue in Mexico in fiscal 20152018, compared to fiscal 2014,the year-ago period, partially offset by growthhigher fee revenue in Venezuela and Colombia. TechnologyArgentina. Financial services and consumer goods were the main sectors contributing to the decline in fee revenue in fiscal 20152018, compared to fiscal 2014, partially offset by an increase inthe year-ago period. The effect of exchange rates on fee revenue in the industrial and financial services sectors during the same period.was minimal.
Legacy LTC.Legacy LTCAdvisory. Advisory reported fee revenue of $267.1$785.0 million, an increase of $12.5$60.8 million, or 5%8%, in fiscal 20152018 compared to $254.6$724.2 million in fiscal 2014.2017. Exchange rates favorably impacted fee revenue by $17.4 million, or 2%, compared to the year-ago period. Fee revenue increased due tofrom consulting services was higher consulting fee revenue of $8.4by $42.8 million or 4%, in fiscal 20152018 compared to the year-ago period, andwith the remaining increase of $18.0 million generated by our products business.
RPO & Professional Search. RPO & Professional Search reported fee revenue of $273.2 million, an increase in product revenue of $4.1$49.5 million, or 7%22%, in fiscal 2018 compared to $223.7 million in fiscal 2017. Higher fee revenues in RPO and professional search of $33.3 million and $18.1 million, respectively, drove the increase in fee revenue. Exchange rates favorably impacted fee revenue by $5.6 million, or 3%, compared to the year-ago period.
Compensation and Benefits
Compensation and benefits expense increased $133.4 million, or 13%, to $1,199.1 million in fiscal 2014. The increase2018 from $1,065.7 million in consulting fee revenue includes $3.7 million of fee revenue generated from the acquisition of Pivot Leadership on March 1, 2015.fiscal 2017. Exchange rates unfavorably impacted fee revenuecompensation and benefits expenses by $4.3$23.0 million, or 2%, in fiscal 2015.
Futurestep.Futurestep reported fee revenue of $163.7 million, an increase of $26.9 million, or 20%, in fiscal 2015 compared to $136.8 million in fiscal 2014. The increase in Futurestep’s fee revenue was due to an 18% increase in the weighted-average fees billed per engagement and a 2% increase in the number of engagements billed in fiscal 20152018 compared to the year-ago period. The increase in the weighted-average fees billedcompensation and benefits was driven byprimarily due to a 25%9% increase in fee revenue from recruitment process outsourcing and a 22% increase in professional recruitment, as these tend to generate higher fees per engagement than other services performed by Futurestep. Exchange rates unfavorably impacted fee revenue by $4.6 million, or 3%, in fiscal 2015.
Compensation and Benefits
Compensation and benefits expense increased $44.6 million, or 7%, to $691.5the average consultant headcount, which contributed $80.4 million in fiscal 2015 from $646.9 million in fiscal 2014. This increase was due in large part to higher performance related bonus expense of $21.0 million and an increase of $16.1 million, $4.9 million, $3.3 million, $2.2 million and $1.8 million in salaries and related payroll taxes, outside contractors, employee$9.4 million more in expenses associated with our deferred compensation and retirement plans (includes the increases in the fair value of participants’ accounts) and an increase of $5.8 million in employer insurance costs in fiscal 2018 compared to the year-ago period. The rest of the change was due to $40.8 million increase in performance-related bonus expense mainly due to the increase in fee revenue and $11.3 million increase in amortization of long term incentive awards, offset by a $9.8 million decrease in integration costs and $2.9 million from the change in the cash surrender value (“CSV”) of company owned life insurance (“COLI”) in fiscal 2018 compared to the year-ago period. The change in the CSV of COLI decreased compensation and benefits expense in fiscal 2018 compared to fiscal 2017 due to larger increases in the market value of the underlying investments due to market changes. COLI is held to fund other deferred compensation retirement plans (See Note 6—Deferred Compensation and Retirement Plans, included in the notes to our Consolidated Financial Statements). Compensation and benefits expense, as a percentage of fee revenue, was 68% in both fiscal 2018 and 2017.
Executive Search compensation and benefits expense increased by $59.6 million, or 15%, to $468.6 million in fiscal 2018 compared to $409.0 million in fiscal 2017. The increase was primarily due to higher salary cost recruitment expense and stock based compensation, respectively. These increasesrelated payroll taxes of $24.8 million due to a 5% increase in average headcount reflecting our continued growth-related investment back into the business. Also contributing to the increase in compensation and benefits expense were partially offset by management separation chargeswas a $17.1 million increase in performance related bonus expense compared to the year-ago period, an $8.4 million increase in amortization of $4.5long-term incentive awards, and an increase of $4.6 million recorded in fiscal 2014expenses associated with no such chargeour deferred compensation and retirement plans (includes the increases in fiscal 2015.the fair value of participants’ accounts). The increase in performance related bonus expense was due to ana 15% increase in fee revenue and profitability duein fiscal 2018 compared to the continued adoption of our strategy, including referrals between lines of business and an increase in average headcount. The higher level of salaries and related payroll expense and employee insurance costs, were due to an increase in average headcount for Executive Search and Futurestep. The increase in headcount, recruiting expense and stock based compensation reflects our continued growth-related investments back into the business. Exchange rates favorably impacted compensation and benefits expenses by $16.2 million, or 3%, in fiscal 2015.
Executive Search compensation and benefits expense went up by $18.6 million, or 5%, to $393.3 million in fiscal 2015 compared to $374.7 million in fiscal 2014. This increase was primarily due to an increase of $11.1 million in salaries and related payroll taxes and higher employee insurance cost of $1.5 million due to a 3% increase in the average headcount. In addition, performance related bonus expense was higher by $4.9 million
due to higher revenue and profitability from the continued adoption of our strategy. These changes were offset by a decrease in expense from certain deferred compensation plans during fiscal 2015 compared to fiscal 2014.year-ago period. Executive Search compensation and benefits expense, as a percentage of fee revenue, was 66% in both fiscal 20152018 and 2014.2017.
Legacy LTCAdvisory compensation and benefits expense increased $9.7$35.3 million, or 7%8%, to $158.9$497.3 million in fiscal 20152018 from $149.2$462.0 million in fiscal 2014.2017. The change was driven by higher performance related bonus expense of $8.0 million primarily associated with an increase in fee revenue, profitability, and referrals between lines of business during fiscal 2015 compared to fiscal 2014. The rest of the change was due to increases in outside contractorssalaries and related payroll taxes of $1.2$25.3 million and recruitment$4.6 million increase in expenses associated with our deferred compensation and retirement plans (includes the increases in the fair value of $1.1 million, both as a result of supporting higher level of fee revenue. Legacy LTCparticipants’ accounts). Also contributing to the increase in compensation and benefits expense as a percentage of fee revenue increased to 60% in fiscal 2015 from 59% in fiscal 2014.
Futurestep compensation and benefits expense increased $18.0 million, or 19%, to $111.8 million in fiscal 2015 from $93.8 million in fiscal 2014. The increase was primarily driven by an increase of $7.3$10.5 million in performance related bonus expense dueand $2.8 million more in employer insurance costs, offset by a decrease in integration costs of $6.3 million compared to a higher level of fee revenue, profitability, and referrals between lines of business and an increase in average headcount. The rest of the change was due to higher salaries and related payroll taxes of $5.4 million and $3.8 million in outside contractors. The increase in salaries and related payroll taxes was due to a 17% increase in the average headcount and the increase in the use of outside contractors was primarily associated with the increase in staffing to accommodate the increase in fee revenue from our RPO business. Futurestepyear-ago period. Advisory compensation and benefits expense, as a percentage of fee revenue, was 68%63% in fiscal 20152018 compared to 69%64% in fiscal 2014.the year-ago period.
CorporateRPO & Professional Search compensation and benefits expense decreased by $1.7increased $38.4 million, or 6%25%, to $27.5$193.2 million in fiscal 20152018 from $29.2$154.8 million in fiscal 2014 mainly2017. The increase was due to management separation charges of $4.5 million recorded in fiscal 2014 with no such charge in fiscal 2015, offset with higher salaries and related payroll taxes of $2.2$26.8 million and $1.2 million more in stock based compensation due to overall profitabilitya 20% increase in the average headcount in fiscal 2018 compared to the year-ago period. The higher average headcount was primarily driven by the need to service an increase in fee revenue in both the professional search and RPO businesses. Also contributing to the increase in compensation and benefits expense was an increase of $11.3 million in performance related bonus expense due to a 22% increase in fee revenue in fiscal 2018 compared to the Company.year-ago period. RPO & Professional Search compensation and benefits expense, as a percentage of fee revenue, was 71% in fiscal 2018 compared to 69% in the year-ago period.
Corporate compensation and benefits expense was $40.0 million in fiscal 2018 as compared to $39.9 million in fiscal 2017.
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General and Administrative Expenses
General and administrative expenses decreased by $6.1increased $11.2 million, or 4%5%, to $145.9$237.4 million in fiscal 20152018 compared to $152.0$226.2 million in fiscal 2014.2017. The increase in general and administrative expenses was due to increases of $6.2 million and $2.2 million in legal and other professional fees and premise and office expenses, respectively, offset by a decline of $3.8 million in integration costs during fiscal 2018 compared to the year-ago period. The rest of the change was primarily due to generating foreign exchange loss of $3.3 million during fiscal 2018 compared to a foreign exchange gain of $0.3 million in fiscal 2017. General and administrative expenses, as a percentage of fee revenue, was 13% in fiscal 2018 compared to 14% in fiscal 2015 compared to 16% in fiscal 2014. The decrease is attributable to a $7.2 million decline in legal and other professional fees and a decline in marketing and business development expense of $3.5 million in fiscal 2015 compared to fiscal 2014. The lower legal and other professional fees are primarily due to a $6.2 million insurance reimbursement for previously incurred legal fees while the decrease in business development expense is due to ongoing cost control initiatives and higher than normal costs in fiscal 2014 related to the integration of the PDI and Global Novation acquisitions into the Legacy LTC business without such costs being incurred in fiscal 2015. This decrease in general and administrative expenses was partially offset by an increase in our foreign currency loss of $3.7 million in fiscal 2015 compared to fiscal 2014 and an increase in premise and office expense of $1.0 million.2017. Exchange rates favorablyunfavorably impacted general and administrative expenses by $4.8$3.7 million, or 3%2%, during fiscal 2015.2018 compared to the year-ago period.
Executive Search general and administrative expenses increased $3.7$8.0 million, or 5%11%, to $71.5$77.7 million in fiscal 20152018 from $67.8$69.7 million in fiscal 2014.2017. General and administrative expenses increased due to highergenerating foreign exchange loss recognizedlosses of $2.5$1.2 million induring fiscal 20152018 compared to fiscal 2014.a foreign exchange gain of $1.3 million during the year-ago period and an increase in legal and other professional fees of $0.9 million. The remainingrest of the change was due to an increase in $0.8 million in marketing and business development expenses to support the higher fee revenues generated in fiscal 2018 compared to the year-ago period, $0.7 million increase in premise and office expenses, and an increase in bad debt expense of $0.9$0.6 million. Executive Search general and administrative expenses, as a percentage of fee revenue, was 12%11% in both fiscal 20152018 and 2014.2017.
Legacy LTCAdvisory general and administrative expenses declined by $0.5increased $1.3 million or 1%, to $35.3$98.4 million in fiscal 2015 from $35.82018 compared to $97.1 million in fiscal 2014. The decrease is attributable to lower marketing and business development expenses and other generalthe year-ago period. General and administrative expenses of $2.3 million, offset by an increase inincreased due to a foreign exchange loss of $1.8$1.1 million during fiscal 2018 compared to a foreign exchange gain of $0.2 million in fiscal 2015 compared to fiscal 2014. The decrease in marketing and
business development expense is due to higher than normal costs in fiscal 2014 related to the integration of the PDI and Global Novation acquisitions into the Legacy LTC business. Legacy LTC2017. Advisory general and administrative expenses, as a percentage of fee revenue, was 13% in both fiscal 2015 compared to 14% in fiscal 2014.2018 and 2017.
FuturestepRPO & Professional Search general and administrative expenses decreased $0.3increased $2.8 million, or 2%12%, to $19.3$26.7 million in fiscal 2015 compared to $19.62018 from $23.9 million in fiscal 2014. Futurestep2017. The increase was due primarily to increases in premise and office expenses, bad debt expense and legal and other professional fees of $1.2 million, $1.0 million and $0.4 million, respectively, in fiscal 2018 compared to the year-ago period. RPO & Professional Search general and administrative expenses, as a percentage of fee revenue, was 12%10% in fiscal 20152018 compared to 14%11% in fiscal 2014.2017.
Corporate general and administrative expenses decreased $9.0$0.9 million, or 31%3%, to $19.8$34.6 million in fiscal 20152018 compared to $28.8$35.5 million in fiscal 2014.2017. The decrease in general and administrative expenses was driven by $8.5due to a decrease of $4.2 million in lowerintegration costs associated with the Legacy Hay acquisition and $0.8 million in business development expenses, offset by an increase in legal fees and other professional fees primarily related to a $6.2of $4.3 million insurance reimbursement for previously incurred legal fees and a decline in other legal fees during fiscal 20152018 compared to fiscal 2014. The rest of the change was due to lower business development expenses of $1.2 million resulting from our ongoing cost control initiatives.2017.
Cost of Services Expense
Cost of services expense consistconsists primarily of non-billable contractor and product costs related to the delivery of various services and products.products, primarily in RPO & Professional Search and Advisory. Cost of services expense decreased $0.2 million, or 1%, to $39.7was $73.7 million in fiscal 20152018 compared to $39.9$71.5 million in fiscal 2014.2017. Cost of services expense, as a percentage of fee revenue, was 4% in both fiscal 2015 and 2014.2018 as compared to 5% in the year-ago period.
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $27.6$48.6 million, an increase of $1.4$1.3 million, in fiscal 20152018 compared to $26.2$47.3 million in fiscal 2014.2017. The increase relates primarily to technology investments that were made in fiscal 2015the current and prior year in the prior year. This expense relates mainly tosoftware and computer equipment, software, furniture and fixtures,in addition to increases in leasehold improvements and intangible assets.furniture and fixtures.
Restructuring Charges, Net
During fiscal 2015, we took actions to rationalize our cost structure as a result of efficiencies obtained from prior year technology investments that enabled further integrationThe Company continued the implementation of the legacy businessfiscal 2016 restructuring plan in fiscal 2017 in order to integrate the Advisory entities that were acquired in fiscal 2016 by eliminating redundant positions and recent acquisitions, as well as other cost saving initiatives. As a result, we recorded $9.5 millionoperational, general and administrative expenses and consolidating premises. This resulted in restructuring charges netof $34.6 million in fiscal 2015,2017, of which $9.2$16.0 million relatesrelated to severance and $0.3 million relates to consolidation/abandonment of premises. During fiscal 2014, as part of the integration of PDI, we recorded $3.7 million of restructuring charges, net, of which $2.9$18.6 million related to consolidation of premises and $0.8 million related to severance.premises. Fiscal 2018 restructuring charges were minimal.
Operating Income
Operating income increased $22.4was $208.4 million, to $114.0an increase of $88.1 million, in fiscal 20152018 as compared to $91.6$120.3 million in fiscal 2014.2017. This increase in operating income resulted from an increasehigher fee revenue of $67.9$201.7 million in fee revenue and a decrease in restructuring charges, net of $6.1$34.5 million, offset by increases of $133.4 million in compensation and benefits expense, $11.2 million in general and administrative expenses. These changes were offset by higher compensationexpenses, $2.2 million in cost of services expense, and benefits expense of $44.6 million, restructuring charges, net of $5.8 million, and $1.4$1.3 million in depreciation and amortization expenses during fiscal 2015 as compared to fiscal 2014. Operating margin was 11.1% in fiscal 2015, as compared to 9.5% in fiscal 2014.expenses.
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Executive Search operating income increased $2.6$25.3 million, or 20%, to $119.0$149.6 million in fiscal 20152018 as compared to $116.4$124.3 million in fiscal 2014.2017. The increase in Executive Search operating income was driven by increases in higher fee revenue of $28.5$91.3 million and declinea decrease in depreciation and amortization expenserestructuring charges, net of $1.3$4.3 million, offset by increases in compensation and benefits expense, of $18.6 million, general and administrative expenses, cost of $3.7services expense and depreciation and amortization expenses of $59.6 million, $8.0 million, $1.6 million and restructuring charges, net of $4.1 million. The increase in compensation and benefits expense was due in part to
investments in headcount to grow the business (an increase in the average headcount of 45 positions), as well as higher incentive compensation tied to referrals between Executive Search, Hay Group and Futurestep resulting from continued adoption of our strategy.$1.1 million, respectively. Executive Search operating income, as a percentage of fee revenue, was 21% in fiscal 2018 as compared to 20% in both fiscal 2015 and 2014.the year-ago period.
Legacy LTCAdvisory operating income increased $4.4was $100.5 million, an increase of $53.1 million, or 112%, in fiscal 2018 as compared to $28.2operating income of $47.4 million in fiscal 2015 as compared to $23.8 million in fiscal 2014.2017. The increase in Legacy LTC operating income was primarily due to a $12.5 milliondriven by an increase in fee revenue of $60.8 million and a declinedecrease in restructuring charges, net of $3.8$29.9 million, offset by an increase of $35.3 million in compensation and benefits expense, $1.8 million in cost of services expense, partially offset by higher compensation and benefit expense of $9.7$1.3 million in general and restructuring charges, net of $1.6 million. Legacy LTCadministrative expenses in fiscal 2018 compared to the year-ago period. Advisory operating income, as a percentage of fee revenue, was 11%13% in fiscal 20152018 compared to 9%7% in fiscal 2014.the year-ago period.
FuturestepRPO & Professional Search operating income increased by $6.6was $39.4 million, to $19.9an increase of $9.4 million, in fiscal 2015 from $13.32018 as compared to $30.0 million in fiscal 2014.2017. The increase in Futurestep operating income was primarily due to $26.9 million indriven by higher fee revenue of $49.5 million, offset by an increase in compensation and a decline inbenefits expense of $38.4 million and general and administrative expenses of $0.3 million, partially offset by an increase of $18.0 million in compensation and benefits expense and $2.6 million in cost of services expense in fiscal 2015 compared to fiscal 2014. Futurestep$2.8 million. RPO & Professional Search operating income, as a percentage of fee revenue, was 12%14% in fiscal 2015 as2018 compared to 10%13% in fiscal 2014.the year-ago period.
Net Income Attributable to Korn Ferry
Net income attributable to Korn Ferry increased $15.7by $49.6 million or 22%, to $88.4$133.8 million in fiscal 20152018 compared to $72.7$84.2 million in fiscal 2014.2017. The increase was due to higher feetotal revenue of $67.9$197.8 million, offset by higher operating expenses of $109.6 million and an increase in operating expenses and income tax provision of $48.1$41.0 million and $5.0 million, respectively.partially due to the enactment of the Tax Act compared to the year-ago period. Net income attributable to Korn Ferry, as a percentage of fee revenue, was 8% in fiscal 2018 as compared to 5% in the year-ago period.
Adjusted EBITDA
Adjusted EBITDA increased $23.4by $38.7 million, or 16% to $161.7$278.0 million in fiscal 20152018 as compared to $138.3$239.3 million in fiscal 2014.2017. This increase was driven by higher adjusted fee revenue of $198.1 million, offset by increases of $143.2 million in compensation and benefits expense (excluding integration costs), $14.9 million in general and administrative expenses (excluding integration costs) and $2.2 million in cost of services expense compared to the year-ago period. Adjusted EBITDA, as a percentage of adjusted fee revenue, was 16% in fiscal 2018 compared to 15% in the year-ago period.
Executive Search Adjusted EBITDA increased $21.8 million, or 16%, to $159.3 million in fiscal 2018 as compared to $137.5 million in fiscal 2017. The increase was driven by higher fee revenue of $67.9 million and a decrease of $6.6 million in general and administrative expenses (excluding integration/acquisition costs). Offsetting these changes in Adjusted EBITDA was higher compensation and benefits expense (excluding certain separation costs) of $49.1 million and a decrease in other income, net of $2.3 million during fiscal 2015 compared to fiscal 2014. Adjusted EBITDA as a percentage of fee revenue was 16% in fiscal 2015 as compared to 14% in fiscal 2014.
Executive Search Adjusted EBITDA was $132.4 million and $127.8 million in fiscal 2015 and 2014, respectively. Adjusted EBITDA increased $4.6 million in fiscal 2015 as compared to fiscal 2014 due to higher fee revenue of $28.5$91.3 million, offset by increases of $18.6$59.6 million in compensation and benefits expense, and $3.7$8.0 million in general and administrative expenses, and a decline in other income, net of $1.0 million. Thean increase in compensation and benefitscost of services expense was due in partof $1.6 million during fiscal 2018 compared to investments in headcount to grow the business, as well as higher incentive compensation tied to referrals between Executive Search, Legacy LTC and Futurestep resulting from continued adoption of our strategy. The increase in general and administrative expenses was partially due to increased levels of business activity as well as other increases such as foreign exchange loss.year-ago period. Executive Search Adjusted EBITDA, as a percentage of fee revenue, was 22% in both fiscal 20152018 and 2014.2017.
Legacy LTCAdvisory Adjusted EBITDA increased by $6.8was $143.5 million, an increase of $13.7 million, or 11%, in fiscal 2018 as compared to $44.4$129.8 million in fiscal 20152017. The increase was driven by higher adjusted fee revenue of $57.3 million, offset by increases of $41.6 million in compensation and benefits expense (excluding integration costs), $0.9 million in general and administrative expenses (excluding integration costs), and an increase in cost of services expense of $1.8 million during fiscal 2018 compared to the year-ago period. Advisory Adjusted EBITDA, as a percentage of adjusted fee revenue, was 18% in both fiscal 2018 and 2017.
RPO & Professional Search Adjusted EBITDA was $42.6 million in fiscal 2018, an increase of $9.8 million, or 30%, as compared to $37.6$32.8 million in fiscal 2014. This2017. The increase was due todriven by higher fee revenue of $12.5 million and a decline in cost of services of $3.8$49.5 million, offset by an increaseincreases of $38.4 million in compensation and benefitbenefits expense of $9.7 million. The decreaseand $2.8 million in cost of services primarily relates to an increased focus on the utilization of internal resources versus outside contractors as evidenced by the 400 basis points increase in our staff utilization to a rate of 71%general and administrative expenses during fiscal 2015. The increase in compensation and benefit expenses was due2018 compared to an increase in performance related bonus expense resulting from higher fee revenue and the continued adoption of the Company’s integrated go to market strategy across all three of our lines of businesses. Legacy LTCyear-ago period. RPO & Professional Search Adjusted EBITDA, as a percentage of fee revenue, was 17%16% in fiscal 2015 as2018 compared to 15% in fiscal 2014.
Other Income (Loss), Net
Futurestep Adjusted EBITDA increased by $6.1 million to $23.0Other income, net was $11.1 million in fiscal 20152018 as compared to $16.9$10.3 million in fiscal 2014.2017. The increase in Futurestep Adjusted EBITDA was primarily due to an increase in fee revenuea smaller amount of $26.9 million,losses associated with our deferred compensation and retirement plans, offset by an increase of $18.0 million in compensation and benefits expense and $2.6 million in cost of services expense during fiscal 2015 as compared to fiscal 2014. The increase in compensation and benefits expense was primarily driven by higher performance related bonus expense due to a higher level of fee revenue and higher salaries and related payroll taxes due to an increase in average headcount. Futurestep Adjusted EBITDA as a percentage of fee revenue was 14% in fiscal 2015 as compared to 12% in fiscal 2014.
Other Income, Net
Other income, net decreased by $2.3 million, to $7.5 million in fiscal 2015 as compared to $9.8 million in fiscal 2014. The decrease in other income, net is due to a smaller increasethe change in the fair value of our marketable securities, where there was a smaller gain during fiscal 20152018 compared to fiscal 2014.the year-ago period.
43
Interest Expense,(Expense) Income, Net
Interest expense,(expense) income, net primarily relates to our term loan facility and borrowings under our COLI policies, which iswas partially offset by interest earned on cash and cash equivalent balances. Interest expense, net was $1.8$13.8 million in fiscal 20152018 as compared to $2.4$14.6 million in fiscal 2014.2017.
Equity in Earnings of Unconsolidated Subsidiaries
Equity in earnings of unconsolidated subsidiaries is comprised of our less than 50% interest in our Mexican subsidiary and IGroup, LLC. We report our interest in earnings or loss of our Mexican subsidiary and IGroup, LLC on the equity basis as a one-line adjustment to net income. Equity in earnings was $2.2 million in both fiscal 2015 and 2014.
Income Tax Provision
The provision for income taxestax was $33.5$70.1 million in fiscal 20152018 compared to $28.5$29.1 million in fiscal 2014. The provision for income taxes in fiscal 2015 and 2014the year-ago period. This reflects a 28%34% and 29%25% effective tax rate for fiscal 2018 and 2017, respectively. In fiscal 2018 the effective tax rate was significantly impacted by the December 22, 2017 enactment of the Tax Act as a result of which, Korn Ferry recorded a provisional tax charge of $18.4 million as a one-time tax on accumulated foreign earnings (the “Transition Tax”), and a provisional tax benefit of $5.9 million from the remeasurement of our U.S. federal deferred tax assets and liabilities.
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 fiscal 2018 and 2017 was $2.1 million compared to $3.1 million, respectively.
Liquidity and Capital Resources
The Company and its Board of Directors endorse a balanced approach to capital allocation. The Company’s first priority is to invest in growth initiatives, such as the hiring of consultants, the continued development of intellectual propertyIP and derivative products and services, and the investment in synergistic, accretive M&Amerger and acquisition transactions that earn a return that is superior to the Company’sCompany's cost of capital. Next, the Company’s capital allocation approach contemplates the planned 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” sectionssection of this Annual Report on Form 10-K. Additionally, the Company considers share repurchases on an opportunistic basis and subject to the terms of our credit agreement.Credit Agreement (defined below).
On December 1, 2015, the Company completed its acquisition of Legacy Hay Group, a global leader in people strategy and organizational performance, for $476.9 million, net of cash acquired. The purchase price consisted of $259.0 million in cash ($54 million from foreign locations), net of estimated cash acquired and 5,922,136 shares of the Company’s common stock, par value $0.01 per share (the “Consideration Shares”), representing an aggregate value of $217.9 million based on the closing price of the Company’s common stock on The New York Stock Exchange on November 30, 2015. On November 23, 2015, the Company borrowed $150 million from the Term Facility, to finance a portion of the Legacy Hay Group acquisition purchase price.
The Company made $10.0 million in principal payments on its Term facility during fiscal 2016. As of April 30, 2016, there was $140.0 million outstanding under the Term Facility. The interest rate on the debt is Adjusted LIBOR plus a spread which is dependent on the Company’s leverage ratio. During fiscal 2016, the average interest rate on the term loan was 1.65%. As discussed below in “Long-Term Debt — New Credit Agreement,” on June 15, 2016, the Company19, 2018, we entered into a new senior secured $400$650.0 million Amended and Restated Credit Agreement (the “Credit Agreement”) with a syndicate of banks and Wells Fargo Bank, National Association as administrative agent to among other things, provide for enhanced financial flexibility and in recognitionflexibility. See Note 10—Long-Term Debt for a description of the accelerated paceCredit Agreement. We drew down $226.9 million on the Revolver (defined below) and used the proceeds to pay-off the term loan that was outstanding as of December 19, 2018. We have $420.2 million available under the Legacy Hay Group integration.Revolver after the draw down and after $2.9 million of standby letters of credit were issued as of April 30, 2019. We had $2.9 million in standby letters of credit issued under our long-term debt arrangements as of April 30, 2019 and 2018, respectively. We had a total of $8.5 million and $7.4 million of standby letters of credits with other financial institutions as of April 30, 2019 and 2018, respectively. The termsstandby letters of this new facility are described therein.credits were generally issued as a result of entering into office premise leases.
As part of the Legacy Hay Groupa previous acquisition, the Company has committed to a $40 million retention pool (up to $5 million payable within one year of the closing of the acquisition) for certain employees of Legacy Hay Groupthe previous acquired company subject to certain circumstances. Of the remainingThe balance 50% will be payable within 45 days after November 30, 2017 and the remaining 50% will be payable within 45 days after November 30, 2018.was paid in full as of January 31, 2019.
On December 8, 2014, theThe Board of Directors has 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. 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 December 8, 2014, theMarch 6, 2019, our Board of Directors also approved an increase into the Company’s stockshare repurchase program of approximately $200 million, which brings our available capacity to an aggregate of $150.0 million. Common stock may be repurchased from time to timerepurchase shares in the open market or privately negotiated transactions atto approximately $250 million. The Company repurchased approximately $37.4 million and $33.1 million of the Company’s discretion subjectstock during fiscal 2019 and 2018, respectively. Any decision to market conditionscontinue to execute our currently outstanding share repurchase program will depend on our earnings, capital requirements, financial condition and other factors.factors considered relevant by our Board of Directors. The Credit Agreement permits us to pay dividends to our stockholders and make share repurchases so long as our pro forma net leverage ratio, defined as the ratio of consolidated funded indebtedness minus up to $50 million of unrestricted cash and cash equivalents of the Company and domestic subsidiaries to consolidated Adjusted EBITDA, is no greater than 3.25 to 1.00, and our pro forma domestic liquidity is at least $50 million, including the revolving credit commitment minus amounts outstanding on the Revolver, issued letters of credit and swing loans.
44
Our performance is subject to the general level of economic activity in the geographic regions and the industries which we service. We believe, based on current economic conditions, that our cash on hand and funds from operations and the New Credit Agreement we entered into on June 15, 2016 will be sufficient to meet anticipated working capital, capital expenditures, general corporate requirements, repayment of the debt, incurred in connection with the Legacy Hay Group acquisition, the retention pool obligations in connection with the Legacy Hay Group acquisitionshare repurchases and dividend payments under our dividend policy during the next twelve months. However, if the national or global economy, credit market conditions and/or labor markets were to deteriorate in the future, such changes wouldcould 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 our existing credit facility to meet our capital needs and/or discontinue our share repurchases and dividend policy.
Cash and cash equivalents and marketable securities were $414.7$767.1 million and $525.4$657.9 million as of April 30, 20162019 and 2015,2018, respectively. Net of amounts held in trust for deferred compensation plans and to pay fiscal 2016accrued bonuses, cash and marketable securities were $88.9$382.1 million and $235.6$312.4 million at April 30, 20162019 and 2015,2018, respectively. As of April 30, 20162019 and 2015,2018, we held $129.0$267.0 million and $143.4$207.6 million, respectively of cash and cash equivalents in foreign locations, net of amounts held in trust for deferred compensation plans and to pay fiscal 2016 and fiscal 20152019 annual bonuses. If these amounts were distributed to the United States, in the form of dividends, we would be subject to additional U.S. income taxes. The Company has a plan to distribute a small portion of the cash held in foreign locations to the United States. No deferred tax liability has been recorded because no additional taxes would arise in connection with such distributions. 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 in fiscal 2016 and 2015 and further includes investments in corporate bonds in fiscal 2015.funds. The primary objectivesobjective of our investment in mutual funds areis to meet the obligations under certain of our deferred compensation plans, while the corporate bonds and other securities are available for general corporate purposes.plans.
As of April 30, 20162019 and 2015,2018, marketable securities of $141.4 million and $144.6 million, respectively, included trading securities of $141.4$140.8 million (net of gross unrealized gains of $1.4$6.3 million and gross unrealized losses of $2.6$1.0 million) and $131.4$137.1 million (net of gross unrealized gains of $8.3$11.0 million and gross unrealized losses of $0.2$1.0 million), respectively, were held in trust for settlement of our obligations under certain deferred compensation plans, of which $130.1$132.5 million and $118.8$122.8 million, respectively, are classified as non-current. Our vested and unvested obligations for which these assetsThese marketable securities were held in trust totaled $138.8to satisfy vested obligations totaling $122.3 million and $129.1$118.2 million as of April 30, 20162019 and 2015,2018, respectively. AsUnvested obligations under the deferred compensation plans totaled $24.6 million and $29.5 million as of April 30, 2015, we had marketable securities classified as available-for-sale with a balance of $13.2 million.2019 and 2018, respectively.
The net decreaseincrease in our working capital of $143.1$130.1 million as of April 30, 20162019 compared to April 30, 20152018 is primarily attributable to the decreaseincreases in cash and cash equivalents and accounts receivable and a decrease in the current portion of the term loan entered into in the quarter and higher other current liabilities due to the Legacy Hay Group acquisition,our long-term debt, partially offset by increasesan increase in accounts receivable.compensation and benefits payable. The decreaseincrease in cash and cash equivalents wasis due to cash used to purchase Legacy Hay Group, annual bonuses earned in fiscal 2015provided by operations. Accounts receivable and paid during the first half of fiscal 2016, dividend payments made of $21.8 million, offset with borrowings from the term loan while accounts receivablecompensation and benefits payable increased due to a $158.8 million increase in fee revenue and higher average headcount. The decrease in the acquisitioncurrent portion of Legacy Hay Group.our long-term debt is a result of the amount withdrawn on the Revolver to pay off the prior term loan. Cash provided by operating activities was $64.1$258.8 million in fiscal 2016, a decrease2019, an increase of $43.2$39.7 million, compared to $107.3$219.1 million in fiscal 2015. The change is due to the decrease in profitability due to acquisition/integration and restructuring charges incurred during fiscal 2016.2018.
Cash used in investing activities was $274.6$69.5 million in fiscal 2016, an increase of $244.0 million,2019 compared to $30.6$44.8 million in fiscal 2015. Cash2018. An increase in cash used in investing activities was higher primarily due to an increase in premiums paid under our COLI contracts and higher cash used for the purchases of property and equipment, offset by an increase in the proceeds from sales/maturities of marketable securities, net of cash used to purchase Legacy Hay Group for $256.1 million in cash, net of estimated cash acquired and a decrease of $4.8 million in proceeds from life insurance policies, offset by cash used to purchase Pivot for $15.3 millionmarketable securities in fiscal 2015.
Cash provided by financing activities was $118.5 million in fiscal 20162019 compared to cashthe year-ago period.
Cash used in financing activities of $7.9was $64.6 million in fiscal 2015. Cash provided by financing activities increased2019 compared to $77.3 million in fiscal 2018. The decrease was primarily due to $226.9 million in proceeds received from the borrowingCredit Agreement and borrowings of $150.0$31.9 million from the term loan facility, offset by $10.0 million in principal payments made under the term loan facility,our COLI contracts, partially offset by an increase in payments made on the term loan of $218.3 million and increases in cash dividends paidused to stockholdersrepurchase shares of $16.7common stock to satisfy tax withholding requirements upon the vesting of restricted stock of $16.9 million, $4.3 million in shares repurchased under the stock repurchase program and an increase in payments on life insurance policy loans of $4.8 million in fiscal 20162019 compared to fiscal 2015. As of April 30, 2016, $150.0 million remained available for common stock repurchases under our stock repurchase program.the year-ago period.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements and have not entered into any transactions involving unconsolidated, special purpose entities.
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Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent liabilities for which we cannot reasonably predict future payment. The following table represents our contractual obligations as of April 30, 2016:2019:
Payments Due in: | ||||||||||||||||||||||
Note (1) | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||||
(in thousands) | ||||||||||||||||||||||
Operating lease commitments | 14 | $ | 446,900 | $ | 65,002 | $ | 117,890 | $ | 93,361 | $ | 170,647 | |||||||||||
Accrued restructuring charges (2) | 7 | 6,121 | 5.445 | 676 | — | — | ||||||||||||||||
Interest payments on COLI loans (3) | 10 | 41,380 | 3,864 | 7,727 | 7,684 | 22,105 | ||||||||||||||||
Retention awards | 12 | 40,000 | 5,000 | 35,000 | — | — �� | ||||||||||||||||
Term loan (4) | 10 | 140,000 | 30,000 | 60,000 | 50,000 | — | ||||||||||||||||
Estimated interest on term loan (5) | 6,000 | 2,253 | 2,931 | 816 | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 680,401 | $ | 111,564 | $ | 224,224 | $ | 151,861 | $ | 192,752 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Payments Due in: |
| |||||||||||||||||
|
| Note (1) |
|
| Total |
|
| Less Than 1 Year |
|
| 1-3 Years |
|
| 3-5 Years |
|
| More Than 5 Years |
| ||||||
|
|
|
|
|
| (in thousands) |
| |||||||||||||||||
Operating lease commitments |
|
| 14 |
|
| $ | 300,737 |
|
| $ | 55,351 |
|
| $ | 98,032 |
|
| $ | 72,590 |
|
| $ | 74,764 |
|
Interest payments on COLI loans (2) |
|
| 10 |
|
|
| 49,265 |
|
|
| 5,237 |
|
|
| 10,469 |
|
|
| 10,435 |
|
|
| 23,124 |
|
Long-term debt |
|
| 10 |
|
|
| 226,875 |
|
|
| — |
|
|
| — |
|
|
| 226,875 |
|
|
| — |
|
Estimated interest on long-term debt (3) |
|
| — |
|
|
| 39,854 |
|
|
| 8,611 |
|
|
| 17,174 |
|
|
| 14,069 |
|
|
| — |
|
Total |
|
|
|
|
| $ | 616,731 |
|
| $ | 69,199 |
|
| $ | 125,675 |
|
| $ | 323,969 |
|
| $ | 97,888 |
|
(1) | See the corresponding Note in the accompanying consolidated financial statements in Item 15. |
(2) |
Assumes COLI loans remain outstanding until receipt of death benefits on COLI policies and applies current interest rates on COLI loans ranging from 4.76% to 8.00% with total death benefits payable, net of loans under COLI contracts of |
(3) |
Principal Payments on New Term Loan | ||||
(in thousands) | ||||
Less than 1 year | $ | 15,469 | ||
1-3 years | 46,406 | |||
3-5 years | 55,000 | |||
More than 5 years | 158,125 | |||
|
| |||
$ | 275,000 | |||
|
|
Interest rate used is the variable rate per the credit agreement as of April 30, |
In addition to the contractual obligations above, we have liabilities related to certain employee benefit plans. These liabilities are recorded in our Consolidated Balance Sheets.consolidated balance sheets. The obligations related to these employee benefit plans are described in Note 6 —6—Deferred Compensation and Retirement Plans, in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K.
Lastly, we have contingent commitments under certain employment agreements that are payable upon involuntary termination without cause, as described in Note 14 —14—Commitments and Contingencies, in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K.
Cash Surrender Value of Company Owned Life Insurance Policies, Net of Loans
The CompanyWe 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 April 30, 20162019 and 2015,2018, we held contracts with gross CSV of $175.7$219.2 million and $172.3$186.8 million, respectively. Since fiscal 2012, we paid our premiums under ourTotal outstanding borrowings against the CSV of COLI contracts from operating cash,were $93.2 million and in prior years, we generally borrowed under our COLI contracts to pay related premiums.$66.7 million as of April 30, 2019 and 2018, respectively. Such borrowings do not require annual principal repayments, bear interest primarily at variable rates and are secured by the CSV of COLI contracts. Total outstanding borrowings against the CSV of COLI contracts were $68.4 million and $69.6 million as of April 30, 2016 and 2015, respectively. At April 30, 20162019 and 2015,2018, the net cash value of these policies was $107.3$126.0 million and $102.7$120.1 million, respectively. Total death benefits payable, net of loans under COLI contracts, were $216.7$223.6 million and $216.5$226.0 million at April 30, 20162019 and 2015,2018, respectively.
Long-Term Debt
Existing Credit Agreement
Prior to June 15, 2016On December 19, 2018, we were party to a Credit Agreement with Wells Fargo Bank, National Association, as lender (the “Lender”), dated January 18, 2013, as amended by Amendment No. 1 dated as of December 12,
2014 (“Amendment No. 1”), Amendment No. 2 dated as of June 3, 2015 (“Amendment No. 2”), Amendment No. 3, dated as of September 23, 2015 (“Amendment No. 3”) and Amendment No. 4, dated as of November 20, 2015 (“Amendment No. 4”; the existing Credit Agreement, as amended by Amendment No. 1, Amendment No. 2, Amendment No. 3 and Amendment No. 4, the “Credit Agreement”).
The Credit Agreement provides for, among other things: (i) a senior unsecured delayed draw term loan facility in an aggregate principal amount of $150 million (the “Term Facility”); and (ii) a revolving credit facility (the “Revolver” and, together with the Term Facility, the “Credit Facilities”) in an aggregate principal amount of $100 million, which includes a $25.0 million sub-limit for letters of credit. Both the Revolver and the Term Facility mature on September 23, 2020, and may be prepaid and terminated early by us at any time without premium or penalty (subject to customary LIBOR breakage fees).
The Credit Agreement includes customary and affirmative negative covenants. In particular, the Credit Agreements limit us to consummating permitted acquisitions, paying dividends to our stockholders and making share repurchases in any fiscal year to a cumulative total of $135.0 million, excluding the consideration paid in connection with the acquisition of Legacy Hay Group. Subject to the foregoing, pursuant toentered into the Credit Agreement we are permitted to pay up to $85.0 million in dividends and share repurchases, in the aggregate, in any fiscal year (subject to the satisfaction of certain conditions). The Credit Agreement also requires us to maintain $50.0 million in domestic liquidity, defined as unrestricted cash and/or marketable securities (excluding any marketable securities that are held in trust for the settlement of our obligation under certain deferred compensation plans) as a condition to consummating permitted acquisitions, paying dividends to our stockholders and repurchasing shares of our common stock. Undrawn amounts on our line of credit may be used to calculate domestic liquidity.
The Credit Agreement includes minimum Adjusted EBITDA and maximum Total Funded Debt to Adjusted EBITDA ratio financial covenants (the “consolidated leverage ratio”) (in each case as defined in the Credit Agreement). As of April 30, 2016, we are in compliance with our debt covenants.
At our option, loans issued under the Credit Facilities bear interest at either adjusted LIBOR or an alternate base rate, in each case plus the applicable interest rate margin. The interest rate applicable to loans outstanding under the Credit Facilities may fluctuate between adjusted LIBOR plus 1.125% per annum to adjusted LIBOR plus 1.875% per annum, in the case of LIBOR borrowings (or between the alternate base rate plus 0.125% per annum and the alternate base rate plus 0.875% per annum, in the alternative), based upon the consolidated leverage ratio at such time. In addition, we will be required to pay to the Lender a quarterly fee ranging from 0.25% to 0.40% per annum on the average daily unused amount of the Credit Facilities, based upon our consolidated leverage ratio at such time, and fees relating to the issuance of letters of credit.
On November 23, 2015 we borrowed $150 million under the Term Facility to finance in part the acquisition of Legacy Hay Group. The Term Facility is payable in quarterly installments, with the final installment consisting of all remaining unpaid principal due on the term loan maturity date of September 23, 2020. We made $10.0 million in principal payments during fiscal 2016. As of April 30, 2016, there was $140.0 million outstanding under the Term Facility. The interest rate on the debt is Adjusted LIBOR plus a spread which is dependent on our leverage ratio, as discussed above. During fiscal 2016, the average interest rate on the term loan was 1.65%.
As of April 30, 2016 and 2015, there was no borrowing made under the Revolver. At April 30, 2016 and 2015, there was $2.8 million of standby letters of credit issued under our long-term debt arrangements. We had a total of $6.4 million and $1.6 million of standby letters of credits withamong other financial institutions as of April 30, 2016 and 2015, respectively.
We are not aware of any other trends, demands or commitments that would materially affect liquidity or those that relate to our resources.
New Credit Agreement
On June 15, 2016, the Company entered into a new senior secured $400 million Credit Agreement (the “New Credit Agreement”) with a syndicate of banks and Wells Fargo Bank, National Association as administrative agent (tothings, provide for enhanced financial flexibility and in recognition of the accelerated pace of the Legacy Hay Group integration).flexibility. The New Credit Agreement provides for, among other things: (a) a new senior secured term loan facility in an aggregate principal amount of $275$650.0 million (the “New Term Facility”); (b) a newfive-year senior secured revolving credit facility (the “New Revolver”“Revolver”) and together with the New Term Facility, the “New Credit Facilities”) in an aggregate principal amount of $125 million, (c) annual term loan amortization of 7.5%, 7.5%, 10.0%, 10.0%, and 10.0%, with the remaining principal due at maturity (d)(b) certain customary affirmative and negative covenants, including a maximum consolidated total leverage ratio (as defined below) and a minimum interest coverage ratio. Our Credit Agreement permits payment of dividends to stockholders and share repurchases so long as the pro forma net leverage ratio is no greater than 3.25 to 1.00, and (e) an expanded definition of permitted add-backs to Adjusted EBITDA in recognition of the accelerated integration actions referenced above.pro forma domestic liquidity is at least $50.0 million. We drew down $275$226.9 million on the new term loanRevolver and used $140 million of the proceeds to pay-off the term loan that was outstanding as of April 30, 2016.December 19, 2018. The remaining fundspay-off of the old credit facility and drawn-down on the new Revolver is considered a debt modification and therefore the previously incurred unamortized and current debt issuance costs will be used for working capital and general corporate purposes.amortized over the life of the new issuance.
At the Company’sour option, loans issued under the New Credit Agreement will bear interest at either LIBOR or an alternate base rate, in each case plus the applicable interest rate margin. The interest rate applicable to loans outstanding under the New Credit FacilitiesAgreement may fluctuate between LIBOR plus 1.25% per annum to LIBOR plus 2.00% per annum, in the case of LIBOR borrowings (or between the alternate base rate plus 0.25% per annum and the alternate base rate plus 1.00% per annum, in the alternative), based upon the Company’s total funded debt to adjustedAdjusted EBITDA ratio (as set forth in the New Credit Agreement, the “consolidated leverage ratio”) at such time. In addition, the Company will be required to pay to the lenders a quarterly commitment fee ranging from 0.20% to 0.35% per annum on the average daily unused amount of the New Term Facility,Revolver, based upon the Company’s consolidated leverage ratio at such time, and fees relating to the issuance of letters of credit. During fiscal 2019 and 2018, the average rate on our long-term debt arrangements was 3.50% and 2.60%, respectively.
Both the New46
The Revolver matures on December 19, 2023 and the New Term Facility matureany unpaid principal balance is payable on June 15, 2021 andthis date. The Revolver may also be prepaid and terminated early by the Companyus at any time without premium or penalty (subject to customary LIBOR breakage fees).
After giving effect to the repayment As of the existing Credit Agreement and costs and fees associated with entering into the New Credit Agreement, the net proceeds of the term loanApril 30, 2019, $226.9 million was outstanding under the New Credit Agreement were approximately $131 million. These funds, as well as the availability under the new $125Revolver compared to $238.9 million revolving facility, which is currently undrawn provide the Company with significant additional liquidity.
Accounting Developments
Recently Adopted Accounting Standards
In November 2015, the FASB issued guidance that simplifies the presentation of deferred income taxes, requiring all deferred tax assets and liabilities, and any related valuation allowances, to be classified as non-current on the balance sheet. The new guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early application permitted for all entities as of the beginning of an interim or annual reporting period. We elected to early adopt the guidance as of January 31, 2016 and have retrospectively applied the new requirements to all periods presented. As such, we reclassified $3.8 million of current deferred tax assets from current assets to non-current assets in the accompanying consolidated balance sheet as of April 30, 2015.2018, under the previous term loan. The unamortized debt issuance costs associated with the long-term debt, were $4.0 million and $2.7 million as of April 30, 2019 and 2018, respectively. The fair value of our Revolver is based on borrowing rates currently required of loans with similar terms, maturity and credit risk. The carrying amount of the Revolver approximates fair value because the base interest rate charged varies with market conditions and the credit spread is commensurate with current market spreadsfor issuers of similar risk. The fair value of the Revolver is classified as a Level 2 liability in the fair value hierarchy. As of April 30, 2019, we were in compliance with our debt covenants.
We had a total of $420.2 million available under the Revolver after we drew down $226.9 million and after $2.9 million of standby letters of credit were issued as of April 30, 2019. As of April 30, 2018, we had no borrowings under the previous revolver. We had a total of $122.1 million available under the previous revolver after $2.9 million of standby letters of credit were issued as of April 30, 2018. We had a total of $8.5 million and $7.4 million of standby letters of credits with other financial institutions as of April 30, 2019 and 2018, respectively. The standby letters of credits were generally issued as a result of entering into office premise leases.
We are not aware of any other trends, demands or commitments that would materially affect liquidity or those that relate to our resources.
Accounting Developments
Recently ProposedAdopted Accounting Standards
In May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued guidance that supersedesAccounting Standards Codification (“ASC”) 606, which superseded revenue recognition requirements regarding contracts with customers to transfer goods or services or for the transfer of nonfinancial assets. Under the newthis guidance, entities are required to recognize revenue in order to depictthat depicts the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The transfer is considered to occur when the customer obtains control of the goods or services delivered. The guidance provides a five-step analysis to be performed on transactions to determine when and how revenue is recognized. In March 2016, the FASB issued additional guidance concerning “Principal versus Agent” considerations (reporting revenue gross versus net); in April 2016, the FASB issued additional guidance on identifying performance obligations and licensing; and in May 2016, the FASB issued additional guidance on collectability, noncash consideration, presentation of sales tax, and contract modifications and completed contracts at transition. These updates are intended to provide interpretive clarifications on theThe new guidance for disclosure about revenue. In July 2015, the FASB decided to approve a one-year deferral of the effective date as well as providing an option to early adopt the standard on the original effective date. This new guidance isbecame effective for fiscal years and interim periods within those annual years beginning after December 15, 2017 as opposed to the original effective date of December 15, 2016.2017. We will adopt this guidanceadopted ASC 606 in fiscal year beginning May 1, 2018 using the modified retrospective transition method with respect to those contracts still outstanding and not completed as of May 1, 2018.
We are currently evaluatingrecognized the cumulative effect of initially applying the new guidance as an adjustment to the opening balance of retained earnings. The comparative periods have not been restated and continue to be reported under the revenue accounting standards in effect for those periods. As a result of the adoption, we recorded an increase to retained earnings of $6.7 million, net of tax as of May 1, 2018 due to the cumulative impact of adopting ASC 606. The change in total assets was recorded to unbilled receivables which is included in receivables due from clients; the changes in total liabilities was recorded to income taxes payable, deferred tax liabilities and deferred revenue, which is included in other accrued liabilities.
The following table summarizes the effect of changes made to our consolidated balance sheet at May 1, 2018:
|
|
|
|
|
| Adjustments |
|
|
|
|
| |
|
| April 30, 2018 |
|
| due to ASC 606 |
|
| May 1, 2018 |
| |||
|
| (in thousands) |
| |||||||||
Total assets |
| $ | 2,287,914 |
|
| $ | 3,496 |
|
| $ | 2,291,410 |
|
Total liabilities |
| $ | 1,068,299 |
|
| $ | (3,160 | ) |
| $ | 1,065,139 |
|
Total stockholders’ equity |
| $ | 1,219,615 |
|
| $ | 6,656 |
|
| $ | 1,226,271 |
|
The adjustments primarily relate to uptick revenue (uptick revenue occurs when a placement’s actual compensation is higher than the guidance will have on our financial conditionoriginal estimated compensation) and resultscertain Korn Ferry products that are now considered Functional IP. Under the new standard, uptick revenue is considered variable consideration and estimated at contract inception using the expected value method and recognized over the service period. Previously, we recognized uptick revenue as the amount became fixed or determinable. Under the new standard, certain products are now considered Functional IP as delivery of operations.IP content fulfills the performance obligation, and revenue is recognized upon delivery and when an enforceable right to payment exists. Previously these products were considered term licenses and revenue was recognized ratably over the contract term.
47
In September 2015,August 2016, the FASB issued guidance requiring an acquirer to recognize adjustments to provisional amounts recorded in an acquisition that are identified duringon the measurement periodclassification of certain cash receipts and cash payments in the reporting period in which the adjustment amounts are determined.statement of cash flows. The acquirer is required to record,new guidance provides clarification on specific cash flow issues regarding presentation and classification in the same period’sstatement of cash flows with the objective of reducing the existing diversity in practice. The amendments in this update are effective for reporting periods beginning after December 15, 2017 and were adopted by us effective May 1, 2018. The adoption of this guidance did not have an impact on our consolidated financial statements,statements.
In January 2017, the effect on earningsFASB issued guidance that clarifies the definition of changes in depreciation, amortizationa business. The new guidance assists a company when evaluating whether transactions should be accounted for as acquisitions (disposals) of assets or other income effects, if any, as a resultbusinesses. The provisions of the change to the provisional amounts, calculated asguidance require that if the accounting had been completed at the acquisition date. The acquirer is also required to present separately on the facefair value of the income statementgross assets acquired (or disposed of) is substantially concentrated in a single identifiable asset or disclose in the footnotes, the portiona group of similar identifiable assets, then it is not a business. The provisions of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustments had been recognized asguidance are to be applied prospectively. The provisions of the acquisition date. This new guidance isare effective for fiscalannual years beginning after December 15, 2015, including interim periods within those fiscal years. We will comply with2017 and were adopted by us effective May 1, 2018. The adoption of this guidance did not have an impact on our consolidated financial statements.
In March 2017, the FASB issued guidance that changes the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance when adjustments in acquisitions are identifiedwill change the presentation of net periodic benefit cost related to employer-sponsored defined benefit plans and recordedother postretirement benefits. Service cost will be included within the same income statement line item as other compensation costs arising from services rendered during the measurement period.period, while other components of net periodic benefit pension cost will be presented separately outside of operating income. Additionally, only service costs may be capitalized in assets. This pronouncement is effective for annual reporting periods beginning after December 15, 2017 and was adopted by us effective May 1, 2018. The change to the consolidated statements of income has been reflected on a retrospective basis and had no effect on net income. Prior period amounts were revised, which resulted in a decrease in compensation expense and other income of $4.6 million and $0.4 million, respectively, and an increase in interest expense of $4.2 million, in fiscal 2018. For fiscal 2017, this resulted in a decrease in compensation expense and other income of $5.8 million and $1.5 million, respectively, and an increase in interest expense of $4.4 million.
In May 2017, the FASB issued guidance clarifying the scope of modification accounting for stock compensation. The new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017 and was adopted by us effective May 1, 2018. The adoption of this guidance did not have an impact on our consolidated financial statements. Any future impact of this guidance will be dependent on future modification including the number of awards modified.
In February 2018, the FASB issued guidance that provides companies the option to reclassify stranded tax effects from accumulated other comprehensive (loss) income to retained earnings. The new guidance requires companies to disclose whether they decided to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income (loss) to retained earnings. The guidance is effective for annual reporting periods beginning after December 15, 2018, but early adoption is permitted. We early adopted effective May 1, 2018, upon the adoption of this guidance we recorded an increase of $2.2 million to retained earnings due to the reclassification from accumulated other comprehensive (loss) income to retained earnings in the period of adoption.
In August 2018, the FASB issued guidance amending and modifying the disclosure requirements for employers that sponsor defined benefit pension or other postretirement pension plans. The amendment removes disclosures to pension plans and other postretirement benefit plans that are no longer considered beneficial and adds disclosure requirements deemed relevant. The amendments of this standard are effective for fiscal years ending after December 15, 2020 with early adoption permitted. We early adopted this standard in the fourth quarter of fiscal 2019. The adoption of this guidance did not have an impact on our consolidated financial statements.
Recently Proposed Accounting Standards - Not Yet Adopted
In February 2016, the FASB issued guidance on accounting for leases that generally requires all leases to be recognized inon the consolidated balance sheet. The provisions of the guidance are effective for fiscal years beginning after December 15, 2018;2018 and early adoption is permitted. We plan to adopt this guidance in fiscal year beginning May 1, 2019. The provisions of the guidance are to be applied using a modified retrospective approach. On July 30, 2018, the FASB issued an amendment that allows entities to apply the provisions at the effective date without adjusting comparative periods. The FASB has also issued subsequent related ASUs, which detail amendments to the ASU, implementation considerations, narrow-scope improvements and practical expedients. We have elected to apply the group of practical expedients which allows us to carry forward its identification of contracts that are or contain leases, its historical lease classification and its initial direct costs for existing leases. We also elected to combine lease and non-lease components for all asset classes and to recognize leases with an initial term of 12 months on a straight-line basis without recognizing a right-to-use asset or operating lease liability. We are currently evaluatingin the effectprocess of finalizing the data validation and associated internal controls for our selected global lease management system. We currently
48
estimate that the adoption of this guidancestandard will result in the recording of a material right-of-use asset and a material operating lease liability, as well as enhanced disclosures. We do not expect the adoption of this standard to have an impact on our consolidated financial statements.statements of income, consolidated statements of stockholders’ equity, or consolidated statements of cash flows.
In MarchJune 2016,the FASB issued guidance on accounting for measurement of credit losses on financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain aspectstypes of share-based paymentsfinancial instruments, including trade receivables. The standard is effective for fiscal years beginning after December 15, 2019. We will adopt this guidance in fiscal year beginning May 1, 2020. The adoption of this guidance is not anticipated to employees.have a material impact on the consolidated financial statements.
In January 2017, the FASB issued guidance simplifying the test for goodwill impairment. The new guidance requires excess tax benefitssimplifies the test for goodwill impairment by removing Step 2 from the goodwill impairment test. Companies will now perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value not to exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments of this standard are effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. We are evaluating the adoption timeline and tax deficiencies to be recorded in the income statement wheneffects that the awards vest or are settled. Furthermore, cash flows related to excess tax benefitsstandard will no longer be separately classified as a financing activity apart from other income tax cash flows.have on the consolidated financial statements.
In August 2017, the FASB issued guidance amending and simplifying accounting for hedging activities. The new guidance also allows companies to repurchase more of an employee’s shareswill refine and expand strategies that qualify for tax withholding purposes without triggering liabilityhedge accounting and also clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides ansimplify the application of hedge accounting policy election to account for forfeitures as they occur.in certain situations. The provisionsamendments of the guidancethis standard are effective for fiscal years beginning after December 15, 2016; early adoption is permitted.2018. We will adopt this guidance in its fiscal year beginning May 1, 2019. We are currently evaluating the effectimpact of adopting this guidance.
In August 2018, the FASB issued guidance amending the disclosure requirements for fair value measurements. The amendment removes and modifies disclosures that are currently required and adds additional disclosures that are deemed relevant. The amendments of this standard are effective for fiscal years beginning after December 15, 2019. We will adopt this guidance in its fiscal year beginning May 1, 2020. We are currently evaluating the impact of adopting this guidance.
In August 2018, the FASB issued guidance amending accounting for internal-use software. The new guidance will have on our consolidated financial statements.align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with developing or obtaining internal-use software. The amendments of this standard are effective for fiscal years ending after December 15, 2019 with early adoption permitted. We will adopt this guidance in its fiscal year beginning May 1, 2020. We are currently evaluating the impact of adopting this guidance.
Item 7A. 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 average rates of exchange during the reporting period. Resulting translation adjustments are reported as a component of accumulated other comprehensive incomeloss, net on our consolidated balance sheets.
Transactions denominated in a currency other than the reporting entity’s functional currency may give rise to transactionforeign currency gains andor losses that impact our results of operations. Historically, we have not realized significant foreign currency gains or losses on such transactions. ForeignDuring fiscal 2019 and 2018, we recorded foreign currency losses on an after tax basis, includedof $1.7 million and $3.3 million, respectively, in net income were $8.7 million duringgeneral and administrative expenses in the consolidated statements of income. During fiscal 2016 as compared to $1.6 million during fiscal 2015. Foreign2017, we recorded foreign currency gains on an after tax basis, includedof $0.3 million in net income were $1.0 million during fiscal 2014. Beginninggeneral and administrative expenses in the third quarterconsolidated statements of fiscal 2016, we establishedincome.
Our exposure to foreign currency exchange rates is primarily driven by fluctuations involving the following currencies—U.S. Dollar, Canadian Dollar, Euro, Pound Sterling, Swiss Franc, Brazilian Real, Singapore Dollar and Mexican Peso. Based on balances exposed to fluctuation in exchange rates between these currencies as of April 30, 2019, a 10% increase or decrease equally in the value of these currencies could result in a foreign exchange gain or loss of $11.3 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 due to an increase in the foreign currency exposures as a result of the Legacy Hay Group acquisition.exposures. These foreign currency forward contracts are neither used for trading purposes nor are they designated as hedging instruments pursuant to Accounting Standards CodificationASC 815, Derivatives and Hedging.Hedging.
Our primary exposure to exchange losses or gains is based on outstanding intercompany loan balances denominated in U.S. dollars. If the U.S. dollar strengthened or weakened by 15%, 25% and 35% against the Pound Sterling, the Euro, the Canadian dollar, the Australian dollar and the Yen, our exchange loss or gain during fiscal 2016 would have been $11.6 million, $19.3 million and $27.0 million, respectively, based on outstanding balances at April 30, 2016.49
OurOur exposure to interest rate risk is limited to our Term FacilityRevolver and borrowings against the CSV of COLI contracts. As of April 30, 2016,2019, there was $140.0$226.9 million outstanding under the Term Facility.Revolver. At our option, loans issued under the Credit FacilitiesAgreement bear interest at either adjusted LIBOR or an alternate base rate, in each case plus the applicable interest rate margin. The interest rate applicable to loans outstanding under the Credit FacilitiesAgreement may fluctuate between adjusted LIBOR plus 1.125%1.25% per annum to adjusted LIBOR plus 1.875%2.00% per annum, in the case of LIBOR borrowings (or between the alternate base rate plus 0.125%0.25% per annum and the alternate base rate plus 0.875%1.00% per annum, in the alternative), based upon our total funded debt to Adjusted EBITDA ratio (as set forth in the 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 0.20% to 0.35% per annum on the average daily unused amount of the Revolver, based upon our consolidated net leverage ratio at such time.time, and fees relating to the issuance of letters of credit. A 100 basis100-basis point increase in LIBOR rates would have increased our interest expense by approximately $0.6$2.3 million for fiscal 2016.2019. During fiscal 2016, 2019, the average interest rate on the termrevolver loan was 1.65%3.50%.
To mitigate this interest rate risk, we entered into an interest rate swap contract with an initial notional amount of $129.8 million to hedge the variability to changes in cash flows attributable to interest rate risks caused by changes in interest rates related to our variable rate debt. We have designated the swap as a cash flow hedge. As of April 30, 2019 the notional amount was $106.6 million. The interest rate swap agreement matures on June 15, 2021 and locks the interest rates on a portion of our outstanding debt at 1.919%, exclusive of the credit spread on the debt.
We had no borrowings under the term facility in fiscal 2015. We had $68.4$93.2 million and $69.6$66.7 million of borrowings against the CSV of COLI contracts as of April 30, 20162019 and 2015,2018, respectively, 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.
Item 8. Financial Statements and Supplementary Data
See Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
Supplemental Financial Information regarding quarterly results is contained in Note 15 — Quarterly15—Quarterly Results, in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, 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. The scope of the assessment of the effectiveness of our disclosure controls and procedures does not include any disclosure control or procedures of Legacy Hay Group, which was acquired in December 2015, that are also part of Legacy Hay Group’s Internal Control over Financial Reporting. This exclusion is in accordance with the guidance of the SEC Division of Corporation Finance that a recently acquired business may be omitted from the scope of the assessment in the year of acquisition. Legacy Hay Group constituted 39% and 49% of total and net assets, respectively, as of April 30, 2016 and 14% of fee revenue for the year ended April 30, 2016. Based on their evaluation of our disclosure controls and procedures conducted as of the end of the period covered by this Annual Report on Form 10-K, 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”)) are effective.
b) | Changes in Internal Control over Financial Reporting. |
(b) Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting during the fourth fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. See Management’s Report on Internal Control Over Financial Reporting and Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting on pages F-2 and F-3, respectively.
Not applicable.
50
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item will be included under the captions “The Board of Directors” and “Sectionif applicable
“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” and elsewhere in our 20162019 Proxy Statement, and is incorporated herein by reference. The information under the heading “Executive Officers of the Registrant”“Information about our Executive Officers” in Part I of this Annual Report on Form 10-K is also incorporated by reference in this section.
We have adopted a “Code of Business Conduct and Ethics,” which is applicableEthics” that applies to all of our directors, officers and employees, including our principal executive officer (who is our Chief Executive Officer), principal financial officer, and principal accounting officer (who is our Chief Financial Officer) and senior financial officers.officers, or persons performing similar functions. The Code of Business Conduct and Ethics is available on the Investor Relations portion of our website atwww.kornferry.comhttp://ir.kornferry.com. We intend to postdisclose future amendments to or waivers to thiscertain provisions of the Code of Business Conduct and Ethics and waivers of the Code of Business Conduct and Ethics granted to executive officers and directors on our website when adopted.within four business days following the date of the amendment or waiver.
Item 11. Executive Compensation
The information required by this Item will be included under the captions “Compensation Discussion and Analysis” and “Compensation of Executive Officers and Directors” and elsewhere in our 20162019 Proxy Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will be included under the caption “Security Ownership of Certain Beneficial Owners and Management” and elsewhere in our 20162019 Proxy Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be included under the caption “Certain Relationships and Related Transactions” and elsewhere in our 20162019 Proxy Statement, and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item will be included under the captions “Fees Paid to Ernst & Young LLP,” and “Audit Committee Pre-Approval Policies and Procedures,” and elsewhere in our 20162019 Proxy Statement, and is incorporated herein by reference.
51
Item 15. Exhibits and Financial Statement Schedules
Financial Statements.
a) |
|
1. | Index to Financial | Page | |||
See Consolidated Financial Statements included as part of this Annual Report on Form 10-K and Schedule II — Valuation and Qualifying Accounts. Pursuant to Rule 7-05 of Regulation S-X, the other schedules have been omitted as the information to be set forth therein is included in the notes of the audited consolidated financial | F-1 |
Exhibits:
Exhibit Number | Description | |
2.1+ | ||
2.2+ | ||
2.3+ | ||
2.4+ | ||
3.1+ | ||
3.2+ | ||
4.1 | ||
4.2 | ||
10.1*+ | ||
10.2*+ | ||
10.3*+ | ||
10.4*+ | ||
10.5*+ | ||
10.6*+ | ||
|
| |
Executive Salary Continuation Plan, filed as Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (No. 333-61697), | ||
10.8*+ | ||
10.9*+ | ||
52
Exhibit Number | Description | |
10.11*+ | ||
10.12*+ | ||
10.13*+ | ||
10.14*+ | ||
10.15*+ | ||
10.16*+ | ||
10.17* | ||
|
| |
Employment Agreement between the Company and Robert | ||
10.19*+ | ||
10.20*+ | ||
10.21*+ | ||
10.22*+ | ||
10.23* | ||
10.24*+ | ||
53
Exhibit Number | Description | |
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 | ||
XBRL Instance Document. | ||
101.SCH | ||
XBRL Taxonomy Extension Schema Document. | ||
101.CAL | ||
XBRL Taxonomy Extension Calculation Linkbase Document. | ||
101.DEF | ||
XBRL Taxonomy Extension Definition Linkbase Document. | ||
101.LAB | ||
XBRL Taxonomy Extension Label Linkbase Document. | ||
101.PRE | ||
XBRL Taxonomy Extension Presentation Linkbase Document. |
* | Management contract, compensatory plan or arrangement. |
+ |
Incorporated herein by reference. |
None
54
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Korn Ferry By: /s/ Robert P. Rozek Robert P. Rozek Executive Vice President, Chief Financial Officer and Chief Corporate Officer | ||
Date: June 28, 20162019
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of the registrant hereby constitutes and appoints Jonathan M. Kuai and Gary D. Burnison, and each of them, as lawful attorney-in-fact and agent for each of the undersigned (with full power of substitution and resubstitution, for and in the name, place and stead of each of the undersigned officers and directors), to sign and file with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, any and all amendments, supplements and exhibits to this report and any and all other documents in connection therewith, hereby granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in order to effectuate the same as fully and to all intents and purposes as each of the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or any of their substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
| ||||
/s/ CHRISTINA A. GOLD Christina A. Gold | Chairman of the Board and Director | June 28, | ||
2019 | ||||
/ Gary D. Burnison | President & Chief Executive Officer (Principal Executive Officer) and Director | June 28, | ||
2019 | ||||
/ Robert P. Rozek | Executive Vice President, Chief Financial Officer and Chief Corporate Officer (Principal Financial Officer and Principal Accounting Officer) | June 28, | ||
2019 | ||||
/ George T. Shaheen | Director | June 28, 2019 | ||
/s/ DOYLE N. BENEBY Doyle N. Beneby | Director | June 28, | ||
2019 | ||||
/ William R. Floyd | Director | June 28, | ||
|
|
|
| ||
/ Jerry Leamon | Director | June 28, | ||
2019 | ||||
/ Angel Martinez | Director | June 28, 2019 | ||
/ Debra J. Perry | Director | June 28, | ||
|
55
KORN FERRY INTERNATIONAL AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 20162019
Page
F-1
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Korn/Korn Ferry International (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or supervised by, the issuer’s principal executive and principal financial officers, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controlcontrols may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of the Company’s annual financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of April 30, 20162019 based on criteria established inInternal Control— – Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”).Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of the Company’s internal control over financial reporting.
Our evaluation did not include assessing the effectiveness of internal control over financial reporting for the 2016 acquisition of HG (Luxembourg) S.à.r.l as permitted by Securities and Exchange Commission guidelines that allow companies to exclude certain acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition. HG (Luxembourg) S.à.r.l which is included in the 2016 consolidated financial statements of the Company constituted 39% and 49% of total and net assets, respectively, as of April 30, 2016 and 14% of fee revenues, for the year then ended. We did not assess the effectiveness of internal control over financial reporting at this newly acquired entity due to the insufficient time between the date acquired and year-end.
Based on this assessment, management did not identify any material weakness in the Company’s internal control over financial reporting, and management has concluded that the Company’s internal control over financial reporting was effective as of April 30, 2016.2019.
Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s financial statements for the year ended April 30, 20162019 included in this Annual Report on Form 10-K, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of April 30, 2016,2019, a copy of which is included in this Annual Report on Form 10-K.
June 28, 2016
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Stockholders and Board of Directors of Korn Ferry:
Korn/Ferry InternationalOpinion on Internal Control over Financial Reporting
We have audited Korn/Korn Ferry International and subsidiaries’ (the “Company”) internal control over financial reporting as of April 30, 2016,2019, based on criteria established in Internal Control —Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Korn Ferry and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of April 30, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Companyas of April 30, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended April 30, 2019 and the related notes and the financial statement schedule listed in the index at Item 15(a) and our report dated June 28, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in/s/ Ernst & Young LLP
Los Angeles, California
June 28, 2019
F-3
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Korn Ferry:
Opinion on the Financial Statements
We have audited the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessmentconsolidated balance sheets of Korn Ferry and conclusion of the effectiveness of internal control over financial reporting did not include the internal controls of HG (Luxembourg) S.à.r.l, which is included in the 2016 consolidated financial statements of the Company and constituted 39% and 49% of total and net assets, respectively,subsidiaries (the “Company”) as of April 30, 2016,2019 and 14%2018, the related consolidated statements of fee revenues,income, comprehensive income, stockholders' equity and cash flows for the year then ended. Our audit of internal control over financial reportingeach of the Company also did not include an evaluation ofthree years in the internal control overperiod ended April 30, 2019 and the related notes and the financial reporting of HG (Luxembourg) S.à.r.l.
statement schedule listed in the index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, Korn/Ferry International and subsidiaries maintained,the consolidated financial statements present fairly, in all material respects, effective internal control overthe financial reporting asposition of the Company at April 30, 2016, based on2019 and 2018, and the COSO criteria.results of their operations and their cash flows for each of the three years in the period ended April 30, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Korn/Ferry International and subsidiariesCompany's internal control over financial reporting as of April 30, 2016
and 2015, and2019, based on criteria established in Internal Control-Integrated Framework issued by the related consolidated statementsCommittee of income, comprehensive income, stockholders’ equity, and cash flows for eachSponsoring Organizations of the three years in the period ended April 30, 2016Treadway Commission (2013 framework), and our report dated June 28, 2016,2019 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLPBasis for Opinion
Los Angeles, California
June 28, 2016
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Korn/Ferry International
We have audited the accompanying consolidated balance sheets of Korn/Ferry International and subsidiaries (the “Company”) as of April 30, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended April 30, 2016. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on thesethe Company’s financial statements and schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Korn/Ferry International and subsidiaries at April 30, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended April 30, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of April 30, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated June 28, 2016, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002
Los Angeles, California
June 28, 2016
KORN FERRY INTERNATIONAL AND SUBSIDIARIES
April 30, |
| April 30, |
| |||||||||||||
2016 | 2015 |
| 2019 |
|
| 2018 |
| |||||||||
(in thousands, except per share data) |
| (in thousands, except per share data) |
| |||||||||||||
ASSETS |
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents | $ | 273,252 | $ | 380,838 |
| $ | 626,360 |
|
| $ | 520,848 |
| ||||
Marketable securities | 11,338 | 25,757 |
|
| 8,288 |
|
|
| 14,293 |
| ||||||
Receivables due from clients, net of allowance for doubtful accounts of $11,292 and $9,958, respectively | 315,975 | 188,543 | ||||||||||||||
Receivables due from clients, net of allowance for doubtful accounts of $21,582 and $17,845 at April 30, 2019 and 2018, respectively |
|
| 404,857 |
|
|
| 384,996 |
| ||||||||
Income taxes and other receivables | 20,579 | 10,966 |
|
| 26,767 |
|
|
| 29,089 |
| ||||||
Unearned compensation |
|
| 42,003 |
|
|
| 37,333 |
| ||||||||
Prepaid expenses and other assets | 43,130 | 31,054 |
|
| 28,535 |
|
|
| 27,700 |
| ||||||
Total current assets |
|
| 1,136,810 |
|
|
| 1,014,259 |
| ||||||||
|
|
|
|
|
|
|
|
|
| |||||||
Total current assets | 664,274 | 637,158 | ||||||||||||||
Marketable securities, non-current | 130,092 | 118,819 |
|
| 132,463 |
|
|
| 122,792 |
| ||||||
Property and equipment, net | 95,436 | 62,088 |
|
| 131,505 |
|
|
| 119,901 |
| ||||||
Cash surrender value of company owned life insurance policies, net of loans | 107,296 | 102,691 |
|
| 126,000 |
|
|
| 120,087 |
| ||||||
Deferred income taxes, net | 27,163 | 59,841 | ||||||||||||||
Deferred income taxes |
|
| 43,220 |
|
|
| 25,520 |
| ||||||||
Goodwill | 590,072 | 254,440 |
|
| 578,298 |
|
|
| 584,222 |
| ||||||
Intangible assets, net | 233,027 | 47,901 |
|
| 82,948 |
|
|
| 203,216 |
| ||||||
Unearned compensation, non-current |
|
| 80,924 |
|
|
| 78,295 |
| ||||||||
Investments and other assets | 51,240 | 34,863 |
|
| 22,684 |
|
|
| 19,622 |
| ||||||
|
| |||||||||||||||
Total assets | $ | 1,898,600 | $ | 1,317,801 |
| $ | 2,334,852 |
|
| $ | 2,287,914 |
| ||||
|
| |||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| ||||||||
Accounts payable | $ | 26,634 | $ | 19,238 |
| $ | 39,156 |
|
| $ | 35,196 |
| ||||
Income taxes payable | 8,396 | 3,813 |
|
| 21,145 |
|
|
| 23,034 |
| ||||||
Compensation and benefits payable | 266,211 | 219,364 |
|
| 328,610 |
|
|
| 304,980 |
| ||||||
Term loan | 30,000 | — | ||||||||||||||
Current portion of long-term debt |
|
| — |
|
|
| 24,911 |
| ||||||||
Other accrued liabilities | 145,023 | 63,595 |
|
| 162,047 |
|
|
| 170,339 |
| ||||||
Total current liabilities |
|
| 550,958 |
|
|
| 558,460 |
| ||||||||
|
|
|
|
|
|
|
|
|
| |||||||
Total current liabilities | 476,264 | 306,010 | ||||||||||||||
Deferred compensation and other retirement plans | 216,113 | 173,432 |
|
| 257,635 |
|
|
| 227,729 |
| ||||||
Term loan, non-current | 110,000 | — | ||||||||||||||
Long-term debt |
|
| 222,878 |
|
|
| 211,311 |
| ||||||||
Deferred tax liabilities | 5,088 | — |
|
| 1,103 |
|
|
| 9,105 |
| ||||||
Other liabilities | 43,834 | 23,110 |
|
| 58,891 |
|
|
| 61,694 |
| ||||||
|
| |||||||||||||||
Total liabilities | 851,299 | 502,552 |
|
| 1,091,465 |
|
|
| 1,068,299 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||
Commitments and contingencies |
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
| |||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock: $0.01 par value, 150,000 shares authorized, 69,723 and 62,863 shares issued and 57,272 and 50,573 shares outstanding, respectively | 702,098 | 463,839 | ||||||||||||||
Stockholders' equity |
|
|
|
|
|
|
|
| ||||||||
Common stock: $0.01 par value, 150,000 shares authorized, 72,442 and 71,631 shares issued and 56,431 and 56,517 shares outstanding at April 30, 2019 and 2018, respectively |
|
| 656,463 |
|
|
| 683,942 |
| ||||||||
Retained earnings | 401,113 | 392,033 |
|
| 660,845 |
|
|
| 572,800 |
| ||||||
Accumulated other comprehensive loss, net | (57,911 | ) | (40,623 | ) |
|
| (76,652 | ) |
|
| (40,135 | ) | ||||
|
| |||||||||||||||
Total Korn/Ferry International stockholders’ equity | 1,045,300 | 815,249 | ||||||||||||||
Total Korn Ferry stockholders' equity |
|
| 1,240,656 |
|
|
| 1,216,607 |
| ||||||||
Noncontrolling interest | 2,001 | — |
|
| 2,731 |
|
|
| 3,008 |
| ||||||
|
| |||||||||||||||
Total stockholders’ equity | 1,047,301 | 815,249 | ||||||||||||||
|
| |||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,898,600 | $ | 1,317,801 | ||||||||||||
|
| |||||||||||||||
Total stockholders' equity |
|
| 1,243,387 |
|
|
| 1,219,615 |
| ||||||||
Total liabilities and stockholders' equity |
| $ | 2,334,852 |
|
| $ | 2,287,914 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
KORN/KORN FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended April 30, |
| Year Ended April 30, |
| |||||||||||||||||||||
2016 | 2015 | 2014 |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||||||||||
(in thousands, except per share data) |
| (in thousands, except per share data) |
| |||||||||||||||||||||
Fee revenue | $ | 1,292,112 | $ | 1,028,152 | $ | 960,301 |
| $ | 1,926,033 |
|
| $ | 1,767,217 |
|
| $ | 1,565,521 |
| ||||||
Reimbursed out-of-pocket engagement expenses | 54,602 | 37,914 | 35,258 |
|
| 47,829 |
|
|
| 52,302 |
|
|
| 56,148 |
| |||||||||
|
|
| ||||||||||||||||||||||
Total revenue | 1,346,714 | 1,066,066 | 995,559 |
|
| 1,973,862 |
|
|
| 1,819,519 |
|
|
| 1,621,669 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Compensation and benefits | 897,345 | 691,450 | 646,889 |
|
| 1,311,240 |
|
|
| 1,199,057 |
|
|
| 1,065,659 |
| |||||||||
General and administrative expenses | 213,018 | 145,917 | 152,040 |
|
| 351,991 |
|
|
| 237,390 |
|
|
| 226,232 |
| |||||||||
Reimbursed expenses | 54,602 | 37,914 | 35,258 |
|
| 47,829 |
|
|
| 52,302 |
|
|
| 56,148 |
| |||||||||
Cost of services | 59,824 | 39,692 | 39,910 |
|
| 75,487 |
|
|
| 73,658 |
|
|
| 71,482 |
| |||||||||
Depreciation and amortization | 36,220 | 27,597 | 26,172 |
|
| 46,489 |
|
|
| 48,588 |
|
|
| 47,260 |
| |||||||||
Restructuring charges, net | 33,013 | 9,468 | 3,682 |
|
| — |
|
|
| 78 |
|
|
| 34,600 |
| |||||||||
|
|
| ||||||||||||||||||||||
Total operating expenses | 1,294,022 | 952,038 | 903,951 |
|
| 1,833,036 |
|
|
| 1,611,073 |
|
|
| 1,501,381 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Operating income | 52,692 | 114,028 | 91,608 |
|
| 140,826 |
|
|
| 208,446 |
|
|
| 120,288 |
| |||||||||
Other (loss) income, net | (4,167 | ) | 7,458 | 9,769 | ||||||||||||||||||||
Interest income (expense), net | 237 | (1,784 | ) | (2,363 | ) | |||||||||||||||||||
|
|
| ||||||||||||||||||||||
Other income, net |
|
| 10,094 |
|
|
| 11,119 |
|
|
| 10,328 |
| ||||||||||||
Interest expense, net |
|
| (16,891 | ) |
|
| (13,832 | ) |
|
| (14,607 | ) | ||||||||||||
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries | 48,762 | 119,702 | 99,014 |
|
| 134,029 |
|
|
| 205,733 |
|
|
| 116,009 |
| |||||||||
Equity in earnings of unconsolidated subsidiaries, net | 1,631 | 2,181 | 2,169 |
|
| 311 |
|
|
| 297 |
|
|
| 333 |
| |||||||||
Income tax provision | 18,960 | 33,526 | 28,492 |
|
| 29,544 |
|
|
| 70,133 |
|
|
| 29,104 |
| |||||||||
|
|
| ||||||||||||||||||||||
Net income | 31,433 | 88,357 | 72,691 |
|
| 104,796 |
|
|
| 135,897 |
|
|
| 87,238 |
| |||||||||
Net income attributable to noncontrolling interest | (520 | ) | — | — |
|
| (2,145 | ) |
|
| (2,118 | ) |
|
| (3,057 | ) | ||||||||
Net income attributable to Korn Ferry |
| $ | 102,651 |
|
| $ | 133,779 |
|
| $ | 84,181 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net income attributable to Korn/Ferry International | $ | 30,913 | $ | 88,357 | $ | 72,691 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Earnings per common share attributable to Korn/Ferry International: | ||||||||||||||||||||||||
Earnings per common share attributable to Korn Ferry: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Basic | $ | 0.58 | $ | 1.78 | $ | 1.51 |
| $ | 1.84 |
|
| $ | 2.39 |
|
| $ | 1.48 |
| ||||||
|
|
| ||||||||||||||||||||||
Diluted | $ | 0.58 | $ | 1.76 | $ | 1.48 |
| $ | 1.81 |
|
| $ | 2.35 |
|
| $ | 1.47 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Basic | 52,372 | 49,052 | 48,162 |
|
| 55,311 |
|
|
| 55,426 |
|
|
| 56,205 |
| |||||||||
|
|
| ||||||||||||||||||||||
Diluted | 52,929 | 49,766 | 49,145 |
|
| 56,096 |
|
|
| 56,254 |
|
|
| 56,900 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Cash dividends declared per share | $ | 0.40 | $ | 0.10 | $ | — | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Cash dividends declared per share: |
| $ | 0.40 |
|
| $ | 0.40 |
|
| $ | 0.40 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
KORN/KORN FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended April 30, |
| ||||||||||||||||||||||
Year Ended April 30, |
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||
2016 | 2015 | 2014 |
| (in thousands) |
| |||||||||||||||||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net income | $ | 31,433 | $ | 88,357 | $ | 72,691 |
| $ | 104,796 |
|
| $ | 135,897 |
|
| $ | 87,238 |
| ||||||
Other comprehensive income: | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Foreign currency translation adjustments | (15,428 | ) | (36,523 | ) | (1,955 | ) |
|
| (28,038 | ) |
|
| 22,900 |
|
|
| (19,266 | ) | ||||||
Deferred compensation and pension plan adjustments, net of tax | (1,864 | ) | (1,702 | ) | 2,230 |
|
| (5,369 | ) |
|
| 6,054 |
|
|
| 6,445 |
| |||||||
Unrealized losses on marketable securities, net of tax | (4 | ) | (10 | ) | (32 | ) | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net unrealized (loss) gain on interest rate swap, net of tax |
|
| (1,080 | ) |
|
| 1,915 |
|
|
| (578 | ) | ||||||||||||
Comprehensive income | 14,137 | 50,122 | 72,934 |
|
| 70,309 |
|
|
| 166,766 |
|
|
| 73,839 |
| |||||||||
Less: comprehensive income attributable to noncontrolling interest | (512 | ) | — | — |
|
| (1,978 | ) |
|
| (2,058 | ) |
|
| (2,811 | ) | ||||||||
|
|
| ||||||||||||||||||||||
Comprehensive income attributable to Korn/Ferry International | $ | 13,625 | $ | 50,122 | $ | 72,934 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Comprehensive income attributable to Korn Ferry |
| $ | 68,331 |
|
| $ | 164,708 |
|
| $ | 71,028 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
KORN/KORN FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
| Accumulated Other |
|
| Total |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Retained Earnings | Accumulated Other Comprehensive (Loss) Income, Net | Total Korn/Ferry International Stockholders’ Equity | Noncontrolling Interest | Total |
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive |
|
| Korn Ferry |
|
|
|
|
|
| Total |
| |||||||||||||||||||||||||||
Common Stock | Common Stock |
|
| Retained |
|
| (Loss) Income, |
|
| Stockholders' |
|
| Noncontrolling |
|
| Stockholder's |
| ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares |
|
| Amount |
|
| Earnings |
|
| Net |
|
| Equity |
|
| Interest |
|
| Equity |
| ||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at May 1, 2013 | 48,734 | $ | 431,508 | $ | 236,090 | $ | (2,631 | ) | $ | 664,967 | $ | — | $ | 664,967 | |||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | 72,691 | 243 | 72,934 | — | 72,934 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at May 1, 2016 |
| 57,272 |
|
| $ | 702,098 |
|
| $ | 401,113 |
|
| $ | (57,911 | ) |
| $ | 1,045,300 |
|
| $ | 2,001 |
|
| $ | 1,047,301 |
| ||||||||||||||||||||||||||||
Net income |
| — |
|
|
| — |
|
|
| 84,181 |
|
|
| — |
|
|
| 84,181 |
|
|
| 3,057 |
|
|
| 87,238 |
| ||||||||||||||||||||||||||||
Other comprehensive loss |
| — |
|
|
| — |
|
|
| — |
|
|
| (13,153 | ) |
|
| (13,153 | ) |
|
| (246 | ) |
|
| (13,399 | ) | ||||||||||||||||||||||||||||
Dividends paid to shareholders |
| — |
|
|
| — |
|
|
| (23,318 | ) |
|
| — |
|
|
| (23,318 | ) |
|
| — |
|
|
| (23,318 | ) | ||||||||||||||||||||||||||||
Dividends paid to noncontrolling interest |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,203 | ) |
|
| (1,203 | ) | ||||||||||||||||||||||||||||
Purchase of stock | (113 | ) | (2,249 | ) | — | — | (2,249 | ) | — | (2,249 | ) |
| (1,346 | ) |
|
| (33,579 | ) |
|
| — |
|
|
| — |
|
|
| (33,579 | ) |
|
| — |
|
|
| (33,579 | ) | |||||||||||||||||
Issuance of stock | 1,190 | 8,805 | — | — | 8,805 | — | 8,805 |
| 1,012 |
|
|
| 5,886 |
|
|
| — |
|
|
| — |
|
|
| 5,886 |
|
|
| — |
|
|
| 5,886 |
| |||||||||||||||||||||
Stock-based compensation | — | 12,160 | — | — | 12,160 | — | 12,160 |
| — |
|
|
| 18,045 |
|
|
| — |
|
|
| — |
|
|
| 18,045 |
|
|
| — |
|
|
| 18,045 |
| |||||||||||||||||||||
Tax benefit from exercise of stock options and vesting of restricted stock | — | (593 | ) | — | — | (593 | ) | — | (593 | ) |
| — |
|
|
| 77 |
|
|
| — |
|
|
| — |
|
|
| 77 |
|
|
| — |
|
|
| 77 |
| ||||||||||||||||||
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at April 30, 2014 | 49,811 | 449,631 | 308,781 | (2,388 | ) | 756,024 | — | 756,024 | |||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | 88,357 | (38,235 | ) | 50,122 | — | 50,122 | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | (5,105 | ) | — | (5,105 | ) | — | (5,105 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Balance at April 30, 2017 |
| 56,938 |
|
|
| 692,527 |
|
|
| 461,976 |
|
|
| (71,064 | ) |
|
| 1,083,439 |
|
|
| 3,609 |
|
|
| 1,087,048 |
| ||||||||||||||||||||||||||||
Net income |
| — |
|
|
| — |
|
|
| 133,779 |
|
|
| — |
|
|
| 133,779 |
|
|
| 2,118 |
|
|
| 135,897 |
| ||||||||||||||||||||||||||||
Other comprehensive income (loss) |
| — |
|
|
| — |
|
|
| — |
|
|
| 30,929 |
|
|
| 30,929 |
|
|
| (60 | ) |
|
| 30,869 |
| ||||||||||||||||||||||||||||
Dividends paid to shareholders |
| — |
|
|
| — |
|
|
| (22,955 | ) |
|
| — |
|
|
| (22,955 | ) |
|
| — |
|
|
| (22,955 | ) | ||||||||||||||||||||||||||||
Dividends paid to noncontrolling interest |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,659 | ) |
|
| (2,659 | ) | ||||||||||||||||||||||||||||
Purchase of stock | (122 | ) | (4,038 | ) | — | — | (4,038 | ) | — | (4,038 | ) |
| (1,092 | ) |
|
| (36,865 | ) |
|
| — |
|
|
| — |
|
|
| (36,865 | ) |
|
| — |
|
|
| (36,865 | ) | |||||||||||||||||
Issuance of stock | 884 | 2,993 | — | — | 2,993 | — | 2,993 |
| 671 |
|
|
| 7,998 |
|
|
| — |
|
|
| — |
|
|
| 7,998 |
|
|
| — |
|
|
| 7,998 |
| |||||||||||||||||||||
Stock-based compensation | — | 13,737 | — | — | 13,737 | — | 13,737 |
| — |
|
|
| 20,282 |
|
|
| — |
|
|
| — |
|
|
| 20,282 |
|
|
| — |
|
|
| 20,282 |
| |||||||||||||||||||||
Tax benefit from exercise of stock options and vesting of restricted stock | — | 1,516 | — | — | 1,516 | — | 1,516 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at April 30, 2015 | 50,573 | 463,839 | 392,033 | (40,623 | ) | 815,249 | — | 815,249 | |||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of noncontrolling interest in Mexico | — | — | — | — | — | 1,489 | 1,489 | ||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | 30,913 | (17,288 | ) | 13,625 | 512 | 14,137 | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | (21,833 | ) | — | (21,833 | ) | — | (21,833 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Balance at April 30, 2018 |
| 56,517 |
|
|
| 683,942 |
|
|
| 572,800 |
|
|
| (40,135 | ) |
|
| 1,216,607 |
|
|
| 3,008 |
|
|
| 1,219,615 |
| ||||||||||||||||||||||||||||
Net income |
| — |
|
|
| — |
|
|
| 102,651 |
|
|
| — |
|
|
| 102,651 |
|
|
| 2,145 |
|
|
| 104,796 |
| ||||||||||||||||||||||||||||
Other comprehensive loss |
| — |
|
|
| — |
|
|
| — |
|
|
| (34,320 | ) |
|
| (34,320 | ) |
|
| (167 | ) |
|
| (34,487 | ) | ||||||||||||||||||||||||||||
Effect of adoption of accounting standards |
| — |
|
|
| — |
|
|
| 8,853 |
|
|
| (2,197 | ) |
|
| 6,656 |
|
|
| — |
|
|
| 6,656 |
| ||||||||||||||||||||||||||||
Dividends paid to shareholders |
| — |
|
|
| — |
|
|
| (23,459 | ) |
|
| — |
|
|
| (23,459 | ) |
|
| — |
|
|
| (23,459 | ) | ||||||||||||||||||||||||||||
Dividends paid to noncontrolling interest |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,255 | ) |
|
| (2,255 | ) | ||||||||||||||||||||||||||||
Purchase of stock | (215 | ) | (7,410 | ) | — | — | (7,410 | ) | — | (7,410 | ) |
| (1,166 | ) |
|
| (58,070 | ) |
|
| — |
|
|
| — |
|
|
| (58,070 | ) |
|
| — |
|
|
| (58,070 | ) | |||||||||||||||||
Issuance of stock | 6,914 | 222,456 | — | — | 222,456 | — | 222,456 |
| 1,080 |
|
|
| 8,528 |
|
|
| — |
|
|
| — |
|
|
| 8,528 |
|
|
| — |
|
|
| 8,528 |
| |||||||||||||||||||||
Stock-based compensation | — | 18,305 | — | — | 18,305 | — | 18,305 |
| — |
|
|
| 22,063 |
|
|
| — |
|
|
| — |
|
|
| 22,063 |
|
|
| — |
|
|
| 22,063 |
| |||||||||||||||||||||
Tax benefit from exercise of stock options and vesting of restricted stock | — | 4,908 | — | — | 4,908 | — | 4,908 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at April 30, 2016 | 57,272 | $ | 702,098 | $ | 401,113 | $ | (57,911 | ) | $ | 1,045,300 | $ | 2,001 | $ | 1,047,301 | |||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at April 30, 2019 |
| 56,431 |
|
| $ | 656,463 |
|
| $ | 660,845 |
|
| $ | (76,652 | ) |
| $ | 1,240,656 |
|
| $ | 2,731 |
|
| $ | 1,243,387 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
KORN/KORN FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended April 30, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
(in thousands) | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 31,433 | $ | 88,357 | $ | 72,691 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 36,220 | 27,597 | 26,172 | |||||||||
Stock-based compensation expense | 18,895 | 13,899 | 12,106 | |||||||||
Provision for doubtful accounts | 8,570 | 7,741 | 7,840 | |||||||||
Gain on cash surrender value of life insurance policies | (3,984 | ) | (10,509 | ) | (8,242 | ) | ||||||
Loss (gain) on marketable securities | 3,333 | (8,829 | ) | (9,498 | ) | |||||||
Deferred income taxes | (18,913 | ) | (316 | ) | 7,598 | |||||||
Change in other assets and liabilities, net of effect of acquisitions: | ||||||||||||
Deferred compensation | (4,605 | ) | 10,130 | 12,186 | ||||||||
Receivables due from clients | (16,622 | ) | (17,213 | ) | (22,318 | ) | ||||||
Income taxes and other receivables | (191 | ) | 115 | 896 | ||||||||
Prepaid expenses and other assets | (6,310 | ) | (1,145 | ) | (1,255 | ) | ||||||
Investment in unconsolidated subsidiaries | (1,631 | ) | (2,181 | ) | (2,169 | ) | ||||||
Income taxes payable | 899 | (9,194 | ) | 7,533 | ||||||||
Accounts payable and accrued liabilities | 18,862 | 17,790 | 29,104 | |||||||||
Other | (1,875 | ) | (8,966 | ) | (3,162 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 64,081 | 107,276 | 129,482 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from investing activities: | ||||||||||||
Cash paid for acquisitions, net of cash acquired and earnout | (256,082 | ) | (15,296 | ) | — | |||||||
Acquisition of Mexican subsidiary, cash acquired | 3,973 | — | — | |||||||||
Purchase of property and equipment | (26,144 | ) | (21,860 | ) | (28,559 | ) | ||||||
Purchase of marketable securities | (30,397 | ) | (22,843 | ) | (28,150 | ) | ||||||
Proceeds from sales/maturities of marketable securities | 30,066 | 21,362 | 44,475 | |||||||||
Change in restricted cash | — | — | 2,861 | |||||||||
Payment of contingent consideration from acquisition | — | — | (15,000 | ) | ||||||||
Premiums on company-owned life insurance policies | (1,623 | ) | (1,676 | ) | (1,727 | ) | ||||||
Proceeds from life insurance policies | 3,256 | 8,087 | 388 | |||||||||
Dividends received from unconsolidated subsidiaries | 2,373 | 1,656 | 2,120 | |||||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (274,578 | ) | (30,570 | ) | (23,592 | ) | ||||||
|
|
|
|
|
| |||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from term loan facility | 150,000 | — | — | |||||||||
Principal payment on term loan facility | (10,000 | ) | — | — | ||||||||
Purchase of common stock | (7,410 | ) | (4,038 | ) | (2,249 | ) | ||||||
Proceeds from issuance of common stock upon exercise of employee stock options and in connection with an employee stock purchase plan | 4,038 | 2,993 | 8,805 | |||||||||
Tax benefit related to stock-based compensation | 4,908 | 1,516 | (593 | ) | ||||||||
Dividends paid to shareholders | (21,833 | ) | (5,105 | ) | — | |||||||
Payments on life insurance policy loans | (1,251 | ) | (3,301 | ) | (388 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) financing activities | 118,452 | (7,935 | ) | 5,575 | ||||||||
|
|
|
|
|
| |||||||
Effect of exchange rate changes on cash and cash equivalents | (15,541 | ) | (21,650 | ) | (1,814 | ) | ||||||
|
|
|
|
|
| |||||||
Net (decrease) increase in cash and cash equivalents | (107,586 | ) | 47,121 | 109,651 | ||||||||
Cash and cash equivalents at beginning of year | 380,838 | 333,717 | 224,066 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents at end of year | $ | 273,252 | $ | 380,838 | $ | 333,717 | ||||||
|
|
|
|
|
| |||||||
Supplemental cash flow information: | ||||||||||||
Cash used to pay interest | $ | 5,154 | $ | 4,230 | $ | 4,229 | ||||||
|
|
|
|
|
| |||||||
Cash used to pay income taxes, net of refunds | $ | 33,189 | $ | 40,899 | $ | 15,604 | ||||||
|
|
|
|
|
|
|
| Year Ended April 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
| (in thousands) |
| |||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 104,796 |
|
| $ | 135,897 |
|
| $ | 87,238 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 46,489 |
|
|
| 48,588 |
|
|
| 47,260 |
|
Stock-based compensation expense |
|
| 23,385 |
|
|
| 21,469 |
|
|
| 18,958 |
|
Impairment of tradenames |
|
| 106,555 |
|
|
| — |
|
|
| — |
|
Provision for doubtful accounts |
|
| 14,260 |
|
|
| 13,675 |
|
|
| 12,987 |
|
Gain on cash surrender value of life insurance policies |
|
| (6,160 | ) |
|
| (7,776 | ) |
|
| (4,918 | ) |
Gain on marketable securities |
|
| (8,134 | ) |
|
| (10,278 | ) |
|
| (10,842 | ) |
Deferred income taxes |
|
| (27,796 | ) |
|
| (6,564 | ) |
|
| 6,589 |
|
Change in other assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
| 18,478 |
|
|
| 27,660 |
|
|
| 6,868 |
|
Receivables due from clients |
|
| (30,625 | ) |
|
| (53,357 | ) |
|
| (42,326 | ) |
Income taxes and other receivables |
|
| 1,409 |
|
|
| 2,093 |
|
|
| (10,177 | ) |
Prepaid expenses and other assets |
|
| (148 | ) |
|
| (2,118 | ) |
|
| (1,796 | ) |
Unearned compensation |
|
| (7,299 | ) |
|
| (42,742 | ) |
|
| (17,465 | ) |
Investment in unconsolidated subsidiaries |
|
| (311 | ) |
|
| (297 | ) |
|
| (333 | ) |
Income taxes payable |
|
| 213 |
|
|
| 32,439 |
|
|
| 205 |
|
Accounts payable and accrued liabilities |
|
| 28,398 |
|
|
| 66,081 |
|
|
| 5,420 |
|
Other |
|
| (4,705 | ) |
|
| (5,645 | ) |
|
| 8,473 |
|
Net cash provided by operating activities |
|
| 258,805 |
|
|
| 219,125 |
|
|
| 106,141 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (46,682 | ) |
|
| (42,000 | ) |
|
| (50,088 | ) |
Purchase of marketable securities |
|
| (9,476 | ) |
|
| (9,462 | ) |
|
| (10,536 | ) |
Proceeds from sales/maturities of marketable securities |
|
| 13,781 |
|
|
| 2,642 |
|
|
| 42,815 |
|
Cash paid for acquisitions, net of cash acquired |
|
| — |
|
|
| — |
|
|
| (2,880 | ) |
Premium on company-owned life insurance policies |
|
| (34,862 | ) |
|
| (1,614 | ) |
|
| (1,597 | ) |
Proceeds from life insurance policies |
|
| 7,632 |
|
|
| 5,355 |
|
|
| 1,117 |
|
Dividends received from unconsolidated subsidiaries |
|
| 140 |
|
|
| 240 |
|
|
| 564 |
|
Net cash used in investing activities |
|
| (69,467 | ) |
|
| (44,839 | ) |
|
| (20,605 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long term debt |
|
| 226,875 |
|
|
| — |
|
|
| 275,000 |
|
Principal payments on term loan |
|
| (238,906 | ) |
|
| (20,625 | ) |
|
| (155,469 | ) |
Payment of debt issuance costs |
|
| (2,181 | ) |
|
| — |
|
|
| — |
|
Repurchases of common stock |
|
| (37,372 | ) |
|
| (33,071 | ) |
|
| (28,821 | ) |
Payments of tax withholdings on restricted stock |
|
| (20,698 | ) |
|
| (3,794 | ) |
|
| (4,758 | ) |
Payment of contingent consideration from acquisitions |
|
| (455 | ) |
|
| (485 | ) |
|
| (1,070 | ) |
Proceeds from issuance of common stock upon exercise of employee stock options and in connection with an employee stock purchase plan |
|
| 7,272 |
|
|
| 6,885 |
|
|
| 5,121 |
|
Dividends paid to shareholders |
|
| (23,459 | ) |
|
| (22,955 | ) |
|
| (23,318 | ) |
Dividends - noncontrolling interest |
|
| (2,255 | ) |
|
| (2,659 | ) |
|
| (1,203 | ) |
Borrowings under life insurance policies |
|
| 31,870 |
|
|
| — |
|
|
| — |
|
Payments on life insurance policy loans |
|
| (5,316 | ) |
|
| (554 | ) |
|
| (1,117 | ) |
Net cash (used in) provided by financing activities |
|
| (64,625 | ) |
|
| (77,258 | ) |
|
| 64,365 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (19,201 | ) |
|
| 12,938 |
|
|
| (12,271 | ) |
Net increase in cash and cash equivalents |
|
| 105,512 |
|
|
| 109,966 |
|
|
| 137,630 |
|
Cash and cash equivalents at beginning of year |
|
| 520,848 |
|
|
| 410,882 |
|
|
| 273,252 |
|
Cash and cash equivalents at end of the period |
| $ | 626,360 |
|
| $ | 520,848 |
|
| $ | 410,882 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash used to pay interest |
| $ | 14,188 |
|
| $ | 11,946 |
|
| $ | 10,882 |
|
Cash used to pay income taxes, net of refunds |
| $ | 58,408 |
|
| $ | 37,486 |
|
| $ | 32,458 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-9
KORN/KORN FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 20162019
1. Organization and Summary of Significant Accounting Policies
Nature of Business
Korn/On June 12, 2018, the Board of Directors of Korn Ferry, International, a Delaware corporation (the “Company”), and its subsidiaries are engagedapproved a plan (the “Plan”) to go to market under a single, master brand architecture and to simplify the Company’s organizational structure by eliminating and/or consolidating certain legal entities and implementing a rebranding of the Company to offer the Company’s current products and services using the “Korn Ferry” name, branding and trademarks. In connection with the Plan, (i) the Company has sunset all sub-brands, including Futurestep, Hay Group and Lominger, among others, and (ii) effective as of January 1, 2019, the Company has been renamed “Korn Ferry.” The Company is harmonizing under one brand to help accelerate the firm’s positioning as the preeminent organizational consultancy and bring more client awareness to its broad range of talent management solutions. While the rebranding did not impact the Company’s segment financial reporting, the Company renamed its Hay Group segment as Korn Ferry Advisory (“Advisory”) and its Futurestep segment as Korn Ferry RPO and Professional Search (“RPO & Professional Search”). The Company’s Executive Search segment name remains unchanged.
The Company currently operates in three global businesses: Executive Search, Advisory and RPO & Professional Search. The Executive Search segment focuses on recruiting board level, chief executive and other senior executive and general management positions, in addition to research-based interviewing and onboarding solutions, for clients predominantly in the businessconsumer goods, financial services, industrial, life sciences/healthcare and technology industries. Advisory assists clients to synchronize strategy and talent by addressing four fundamental needs: Organizational Strategy, Assessment and Succession, Leadership Development, and Rewards and Benefits, all underpinned by a comprehensive array of providingworld-leading intellectual property, products and tools. RPO & Professional Search is a global industry leader in high-impact talent management solutions, including executiveacquisition solutions. Its portfolio of services includes global and regional Recruitment Process Outsourcing (“RPO”), project recruitment, individual professional search on a retained basis, recruitment for non-executive professionals, recruitment process outsourcing and leadership & talent consulting services. The Company’s worldwide network of 150 offices in 52 countries enables it to meet the needs of its clients in all industries.consulting.
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of 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 the industry. The consolidated financial statements include all adjustments, consisting of normal recurring accruals and any other adjustments that management considers necessary for a fair presentation of the results for these periods.
Investments in affiliated companies, which are 50% or less owned and where the Company exercises significant influence over operations, are accounted for using the equity method. Dividends received from our unconsolidated subsidiaries were approximately $2.4$0.1 million, $1.7$0.2 million and $2.1$0.6 million during fiscal 2016, 20152019, 2018 and 2014,2017, respectively.
The Company has control of a Mexico subsidiary and consolidates the operations of this subsidiary. Noncontrolling interest, which represents the Mexico Partners 51% interest in the Mexico subsidiary, is reflected on the Company’s consolidated financial statements.
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 andor determinable. The most significant areas that require managementmanagement’s judgment are revenue recognition, restructuring, deferred compensation, annual performance relatedperformance-related bonuses, evaluation of the carrying value of receivables, goodwill and other intangible assets, fair value of contingent consideration, share-based payments and the recoverability of deferred income taxes.
F-10
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2019 (continued)
Substantially all fee revenue is derived from fees for professional services related to executive searchand professional recruitment performed on a retained basis, recruitment for non-executive professionals, recruitment process outsourcing, leadership & talent consultingand organizational advisory services and the sale of productizedproducts, 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 Standard Codification 606 (“ASC 606”): 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.
Fee revenue from executive and professional search activities and recruitment for non-executive professionals is generally one-third of the estimated first yearfirst-year compensation of the placed executive or non-executive professional, as applicable,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, related expenses.there is one performance obligation, which is the promise to undertake a search. The Company generally recognizes such revenue onover the course of a straight-line basis over a three-month period, commencing upon client acceptance,search and when it is legally entitled to payment as this isoutlined in the period over which the
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
April 30, 2016
recruitment services are performed. Fees earned in excessbilling terms of the initial contract amount are recognized upon completion of the engagement, which reflect the difference between the final actual compensation of the placed executive and the estimate used for purposes of the previous billings. Since the initial contract fees are typically not contingent upon placement of a candidate, our assumptions primarily relate to establishing the period over which such service is performed. These assumptions determine the timing of revenue recognition and profitability for the reported period.contract. Any revenues associated with services that are provided on a contingent basis are recognized once the contingency is resolved. In additionresolved, as this is when control is transferred to recruitmentthe customer. These assumptions determine the timing of revenue recognition for non-executive professionals, Futurestep provides recruitment process outsourcing (“RPO”) services andthe reported period.
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.
Consulting fee revenue, primarily generated from Advisory, is recognized as services are rendered, and/or as milestones are achieved. Fee revenue from Hay Group (formerly known as Leadership & Talent Consulting (“Legacy LTC”) and which was combined with HG (Luxembourg) S.à.r.l (“Legacy Hay Group”) in December 2015) is recognized as services are rendered for consulting engagements and other time based services, measured by total hours incurred to the total estimated hours at completion. It is possible that updated estimates for the consulting engagementengagements 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. Hay Group
Product revenue is also derivedgenerated from a range of online tools designed to support human resource processes for pay, talent and engagement, and assessments, as well as licenses to proprietary intellectual property (“IP”) and tangible/digital products. IP subscriptions grant access to proprietary compensation and job evaluation databases. IP subscriptions are considered symbolic IP due to the saledynamic nature of productized services, which includesthe content and, as a result, revenue from licenses and from the sale of products. Revenue from licenses is recognized using a straight-line method over the term of the contract (generally 12 months). Undercontract. Functional IP licenses grant customers the fixed term licenses, the Company is obligated to provide the licensee with access to any updates to the underlying intellectual property that are made by the Company during the term of the license. Once the term of the agreement expires, the client’s right to access or use IP content via delivery of a flat file. Because the intellectual property expiresIP content license has significant stand-alone functionality, revenue is recognized upon delivery and when an enforceable right to payment exists. Online assessments are delivered in the form of online questionnaires.A bundle of assessments represents one performance obligation, and revenue is recognized as assessment services are delivered and the Company has no further obligationsa legally enforceable right to the client under the license agreement. Revenue from perpetual licenses is recognized when the license is sold since the Company’s only obligation is to provide the client access to the intellectual property but is not obligated to provide maintenance, support, updates or upgrades. Productspayment. Tangible/digital products sold by the Company mainly consist of books and automated servicesdigital files covering a variety of topics, including performance management, team effectiveness, and coaching and development. The Company recognizes revenue for its products when the product has been sold or shipped, inas is the case offor books. As of April 30, 2016 and 2015, the Company included deferred revenue of $95.9 million and $40.5 million, respectively, in other accrued liabilities.
Reimbursements
The Company incurs certain out-of-pocket expenses that are reimbursed by its clients, which are accounted for as revenue in itsthe 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 amount of the allowance is based on historical loss experience and assessment of the collectability of specific accounts, as well as expectations of future collections based upon trends and the type of work for which services are rendered. After the Company exhausts all collection efforts, the amount of the allowance is reduced for balances identified as uncollectible.
F-11
KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2019 (continued)
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 April 30, 20162019 and 2015,2018, the Company’s investments in cash equivalents consistconsisted of money market funds for which market prices are readily available. As of April 30, 2016 and 2015, the Company had cash equivalents of $117.5 million and $260.6 million, respectively.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
April 30, 2016
Marketable Securities
The Company currently has investments 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 based upon 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 and the Company invests in marketable securities and mutual funds which are classified as either trading securities or available-for-sale, based upon management’s intent and ability to hold, sell or trade such securities. The classification of the investments inmirror these marketable securities and mutual funds is assessed upon purchase and reassessed at each reporting period.elections. These investments are recorded at fair value, with the change in value in the period being reflected in the consolidated statements of income and are classified as marketable securities in the accompanying consolidated balance sheets. The investments that the Company may sell within the next twelve months are carried as current assets. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis,basis; dividends are recorded as earned on the ex-dividend date. Interest, and dividend income are recorded in the accompanying consolidated statements of income in interest income (expense), net.
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 (see Note 5 —Marketable Securities) and are classified as trading securities. Such investments are based upon 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 and the Company invests in marketable securities to mirror these elections. The changes in fair value in tradingmarketable securities are recorded in the accompanying consolidated statements of income in other (loss) 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. 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. When, in the opinion of management, a decline in the fair value of an investment below its amortized cost is considered to be “other-than-temporary,” a credit loss is recorded in the statement of operations in other (loss) income, net; any amount in excess of the credit loss is recorded as unrealized gains or 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. The determination of the other-than-temporary decline includes, in addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write-down may be necessary. During fiscal 2016, 2015 and 2014, no other-than-temporary impairment was recognized. As of April 30, 2016, the Company does not hold marketable securities classified as available-for-sale. At April 30, 2015, the Company’s investment portfolio includes corporate bonds.
Foreign Currency Forward Contracts Not Designated as Hedges
Beginning in the third quarter of fiscal 2016, the Company established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures due to an increase in these exposures as a result of the Legacy Hay Group acquisition. 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. Accordingly, the fair value of these contracts are 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 statement of income.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
April 30, 2016
As of April 30, 2016, the total notional amounts of the forward contracts purchased and sold were $14.5 million and $44.3 million, respectively. The Company’s recognizes forward contracts as a net asset or net liability on the consolidated balance sheets as such contracts are covered by master netting agreements. As of April 30, 2016 the net fair value of outstanding foreign currency forward contracts were $0.7 million (gross liabilities of $1.0 million and gross assets of $0.3 million) included in other accrued liabilities in the accompanying consolidated balance sheets. The Company incurred $1.8 million of net losses related to forward contracts for fiscal 2016, which is recorded in general and administrative expenses in the accompanying consolidated statement of income. The cash flows related to foreign currency forward contracts are included in cash provided by operating activities.
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 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: