UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
UNITED STATESForm10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended July 31, 2017 | ||
or | ||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2016
OR
For the transition period from _________ to ___________
Commission File Number001-14505
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 principal executive offices) (Zip code)Code)
(310)552-1834
(Registrant’s telephone number, including area code)
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 RegulationS-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 whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):
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 Rule12b-2 of the Exchange Act). Yes ¨☐ No x☑
The number of shares outstanding of our common stock as of September 6, 20165, 2017 was 57,901,73856,492,489 shares.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
Item # | Description | Page | ||||
Part I. Financial Information | ||||||
Item 1. | ||||||
Consolidated Balance Sheets as of July 31, 2017 (unaudited) and April 30, 2017 | 1 | |||||
Consolidated | ||||||
2 | ||||||
3 | ||||||
4 | ||||||
Notes to Consolidated Unaudited | 5 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | Quantitative and Qualitative Disclosures | |||||
Item 4. | ||||||
Part II. Other Information | ||||||
Item 1. | ||||||
Item 1A. | ||||||
Item 2. | Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities | |||||
Item 6. | ||||||
PART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 2016 | April 30, 2016 | July 31, 2017 | April 30, 2017 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
(in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 244,073 | $ | 273,252 | $ | 282,019 | $ | 410,882 | ||||||||
Marketable securities | 3,475 | 11,338 | 11,651 | 4,363 | ||||||||||||
Receivables due from clients, net of allowance for doubtful accounts of $12,674 and $11,292, respectively | 341,984 | 315,975 | ||||||||||||||
Receivables due from clients, net of allowance for doubtful accounts of $16,088 and $15,455 at July 31, 2017 and April 30, 2017, respectively | 365,657 | 345,314 | ||||||||||||||
Income taxes and other receivables | 28,672 | 20,579 | 44,035 | 31,573 | ||||||||||||
Prepaid expenses and other assets | 53,196 | 43,130 | 62,525 | 51,542 | ||||||||||||
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Total current assets | 671,400 | 664,274 | 765,887 | 843,674 | ||||||||||||
Marketable securities, non-current | 133,502 | 130,092 | 114,608 | 115,574 | ||||||||||||
Property and equipment, net | 99,980 | 95,436 | 112,787 | 109,567 | ||||||||||||
Cash surrender value of company owned life insurance policies, net of loans | 110,195 | 107,296 | 113,866 | 113,067 | ||||||||||||
Deferred income taxes, net | 26,232 | 27,163 | 19,387 | 20,175 | ||||||||||||
Goodwill | 587,615 | 590,072 | 583,265 | 576,865 | ||||||||||||
Intangible assets, net | 228,992 | 233,027 | 213,910 | 217,319 | ||||||||||||
Investments and other assets | 67,447 | 51,240 | 90,617 | 66,657 | ||||||||||||
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Total assets | $ | 1,925,363 | $ | 1,898,600 | $ | 2,014,327 | $ | 2,062,898 | ||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Accounts payable | $ | 33,719 | $ | 26,634 | $ | 32,658 | $ | 37,481 | ||||||||
Income taxes payable | 4,351 | 8,396 | 7,204 | 4,526 | ||||||||||||
Compensation and benefits payable | 147,617 | 266,211 | 145,752 | 248,354 | ||||||||||||
Term loan | 19,754 | 30,000 | 19,754 | 19,754 | ||||||||||||
Other accrued liabilities | 149,865 | 145,023 | 153,386 | 148,464 | ||||||||||||
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Total current liabilities | 355,306 | 476,264 | 358,754 | 458,579 | ||||||||||||
Deferred compensation and other retirement plans | 217,957 | 216,113 | 220,894 | 219,905 | ||||||||||||
Term loan, non-current | 251,038 | 110,000 | 231,284 | 236,222 | ||||||||||||
Deferred tax liabilities | 13,664 | 5,088 | 18,758 | 7,014 | ||||||||||||
Other liabilities | 51,056 | 43,834 | 55,886 | 54,130 | ||||||||||||
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Total liabilities | 889,021 | 851,299 | 885,576 | 975,850 | ||||||||||||
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Stockholders’ equity: | ||||||||||||||||
Common stock: $0.01 par value, 150,000 shares authorized, 70,576 and 69,723 shares issued and 57,898 and 57,272 shares outstanding, respectively | 705,792 | 702,098 | ||||||||||||||
Common stock: $0.01 par value, 150,000 shares authorized, 71,480 and 70,811 shares issued at July 31, 2017 and April 30, 2017, respectively, and 57,246 and 56,938 shares outstanding at July 31, 2017 and April 30, 2017, respectively | 694,146 | 692,527 | ||||||||||||||
Retained earnings | 398,412 | 401,113 | 485,194 | 461,976 | ||||||||||||
Accumulated other comprehensive loss, net | (70,577 | ) | (57,911 | ) | (54,691 | ) | (71,064 | ) | ||||||||
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Total Korn/Ferry International stockholders’ equity | 1,033,627 | 1,045,300 | 1,124,649 | 1,083,439 | ||||||||||||
Noncontrolling interest | 2,715 | 2,001 | 4,102 | 3,609 | ||||||||||||
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Total stockholders’ equity | 1,036,342 | 1,047,301 | 1,128,751 | 1,087,048 | ||||||||||||
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Total liabilities and stockholders’ equity | $ | 1,925,363 | $ | 1,898,600 | $ | 2,014,327 | $ | 2,062,898 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
(in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||
Fee revenue | $ | 375,621 | $ | 267,394 | $ | 401,254 | $ | 375,621 | ||||||||
Reimbursed out-of-pocket engagement expenses | 17,312 | 11,941 | 13,663 | 17,312 | ||||||||||||
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Total revenue | 392,933 | 279,335 | 414,917 | 392,933 | ||||||||||||
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Compensation and benefits | 262,967 | 179,456 | 273,954 | 262,967 | ||||||||||||
General and administrative expenses | 55,342 | 37,491 | 58,261 | 55,342 | ||||||||||||
Reimbursed expenses | 17,312 | 11,941 | 13,663 | 17,312 | ||||||||||||
Cost of services | 16,832 | 10,120 | 15,813 | 16,832 | ||||||||||||
Depreciation and amortization | 11,444 | 7,423 | 12,209 | 11,444 | ||||||||||||
Restructuring charges, net | 24,520 | — | 280 | 24,520 | ||||||||||||
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Total operating expenses | 388,417 | 246,431 | 374,180 | 388,417 | ||||||||||||
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Operating income | 4,516 | 32,904 | 40,737 | 4,516 | ||||||||||||
Other income (loss), net | 4,259 | (74 | ) | |||||||||||||
Other income, net | 3,532 | 4,259 | ||||||||||||||
Interest expense, net | (3,061 | ) | (299 | ) | (2,660 | ) | (3,061 | ) | ||||||||
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Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries | 5,714 | 32,531 | 41,609 | 5,714 | ||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | 79 | 725 | 30 | 79 | ||||||||||||
Income tax provision | 1,725 | 10,174 | 12,210 | 1,725 | ||||||||||||
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Net income | 4,068 | 23,082 | 29,429 | 4,068 | ||||||||||||
Net income attributable to noncontrolling interest | (860 | ) | — | (388 | ) | (860 | ) | |||||||||
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Net income attributable to Korn/Ferry International | $ | 3,208 | $ | 23,082 | $ | 29,041 | $ | 3,208 | ||||||||
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Earnings per common share attributable to Korn/Ferry International: | ||||||||||||||||
Basic | $ | 0.06 | $ | 0.46 | $ | 0.52 | $ | 0.06 | ||||||||
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Diluted | $ | 0.06 | $ | 0.46 | $ | 0.51 | $ | 0.06 | ||||||||
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Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 56,189 | 49,493 | 55,795 | 56,189 | ||||||||||||
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Diluted | 56,576 | 50,014 | 56,403 | 56,576 | ||||||||||||
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Cash dividends declared per share | $ | 0.10 | $ | 0.10 | ||||||||||||
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Cash dividends declared per share: | $ | 0.10 | $ | 0.10 | ||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)/INCOME
(unaudited)
Three Months Ended July 31, | ||||||||||||||||
Three Months Ended July 31, | 2017 | 2016 | ||||||||||||||
2016 | 2015 | (in thousands, except per share data) | ||||||||||||||
(in thousands) | ||||||||||||||||
Net income | $ | 4,068 | $ | 23,082 | $ | 29,429 | $ | 4,068 | ||||||||
Other comprehensive (loss) income: | ||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustments | (13,274 | ) | (15,632 | ) | 16,189 | (13,274 | ) | |||||||||
Deferred compensation and pension plan adjustments, net of tax | 462 | 447 | 352 | 462 | ||||||||||||
Unrealized losses on marketable securities, net of tax | — | (4 | ) | |||||||||||||
Net unrealized loss on interest rate swap, net of tax | (63 | ) | — | |||||||||||||
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Comprehensive (loss) income | (8,744 | ) | 7,893 | |||||||||||||
Comprehensive income (loss) | 45,907 | (8,744 | ) | |||||||||||||
Less: comprehensive income attributable to noncontrolling interest | (714 | ) | — | (493 | ) | (714 | ) | |||||||||
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Comprehensive (loss) income attributable to Korn/Ferry International | $ | (9,458 | ) | $ | 7,893 | |||||||||||
Comprehensive income (loss) attributable to Korn/Ferry International | $ | 45,414 | $ | (9,458 | ) | |||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 4,068 | $ | 23,082 | $ | 29,429 | $ | 4,068 | ||||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||||||
Depreciation and amortization | 11,444 | 7,423 | 12,209 | 11,444 | ||||||||||||
Stock-based compensation expense | 4,915 | 3,691 | 4,696 | 4,915 | ||||||||||||
Provision for doubtful accounts | 2,577 | 2,068 | 3,070 | 2,577 | ||||||||||||
Gain on cash surrender value of life insurance policies | (2,498 | ) | (2,494 | ) | (2,485 | ) | (2,498 | ) | ||||||||
Gain on marketable securities | (3,915 | ) | (665 | ) | (3,429 | ) | (3,915 | ) | ||||||||
Deferred income taxes | 5,410 | 5,124 | 8,562 | 5,410 | ||||||||||||
Change in other assets and liabilities: | ||||||||||||||||
Deferred compensation | (5,866 | ) | (1,820 | ) | 8,288 | (5,866 | ) | |||||||||
Receivables due from clients | (28,586 | ) | (13,058 | ) | (23,413 | ) | (28,586 | ) | ||||||||
Income tax and other receivables | (8,093 | ) | 1,145 | (10,930 | ) | (8,093 | ) | |||||||||
Prepaid expenses and other assets | (10,066 | ) | (4,869 | ) | (10,983 | ) | (10,066 | ) | ||||||||
Investment in unconsolidated subsidiaries | (79 | ) | (725 | ) | (30 | ) | (79 | ) | ||||||||
Income taxes payable | (4,346 | ) | (1,990 | ) | 6,463 | (4,014 | ) | |||||||||
Accounts payable and accrued liabilities | (93,866 | ) | (96,737 | ) | (109,034 | ) | (93,866 | ) | ||||||||
Other | (7,137 | ) | (10,368 | ) | (21,986 | ) | (7,137 | ) | ||||||||
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Net cash used in operating activities | (136,038 | ) | (90,193 | ) | (109,573 | ) | (135,706 | ) | ||||||||
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Cash flows from investing activities: | ||||||||||||||||
Purchase of property and equipment | (15,079 | ) | (5,485 | ) | (9,529 | ) | (15,079 | ) | ||||||||
Cash paid for acquisition, net of cash acquired | (2,880 | ) | — | — | (2,880 | ) | ||||||||||
Purchase of marketable securities | (5,430 | ) | (9,116 | ) | (4,600 | ) | (5,430 | ) | ||||||||
Proceeds from sales/maturities of marketable securities | 13,764 | 16,364 | 1,734 | 13,764 | ||||||||||||
Premium on company-owned life insurance policies | (401 | ) | (404 | ) | (403 | ) | (401 | ) | ||||||||
Proceeds from life insurance policies | — | 1,659 | 971 | — | ||||||||||||
Dividends received from unconsolidated subsidiaries | 230 | 806 | 60 | 230 | ||||||||||||
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Net cash (used in) provided by investing activities | (9,796 | ) | 3,824 | |||||||||||||
Net cash used in investing activities | (11,767 | ) | (9,796 | ) | ||||||||||||
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Cash flows from financing activities: | ||||||||||||||||
Proceeds from term loan facility | 275,000 | — | — | 275,000 | ||||||||||||
Principal payment on term loan facility | (140,000 | ) | — | (5,156 | ) | (140,000 | ) | |||||||||
Payment of contingent consideration from acquisition | (1,070 | ) | — | (485 | ) | (1,070 | ) | |||||||||
Purchase of common stock | (4,161 | ) | (6,573 | ) | ||||||||||||
Repurchases of common stock | (4,026 | ) | — | |||||||||||||
Payments of tax withholdings on restricted stock | (3,346 | ) | (4,161 | ) | ||||||||||||
Proceeds from issuance of common stock upon exercise of employee stock options and in connection with an employee stock purchase plan | 2,430 | 2,379 | 3,984 | 2,430 | ||||||||||||
Tax benefit related to stock-based compensation | 332 | 4,064 | ||||||||||||||
Dividends paid to shareholders | (5,909 | ) | (5,115 | ) | (5,823 | ) | (5,909 | ) | ||||||||
Payments on life insurance policy loans | — | (1,151 | ) | (414 | ) | — | ||||||||||
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Net cash provided by (used in) financing activities | 126,622 | (6,396 | ) | |||||||||||||
Net cash (used in) provided by financing activities | (15,266 | ) | 126,290 | |||||||||||||
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Effect of exchange rate changes on cash and cash equivalents | (9,967 | ) | (11,559 | ) | 7,743 | (9,967 | ) | |||||||||
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Net decrease in cash and cash equivalents | (29,179 | ) | (104,324 | ) | (128,863 | ) | (29,179 | ) | ||||||||
Cash and cash equivalents at beginning of period | 273,252 | 380,838 | 410,882 | 273,252 | ||||||||||||
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Cash and cash equivalents at end of period | $ | 244,073 | $ | 276,514 | $ | 282,019 | $ | 244,073 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2016
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 |
1. Organization and Summary of Significant Accounting Policies
Nature of Business
Korn/Ferry International, a Delaware corporation (the “Company”), and its subsidiaries are engaged in the business of providing talent management solutions, including executive search on a retained basis, recruitment fornon-executive professionals, recruitment process outsourcing and leadership & talent consulting services. The Company’s worldwide network of 128 offices in 52 countries enables it to meet the needs of its clients in all industries.
Basis of Consolidation and Presentation
The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form10-K for the year ended April 30, 20162017 for 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. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year.
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.
The Company has control of a Mexico subsidiary and consolidates the operations of this subsidiary. Noncontrolling interest, which represents the Company’s 51% noncontrolling 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 and determinable. The most significant areas that require management judgment are revenue recognition, restructuring, deferred compensation, annual performance 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.
Revenue Recognition
Substantially all fee revenue is derived from fees for professional services related to executive search performed on a retained basis, recruitment fornon-executive professionals, recruitment process outsourcing, people and organizational advisory services and the sale of productizedproduct services. Fee revenue from executive search activities and recruitment fornon-executive professionals is generallyone-third of the estimated first year compensation of the placed executive ornon-executive professional, as applicable, plus a percentage of the fee to cover indirect engagement related expenses. The Company generally recognizes such revenue on a straight-line basis over a three-month period, commencing upon client acceptance, as this is the period over which the recruitment services are performed. Fees earned in excess 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. Any revenues associated with services that are provided on a contingent basis are recognized once the contingency is resolved. In addition to recruitment fornon-executive professionals, Futurestep provides recruitment process outsourcing (“RPO”) services and fee revenue 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”) which was combined with HG (Luxembourg) S.à.r.l (“Legacy Hay”) in December 2015) is recognized as services are rendered for consulting engagements and other time basedtime-based services,
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
measured by total hours incurred to the total estimated hours at completion. It is possible that updated estimates for the consulting engagement may vary from initial estimates with such updates being recognized in the period of determination.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
Depending on the timing of billings and services rendered, the Company accrues or defers revenue as appropriate. Hay Group revenue is also derived from the sale of productizedproduct services, which includes 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). Under 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 the intellectual property expires and the Company has no further obligations 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. Products sold by the Company mainly consist of books and automated services 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 in the case of books. As of July 31, 20162017 and April 30, 2016,2017, the Company included deferred revenue of $88.9$93.6 million and $95.9$95.8 million, respectively, in other accrued liabilities.
Reimbursements
The Company incurs certainout-of-pocket expenses that are reimbursed by its clients, which are accounted for as revenue in its 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, 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of July 31, 20162017 and April 30, 2016,2017, the Company’s investments in cash equivalents consist of money market funds for which market prices are readily available.
Marketable Securities
The Company currently has investments in mutual funds that are classified as trading securities based upon management’s intent and ability to hold, sell or trade such securities. The classification of the investments in mutual funds is assessed upon purchase and reassessed at each reporting period. The investments in mutual funds (for which market prices are readily available) are held in trust to satisfy obligations under the Company’s deferred compensation plans (see Note 6 — Financial Instruments).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 apre-determined set of securities and the Company invests in marketable securities to mirror these elections. These investments are recorded at fair value 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 theex-dividend date. Interest, and dividend income and the changes in fair value in trading securities are recorded in the accompanying consolidated statements of income in other income, (loss), net.
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 which increased as a result of the 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 statements of income.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
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:
◾ | Level |
◾ | Level |
◾ | Level |
As of July 31, 20162017 and April 30, 2016,2017, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included cash, cash equivalents, accounts receivable, marketable securities, and foreign currency forward contracts.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
contracts and interest rate swap. The carrying amount of cash, cash equivalents and accounts receivable approximates fair value due to the short maturity of these instruments. The fair values of marketable securities classified as trading are obtained from quoted market prices, and the fair values of foreign currency forward contracts or the interest rate swap are obtained from a third party, which are based on quoted prices or market prices for similar assets and financial instruments.
Derivative Financial Instruments
The Company is exposed to interest rate risk due to the outstanding senior secured credit agreement entered on June 15, 2016. The Company has entered into an interest rate swap agreement to effectively convert its variable debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s long-term debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has determined that the interest rate swap qualifies as a cash flow hedge in accordance with Accounting Standards Codification 815,Derivatives and Hedging. Changes in the fair value of an interest rate swap agreement designated as a cash flow hedge are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
Foreign Currency Forward Contracts Not Designated as Hedges
The Company has established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. 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 is 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 statements of income.
Business Acquisitions
Business acquisitions are accounted for under the acquisition method. The acquisition method requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable assets acquired, the liabilities assumed and any non-controllingnoncontrolling interest in the acquired entity, and recognize and measure goodwill or a gain from the purchase. The acquiree’s results are included in the Company’s consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill, or if the fair value of the assets acquired exceeds the purchase price consideration, a bargain purchase gain is recorded. Adjustments to fair value assessments are generally recorded to goodwill over the measurement period (not longer than twelve months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense as committed, and requires the Company to recognize and measure certain assets and liabilities including those arising from contingencies and contingent consideration in a business combination.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of assets acquired. The goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit would be considered impaired. To measure the amount of the impairment loss, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For each of these tests, the fair value of each of the Company’s reporting units is determined using a combination of valuation techniques, including a discounted cash flow methodology. To corroborate the discounted cash flow analysis performed at each reporting unit, a market approach is utilized using 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). Results of the annual impairment test performed as of January 31, 2016,2017, indicated that 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 werewas also no indicatorsindication of potential impairment as of July 31, 20162017 and April 30, 20162017 that would have required further testing.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
Intangible assets primarily consist of customer lists,non-compete agreements, proprietary databases, intellectual property and trademarks and are recorded at their estimated fair value at the date of acquisition and are amortized in a pattern in which the asset is consumed if that pattern can be reliably determined, or using the straight-line method over their estimated useful lives which range from one to 24 years. For intangible assets subject to amortization, an impairment loss is recognized if the carrying amount of the intangible assets is not recoverable and exceeds fair value. The carrying amount of the intangible assets is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from use of the asset. Intangible assets with indefinite lives are not amortized, but are reviewed annually for impairment or more frequently
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying amount. As of July 31, 20162017 and April 30, 2016,2017, there were no indicators of impairment with respect to the Company’s intangible assets.
Compensation and Benefits Expense
Compensation and benefits expense in the accompanying consolidated statements of income consist of compensation and benefits paid to consultants (employees who originate business), executive officers and administrative and support personnel. The most significant portions of this expense are salaries and the amounts paid under the annual performance related bonus plan to employees. The portion of the expense applicable to salaries is comprised of amounts earned by employees during a reporting period. The portion of the expenses applicable to annual performance related bonuses refers to the Company’s annual employee performance related bonus with respect to a fiscal year, the amount of which is communicated and paid to each eligible employee following the completion of the fiscal year.
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 Group and Futurestep consultants), the level of engagements referred by a fee earnerconsultant in one line of business to a different line of business, Company performance including profitability, competitive forces and future economic conditions and their impact on the Company’s 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 objectives and the results of individual performance appraisals, and the current economic landscape. Accordingly, each quarter the Company reevaluates the assumptions used to estimate annual performance related bonus liability and adjusts the carrying amount of the liability recorded on the consolidated balance sheet and reports any changes in the estimate in current operations.
Because annual performance-based bonuses are communicated and paid only after the Company reports its 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. The performance related bonus expense was $42.4$41.6 million and $41.8$42.4 million during the three months ended July 31, 20162017 and 2015,2016, respectively, included in compensation and benefits expense in the consolidated statements of income.
Other expenses included in compensation and benefits expense are due to changes in deferred compensation and pension plan liabilities, changes in cash surrender value (“CSV”) of company owned life insurance (“COLI”) contracts, amortization of stock compensation awards, payroll taxes and employee insurance benefits. Investments and other assets include long-term retention awards that are generally amortized over four to five years.
Restructuring Charges, Net
The Company accounts for its restructuring charges as a liability when the obligations are incurred and records such charges at fair value. Such charges includedone-time employee termination benefits and the cost to terminate an office lease including remaining lease payments. Changes in the estimates of the restructuring charges are recorded in the period the change is determined.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
Stock-Based Compensation
The Company has employee compensation plans under which various types of stock-based instruments are granted. These instruments principally include restricted stock units, restricted stock, stock options and an Employee Stock Purchase Plan (“ESPP”). The Company recognizes compensation expense related to restricted stock units, restricted stock and the estimated fair value of stock options and stock purchases under the ESPP on a straight-line basis over the service period for the entire award.
Recently Adopted Accounting Standards
In April 2015, March 2016,the Financial Accounting Standards Board (the “FASB”)FASB issued guidance simplifyingon accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. Furthermore, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The guidance also allows companies to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifying that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity in the consolidated statements of cash flows and provides an accounting policy election to account for forfeitures as they occur. The provisions of the guidance are effective for fiscal years beginning after December 15, 2016, and were adopted by the Company effective May 1, 2017. The primary impact of the adoption was the recognition of excess tax benefits in our provision for income taxes in the current year compared to recording it previously as a component of equity. Additional amendments to the accounting for income taxes and
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
minimum statutory withholding tax requirements had no impact to retained earnings, where the cumulative effect of these changes are required to be recorded. The Company elected to apply the presentation of debt issue costs. The guidance requires debt issuance costsfor cash flows related to excess tax benefits retrospectively for all periods presented which resulted in a debt liabilitydecrease to be presentedcash used in the balance sheet as a direct deduction from the carrying amountoperations and cash provided by financing activities of that debt liability, rather than being classified as an asset. The Company adopted this guidance during$0.3 million for the three months ended July 31, 2016 and2016. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact on any of the periods presented on our consolidated cash flows statements since such cash flows have historically been presented as a result, $4.2 million of unamortized debt issuance costs associated with its senior secured Credit Agreement were classified as a direct deduction to the term loan as of July 31, 2016, of which $0.9 million was recorded to term loan, current, and $3.3 million was recorded to term loan, non-current. The adoption did not have a material impact on the consolidated financial statements as of April 30, 2016.
In September 2015, the FASB issued guidance requiring an acquirer to recognize adjustments to provisional amounts recorded in an acquisition that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer is required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The acquirer is also required to present separately on the face of the income statement or disclose in the footnotes, the portion 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 as of the acquisition date.financing activity. The Company adopted this guidance duringelected to account for forfeitures as they occur, rather than estimating the three months ended July 31, 2016 andexpected forfeitures over the adoptionvesting period. This election did not have an impact on the consolidated financial statements of the Company.statements.
Recently Proposed Accounting Standards
In May 2014, the FASB issued guidance that supersedes revenue recognition requirements regarding contracts with customers to transfer goods or services or for the transfer of nonfinancial assets. Under the new 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 guidance provides a five-step analysis to be performed on transactions to determine when and how revenue is recognized. The guidance permits two transition methods of adoption 1) the full retrospective method, in which case the standard would be applied to all reporting periods presented, or 2) the modified retrospective method, with a cumulative-effect adjustment as of the date of adoption. In July 2015, the FASB decided to approve aone-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 is 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. The Company will adopt this guidance in its fiscal year beginning May 1, 2018. The Company is currently evaluatinghas organized a team and developed a project plan to guide the effectimplementation. The project plan includes working sessions to review, evaluate and document the guidance will have onarrangements with customers under our financial condition and resultsvarious reporting units to identify potential differences that would result from applying the requirements of operations.
In January 2016, the FASB issued guidance on the classification and measurement of financial instruments, which requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities, generally be measured at fair value through earnings and (ii) when the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk, be recognized separately in other comprehensive income. Additionally, it changes the disclosure requirements for financial instruments. The new guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for certain provisions.standard. The Company is currently in the process of developing an updated accounting policy utilizing abottoms-up approach by reviewing our current contracts with customers by various revenue streams, evaluating new disclosure requirements and identifying and implementing appropriate changes to business processes, systems and controls to support revenue recognition and disclosure under the new standard. The Company is still evaluating the effectimpact of ASUNo. 2014-09 on our financial statements. Based on our evaluation to date, under the guidance will havenew standard revenue on the consolidated financial statements.majority of our contracts will continue to be recognized over time as services are rendered. In addition, capitalization of costs associated with obtaining contracts will be required upon adoption of the new standard. The Company expects to finalize the evaluation in upcoming quarters and will provide updates on our progress including decisions made on method of adoption in future filings.
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. The Company plans 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. The Company is currently evaluating the effect that this guidance will have on the consolidated financial statements.
In MarchAugust 2016, the FASB issued guidance on accounting forthe classification of certain aspectscash receipts and cash payments in the statement of share-based payments to employees.cash flows. The new guidance requires excess tax benefitsprovides clarification on specific cash flow issues regarding presentation and tax deficiencies to be recordedclassification in the income statement when the awards vest or are settled. Furthermore, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The guidance also allows companies to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifying that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity in the consolidated statements of cash flows and provides an accounting policy electionwith the objective of reducing the existing diversity in practice. The amendments in this update are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company plans to account for forfeitures as they occur.adopt this guidance in its fiscal year beginning May 1, 2018. The provisions of the guidance are to be applied using a retrospective transition method. The adoption of this guidance is not anticipated to have a material impact on the consolidated financial statements.
In January 2017, the FASB issued guidance that clarifies the definition of a business. The new guidance assists a company when evaluating whether transactions should be accounted for as acquisitions (disposals) of assets or businesses. The provisions of the guidance require that if the fair value of the gross assets acquired (or disposed of) is substantially concentrated in a single identifiable asset or a group of similar identifiable assets, then it is not a business. The provisions of the guidance are effective for annual years beginning after December 15, 2017, including interim periods, with early adoption permitted. The Company plans to adopt this guidance in its fiscal year beginning May 1, 2018. The provisions of the guidance are to be applied prospectively. The adoption of this guidance is not anticipated to 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 simplifies 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
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. The Company is evaluating the adoption timeline and the effects that the standard will have on the consolidated financial statements.
In March 2017, the FASB issued guidance that improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance will change the presentation of net periodic benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Service cost will be included within the same income statement line item as other compensation costs arising from services rendered during the 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. The amendments of this standard are effective for fiscal years beginning after December 15, 2016;2017, including interim periods within those years. The Company will adopt this guidance in its fiscal year beginning May 1, 2018. The adoption of this standard is not anticipated to have a material impact on the consolidated financial statements.
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, but early adoption is permitted. The Company will adopt this guidance in its fiscal year beginning May 1, 2018. The Company is currently evaluating the effect thatimpact of adopting this guidance will have on the consolidated financial statements.guidance.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES2. Basic and Diluted Earnings Per Share
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
Accounting Standards Codification 260,Earnings Per Share, requires companies to treat unvested share-based payment awards that havenon-forfeitable rights to dividends prior to vesting as a separate class of securities in calculating earnings per share. We have granted and expect to continue to grant to certain employees under our restricted stock agreements, grants that containnon-forfeitable rights to dividends. Such grants are considered participating securities. Therefore, we are required to apply thetwo-class method in calculating earnings per share. Thetwo-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The dilutive effect of participating securities is calculated using the more dilutive of the treasury method or thetwo-class method.
Basic earnings per common share was computed using thetwo-class method by dividing basic net earnings attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per common share was computed using thetwo-class method by dividing diluted net earnings attributable to common stockholders by the weighted-average number of common shares outstanding plus dilutive common equivalent shares. Dilutive common equivalent shares include allin-the-money outstanding options or other contracts to issue common stock as if they were exercised or converted.
During Financial instruments that are not in the three months ended July 31, 2016form of common stock, but when converted into common stock increase earnings per share are anti-dilutive, and 2015, all shares of outstanding options wereare not included in the computation of diluted earnings per share.
During both the three months ended July 31, 20162017 and 2015,2016, restricted stock awards of 0.6 million and 0.5 million were outstanding, respectively, but not included in the computation of diluted earnings per share because they were anti-dilutive.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
The following table summarizes basic and diluted earnings per common share attributable to common stockholders:
Three Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
(in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||
Net income attributable to Korn/Ferry International | $ | 3,208 | $ | 23,082 | $ | 29,041 | $ | 3,208 | ||||||||
Less: distributed and undistributed earnings to nonvested restricted stockholders | 44 | 224 | 288 | 44 | ||||||||||||
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Basic net earnings attributable to common stockholders | 3,164 | 22,858 | 28,753 | 3,164 | ||||||||||||
Add: undistributed earnings to nonvested restricted stockholders | — | 176 | 232 | — | ||||||||||||
Less: reallocation of undistributed earnings to nonvested restricted stockholders | — | 174 | 230 | — | ||||||||||||
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Diluted net earnings attributable to common stockholders | $ | 3,164 | $ | 22,860 | $ | 28,755 | $ | 3,164 | ||||||||
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Weighted-average common shares outstanding: | ||||||||||||||||
Basic weighted-average number of common shares outstanding | 56,189 | 49,493 | 55,795 | 56,189 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Restricted stock | 316 | 452 | 588 | 316 | ||||||||||||
Stock options | 60 | 66 | 12 | 60 | ||||||||||||
ESPP | 11 | 3 | 8 | 11 | ||||||||||||
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Diluted weighted-average number of common shares outstanding | 56,576 | 50,014 | 56,403 | 56,576 | ||||||||||||
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Net earnings per common share: | ||||||||||||||||
Basic earnings per share | $ | 0.06 | $ | 0.46 | $ | 0.52 | $ | 0.06 | ||||||||
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Diluted earnings per share | $ | 0.06 | $ | 0.46 | $ | 0.51 | $ | 0.06 | ||||||||
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES3. Stockholders’ Equity
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the changes in stockholders’ equity for the three months ended July 31, 2016
Total Korn/Ferry International Stockholders’ Equity | Noncontrolling Interest | Total Stockholders’ Equity | ||||||||||
(in thousands) | ||||||||||||
Balance as of April 30, 2017 | $ | 1,083,439 | $ | 3,609 | $ | 1,087,048 | ||||||
Comprehensive income (loss): | ||||||||||||
Net income | 29,041 | 388 | 29,429 | |||||||||
Foreign currency translation adjustments | 16,084 | 105 | 16,189 | |||||||||
Deferred compensation and pension plan adjustments, net of tax | 352 | — | 352 | |||||||||
Net unrealized loss on interest rate swap, net of tax | (63 | ) | — | (63 | ) | |||||||
Dividends paid to shareholders | (5,823 | ) | — | (5,823 | ) | |||||||
Purchase of stock | (7,372 | ) | — | (7,372 | ) | |||||||
Issuance of stock | 4,586 | — | 4,586 | |||||||||
Stock-based compensation | 4,405 | — | 4,405 | |||||||||
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Balance as of July 31, 2017 | $ | 1,124,649 | $ | 4,102 | $ | 1,128,751 | ||||||
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
The following table summarizes the changes in stockholders’ equity for the three months ended July 31, 2016:
Total Korn/Ferry International Stockholders’ Equity | Noncontrolling Interest | Total Stockholders’ Equity | Total Korn/Ferry International Stockholders’ Equity | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Balance as of April 30, 2016 | $ | 1,045,300 | $ | 2,001 | $ | 1,047,301 | $ | 1,045,300 | $ | 2,001 | $ | 1,047,301 | ||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||
Net income | 3,208 | 860 | 4,068 | 3,208 | 860 | 4,068 | ||||||||||||||||||
Foreign currency translation adjustments | (13,128 | ) | (146 | ) | (13,274 | ) | (13,128 | ) | (146 | ) | (13,274 | ) | ||||||||||||
Deferred compensation and pension plan adjustments, net of tax | 462 | — | 462 | 462 | — | 462 | ||||||||||||||||||
Dividends declared | (5,909 | ) | — | (5,909 | ) | |||||||||||||||||||
Dividends paid to shareholders | (5,909 | ) | — | (5,909 | ) | |||||||||||||||||||
Purchase of stock | (4,161 | ) | — | (4,161 | ) | (4,161 | ) | — | (4,161 | ) | ||||||||||||||
Issuance of stock | 2,784 | — | 2,784 | 2,784 | — | 2,784 | ||||||||||||||||||
Stock-based compensation | 4,739 | — | 4,739 | 4,739 | — | 4,739 | ||||||||||||||||||
Tax benefit from exercise of stock options and vesting of restricted stock | 332 | — | 332 | 332 | — | 332 | ||||||||||||||||||
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Balance as of July 31, 2016 | $ | 1,033,627 | $ | 2,715 | $ | 1,036,342 | $ | 1,033,627 | $ | 2,715 | $ | 1,036,342 | ||||||||||||
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4. Comprehensive Income (Loss)
Comprehensive income (loss) income is comprised of net income (loss) and all changes to stockholders’ equity, except those changes resulting from investments by stockholders (changes in paid in capital) and distributions to stockholders (dividends) and is reported in the accompanying consolidated statements of comprehensive income (loss)/income.. Accumulated other comprehensive loss, net of taxes, is recorded as a component of stockholders’ equity.
The components of accumulated other comprehensive loss were as follows:
July 31, 2016 | April 30, 2016 | July 31, 2017 | April 30, 2017 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Foreign currency translation adjustments | $ | (49,467 | ) | $ | (36,339 | ) | $ | (39,275 | ) | $ | (55,359 | ) | ||||
Deferred compensation and pension plan adjustments, net of tax | (21,110 | ) | (21,572 | ) | (14,775 | ) | (15,127 | ) | ||||||||
Interest rate swap unrealized loss, net of taxes | (641 | ) | (578 | ) | ||||||||||||
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Accumulated other comprehensive loss, net | $ | (70,577 | ) | $ | (57,911 | ) | $ | (54,691 | ) | $ | (71,064 | ) | ||||
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
The following table summarizes the changes in each component of accumulated other comprehensive income (loss) for the three months ended July 31, 2017:
Foreign Currency Translation | Deferred Compensation and Pension Plan (1) | Unrealized (losses) on interest rate swap (2) | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
(in thousands) | ||||||||||||||||
Balance as of April 30, 2017 | $ | (55,359 | ) | $ | (15,127 | ) | $ | (578 | ) | $ | (71,064 | ) | ||||
Unrealized gains (losses) arising during the period | 16,084 | — | (234 | ) | 15,850 | |||||||||||
Reclassification of realized net losses to net income | — | 352 | 171 | 523 | ||||||||||||
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Balance as of July 31, 2017 | $ | (39,275 | ) | $ | (14,775 | ) | $ | (641 | ) | $ | (54,691 | ) | ||||
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The following table summarizes the changes in each component of accumulated other comprehensive income (loss) for the three months ended July 31, 2016:
Foreign Currency Translation | Deferred Compensation and Pension Plan (1) | Unrealized Gains (Losses) on Marketable Securities | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
(in thousands) | ||||||||||||||||
Balance as of April 30, 2016 | $ | (36,339 | ) | $ | (21,572 | ) | $ | — | $ | (57,911 | ) | |||||
Unrealized losses arising during the period | (13,128 | ) | — | — | (13,128 | ) | ||||||||||
Reclassification of realized net losses to net income | — | 462 | — | 462 | ||||||||||||
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Balance as of July 31, 2016 | $ | (49,467 | ) | $ | (21,110 | ) | $ | — | $ | (70,577 | ) | |||||
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
The following table summarizes the changes in each component of accumulated other comprehensive income (loss) for the three months ended July 31, 2015:
Foreign Currency Translation | Deferred Compensation and Pension Plan (1) | Unrealized Gains (Losses) on Marketable Securities | Accumulated Other Comprehensive Income (Loss) | Foreign Currency Translation | Deferred Compensation and Pension Plan (1) | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||
Balance as of April 30, 2015 | $ | (20,919 | ) | $ | (19,708 | ) | $ | 4 | $ | (40,623 | ) | |||||||||||||||||
Balance as of April 30, 2016 | $ | (36,339 | ) | $ | (21,572 | ) | $ | (57,911 | ) | |||||||||||||||||||
Unrealized losses arising during the period | (15,632 | ) | — | (4 | ) | (15,636 | ) | (13,128 | ) | — | (13,128 | ) | ||||||||||||||||
Reclassification of realized net losses to net income | — | 447 | — | 447 | — | 462 | 462 | |||||||||||||||||||||
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Balance as of July 31, 2015 | $ | (36,551 | ) | $ | (19,261 | ) | $ | — | $ | (55,812 | ) | |||||||||||||||||
Balance as of July 31, 2016 | $ | (49,467 | ) | $ | (21,110 | ) | $ | (70,577 | ) | |||||||||||||||||||
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(1) | The tax effect on the reclassifications of realized net losses was $0.2 million and $0.3 million for |
(2) | The tax effect on unrealized (losses) was $0.1 million for the three months ended July 31, 2017. The tax effect on the reclassification of realized net losses to net income was $0.1 million for the three months ended July 31, 2017. |
5. Employee Stock Plans
Stock-Based Compensation
The following table summarizes the components of stock-based compensation expense recognized in the Company’s consolidated statements of incomeoperations for the periods indicated:
Three Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Restricted stock | $ | 4,739 | $ | 3,554 | $ | 4,405 | $ | 4,739 | ||||||||
ESPP | 176 | 120 | 291 | 176 | ||||||||||||
Stock options | — | 17 | ||||||||||||||
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Total stock-based compensation expense, pre-tax | 4,915 | 3,691 | 4,696 | 4,915 | ||||||||||||
Tax benefit from stock-based compensation expense | (1,484 | ) | (1,154 | ) | (1,378 | ) | (1,484 | ) | ||||||||
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Total stock-based compensation expense, net of tax | $ | 3,431 | $ | 2,537 | $ | 3,318 | $ | 3,431 | ||||||||
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Stock Incentive Plans
At the Company’s 20122016 Annual Meeting of Stockholders, held on September 27, 2012,October 6, 2016, the Company’s stockholders approved an amendment and restatement to the Korn/Ferry International Amended and Restated 2008 Stock Incentive Plan (the 20122016 amendment and restatement being the “Second“The Third A&R 2008 Plan”), which among other things, increased the number of shares under the plan by 5,500,000 shares, increasing the current maximum number of shares that may be issued under the plan to 5,700,00011,200,000 shares, subject to certain changes in the Company’s capital structure and other extraordinary events. The SecondThird A&R 2008 Plan provides for the grant of awards to eligible participants, designated as either nonqualified or incentive stock options, restricted stock and restricted stock units, any of which may be performance-based or market-based, and incentive bonuses, which may be paid in cash or stock or a combination thereof. Under the SecondThird A&R 2008 Plan, the ability to issue full-value awards is limited by requiring full-value stock awards to count 1.912.3 times as much as stock options.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
Restricted Stock
The Company grants time-based restricted stock awards to executive officers and other senior employees generally vesting over a three to four yearfour-year period. In addition, certain key management members typically receive time-based restricted stock awards upon commencement of employment and may receive them annually in conjunction with the Company’s performance review. Time-based restricted stock awards are granted at a price equal to fair value, which is determined based on the closing price of the Company’s common stock on the grant date. The Company recognizes compensation expense for time-based restricted stock awards on a straight-line basis over the vesting period.
The Company also grants market-based and performance-based restricted stock units to executive officers and other senior employees. The market-based units vest after three years depending upon the Company’s total stockholder return over the
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
three-year performance period relative to other companies in its selected peer group. The fair value of these market-based restricted stock units are determined by using extensive market data that is based on historical Company and peer group information. The Company recognizes compensation expense for market-based restricted stock units on a straight-line basis over the vesting period.
Performance-based restricted stock units vest after three years depending upon the Company meeting certain objectives that are set at the time the restricted stock unit is issued. Performance-based restricted stock units are granted at a price equal to the fair value, which is determined based on the closing price of the Company’s common stock on the grant date. The Company recognizes compensation expense for performance-based restricted stock units on a straight-line basis over the vesting period. At the end of each reporting period, the Company estimates the number of restricted stock units expected to vest, based on the probability that certain performance objectives will be met, exceeded, or fall below target levels, and the Company takes into account these estimates when calculating the expense for the period.
Restricted stock activity during the three months ended July 31, 20162017 is summarized below:
Shares | Weighted- Average Grant Date Fair Value | Shares | Weighted- Average Grant Date Fair Value | |||||||||||||
(in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||
Non-vested, April 30, 2016 | 1,506 | $ | 34.12 | |||||||||||||
Non-vested, April 30, 2017 | 1,581 | $ | 29.74 | |||||||||||||
Granted | 718 | $ | 19.89 | 574 | $ | 34.10 | ||||||||||
Vested | (666 | ) | $ | 21.80 | (368 | ) | $ | 26.32 | ||||||||
Forfeited/expired | (11 | ) | $ | 26.35 | (62 | ) | $ | 33.19 | ||||||||
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Non-vested, July 31, 2016 | 1,547 | $ | 32.87 | |||||||||||||
Non-vested, July 31, 2017 | 1,725 | $ | 31.79 | |||||||||||||
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As of July 31, 2016,2017, there were 0.60.7 million shares and 0.10.2 million shares outstanding relating to market-based and performance-based restricted stock units, respectively, with total unrecognized compensation totaling $11.7$11.0 million and $9.3$7.0 million, respectively.
As of July 31, 2016,2017, there was $41.6$42.1 million of total unrecognized compensation cost related to allnon-vested awards of restricted stock, which is expected to be recognized over a weighted-average period of 2.7 years. During the three months ended July 31, 2017 and 2016, and 2015, 185,75497,483 shares and 188,104185,754 shares of restricted stock totaling $4.2$3.3 million and $6.6$4.2 million, respectively, were repurchased by the Company, at the option of the employee, to pay for taxes related to vesting of restricted stock.
Employee Stock Purchase Plan
The Company has an ESPP that, in accordance with Section 423 of the Internal Revenue Code, allows eligible employees to authorize payroll deductions of up to 15% of their salary to purchase shares of the Company’s common stock at 85% of the fair market price of the common stock on the last day of the enrollment period. Employees may not purchase more than $25,000 in stock during any calendar year. The maximum number of shares that may be issued under the ESPP is 3.0 million shares. During the three months ended July 31, 2017 and 2016, employees purchased 116,285 shares at $29.35 per share and 114,011 shares at $17.60 per share. During the three months ended July 31, 2015, employees purchased 44,334 shares at $29.55 per share.share, respectively. As of July 31, 2016,2017, the ESPP had approximately 1.41.2 million shares remaining available for future issuance.
Common Stock
During the three months ended July 31, 20162017 and 2015,2016, the Company issued 32,47041,075 shares and 71,42832,470 shares of common stock, respectively, as a result of the exercise of stock options, with cash proceeds from the exercise of $0.4$0.6 million and $1.1$0.4 million, respectively.
During the three months ended July 31, 2017, the Company repurchased (on the open market) 119,356 shares of the Company’s common stock for $4.0 million. No shares were repurchased during the three months ended July 31, 2016, and 2015, other than to satisfy minimum tax withholding requirements upon the vesting of restricted stock as described above.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
6. Financial Instruments
The following tables show the Company’s cash, trading securitiesfinancial instruments and foreign currency forward contracts’ cost, gross unrealized gains, gross unrealized losses and fair value by significant category recorded as cash and cash equivalents, current portion of current marketable securities, non-current marketable securities, or other accrued liabilitiesbalance sheet classification as of July 31, 20162017 and April 30, 2016:2017:
July 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
July 31, 2016 | Fair Value Measurement | Balance Sheet Classification | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurement | Balance Sheet Classification | Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable Securities, Current | Marketable Securities, Non-current | Other Accrued Liabilities | Income Taxes & Other Receivables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable Securities, Current | Marketable Securities, Non-current | Other Accrued Liabilities | (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 1: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash | $ | 119,660 | $ | — | $ | — | $ | 119,660 | $ | 119,660 | $ | — | $ | — | $ | — | $ | 280,961 | $ | — | $ | — | $ | 280,961 | $ | 280,961 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
Money market funds | 124,413 | — | — | 124,413 | 124,413 | — | — | — | 1,058 | — | — | 1,058 | 1,058 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Mutual funds (1) | 134,447 | 3,477 | (947 | ) | 136,977 | — | 3,475 | 133,502 | — | 117,222 | 9,533 | (496 | ) | 126,259 | — | 11,651 | 114,608 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
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Total | $ | 378,520 | $ | 3,477 | $ | (947 | ) | $ | 381,050 | $ | 244,073 | $ | 3,475 | $ | 133,502 | $ | — | $ | 399,241 | $ | 9,533 | $ | (496 | ) | $ | 408,278 | $ | 282,019 | $ | 11,651 | $ | 114,608 | $ | — | $ | — | ||||||||||||||||||||||||||||||||
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Level 2: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency forward contracts | $ | — | $ | 419 | $ | (966 | ) | $ | (547 | ) | $ | — | $ | — | $ | — | $ | (547 | ) | $ | — | $ | 386 | $ | (400 | ) | $ | (14 | ) | $ | — | $ | — | $ | — | $ | (315 | ) | $ | 301 | ||||||||||||||||||||||||||||
Interest rate swap | $ | — | $ | — | $ | (1,050 | ) | $ | (1,050 | ) | $ | — | $ | — | $ | — | $ | (1,050 | ) | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||
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April 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurement | Balance Sheet Classification | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable Securities, Current | Marketable Securities, Non-current | Other Accrued Liabilities | Income Taxes & Other Receivables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 1: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash | $ | 409,824 | $ | — | $ | — | $ | 409,824 | $ | 409,824 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Money market funds | 1,058 | — | — | 1,058 | 1,058 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mutual funds (1) | 113,818 | 6,697 | (578 | ) | 119,937 | — | 4,363 | 115,574 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total | $ | 524,700 | $ | 6,697 | $ | (578 | ) | $ | 530,819 | $ | 410,882 | $ | 4,363 | $ | 115,574 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||
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Level 2: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency forward contracts | $ | — | $ | 129 | $ | (846 | ) | $ | (717 | ) | $ | — | $ | — | $ | — | $ | (717 | ) | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap | $ | — | $ | — | $ | (947 | ) | $ | (947 | ) | $ | — | $ | — | $ | — | $ | (947 | ) | $ | — |
April 30, 2016 | ||||||||||||||||||||||||||||||||
Fair Value Measurement | Balance Sheet Classification | |||||||||||||||||||||||||||||||
Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable Securities, Current | Marketable Securities, Non-current | Other Accrued Liabilities | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Level 1: | ||||||||||||||||||||||||||||||||
Cash | $ | 155,702 | $ | — | $ | — | $ | 155,702 | $ | 155,702 | $ | — | $ | — | $ | — | ||||||||||||||||
Money market funds | 117,550 | — | — | 117,550 | 117,550 | — | — | — | ||||||||||||||||||||||||
Mutual funds (1) | 142,588 | 1,395 | (2,553 | ) | 141,430 | — | 11,338 | 130,092 | — | |||||||||||||||||||||||
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Total | $ | 415,840 | $ | 1,395 | $ | (2,553 | ) | $ | 414,682 | $ | 273,252 | $ | 11,338 | $ | 130,092 | $ | — | |||||||||||||||
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Foreign currency forward contracts | $ | — | $ | 324 | $ | (1,041 | ) | $ | (717 | ) | $ | — | $ | — | $ | — | $ | (717 | ) | |||||||||||||
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(1) | These investments are held in trust for settlement of the Company’s vested |
Investments in marketable securities classified as trading are based upon investment selections the employee elects from apre-determined set of securities in the ECAP and the Company invests in marketable securities to mirror these elections. As of July 31, 20162017 and April 30, 2016,2017, the Company’s investments in marketable securities classified as trading consist of mutual funds for which market prices are readily available. Investments
Designated Derivatives - Interest Rate Swap Agreement
In March 2017, the Company entered into an interest rate swap contract with a notional amount of $129.8 million, to hedge the variability to changes in marketable securities classifiedcash flows attributable to interest rate risks caused by changes in interest rates related to its variable rate debt. The Company has designated the swap as available-for-sale securities are made based ona cash flow hedge. The notional amount will be amortized so that the Company’s investment policy, which restrictsamount is always half of the typesprincipal balance of investments that can be made.the debt outstanding. As of July 31, 20162017, the notional amount was $127.2 million. The interest rate swap agreement matures on June 15, 2021, and April 30, 2016,locks the Company does not hold marketable securities classifiedinterest rates on half the debt outstanding at 1.919%, exclusive of the credit spread on the debt.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
The fair value of the derivative designated as available-for-sale. a cash flow hedge instrument is as follows:
July 31, 2017 | April 30, 2017 | |||||||
(in thousands) | ||||||||
Derivative liability: | ||||||||
Interest rate swap contract | $ | 1,050 | $ | 947 |
During the three months ended July 31, 2015,2017, the Company received $3.0recognized the following losses on the interest rate swap:
July 31, 2017 | ||||
(in thousands) | ||||
Losses recognized in other comprehensive income (net of tax effects of $149) | $ | 234 | ||
Losses reclassified from accumulated other comprehensive income into interest expense, net | 280 |
As the critical terms of the hedging instrument and the hedged forecasted transaction are the same, the Company has concluded that the changes in the fair value or cash flows attributable to the risk being hedged are expected to completely offset at inception and on an ongoing basis.
We estimate that $0.7 million of derivative losses included in proceeds from maturitiesaccumulated other comprehensive income as of available-for-sale marketable securities.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
2017 will be reclassified into other expense within the following 12 months. The cash flows related to the interest rate swap contract are included in net cash provided by operating activities.
Non-Designated Derivatives – Foreign Currency Forward Contracts
The fair value of derivatives not designated as hedge instruments are as follows:
July 31, 2016 | April 30, 2016 | July 31, 2017 | April 30, 2017 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Derivative assets: | ||||||||||||||||
Foreign currency forward contracts | $ | 419 | $ | 324 | ||||||||||||
Total gross amount of foreign currency forward contracts | $ | 386 | $ | — | ||||||||||||
Gross derivatives offset on the balance sheet (1) | (85 | ) | — | |||||||||||||
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Net amounts presented on the balance sheet | $ | 301 | $ | — | ||||||||||||
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Derivative liabilities: | ||||||||||||||||
Foreign currency forward contracts | $ | 966 | $ | 1,041 | ||||||||||||
Total gross amount of foreign currency forward contracts | $ | 400 | $ | 846 | ||||||||||||
Gross derivatives offset on the balance sheet (1) | (85 | ) | (129 | ) | ||||||||||||
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Net amounts presented on the balance sheet | $ | 315 | $ | 717 | ||||||||||||
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(1) | These amounts represent the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement exists and fair value of adjustments related to our counterparty credit risk. |
As of July 31, 2016,2017, the total notional amounts of the forward contracts purchased and sold were $13.1$12.2 million and $58.5$67.2 million, respectively. As of April 30, 2016,2017, the total notional amounts of the forward contracts purchased and sold were $14.5$19.4 million and $44.3$70.0 million, respectively. TheDuring the three months ended July 31, 2017, the Company recognizesincurred losses of $2.6 million related to forward contracts aswhich is recorded in general and administrative expenses in the accompanying consolidated statements of operations. These losses offset foreign currency gains that result from transactions denominated in a net asset or net liability oncurrency other than the consolidated balance sheets as such contracts are covered by master netting agreements.Company’s functional currency. The Company incurred an immaterial net gain related to forward contracts during the three months ended July 31, 2016, which is recorded in general and administrative expenses in the accompanying consolidated statements of income.2016. The cash flows related to foreign currency forward contracts are included in net cash used in operating activities.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
7. Deferred Compensation and Retirement Plans
The Company has several deferred compensation and retirement plans for eligible consultants and vice presidents that provide defined benefits to participants based on the deferral of current compensation or contributions made by the Company subject to vesting and retirement or termination provisions. Among these plans is a defined benefit pension plan for certain Hay Group employees in the United States. The assets of this plan are held separately from the assets of the sponsors in self-administered funds. The plan is funded consistent with local statutory requirements and the Company does not expectexpects to make any contributioncontribute $0.2 million to this plan during fiscal 2017.2018. All other defined benefit obligations from other plans are unfunded.
The components of net periodic benefit costs are as follows:
Three Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Service cost | $ | 2,126 | $ | 609 | ||||||||||||
Interest cost | $ | 1,062 | $ | 703 | 959 | 1,062 | ||||||||||
Amortization of actuarial loss | 763 | 731 | 577 | 763 | ||||||||||||
Service cost | 609 | — | ||||||||||||||
Expected return on plan assets | (390 | ) | — | (399 | ) | (390 | ) | |||||||||
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Net periodic benefit costs | $ | 2,044 | $ | 1,434 | $ | 3,263 | $ | 2,044 | ||||||||
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(1) | The expected long-term rate of return on plan assets is 6.50% for July 31,2017 and 2016. |
The Company purchased COLI 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 mentioned above that are unfunded.plans. The gross CSV of these contracts of $178.6$180.7 million and $175.7$180.3 million is offset by outstanding policy loans of $68.4$66.8 million and $67.2 million in the accompanying consolidated balance sheets as of July 31, 20162017 and April 30, 2016,2017, respectively. The CSV value of the underlying COLI investments increased by $2.5 million during both the three months ended July 31, 2017 and 2016, and 2015, respectively,is recorded as a decrease in compensation and benefits expense in the accompanying consolidated statements of income.
The Company has anCompany’s ECAP which is intended to provide certain employees an opportunity to defer salary and/or bonus on apre-tax basis or make anafter-tax contribution. In addition, the Company, as part of its compensation philosophy, makes discretionary contributions into the ECAP and such contributions may be granted to key employees annually based upon employeeon the employee’s performance. Certain key management may also receive Company ECAP contributions upon commencement of employment. AsThe Company amortizes these contributions vest,on a straight-line basis over the service period, generally a four- to five-year period. Participants have the ability to allocate their deferrals among a number of investment options and may receive their benefits at termination, retirement or “in service” either in a lump sum or in quarterly installments over one to 15 years. The ECAP amounts that are recordedexpected to be paid to employees over the next 12 months are classified as a current liability included in deferred compensation and other retirement plansbenefits payable on the accompanying balance sheet and compensation and benefits on the accompanying consolidated statements of income. Participants generally vest in Company contributions over a four to five year period.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
sheet.
The ECAP is accounted for whereby the changes in the fair value of the vested amounts owed to the participants are adjusted with a corresponding charge (or credit) to compensation and benefits costs. During the three months ended July 31, 20162017 and 2015,2016, deferred compensation liability increased; therefore, the Company recognized an increase in compensation expense $3.2of $3.7 million and $0.7$3.2 million, respectively. Offsetting these increasesthe increase in compensation and benefits expense was an increase in the fair value of marketable securities classified as trading (held in trust to satisfy obligations under certain deferred compensation liabilities)the ECAP) of $3.9$3.4 million and $0.7$3.9 million during the three months ended July 31, 20162017 and 2015,2016, respectively, recorded in other income, (loss), net on the consolidated statements of income (see Note 6 —6—Financial Instruments).
8. Restructuring Charges, Net
During fiscal 2016, the Company implemented a restructuring plan in order to rationalize its cost structure by eliminating redundant positions and consolidating office space due to the acquisition of Legacy Hay on December 1, 2015. The Company continued the implementation of the fiscal 2016 restructuring plan during the three months ended July 31, 2016in fiscal 2018 in order to integrate the Hay Group entities that were acquired in the prior year acquisitionfiscal 2016 by eliminating redundant positions and operational and general and administrative expenses and consolidating office space.premises. This resulted in restructuring charges of $24.5$0.3 million in the three months ended July 31, 2016,2017, all of which $11.5 million relates to severance and $13.0 million relates to consolidation of office space.premises.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
Changes in the restructuring liability during the three months ended July 31, 20162017 are as follows:
Severance | Facilities | Total | Severance | Facilities | Total | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Liability as of April 30, 2016 | $ | 5,293 | $ | 669 | $ | 5,962 | ||||||||||||||||||
Liability as of April 30, 2017 | $ | 5,341 | $ | 8,354 | $ | 13,695 | ||||||||||||||||||
Restructuring charges, net | 11,472 | 13,048 | 24,520 | — | 280 | 280 | ||||||||||||||||||
Reductions for cash payments | (4,788 | ) | (1,787 | ) | (6,575 | ) | (2,602 | ) | (1,464 | ) | (4,066 | ) | ||||||||||||
Reductions for non-cash charges | — | (2,480 | ) | (2,480 | ) | |||||||||||||||||||
Exchange rate fluctuations | (111 | ) | (66 | ) | (177 | ) | 165 | 244 | 409 | |||||||||||||||
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Liability as of July 31, 2016 | $ | 11,866 | $ | 9,384 | $ | 21,250 | ||||||||||||||||||
Liability as of July 31, 2017 | $ | 2,904 | $ | 7,414 | $ | 10,318 | ||||||||||||||||||
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As of July 31, 2017 and April 30, 2017, the restructuring liability is included in the current portion of other accrued liabilities on the consolidated balance sheets, except for $4.0 million and $4.6 million, respectively, of facilities costs which primarily relate to commitments under operating leases, net of sublease income, which are included in other long-term liabilities.
The restructuring liability by segment is summarized below:
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As of July 31, 2017 and April 30, 2017, the restructuring liability is included in the current portion of other accrued liabilities on the consolidated balance sheets, except for $4.0 million and $4.6 million, respectively, of facilities costs which primarily relate to commitments under operating leases, net of sublease income, which are included in other long-term liabilities.
The restructuring liability by segment is summarized below:
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July 31, 2017 | ||||||||||||||||||||||||
Severance | Facilities | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Executive Search | ||||||||||||||||||||||||
North America | $ | 40 | $ | 242 | $ | 282 | ||||||||||||||||||
Europe, Middle East and Africa (“EMEA”) | 204 | — | 204 | |||||||||||||||||||||
Asia Pacific | — | 3 | 3 | |||||||||||||||||||||
Latin America | — | 49 | 49 | |||||||||||||||||||||
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Total Executive Search | 244 | 294 | 538 | |||||||||||||||||||||
Hay Group | 2,660 | 6,991 | 9,651 | |||||||||||||||||||||
Futurestep | — | 129 | 129 | |||||||||||||||||||||
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Liability as of July 31, 2017 | $ | 2,904 | $ | 7,414 | $ | 10,318 | ||||||||||||||||||
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April 30, 2017 | ||||||||||||||||||||||||
Severance | Facilities | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Executive Search | ||||||||||||||||||||||||
North America | $ | 134 | $ | 250 | $ | 384 | ||||||||||||||||||
Europe, Middle East and Africa | 393 | — | 393 | |||||||||||||||||||||
Asia Pacific | — | 6 | 6 | |||||||||||||||||||||
Latin America | — | 87 | 87 | |||||||||||||||||||||
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Total Executive Search | 527 | 343 | 870 | |||||||||||||||||||||
Hay Group | 4,814 | 7,879 | 12,693 | |||||||||||||||||||||
Futurestep | — | 132 | 132 | |||||||||||||||||||||
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Liability as of April 30, 2017 | $ | 5,341 | $ | 8,354 | $ | 13,695 | ||||||||||||||||||
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As of July 31, 2016 and April 30, 2016, the restructuring liability is included in the current portion of other accrued liabilities on the consolidated balance sheets, except for $4.5 million and $0.6 million, respectively, of facilities costs which primarily relate to commitments under operating leases, net of sublease income, which are included in other long-term liabilities.9. Business Segments
The restructuring liability by segment is summarized below:
July 31, 2016 | ||||||||||||
Severance | Facilities | Total | ||||||||||
(in thousands) | ||||||||||||
Executive Search | ||||||||||||
North America | $ | 743 | $ | 525 | $ | 1,268 | ||||||
Europe, Middle East and Africa (“EMEA”) | 414 | 84 | 498 | |||||||||
Asia Pacific | 6 | 44 | 50 | |||||||||
Latin America | 17 | 166 | 183 | |||||||||
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Total Executive Search | 1,180 | 819 | 1,999 | |||||||||
Hay Group | 10,563 | 8,361 | 18,924 | |||||||||
Futurestep | — | 204 | 204 | |||||||||
Corporate | 123 | — | 123 | |||||||||
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Liability as of July 31, 2016 | $ | 11,866 | $ | 9,384 | $ | 21,250 | ||||||
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
April 30, 2016 | ||||||||||||
Severance | Facilities | Total | ||||||||||
(in thousands) | ||||||||||||
Executive Search | ||||||||||||
North America | $ | — | $ | 5 | $ | 5 | ||||||
EMEA | 1,533 | 23 | 1,556 | |||||||||
Asia Pacific | 33 | — | 33 | |||||||||
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Total Executive Search | 1,566 | 28 | 1,594 | |||||||||
Hay Group | 3,727 | 396 | 4,123 | |||||||||
Futurestep | — | 245 | 245 | |||||||||
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Liability as of April 30, 2016 | $ | 5,293 | $ | 669 | $ | 5,962 | ||||||
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The Company currently operates in three global businesses: Executive Search, Hay Group and Futurestep. The Executive Search segment focuses on recruiting Board of Director andC-level positions, in addition to research-based interviewing and onboarding solutions, for clients predominantly in the consumer, financial services, industrial, life sciences/healthcare and technology industries. Hay Group assists clients with ongoing assessment, compensation and development of their senior executives and management teams, and addresses threefour fundamental needs: Talent Strategy, Succession Management, and Leadership Development, and Rewards, Motivation and Engagement, all underpinned by a comprehensive array of world-leading IP,intellectual property, products and tools. Futurestep is a global industry leader in high-impact talent acquisition solutions. Its portfolio of services includes global and regional RPO, project recruitment, individual professional search and consulting. The Executive Search business segment is managed by geographic regional leaders and Hay Group and Futurestep worldwide operations are managed by their Chief Executive Officers. The Executive Search geographic regional leaders and the Chief Executive Officers of Hay Group and Futurestep report directly to the Chief Executive Officer of the Company. The Company also operates a Corporate segment to record global expenses of the Company.
The Company evaluates performance and allocates resources based on the Company’s chief operating decision maker’s (“CODM”) 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 certainnon-cash charges (goodwill, intangible asset and other than temporary impairment). The
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
accounting policies for the reportable segments are the same as those described in the summary of significant accounting policies, except the items described above are excluded from EBITDA to arrive at Adjusted EBITDA.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the three months ended July 31, 2016,
Adjusted EBITDA includes deferred revenue adjustment related to the Legacy Hay acquisition, reflecting revenue that the Hay Group would have realized if not for business combination accounting that requires a company to record the acquisition balance sheet at fair value andwrite-off deferred revenue where no future services are required to be performed to earn that revenue.
Financial highlights by business segment are as follows:
Three Months Ended July 31, 2016 | Three Months Ended July 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Executive Search | Executive Search | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
North America | EMEA | Asia Pacific | Latin America | Subtotal | Hay Group | Futurestep | Corporate | Consolidated | North America | EMEA | Asia Pacific | Latin America | Subtotal | Hay Group | Futurestep | Corporate | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fee revenue | $ | 81,802 | $ | 35,370 | $ | 19,626 | $ | 9,563 | $ | 146,361 | $ | 174,582 | $ | 54,678 | $ | — | $ | 375,621 | $ | 91,833 | $ | 40,121 | $ | 21,578 | $ | 7,659 | $ | 161,191 | $ | 179,453 | $ | 60,610 | $ | — | $ | 401,254 | ||||||||||||||||||||||||||||||||||||
Deferred revenue adjustment due to acquisition | — | — | — | — | — | 3,535 | — | — | 3,535 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Adjusted fee revenue | $ | 81,802 | $ | 35,370 | $ | 19,626 | $ | 9,563 | $ | 146,361 | $ | 178,117 | $ | 54,678 | $ | — | $ | 379,156 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total revenue | $ | 85,425 | $ | 36,249 | $ | 20,180 | $ | 9,614 | $ | 151,468 | $ | 181,508 | $ | 59,957 | $ | — | $ | 392,933 | $ | 95,205 | $ | 41,058 | $ | 21,880 | $ | 7,664 | $ | 165,807 | $ | 183,296 | $ | 65,814 | $ | — | $ | 414,917 | ||||||||||||||||||||||||||||||||||||
Net income | 4,068 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to Korn/Ferry International | $ | 29,041 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interest | 388 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income, net | (4,259 | ) | (3,532 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net | 3,061 | 2,660 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | (79 | ) | (30 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax provision | 1,725 | 12,210 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Operating income (loss) | $ | 16,468 | $ | 6,027 | $ | 2,102 | $ | 2,330 | $ | 26,927 | $ | (7,743 | ) | $ | 7,513 | $ | (22,181 | ) | $ | 4,516 | $ | 21,995 | $ | 6,675 | $ | 3,141 | $ | 1,026 | $ | 32,837 | $ | 19,083 | $ | 8,237 | $ | (19,420 | ) | 40,737 | ||||||||||||||||||||||||||||||||||
Depreciation and amortization | 830 | 211 | 225 | 114 | 1,380 | 8,016 | 623 | 1,425 | 11,444 | 949 | 428 | 320 | 107 | 1,804 | 8,085 | 796 | 1,524 | 12,209 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income (loss), net | 288 | 24 | 87 | 73 | 472 | 235 | (2 | ) | 3,554 | 4,259 | 282 | 56 | 105 | 20 | 463 | 32 | 8 | 3,029 | 3,532 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | 79 | — | — | — | 79 | — | — | — | 79 | 30 | — | — | — | 30 | — | — | — | 30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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EBITDA | 17,665 | 6,262 | 2,414 | 2,517 | 28,858 | 508 | 8,134 | (17,202 | ) | 20,298 | 23,256 | 7,159 | 3,566 | 1,153 | 35,134 | 27,200 | 9,041 | (14,867 | ) | 56,508 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring charges, net | 1,706 | 128 | 622 | 360 | 2,816 | 21,488 | — | 216 | 24,520 | — | — | 40 | — | 40 | 240 | — | — | 280 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Integration/acquisition costs | — | — | — | — | — | 4,264 | — | 3,763 | 8,027 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred revenue adjustment due to acquisition | — | — | — | — | — | 3,535 | — | — | 3,535 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Integration/acquisition cost | — | — | — | — | — | 2,549 | — | 39 | 2,588 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Adjusted EBITDA | $ | 19,371 | $ | 6,390 | $ | 3,036 | $ | 2,877 | $ | 31,674 | $ | 29,795 | $ | 8,134 | $ | (13,223 | ) | $ | 56,380 | $ | 23,256 | $ | 7,159 | $ | 3,606 | $ | 1,153 | $ | 35,174 | $ | 29,989 | $ | 9,041 | $ | (14,828 | ) | $ | 59,376 | ||||||||||||||||||||||||||||||||||
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Three Months Ended July 31, 2015 | ||||||||||||||||||||||||||||||||||||
Executive Search | ||||||||||||||||||||||||||||||||||||
North America | EMEA | Asia Pacific | Latin America | Subtotal | Hay Group | Futurestep | Corporate | Consolidated | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Fee revenue | $ | 90,359 | $ | 36,090 | $ | 19,215 | $ | 6,426 | $ | 152,090 | $ | 69,240 | $ | 46,064 | $ | — | $ | 267,394 | ||||||||||||||||||
Total revenue | $ | 94,399 | $ | 37,171 | $ | 19,990 | $ | 6,432 | $ | 157,992 | $ | 71,441 | $ | 49,902 | $ | — | $ | 279,335 | ||||||||||||||||||
Net income | $ | 23,082 | ||||||||||||||||||||||||||||||||||
Other loss, net | 74 | |||||||||||||||||||||||||||||||||||
Interest expense, net | 299 | |||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | (725 | ) | ||||||||||||||||||||||||||||||||||
Income tax provision | 10,174 | |||||||||||||||||||||||||||||||||||
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Operating income (loss) | $ | 24,145 | $ | 6,276 | $ | 2,986 | $ | 1,508 | $ | 34,915 | $ | 7,495 | $ | 6,189 | $ | (15,695 | ) | $ | 32,904 | |||||||||||||||||
Depreciation and amortization | 827 | 365 | 246 | 78 | 1,516 | 3,748 | 585 | 1,574 | 7,423 | |||||||||||||||||||||||||||
Other income (loss), net | 32 | 143 | 18 | 239 | 432 | (863 | ) | — | 357 | (74 | ) | |||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | 86 | — | — | — | 86 | — | — | 639 | 725 | |||||||||||||||||||||||||||
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EBITDA | 25,090 | 6,784 | 3,250 | 1,825 | 36,949 | 10,380 | 6,774 | (13,125 | ) | 40,978 | ||||||||||||||||||||||||||
Integration/acquisition costs | — | — | — | — | — | 329 | — | 345 | 674 | |||||||||||||||||||||||||||
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Adjusted EBITDA | $ | 25,090 | $ | 6,784 | $ | 3,250 | $ | 1,825 | $ | 36,949 | $ | 10,709 | $ | 6,774 | $ | (12,780 | ) | $ | 41,652 | |||||||||||||||||
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2016
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
Three Months Ended July 31, 2016 | ||||||||||||||||||||||||||||||||||||
Executive Search | ||||||||||||||||||||||||||||||||||||
North America | EMEA | Asia Pacific | Latin America | Subtotal | Hay Group | Futurestep | Corporate | Consolidated | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Fee revenue | $ | 81,802 | $ | 35,370 | $ | 19,626 | $ | 9,563 | $ | 146,361 | $ | 174,582 | $ | 54,678 | $ | — | $ | 375,621 | ||||||||||||||||||
Deferred revenue adjustment due to acquisition | — | — | — | — | — | 3,535 | — | — | 3,535 | |||||||||||||||||||||||||||
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Adjusted fee revenue | $ | 81,802 | $ | 35,370 | $ | 19,626 | $ | 9,563 | $ | 146,361 | $ | 178,117 | $ | 54,678 | $ | — | $ | 379,156 | ||||||||||||||||||
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Total revenue | $ | 85,425 | $ | 36,249 | $ | 20,180 | $ | 9,614 | $ | 151,468 | $ | 181,508 | $ | 59,957 | $ | — | $ | 392,933 | ||||||||||||||||||
Net income attributable to Korn/Ferry International | $ | 3,208 | ||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interest | 860 | |||||||||||||||||||||||||||||||||||
Other income, net | (4,259 | ) | ||||||||||||||||||||||||||||||||||
Interest expense, net | 3,061 | |||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | (79 | ) | ||||||||||||||||||||||||||||||||||
Income tax provision | 1,725 | |||||||||||||||||||||||||||||||||||
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Operating income (loss) | $ | 16,468 | $ | 6,027 | $ | 2,102 | $ | 2,330 | $ | 26,927 | $ | (7,743 | ) | $ | 7,513 | $ | (22,181 | ) | 4,516 | |||||||||||||||||
Depreciation and amortization | 830 | 211 | 225 | 114 | 1,380 | 8,016 | 623 | 1,425 | 11,444 | |||||||||||||||||||||||||||
Other income (loss), net | 288 | 24 | 87 | 73 | 472 | 235 | (2 | ) | 3,554 | 4,259 | ||||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | 79 | — | — | — | 79 | — | — | — | 79 | |||||||||||||||||||||||||||
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EBITDA | 17,665 | 6,262 | 2,414 | 2,517 | 28,858 | 508 | 8,134 | (17,202 | ) | 20,298 | ||||||||||||||||||||||||||
Restructuring charges, net | 1,706 | 128 | 622 | 360 | 2,816 | 21,488 | — | 216 | 24,520 | |||||||||||||||||||||||||||
Integration/acquisition costs | — | — | — | — | — | 4,264 | — | 3,763 | 8,027 | |||||||||||||||||||||||||||
Deferred revenue adjustment due to acquisition | — | — | — | — | — | 3,535 | — | — | 3,535 | |||||||||||||||||||||||||||
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Adjusted EBITDA | $ | 19,371 | $ | 6,390 | $ | 3,036 | $ | 2,877 | $ | 31,674 | $ | 29,795 | $ | 8,134 | $ | (13,223 | ) | $ | 56,380 | |||||||||||||||||
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10. Long-Term Debt
On June 15, 2016, the Company entered into a senior secured $400 million Credit Agreement (the “Credit Agreement”) with a syndicate of banks and Wells Fargo Bank, National Association as administrative agent (to provide for enhanced financial flexibility and in recognition of the accelerated pace of the Hay Group integration). The Credit Agreement provides for, among other things: (a) a senior secured term loan facility in an aggregate principal amount of $275 million (the “ Term“Term Facility”);, (b) a senior secured revolving credit facility (the “Revolver” and together with the Term Facility, the “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) certain customary affirmative and negative covenants, including a maximum consolidated total leverage ratio (as defined below) and a minimum interest coverage ratio and (e) an expanded definition of permittedadd-backs to Adjusted EBITDA in recognition of the accelerated integration actions. The Company drew down $275 million on the new term loan and used $140 million of the proceeds topay-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. As of July 31, 2016, the Company was in compliance with its debt covenants.
At the Company’s option, loans issued under the 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 Credit Facilities 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 adjusted EBITDA ratio (as set forth in the Credit Agreement, the “consolidated leverage ratio”) at such time. In addition, the Company will be required to pay to the lenders a quarterly fee ranging from 0.20% to 0.35% per annum on the average daily unused amount of the Term Facility, based upon the Company’s consolidated leverage ratio at such time, and fees relating to the issuance of letters of credit. During the three months ended July 31, 2017 and 2016, the average rate on the Term Facility was 2.34% and 2.40%, respectively.
Both the Revolver and the Term Facility mature on June 15, 2021, and may be prepaid and terminated early by the Company at any time without premium or penalty (subject to customary LIBOR breakage fees). The Term Facility is payable in quarterly installments beginning on September 30, 2016.with principal payments totaling $5.2 million made during the three months ended July 31, 2017. As of July 31, 2016, $275.02017, $254.4 million was outstanding under the Term Facility compared to $140.0$259.5 million as of April 30, 2016, under2017. The current and long-term portion of unamortized debt issuance costs associated with the previous Facility. During the three months endedlong-term debt, was $3.4 million and $3.5 million as of July 31, 2016,2017 and April 30, 2017, respectively. The fair value of the average rateCompany’s Term Facility is based on borrowing rates
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS July 31, 2017 (continued) |
currently required of loans with similar terms, maturity and credit risk. The carrying amount of the Term Facility approximates fair value because the base interest rate charged varies with market conditions and the credit spread is commensurate with current market spreads for issuers of similar risk. The fair value of the Term Facility is classified as a Level 2 liability in the fair value hierarchy. As of July 31, 2017, the Company was 2.40%.in compliance with its debt covenants.
As of July 31, 20162017 and April 30, 2016,2017, the Company had no borrowings under the Revolver. At July 31, 2016 and April 30, 2016, there were $2.8The Company had $3.0 million of standby letters of creditcredits issued under its long-term debt arrangements.arrangements as of July 31, 2017 and April 30, 2017. The Company had a total of $5.6$8.8 million and $6.4$8.1 million of standby letters of credits with other financial institutions as of July 31, 20162017 and April 30, 2016,2017, respectively. The standby letters of credits were generally issued as a result of entering into office premise leases.
11. Subsequent Events
Quarterly Dividend Declaration
On September 7, 2016,5, 2017, the Board of Directors of the Company declared a cash dividend of $0.10 per share that will be paid onwith a payment date of October 14, 201613, 2017 to holders of the Company’s common stock of record at the close of business on September 26, 2016.27, 2017. 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 may amend, revoke or suspend the dividend policy at any time and for any reason.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
This Quarterly Report onForm 10-Q 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 brand name and professional reputation, 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 byoff-limits agreements, competition, reliance on information processing systems, cyber security vulnerabilities, changes to data security, data privacy, and data protection laws, limited protection of our intellectual property, 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, deferred tax assets that we may not be able to use, our ability to develop new products and services, 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, and the matters disclosed under the heading “Risk Factors” in the Company’s Exchange Act reports, including Item 1A of the Company’s Annual Report on Form10-K for the fiscal year ended April 30, 20162017 (“Form10-K”). Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Quarterly Report on Form10-Q are made only as of the date of this Quarterly Report on Form10-Q 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 Quarterly Report onForm 10-Q. We also make available on the Investor Relations portion of our website at www.kornferry.com earnings slides and other important information, which we encourage you to review.
Executive Summary
Korn/Ferry International (referred to herein as the “Company,” “Korn Ferry,” or in the first person notations “we,” “our,” and “us”) is the preeminent global people and organizational advisory firm. Our services include Executive Search, advisory solutions and products through Hay Group (formerly known as Leadership & Talent Consulting (“Legacy LTC”) which was combined with HG (Luxembourg) S.à.r.l (“Legacy Hay”) in December 2015) and recruitment fornon-executive professionals and recruitment process outsourcing (“RPO”) through Futurestep. The Company also operates a Corporate segment to record global expenses of the Company. Approximately 73%71% of the executive searches we performed in fiscal 20162017 were for board level, chief executive and other senior executive and general management positions. Our 5,5753,589 executive search clients in fiscal 20162017 included many of the world’s largest and most prestigious public and private companies, including approximately 54%57% of the FORTUNEFortune 500, middle market and emerging growth companies, as well as government and nonprofit organizations. We have built strong client loyalty, with 84%82% of assignments performed (without giving effect to Legacy Hay assignments) during fiscal 20162017 having been on behalf of clients for whom we had conducted assignments in the previous three fiscal years. Approximately 62%61% of 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:
Strategy Execution & Organization Design | We establish the conditions for success by clarifying strategy; designing an operating model and organization structure that aligns to it; and defining a high performance culture. We enable strategic change by engaging and motivating people to perform. | |
Talent Strategy and Work Design | We map talent strategy to business strategy and help organizations put their plan into action. We | |
Rewards and Benefits | We help organizations align reward with strategy. We help them pay their people fairly for doing the right things | |
Assessment and Succession | We provide actionable, research-backed
| |
Executive Search and Recruitment | We integrate scientific research with our practical experience and industry-specific expertise to recruit professionals of all levels and functions at organizations across every | |
Leadership Development | We activate purpose, vision, and strategy through leaders at all levels and organizations. We combine expertise, science, and proven techniques with forward thinking and creativity to build leadership experiences that help |
During fiscal 2016,2017, we implemented acontinued the implementation of our fiscal 2016 restructuring plan in order to rationalize our cost structure in order to eliminateby eliminating redundant positions and real estate that were created due to the acquisition of HG (Luxembourg) S.à.r.l (“Legacy Hay”)Hay in December 2015. In particular, the majority of our efforts in fiscal 2016 were focused on activities associated with integration of ourgo-to-market activities, our intellectual property and content, our solution sets and service offerings, and our back office systems and business processes. We continued to implement this plan duringDuring the first quarter of fiscal 2017 and in connection with the plan,three months ended July 31, 2016, we recorded $24.5 million ofin restructuring charges with $11.5 million relating toof severance costs and $13.0 million relating to the consolidation of office space duringpremises. During the three months ended July 31, 2016. No2017, we recorded $0.3 million of restructuring charges were incurred duringrelating to the three months ended July 31, 2015.consolidation of premises.
The Company currently operates in three global business segments: Executive Search, Hay Group and Futurestep. See Note 9 –—Business Segments, in the Notes to Consolidated Unaudited Consolidated Financial Statements for 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 and certain separation costs and certainnon-cash charges (goodwill, intangible asset and other than temporary impairment). For the three months ended July 31, 2016, Adjusted EBITDA includes a deferred revenue adjustment related to the Legacy Hay acquisition, reflecting revenue that Hay Group would have realized if not for business combination accounting that requires a company to record the acquisition balance sheet at fair value andwrite-off deferred revenue where no future services are required to be performed to earn that revenue. Management willDuring the three months ended July 31, 2017, management no longer havehas adjusted fee revenue after this quarter. revenue.
Adjusted EBITDA is a and EBITDA arenon-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 tonon-GAAP performance measures that may be presented by other companies.
Management believes the presentation of this thesenon-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 this thesenon-GAAP financial measuremeasures facilitates comparisons to Korn Ferry’s historical performance and 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. Korn Ferry includes this thesenon-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 is anon-GAAP financial measure. Adjusted fee revenue is not a measure that substitutes an individually tailored revenue recognition or measurement method for those of GAAP,GAAP; rather, it is an adjustment for a short period of time that will provide better comparability in the current and future 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 meaningfulperiod-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 $108.2$25.7 million, or 40%7%, in the three months ended July 31, 2017 to $401.3 million compared to $375.6 million in the three months ended July 31, 2016, to $375.6 million compared to $267.4 million in the three months ended July 31, 2015, with increases in fee revenue in Hay Group and Futurestep offset by lower fee revenue in Executive Search.all business segments. During the three months ended July 31, 2016,2017, we recorded operating income of $4.5$40.7 million with Executive Search and Futurestep segments contributing $26.9 million and $7.5 million, respectively, offset by the operating losses from Hay Group and Corporate segments of $7.7 million and $22.2 million, respectively. Net income during the three months ended July 31, 2016 and 2015 was $4.1 million and $23.1 million, respectively. Adjusted EBITDA was $56.4 million during the three months ended July 31, 2016 with Executive Search, Hay Group and Futurestep segments contributing $31.7$32.8 million, $29.8$19.1 million and $8.1$8.2 million, respectively, offset by corporateCorporate expenses net of other$19.4 million. Net income attributable to Korn Ferry during the three months ended July 31, 2017 was $29.0 million compared to $3.2 million for the three months ended July 31, 2016, an increase of $13.2 million.$25.8 million over theyear-ago quarter. Adjusted EBITDA increased $14.7was $59.4 million during the three months ended July 31, 2016,2017 with Executive Search, Hay Group and Futurestep segments contributing $35.2 million, $30.0 million, and $9.0 million, respectively, offset by Corporate expenses net of other income of $14.8 million. Adjusted EBITDA increased $3.0 million during the three months ended July 31, 2017, from Adjusted EBITDA of $41.7$56.4 million in theyear-ago quarter.
Our cash, cash equivalents and marketable securities decreased $33.6$122.5 million, or 8%23%, to $381.1$408.3 million at July 31, 2016,2017, compared to $414.7$530.8 million at April 30, 2016.2017. This decrease is mainly due to bonuses earned in fiscal 20162017 and paid during the first quarter of fiscal 2017, $15.12018,sign-on and retention payments, $9.5 million in payments for the purchase of fixed assets, $5.9$5.8 million in dividends paid during first quarter of fiscal 2017,2018, $5.2 million in principal payments on our term loan and $4.0 million in stock repurchases in the open market, partially offset by the drawdown of $275 million on the new term loan of which $140 million of the proceeds were used to pay-off the term loan that was outstanding as of April 30, 2016 and cash provided by operating activities. As of July 31, 2016,2017, we held marketable securities to settle obligations under our Executive Capital Accumulation Plan (“ECAP”) with a cost value of $134.4$117.2 million and a fair value of $137.0$126.3 million. Our vested and unvested obligations for which these assets were held in trust totaled $133.9$116.2 million as of July 31, 2016.2017 and our unvested obligations totaled $25.3 million.
Our working capital increased by $128.1$22.0 million to $316.1$407.1 million in the three months ended July 31, 2016.2017. 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 the debt obligations incurred in connection with the Legacy Hay acquisition, the retention pool obligations pursuant to the Legacy Hay acquisition and dividend payments under our dividend policy in the next twelve months. We had no outstanding borrowings under our revolving credit facility at July 31, 20162017 and April 30, 2016.2017. As of July 31, 20162017 and April 30, 2016,2017, there was $2.8$3.0 million of standby letters of credit issued under our long-term debt arrangements. We havehad a total of $5.6$8.8 million and $6.4$8.1 million of standby letters of credits with other financial institutions as of July 31, 20162017 and April 30, 2016, respectively.
Results of Operations
The following table summarizes the results of our operations as a percentage of fee revenue:
(Numbers may not total exactly due to rounding)
Three Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Fee revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Reimbursed out-of-pocket engagement expenses | 4.6 | 4.5 | 3.4 | 4.6 | ||||||||||||
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Total revenue | 104.6 | 104.5 | 103.4 | 104.6 | ||||||||||||
Compensation and benefits | 70.0 | 67.1 | 68.3 | 70.0 | ||||||||||||
General and administrative expenses | 14.7 | 14.0 | 14.5 | 14.7 | ||||||||||||
Reimbursed expenses | 4.6 | 4.5 | 3.4 | 4.6 | ||||||||||||
Cost of services | 4.5 | 3.8 | 3.9 | 4.5 | ||||||||||||
Depreciation and amortization | 3.0 | 2.8 | 3.0 | 3.0 | ||||||||||||
Restructuring charges, net | 6.5 | — | 0.1 | 6.5 | ||||||||||||
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Operating income | 1.2 | 12.3 | 10.2 | 1.2 | ||||||||||||
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Net income | 1.1 | % | 8.6 | % | 7.3 | % | 1.1 | % | ||||||||
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Net income attributable to Korn/Ferry International | 0.9 | % | 8.6 | % | 7.2 | % | 0.9 | % | ||||||||
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The following tables summarize the results of our operations by business segment:
(Numbers may not total exactly due to rounding)
Three Months Ended July 31, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
Dollars | % | Dollars | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Fee revenue | ||||||||||||||||
Executive Search: | ||||||||||||||||
North America | $ | 81,802 | 21.8 | % | $ | 90,359 | 33.8 | % | ||||||||
EMEA | 35,370 | 9.4 | 36,090 | 13.5 | ||||||||||||
Asia Pacific | 19,626 | 5.2 | 19,215 | 7.2 | ||||||||||||
Latin America. | 9,563 | 2.5 | 6,426 | 2.4 | ||||||||||||
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Total Executive Search | $ | 146,361 | 39.0 | 152,090 | 56.9 | |||||||||||
Hay Group | 174,582 | 46.5 | 69,240 | 25.9 | ||||||||||||
Futurestep | 54,678 | 14.6 | 46,064 | 17.2 | ||||||||||||
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Total fee revenue | 375,621 | 100.0 | % | 267,394 | 100.0 | % | ||||||||||
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Reimbursed out-of-pocket engagement expense | 17,312 | 11,941 | ||||||||||||||
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Total revenue | $ | 392,933 | $ | 279,335 | ||||||||||||
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Three Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
Dollars | Margin (1) | Dollars | Margin (1) | Dollars | % | Dollars | % | |||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
Operating income | ||||||||||||||||||||||||||||||||
Fee revenue | ||||||||||||||||||||||||||||||||
Executive Search: | ||||||||||||||||||||||||||||||||
North America | $ | 16,468 | 20.1 | % | $ | 24,145 | 26.7 | % | $ | 91,833 | 22.9 | % | $ | 81,802 | 21.8 | % | ||||||||||||||||
EMEA | 6,027 | 17.0 | 6,276 | 17.4 | 40,121 | 10.0 | 35,370 | 9.4 | ||||||||||||||||||||||||
Asia Pacific | 2,102 | 10.7 | 2,986 | 15.5 | 21,578 | 5.4 | 19,626 | 5.2 | ||||||||||||||||||||||||
Latin America. | 2,330 | 24.4 | 1,508 | 23.5 | ||||||||||||||||||||||||||||
Latin America | 7,659 | 1.9 | 9,563 | 2.5 | ||||||||||||||||||||||||||||
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Total Executive Search | 161,191 | 40.2 | 146,361 | 39.0 | ||||||||||||||||||||||||||||
Hay Group | 179,453 | 44.7 | 174,582 | 46.5 | ||||||||||||||||||||||||||||
Futurestep | 60,610 | 15.1 | 54,678 | 14.6 | ||||||||||||||||||||||||||||
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Total fee revenue | 401,254 | 100.0 | % | 375,621 | 100.0 | % | ||||||||||||||||||||||||||
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Reimbursedout-of-pocket engagement expense | 13,663 | 17,312 | ||||||||||||||||||||||||||||||
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Total revenue | $ | 414,917 | $ | 392,933 | ||||||||||||||||||||||||||||
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Three Months Ended July 31, | ||||||||||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||||||||||
Dollars | Margin(1) | Dollars | Margin(1) | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Operating income (loss) | ||||||||||||||||||||||||||||||||
Executive Search: | ||||||||||||||||||||||||||||||||
North America | $ | 21,995 | 24.0 | % | $ | 16,468 | 20.1 | % | ||||||||||||||||||||||||
EMEA | 6,675 | 16.6 | 6,027 | 17.0 | ||||||||||||||||||||||||||||
Asia Pacific | 3,141 | 14.6 | 2,102 | 10.7 | ||||||||||||||||||||||||||||
Latin America | 1,026 | 13.4 | 2,330 | 24.4 | ||||||||||||||||||||||||||||
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Total Executive Search | 26,927 | 18.4 | 34,915 | 23.0 | 32,837 | 20.4 | 26,927 | 18.4 | ||||||||||||||||||||||||
Hay Group | (7,743 | ) | (4.4 | ) | 7,495 | 10.8 | 19,083 | 10.6 | (7,743 | ) | (4.4 | ) | ||||||||||||||||||||
Futurestep | 7,513 | 13.7 | 6,189 | 13.4 | 8,237 | 13.6 | 7,513 | 13.7 | ||||||||||||||||||||||||
Corporate | (22,181 | ) | (15,695 | ) | (19,420 | ) | (22,181 | ) | ||||||||||||||||||||||||
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Total operating income | $ | 4,516 | 1.2 | % | $ | 32,904 | 12.3 | % | $ | 40,737 | 10.2 | % | $ | 4,516 | 1.2 | % | ||||||||||||||||
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(1) | Margin calculated as a percentage of fee revenue by business segment. |
Fee revenue Deferred revenue adjustment due to acquisition Adjusted 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 Integration/acquisition costs Deferred revenue adjustment due to acquisition Adjusted EBITDA Adjusted EBITDA margin Three Months Ended July 31, 2016 Executive Search North
America EMEA Asia
Pacific Latin
America Subtotal Hay
Group Futurestep Corporate Consolidated (in thousands) $ 81,802 $ 35,370 $ 19,626 $ 9,563 $ 146,361 $ 174,582 $ 54,678 $ — $ 375,621 — — — — — 3,535 — — 3,535 $ 81,802 $ 35,370 $ 19,626 $ 9,563 $ 146,361 $ 178,117 $ 54,678 $ — $ 379,156 $ 85,425 $ 36,249 $ 20,180 $ 9,614 $ 151,468 $ 181,508 $ 59,957 $ — $ 392,933 $ 4,068 (4,259 ) 3,061 (79 ) 1,725 $ 16,468 $ 6,027 $ 2,102 $ 2,330 $ 26,927 $ (7,743 ) $ 7,513 $ (22,181 ) 4,516 830 211 225 114 1,380 8,016 623 1,425 11,444 288 24 87 73 472 235 (2 ) 3,554 4,259 79 — — — 79 — — — 79 17,665 6,262 2,414 2,517 28,858 508 8,134 (17,202 ) 20,298 1,706 128 622 360 2,816 21,488 — 216 24,520 — — — — — 4,264 — 3,763 8,027 — — — — — 3,535 — — 3,535 $ 19,371 $ 6,390 $ 3,036 $ 2,877 $ 31,674 $ 29,795 $ 8,134 $ (13,223 ) $ 56,380 23.7 % 18.1 % 15.5 % 30.1 % 21.6 % 16.7 % 14.9 % 14.9 %
Three Months Ended July 31, 2015 | Three Months Ended July 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Executive Search | Executive Search | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
North America | EMEA | Asia Pacific | Latin America | Subtotal | Hay Group | Futurestep | Corporate | Consolidated | North America | EMEA | Asia Pacific | Latin America | Subtotal | Hay Group | Futurestep | Corporate | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fee revenue | $ | 90,359 | $ | 36,090 | $ | 19,215 | $ | 6,426 | $ | 152,090 | $ | 69,240 | $ | 46,064 | $ | — | $ | 267,394 | $ | 91,833 | $ | 40,121 | $ | 21,578 | $ | 7,659 | $ | 161,191 | $ | 179,453 | $ | 60,610 | $ | — | $ | 401,254 | ||||||||||||||||||||||||||||||||||||
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Total revenue | $ | 94,399 | $ | 37,171 | $ | 19,990 | $ | 6,432 | $ | 157,992 | $ | 71,441 | $ | 49,902 | $ | — | $ | 279,335 | $ | 95,205 | $ | 41,058 | $ | 21,880 | $ | 7,664 | $ | 165,807 | $ | 183,296 | $ | 65,814 | $ | — | $ | 414,917 | ||||||||||||||||||||||||||||||||||||
Net income | $ | 23,082 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other loss, net | 74 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to Korn/Ferry International | $ | 29,041 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interest | 388 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income, net | (3,532 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net | 299 | 2,660 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | (725 | ) | (30 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax provision | 10,174 | 12,210 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Operating income (loss) | $ | 24,145 | $ | 6,276 | $ | 2,986 | $ | 1,508 | $ | 34,915 | $ | 7,495 | $ | 6,189 | $ | (15,695 | ) | 32,904 | $ | 21,995 | $ | 6,675 | $ | 3,141 | $ | 1,026 | $ | 32,837 | $ | 19,083 | $ | 8,237 | $ | (19,420 | ) | 40,737 | ||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 827 | 365 | 246 | 78 | 1,516 | 3,748 | 585 | 1,574 | 7,423 | 949 | 428 | 320 | 107 | 1,804 | 8,085 | 796 | 1,524 | 12,209 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income (loss), net | 32 | 143 | 18 | 239 | 432 | (863 | ) | — | 357 | (74 | ) | 282 | 56 | 105 | 20 | 463 | 32 | 8 | 3,029 | 3,532 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | 86 | — | — | — | 86 | — | — | 639 | 725 | 30 | — | — | — | 30 | — | — | — | 30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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EBITDA | 25,090 | 6,784 | 3,250 | 1,825 | 36,949 | 10,380 | 6,774 | (13,125 | ) | 40,978 | 23,256 | 7,159 | 3,566 | 1,153 | 35,134 | 27,200 | 9,041 | (14,867 | ) | 56,508 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Restructuring charges, net | — | — | 40 | — | 40 | 240 | — | — | 280 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Integration/acquisition costs | — | — | — | — | — | 329 | — | 345 | 674 | — | — | — | — | — | 2,549 | — | 39 | 2,588 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Adjusted EBITDA | $ | 25,090 | $ | 6,784 | $ | 3,250 | $ | 1,825 | $ | 36,949 | $ | 10,709 | $ | 6,774 | $ | (12,780 | ) | $ | 41,652 | $ | 23,256 | $ | 7,159 | $ | 3,606 | $ | 1,153 | $ | 35,174 | $ | 29,989 | $ | 9,041 | $ | (14,828 | ) | $ | 59,376 | ||||||||||||||||||||||||||||||||||
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Adjusted EBITDA margin | 27.8 | % | 18.8 | % | 16.9 | % | 28.4 | % | 24.3 | % | 15.5 | % | 14.7 | % | 15.6 | % | 25.3 | % | 17.8 | % | 16.7 | % | 15.1 | % | 21.8 | % | 16.7 | % | 14.9 | % | 14.8 | % | ||||||||||||||||||||||||||||||||||||||||
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North America | EMEA | Asia Pacific | Latin America | Subtotal | Hay Group | Futurestep | Corporate | Consolidated | ||||||||||||||||||||||||||||
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Fee revenue | $ | 81,802 | $ | 35,370 | $ | 19,626 | $ | 9,563 | $ | 146,361 | $ | 174,582 | $ | 54,678 | $ | — | $ | 375,621 | ||||||||||||||||||
Deferred revenue adjustment due to acquisition | — | — | — | — | — | 3,535 | — | — | 3,535 | |||||||||||||||||||||||||||
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Adjusted fee revenue | $ | 81,802 | $ | 35,370 | $ | 19,626 | $ | 9,563 | $ | 146,361 | $ | 178,117 | $ | 54,678 | $ | — | $ | 379,156 | ||||||||||||||||||
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Total revenue | $ | 85,425 | $ | 36,249 | $ | 20,180 | $ | 9,614 | $ | 151,468 | $ | 181,508 | $ | 59,957 | $ | — | $ | 392,933 | ||||||||||||||||||
Net income attributable to Korn/Ferry International | $ | 3,208 | ||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interest | 860 | |||||||||||||||||||||||||||||||||||
Other income, net | (4,259 | ) | ||||||||||||||||||||||||||||||||||
Interest expense, net | 3,061 | |||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | (79 | ) | ||||||||||||||||||||||||||||||||||
Income tax provision | 1,725 | |||||||||||||||||||||||||||||||||||
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Operating income (loss) | $ | 16,468 | $ | 6,027 | $ | 2,102 | $ | 2,330 | $ | 26,927 | $ | (7,743 | ) | $ | 7,513 | $ | (22,181 | ) | 4,516 | |||||||||||||||||
Depreciation and amortization | 830 | 211 | 225 | 114 | 1,380 | 8,016 | 623 | 1,425 | 11,444 | |||||||||||||||||||||||||||
Other income (loss), net | 288 | 24 | 87 | 73 | 472 | 235 | (2 | ) | 3,554 | 4,259 | ||||||||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries, net | 79 | — | — | — | 79 | — | — | — | 79 | |||||||||||||||||||||||||||
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EBITDA | 17,665 | 6,262 | 2,414 | 2,517 | 28,858 | 508 | 8,134 | (17,202 | ) | 20,298 | ||||||||||||||||||||||||||
Restructuring charges, net | 1,706 | 128 | 622 | 360 | 2,816 | 21,488 | — | 216 | 24,520 | |||||||||||||||||||||||||||
Integration/acquisition costs | — | — | — | — | — | 4,264 | — | 3,763 | 8,027 | |||||||||||||||||||||||||||
Deferred revenue adjustment due to acquisition | — | — | — | — | — | 3,535 | — | — | 3,535 | |||||||||||||||||||||||||||
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Adjusted EBITDA | $ | 19,371 | $ | 6,390 | $ | 3,036 | $ | 2,877 | $ | 31,674 | $ | 29,795 | $ | 8,134 | $ | (13,223 | ) | $ | 56,380 | |||||||||||||||||
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Adjusted EBITDA margin | 23.7 | % | 18.1 | % | 15.5 | % | 30.1 | % | 21.6 | % | 16.7 | % | 14.9 | % | 14.9 | % | ||||||||||||||||||||
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Three Months Ended July 31, 20162017 Compared to Three Months Ended July 31, 20152016
Fee Revenue
Fee Revenue.Fee revenue went up by $108.2$25.7 million, or 40%7%, to $375.6$401.3 million in the three months ended July 31, 20162017 compared to $267.4$375.6 million in theyear-ago quarter. Exchange rates unfavorably impacted fee revenue by $8.4$3.3 million, or 1%, in the three months ended July 31, 2017 compared to theyear-ago quarter. The higher fee revenue was attributable to organic growth in all lines of business.
Executive Search.Executive Search reported fee revenue of $161.2 million, an increase of $14.8 million, or 10%, in the three months ended July 31, 2017 compared to $146.4 million in theyear-ago quarter. As detailed below, Executive Search fee revenue was higher in North America, EMEA and Asia Pacific, partially offset by lower fee revenue in the Latin America region in the three months ended July 31, 2017 as compared to theyear-ago quarter. The higher fee revenue in Executive Search was mainly due to a 12% increase in the number of engagements billed, offset by a 1% decrease in the weighted-average fees billed per engagement (calculated using local currency) during the three months ended July 31, 2017 compared to theyear-ago quarter. Exchange rates unfavorably impacted fee revenue by $1.2 million, or 1%, in the three months ended July 31, 2017, compared to theyear-ago quarter.
North America reported fee revenue of $91.8 million, an increase of $10.0 million, or 12%, in the three months ended July 31, 2017 compared to $81.8 million in theyear-ago quarter. 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) during the three months ended July 31, 2017 compared to theyear-ago quarter. The overall increase in fee revenue was driven by the increase in fee revenue from the industrial and technology sectors compared to theyear-ago quarter, offset by a decline in fee revenue in the life sciences/healthcare and consumer goods sectors. The effect of exchange rates was minimal to fee revenue in the three months ended July 31, 2017, compared to theyear-ago quarter.
EMEA reported fee revenue of $40.1 million, an increase of $4.7 million, or 13%, in the three months ended July 31, 2017 compared to $35.4 million in theyear-ago quarter. Exchange rates unfavorably impacted fee revenue by $1.1 million, or 3%, in the three months ended July 31, 20162017, compared to theyear-ago quarter. The higherrest of the change in fee revenue was attributabledue to growth in Hay Group and Futurestep, offset with the decrease in Executive Search. Thea 24% increase in Hay Group was primarily due to the Legacy Hay acquisition, which was consummated in the third quarternumber of fiscal 2016.
Executive Search.Executive Search reported fee revenue of $146.4 million, a decrease of $5.7 million, or 4%, in the three months ended July 31, 2016 compared to $152.1 million in the year-ago quarter. As detailed below, Executive Search fee revenue was lower in North America and EMEA,engagements billed, offset by higher fee revenue in the Latin America and Asia Pacific regions in the three months ended July 31, 2016 as compared to the year-ago quarter. The lower fee revenue in Executive Search was mainly due to an 11%a 6% decrease in the weighted-average fees billed per engagement partially offset by a 7% increase in engagements billed(calculated using local currency) during the three months ended July 31, 2016 as2017 compared to theyear-ago quarter. The consolidation of our Mexico subsidiary that we obtained control ofperformance in the fourthUnited Kingdom, Germany and Italy were the primary contributors to the increase in fee revenue in
the three months ended July 31, 2017 compared to theyear-ago quarter, of fiscal 2016 droveoffset by a 5% decrease in the weighted-average fees billed per engagement. Exchange rates unfavorably impacted fee revenue by $3.6 million, or 2%,in the United Arab Emirates. In terms of business sectors, industrial, life sciences/healthcare and technology had the largest increase in fee revenue in the three months ended July 31, 2016, when2017 as compared to theyear-ago quarter.
North AmericaAsia Pacific reported fee revenue of $81.8$21.6 million, a decreasean increase of $8.6$2.0 million, or 10%, in the three months ended July 31, 20162017 compared to $90.4$19.6 million in theyear-ago quarter. North America’s fee revenue was lower due to a 6% decrease in the weighted-average fees billed per engagement and a 4% decrease in the number of engagements billed during the three months ended July 31, 2016 compared to the year-ago quarter. The overall decrease in fee revenueeffect of exchange rates was driven by a decline in the industrial, technology, life sciences/healthcare, and financial services sectors as comparedminimal to the year-ago quarter, partially offset by the growth in the consumer goods sector. Exchange rates unfavorably impacted fee revenue by $0.2 million in the three months ended July 31, 2016, when compared to the year-ago quarter.
EMEA reported fee revenue of $35.4 million, a decrease of $0.7 million, or 2%, in the three months ended July 31, 2016 compared to $36.1 million in the year-ago quarter. Exchange rates unfavorably impacted fee revenue by $1.5 million, or 4%, in the three months ended July 31, 2016, when compared to the year-ago quarter. EMEA’s fee revenue was lower due to a 4% decrease in the weighted-average fees billed per engagement, offset by a 2% increase in the number of engagements billed during the three months ended July 31, 2016 compared to the year-ago quarter. The performance in existing offices in Switzerland and France were the primary contributors to the decrease in fee revenue in the three months ended July 31, 20162017, compared to theyear-ago quarter, offset by an increase in fee revenue in Germany and United Arab Emirates. In terms of business sectors, life sciences/healthcare experienced the largest decline in fee revenue in the three months ended July 31, 2016 as compared to the year-ago quarter, partially offset by an increase in the technology sector.
Asia Pacific reported fee revenue of $19.6 million, an increase of $0.4 million, or 2%, in the three months ended July 31, 2016 compared to $19.2 million in the year-ago quarter. Exchange rates unfavorably impacted fee revenue by $0.5 million, or 3%, in the three months ended July 31, 2016, when compared to the year-ago quarter. The increase in fee revenue was due to a 6%9% increase in the number of engagements billed offset byand a 3% decrease1% increase in the weighted-average fees billed per engagement (calculated using local currency) in the three months ended July 31, 20162017 compared to theyear-ago quarter. The performance in China,Australia and Japan and India were the primary contributors to the increase in fee revenue in the three months ended July 31, 20162017 compared to theyear-ago quarter, partially offset by a decreasedecline in fee revenue in Australia. FinancialHong Kong. Industrial and financial services and consumer goods were the main sectors contributing to the increase in fee revenue in the three months ended July 31, 20162017, as compared to theyear-ago quarter, partially offset by a decline in fee revenue in the industrial sector. quarter.
Latin America reported fee revenue of $9.6$7.7 million, an increasea decrease of $3.2$1.9 million, or 50%20%, in the three months ended July 31, 20162017 compared to $6.4$9.6 million in theyear-ago quarter. Exchange rates unfavorably impacted fee revenue for Latin America by $1.4 million, or 22%, in the three months ended July 31, 2016, when compared to the year-ago quarter. The increase is dueeffect of exchange rates was minimal to $4.4 million in fee revenue from our Mexican subsidiary that we began consolidating in the fourth quarter of fiscal 2016 as a result of obtaining control of the entity. The rest of the change primarily relates to an increase in fee revenue in Brazil, offset by lower fee revenues in Venezuela in the three months ended July 31, 2016 compared to the year-ago quarter. Industrial, financial services, consumer goods, and life sciences/healthcare were the main sectors contributing to the growth in fee revenue in the three months ended July 31, 20162017, compared to theyear-ago quarter. The decrease is due to lower fee revenue in Mexico and Brazil in the three months ended July 31, 2017, compared to theyear-ago quarter, partially offset by higher fee revenue in Chile. Consumer goods and financial services were the main sectors contributing to the decline in fee revenue, offset by the growth in technology sector in the three months ended July 31, 2017, compared to theyear-ago quarter.
Hay Group.Hay Group reported fee revenue of $174.6$179.5 million, an increase of $105.4 million, or 152%, in the three months ended July 31, 2016 compared to $69.2 million in the year-ago quarter. Exchange rates unfavorably impacted fee revenue by $3.4 million, or 5%, compared to the year-ago quarter. The increase in fee revenue was primarily due to the legacy Hay acquisition which was consummated in the third quarter of fiscal 2016. As a result of the Legacy Hay acquisition, consulting fee revenue was higher by $70.5 million in the three months ended July 31, 2016 compared to the year-ago quarter, with the remaining increase generated by product revenue.
Futurestep.Futurestep reported fee revenue of $54.7 million, an increase of $8.6 million, or 19%, in the three months ended July 31, 2016 compared to $46.1 million in the year-ago quarter. Exchange rates unfavorably impacted fee revenue by $1.4$4.9 million, or 3%, in the three months ended July 31, 2016.2017 compared to $174.6 million in theyear-ago quarter. Exchange rates unfavorably impacted fee revenue by $1.7 million, or 1%, compared to theyear-ago quarter. Fee revenue from our products business was higher by $4.6 million in the three months ended July 31, 2017 compared to theyear-ago quarter, with the remaining increase of $0.3 million generated by consulting services.
Futurestep.Futurestep reported fee revenue of $60.6 million, an increase of $5.9 million, or 11%, in the three months ended July 31, 2017 compared to $54.7 million in theyear-ago quarter. Exchange rates unfavorably impacted fee revenue by $0.4 million, or 1%, in the three months ended July 31, 2017. Higher fee revenues in RPO and professional search of $5.4$5.2 million and $2.9$1.4 million, respectively, drove the increase in fee revenue. The increase in fee revenue in professional search was due to a 14% increase in the number of engagements billed in the three months ended July 31, 2016 compared to the year-ago quarter.
Compensation and Benefits
Compensation and benefits expense increased $83.5$11.0 million, or 47%4%, to $263.0$274.0 million in the three months ended July 31, 20162017 from $179.5$263.0 million in theyear-ago quarter. Exchange rates favorably impacted compensation and benefits expenses by $5.3$1.8 million, or 3%1%, in the three months ended July 31, 20162017 compared to theyear-ago quarter. The increase in compensation and benefits was primarily due to the Legacy Hay acquisition and $5.3higher average headcount which contributed $13.9 million in integration/acquisition costs compared to the year-ago quarter. The acquisition was the main factor for increases of $59.1 million, $2.2 million, $1.7 million and $1.1 millionhigher in salaries and related payroll taxes, retirement plans, insurancepartially offset by a decline of $3.0 million in integration costs compared toyear-ago quarter.
Executive Search compensation and outside contractors, respectively.benefits expense increased by $8.8 million, or 9%, to $107.5 million in the three months ended July 31, 2017 compared to $98.7 million in theyear-ago quarter. The increase was primarily due to higher salaries and related payroll taxes of $4.4 million due to an 8% increase in average headcount reflecting our continued growth-related investments back into the business. Also contributing to the increase in compensation and benefits expense was an increase in the amortization of long-term incentive awards of $2.6 million, $1.3$1.9 million in higher stock based compensation and a change in the fair value of vested amounts owed under certain deferred compensation plans of $2.5 million in the three months ended July 31, 2016 compared to the year-ago quarter due to market movements.
Executive Search compensation and benefits expense decreased by $0.7 million, to $98.7 million in the three months ended July 31, 2016 compared to $99.4 million in the year-ago quarter. This decrease was primarily due to lower performance related bonus expense of $7.3 million, partially offset by an increase of $3.3 million in salaries and related payroll expense, $2.0 million in the amortization of long-term incentive awards and $2.3 million in increased compensation expenses associated with our deferred compensation plans during the three months ended July 31, 2016and a $1.6 million increase in amortization of long-term incentive awards compared to theyear-ago quarter due to market movements. The decrease in performance related bonus expense was principally due to lower fee revenue and profitability. quarter. Executive Search compensation and benefits expense, as a percentage of fee revenue, increased towas 67% in both the three months ended July 31, 2016 from 65% in the year-ago quarter.2017 and 2016.
Hay Group compensation and benefits expense increased $73.8decreased $1.3 million, or 178%1%, to $115.3$114.0 million in the three months ended July 31, 20162017 from $41.5$115.3 million in theyear-ago quarter. The increase in compensation and benefitschange was primarily due to the Legacy Hay acquisition and $4.0 milliona decrease in integration/acquisition costs compared to the year-ago quarter. Due to the acquisition, average headcount increased by 297% during the three months ended July 31, 2016 compared to the year-ago quarter, resulting in higher salaries and related payroll taxes, performance related bonus expense, retirement plans and insuranceintegration costs of $50.3 million, $7.8 million, $1.7 million and $1.5 million, respectively.compared toyear-ago quarter. Hay Group compensation and benefits expense, as a percentage of fee revenue, increased to 66%was 64% in the three months ended July 31, 2016 from 60%2017 compared to 66% in theyear-ago quarter.
Futurestep compensation and benefits expense increased $6.7$5.0 million, or 21%13%, to $38.0$43.0 million in the three months ended July 31, 20162017 from $31.3$38.0 million in theyear-ago quarter. SalariesThe increase was due to higher salaries and related payroll taxes were the primary drivers which increased by $5.3of $5.0 million due to a 29%13% increase in the average headcount in the three months ended July 31, 20162017 compared to theyear-ago quarter. The higher average headcount was primarily driven by the need to service an increase in fee revenue in both professional search andthe RPO businesses.business. Futurestep compensation and benefits expense, as a percentage of fee revenue, was 69%71% in the three months ended July 31, 20162017 compared to 68%69% in theyear-ago quarter.
Corporate compensation and benefits expense increaseddecreased by $3.7$1.6 million, or 51%15%, to $11.0$9.4 million in the three months ended July 31, 20162017 from $7.3$11.0 million in theyear-ago quarter. ExcludingThis decrease was mainly due to a decrease of $1.3 million of integration/acquisitionin integration costs related to the Legacy Hay acquisition, compensation and benefits expense increased $2.4 million in the three months ended July 31, 2016 as2017 compared to theyear-ago quarter. This increase was mainly due to an increase of $1.1 million and $0.9 million in stock based compensation and expenses associated with our deferred compensation plans, respectively in the three months ended July 31, 2016 compared to the year-ago quarter.
General and Administrative Expenses
General and administrative expenses increased $17.8$3.0 million, or 48%5%, to $55.3$58.3 million in the three months ended July 31, 20162017 compared to $37.5$55.3 million in the three months ended July 31, 2015.year-ago quarter. Exchange rates favorably impacted general and administrative expenses by $1.4$0.6 million, or 4%1%, during the three months ended July 31, 20162017 compared to theyear-ago quarter. The increase in general and administrative expenses was primarily due to foreign exchange loss of $1.4 million during the Legacy Hay acquisition that took place in the third quarter of fiscal 2016 and $2.1 million in integration/acquisition coststhree months ended July 31, 2017 compared to a foreign exchange gain of $1.3 million during theyear-ago quarter. The acquisitionrest of the change in general and administrative expenses was the main factor fordue to increases of $11.3$1.3 million, $2.1 million, $1.6$0.5 million and $1.2$0.5 million in premise and office expense, business development expenses legal and other professionalbad debt expenses, and travel related expenses, respectively.respectively, offset by a decline of $2.4 million in integration costs compared to theyear-ago quarter. General and administrative expenses, as a percentage of fee revenue, was 15% in both the three months ended July 31, 2016 compared to 14% in the year-ago quarter.2017 and 2016.
Executive Search general and administrative expenses decreased $0.5increased $2.2 million, or 3%14%, to $16.1$18.3 million in the three months ended July 31, 20162017 from $16.6$16.1 million in theyear-ago quarter. General and administrative expenses decreasedincreased of $1.1 million primarily due to highergenerating foreign exchange gains of $0.7 million during theyear-ago quarter compared to being flat in the three months ended July 31, 2016 compared to the year-ago quarter.2017. Executive Search general and administrative expenses, as a percentage of fee revenue, was 11% in both the three months ended July 31, 20162017 and 2015.2016.
Hay Group general and administrative expenses increased $15.4$0.8 million, or 177%3%, to $24.1$24.9 million in the three months ended July 31, 20162017 compared to $8.7$24.1 million in theyear-ago quarter. The increase is primarily due to foreign exchange losses of $0.6 million during the three months ended July 31, 2015. The increase in general and administrative expenses was primarily due2017 compared to the Legacy Hay acquisition. The acquisition was the main factor for increasesa foreign exchange gains of $10.7$0.5 million $1.6 million, $ 1.3 million and $1.2 million in premise and office expense, business development expenses, legal and other professional expenses and travel related expenses, respectively.during theyear-ago quarter. Hay Group general and administrative expenses, as a percentage of fee revenue, was 14% in both the three months ended July 31, 2016 compared to 13% in the year-ago quarter.2017 and 2016.
Futurestep general and administrative expenses were $5.6increased $1.0 million, and $5.4or 18%, to $6.6 million respectively, in the three months ended July 31, 20162017 from $5.6 million in theyear-ago quarter. The increase was mainly due to increases of $0.5 million and 2015.$0.4 million in premise and office expense and bad debt expense, respectively, during the three months ended July 31, 2017 compared to theyear-ago quarter. Such increases were due in large part to the increase in fee revenue in the three months ended July 31, 2017 compared theyear-ago quarter. Futurestep general and administrative expenses, as a percentage of fee revenue, was 10%11% in the three months ended July 31, 20162017 compared to 12%10% in theyear-ago quarter.
Corporate general and administrative expenses increased $2.7decreased $1.0 million, or 40%11%, to $9.5$8.5 million in the three months ended July 31, 20162017 compared to $6.8$9.5 million in theyear-ago quarter. The increasedecrease in general and administrative expenses was driven bydue to a decrease of $2.4 million in integration/acquisitionintegration costs associated with the Legacy Hay acquisition, incurredoffset by the increase of $0.8 million and $0.5 million in legal and other professional expenses and foreign currency losses, respectively, during the three months ended July 31, 2017 compared to the three months ended July 31, 2016.
Cost of Services Expense
Cost of services expense consistconsists primarily ofnon-billable contractor and product costs related to the delivery of various services and products, primarily in Futurestep and Hay Group. Cost of services expense increased $6.7decreased $1.0 million, or 66%6%, to $16.8$15.8 million in the three months ended July 31, 20162017 compared to $10.1$16.8 million in theyear-ago quarter. The increase is mainly due to higher fee revenue in Hay Group due to the Legacy Hay acquisition. Cost of services expense, as a percentage of fee revenue, was 4% in both the three months ended July 31, 20162017 and 2015.2016.
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $11.4$12.2 million, an increase of $4.0$0.8 million, or 54%7%, in the three months ended July 31, 20162017 compared to $7.4$11.4 million in theyear-ago quarter. The increase is mainly due to the Legacy Hay acquisition. The increase relates primarily to technology investments that were made in the current and prior year in software and computer equipment, in addition to increases in leasehold improvements, furniture and fixtures and intangible assets.
Restructuring Charges, Net
During the three months ended July 31, 2017, we continued the implementation of the fiscal 2016 werestructuring plan to integrate Legacy Hay entities that were acquired in fiscal 2016 and recorded $0.3 million of restructuring charges relating to the consolidation of premises.
During the three months ended July 31, 2016, the Company continued the implementation of the fiscal 2016 restructuring plan in order to integrate the Hay Group entities that were acquired in the prior yearfiscal 2016 by eliminating redundant positions and operational, and general and administrative expenses and consolidation of office space. As a result, we recorded $24.5 million ofconsolidating premises. This resulted in restructuring charges with $11.5 million of severance costs and $13.0 million relating to the consolidation of office space during the three months ended July 31, 2016. No restructuring charges, net were incurred during the three months ended July 31, 2015.
Operating Income
Operating income was $4.5$24.5 million in the three months ended July 31, 2016, as comparedof which $11.5 million relates to operatingseverance and $13.0 million relates to consolidation of premises.
Operating Income
Operating income of $32.9 million in the year-ago quarter. This decrease in operating income resulted from increases of $83.5 million in compensation and benefits expense (which included $5.3 million in integration/acquisition costs), $24.5 million in restructuring charges, net, $17.8 million in general and administrative expenses (which included $2.1 million in integration/acquisition costs), $6.7 million cost of services expense and $4.0 million of depreciation and amortization expenses. These changes were partially offset by higher fee revenue of $108.2 million during the three months ended July 31, 2016 as compared to the year-ago quarter.
Executive Search operating income decreased $8.0 million to $26.9was $40.7 million in the three months ended July 31, 20162017 as compared to $34.9$4.5 million in theyear-ago quarter. This increase in operating income resulted from higher fee revenue of $25.7 million and a decrease in restructuring charges, net of $24.2 million, offset by increases of $11.0 million in compensation and benefits expense and $3.0 million in general and administrative expenses.
Executive Search operating income increased $5.9 million, or 22%, to $32.8 million in the three months ended July 31, 2017 as compared to $26.9 million in theyear-ago quarter. The decreaseincrease in Executive Search operating income was driven by lowerincreases in higher fee revenue of $5.7$14.8 million and an increasea decrease in restructuring charges, net of $2.8 million, offset by increases in restructuring charges, net.compensation and benefits expense, general and administrative expenses and depreciation and amortization expenses of $8.8 million $2.2 million and $0.4 million, respectively. Executive Search operating income, as a percentage of fee revenue, was 18%20% in the three months ended July 31, 20162017 as compared to 23%18% in theyear-ago quarter.
Hay Group operating lossincome was $7.7$19.1 million, primarilyan increase of $26.8 million, in the three months ended July 31, 20162017 as compared to operating incomeloss of $7.5$7.7 million in theyear-ago quarter. The change was primarily driven by increasesa decrease in restructuring charges, net of $21.2 million, an increase in fee revenue of $4.9 million and a decrease of $1.3 million in compensation and benefits expense, (which included $4.0 millionoffset by an increase in integration/acquisition costs), restructuring charges, net and general and administrative expenses of $73.8$0.8 million $21.5 million and $15.4 million, respectively in the three months ended July 31, 20162017 compared to theyear-ago quarter. Further contributing the decline was an increase in costHay Group operating income, as a percentage of services expense and depreciation and amortization expense of $5.6 million and $4.3 million, respectively. Partially offsetting these changes in operating loss was an increase in fee revenue, of $105.4 million mainly duewas 11% in the three months ended July 31, 2017 compared to the Legacy Hay acquisition. Hay Group operating loss as a percentage of fee revenue was 4%of (4%) in the three months ended July 31, 2016 compared to operating income as a percentage of fee revenue of 11% in the year-ago quarter.
Futurestep operating income increased by $1.3was $8.2 million, to $7.5an increase of $0.7 million, in the three months ended July 31, 20162017 as compared to $7.5 million from $6.2 million in theyear-ago quarter. The increase in Futurestep operating income was primarily due to $8.6 million indriven by higher fee revenue partiallyof $5.9 million, offset by an increase of $6.7 million in compensation and benefits expense in the three months ended July 31, 2016 compared to the year-ago quarter. The change in compensation and benefits expense was driven by higher salaries and related payroll taxes due to an increase in average headcount.of $5.0 million. Futurestep operating income, as a percentage of fee revenue, was 14% in both the three months ended July 31, 2016 compared to 13% in the three months ended July 31, 2015.2017 and 2016.
Net Income Attributable to Korn Ferry
Net income attributable to Korn Ferry decreased $19.9increased by $25.8 million or 86%, to $3.2$29.0 million in the three months ended July 31, 20162017 compared to $23.1$3.2 million in theyear-ago quarter. The decreaseincrease was due to higher total revenue of $22.0 million and lower operating expenses of $142.0$14.2 million, offset by an increase in total revenue of $113.6 million and a decrease in income tax provision of $8.4$10.5 million due to lower profitability.higher profitability compared theyear-ago quarter. Net income attributable to Korn Ferry, as a percentage of fee revenue, was 7% for the three months ended July 31, 2017 as compared to 1% in theyear-ago quarter.
Adjusted EBITDA
Adjusted EBITDA increased $14.7$3.0 million to $56.4$59.4 million in the three months ended July 31, 20162017 as compared to $41.7$56.4 million in theyear-ago quarter. This increase was driven by higher adjusted fee revenue of $111.8$22.1 million, (which included a $3.5 million deferred revenue adjustment related to the Legacy Hay acquisition) and an increase in the fair value of our marketable securities of $3.2 million in the three months ended July 31, 2016 compared to the year-ago quarter, offset by increases of $78.2 million, $15.7 million and $6.7$14.0 million in compensation and benefits expense (excluding integration/acquisition costs),and $5.4 million in general and administrative expense (excluding integration/acquisition costs) and cost of services expense, respectively.expenses. Adjusted EBITDA, as a percentage of adjusted fee revenue, was 15% in both the three months ended July 31, 2016 as compared to 16% in the year-ago quarter.2017 and 2016.
Executive Search Adjusted EBITDA was $31.7 million, a decrease of $5.2increased $3.5 million, or 14%11%, in the three months ended July 31, 2016 as compared to $36.9$35.2 million in the three months ended July 31, 2015. This decrease2017 as compared to $31.7 million in the three months ended July 31, 2016. The increase was due to lowerdriven by higher fee revenue of $5.7$14.8 million, offset by a decreaseincreases of $0.7$8.8 million in compensation and benefits expense and $2.2 million in general and administrative expenses during the three months ended July 31, 20162017 compared to theyear-ago quarter. The decrease in compensation and benefits expense was driven by lower performance related bonus expense, offset by an increase in salaries and related payroll expense. Executive Search Adjusted EBITDA, as a percentage of fee revenue, was 22% in both the three months ended July 31, 2016 as compared to 24% in the year-ago quarter.2017 and 2016.
Hay Group Adjusted EBITDA increased by $19.1 million to $29.8was $30.0 million in the three months ended July 31, 20162017 as compared to $10.7$29.8 million in theyear-ago quarter. This increase was due to higher adjusted fee revenue of $108.9 million (which included a $3.5 million deferred revenue adjustment related to Legacy Hay acquisition), offset by an increase of $69.8 million, $15.4 million and $5.6 million in compensation and benefit expense (excluding integration/acquisition costs), general and administrative expenses and cost of services expense, respectively. Hay Group Adjusted EBITDA, as a percentage of adjusted fee revenue, was 17% in both the three months ended July 31, 2016 as compared to 15% in the year-ago quarter.2017 and 2016.
Futurestep Adjusted EBITDA increased by $1.3 million to $8.1was $9.0 million in the three months ended July 31, 20162017 as compared to $6.8$8.1 million in theyear-ago quarter. The increase in Futurestep Adjusted EBITDA was primarily due to an increase in fee revenue of $8.6 million, offset by an increase of $6.7 million in compensation and benefits expense during the three months ended July 31, 2016 as compared to the year-ago quarter. The increase in compensation and benefits expense was primarily driven by higher salaries and related payroll taxes due to an increase in average headcount. Futurestep Adjusted EBITDA, as a percentage of fee revenue, was 15% in both the three months ended July 31, 20162017 and 2015.2016.
Other Income, (Loss), Net
Other income, net was $4.3$3.5 million in the three months ended July 31, 20162017 as compared to other loss, net of $0.1$4.3 million in theyear-ago quarter. The changedecrease was primarily due to the increasechange in the fair value of our marketable securities, which created a smaller gain of $3.9 million and $0.7 million during the three months ended July 31, 2016 and 2015, respectively.2017 compared to theyear-ago quarter.
Interest Expense, Net
Interest expense, net primarily relates to our term loan facility and borrowings under our COLI policies, which is partially offset by interest earned on cash and cash equivalent balances. Interest expense, net was $3.1$2.7 million in the three months ended July 31, 20162017 as compared to $0.3$3.1 million in theyear-ago quarter. The increasedecrease was mainly due to thewrite-off of $1.0 million in debt issuance costs in theyear-ago quarter associated with our prior term facility, offset with the increase of $0.5 million in interest expense associated with the term loan facility that we entered into in the current quarterfiscal 2017 to provide enhanced financial flexibility.
Equity
flexibility and in Earningsrecognition of Unconsolidated Subsidiaries
Equity in earningsthe accelerated pace of unconsolidated subsidiaries is comprised of our less than 50% interest in 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, in three months ended July 31, 2016, and also includes our Mexican subsidiary for the three months ended July 31, 2015. In the fourth quarter of fiscal 2016, we obtained control of our Mexico subsidiary and began to consolidate the operations. Equity in earnings was $0.1 million in the three months ended July 31, 2016 as compared to $0.7 million in the three months ended July 31, 2015. The decrease is due to the consolidation of our Mexico subsidiary for the three months ended July 31, 2016, which is now included in operations.Legacy Hay integration.
Income Tax Provision
The provision for income tax was $1.7$12.2 million in the three months ended July 31, 20162017 compared to $10.1$1.7 million in theyear-ago quarter. This reflects a 30%29% and 31%30% effective tax rate infor the three months ended July 31, 2017 and 2016, and 2015, respectively.
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 included 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 for the three months ended July 31, 20162017 was $0.4 million compared to $0.9 million.million for the three months ended July 31, 2016.
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 property 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’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 in the “Risk Factors” sections of the Annual Report on Form10-K for the fiscal year ending April 30, 2016.2017. Additionally, the Company considers share repurchases on an opportunistic basis and subject to the terms of our credit agreement.
On June 15, 2016, we entered into a new senior secured $400 million Credit Agreement with a syndicate of banks and Wells Fargo Bank, National Association as administrative agent, to provide for enhanced financial flexibility and in recognition of the accelerated pace of the Legacy Hay integration. See Note 10 —Long-Term Debtfor a description of the new credit facility. We drew down $275 million on the new term loan and used $140 million of the proceeds topay-off the term loan that was outstanding as of April 30, 2016. We had $3.0 million standby letters of credit issued under our long-term debt arrangements as of July 31, 2017 and April 30, 2017. We had a total of $8.8 million and $8.1 million of standby letters of credits with other financial institutions as of July 31, 2017 and April 30, 2017, respectively. The remaining funds are available for working capital and general corporate purposes.standby letters of credits were generally issued as a result of entering into office premise leases.
As part of the Legacy Hay acquisition, the Company has committed to a $40 million retention pool (up to $5(of which $9.0 million payable within one year of the closing of the acquisition)was paid in fiscal 2017) for certain employees of Legacy Hay subject to certain circumstances. Of the remaining 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.
On December 8, 2014, the Board of Directors 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, the Board of Directors also approved an increase in the Company’s stock repurchase program to an aggregate of $150.0 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. During the second quarter of fiscal 2017, we resumed repurchasing shares through this program. We repurchased approximately $4.0 million of the Company’s common stock during the three months ended July 31, 2017. As of July 31, 2017, $117.2 million remained available for common stock repurchases under our stock repurchase program. Any decision to continue to execute our currently outstanding issuer repurchase program will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board of Directors. Our senior secured credit agreement requires that 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 as a condition to consummating permitted acquisitions, paying dividends to our stockholders and share repurchases of our common stock.
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 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 acquisition, the retention pool obligations in connection with the Legacy Hay acquisition, shares 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 dividend policy.
Cash and cash equivalents and marketable securities were $381.1$408.3 million and $414.7$530.8 million as of July 31, 20162017 and April 30, 2016,2017, respectively. Net of amounts held in trust for deferred compensation plans and accrued bonuses, cash and marketable securities were $195.0$235.1 million and $88.9$245.1 million at July 31, 20162017 and April 30, 2016,2017, respectively. As of July 31, 20162017 and April 30, 2016,2017, we held $127.5$184.8 million and $129.0$165.8 million, respectively of cash and cash equivalents in foreign locations, net of amounts held in trust for deferred compensation plans and to pay fiscal 20172018 and 20162017 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 the three months ended July 31, 2016.2017. The primary objectives of our investment in mutual funds are to meet the obligations under certain of our deferred compensation plans.
As of July 31, 20162017 and April 30, 2016,2017, marketable securities included trading securities of $137.0$126.3 million (net of gross unrealized gains of $3.5$9.5 million and gross unrealized losses of $0.9$0.5 million) and $141.4$119.9 million (net of gross unrealized gains of $1.4$6.7 million and gross unrealized losses of $2.6$0.6 million), respectively, held in trust for settlement of our obligations under certain deferred compensation plans, of which $133.5$114.6 million and $130.1$115.6 million, respectively, are classified asnon-current. Our vested and unvested obligations for which these assets These marketable securities were held in trust totaled $133.9to satisfy vested obligations totaling $116.2 million and $138.8$99.5 million as of July 31, 20162017 and April 30, 2016,2017, respectively. Unvested obligations under the deferred compensation plans totaled $25.3 million and $37.6 million as of July 31, 2017 and April 30, 2017, respectively.
The net increase in our working capital of $128.1$22.0 million as of July 31, 20162017 compared to April 30, 20162017 is primarily attributable to a decrease in compensation and benefits payable and an increase in accounts receivable, offset by decreases in cash and cash equivalents. The decrease in compensation and benefits payable and cash and cash equivalents was primarily due to the payment of annual bonuses earned in fiscal 20162017 and paid during the first quarter of fiscal 2017 while2018, with cash and cash equivalents also decreasing due tosign-on and retention payments made during the quarter. The increase in accounts receivable increasedwas due to an increase in days of sales outstanding which went from 5561 days to 6769 days (which is consistent with historical experience) from April 30, 20162017 to July 31, 2016.2017. Cash used in operating activities was $136.0$109.6 million in the three months ended July 31, 20162017, a decrease of $26.1 million, compared to $90.2$135.7 million in theyear-ago quarter. period.
Cash used in investing activities was $9.8$11.8 million in the three months ended July 31, 2016,2017, an increase of $13.6$2.0 million, compared to cash provided by investing activities of $3.8$9.8 million in theyear-ago quarter. Cash used in investing activities was higher primarily due cash used to an increasepurchase marketable securities net of sales/maturities of marketable securities in the three months ended July 31, 2017 compared to cash provided by sales/maturities of marketable securities net of purchase of marketable securities in theyear-ago quarter, offset with the decrease in cash used to purchase property and equipment in connection with ourco-location activities and a payment made on the final working capital settlementamount paid in theyear-ago quarter related to the Legacy Hay acquisition.
Cash provided byused in financing activities was $126.6$15.3 million in the three months ended July 31, 2016, an increase of $133.0 million,2017 compared to cash used inprovided by financing activities of $6.4$126.3 million in theyear-ago quarter. Cash provided byused in financing activities increased primarily due to the borrowinga decrease of $275.0$135.0 million in proceeds from the newour term loan facility in the three months ended July 31, 2016, offset by $140.0 million used to net ofpay-off of the term loan that was outstanding as of April 30, 2016. As of2016, $5.2 million in term loan payments made during the three months ended July 31, 2016, $150.02017 and $4.0 million remained available forof Company’s common stock repurchasespurchased under ourthe stock repurchase program.
Cash Surrender Value of Company Owned Life Insurance Policies, Net of Loans
The Company 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 July 31, 20162017 and April 30, 2016,2017, we held contracts with gross CSV of $178.6$180.7 million and $175.7$180.3 million, respectively. Since fiscal 2012, we paid the premiums under our COLI contracts from operating cash, and in prior years, we generally borrowed under our COLI contracts to pay related premiums. 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$66.8 million and $67.2 million as of July 31, 20162017 and April 30, 2016.2017, respectively. At July 31, 20162017 and April 30, 2016,2017, the net cash value of these policies was $110.2$113.9 million and $107.3$113.1 million, respectively.
Long-Term Debt
On June 15, 2016, we entered into a senior secured $400 million Credit Agreement (the “Credit Agreement”) with a syndicate of banks and Wells Fargo Bank, National Association as administrative agent ( to(to provide for enhanced financial flexibility and in recognition of the accelerated pace of the Hay Group integration). The Credit Agreement provides for, among other things: (a) a senior secured term loan facility in an aggregate principal amount of $275 million (the “ Term Facility”);, (b) a senior secured revolving credit facility (the “Revolver” and together with the Term Facility, the “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) certain customary affirmative and negative covenants, including a maximum consolidated total leverage ratio (as defined below) and a minimum interest coverage ratio and (e) an expanded definition of permittedadd-backs to Adjusted EBITDA in recognition of the accelerated integration actions referenced above.actions. We drew down $275 million on
the new term loan and used $140 million of the proceeds topay-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. As of July 31, 2016, we were in compliance with our debt covenants.
At our option, loans issued under the 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 Credit Facilities 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 our total funded debt to adjusted EBITDA ratio (as set forth in the Credit Agreement, the “consolidated leverage ratio”) at such time. In addition, the Companywe will be required to pay to the lenders a quarterly fee ranging from 0.20% to 0.35% per annum on the average daily unused amount of the Term Facility, based upon the Company’sour consolidated leverage ratio at such time, and fees relating to the issuance of letters of credit. During the three months ended July 31, 2017 and 2016, the average rate on the Term Facility was 2.34% and 2.40%, respectively.
Both the Revolver and the Term Facility mature on June 15, 2021, and may be prepaid and terminated early by us at any time without premium or penalty (subject to customary LIBOR breakage fees). The Term Facility is payable in quarterly instalments beginning on September 30, 2016.installments with principal payments totaling $5.2 million made during the three months ended July 31, 2017. As of July 31, 2016, $2752017, $254.4 million was outstanding under the Term Facility compared to $140$259.5 million as of April 30, 2016, under2017. The current and long-term portion of unamortized debt issuance costs associated with the previous Facility. During the three months endedlong-term debt, was $3.4 million and $3.5 million as of July 31, 2016, the average rate2017 and April 30, 2017, respectively. The fair value of our Term Facility is based on borrowing rates currently required of loans with similar terms, maturity and credit risk. The carrying amount of the Term Facility was 2.40%approximates fair value because the base interest rate charged varies with market conditions and the credit spread is commensurate with current market spreads for issuers of similar risk. The fair value of the Term Facility is classified as a Level 2 liability in the fair value hierarchy. As of July 31, 2017, we were in compliance with its debt covenants.
As of July 31, 20162017 and April 30, 2016,2017, we had no borrowings under the Revolver. At July 31, 2016 and April 30, 2016, there was $2.8We had $3.0 million of standby letters of creditcredits issued under ourits long-term debt arrangements.arrangements as of July 31, 2017 and April 30, 2017. We had a total of $5.6$8.8 million and $6.4$8.1 million of standby letters of credits with other financial institutions as of July 31, 20162017 and April 30, 2016,2017, 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.
Off-Balance Sheet Arrangements
We have nooff-balance sheet arrangements and have not entered into any transactions involving unconsolidated, special purpose entities. We had no material changes in contractual obligations as of July 31, 2016,2017, as compared to those disclosed in our table of contractual obligations included in our Annual Report.
Critical Accounting Policies
Preparation of this Quarterly Report onForm 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of 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 interim 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 related to revenue recognition, performance related bonuses, restructuring, deferred compensation, carrying values of receivables, goodwill, intangible assets, fair value of contingent consideration share-based payments and recoverability of deferred income taxes as critical to an understanding of our interim 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 our Form10-K filed with the Securities Exchange Commission. There have been no material changes in our critical accounting policies since fiscal 2016.
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 loss, net on our consolidated balance sheets.
Transactions entered in the ordinary course of business, denominated in a currency other than the reporting entity’s functional currency may give rise to foreign currency gains or losses that impact our results of operations. Historically, we have not realized significant foreign currency gains or losses on such transactions. Foreign currency losses, on an after tax basis, included in net income were $1.0 million in the
three months ended July 31, 2017 as compared to foreign currency gains, on an after tax basis, included in net income were $1.0 million in the three months ended July 31, 2016 as compared to foreign currency losses, on an after tax basis, included in net income of $0.2 million in the three months ended July 31, 2015.2016.
Our exposure to foreign currency exchange rates is primarily driven by fluctuations involving the following currencies – U.S. dollars,Dollar, Canadian Dollar, Euro, Pound Sterling, Swiss Franc, Korean Won, Brazilian Real Japanese Yen, Australian dollar and Chinese Yuan.Russian Ruble. Based on balances exposed to fluctuation in exchange rates between these currencies as of July 31, 2016,2017, a 10% increase or decrease equally in the value of these currencies would have resultedcould result in a foreign exchange gain or loss of $6.7$8.5 million. Beginning in the third quarter of fiscal 2016, weWe have established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures which increased as a result of the Legacy Hay 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.Hedging.
Interest Rate Risk
Our exposure to interest rate risk is limited to our Term Facility and borrowings against the CSV of COLI contracts. As of July 31, 2016,2017, there was $275.0$254.4 million outstanding under the Term Facility. At our option, loans issued under the Credit Agreement willFacilities 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 Credit Facilities 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’sour total funded debt to adjusted EBITDA ratio (as set forth in the Credit Agreement, the “consolidated leverage ratio”) at such time. In addition, the Company iswe are required to pay to the lenders a quarterly fee ranging from 0.20% to 0.35% per annum on the average daily unused amount of the Term Facility, based upon the Company��sour consolidated leverage ratio at such time, and fees relating to the issuance of letters of credit. A 100 basis point increase in LIBOR rates would have increased our interest expense by approximately $0.5$0.7 million for the three months ended July 31, 2016.2017. During the three months ended July 31, 2017 and 2016, the average interest rate on the new term loan was 2.34% and 2.40%., respectively. We had no borrowings under the Revolver as of July 31, 2016. 2017.
To mitigate the interest rate risk on our Term Facility, 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. The notional amount is amortized so that the amount is always 50% of the principal balance of the debt outstanding. As of July 31, 2017, the notional amount was $127.2 million. The interest rate swap agreement matures on June 15, 2021 and locks the interest rates on 50% of our outstanding debt at 1.919%, exclusive of the credit spread on the debt.
We had $68.4$66.8 million and $67.2 of borrowings against the CSV of COLI contracts as of July 31, 20162017 and April 30, 2016,2017, 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 4.Controls and Procedures
Evaluation of Disclosure Controls and |
(a) Evaluation of Disclosure Controls and Procedures.
Based on their evaluation of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) conducted as of the end of the period covered by this Quarterly Report on Form10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”))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 three months ended July 31, 20162017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
From time to time, the Company has been and is involved in litigation incidental to its business. The Company is currently not a party to any litigation, which, if resolved adversely against the Company, would, in the opinion of management, after consultation with legal counsel, have a material adverse effect on the Company’s business, financial position or results of operations.
In our Form10-K for the year ended April 30, 2016,2017, we described material risk factors facing our business. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. As of the date of this report, there have been no material changes to the risk factors described in our Form10-K.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuers Purchases of Equity Securities
Issuer Purchases of Equity Securities
The following table summarizes common stock repurchased by us during the quarter ended July 31, 2016:2017:
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) | |||||||||||
May 1, 2016— May 31, 2016 | 659 | $ | 27.01 | — | $150.0 million | |||||||||
June 1, 2016— June 30, 2016 | 7,873 | $ | 28.80 | — | $150.0 million | |||||||||
July 1, 2016— July 31, 2016 | 177,222 | $ | 22.10 | — | $150.0 million | |||||||||
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Total | 185,754 | $ | 22.40 | — | $150.0 million | |||||||||
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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) | |||||||||||||
May 1, 2017— May 31, 2017 | 656 | $ | 32.63 | — | $121.2 million | |||||||||||
June 1, 2017— June 30, 2017 | 10,767 | $ | 34.34 | 10,000 | $120.8 million | |||||||||||
July 1, 2017— July 31, 2017 | 205,416 | $ | 33.98 | 109,356 | $117.2 million | |||||||||||
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Total | 216,839 | $ | 34.00 | 119,356 | ||||||||||||
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(1) | Represents withholding of a portion of restricted shares to cover taxes on vested restricted |
(2) | On December 8, 2014, the Board of Directors approved an increase in the Company’s stock repurchase program to an aggregate of $150.0 million. The shares can be repurchased in open market transactions or privately negotiated transactions at the Company’s discretion. We repurchased approximately $4.0 million of the Company’s common stock under the program during the first quarter of fiscal 2018. |
Our senior secured 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.
Exhibit
| Description | |
31.1 | Chief Executive Officer Certification pursuant to Rule13a-14(a) under the Exchange Act. | |
31.2 | Chief Financial Officer Certification pursuant to Rule13a-14(a) under the Exchange Act. | |
32.1 | Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. | |
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. |
Pursuant to the requirements 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.
By: | /s/ Robert P. Rozek | |
Robert P. Rozek | ||
Executive Vice President, Chief Financial Officer | ||
and Chief Corporate Officer |
Date: September 9, 2016
EXHIBIT INDEX
Exhibit
| Description | |
31.1 | Chief Executive Officer Certification pursuant to Rule13a-14(a) under the Exchange Act. | |
31.2 | Chief Financial Officer Certification pursuant to Rule13a-14(a) under the Exchange Act. | |
32.1 | Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. | |
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 | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |