KORN FERRY - Quarter Report: 2009 January (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-14505
KORN/FERRY INTERNATIONAL
(Exact name of registrant as specified in its charter)
Delaware | 95-2623879 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification Number) |
1900 Avenue of the Stars, Suite 2600, Los Angeles, California 90067
(Address of principal executive offices) (Zip code)
(310) 552-1834
(Registrants 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, and
(2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The
number of shares outstanding of our common stock as of March 9,
2009 was 44,721,871.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
As of | As of | |||||||
January 31, | April 30, | |||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 217,486 | $ | 305,296 | ||||
Marketable securities |
2,094 | 5,940 | ||||||
Receivables due from clients, net of allowance for doubtful accounts of $12,501 and
$11,504, respectively |
98,200 | 119,952 | ||||||
Income taxes and other receivables |
6,247 | 7,071 | ||||||
Deferred income taxes |
11,636 | 10,401 | ||||||
Prepaid expenses and other assets |
21,949 | 20,057 | ||||||
Total current assets |
357,612 | 468,717 | ||||||
Marketable securities, noncurrent |
70,299 | 78,026 | ||||||
Property and equipment, net |
32,395 | 32,462 | ||||||
Cash surrender value of company owned life insurance policies, net of loans |
62,437 | 81,377 | ||||||
Deferred income taxes |
35,072 | 47,128 | ||||||
Goodwill |
131,997 | 142,699 | ||||||
Intangible assets, net |
17,146 | 15,519 | ||||||
Investments and other |
28,112 | 14,286 | ||||||
Total assets |
$ | 735,070 | $ | 880,214 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Accounts payable |
$ | 9,191 | $ | 15,309 | ||||
Income taxes payable |
1,180 | 20,948 | ||||||
Compensation and benefits payable |
113,394 | 199,081 | ||||||
Other accrued liabilities |
38,143 | 37,120 | ||||||
Total current liabilities |
161,908 | 272,458 | ||||||
Deferred compensation and other retirement plans |
100,667 | 105,719 | ||||||
Other liabilities |
5,677 | 5,903 | ||||||
Total liabilities |
268,252 | 384,080 | ||||||
Stockholders equity: |
||||||||
Common stock: $0.01 par value, 150,000 shares authorized, 56,085 and 54,786 shares
issued and 44,696 and 44,593 shares outstanding, respectively |
365,172 | 358,568 | ||||||
Retained earnings |
102,122 | 95,014 | ||||||
Accumulated other comprehensive income |
64 | 43,097 | ||||||
Stockholders equity |
467,358 | 496,679 | ||||||
Less: notes receivable from stockholders |
(540 | ) | (545 | ) | ||||
Total stockholders equity |
466,818 | 496,134 | ||||||
Total liabilities and stockholders equity |
$ | 735,070 | $ | 880,214 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Fee revenue |
$ | 136,210 | $ | 201,156 | $ | 531,243 | $ | 582,366 | ||||||||
Reimbursed out-of-pocket engagement expenses |
8,283 | 10,935 | 30,459 | 32,826 | ||||||||||||
Total revenue |
144,493 | 212,091 | 561,702 | 615,192 | ||||||||||||
Compensation and benefits |
93,978 | 138,594 | 365,849 | 391,984 | ||||||||||||
General and administrative expenses |
30,963 | 35,255 | 97,316 | 101,168 | ||||||||||||
Out-of-pocket engagement expenses |
11,041 | 14,250 | 39,071 | 42,664 | ||||||||||||
Depreciation and amortization |
2,924 | 2,812 | 8,637 | 7,701 | ||||||||||||
Restructuring charges |
16,845 | | 16,845 | | ||||||||||||
Total operating expenses |
155,751 | 190,911 | 527,718 | 543,517 | ||||||||||||
Operating (loss) income |
(11,258 | ) | 21,180 | 33,984 | 71,675 | |||||||||||
Interest and other (loss) income, net |
(14,794 | ) | 5,025 | (13,294 | ) | 9,769 | ||||||||||
Interest expense |
1,267 | 1,248 | 3,571 | 3,695 | ||||||||||||
(Loss) income before (benefit) provision for income taxes and
equity in earnings of unconsolidated subsidiaries |
(27,319 | ) | 24,957 | 17,119 | 77,749 | |||||||||||
(Benefit) provision for income taxes |
(4,549 | ) | 9,353 | 12,327 | 29,753 | |||||||||||
Equity in earnings of unconsolidated subsidiaries, net |
414 | 652 | 2,316 | 2,469 | ||||||||||||
Net (loss) income |
$ | (22,356 | ) | $ | 16,256 | $ | 7,108 | $ | 50,465 | |||||||
Basic (loss) earnings per common share |
$ | (0.52 | ) | $ | 0.38 | $ | 0.16 | $ | 1.14 | |||||||
Basic weighted average common shares outstanding |
43,406 | 43,247 | 43,538 | 44,273 | ||||||||||||
Diluted (loss) earnings per common share |
$ | (0.52 | ) | $ | 0.37 | $ | 0.16 | $ | 1.10 | |||||||
Diluted weighted average common shares outstanding |
43,406 | 44,303 | 44,352 | 45,839 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(unaudited)
Nine Months Ended | ||||||||
January 31, | ||||||||
2009 | 2008 | |||||||
Cash from operating activities: |
||||||||
Net income |
$ | 7,108 | $ | 50,465 | ||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
||||||||
Depreciation and amortization |
8,637 | 7,701 | ||||||
Stock-based compensation expense |
12,396 | 11,931 | ||||||
Loss on disposition of property and equipment |
248 | 130 | ||||||
Provision for doubtful accounts |
7,223 | 9,332 | ||||||
Loss (gain) on cash surrender value of life insurance policies |
3,799 | (1,908 | ) | |||||
Realized loss (gain) on marketable securities |
1,264 | (4,013 | ) | |||||
Other-than temporary impairment on marketable securities |
15,893 | | ||||||
Deferred income taxes |
10,298 | (8,143 | ) | |||||
Change in other assets and liabilities, net of effect of acquisitions: |
||||||||
Deferred compensation |
(5,052 | ) | 12,784 | |||||
Receivables |
18,536 | (41,176 | ) | |||||
Prepaid expenses |
(1,772 | ) | (2,003 | ) | ||||
Investment in unconsolidated subsidiaries |
(2,316 | ) | (3,123 | ) | ||||
Income taxes payable |
(19,954 | ) | 1,750 | |||||
Accounts payable and accrued liabilities |
(92,706 | ) | (7,745 | ) | ||||
Other |
1,444 | (2,277 | ) | |||||
Net cash (used in) provided by operating activities |
(34,954 | ) | 23,705 | |||||
Cash from investing activities: |
||||||||
Purchase of property and equipment |
(10,300 | ) | (12,849 | ) | ||||
(Purchase of) proceeds from marketable securities, net |
(3,290 | ) | 16,023 | |||||
Cash paid for acquisitions, net of cash acquired |
(12,900 | ) | (4,260 | ) | ||||
Premiums on life insurance policies |
(1,479 | ) | (1,525 | ) | ||||
Dividends received from unconsolidated subsidiaries |
2,952 | 2,782 | ||||||
Net cash (used in) provided by investing activities |
(25,017 | ) | 171 | |||||
Cash from financing activities: |
||||||||
Payments on life insurance policy loans |
(367 | ) | (1,012 | ) | ||||
Borrowings under life insurance policies |
1,459 | 1,464 | ||||||
Purchase of common stock |
(9,539 | ) | (62,617 | ) | ||||
Proceeds from issuance of common stock upon exercise of employee stock
options and in connection with an employee stock purchase plan |
3,480 | 17,177 | ||||||
Tax benefit from exercise of stock options |
169 | 3,473 | ||||||
Receipts on stockholders notes |
5 | 6 | ||||||
Net cash used in financing activities |
(4,793 | ) | (41,509 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
(23,046 | ) | 8,756 | |||||
Net decrease in cash and cash equivalents during the period |
(87,810 | ) | (8,877 | ) | ||||
Cash and cash equivalents at beginning of the period |
305,296 | 232,531 | ||||||
Cash and cash equivalents at end of the period |
$ | 217,486 | $ | 223,654 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements for the three and nine months ended January
31, 2009 and 2008 include the accounts of Korn/Ferry International and all of its wholly and
majority owned/controlled domestic and international subsidiaries (collectively, the Company).
The condensed consolidated financial statements are unaudited, but 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. These financial statements have
been prepared consistently with the accounting policies described in the Companys Annual Report on
Form 10-K for the fiscal year ended April 30, 2008 (the Annual Report) and should be read
together with the Annual Report.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (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 financial statements and the reported amounts of revenue and expenses during the reporting
period. As a result, actual results could differ from these estimates. The most significant areas
that require management judgment are revenue recognition, deferred compensation and the carrying
values of goodwill, other intangible assets and deferred income taxes.
Cash and Cash Equivalents
The Company considers cash equivalents to be only those investments which are highly liquid,
readily convertible and mature within three months from the date of purchase.
Marketable Securities
The Company classifies its marketable securities as either trading securities or
available-for-sale as defined in Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115). These
investments are recorded at fair value and are classified as marketable securities in the
accompanying condensed consolidated balance sheets as of January 31, 2009 and April 30, 2008.
Certain investments, which the Company intends to sell within the next twelve months, are carried
as current. Additionally, certain of the Companys investments, which are held in trust to satisfy
obligations under the Companys deferred compensation plans, are classified as noncurrent (see Note
5). The changes in fair values on trading securities are recorded as a component of net (loss)
income. The changes in fair values, net of applicable taxes, on available-for-sale marketable
securities are recorded as unrealized (losses) gains as a component of accumulated other
comprehensive (loss) income in stockholders equity. Investments are made based on the Companys
investment policy which restricts the types of investments that can be made.
When, in the opinion of management, a decline in the fair value of an investment below its
cost or amortized cost is considered to be other-than-temporary, the investments cost or
amortized cost is written-down to its fair value and the amount written-down is recorded in the
statement of operations in interest and other (loss) income, net. The determination of
other-than-temporary decline includes, in addition to other relevant factors, a presumption that if
the market value is below cost by a significant amount for a period of time, a write-down may be
necessary. The amount of any write-down is determined by the difference between cost or amortized
cost of the investment and its fair value at the time the other-than-temporary decline is
identified. During the three months ended January 31, 2009, the Company recorded a write-down of
$15.3 million related to an other-than-temporary decline in fair
value of marketable securities (see Note 5).
Stock-Based Compensation
The Company has employee compensation plans under which various types of stock-based
instruments are granted. These instruments, as more fully described below, principally include
stock options, stock appreciation rights (SARs), restricted stock, and an Employee Stock Purchase
Plan (ESPP). The Company accounts for stock-based instruments in accordance with SFAS No.
123(R), Share-Based Payment (SFAS No. 123(R)).
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The following table reflects the components of stock-based compensation expense recognized in
the Companys condensed consolidated statements of operations for the three and nine months ended
January 31, 2009 and 2008:
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Stock options and SARs |
$ | (115 | ) | $ | 238 | $ | 109 | $ | 1,265 | |||||||
Restricted stock |
3,889 | 3,518 | 11,947 | 10,357 | ||||||||||||
ESPP |
94 | 125 | 340 | 399 | ||||||||||||
Total stock-based compensation expense, pre-tax |
3,868 | 3,881 | 12,396 | 12,021 | ||||||||||||
Tax benefit from stock-based compensation expense |
(1,412 | ) | (1,417 | ) | (4,525 | ) | (4,388 | ) | ||||||||
Total stock-based compensation expense, net of tax |
$ | 2,456 | $ | 2,464 | $ | 7,871 | $ | 7,633 | ||||||||
The Company uses the Black-Scholes option valuation model to estimate the grant date fair
value of each employee stock option. The expected volatility reflects the consideration of the
historical volatility in the Companys publicly traded instruments during the period the option is
granted. The Company believes historical volatility in these instruments is more indicative of
expected future volatility than the implied volatility in the price of the Companys common stock.
The expected life of each option is estimated using historical data. The risk-free interest rate is
based on the U.S. Treasury zero-coupon issue with a remaining term approximating the expected term
of the option. The Company uses historical data to estimate forfeiture rates applied to the gross
amount of expense determined using the option valuation model. The assumptions used to estimate the
fair value of each employee stock option using the Black-Scholes option valuation model were as
follows for the nine months ended January 31, 2009 and 2008:
Nine Months Ended | ||||||||
January 31, | ||||||||
2009 | 2008 | |||||||
Expected volatility |
44.11 | % | 44.42 | % | ||||
Risk-free interest rate |
3.27 | % | 4.60 | % | ||||
Expected option life (in years) |
4.25 | 4.00 | ||||||
Expected dividend yield |
0.00 | % | 0.00 | % |
The Black-Scholes option pricing model was developed for use in estimating the fair value of
traded options. The assumptions used in option valuation models are highly subjective, particularly
the expected stock price volatility of the underlying stock.
Common Stock
In the three and nine months ended January 31, 2009, the Company issued approximately 15 and
112 shares of common stock as a result of the exercise of stock
options, and 90 and 209 shares of
common stock in conjunction with the Companys ESPP. In the three and nine months ended January 31,
2008, the Company issued approximately 80 and 1,066 shares of common stock as a result of the
exercise of stock options, and 78 and 151 shares of common stock in conjunction with the Companys
ESPP.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period
presentation (see Note 5).
New Accounting Standards
In September 2006, the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) ratified EITF Issue No. 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF No.
06-4). The scope of EITF No. 06-4 is limited to the recognition of a liability and related
compensation costs for endorsement split-dollar life insurance policies that provide a benefit to
an employee that extends to postretirement periods. Therefore, EITF No. 06-4 does not apply to a
split-dollar life insurance arrangement that provides a specified benefit to an employee that is
limited to the employees active service period with an employer. EITF No. 06-4 is effective for
fiscal years beginning after December 15, 2007, with earlier adoption permitted. The Company
adopted EITF No. 06-4 effective May 1, 2008 and it did not have a material impact on its financial
position or results of operations.
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In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
The statement defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The statement emphasizes that fair value is a
market-based measurement, not an entity-specific measurement and establishes a fair value
hierarchy. This statement also clarifies how the assumptions of risk and the effect of restrictions
on sales or use of an asset effect the valuation. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years, however, the FASB staff has approved a one year deferral for the implementation
of SFAS No. 157 for other non-financial assets and liabilities. The Company adopted this statement
effective May 1, 2008 and it did not have a material impact on its financial position or results of
operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159) including an amendment of SFAS No. 115. SFAS No. 159
provides companies with an option to report selected financial assets and liabilities at fair
value. This statement is effective for fiscal years beginning after November 15, 2007 with early
adoption permitted. The Company adopted this statement effective May 1, 2008 and it did not have a
material impact on its financial position or results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the
framework, or hierarchy, for selecting the accounting principles used in preparing financial
statements that are presented in conformity with U.S. GAAP by nongovernmental entities. This
statement is effective 60 days following the SEC approval of the Public Company Accounting
Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles (Section 411). As of the date of this
report, the SEC had not approved the PCAOB amendments to AU Section 411. The Company has not
completed its evaluation of the potential impact, if any, of the adoption of SFAS No. 162 on its
consolidated financial position, results of operations and cash flows.
2. Basic and Diluted (Loss) Earnings Per Share
Basic (loss) earnings per common share was computed by dividing net (loss) earnings by the
weighted-average number of common shares outstanding. Diluted earnings per common share reflects
the potential dilution that would occur if all in-the-money outstanding options or other contracts
to issue common stock were exercised or converted and was computed by dividing net (loss) earnings
attributable to common stockholders, after assumed conversion of subordinated notes and preferred
stock, by the weighted-average number of common shares outstanding plus dilutive common equivalent
shares. Due to the loss attributable to common stockholders for the three months ended January 31,
2009, no potentially dilutive shares are included in the loss per share calculation as including
such shares in the calculation would be anti-dilutive.
The following table summarizes the basic and diluted (loss) earnings per share calculations:
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net (loss) earnings: |
||||||||||||||||
Net (loss) earnings |
$ | (22,356 | ) | $ | 16,256 | $ | 7,108 | $ | 50,465 | |||||||
Interest expense on convertible securities, net of related tax effects |
| 36 | | 109 | ||||||||||||
Net (loss) earnings attributable to common stockholders |
$ | (22,356 | ) | $ | 16,292 | $ | 7,108 | $ | 50,574 | |||||||
Weighted-average shares outstanding: |
||||||||||||||||
Basic weighted-average number of common shares outstanding |
43,406 | 43,247 | 43,538 | 44,273 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Warrants |
| 84 | 54 | 117 | ||||||||||||
Restricted stock |
| 179 | 132 | 302 | ||||||||||||
Stock options |
| 790 | 593 | 1,135 | ||||||||||||
ESPP |
| 3 | 35 | 12 | ||||||||||||
Diluted weighted-average number of common shares outstanding |
43,406 | 44,303 | 44,352 | 45,839 | ||||||||||||
Net (loss) earnings per common share: |
||||||||||||||||
Basic (loss) earnings per share |
$ | (0.52 | ) | $ | 0.38 | $ | 0.16 | $ | 1.14 | |||||||
Diluted (loss) earnings per share |
$ | (0.52 | ) | $ | 0.37 | $ | 0.16 | $ | 1.10 | |||||||
Assumed exercises or conversions have been excluded in computing the diluted earnings per
share when their inclusion would be anti-dilutive.
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3. Comprehensive (Loss) Income
Comprehensive (loss) income is comprised of net (loss) income and all changes to stockholders
equity, except those changes resulting from investments by stockholders (changes in paid in
capital) and distributions to stockholders (dividends).
Total comprehensive (loss) income is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net (loss) income |
$ | (22,356 | ) | $ | 16,256 | $ | 7,108 | $ | 50,465 | |||||||
Foreign currency translation adjustment |
(2,208 | ) | (112 | ) | (44,923 | ) | 15,451 | |||||||||
Unrealized losses on marketable securities, net of taxes |
(846 | ) | (4,488 | ) | (7,105 | ) | (3,129 | ) | ||||||||
Reclassification of unrealized losses on marketable securities, net of taxes to other-than-temporary impairment |
8,995 | | 8,995 | | ||||||||||||
Comprehensive (loss) income |
$ | (16,415 | ) | $ | 11,656 | $ | (35,925 | ) | $ | 62,787 | ||||||
The components of accumulated other comprehensive income were as follows:
As of | ||||||||
January 31, | ||||||||
2009 | 2008 | |||||||
Foreign currency translation adjustments |
$ | (715 | ) | $ | 34,765 | |||
Unrealized losses on marketable securities, net of taxes |
| (1,503 | ) | |||||
SFAS No. 158 adjustments, net of taxes |
779 | (335 | ) | |||||
Accumulated other comprehensive income |
$ | 64 | $ | 32,927 | ||||
4. Employee Stock Plans
Stock Option Plans
The Korn/Ferry International 2008 Stock
Incentive Plan (the 2008 Plan) was adopted by the Companys stockholders on
September 23, 2008, at the Annual Stockholder Meeting, and replaced the Companys former stock
incentive plan, the Performance Award Plan, which expired on August 8, 2008. The Performance Award
Plan provided for, and the 2008 Plan provides for, the grant of awards to eligible participants,
designated as either nonqualified or incentive stock options, SARS, restricted stock and restricted
stock units, any of which may be performance-based, and incentive bonuses, which may be paid in
cash or a combination thereof.
Stock option and SARs information during the nine months ended January 31, 2009 is as follows:
Weighted- | ||||||||||||||||
average | ||||||||||||||||
Weighted- | remaining | Aggregate | ||||||||||||||
Options | average | contractual | intrinsic | |||||||||||||
(in thousands) | exercise price | life (Yrs) | value | |||||||||||||
Outstanding at April 30, 2008 |
3,564 | $ | 14.79 | |||||||||||||
Granted |
6 | 14.54 | ||||||||||||||
Exercised |
(112 | ) | 9.05 | |||||||||||||
Forfeited/expired |
(112 | ) | 20.32 | |||||||||||||
Outstanding at January 31, 2009 |
3,346 | $ | 14.79 | 3.90 | $ | 1,923 | ||||||||||
Exercisable at January 31, 2009 |
3,269 | $ | 14.69 | 3.84 | $ | 1,923 | ||||||||||
Included in the table above are 59 SARs outstanding and exercisable at January 31, 2009 with a
weighted-average exercise price of $12.26. As of January 31, 2009, there was $238 of total
unrecognized compensation cost related to nonvested awards of stock options and SARs. That cost is
expected to be recognized over a weighted-average period of 1.3 years. For stock option awards
subject to graded vesting, the Company recognizes the total compensation cost on a straight-line
basis over the service period for the entire award.
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Additional information pertaining to stock options:
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Weighted average fair value of stock options granted |
$ | 5.01 | $ | 7.24 | $ | 5.77 | $ | 8.77 | ||||||||
Total fair value of stock options and SARs vested |
23 | 32 | 1,931 | 3,966 | ||||||||||||
Total intrinsic value of stock options exercised |
20 | 528 | 630 | 12,304 | ||||||||||||
Total intrinsic value of SARs paid |
| | | |
Restricted Stock
The Company grants restricted stock to executive officers and other senior employees generally
vesting over a four year period. Restricted stock is granted at a price equal to the fair market
value of the Companys common stock on the date of grant. Employees may receive restricted stock
annually in conjunction with the Companys performance review as well as upon commencement of
employment. The fair value of restricted stock is determined based on the closing price of the
Companys common stock on the date of grant.
Information regarding the Companys restricted stock during the nine months ended January 31,
2009 is as follows:
Weighted- | ||||||||
average | ||||||||
Shares | grant date | |||||||
Nonvested shares | (in thousands) | fair value | ||||||
Nonvested at April 30, 2008 |
1,952 | $ | 22.01 | |||||
Granted |
1,288 | 17.57 | ||||||
Vested |
(579 | ) | 21.34 | |||||
Forfeited |
(184 | ) | 19.68 | |||||
Nonvested at January 31, 2009 |
2,477 | $ | 15.50 | |||||
As of January 31, 2009, there was $38,339 of total unrecognized compensation cost related to
nonvested awards of restricted stock. That cost is expected to be recognized over a
weighted-average period of three years. For restricted stock awards subject to graded vesting, the
Company recognizes the total compensation cost on a straight-line basis over the service period for
the entire award. In the three and nine months ended January 31, 2009, four and 130 shares of
restricted stock totaling $50 and $2,174, respectively, were repurchased by the Company at the
option of the employee to pay for taxes related to the vesting of restricted stock. In the three
and nine months ended January 31, 2008, one and 159 shares of restricted stock totaling $20 and
$4,165, respectively, were repurchased by the Company at the option of the employee to pay for
taxes related to the vesting of restricted stock.
Employee Stock Purchase Plan
In October 2003, the Company implemented 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 Companys common stock at 85% of the fair market price of
the common stock on the last day of the enrollment period. The maximum number of shares of common
stock reserved for ESPP issuance is 1,500, subject to adjustment for certain changes in the
Companys capital structure and other extraordinary events. During the three months ended January
31, 2009 and 2008, employees purchased 90 shares at $9.71 per share, and 78 shares at $16.00 per
share, respectively. During the nine months ended January 31, 2009 and 2008, employees purchased
209 shares at $11.78 per share, and 151 shares at $19.06 per share, respectively.
10
Table of Contents
5. Marketable Securities
Effective May 1, 2008, the Company adopted SFAS No. 157 for financial assets and liabilities.
The statement defines fair value, provides guidance for measuring fair value and requires certain
disclosures. SFAS No. 157 discusses valuation techniques, such as the market approach (comparable
market prices), the income approach (present value of future income or cash flow) and the cost
approach (cost to replace the service capacity of an asset or replacement cost). The statement
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels. The following is a brief description of those three
levels:
| Level 1: Observable inputs such as quoted prices (unadjusted) in active markets that are
accessible at the measurement date for identical, unrestricted assets or liabilities. |
| Level 2: Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar assets or liabilities
in active markets and quoted prices for identical or similar assets or liabilities in
markets that are not active. |
| Level 3: Unobservable inputs that reflect the reporting entitys own assumptions. |
As of January 31, 2009, the Company held certain assets that are required to be measured at
fair value on a recurring basis. These included cash equivalents, marketable securities and a put
option.
The Companys investments associated with cash equivalents and marketable securities consist
of money market funds, United States government and government agency bonds and equity securities
for which market prices are readily available. Our investments in marketable securities also
include student loan portfolios (auction rate securities), which are classified as noncurrent
marketable securities and reflected at fair value.
As of January 31, 2009 and April 30, 2008, the Companys marketable securities included
$59,968 (net of unrealized losses of $15,893) and $63,491 (net of unrealized losses of $1,598
million) respectively, held in trust for settlement of the Companys obligations under certain of
its deferred compensation plans, of which $57,874 and $57,551 are classified as noncurrent. The
Companys obligations for which these assets were held in trust were $59,835 and $62,931 as of
January 31, 2009 and April 30, 2008, respectively. Based on
a review of the Companys
available-for-sale securities, the Company determined that the unrealized losses were
other-than-temporary as a result of the severity and duration of the
change in fair value of these securities. Therefore, as of January 31, 2009, the Company recorded an other-than-temporary
impairment charge of $15,893 in the accompanying statement of operations in interest and other
(loss) income, net.
As of January 31, 2009, $12,425 par value (with a fair value of $11,545) of the Companys
marketable securities consisted of auction rate securities, of which all were securities
collateralized by student loan portfolios, which are guaranteed by the United States government.
The Company continues to earn interest on all of its auction rate securities as of January 31,
2009. Due to events in credit markets, the auction rate securities held by the Company have
experienced failed auctions during calendar year 2008 and into the first two months of 2009. As
such, quoted prices in active markets are not readily available at this time. A third-party
investment institution provided an estimate of the fair value of the auction rate securities held
by the Company as of January 31, 2009 and April 30, 2008. Therefore, in order to validate the fair
value estimate of these securities for reporting, the Company considered the institutions pricing
model which included factors such as tax status, credit quality, duration, insurance wraps,
portfolio composition, assumptions about future cash flows and likelihood of redemption. The
Company concluded that the pricing model, given the lack of market available pricing, provided a
reasonable basis for determining fair value of the auction rate securities as of January 31, 2009
and April 30, 2008.
By letter dated August 8, 2008, the Company received notification from one of its investment
securities firms (Investment Firm) announcing a proposed settlement to repurchase all of the
Companys auction rate security holdings at par value. The Company formally accepted the settlement
agreement and entered into a repurchase agreement (Agreement) with the Investment Firm on October
28, 2008 (Acceptance Date). By accepting the Agreement, the Company (1) received the right (Put
Option) to sell its auction rate securities at par value to the Investment Firm between June 30,
2010 and July 2, 2012 and (2) gave the Investment Firm the right to purchase the auction rate
securities from the Company any time after the Acceptance Date as long as the Company receives the
par value.
11
Table of Contents
The Agreement covers $12,425 par value (fair value of $11,545) of the Companys auction rate
securities as of January 31, 2009. The Company has accounted for the Put Option as a freestanding
financial instrument and elected to record the value under the fair value option of SFAS No. 159.
This resulted in the recording of a receivable with a corresponding credit to income for the value
of the
Put Option. Simultaneously, the Company made an election pursuant to SFAS No. 115 to transfer
these auction rate securities from available-for-sale to trading securities. The transfer resulted
in the reversal of prior unrealized losses, net of taxes, on the auction rate securities from
accumulated other comprehensive (loss) income and the recognition of the unrealized losses as a
charge to income of $1,638 in the six months ended October 31, 2008. During the three months ended
January 31, 2009, the Company recognized realized gains on its trading securities of $758 offset by
the fair value loss adjustment to the Put Option.
The following table represents the Companys fair value hierarchy for financial assets
measured at fair value on a recurring basis as of January 31, 2009:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Cash equivalents |
$ | 97,334 | $ | 97,334 | $ | | $ | | ||||||||
Auction rate securities (1) |
11,545 | | | 11,545 | ||||||||||||
Auction rate securities put option |
880 | | | 880 | ||||||||||||
Equity securities (2) |
23,768 | 23,768 | | | ||||||||||||
Fixed income mutual fund (2) |
10,965 | 10,965 | | | ||||||||||||
Noncurrent money market mutual funds (2) |
25,235 | 25,235 | | | ||||||||||||
Total |
$ | 169,727 | $ | 157,302 | $ | | $ | 12,425 | ||||||||
(1) | Classified as trading securities. |
|
(2) | These investments are held in trust for settlement of the Companys
obligations under certain of its deferred compensation plans with
$2,094 classified as current assets (see Note 6). |
The following table presents the Companys assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) as defined in SFAS No. 157 for the three and nine
months ended January 31, 2009:
Auction Rate Securities | ||||||||
Three Months Ended | Nine Months Ended | |||||||
January 31, | January 31, | |||||||
2009 | 2009 | |||||||
Balance at beginning of period |
$ | 17,577 | $ | 20,475 | ||||
Auction rate securities put option |
(758 | ) | 880 | |||||
Reversal of unrealized loss associated with transfer of securities to trading |
| 780 | ||||||
Unrealized gain (loss) included in income |
758 | (880 | ) | |||||
Unrealized loss included in accumulated other comprehensive (loss) income |
| (586 | ) | |||||
Sales of securities |
(5,775 | ) | (9,025 | ) | ||||
Reversal of unrealized loss associated with sales of securities at par |
623 | 781 | ||||||
Ending balance at January 31, 2009 |
$ | 12,425 | $ | 12,425 | ||||
6. Deferred Compensation and Retirement Plans
The Company has several deferred compensation and retirement plans for vice-presidents that
provide defined benefit payments to participants based on the deferral of current compensation
subject to vesting and retirement or termination provisions. The components of net periodic benefit
cost are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
Components of net periodic benefit costs: | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Service cost |
$ | 174 | $ | 267 | $ | 522 | $ | 800 | ||||||||
Interest cost |
910 | 835 | 2,730 | 2,505 | ||||||||||||
Amortization of actuarial gain |
(21 | ) | (18 | ) | (63 | ) | (54 | ) | ||||||||
Amortization of net transition obligation |
53 | 53 | 159 | 159 | ||||||||||||
Net periodic benefit cost |
$ | 1,116 | $ | 1,137 | $ | 3,348 | $ | 3,410 | ||||||||
12
Table of Contents
The Company also has an Executive Capital Accumulation Plan (ECAP) which is intended to
provide certain employees an opportunity to defer salary and/or bonus on a pre-tax basis, or make
an after-tax contribution. The Company made $324 and $15,020 in ECAP contributions in the three and
nine months ended January 31, 2009. The Company contributions vest and are generally expensed
ratably over a four year period. The ECAP is accounted for in accordance with Emerging Interest
Task Force (EITF) 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned
Are Held in a Rabbi Trust and Invested (EITF 97-14), 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. The reduction in the deferred compensation liability recognized
in income during the three and nine months ended January 31, 2009 was $2,079 and $10,642,
respectively as compared to $2,735 and $344 during the three and nine months ended January 31,
2008, respectively.
7. Business Segments
The Company operates in two global business segments: executive recruitment and Futurestep.
These segments are distinguished primarily by the candidates level of compensation. The executive
recruitment business segment is managed by geographic regional leaders. Revenue from leadership and
talent consulting and other consulting engagements is included in executive recruitment.
Futuresteps worldwide operations are managed by the Chief Executive Officer of Futurestep. The
executive recruitment geographic regional leaders and the Chief Executive Officer of 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.
A summary of the Companys results of operations by business segment is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Fee revenue: |
||||||||||||||||
Executive recruitment: |
||||||||||||||||
North America |
$ | 66,978 | $ | 94,812 | $ | 252,649 | $ | 276,988 | ||||||||
EMEA |
30,423 | 46,292 | 122,499 | 133,072 | ||||||||||||
Asia Pacific |
13,591 | 25,322 | 56,181 | 72,639 | ||||||||||||
South America |
5,650 | 6,617 | 20,063 | 19,184 | ||||||||||||
Total executive recruitment |
116,642 | 173,043 | 451,392 | 501,883 | ||||||||||||
Futurestep |
19,568 | 28,113 | 79,851 | 80,483 | ||||||||||||
Total fee revenue |
$ | 136,210 | $ | 201,156 | $ | 531,243 | $ | 582,366 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Total revenue: |
||||||||||||||||
Executive Recruitment: |
||||||||||||||||
North America |
$ | 72,118 | $ | 99,707 | $ | 269,186 | $ | 292,100 | ||||||||
EMEA |
31,552 | 47,731 | 127,042 | 137,203 | ||||||||||||
Asia Pacific |
13,942 | 25,731 | 57,400 | 74,221 | ||||||||||||
South America |
5,731 | 6,740 | 20,378 | 19,532 | ||||||||||||
Total executive recruitment |
123,343 | 179,909 | 474,006 | 523,056 | ||||||||||||
Futurestep |
21,150 | 32,182 | 87,696 | 92,136 | ||||||||||||
Total revenue |
$ | 144,493 | $ | 212,091 | $ | 561,702 | $ | 615,192 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Operating (loss) income: |
||||||||||||||||
Executive recruitment: |
||||||||||||||||
North America |
$ | 10,767 | $ | 16,167 | $ | 45,601 | $ | 57,346 | ||||||||
EMEA |
(6,291 | ) | 7,116 | 8,105 | 20,871 | |||||||||||
Asia Pacific |
367 | 5,444 | 7,110 | 14,595 | ||||||||||||
South America |
373 | 291 | 2,667 | 1,836 | ||||||||||||
Total executive recruitment |
5,216 | 29,018 | 63,483 | 94,648 | ||||||||||||
Futurestep |
(8,309 | ) | 2,026 | (4,233 | ) | 5,642 | ||||||||||
Corporate |
(8,165 | ) | (9,864 | ) | (25,266 | ) | (28,615 | ) | ||||||||
Total operating (loss) income |
$ | (11,258 | ) | $ | 21,180 | $ | 33,984 | $ | 71,675 | |||||||
13
Table of Contents
8. Restructuring Charges
Due
to deteriorating economic conditions encountered in the current
fiscal year, the Company implemented a restructuring of its cost structure designed to reduce the
work force by approximately 400 employees and to consolidate premises. This initiative resulted in a total
charge of $16,845 against operations in the three months ended January 31, 2009 of which $13,468
and $3,377 related to severance costs and the consolidation of
premises, respectively. As of January 31, 2009, $5,559 of the
restructuring charge was paid in cash.
A roll-forward of the restructuring liability at January 31, 2009 is as follows:
Severance | Facilities | Total | ||||||||||
Liability as of April 30, 2008 |
$ | | $ | | $ | | ||||||
Charge to expense |
13,006 | 2,572 | 15,578 | |||||||||
Non-cash items |
462 | 805 | 1,267 | |||||||||
Cash payments |
(5,492 | ) | (67 | ) | (5,559 | ) | ||||||
Exchange rate fluctuations |
(295 | ) | (29 | ) | (324 | ) | ||||||
Liability as of January 31, 2009 |
$ | 7,681 | $ | 3,281 | $ | 10,962 | ||||||
The following table summarizes the restructuring charges by segment for the three and nine
months ended January 31, 2009:
Severance | Facilities | Total | ||||||||||
Executive recruitment |
||||||||||||
North America |
$ | 2,557 | $ | | $ | 2,557 | ||||||
EMEA |
6,606 | | 6,606 | |||||||||
Asia Pacific |
947 | | 947 | |||||||||
South America |
956 | | 956 | |||||||||
Total executive recruitment |
11,066 | | 11,066 | |||||||||
Futurestep |
2,402 | 3,377 | 5,779 | |||||||||
Corporate |
| | | |||||||||
Total |
$ | 13,468 | $ | 3,377 | $ | 16,845 | ||||||
14
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
This quarterly report on Form 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 and Section 21E of the Securities Exchange Act of 1934. 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, estimates,
potential, continue or other similar words or phrases. Similarly, statements that describe our
objectives, plans or goals are also 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, dependence on attracting and retaining
qualified and experienced consultants, portability of client relationships, local political or
economic developments in or affecting countries where we have operations, currency fluctuations in
our international operations, ability to manage growth, restrictions imposed by off-limits
agreements, competition, risks related to the growth and results of Futurestep, global economic
developments, reliance on information processing systems, and employment liability risk as well as
the matters disclosed under the heading Risk Factors in Item 1A of the Companys Annual Report on
Form 10-K for the fiscal year ended April 30, 2008 (Form 10-K). Readers are urged to consider
these factors carefully in evaluating the forward-looking statements included in this Form
10-Q. The forward-looking statements included in this Form 10-Q are made only as of the date
of this report and we undertake no obligation to publicly update these forward-looking statements
to reflect subsequent events or circumstances.
The following presentation of managements discussion and analysis of our financial condition
and results of operations should be read together with our condensed consolidated financial
statements included in this Form 10-Q.
Executive Summary
Korn/Ferry International (referred to herein as the Company, Korn/Ferry, or in the first
person notations we, our, and us) is a premier provider of talent management solutions that
help clients to attract, deploy, retain and reward their talent. Our services include executive
recruitment, middle-management recruitment, outsourced recruitment (through Futurestep), leadership
development solutions and executive coaching. Over half of the executive recruitment engagements we
performed in the last fiscal year were for board level, chief executive or other senior executive
and general management positions. Our 5,120 clients in fiscal 2008 included approximately 49% of
the FORTUNE 500 companies. We have established strong client loyalty with 74% of the executive
recruitment assignments we performed during the previous fiscal year
being on behalf of clients for
whom we had conducted assignments in the previous three fiscal years.
In an effort to maintain our long-term strategy of being the leading provider of executive
recruitment, middle-management recruitment, outsourced recruitment, leadership development
solutions and executive coaching, our strategic focus for fiscal 2009 centers upon increasing
market share and further enhancing the cross-selling of our multi-service strategy. We plan to
continue to address areas of increasing client demand, including Recruitment Process Outsourcing
(RPO) and Leadership and Talent Consulting (LTC). We plan to explore new products and services,
continue to pursue a disciplined acquisition strategy, enhance our technology and processes and
aggressively leverage our brand through thought leadership and intellectual capital projects as a
means of delivering world-class service to our clients.
During the third quarter of fiscal 2009 global economic conditions significantly deteriorated,
which caused a material decline in the results of our operations. Fee revenue decreased 32% in the
third quarter of fiscal 2009 to $136.2 million compared to $201.2 million in the third quarter of
fiscal 2008, with decreases in fee revenue in both segments. The North America and Europe regions
in executive recruitment experienced the largest dollar decreases in fee revenue. In the third
quarter of fiscal 2009, we incurred an operating loss of $11.3 million with operating losses of
$8.3 million from Futurestep and corporate expenses of $8.2 million, partially offset by operating
income from executive recruitment of $5.2 million. This compares to the
prior years third quarter operating income of $21.2 million.
In
addition, due to the deteriorating economic conditions, we
implemented a restructuring of our cost structure designed to reduce
the work force by approximately 400 employees and to consolidate premises. As a
result, during the third quarter of fiscal 2009, we recorded $16.8 million in restructuring charges with $13.5 million
of severance costs related to a reduction in our work force and $3.3 million relating to the consolidation of premises.
Our cash, cash equivalents and marketable securities have also declined significantly since
the end of fiscal 2008, partially due to the payment of fiscal 2008 bonuses, which are paid in
fiscal 2009. During the third quarter of 2009 our cash, cash equivalents and marketable securities
increased 4% to $289.9 million at January 31, 2009 compared to $279.8 million at October 31, 2008
and we generated $18.3 million of cash flow during the three months ended January 31, 2009. Our
working capital decreased $0.6 million in the first nine months of fiscal 2009 to $195.7 million at
January 31, 2009. We believe that cash on hand and funds from operations will be sufficient to
meet our anticipated working capital, capital expenditures and general corporate requirements.
15
Table of Contents
Critical Accounting Policies
The following discussion and analysis of our financial condition and operating results are
based on our unaudited condensed consolidated financial statements. Preparation of this quarterly
report on Form 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
periods. Actual results may differ from those estimates and assumptions. In preparing our interim
financial statements and accounting for the underlying transactions and balances, we apply our
accounting policies as disclosed in our Notes to Unaudited Condensed Consolidated Financial
Statements. We consider the policies related to revenue recognition, deferred compensation and the
carrying values of goodwill, intangible assets and deferred income taxes as critical to an
understanding of our interim consolidated financial statements because their application places the
most significant demands on managements judgment. Specific risks for these critical accounting
policies are described in our Form 10-K.
Results of Operations
The following table summarizes the results of our operations for the three and nine month
periods ended January 31, 2009 and 2008 as a percentage of fee revenue:
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Fee revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Reimbursed out-of-pocket engagement expenses |
6.1 | 5.4 | 5.7 | 5.6 | ||||||||||||
Total revenue |
106.1 | 105.4 | 105.7 | 105.6 | ||||||||||||
Compensation and benefits |
69.0 | 68.9 | 68.9 | 67.3 | ||||||||||||
General and administrative expenses |
22.7 | 17.5 | 18.3 | 17.4 | ||||||||||||
Out-of-pocket engagement expenses |
8.1 | 7.1 | 7.4 | 7.3 | ||||||||||||
Depreciation and amortization |
2.2 | 1.4 | 1.5 | 1.3 | ||||||||||||
Restructuring charges |
12.4 | | 3.2 | | ||||||||||||
Operating (loss) income |
(8.3 | ) | 10.5 | 6.4 | 12.3 | |||||||||||
Net (loss) income |
(16.4 | %) | 8.1 | % | 1.3 | % | 8.7 | % | ||||||||
The following tables summarize the results of our operations by business segment. Operating
(loss) income is calculated as a percentage of fee revenue of the respective segment (dollars in
thousands).
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
January 31, | January 31, | |||||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Dollars | % | Dollars | % | Dollars | % | Dollars | % | |||||||||||||||||||||||||
Fee revenue |
||||||||||||||||||||||||||||||||
Executive recruitment: |
||||||||||||||||||||||||||||||||
North America |
$ | 66,978 | 49.2 | % | $ | 94,812 | 47.1 | % | $ | 252,649 | 47.6 | % | $ | 276,988 | 47.6 | % | ||||||||||||||||
EMEA |
30,423 | 22.3 | 46,292 | 23.0 | 122,499 | 23.1 | 133,072 | 22.9 | ||||||||||||||||||||||||
Asia Pacific |
13,591 | 10.0 | 25,322 | 12.6 | 56,181 | 10.6 | 72,639 | 12.5 | ||||||||||||||||||||||||
South America |
5,650 | 4.1 | 6,617 | 3.3 | 20,063 | 3.7 | 19,184 | 3.2 | ||||||||||||||||||||||||
Total executive
recruitment |
116,642 | 85.6 | 173,043 | 86.0 | 451,392 | 85.0 | 501,883 | 86.2 | ||||||||||||||||||||||||
Futurestep |
19,568 | 14.4 | 28,113 | 14.0 | 79,851 | 15.0 | 80,483 | 13.8 | ||||||||||||||||||||||||
Total fee revenue |
136,210 | 100.0 | % | 201,156 | 100.0 | % | 531,243 | 100.0 | % | 582,366 | 100.0 | % | ||||||||||||||||||||
Reimbursed
out-of-pocket
engagement expenses |
8,283 | 10,935 | 30,459 | 32,826 | ||||||||||||||||||||||||||||
Total revenue |
$ | 144,493 | $ | 212,091 | $ | 561,702 | $ | 615,192 | ||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
January 31, | January 31, | |||||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Dollars | % | Dollars | % | Dollars | % | Dollars | % | |||||||||||||||||||||||||
Operating (loss) income |
||||||||||||||||||||||||||||||||
Executive recruitment: |
||||||||||||||||||||||||||||||||
North America |
$ | 10,767 | 16.1 | % | $ | 16,167 | 17.1 | % | $ | 45,601 | 18.0 | % | $ | 57,346 | 20.7 | % | ||||||||||||||||
EMEA |
(6,291 | ) | (20.7 | ) | 7,116 | 15.4 | 8,105 | 6.6 | 20,871 | 15.7 | ||||||||||||||||||||||
Asia Pacific |
367 | 2.7 | 5,444 | 21.5 | 7,110 | 12.7 | 14,595 | 20.1 | ||||||||||||||||||||||||
South America |
373 | 6.6 | 291 | 4.4 | 2,667 | 13.3 | 1,836 | 9.6 | ||||||||||||||||||||||||
Total executive
recruitment |
5,216 | 4.5 | 29,018 | 16.8 | 63,483 | 14.1 | 94,648 | 18.9 | ||||||||||||||||||||||||
Futurestep |
(8,309 | ) | (42.5 | ) | 2,026 | 7.2 | (4,233 | ) | (5.3 | ) | 5,642 | 7.0 | ||||||||||||||||||||
Corporate |
(8,165 | ) | (9,864 | ) | (25,266 | ) | (28,615 | ) | ||||||||||||||||||||||||
Total operating
(loss) income |
$ | (11,258 | ) | (8.3 | %) | $ | 21,180 | 10.5 | % | $ | 33,984 | 6.4 | % | $ | 71,675 | 12.3 | % | |||||||||||||||
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Three Months Ended January 31, 2009 Compared to Three Months Ended January 31, 2008
Fee Revenue. Fee revenue decreased $65.0 million, or 32%, to $136.2 million in the three
months ended January 31, 2009 compared to $201.2 million in the three months ended January 31,
2008. As the global economic crisis intensified we experienced a decline in fee revenue
attributable to a 34% decline in the number of executive search engagements opened during the third
quarter of fiscal 2009 as compared to the third quarter fiscal 2008 and a 17% decrease in average
fees billed per engagement with all regions declining during the same period. Exchange rates
unfavorably impacted fee revenues by $11.3 million in the third quarter of fiscal 2009.
Executive Recruitment. Executive recruitment reported fee revenue of $116.6 million, a
decrease of $56.4 million, or 33%, in the three months ended January 31, 2009 compared to $173.0
million in the three months ended January 31, 2008 due to a 24% decrease in the overall number of
engagements billed and an 11% decrease in the average fee per engagement for the segment. Exchange
rates unfavorably impacted fee revenues by $8.6 million in the third quarter of fiscal 2009.
North America reported fee revenue of $67.0 million, a decrease of $27.8 million, or 29%, in
the three months ended January 31, 2009 compared to $94.8 million in the three months ended January
31, 2008 primarily due to a 25% decrease in the number of engagements billed and a 6% decrease in
average fees in the region compared to the third quarter of fiscal 2008. The overall revenue
decline in the region was driven by a significant decrease in the technology, consumer goods, and
financial sectors. Exchange rates unfavorably impacted North America fee revenue by $1.8 million
in the third quarter of fiscal 2009.
EMEA reported fee revenue of $30.4 million, a decrease of $15.9 million, or 34%, in the three
months ended January 31, 2009 compared to $46.3 million in the three months ended January 31, 2008.
EMEAs decrease in fee revenue was driven by a 16% decrease in average fees compared to the third
quarter of fiscal 2008 and a 22% decrease in the number of engagements billed in the third quarter
of fiscal 2009 as compared to the third quarter of fiscal 2008. The existing offices in the United
Kingdom, France, and the United Arab Emirites were the primary contributors to the decrease in fee
revenue. The financial, industrial and consumer goods sectors experienced the largest decrease in
fee revenue compared to the third quarter of fiscal 2008. Exchange rates unfavorably impacted EMEA
fee revenue by $4.2 million in the third quarter of fiscal 2009.
Asia Pacific reported fee revenue of $13.6 million, a decrease of $11.7 million, or 46%, in
the three months ended January 31, 2009 compared to $25.3 million in the three months ended January
31, 2008 due to a 24% decrease in average fees billed per engagement and a 30% decline in the number
of engagements billed. The declined performance in Australia, India, Hong Kong and Japan were the
primary contributors to the decrease in fee revenue in the third quarter of fiscal 2009 over the
third quarter of fiscal 2008. The decrease in fee revenue was primarily due to declines in the
financial, technology, and industrial sectors. Exchange rates unfavorably impacted fee revenue for
Asia Pacific by $1.4 million in the third quarter of fiscal 2009.
South America reported fee revenue of $5.6 million, a decrease of $1.0 million, or 15%, in the
three months ended January 31, 2009 compared to $6.6 million in the three months ended January 31,
2008. Engagements billed decreased 14% within the region compared to the third quarter of fiscal
2008. The declined performance in Brazil and Colombia were the primary contributors to the decrease
in fee revenue in the third quarter of fiscal 2009 over the third quarter of fiscal 2008. Exchange
rates unfavorably impacted fee revenue for South America by $1.2 million in the third quarter of
fiscal 2009.
Futurestep. Futurestep reported fee revenue of $19.6 million, a decrease of $8.6 million, or
30%, in the three months ended January 31, 2009 compared to $28.2 million in the three months ended
January 31, 2008. The decline in Futuresteps fee revenue is due to a 27% decrease in average fee
per engagement billed and to a lesser extent by a decrease in the number of engagements billed. Of
the total decrease in fee revenue, Europe experienced the largest decrease in fee revenue of $4.2
million, or 40%, to $6.3 million related to declines from Norway, the United Kingdom and France.
North America fee revenue decreased $2.7 million, or 26%, to $7.6 million reflecting decreased
revenue from areas including RPO and individual searches. Asia fee revenue decreased $1.7 million,
or 23%, to $5.6 million, arising from decreased business in Australia and China offset by an
increase in Singapore. Exchange rates unfavorably impacted fee revenue by $2.7 million in the third
quarter of fiscal 2009.
Compensation and Benefits. Compensation and benefits expense decreased $44.6 million, or 32%
to $94.0 million in the three months ended January 31, 2009 compared to $138.6 million in the three
months ended January 31, 2008. The change in compensation and benefits expenses is primarily due to
a reduction in global headcount and a $35.9 million decrease in profitability based compensation
compared to the third quarter of fiscal 2008. Exchange rates favorably impacted compensation and
benefits expenses by $8.2 million during the third quarter of fiscal 2009.
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Executive recruitment compensation and benefits costs were $73.5 million, a decrease of $39.6
million or 35%, compared to $113.1 million in the three months ended January 31, 2008. A majority
of the decline in compensation and benefits was due to a reduction in profitability based
compensation. Exchange rates impacted executive recruitment compensation and benefits expense
favorably by $6.3 million. Executive recruitment compensation and benefits expenses in the third
quarter of fiscal 2009 were 63% as a percentage of fee revenue, compared to 65% in the third
quarter of fiscal 2008.
Futurestep compensation and benefits expense decreased $2.6 million, or 14%, to $16.5 million
in the three months ended January 31, 2009 from $19.1 million in the three months ended January 31,
2008 due to a reduction in profitability based compensation offset by investments in our employees
which increased Futurestep average consultant headcount during the three months ended
January 31, 2009 compared to the three months ended January 31, 2008. Exchange rates favorably
impacted Futurestep compensation and benefits expense by $1.9 million. Futurestep compensation and
benefits expense, as a percentage of fee revenue, were 84% in the third quarter of fiscal 2009 from
68% in the third quarter of fiscal 2008.
Corporate compensation and benefits expense decreased $2.3 million, or 37%, to $4.0 million in
the three months ended January 31, 2009 from $6.3 million in the three months ended January 31,
2008 primarily from a $2.1 million decrease in certain deferred compensation retirement plan
liabilities. The Company holds marketable securities in a trust for settlement of these
obligations as discussed in Note 5 of our Condensed Consolidated Financial Statements. As of
January 31, 2009, these marketable securities had a fair value of $60.0 million and we recognized
an asset impairment charge of $15.3 million related to these assets during the three months ended
January 31, 2009.
General and Administrative Expenses. General and administrative expenses decreased $4.3
million, or 12%, to $31.0 million in the three months ended January 31, 2009 compared to $35.3
million in the three months ended January 31, 2008. The decrease is attributable to our cost
control initiatives and an overall decline in business activity resulting in decreases in business
development, other miscellaneous expenses and partially offset by an increase in foreign exchange
gains. Exchange rates favorably impacted general and administrative expenses by $2.2 million in
the third quarter of fiscal 2009.
Executive recruitment general and administrative expenses decreased $3.7 million, or 14%, to
$22.5 million in the three months ended January 31, 2009 from $26.2 million in the three months
ended January 31, 2008. This decrease was driven by decreases in other types of general expenses
including meeting and travel expenses of $1.9 million, business development expenses of $1.0
million and realized foreign exchange gains of $0.8 million. Business development and travel
expenses declined due to the decrease in the business. Executive recruitment general and
administrative expenses, as a percentage of fee revenue, was 19% in the third quarter of fiscal
2009 as compared to 15% in the third quarter in fiscal 2008.
Futurestep general and administrative expenses decreased $1.2 million, or 20%, to $4.7 million
in the three months ended January 31, 2009 compared to $5.9 million in the three months ended
January 31, 2008 primarily due to a decrease in general expenses which include meeting and travel
expenses, of $0.8 million and bad debt expenses of $0.6 million offset by an increase in premise
and office expense of $0.2 million. Increases in premise and office expenses resulted from increase
in rent expenses noted across all regions. Futurestep general and administrative expenses, as a
percentage of fee revenue, was 24% in the third quarter of fiscal 2009 as compared to 21% in the
third quarter of fiscal 2008.
Corporate general and administrative expenses increased $0.6 million, or 19%, to $3.8 million
in the three months ended January 31, 2009 compared to $3.2 million in the three months ended
January 31, 2008 primarily due to an increase in professional fees.
Out-of-Pocket Engagement Expenses. Out-of-pocket engagement expenses consist of expenses
incurred by candidates and our consultants that are generally billed to clients. Out-of-pocket
engagement expenses decreased $3.3 million, or 23%, to $11.0 million in the three months ended
January 31, 2009 compared to $14.3 million in the three months ended January 31, 2008.
Out-of-pocket engagement expenses as a percentage of fee revenue was 8% in the third quarter of
fiscal 2009, compared to 7% in the third quarter of fiscal 2008.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $0.1
million, or 4%, to $2.9 million in the three months ended January 31, 2009 compared to $2.8 million
in the three months ended January 31, 2008. This expense relates mainly to computer equipment,
software, furniture and leasehold improvements. The increase in depreciation and amortization
expenses is attributable to an increase in fixed asset balances primarily associated with furniture
and fixtures and leasehold improvements related to business expansion, office build out and
amortization of software costs that added new functionality in our corporate and executive search
segments.
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Restructuring Charges. The Company previously announced it would incur expenses to
rationalize its cost structure to the changing economic environment. During the third quarter of
fiscal 2009, we recorded $16.8 million in restructuring charges with $13.5 million of severance
costs related to a reduction in our work force and $3.3 million relating to the consolidation of
premises.
Operating (Loss) Income. Operating income decreased $32.5 million, or 153%, to an operating
loss of $11.3 million in the three months ended January 31, 2009 compared to operating income of
$21.2 million in the three months ended January 31, 2008. The decrease in operating income resulted
from a decrease in fee revenue of $65.0 million, which was offset by a $35.2 million decrease in
operating expenses, mainly attributable to a decrease in compensation and benefits partially offset
by $16.8 million in restructuring charges, of which $5.6 million was paid in cash as of January 31,
2009.
Executive recruitment operating income decreased $23.8 million, or 82%, to $5.2 million in the
three months ended January 31, 2009 compared to $29.0 million in the three months ended January 31,
2008. The decline in executive recruitment operating income is primarily attributable to decreased
revenues within the quarter offset by a reduction in operating expenses. The reduction in operating
expenses were partially offset by restructuring charges of $11.1 million. Executive recruitment
operating income during the third quarter of fiscal 2009, as a percentage of fee revenue, was 5%
compared to 17% in the third quarter of fiscal 2008.
Futurestep operating income decreased $10.3 million, or 515%, to an operating loss of $8.3
million in the three months ended January 31, 2009 as compared to operating income of $2.0 million
in the three months ended January 31, 2008. The change in Futurestep operating income is primarily
due to a decrease in total revenue while incurring restructuring related costs of approximately
$5.8 million during the three months ended January 31, 2009 compared to the three months ended
January 31, 2008. Futurestep operating loss, as a percentage of fee
revenue, was 43% in the third quarter of fiscal 2009, compared to
operating income, as a percentage of fee revenue of 7% in the third quarter of fiscal 2008.
Interest Income and Other (Loss) Income, Net. Interest income and other (loss) income, net
decreased by $19.8 million in the three months ended January 31, 2009 from $5.0 million in the
three months ended January 31, 2008. The decrease in net interest and other (loss) income, net was
due to a non-cash asset impairment charge of $15.3 million related to marketable securities during
the three months ended January 31, 2009 and a decrease in interest and dividend income. Interest
and dividend income decreased primarily as a result of lower average interest-bearing balances and
lower overall interest rates in the third quarter of fiscal 2009 compared to the third quarter of
fiscal 2008.
Interest Expense. Interest expense, primarily related to borrowings under Company Owned Life
Insurance Policies (COLI), was $1.3 million in the three months ended January 31, 2009 and $1.2
million in the three months ended January 31, 2008.
(Benefit) Provision for Income Taxes. The benefit for income taxes was $4.5 million in the
three months ended January 31, 2009, as compared to a provision for income taxes of $9.4 million in
the three months ended January 31, 2008. The benefit for income taxes in the third quarter of
fiscal 2009 reflects a 17% tax benefit, compared to a 37% effective tax rate for the third quarter
of fiscal 2008. The tax benefit is not as large in the nine months ended January 31, 2009 as the
Company did not realize tax benefits on the marketable securities asset impairment of $15.3 million
during the three months ended January 31, 2009.
Equity in Earnings of Unconsolidated Subsidiaries. Equity in earnings of unconsolidated
subsidiaries is comprised of our less than 50% interest in our Mexican subsidiary. We report our
interest in earnings or loss of our Mexican subsidiaries on the equity basis as a one-line
adjustment to net (loss) income, net of taxes. Equity in earnings was $0.4 million in the three
months ended January 31, 2009 compared to $0.7 million in the three months ended January 31, 2008.
Nine Months Ended January 31, 2009 Compared to Nine Months Ended January 31, 2008
Fee Revenue. Fee revenue decreased $51.2 million, or 9%, to $531.2 million in the nine months
ended January 31, 2009 compared to $582.4 million in the nine months ended January 31, 2008. The
decrease in fee revenue is attributable mainly to a 9% decrease in average fees billed per
engagement. Exchange rates unfavorably impacted fee revenues by $6.0 million in the nine months
ended January 31, 2009.
Executive Recruitment. Executive recruitment reported fee revenue of $451.4 million, a
decrease of $50.5 million, or 10%, in the nine months ended January 31, 2009 compared to $501.9
million in the nine months ended January 31, 2008 due to a 8% decrease in number of engagements
billed and to a lesser extent a decrease in the average fees for the segment in the nine months
ended January 31, 2009 compared to that of the nine months ended January 31, 2008. Exchange rates
unfavorably impacted fee revenues by $4.3 million in the nine months ended January 31, 2009.
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North America reported fee revenue of $252.6 million, a decrease of $24.4 million, or 9%, in
the nine months ended January 31, 2009 compared to $277.0 million in the nine months ended January
31, 2008 primarily due to a 7% decrease in the number of engagements billed while average fees in
the region decreased 2% compared to the nine months ended January 31, 2008. Overall revenue
declines were driven by more significant decreases in the financial, technology and consumer goods
sectors partially offset by increases in the industrial sector. Exchange rates unfavorably impacted
North America fee revenue by $1.8 million in the nine months ended January 31, 2009.
EMEA reported fee revenue of $122.5 million, a decrease of $10.6 million, or 8%, in the nine
months ended January 31, 2009 compared to $133.1 million in the nine months ended January 31, 2008.
EMEAs decrease in fee revenue was driven by a 5% decrease in the number of engagements billed and
a 3% decrease in average fees. The performance in existing offices in the United Kingdom, France,
and the Netherlands were the primary contributors to the decrease in fee revenue offset by
increases in Germany and Switzerland. The financial, consumer goods and life sciences sectors
experienced the largest decrease in fee revenue offset by an increase in the industrial sector
compared to the nine months ended January 31, 2008. Exchange rates unfavorably impacted EMEA fee
revenue by $1.2 million in the nine months ended January 31, 2009.
Asia Pacific reported fee revenue of $56.2 million, a decrease of $16.4 million, or 23%, in
the nine months ended January 31, 2009 compared to $72.6 million in the nine months ended January
31, 2008 attributed to a decrease of 7% in average fees billed per engagement and a 17% decline in
the number of engagements billed. The decline in performance in Australia, India, China and Japan
were the primary contributors to the decrease in fee revenue in the
nine months ended January 31, 2009
over the nine months ended January 31, 2008. The largest decrease in fee
revenue was experienced in the financial and
technology sectors. Exchange rates unfavorably impacted fee revenue for Asia Pacific by $1.2
million in the nine months ended January 31, 2009.
South America reported fee revenue of $20.1 million, an increase of $0.9 million, or 5%, in
the nine months ended January 31, 2009 compared to $19.2 million in the nine months ended January
31, 2008. Average fees increased 8% while engagements billed decreased 3% within the region in the
nine months ended January 31, 2009 compared to the nine months ended January 31, 2008. The improved
performance in the consumer goods and life sciences sectors was the primary contributor to the
increase in fee revenue in the nine months ended January 31, 2009 over the nine months ended
January 31, 2008.
Futurestep.
Futurestep reported fee revenue of $79.8 million, a decrease
of $0.7 million, or 1%, in
the nine months ended January 31, 2009 compared to $80.5 million in the nine months ended January
31, 2008. The decline in Futuresteps fee revenue is due to a 16% decrease in average fee per
engagement billed offset by an 18% increase in the number of engagements billed. Of the total
decrease in fee revenue, Europe experienced a decrease in fee revenue
of $4.8 million, or 16%, to
$24.9 million. North America increased its fee revenue by $2.4 million, or 8%, to $32.3 million
related to increases from Canada and the United States. Asia fee
revenue increased $1.7 million, or
8%, to $22.6 million reflecting increased revenue from RPOs.
Exchange rates unfavorably impacted fee revenue by $1.7 million in the nine months ended January
31, 2009.
Compensation and Benefits. Compensation and benefits expense decreased $26.2 million, or 7%,
to $365.8 million in the nine months ended January 31, 2009 from $392.0 million in the nine months
ended January 31, 2008. The decrease in compensation and benefits expenses is primarily due to a
decrease in profitability based awards coupled with a decrease in global headcount, compared to the
nine months ended January 31, 2008. Exchange rates favorably impacted compensation and benefits
expenses by $4.7 million during the nine months ended January 31, 2009.
Executive recruitment compensation and benefits costs decreased $26.2 million, or 8%, to
$293.6 million in the nine months ended January 31, 2009 compared to $319.8 million in the nine
months ended January 31, 2008 primarily due to a $32.3 million decrease in the profitability based
compensation offset by an increase in the number of consultants. In the nine months ended January
31, 2009, the average number of consultants increased by 9, or 2%, compared to the nine months
ended January 31, 2008. Exchange rates impacted executive recruitment compensation and benefits
expense favorably by $3.7 million. Executive recruitment compensation and benefits expenses in the
nine months ended January 31, 2009 increased to 65% as a percentage of fee revenue, compared to 64%
in the nine months ended January 31, 2008.
Futurestep compensation and benefits expense increased $3.5 million, or 6%, to $58.4 million
in the nine months ended January 31, 2009 from $54.9 million in the nine months ended January 31,
2008 due to investments in our employees with Futurestep average consultant headcount increasing during the nine months ended January 31, 2009 compared to the nine months ended January 31,
2008. Exchange rates favorably impacted Futurestep compensation and benefits expense by $1.0
million. Futurestep compensation and benefits expense, as a percentage of fee revenue, increased to
73% in the nine months ended January 31, 2009 from 68% in the nine months ended January 31, 2008.
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Table of Contents
Corporate compensation and benefits expense decreased $3.5 million, or 20%, to $13.8 million
in the nine months ended January 31, 2009 compared to $17.3 million in the nine months ended
January 31, 2008 primarily from a $10.6 million decrease in certain deferred compensation
retirement plan liabilities partially offset by decreases in cash surrender value of company owned
life insurance policies in the nine months ended January 31, 2009 compared to the nine months ended
January 31, 2008. The Company holds marketable securities in a trust for settlement of certain of
these deferred compensation obligations as discussed in Note 5 of our Condensed Consolidated
Financial Statements. As of January 31, 2009, these marketable securities had a fair value of
$60.0 million and we recognized an asset impairment charge of $15.9 million related to these assets
during the nine months ended January 31, 2009.
General and Administrative Expenses. General and administrative expenses decreased $3.9
million, or 4%, to $97.3 million in the nine months ended January 31, 2009 compared to $101.2
million in the nine months ended January 31, 2008. Exchange rates favorably impacted general and
administrative expenses by $1.0 million in the nine months ended January 31, 2009.
Executive recruitment general and administrative expenses decreased $3.3 million, or 4%, to
$70.3 million in the nine months ended January 31, 2009 from $73.6 million in the nine months ended
January 31, 2008. The decrease in general and administrative expenses was driven by a decrease in
other types of general expenses, including meeting and travel expense
of $2.5 million, business
development of $1.1 million and $1.3 million in realized foreign exchange. Offsetting the overall
decrease was an increase in premise and office expenses of $2.5 million. General expenses decreased
primarily due to the decline in our overall business activities. Increased premise and office
expenses is attributable to all regions due to increased rent expenses and associated utility
costs. Executive recruitment general and administrative expenses, as a percentage of fee revenue,
was 16% in the nine months ended January 31, 2009 compared to 15% in the nine months ended January
31, 2008.
Futurestep general and administrative expenses decreased $0.5 million, or 3%, to $16.7 million
in the nine months ended January 31, 2009 compared to $17.2 million in the nine months ended
January 31, 2008 primarily due to decreases of $1.1 million in general and administrative expenses
and $1.1 million consisting of bad debt expenses, which was
offset by increases in both business development
expenses of $0.8 million and premise and office expenses of $0.9 million. Bad debt expense
decreased due to an overall improvement of accounts receivable and fewer bad debt write-offs during
the nine months ended January 31, 2009 as compared to the year-ago period. Increases in premise
and office expenses resulted from increase in rent expenses noted across all regions and the
opening of new offices in Europe and Asia. Futurestep general and administrative expenses, as a
percentage of fee revenue, was 21% in the nine months ended January 31, 2009 and 2008.
Corporate general and administrative expenses decreased $0.1 million, or 1%, to $10.3 million
in the nine months ended January 31, 2009 compared to $10.4 million in the nine months ended
January 31, 2008 primarily due to decreased travel and meetings and premise and office expenses,
partially offset by an increase in professional fees.
Out-of-Pocket Engagement Expenses. Out-of-pocket engagement expenses consist of expenses
incurred by candidates and our consultants that are generally billed to clients. Out-of-pocket
engagement expenses decreased $3.6 million, or 8%, to $39.1 million in the nine months ended
January 31, 2009, compared to $42.7 million in the nine months ended January 31, 2008.
Out-of-pocket engagement expenses as a percentage of fee revenue remained constant at 7% in both
the nine months ended January 31, 2009 and the nine months ended January 31, 2008.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $0.9
million, or 12%, to $8.6 million in the nine months ended January 31, 2009 compared to $7.7 million
in the nine months ended January 31, 2008. This expense relates mainly to computer equipment,
software, furniture and leasehold improvements. The increase in depreciation and amortization
expenses is attributable to an increase in fixed asset balances primarily associated with furniture
and fixtures and leasehold improvements related to business expansion, office build out and
amortization of software costs that added new functionality in our corporate and executive search
segments.
Restructuring Charges. The Company previously announced it would incur expenses to
rationalize its cost structure to the changing economic environment. During the nine months ended
January 31, 2009, we recorded $16.8 million in restructuring charges with $13.5 million of
severance costs related to a reduction in our work force and $3.3 million relating to the
consolidation of premises.
Operating Income. Operating income decreased $37.7 million, or 53%, to $34.0 million in the
nine months ended January 31, 2009 compared to $71.7 million in the nine months ended January 31,
2008. This decrease in operating income resulted from a $51.2 million decrease in fee revenue which
was partially offset by a decrease in operating expenses of $15.8 million. The decrease in
operating expenses is primarily attributable to a decrease in compensation and benefits, offset by
an increase in restructuring charges of $16.8 million, of which $5.6 million was paid in cash as of
January 31, 2009.
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Executive recruitment operating income decreased $31.1 million, or 33%, to $63.5 million in
the nine months ended January 31, 2009 compared to $94.6 million in the nine months ended January
31, 2008. The decline in executive recruitment operating income is attributable to a decrease in
revenues offset by a reduction in compensation expenses relating to a decrease in headcount and
profitability based compensation, as well as a decrease in general and administrative expenses.
Executive recruitment operating income during the nine months ended January 31, 2009, as a
percentage of fee revenue, was 14% compared to 19% in the nine months ended January 31, 2008.
Futurestep operating income decreased by $9.8 million, or 175%, to an operating loss of $4.2
million in the nine months ended January 31, 2009 as compared to operating income of $5.6 million
in the nine months ended January 31, 2008. The change in Futurestep operating income is primarily
due to an increase in compensation and benefits due to an increase in the average consultant
headcount and restructuring related costs of $5.8 million during the nine months ended January 31,
2009 compared to the nine months ended January 31, 2008. Futurestep operating loss, as a percentage
of fee revenue, was 5% in the nine months ended January 31, 2009, compared operating income, as a
percentage of fee revenue of 7% in the nine months ended January 31, 2008.
Interest Income and Other (Loss) Income, Net. Interest income and other (loss) income, net
decreased by $23.1 million, or 236%, to a loss of $13.3 million in the nine months ended January
31, 2009 from income of $9.8 million in the nine months ended January 31, 2008. The decrease in net
interest and other (loss) income, net was due to a non-cash asset impairment charge of $15.9
million related to marketable securities during the nine months ended January 31, 2009 and a
decrease in interest and dividend income. Interest and dividend income decreased primarily as a
result of lower average United States cash balances, and lower overall interest rates compared to the
nine months ended January 31, 2008.
Interest Expense. Interest expense, primarily related to borrowings under Company Owned Life
Insurance Policies (COLI), was $3.6 million in the nine months ended January 31, 2009 compared to
$3.7 million in the nine months ended January 31, 2008.
Provision for Income Taxes. The provision for income taxes was $12.3 million in the nine
months ended January 31, 2009, compared to $29.8 million in the nine months ended January 31, 2008.
The provision for income taxes in the nine months ended January 31, 2009 reflects a 72% effective
tax rate, compared to a 38% effective tax rate for the nine months ended January 31, 2008. The
effective tax rate is larger in the nine months ended January 31, 2009 as compared to the nine
months ended January 31, 2008 as the Company did not realize tax benefits on the marketable
securities asset impairment of $15.9 million.
Equity in Earnings of Unconsolidated Subsidiaries. Equity in earnings of unconsolidated
subsidiaries is comprised of our less than 50% interest in our Mexican subsidiaries. We report our
interest in earnings or loss of our Mexican subsidiaries on the equity basis as a one-line
adjustment to net income, net of taxes. Equity in earnings was $2.3 million in the nine months
ended January 31, 2009 compared to $2.5 million in the nine months ended January 31, 2008.
Liquidity and Capital Resources
The operating environment for the Companys suite of services deteriorated rapidly in the last
six weeks of calendar 2008 and through the first two months of 2009. The macroeconomic climate
remains uncertain. In response to such conditions and the extraordinary conditions in worldwide
credit markets, management felt it prudent after the end of the third quarter of fiscal 2009 to
drawdown $42 million from its existing credit line, which is
secured by substantially all of our assets, to maximize the Companys financial flexibility.
This action has provided the Company with additional liquidity in the amount of $42 million.
The
Company has also taken steps to align its cost structure with anticipated revenue levels.
The Company plans to take further steps including a reduction of work force and possible consolidation of
premises in the three months ended April 30, 2009 to align our cost structure with anticipated
revenue levels and currently plans to incur $10 million to $13 million of expenses to implement
these steps. Continued adverse changes in the Companys revenue, however, could require us to
institute additional cost cutting measures, and to the extent our efforts are not quick or deep
enough, we may be required to obtain additional financing to meet our needs. The Company
believes that the cash on hand and funds from operations will be sufficient to meet anticipated
working capital, capital expenditures and general corporate requirements during the next twelve
months.
Our performance is subject to the general level of economic activity in the geographic regions
and industries in which we operate. The economic activity in those regions and industries have
recently deteriorated significantly and may remain depressed for the foreseeable future. If the
national or global economy or credit market conditions in general were to deteriorate further in
the future, it is possible that such changes could put additional negative pressure on demand for
our services and affect our cash flows.
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As of January 31, 2009, we held marketable securities (to settle obligations under the ECAP)
with a cost value of $75.9 million and a fair value of $60.0 million. The difference between cost
and fair value has previously been recorded as an unrealized loss in our
statement of stockholders equity. As a result of the severity and
duration of the decline in the
fair value of these securities the Company recorded a $15.9 million asset impairment charge during
the nine months ended January 31, 2009 in the accompanying statement of operations in interest and
other (loss) income, net. Because the impaired assets mirror liabilities to participants which
have previously been adjusted to the market value of the assets, this non-cash charge does not
impact the Companys operations, operating income or liquidity.
As of January 31, 2009 we held approximately $12.4 million par value (with a fair value of
$11.5 million) of marketable securities investments, classified as noncurrent assets, with an
auction reset feature (auction rate securities) whose underlying assets are generally student
loans which are substantially backed by the federal government. Continued liquidity issues in the
global credit markets caused auctions for all of our auction rate securities to fail because the
amount of securities offered for sale exceeded the amount of bids. As a result, the liquidity of
our remaining auction rate securities has diminished. We expect this decreased liquidity will
continue for as long as the present depressed global credit market environment persists, or until
issuers refinance and replace these securities with other instruments. Despite the current auction
market, we believe the credit quality of our auction rate securities remains high due to the
creditworthiness of the issuers. We continue to collect interest when due and at this time we
expect to continue to do so going forward. Additionally, we expect we will receive the principal
balance through either future successful auctions, sales of these securities outside the auction
process, the issuers establishment of different form of financing to replace these securities, or
the maturing of the securities.
As of August 8, 2008 we received notification from one of our investment securities firms
(Investment Firm) announcing a proposed settlement to repurchase all of our auction rate security
holdings at par value. We formally accepted the settlement agreement and entered into a repurchase
agreement (Agreement) with the Investment Firm on October 28, 2008 (Acceptance Date). By
accepting the Agreement, we (1) received the right to sell our auction rate securities at par value
to the Investment Firm between June 30, 2010 and July 2, 2012 and (2) gave the Investment Firm the
right to purchase the auction rate securities from us any time after the Acceptance Date as long as
we receive the par value. The Agreement covers $12.4 million par value (fair value of $11.5) of our
auction rate securities as of January 31, 2009 and we expect to receive the entire par value upon
the future liquidation of the securities.
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 no off-balance sheet arrangements and have not entered into any transactions involving
unconsolidated, limited purpose entities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of our global operating activities, we are exposed to certain market risks,
including foreign currency exchange fluctuations and fluctuations in interest. We manage our
exposure to these risks in the normal course of our business as described below. We have not
utilized financial instruments for trading, hedging or other speculative purposes nor do we trade
in derivative financial instruments.
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
comprehensive income on our consolidated Statement of Stockholders Equity and accumulated other
comprehensive income on our consolidated Balance Sheets.
Transactions denominated in a currency other than the reporting entitys functional currency
may give rise to transaction gains and losses that impact our results of operations. Historically,
we have not realized significant foreign currency gains or losses on such transactions. In the
three months ended January 31, 2009, we recognized foreign currency gains, after income taxes, of
$0.2 million primarily related to our North America, Latin America and Corporate operations.
Our primary exposure to exchange losses is based on outstanding intercompany loan balances
denominated in U.S. dollars. If the U.S. dollar strengthened 15%, 25% and 35% against the Pound
Sterling, the Euro, the Canadian dollar, the Australian dollar and the Yen, our exchange loss would
have been $3.4 million, $5.6 million and $7.9 million, respectively, based on outstanding balances
at January 31, 2009. If the U.S. dollar weakened by the same increments against the Pound Sterling,
the Euro, the Canadian dollar, the
Australian dollar and the Yen, our exchange gain would have been $3.4 million, $5.6 million
and $7.9 million, respectively, based on outstanding balances at January 31, 2009.
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Interest Rate Risk
We primarily manage our exposure to fluctuations in interest rates through our regular
financing activities, which generally are short-term and provide for
variable market rates. As discussed above, however, due to the extraordinary conditions in worldwide credit markets
management felt it prudent after the end of the third quarter to draw down
$42 million from its existing credit line, which is secured by
substantially all of our assets, to maximize the Companys
financial flexibility.
This action provided an additional $42 million of liquidity. We have $61.8 million of borrowings
against the cash surrender value of COLI contracts as of January 31, 2009 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 on the cash
surrender value on our COLI contracts.
As
of January 31, 2009, we held marketable securities (to settle
obligations under the ECAP) with a cost value of $75.9 million and a
fair value of $60.0 million. The difference between cost and fair value has previously been
recorded as an unrealized loss in our statement of stockholders equity. As a result of the
severity and duration of the decline in fair value of these securities the Company recorded a $15.9
million asset impairment charge during the nine months ended January 31, 2009 in the accompanying
statement of operations in interest and other (loss) income, net. Because the impaired assets
mirror liabilities to participants which have previously been adjusted to the market value of the
assets, this non-cash charge does not impact the Companys operations, operating income or
liquidity.
As of January 31, 2009, we held approximately $12.4 million par value (fair valued of $11.5
million) of auction rate securities. Continued liquidity issues in the global credit markets caused
auctions for all of our auction rate securities to fail, and there is no assurance that currently
successful auctions on the other auction rate securities in our investment portfolio will continue
to succeed. As a result of the current situation in the auction markets, our ability to liquidate
our investment in auction rate securities and fully recover the carrying value of our investment in
the near term may be limited or impossible. An auction failure means that the parties wishing to
sell securities cannot. If in the future the issuers are unable to successfully close future
auctions and their credit ratings deteriorate, we may be required to record an impairment charge on
these investments. We believe we will be able to liquidate our investment without significant loss
within the next year, however, it could take until the final maturity of the underlying notes (up
to 30 years) to realize our investments recorded value. Based on our expected operating cash
flows, and our other sources of cash, we do not anticipate the potential lack of liquidity on these
investments will affect our ability to execute our current business plan.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange
Act)) under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer. Based upon such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are
effective.
(b) Changes in Internal Control over Financial Reporting.
During the fiscal quarter ended January 31, 2009, there were no changes in our internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in litigation both as plaintiff and defendant, relating to
claims arising out of our operations that is ordinary, routine litigation incidental to the
business. As of the date of this report, we are not engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect on our business,
financial condition or results of operations.
Item 1A. Risk Factors
In our Form 10-K, we described material risk factors facing the 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, except as noted, there have been no material changes to risk factors
described in our Form 10-K.
Global economic developments and the economic conditions in the geographic regions and the
industries from which we derive a significant portion of our fee revenue could undermine our future
profitability.
Demand for our services is affected by global economic conditions and the general level of
economic activity in the geographic regions and industries in which we operate. When conditions in
the global economy, including the credit markets, deteriorate, or economic activity slows, many
companies hire fewer permanent employees. Those regions and industries have recently deteriorated
significantly and may remain depressed for the foreseeable future. If the national or global
economy or credit market conditions in general do not improve or deteriorate further in
the future, the demand for our services could continue to weaken,
resulting in lower cash flows and a negative effect on our financial
condition.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
During the three months ended January 31, 2009, the Company repurchased shares of its common
stock under the common stock repurchase program approved by the Board of Directors in November
2007. Pursuant to this program, shares can be repurchased in open market transactions or privately
negotiated transactions at the Companys discretion.
Approximate | ||||||||||||||||
Shares | Dollar Value of | |||||||||||||||
Purchased | Shares that | |||||||||||||||
Average | as Part of a | May Yet Be | ||||||||||||||
Price | Publicly- | Purchased | ||||||||||||||
Paid | Announced | Under the | ||||||||||||||
Shares | Per | Program | Program | |||||||||||||
Purchased | Share | (1) | (1) | |||||||||||||
November 1, 2008 November 30, 2008 |
156,426 | $ | 12.37 | 154,400 | $ | 36.4 million | ||||||||||
December 1, 2008 December 31, 2008 |
710 | $ | 11.63 | | $ | 36.4 million | ||||||||||
January 1, 2009 January 31, 2009 |
1,200 | $ | 11.16 | | $ | 36.4 million | ||||||||||
Balance as of January 31, 2009 |
158,336 | 154,400 | ||||||||||||||
(1) | On November 2, 2007, the Board of Directors approved the repurchase of up to $50 million of
the Companys common stock in a common stock repurchase program. The shares can be repurchased
in open market transactions or privately negotiated transactions at the Companys discretion. |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the third quarter of fiscal
year 2009.
Item 5. Other Information
Due
to deteriorating economic conditions encountered in the current
fiscal year, the Company implemented a
restructuring of its cost structure designed to reduce the work force
by approximately 400 employees and to
consolidate premises. This initiative resulted in a total charge of $16.8 million against operations in the three
months ended January 31, 2009 of which $13.5 million and $3.3 million related to severance costs and the consolidation
of premises, respectively (See Note 5 to the Companys condensed financial statements).
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Item 6. Exhibits
Exhibit | ||||
Number | Description of Exhibit | |||
3.1 | * | Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Companys Quarterly Report
on Form 10-Q, dated December 15, 1999. |
||
3.2 | * | Certificate of Designations of 7.5% Convertible Preferred Stock, filed as Exhibit 3.1 to the
Companys Current Report on Form 8-K, dated June 18, 2002. |
||
3.3 | * | Amended and Restated Bylaws of the Company, filed as Exhibit 3.3 to the Companys Annual Report on
Form 10-K, dated October 29, 2002. |
||
31.1 | Certification by Chief Executive Office pursuant to Rule 13a-14(a) under the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
* | incorporated by reference. |
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant has caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
KORN/FERRY INTERNATIONAL |
||||
Date: March 12, 2009 | By: | /s/ STEPHEN J. GIUSTO | ||
Stephen J. Giusto | ||||
Executive Vice President and Chief Financial Officer |
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EXHIBIT INDEX
Exhibit | ||||
Number | Description of Exhibit | |||
31.1 | Certification by Chief Executive Office pursuant to Rule 13a-14(a) under the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
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