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Korn/Ferry International Announces Third Quarter Fiscal 2009 Results of Operations

Posted on: Wednesday, 11 March 2009, 06:50 CDT

Highlights

- Excluding a $16.8 million restructuring charge and a $15.3 million asset impairment charge recorded in the period, Q3'09 diluted earnings per share was $0.08. Third quarter fiscal 2009 diluted loss per share was $0.52 compared to diluted earnings per share of $0.37 in Q3'08.

- Third quarter fiscal 2009 fee revenue was $136.2 million, a 32% decline (27% decline on a constant currency basis) from the same quarter last year.

LOS ANGELES, March 11 /PRNewswire-FirstCall/ -- Korn/Ferry International (NYSE: KFY), a premier global provider of talent management solutions, announced third quarter fiscal 2009 diluted loss per share of $0.52 compared to diluted earnings per share of $0.37 in Q3'08. Excluding a $16.8 million restructuring charge and a $15.3 million non-cash asset impairment charge recorded in the period, earnings per share would have been $0.08.

Gary D. Burnison, Chief Executive Officer, Korn/Ferry stated, "The unprecedented economic environment has impeded business throughout the world. Despite our leading brand and diversified strategy, unfortunately we have not been immune from the recession that has affected virtually every company conducting business today. Nevertheless, we plan to leverage the strengths of our world-class client relationships, trusted brand, global footprint, leading consultants and diversified solutions mix to not only navigate the current environment, but more importantly, to best position us for acceleration through this economic storm and the inevitable recovery, paving the way for our continued transformation as a talent management solutions provider."

Financial Results (dollars in millions, except per share amounts) Third Quarter Year to date Q3'09 Q3'08 Q3'09 Q3'08 ----- ----- ----- ----- Fee revenue $136.2 $201.2 $531.2 $582.4 Revenue $144.5 $212.1 $561.7 $615.2 Operating (loss) income $(11.3) $21.2 $34.0 $71.7 Operating margin (8.3%) 10.5% 6.4% 12.3% Net (loss) income $(22.4) $16.3 $7.1 $50.5 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 Adjusted Results (a): Third Year to Quarter date Q3'09 Q3'09 ----- ----- Operating income $5.5 $50.8 Operating margin 4.1% 9.6% Net income $3.5 $33.4 Basic earnings per share $0.08 $0.77 Diluted earnings per share $0.08 $0.75 (a) Adjusted results are non-GAAP financial measures that exclude restructuring charges of $16.8 million during the three and nine months ended January 31, 2009 and an impairment charge on marketable securities of $15.3 million and $15.9 million during the three and nine months ended January 31, 2009, respectively (see attached reconciliations).

Fee revenue was $136.2 million in Q3'09 compared to $201.2 million in Q3'08, a decrease of 32.3% (and a decrease of 26.7% on a constant currency basis). As the global economic and financial crisis intensified the Company experienced a 33.5% decline in the number of executive search engagements opened compared to a year ago and the average fee billed per engagement decreased by 16.6% compared to the prior year.

Compensation and benefits were $94.0 million in Q3'09, a decrease of $44.6 million, or 32.2% (and a decrease of 26.3% on a constant currency basis), compared to $138.6 million in Q3'08. The decrease is attributable mainly to a reduction in worldwide headcount and a reduction in profitability based compensation. Changes in exchange rates impacted compensation and benefits in Q3'09 favorably by $8.2 million from Q3'08.

General and administrative expenses were $31.0 million in Q3'09, a decrease of $4.3 million, or 12.2% from $35.3 million in Q3'08. The decrease is attributable to the Company's cost control initiatives. Changes in exchange rates impacted general and administrative expenses in Q3'09 favorably by $2.2 million from Q3'08.

The Company previously announced it would incur expenses to rationalize its cost structure to the changing economic environment. During the quarter the Company recorded a $16.8 million restructuring charge with $13.5 million of severance costs related to a reduction in work force, of which approximately $5.5 million was paid in cash during the quarter, and $3.3 million relating to the consolidation of premises.

Excluding the previously mentioned restructuring costs of $16.8 million, Q3'09 operating income was $5.5 million. Including the restructuring charge, the Company recorded an operating loss of $11.3 million in Q3'09 compared to operating income of $21.2 million in Q3'08, a decrease of $32.5 million.

Balance Sheet and Liquidity

Cash, cash equivalents and marketable securities were $289.9 million at January 31, 2009 compared to $298.3 million at January 31, 2008. The Company generated $18.3 million of cash flow in Q3'09.

During the quarter, given the severity and duration of the decline in the market value of marketable securities held on behalf of participants in certain long-term compensation programs, management recorded an impairment charge of $15.3 million to interest and other (loss) income. 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 Company's operations, operating income or liquidity.

Interest expense was $1.3 million in Q3'09 and $1.2 million in the same period last year. Interest expense in both years related primarily to borrowings under Korn/Ferry's COLI policies.

Results by Segment Selected Executive Recruitment Data (dollars in millions) Third Quarter Year to date Q3'09 Q3'08 Q3'09 Q3'08 ----- ----- ----- ----- Fee revenue $116.6 $173.0 $451.4 $501.9 Revenue $123.3 $179.9 $474.0 $523.1 Operating income $5.2 $29.0 $63.5 $94.7 Operating margin 4.5% 16.8% 14.1% 18.9% Average number of consultants 516 521 521 512 Engagements (a) 1,217 1,830 4,806 5,483 (a) Represents new engagements opened in the respective period. Adjusted Results (b): Third Year to Quarter date Q3'09 Q3'09 ----- ----- Operating income $16.3 $74.6 Operating margin 14.0% 16.5% (b) Adjusted results are non-GAAP financial measures that exclude restructuring charges of $11.1 million (see attached reconciliation).

Fee revenue was $116.6 million in Q3'09, a decrease of $56.4 million, or 32.6% from $173.0 million in Q3'08 (and a decrease of 27.6% on a constant currency basis). Fee revenue decreased in all regions due to a decrease in the overall number of engagements billed and an overall decrease of 11.1% in the average fee per engagement.

The Q3'09 operating income includes restructuring costs of $11.1 million without which operating income would have been $16.3 million. Operating income was $5.2 million in Q3'09 compared to $29.0 million in Q3'08, resulting in a decrease of $23.8 million from the prior year.

The total number of consultants at January 31, 2009 was 497, a decrease of 21 from January 31, 2008.

Selected Futurestep Data (dollars in millions) Third Quarter Year to date Q3'09 Q3'08 Q3'09 Q3'08 ----- ----- ----- ----- Fee revenue $19.6 $28.2 $79.8 $80.5 Revenue $21.2 $32.2 $87.7 $92.1 Operating (loss) income $(8.3) $2.0 $(4.2) $5.6 Operating margin (42.5%) 7.1% (5.3%) 7.0% Adjusted Results (a): Third Year to Quarter date Q3'09 Q3'09 ----- ----- Operating (loss) income $(2.5) $1.5 Operating margin (12.9%) 1.9% (a) Adjusted results are non-GAAP financial measures that exclude restructuring charges of $5.8 million (see attached reconciliation).

Fee revenue was $19.6 million in Q3'09, a decrease of $8.6 million, or 30.5% (and a decrease of 21.3% on a constant currency basis), from $28.2 million in Q3'08. Reductions in fee revenue were driven by a decrease in the average fee per engagement and to a lesser extent by a decrease in the number of engagements billed.

The Q3'09 operating loss includes restructuring costs of $5.8 million without which the operating loss would have been $2.5 million. Operating loss was $8.3 million in Q3'09 compared to operating income of $2.0 million in Q3'08.

Outlook

The global economic crisis has had a significant impact on many of our client's people initiatives; as such, the demand for the Company's suite of services experienced a precipitous decline in the last eight weeks of calendar 2008. Although the demand for the Company's services has remained relatively consistent over the past two months, the macroeconomic climate remains uncertain. The Company plans to take further steps including a reduction of work force and possible consolidation of premises in Q4'09 to align its cost structure with anticipated revenue levels and currently plans to incur $10 million to $13 million of expenses to implement these steps. Based on new business confirmed subsequent to the end of Q3'09, revenues would be approximately $110 million in Q4'09. However, this presumes an equivalent level of confirmations for the remainder of Q4'09. Given the unprecedented economic environment, predicting revenues is extremely imprecise, making a meaningful prediction about earnings impractical. Given these business conditions, the Company's primary operating goal in the short run is to maintain neutral to positive cash flows as measured by earnings before interest, taxes, depreciation and amortization and non-cash stock compensation. To the extent that business conditions continue to decline, further efforts to align the Company's cost structure may not occur in time to retain positive cash flows by that measure in the final quarter of the fiscal year.

Earnings Conference Call Webcast

The earnings conference call will be held today at 9:00 AM (EDT) and hosted by Gary Burnison, Chief Executive Officer, and Stephen Giusto, Chief Financial Officer. The conference call will be webcast and available online at www.kornferry.com, accessible through the Investor Relations section.

Korn/Ferry International (NYSE: KFY), with more than 90 offices in 40 countries, is a premier global provider of talent management solutions. Based in Los Angeles, the firm delivers an array of solutions that help clients to identify, deploy, develop, retain and reward their talent. For more information on the Korn/Ferry International family of companies, visit www.kornferry.com.

Forward Looking Statements

Statements in this press release and our conference call that relate to future results and events ("forward-looking statements") are based on Korn/Ferry's current expectations. Readers are cautioned not to place undue reliance on such statements. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties that are beyond the control of Korn/Ferry. The potential risks and uncertainties relate to competition, the dependence on attracting and retaining qualified and experienced consultants, the portability of client relationships, local political or economic developments in or affecting countries where we have operations, including fluctuations in exchange rates, risks related to the growth and results of Futurestep, global economic developments, restrictions imposed by off-limits agreements, reliance on information systems and employment liability risk. For a detailed description of risks and uncertainties that could cause differences, please refer to Korn/Ferry's periodic filings with the Securities and Exchange Commission. Korn/Ferry disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Use of Non-GAAP Financial Measures

This press release contains financial information calculated other than in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). These non-GAAP financial measures include adjusted operating income and operating margin, adjusted to exclude restructuring charges, and adjusted net income, basic earnings per share and diluted earnings per share, adjusted to exclude restructuring charges and an impairment charge on marketable securities.

This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial information determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Management believes the presentation of non-GAAP financial measures in this press release provides meaningful supplemental information regarding Korn/Ferry's performance by excluding certain charges that may not be indicative of Korn/Ferry's operating results. The use of these non-GAAP financial measures facilitate comparisons to Korn/Ferry's historical performance. Korn/Ferry includes these non-GAAP financial measures because management believes it is useful to investors in allowing for greater transparency with respect to supplemental information used by management in its evaluation of Korn/Ferry's ongoing operations and financial and operational decision-making.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (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 expense 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 expense 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 (16,061) 3,777 (16,865) 6,074 ------- ----- ------- ----- (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 ====== ====== ====== ====== KORN/FERRY INTERNATIONAL AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS EXCLUDING NON-GAAP ADJUSTMENTS (in thousands, except per share amounts) (unaudited) Three Months Ended January 31, ----------- 2009 - As 2009 - As Reported Adjustments Adjusted ---------- ----------- ---------- Fee revenue $136,210 $136,210 Reimbursed out-of-pocket engagement expenses 8,283 8,283 ----- ----- Total revenue 144,493 144,493 Compensation and benefits 93,978 93,978 General and administrative expense 30,963 30,963 Out-of-pocket engagement expenses 11,041 11,041 Depreciation and amortization 2,924 2,924 Restructuring charges (1) 16,845 (16,845) - ------ ----- Total operating expense 155,751 (16,845) 138,906 ------- ------- Operating (loss) income (11,258) 5,587 Interest and other (loss) income, net (2) (16,061) 15,348 (713) ------- ---- (Loss) income before (benefit) provision for income taxes and equity in earnings of unconsolidated subsidiaries (27,319) 4,874 (Benefit) provision for income taxes (3) (4,549) 6,381 1,832 Equity in earnings of unconsolidated subsidiaries, net 414 414 --- --- Net (loss) income $(22,356) $3,456 ======== ====== Basic (loss) earnings per common share $(0.52) $0.08 ====== ===== Basic weighted average common shares outstanding 43,406 43,406 ====== ====== Diluted (loss) earnings per common share $(0.52) $0.08 ====== ===== Diluted weighted average common shares outstanding 43,406 43,406 ====== ====== Nine Months Ended January 31, ----------- 2009 - As 2009 - As Reported Adjustments Adjusted ---------- ----------- ---------- Fee revenue $531,243 $531,243 Reimbursed out-of-pocket engagement expenses 30,459 30,459 ------ ------ Total revenue 561,702 561,702 Compensation and benefits 365,849 365,849 General and administrative expense 97,316 97,316 Out-of-pocket engagement expenses 39,071 39,071 Depreciation and amortization 8,637 8,637 Restructuring charges (1) 16,845 (16,845) - ------ - Total operating expense 527,718 (16,845) 510,873 ------- ------- Operating (loss) income 33,984 50,829 Interest and other (loss) income, net (2) (16,865) 15,893 (972) ------- ---- (Loss) income before (benefit) provision for income taxes and equity in earnings of unconsolidated subsidiaries 17,119 49,857 (Benefit) provision for income taxes (3) 12,327 6,401 18,728 Equity in earnings of unconsolidated subsidiaries, net 2,316 2,316 ----- ----- Net (loss) income $7,108 $33,445 ====== ======= Basic (loss) earnings per common share $0.16 $0.77 ===== ===== Basic weighted average common shares outstanding 43,538 43,538 ====== ====== Diluted (loss) earnings per common share $0.16 $0.75 ===== ===== Diluted weighted average common shares outstanding 44,352 44,352 ====== ====== Explanation of Non-GAAP Adjustments ----------------------------------- For the three and nine months ended January 31, 2009: (1) Restructuring charges (2) Asset impairment on marketable securities (3) Tax effect related to net operating expense adjustments KORN/FERRY INTERNATIONAL AND SUBSIDIARIES FINANCIAL SUMMARY BY SEGMENT (in thousands) (unaudited) Three Months Ended January 31, 2009 2008 ---- ---- Fee Revenue: Executive recruitment: North America $66,978 $94,812 EMEA 30,423 46,292 Asia Pacific 13,591 25,322 South America 5,650 6,617 ----- ----- Total executive recruitment 116,642 173,043 Futurestep 19,568 28,113 ------ ------ Total fee revenue 136,210 201,156 Reimbursed out-of-pocket engagement expenses 8,283 10,935 ----- ------ Total revenue $144,493 $212,091 ======== ======== Operating (Loss) Income: Margin Margin ------ ------ Executive recruitment: North America $10,767 16.1% $16,167 17.1% EMEA (6,291) (20.7%) 7,116 15.4% Asia Pacific 367 2.7% 5,444 21.5% South America 373 6.6% 291 4.4% --- --- Total executive recruitment 5,216 4.5% 29,018 16.8% Futurestep (8,309) (42.5%) 2,026 7.2% Corporate (8,165) (9,864) ------ ------ Total operating (loss) income $(11,258) (8.3%) $21,180 10.5% ======== ======= Restructuring Charges: Executive recruitment: North America $2,557 3.8% $- 0.0% EMEA 6,606 21.7% - 0.0% Asia Pacific 947 7.0% - 0.0% South America 956 16.9% - 0.0% --- - Total executive recruitment 11,066 9.5% - 0.0% Futurestep 5,779 29.6% - 0.0% Corporate - - --- --- Total operating income $16,845 12.4% $- 0.0% ======= === Adjusted Operating Income: (Excluding Restructuring charges) Margin Margin ------ ------ Executive recruitment: North America $13,324 19.9% $16,167 17.1% EMEA 315 1.0% 7,116 15.4% Asia Pacific 1,314 9.7% 5,444 21.5% South America 1,329 23.5% 291 4.4% ----- --- Total executive recruitment 16,282 14.0% 29,018 16.8% Futurestep (2,530) (12.9%) 2,026 7.2% Corporate (8,165) (9,864) ------ ------ Total adjusted operating income $5,587 4.1% $21,180 10.5% ====== ======= Nine Months Ended January 31, 2009 2008 ---- ---- Fee Revenue: Executive recruitment: North America $252,649 $276,988 EMEA 122,499 133,072 Asia Pacific 56,181 72,639 South America 20,063 19,184 ------ ------ Total executive recruitment 451,392 501,883 Futurestep 79,851 80,483 ------ ------ Total fee revenue 531,243 582,366 Reimbursed out-of-pocket engagement expenses 30,459 32,826 ------ ------ Total revenue $561,702 $615,192 ======== ======== Operating (Loss) Income: Margin Margin ------ ------ Executive recruitment: North America $45,601 18.0% $57,346 20.7% EMEA 8,105 6.6% 20,871 15.7% Asia Pacific 7,110 12.7% 14,595 20.1% South America 2,667 13.3% 1,836 9.6% ----- ----- Total executive recruitment 63,483 14.1% 94,648 18.9% Futurestep (4,233) (5.3%) 5,642 7.0% Corporate (25,266) (28,615) ------- ------- Total operating (loss) income $33,984 6.4% $71,675 12.3% ======= ======= Restructuring Charges: Executive recruitment: North America $2,557 1.1% $- 0.0% EMEA 6,606 5.4% - 0.0% Asia Pacific 947 1.6% - 0.0% South America 956 4.7% - 0.0% --- --- Total executive recruitment 11,066 2.4% - 0.0% Futurestep 5,779 7.2% - 0.0% Corporate - - --- --- Total operating income $16,845 3.2% $- 0.0% ======= === Adjusted Operating Income: (Excluding Restructuring charges) Margin Margin ------ ------ Executive recruitment: North America $48,158 19.1% $57,346 20.7% EMEA 14,711 12.0% 20,871 15.7% Asia Pacific 8,057 14.3% 14,595 20.1% South America 3,623 18.0% 1,836 9.6% ----- ----- Total executive recruitment 74,549 16.5% 94,648 18.9% Futurestep 1,546 1.9% 5,642 7.0% Corporate (25,266) (28,615) ------- ------- Total adjusted operating income $50,829 9.6% $71,675 12.3% ======= ======= KORN/FERRY INTERNATIONAL AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) As of As of January 31, 2009 April 30, 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, non-current 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 Other assets 28,112 14,286 ------ ------ Total assets $735,070 $880,214 ======== ======== LIABILITIES AND SHAREHOLDERS' 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 Shareholders' 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 -- ------ Shareholders' equity 467,358 496,679 Less: notes receivable from shareholders (540) (545) ---- ---- Total shareholders' equity 466,818 496,134 ------- ------- Total liabilities and shareholders' equity $735,070 $880,214 ======== ========

SOURCE Korn/Ferry International

Source: PR Newswire

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