Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2010
OR
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o |
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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)
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Delaware
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95-2623879 |
(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer 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, (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes 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. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The number of shares outstanding of our common stock as of December 7, 2010 was
46,402,278 shares.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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October 31, |
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April 30, |
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2010 |
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2010 |
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(unaudited) |
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(in thousands, except per share data) |
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ASSETS |
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Cash and cash equivalents |
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$ |
151,118 |
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$ |
219,233 |
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Marketable securities |
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16,189 |
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4,114 |
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Receivables due from clients, net of allowance for doubtful accounts of
$8,106 and $5,983, respectively |
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145,043 |
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107,215 |
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Income taxes and other receivables |
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8,476 |
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6,292 |
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Deferred income taxes |
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21,375 |
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20,844 |
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Prepaid expenses and other assets |
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27,940 |
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23,166 |
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Total current assets |
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370,141 |
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380,864 |
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Marketable securities, non-current |
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97,410 |
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73,105 |
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Property and equipment, net |
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37,470 |
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24,963 |
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Cash surrender value of company owned life insurance policies, net of loans |
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71,929 |
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69,069 |
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Deferred income taxes |
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53,526 |
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59,742 |
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Goodwill |
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177,562 |
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172,273 |
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Intangible assets, net |
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24,310 |
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25,425 |
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Investments and other assets |
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31,931 |
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21,657 |
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Total assets |
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$ |
864,279 |
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$ |
827,098 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Accounts payable |
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$ |
11,308 |
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$ |
11,148 |
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Income taxes payable |
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8,487 |
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6,323 |
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Compensation and benefits payable |
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121,894 |
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131,550 |
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Other accrued liabilities |
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50,762 |
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49,062 |
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Total current liabilities |
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192,451 |
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198,083 |
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Deferred compensation and other retirement plans |
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131,009 |
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123,794 |
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Other liabilities |
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21,706 |
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13,879 |
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Total liabilities |
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345,166 |
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335,756 |
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Stockholders equity: |
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Common stock: $0.01 par value, 150,000 shares authorized, 58,548 and 57,614
shares issued and 46,388 and 45,979 shares outstanding, respectively |
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387,909 |
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388,717 |
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Retained earnings |
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114,780 |
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90,220 |
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Accumulated other comprehensive income, net |
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16,949 |
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12,934 |
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Stockholders equity |
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519,638 |
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491,871 |
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Less: notes receivable from stockholders |
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(525 |
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(529 |
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Total stockholders equity |
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519,113 |
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491,342 |
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Total liabilities and stockholders equity |
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$ |
864,279 |
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$ |
827,098 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended |
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Six Months Ended |
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October 31, |
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October 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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(in thousands, except per share data) |
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Fee revenue |
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$ |
185,350 |
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$ |
140,145 |
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$ |
360,462 |
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$ |
256,948 |
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Reimbursed out-of-pocket engagement expenses |
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7,854 |
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6,411 |
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15,904 |
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12,896 |
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Total revenue |
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193,204 |
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146,556 |
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376,366 |
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269,844 |
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Compensation and benefits |
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127,555 |
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102,076 |
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247,763 |
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192,461 |
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General and administrative expenses |
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27,363 |
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27,164 |
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55,978 |
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55,218 |
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Out-of-pocket engagement expenses |
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13,237 |
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9,464 |
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25,336 |
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18,253 |
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Depreciation and amortization |
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3,144 |
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2,860 |
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6,112 |
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5,689 |
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Restructuring charges, net |
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2,130 |
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2,774 |
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2,130 |
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20,957 |
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Total operating expenses |
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173,429 |
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144,338 |
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337,319 |
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292,578 |
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Operating income (loss) |
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19,775 |
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2,218 |
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39,047 |
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(22,734 |
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Other income, net |
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2,915 |
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1,747 |
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1,414 |
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5,746 |
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Interest expense, net |
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(1,258 |
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(567 |
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(2,066 |
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(1,275 |
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Income (loss) before provision (benefit) for income taxes
and equity in earnings of unconsolidated subsidiaries |
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21,432 |
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3,398 |
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38,395 |
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(18,263 |
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Income tax provision (benefit) |
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8,288 |
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879 |
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14,809 |
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(6,486 |
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Equity in earnings of unconsolidated subsidiaries, net |
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512 |
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226 |
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974 |
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249 |
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Net income (loss) |
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$ |
13,656 |
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$ |
2,745 |
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$ |
24,560 |
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$ |
(11,528 |
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Earnings (loss) per common share: |
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Basic |
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$ |
0.30 |
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$ |
0.06 |
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$ |
0.55 |
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$ |
(0.26 |
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Diluted |
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$ |
0.30 |
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$ |
0.06 |
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$ |
0.53 |
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$ |
(0.26 |
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Weighted-average common shares outstanding: |
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Basic |
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45,130 |
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44,470 |
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44,886 |
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44,123 |
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Diluted |
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45,918 |
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45,291 |
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46,061 |
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44,123 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Six Months Ended |
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October 31, |
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2010 |
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2009 |
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(in thousands) |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
24,560 |
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$ |
(11,528 |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Depreciation and amortization |
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6,112 |
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5,689 |
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Stock-based compensation expense |
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7,806 |
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9,248 |
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Loss on disposition of property and equipment |
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82 |
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437 |
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Provision for doubtful accounts |
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4,274 |
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1,444 |
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Gain on cash surrender value of life insurance policies |
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(2,982 |
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(5,196 |
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Gain on marketable securities classified as trading |
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(1,832 |
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(6,115 |
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Change in fair value of acquisition-related contingent consideration |
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(1,878 |
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Deferred income taxes |
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5,685 |
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(7,112 |
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Change in other assets and liabilities: |
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Deferred compensation |
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7,215 |
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16,595 |
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Receivables |
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(44,286 |
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(28,598 |
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Prepaid expenses |
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(4,774 |
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(4,764 |
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Investment in unconsolidated subsidiaries |
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(974 |
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(249 |
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Income taxes payable |
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2,165 |
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6,530 |
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Accounts payable and accrued liabilities |
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(7,723 |
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(40,782 |
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Other |
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(1,141 |
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(4,389 |
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Net cash used in operating activities |
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(7,691 |
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(68,790 |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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(17,263 |
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(2,723 |
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Purchase of intangible assets |
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(3,481 |
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(Purchase of) proceeds from marketable securities, net |
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(34,507 |
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3,090 |
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Cash paid for acquisitions, net of cash acquired and contingent consideration |
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(9,984 |
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Payment of contingent consideration from acquisitions |
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(1,995 |
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Premiums on life insurance policies |
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(363 |
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(439 |
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Dividends received from unconsolidated subsidiaries |
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591 |
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157 |
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Net cash used in investing activities |
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(53,537 |
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(13,380 |
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Cash flows from financing activities: |
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Borrowings under life insurance policies |
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489 |
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3,219 |
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Purchase of common stock |
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(13,390 |
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(1,362 |
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Proceeds from exercise of warrants |
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2,983 |
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Proceeds from issuance of common stock upon exercise of employee stock
options and in connection with an employee stock purchase plan |
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2,005 |
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3,991 |
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Tax expense from exercise of stock options |
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(226 |
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(3,125 |
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Net cash (used in) provided by financing activities |
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(8,139 |
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2,723 |
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Effect of exchange rate changes on cash and cash equivalents |
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1,252 |
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7,385 |
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Net decrease in cash and cash equivalents |
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(68,115 |
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(72,062 |
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Cash and cash equivalents at beginning of period |
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219,233 |
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255,000 |
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Cash and cash equivalents at end of period |
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$ |
151,118 |
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$ |
182,938 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2010
1. Organization and Summary of Significant Accounting Policies
Nature of Business
Korn/Ferry International, a Delaware corporation (the Company), and its subsidiaries are
engaged in the business of providing executive recruitment, outsourced recruiting and leadership
and talent consulting on a retained basis. The Companys worldwide network of 76 offices in 36
countries enables it to meet the needs of its clients in all industries.
Basis of Consolidation and Presentation
The condensed consolidated financial statements for the three and six months ended October 31,
2010 and 2009 include the accounts of the Company and its wholly and majority owned/controlled
domestic and international subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation. The preparation of the condensed consolidated financial statements
conform with United States (U.S.) generally accepted accounting principles (GAAP) and
prevailing practice within the industry. The condensed consolidated financial statements include
all adjustments, consisting of normal recurring accruals and any other adjustments that management
considers necessary for a fair presentation of the results for these periods. 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, 2010 (the Annual Report) and
should be read together with the Annual Report.
Investments in affiliated companies which are 50% or less owned and where the Company
exercises significant influence over operations are accounted for using the equity method.
Certain amounts included in the prior fiscal period consolidated financial statements have
been reclassified to conform to the current fiscal year presentation.
Use of Estimates and Uncertainties
The preparation of the condensed consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from these estimates and changes in estimates are reported in current
operations. The most significant areas that require management judgment are revenue recognition,
deferred compensation, annual incentive compensation, evaluation of the carrying value of
receivables, marketable securities, goodwill and other intangible assets, fair value of contingent
consideration and deferred income taxes.
Revenue Recognition
Substantially all professional fee revenue is derived from fees for professional services
related to executive recruitment performed on a retained basis, middle-management recruitment and
leadership and talent consulting services. Fee revenue from recruitment activities is generally
one-third of the estimated first year compensation plus a percentage of the fee to cover indirect
expenses. Fee revenue from leadership and talent consulting services is recognized as earned. The
Company generally bills clients in three monthly installments commencing the month of client
acceptance. Fees earned in excess of the initial contract amount are billed upon completion of the
engagement. Any services that are provided on a contingent basis are recognized once the
contingency is fulfilled.
Allowance for Doubtful Accounts
A provision is established for doubtful accounts through a charge to general and
administrative expenses based on historical loss experience, assessment of the collectability of
specific accounts, as well as expectations of future collections based upon trends and the type of
work for which services are rendered. After all collection efforts have been exhausted, the
Company reduces the allowance for doubtful accounts for balances identified as uncollectible.
4
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
Marketable Securities
The Company classifies its marketable securities as either trading securities or
available-for-sale. These investments are recorded at fair value and are classified as marketable
securities in the accompanying consolidated balance sheets. Certain investments, which the Company
intends to sell within the next twelve months, are carried as current assets. Investments are made
based on the Companys investment policy, which restricts the types of investments that can be
made.
Trading securities consist of the Companys investments which are held in trust to satisfy
obligations under the Companys deferred compensation plans (see Note 5). The changes in fair
values on trading securities are recorded as a component of net income (loss) in other income, net.
Available-for-sale securities consist of corporate bonds, U.S Treasury and agency securities
and commercial paper. The changes in fair values, net of applicable taxes, are recorded as
unrealized gains (losses) as a component of accumulated other comprehensive income in stockholders
equity. 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 other 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 and six
months ended October 31, 2010 and 2009, no other-than-temporary impairment was recognized.
Business acquisitions
Business acquisitions are accounted for under the purchase method by assigning the purchase
price to tangible and intangible assets acquired and liabilities assumed. The results are included
in the Companys consolidated financial statements from the date of each respective acquisition.
Assets acquired and liabilities assumed are recorded at their fair values and the excess of the
purchase price over the amounts assigned is recorded as goodwill. Purchased intangible assets with
finite lives are amortized over their estimated useful lives. Adjustments to fair value assessments
are recorded to goodwill over the purchase price allocation period (generally not longer than
twelve months). During the three months ended October 31, 2010, the Company recorded a $1.9
million reduction in the estimated fair value of contingent consideration relating to a prior
acquisition, as a component of general and administrative expenses.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of assets acquired.
The goodwill impairment test compares the fair value of a reporting unit with its carrying amount,
including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill of
the reporting unit would be considered impaired. To measure the amount of the impairment loss, the
implied fair value of a reporting units goodwill is compared to the carrying amount of that
goodwill. The implied fair value of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination. If the carrying amount of a reporting units
goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. For each of these tests, the fair value of each of the Companys
reporting units was determined using a combination of valuation techniques, including a discounted
cash flow methodology. The annual goodwill impairment test performed as of January 31, 2010,
indicated that the fair value of each reporting unit exceeded its carrying amount. As a result, no
impairment charge was recognized. There was also no indication of impairment as of October 31, 2010
and April 30, 2010.
5
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
Intangible assets primarily consist of customer lists, non-compete agreements, proprietary
databases, intellectual property and trademarks, and are recorded at the estimated fair value at
the date of acquisition and are amortized using the straight-line method over their estimated
useful lives of five to 24 years. For intangible assets subject to amortization, an impairment
loss is recognized if the carrying amount of the intangible assets is not recoverable and exceeds
fair value. The carrying amount of the intangible assets is considered not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from use of the asset. As of
October 31, 2010 and April 30, 2010, there were no indicators of impairment with respect to the
Companys intangible assets.
Restructuring Charges
The Company accounts for its restructuring charges as a liability when the costs are incurred
and are recorded at fair value. Changes in the estimates of the restructuring charges are recorded
in the period the change is determined.
Compensation and Benefits Expense
Compensation and benefits expense in the accompanying statements of operations consist of
compensation and benefits paid to consultants, executive officers, and administrative and support
personnel. The most significant portions of this expense are salaries and the annual performance
related bonus paid to consultants. Compensation and benefits are recognized when incurred.
Management makes certain estimates related to the annual performance related bonus. These annual
performance related bonuses are generally paid within twelve months following the fiscal year end
though the Company deferred certain bonuses earned in fiscal 2009 and 2010 until December 2010 and
2011, respectively. Management reevaluates the estimates up to the payment date, and any changes
in the estimate are reported in current operations. Other expenses included in this line item are
changes in the deferred compensation liabilities and cash surrender value (CSV) of company owned
life insurance (COLI) contracts, amortization of stock compensation awards, payroll taxes and
employee insurance benefits.
Stock-Based Compensation
The Company has employee compensation plans under which various types of stock-based
instruments are granted. These instruments, principally include stock options, stock appreciation
rights (SARs), restricted stock and an Employee Stock Purchase Plan (ESPP). The Company
recognizes compensation expense related to restricted stock and SARs and the estimated fair value
of stock options and stock purchases under the ESPP.
Fair Value of Financial Instruments
The Company measures the fair values of its financial instruments in accordance with
accounting guidance that defines fair value, provides guidance for measuring fair value and
requires certain disclosures. The guidance also 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 guidance 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. |
6
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
As of October 31, 2010, the Company held certain assets that are required to be measured at
fair value on a recurring basis. These included cash equivalents and marketable securities. The
carrying amount of cash, cash equivalents and accounts receivable approximates fair value due to
the short maturity of these instruments. The fair values of marketable securities classified as
trading, are obtained from quoted market prices and the fair values of marketable securities
classified as available-for-sale, are obtained from a third party, which are based on quoted prices
or market prices for similar assets. As of April 30, 2010, the Company also held auction rate
securities (ARS) and a related put option. The fair value for these instruments are determined
by the use of pricing models (see Note 5). The ARS were redeemed at full value during the six
months ended October 31, 2010.
Recently Adopted Accounting Standards
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance on Fair
Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements, which
amends the disclosure guidance with respect to fair value measurements. Specifically, the new
guidance requires disclosure of amounts transferred in and out of Levels 1 and 2 fair value
measurements, a reconciliation presented on a gross basis rather than a net basis of activity in
Level 3 fair value measurements, greater disaggregation of the assets and liabilities for which
fair value measurements are presented and more robust disclosure of the valuation techniques and
inputs used to measure Level 2 and 3 fair value measurements. The guidance is effective for interim
and annual reporting periods beginning after December 15, 2009, with the exception of the new
guidance around the Level 3 activity reconciliation, which is effective for fiscal years beginning
after December 15, 2010. The Company adopted the new guidance on February 1, 2010. The adoption did
not impact the Companys financial position, results of operations or liquidity.
2. Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per common share was computed by dividing net earnings (loss)
attributable to common stockholders 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 earnings (loss) attributable to common stockholders by
the weighted-average number of common shares outstanding plus dilutive common equivalent shares.
During both the three months and six months ended October 31, 2010, SARs and options to purchase
1.1 million shares were outstanding but not included in the computation of diluted earnings per
share because they were anti-dilutive. During the three months ended October 31, 2009, SARs and
options to purchase 1.6 million shares were outstanding but not included in the computation of
diluted earnings per share because they were anti-dilutive. Due to the loss attributable to common
stockholders during the six months ended October 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.
7
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
The following table summarizes basic and diluted earnings (loss) per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 31, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to common stockholders |
|
$ |
13,656 |
|
|
$ |
2,745 |
|
|
$ |
24,560 |
|
|
$ |
(11,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average number of common shares
outstanding |
|
|
45,130 |
|
|
|
44,470 |
|
|
|
44,886 |
|
|
|
44,123 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock |
|
|
459 |
|
|
|
385 |
|
|
|
842 |
|
|
|
|
|
Stock options |
|
|
328 |
|
|
|
386 |
|
|
|
326 |
|
|
|
|
|
Warrants |
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
ESPP |
|
|
1 |
|
|
|
2 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of common shares
outstanding |
|
|
45,918 |
|
|
|
45,291 |
|
|
|
46,061 |
|
|
|
44,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
0.30 |
|
|
$ |
0.06 |
|
|
$ |
0.55 |
|
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
0.30 |
|
|
$ |
0.06 |
|
|
$ |
0.53 |
|
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Comprehensive Income
Comprehensive income is comprised of net income (loss) and all changes to stockholders
equity, except those changes resulting from investments by stockholders (changes in paid in
capital) and distributions to stockholders (dividends).
Total comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 31, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Net income (loss) |
|
$ |
13,656 |
|
|
$ |
2,745 |
|
|
$ |
24,560 |
|
|
$ |
(11,528 |
) |
Foreign currency translation adjustments |
|
|
7,758 |
|
|
|
5,975 |
|
|
|
3,974 |
|
|
|
18,259 |
|
Unrealized gains on marketable securities, net of taxes |
|
|
42 |
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
21,456 |
|
|
$ |
8,720 |
|
|
$ |
28,575 |
|
|
$ |
6,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income were as follows:
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
April 30, |
|
|
|
2010 |
|
|
2010 |
|
|
|
(in thousands) |
|
Foreign currency translation adjustments |
|
$ |
22,874 |
|
|
$ |
18,900 |
|
Defined benefit adjustments, net of taxes |
|
|
(5,966 |
) |
|
|
(5,966 |
) |
Unrealized gains on marketable securities, net of taxes |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
16,949 |
|
|
$ |
12,934 |
|
|
|
|
|
|
|
|
8
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
4. Employee Stock Plans
Stock-Based Compensation
The following table summarizes the components of stock-based compensation expense recognized
in the Companys condensed consolidated statements of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 31, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Restricted stock |
|
$ |
3,588 |
|
|
$ |
4,406 |
|
|
$ |
7,152 |
|
|
$ |
8,553 |
|
Stock options and SARs |
|
|
311 |
|
|
|
258 |
|
|
|
447 |
|
|
|
494 |
|
ESPP |
|
|
92 |
|
|
|
88 |
|
|
|
207 |
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, pre-tax |
|
|
3,991 |
|
|
|
4,752 |
|
|
|
7,806 |
|
|
|
9,248 |
|
Tax benefit from stock-based compensation expense |
|
|
(1,457 |
) |
|
|
(1,735 |
) |
|
|
(2,849 |
) |
|
|
(3,376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax |
|
$ |
2,534 |
|
|
$ |
3,017 |
|
|
$ |
4,957 |
|
|
$ |
5,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses the Black-Scholes option valuation model to estimate the grant date fair
value of employee stock options. The expected volatility reflects 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 weighted-average assumptions used to estimate the fair value of each employee stock option
and SARs were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
Expected volatility |
|
|
47.67 |
% |
|
|
48.91 |
% |
Risk-free interest rate |
|
|
1.83 |
% |
|
|
2.53 |
% |
Expected option life (in years) |
|
|
5.00 |
|
|
|
5.00 |
|
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.
Stock Incentive Plans
The Korn/Ferry International 2008 Stock Incentive Plan, as amended (the 2008 Plan) made
available an additional 2,360,000 shares of the Companys common stock for stock-based compensation
awards. 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.
9
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
Stock Options and SARs
Stock options and SARs transactions under the Companys stock incentive plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended October 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Life (In Years) |
|
|
Value |
|
|
|
(in thousands, except per share data) |
|
Outstanding, April 30, 2010 |
|
|
2,723 |
|
|
$ |
14.72 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
208 |
|
|
$ |
13.97 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(100 |
) |
|
$ |
7.75 |
|
|
|
|
|
|
|
|
|
Forfeited/expired |
|
|
(434 |
) |
|
$ |
21.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, October 31, 2010 |
|
|
2,397 |
|
|
$ |
13.79 |
|
|
|
4.11 |
|
|
$ |
10,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, October 31, 2010 |
|
|
1,741 |
|
|
$ |
14.39 |
|
|
|
3.38 |
|
|
$ |
6,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the table above are 24,103 SARs outstanding and exercisable as of October 31, 2010
with a weighted-average exercise price of $8.87. As of October 31, 2010, there was $3.2 million of
total unrecognized compensation cost related to non-vested awards of stock options and SARs. That
cost is expected to be recognized over a weighted-average period of 1.7 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.
Additional information pertaining to stock options and SARs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 31, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands, except per share data) |
|
Weighted-average fair value of stock options granted |
|
$ |
6.86 |
|
|
$ |
6.48 |
|
|
$ |
6.05 |
|
|
$ |
4.81 |
|
Total fair value of stock options and SARs vested |
|
$ |
71 |
|
|
$ |
508 |
|
|
$ |
615 |
|
|
$ |
596 |
|
Total intrinsic value of stock options exercised |
|
$ |
509 |
|
|
$ |
382 |
|
|
$ |
685 |
|
|
$ |
1,100 |
|
Total intrinsic value of SARs paid |
|
$ |
67 |
|
|
$ |
|
|
|
$ |
67 |
|
|
$ |
|
|
Restricted Stock
The Company grants restricted stock to executive officers and other senior employees generally
vesting over a three to 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.
Restricted stock activity during the six months ended October 31, 2010, is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
|
|
(in thousands, except per share data) |
|
Non-vested, April 30, 2010 |
|
|
2,480 |
|
|
$ |
9.93 |
|
Granted |
|
|
544 |
|
|
$ |
14.43 |
|
Vested |
|
|
(849 |
) |
|
$ |
14.32 |
|
Forfeited/expired |
|
|
(86 |
) |
|
$ |
17.65 |
|
|
|
|
|
|
|
|
|
Non-vested, October 31, 2010 |
|
|
2,089 |
|
|
$ |
11.68 |
|
|
|
|
|
|
|
|
|
10
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
As of October 31, 2010, there was $24.4 million of total unrecognized compensation cost
related to non-vested awards of restricted stock, which is expected to be recognized over a
weighted-average period of 3.2 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. During the three and six months ended October 31, 2010, 9,044 shares and 190,991
shares of restricted stock totaling $0.1 million and $2.7 million, respectively, were repurchased
by the Company at the option of the employee to pay for taxes related to vesting of restricted
stock. During the three and six months ended October 31, 2009, 8,737 shares and 128,654 shares of
restricted stock totaling $0.2 million and $1.4 million, respectively, were repurchased by the
Company at the option of the employee to pay for taxes related to vesting of restricted stock.
Employee Stock Purchase Plan
The Company has an ESPP that, in accordance with Section 423 of the Internal Revenue Code,
allows eligible employees to authorize payroll deductions of up to 15% of their salary to purchase
shares of the 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 1.5 million shares, subject to adjustment for certain changes in the Companys capital
structure and other extraordinary events. During the six months ended October 31, 2010 and 2009,
employees purchased 108,425 shares at $11.82 per share and 141,923 shares at $9.04 per share,
respectively. No shares were purchased in the three months ended October 31, 2010 and 2009. At
October 31, 2010, the ESPP had approximately 0.3 million shares available for future issuance.
Common Stock
During the three and six months ended October 31, 2010, the Company issued 66,309 shares and
93,077 shares of common stock, respectively, as a result of the exercise of stock options. During
the three and six months ended October 31, 2009, the Company issued 50,050 shares and 340,880
shares, respectively, of common stock as a result of the exercise of stock options.
In June 2002, the Company issued warrants to purchase 274,207 shares of its common stock at an
exercise price of $11.94, subject to anti-dilution provisions. During the six months ended October
31, 2010, these warrants were exercised for 274,207 shares of common stock in exchange for $3.0
million in cash.
During the three and six months ended October 31, 2010, the Company repurchased 157,425 shares
of the Companys common stock for $2.1 million and 724,064 shares for $10.6 million, respectively.
No shares of the Companys common stock were repurchased during the three and six months ended
October 31, 2009.
11
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
5. Marketable Securities
As of October 31, 2010, marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for- |
|
|
|
|
|
|
Trading |
|
|
Sale |
|
|
Total |
|
|
|
(in thousands) |
|
Mutual funds (1) |
|
$ |
67,044 |
|
|
$ |
|
|
|
$ |
67,044 |
|
Corporate bonds |
|
|
|
|
|
|
36,631 |
|
|
|
36,631 |
|
U.S. Treasury and agency securities |
|
|
|
|
|
|
8,926 |
|
|
|
8,926 |
|
Commercial paper |
|
|
|
|
|
|
998 |
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
67,044 |
|
|
|
46,555 |
|
|
|
113,599 |
|
Less: current portion of marketable securities |
|
|
(6,072 |
) |
|
|
(10,117 |
) |
|
|
(16,189 |
) |
|
|
|
|
|
|
|
|
|
|
Non-current marketable securities |
|
$ |
60,972 |
|
|
$ |
36,438 |
|
|
$ |
97,410 |
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2010, marketable securities consisted of the following:
|
|
|
|
|
|
|
Trading |
|
|
|
(in thousands) |
|
Mutual funds (1) |
|
$ |
69,019 |
|
Auction rate securities |
|
|
7,455 |
|
Auction rate securities put option |
|
|
745 |
|
|
|
|
|
Total |
|
|
77,219 |
|
Less: current portion of marketable securities |
|
|
(4,114 |
) |
|
|
|
|
Non-current marketable securities |
|
$ |
73,105 |
|
|
|
|
|
|
|
|
(1) |
|
These investments are held in trust for settlement of the Companys obligations under certain
of its deferred compensation plans with $6.0 million and $4.1 million classified as current
assets as of October 31, 2010 and April 30, 2010, respectively (see Note 7). |
As of October 31, 2010, amortized cost and fair values of marketable securities classified as
available-for-sale investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(in thousands) |
|
Corporate bonds |
|
$ |
36,565 |
|
|
$ |
105 |
|
|
$ |
(39 |
) |
|
$ |
36,631 |
|
U.S. Treasury and agency securities |
|
|
8,923 |
|
|
|
5 |
|
|
|
(2 |
) |
|
|
8,926 |
|
Commercial paper |
|
|
996 |
|
|
|
2 |
|
|
|
|
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,484 |
|
|
$ |
112 |
|
|
$ |
(41 |
) |
|
$ |
46,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities are made based on the Companys investment policy, which
restricts the types of investments that can be made. As of October 31, 2010, the Companys
investments associated with cash equivalents consist of money market funds for which market prices
are readily available. Marketable securities classified as available-for-sale consist of corporate
bonds, U.S Treasury and agency securities and commercial paper for which market prices for similar
assets are readily available, with maturities ranging
from four months to three years. Marketable securities classified as trading consist of mutual funds
for which market prices are readily available. The Companys investments in marketable securities,
consisting of mutual funds, as of April 30, 2010, were classified as trading and also included ARS,
which were reflected at fair value. The ARS were redeemed at full value during the six months ended
October 31, 2010.
12
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
As of October 31, 2010 and April 30, 2010, the Companys marketable securities included $67.0
million (net of unrealized gains of $3.4 million) and $69.0 million (net of unrealized gains of
$2.0 million) respectively, held in trust for settlement of the Companys obligations under certain
of its deferred compensation plans, of which $61.0 million and $64.9 million, respectively, are
classified as non-current. The Companys obligations for which these assets were held in trust
totaled $66.4 million and $69.0 million as of October 31, 2010 and April 30, 2010, respectively.
The following table represents the Companys fair value hierarchy for financial assets
measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2010 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
(in thousands) |
|
Cash equivalents |
|
$ |
86,577 |
|
|
$ |
86,577 |
|
|
$ |
|
|
|
$ |
|
|
Mutual funds |
|
|
67,044 |
|
|
|
67,044 |
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
36,631 |
|
|
|
|
|
|
|
36,631 |
|
|
|
|
|
U.S. Treasury and agency securities |
|
|
8,926 |
|
|
|
|
|
|
|
8,926 |
|
|
|
|
|
Commercial paper |
|
|
998 |
|
|
|
|
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
200,176 |
|
|
$ |
153,621 |
|
|
$ |
46,555 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
(in thousands) |
|
Cash equivalents |
|
$ |
148,238 |
|
|
$ |
148,238 |
|
|
$ |
|
|
|
$ |
|
|
Mutual funds |
|
|
69,019 |
|
|
|
69,019 |
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
7,455 |
|
|
|
|
|
|
|
|
|
|
|
7,455 |
|
Auction rate securities put option |
|
|
745 |
|
|
|
|
|
|
|
|
|
|
|
745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
225,457 |
|
|
$ |
217,257 |
|
|
$ |
|
|
|
$ |
8,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Companys assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 31, |
|
|
October 31, |
|
Auction Rate Securities |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Balance, beginning of period |
|
$ |
|
|
|
$ |
12,225 |
|
|
$ |
8,200 |
|
|
$ |
12,425 |
|
Auction rate securities put option |
|
|
|
|
|
|
42 |
|
|
|
(745 |
) |
|
|
164 |
|
Realized gain included in operations |
|
|
|
|
|
|
|
|
|
|
745 |
|
|
|
|
|
Unrealized loss included in operations |
|
|
|
|
|
|
(42 |
) |
|
|
|
|
|
|
(164 |
) |
Sale of securities |
|
|
|
|
|
|
(275 |
) |
|
|
(8,200 |
) |
|
|
(475 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
|
|
|
$ |
11,950 |
|
|
$ |
|
|
|
$ |
11,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
6. Restructuring Liability
During the three months ended October 31, 2010, the Company increased previously recorded
restructuring charges resulting in net restructuring costs of $2.1 million. The increase in
restructuring expenses primarily relates to higher facility costs than originally recorded.
Changes in the restructuring liability during the three months ended October 31, 2010 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Facilities |
|
|
Total |
|
|
|
(in thousands) |
|
Liability as of July 31, 2010 |
|
$ |
2,202 |
|
|
$ |
9,250 |
|
|
$ |
11,452 |
|
Reductions for cash payments |
|
|
(313 |
) |
|
|
(2,211 |
) |
|
|
(2,524 |
) |
Other increases (reductions), net |
|
|
(299 |
) |
|
|
2,429 |
|
|
|
2,130 |
|
Exchange rate fluctuations |
|
|
66 |
|
|
|
256 |
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
Liability as of October 31, 2010 |
|
$ |
1,656 |
|
|
$ |
9,724 |
|
|
$ |
11,380 |
|
|
|
|
|
|
|
|
|
|
|
Changes in the restructuring liability during the six months ended October 31, 2010 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Facilities |
|
|
Total |
|
|
|
(in thousands) |
|
Liability as of April 30, 2010 |
|
$ |
2,714 |
|
|
$ |
11,095 |
|
|
$ |
13,809 |
|
Reductions for cash payments |
|
|
(820 |
) |
|
|
(4,060 |
) |
|
|
(4,880 |
) |
Other increases (reductions), net |
|
|
(299 |
) |
|
|
2,429 |
|
|
|
2,130 |
|
Exchange rate fluctuations |
|
|
61 |
|
|
|
260 |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
Liability as of October 31, 2010 |
|
$ |
1,656 |
|
|
$ |
9,724 |
|
|
$ |
11,380 |
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2010 and April 30, 2010, the restructuring liability is included in current
portion of other accrued liabilities on the consolidated balance sheet, except for $3.6 million and
$5.2 million, respectively, of facilities costs which primarily relate to commitments under
operating leases, net of sublease income, which are included in other long-term liabilities and
will be paid over the next eight years.
The restructuring liability by segment is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2010 |
|
|
|
Severance |
|
|
Facilities |
|
|
Total |
|
|
|
(in thousands) |
|
Executive Recruitment |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
|
|
|
$ |
118 |
|
|
$ |
118 |
|
Europe, Middle East and Africa (EMEA) |
|
|
1,539 |
|
|
|
7,740 |
|
|
|
9,279 |
|
Asia Pacific |
|
|
|
|
|
|
516 |
|
|
|
516 |
|
South America |
|
|
117 |
|
|
|
|
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
Total Executive Recruitment |
|
|
1,656 |
|
|
|
8,374 |
|
|
|
10,030 |
|
Futurestep |
|
|
|
|
|
|
1,350 |
|
|
|
1,350 |
|
|
|
|
|
|
|
|
|
|
|
Liability as of October 31, 2010 |
|
$ |
1,656 |
|
|
$ |
9,724 |
|
|
$ |
11,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010 |
|
|
|
Severance |
|
|
Facilities |
|
|
Total |
|
|
|
(in thousands) |
|
Executive Recruitment |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
5 |
|
|
$ |
845 |
|
|
$ |
850 |
|
EMEA |
|
|
2,429 |
|
|
|
7,816 |
|
|
|
10,245 |
|
Asia Pacific |
|
|
|
|
|
|
773 |
|
|
|
773 |
|
South America |
|
|
115 |
|
|
|
|
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
Total Executive Recruitment |
|
|
2,549 |
|
|
|
9,434 |
|
|
|
11,983 |
|
Futurestep |
|
|
165 |
|
|
|
1,661 |
|
|
|
1,826 |
|
|
|
|
|
|
|
|
|
|
|
Liability as of April 30, 2010 |
|
$ |
2,714 |
|
|
$ |
11,095 |
|
|
$ |
13,809 |
|
|
|
|
|
|
|
|
|
|
|
14
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
7. Deferred Compensation and Retirement Plans
The Company has several deferred compensation and retirement plans for vice-presidents that
provide defined benefits to participants based on the deferral of current compensation or
contributions made by the Company subject to vesting and retirement or termination provisions.
The components of net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 31, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Service cost |
|
$ |
34 |
|
|
$ |
85 |
|
|
$ |
68 |
|
|
$ |
170 |
|
Interest cost |
|
|
925 |
|
|
|
945 |
|
|
|
1,850 |
|
|
|
1,890 |
|
Amortization of actuarial loss (gain) |
|
|
105 |
|
|
|
(20 |
) |
|
|
210 |
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs |
|
$ |
1,064 |
|
|
$ |
1,010 |
|
|
$ |
2,128 |
|
|
$ |
2,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company 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 contributions to the ECAP of $0.1 million and $0.2 million
during the three months ended October 31, 2010 and 2009, respectively. The Company made
contributions to the ECAP of $0.4 million and $0.6 million during the six months ended October 31,
2010 and 2009, respectively. Participants generally vest in Company contributions over a four year
period. The ECAP is accounted for whereby the changes in the fair value of the vested amounts owed
to the participants are adjusted with a corresponding charge (or credit) to compensation and
benefits costs. During the three and six months ended October 31, 2010, deferred compensation
liability increased; therefore the Company recognized compensation expenses of $2.5 million and
$1.3 million, respectively. During the three and six months ended October 31, 2009, deferred
compensation liability increased; therefore the Company recognized compensation expenses of $1.4
million and $4.0 million, respectively.
15
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
8. Business Segments
The Company operates in two global business segments; executive recruitment and Futurestep.
The executive recruitment segment focuses on recruiting board-level, chief executive and other
senior executive positions for clients predominantly in the consumer, financial services,
industrial, life sciences and technology industries and provides other related recruiting services.
Futurestep creates customized, flexible talent acquisition solutions to meet specific workforce
needs of organizations around the world. Their portfolio of services include recruitment process
outsourcing, talent acquisition and management consulting services, project-based recruitment,
mid-level recruitment and interim professionals. The executive recruitment business segment is
managed by geographic regional leaders. 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.
Financial highlights by business segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31, 2010 |
|
|
|
Executive Recruitment |
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
South |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
Asia Pacific |
|
|
America |
|
|
Subtotal |
|
|
Futurestep |
|
|
Corporate (1) |
|
|
Consolidated |
|
|
|
(in thousands) |
|
Fee revenue |
|
$ |
94,066 |
|
|
$ |
37,424 |
|
|
$ |
24,098 |
|
|
$ |
8,478 |
|
|
$ |
164,066 |
|
|
$ |
21,284 |
|
|
$ |
|
|
|
$ |
185,350 |
|
Total revenue |
|
$ |
98,703 |
|
|
$ |
38,628 |
|
|
$ |
24,510 |
|
|
$ |
8,633 |
|
|
$ |
170,474 |
|
|
$ |
22,730 |
|
|
$ |
|
|
|
$ |
193,204 |
|
Operating income (loss) |
|
$ |
19,595 |
|
|
$ |
84 |
|
|
$ |
1,561 |
|
|
$ |
2,698 |
|
|
$ |
23,938 |
|
|
$ |
1,183 |
|
|
$ |
(5,346 |
) |
|
$ |
19,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31, 2009 |
|
|
|
Executive Recruitment |
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
South |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
Asia Pacific |
|
|
America |
|
|
Subtotal |
|
|
Futurestep |
|
|
Corporate (1) |
|
|
Consolidated |
|
|
|
(in thousands) |
|
Fee revenue |
|
$ |
68,230 |
|
|
$ |
35,376 |
|
|
$ |
13,563 |
|
|
$ |
6,122 |
|
|
$ |
123,291 |
|
|
$ |
16,854 |
|
|
$ |
|
|
|
$ |
140,145 |
|
Total revenue |
|
$ |
71,909 |
|
|
$ |
36,213 |
|
|
$ |
13,911 |
|
|
$ |
6,263 |
|
|
$ |
128,296 |
|
|
$ |
18,260 |
|
|
$ |
|
|
|
$ |
146,556 |
|
Operating income (loss) |
|
$ |
12,529 |
|
|
$ |
(4,204 |
) |
|
$ |
(26 |
) |
|
$ |
1,375 |
|
|
$ |
9,674 |
|
|
$ |
2,617 |
|
|
$ |
(10,073 |
) |
|
$ |
2,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended October 31, 2010 |
|
|
|
Executive Recruitment |
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
South |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
Asia Pacific |
|
|
America |
|
|
Subtotal |
|
|
Futurestep |
|
|
Corporate (1) |
|
|
Consolidated |
|
|
|
(in thousands) |
|
Fee revenue |
|
$ |
184,041 |
|
|
$ |
73,692 |
|
|
$ |
45,240 |
|
|
$ |
15,964 |
|
|
$ |
318,937 |
|
|
$ |
41,525 |
|
|
$ |
|
|
|
$ |
360,462 |
|
Total revenue |
|
$ |
193,768 |
|
|
$ |
75,766 |
|
|
$ |
46,113 |
|
|
$ |
16,251 |
|
|
$ |
331,898 |
|
|
$ |
44,468 |
|
|
$ |
|
|
|
$ |
376,366 |
|
Operating income (loss) |
|
$ |
39,270 |
|
|
$ |
3,137 |
|
|
$ |
4,630 |
|
|
$ |
4,577 |
|
|
$ |
51,614 |
|
|
$ |
2,172 |
|
|
$ |
(14,739 |
) |
|
$ |
39,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended October 31, 2009 |
|
|
|
Executive Recruitment |
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
South |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
Asia Pacific |
|
|
America |
|
|
Subtotal |
|
|
Futurestep |
|
|
Corporate (1) |
|
|
Consolidated |
|
|
|
(in thousands) |
|
Fee revenue |
|
$ |
123,522 |
|
|
$ |
64,597 |
|
|
$ |
25,934 |
|
|
$ |
10,567 |
|
|
$ |
224,620 |
|
|
$ |
32,328 |
|
|
$ |
|
|
|
$ |
256,948 |
|
Total revenue |
|
$ |
130,962 |
|
|
$ |
66,620 |
|
|
$ |
26,544 |
|
|
$ |
10,804 |
|
|
$ |
234,930 |
|
|
$ |
34,914 |
|
|
$ |
|
|
|
$ |
269,844 |
|
Operating income (loss) |
|
$ |
16,736 |
|
|
$ |
(21,824 |
) |
|
$ |
949 |
|
|
$ |
689 |
|
|
$ |
(3,450 |
) |
|
$ |
1,802 |
|
|
$ |
(21,086 |
) |
|
$ |
(22,734 |
) |
|
|
|
(1) |
|
Improvement primarily due to a decrease in net expenses related to the change in amounts due
under deferred compensation plans determined by an increase (or decrease) in market values, and
adjustment to the fair value of contingent consideration for a prior acquisition, totaling $4.3
million and $3.8 million during the three and six months ended October 31, 2010 compared to the
three and six months ended October 31, 2009, respectively. |
16
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
October 31, 2010
9. Long-Term Debt
The aggregate availability under the Companys Senior Secured Revolving Credit Facility (the
Facility) is up to $50 million, with a $15 million sub-limit for letters of credit, subject to
satisfaction of borrowing base requirements based on eligible domestic accounts receivable and cash
held on deposit. As of October 31, 2010 and April 30, 2010, the borrowing base was $41.5 million
and $33.2 million, respectively. The maturity date of the Facility is March 14, 2011. The Facility
is secured by substantially all of the Companys assets and assets of significant subsidiaries,
including certain accounts receivable balances and guarantees by and pledges of the capital stock
of significant subsidiaries. The financial covenants include a maximum consolidated leverage
ratio, minimum consolidated quick ratio and minimum consolidated earnings before taxes, interest
and depreciation and amortization tests. As of October 31, 2010 and April 30, 2010, the Company
had no borrowings under its Facility; however, at October 31, 2010 and April 30, 2010 there were
$8.5 million and $8.2 million of standby letters of credit issued under this Facility,
respectively, for which the Company pledged $9.0 million in cash in both periods.
17
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 also are forward-looking statements. All of these forward-looking
statements are subject to risks and uncertainties that could cause our actual results to differ
materially from those contemplated by the relevant forward-looking statement. The principal risk
factors that could cause actual performance and future actions to differ materially from the
forward-looking statements include, but are not limited to, dependence on attracting and retaining
qualified and experienced consultants, portability of client relationships, global, local political
or economic developments in or affecting countries where we have operations, currency fluctuations
in our international operations, ability to manage growth, competition, reliance on information
processing systems, our ability to enhance and develop new technology, employment liability risk,
an impairment in the carrying value of goodwill and other intangible assets, deferred tax assets
that we may not be able to use, our ability to develop new products and services, and alignment of
our cost structure to our revenue level, as well as risks related to the integration of recently
acquired businesses and the matters disclosed under the heading Risk Factors in the Companys
Exchange Act reports, including Item 1A of the Companys Annual Report of Form 10-K for the fiscal
year ended April 30, 2010 (Form 10-K). Readers are urged to consider these factors carefully in
evaluating the forward-looking statements. The forward-looking statements included in this
Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q
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 consolidated financial statements and
related notes included in this Quarterly Report on 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 global provider of talent management solutions
that helps clients to attract, develop, retain and sustain their talent. We are the largest
provider of executive recruitment, leadership and talent consulting and talent acquisition
solutions, with the broadest global presence in the recruitment industry. Our services include
executive recruitment, middle-management recruitment (through Futurestep), recruitment process
outsourcing (RPO), leadership and talent consulting (LTC) and executive coaching.
Approximately two-thirds of the executive recruitment searches we performed in fiscal 2010 were for
board level, chief executive and other senior executive and general management positions. Our 4,277
clients in fiscal 2010 included many of the worlds largest and most prestigious public and private
companies, including approximately 42% of the FORTUNE 500 companies, middle market and emerging
growth companies, as well as government and nonprofit organizations. We have built strong client
loyalty with 74% of the executive recruitment assignments performed during fiscal 2010 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
search, middle-management recruitment, RPO, LTC and executive coaching, our strategic focus for
fiscal 2011 centers upon enhancing the cross-selling of our multi-service strategy. We plan to
continue to address areas of increasing client demand, including RPO and 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.
Fee revenue increased $45.3 million in the three months ended October 31, 2010 to $185.4
million compared to $140.1 million in the three months ended October 31, 2009, with increases in
fee revenue in all regions of executive search and Futurestep. The North America and Asia Pacific
regions in executive recruitment experienced the largest dollar increases in fee revenue. During
the three months ended October 31, 2010, we recorded operating income of $19.8 million with
operating income from executive recruitment and Futurestep of $23.9 million and $1.2 million,
respectively, offset by corporate
expenses of $5.3 million. This represents an increase of $17.5 million in the three months
ended October 31, 2010, from operating income of $2.3 million in the three months ended October 31,
2009.
18
Our cash, cash equivalents and marketable securities decreased $31.8 million, or 11%, to
$264.7 million at October 31, 2010 compared to $296.5 million at April 30, 2010, mainly due to the
payment of fiscal 2010 annual bonuses, partially offset by cash provided by operating activities.
As of October 31, 2010, we held marketable securities, to settle obligations under our Executive
Capital Accumulation Plan (ECAP) with a cost value of $63.6 million and a fair value of $67.0
million. Our working capital decreased by $5.1 million in the six months ended October 31, 2010 to
$177.7 million. 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 in the
next twelve months. We had no long-term debt nor any outstanding borrowings under our credit
facility at October 31, 2010; however, we had $8.5 million of standby letters of credit issued
under our facility, for which we pledged $9.0 million.
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations 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 revenues and expenses during the reporting period.
Actual results may differ from those estimates and assumptions and changes in the estimates are
reported in current operations. In preparing our interim financial statements and accounting for
the underlying transactions and balances, we apply our accounting policies as disclosed in the
notes to our condensed consolidated financial statements. We consider the policies related to
revenue recognition, deferred compensation, annual incentive compensation, marketable securities
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 filed with the Securities Exchange Commission.
Results of Operations
The following table summarizes the results of our operations as a percentage of fee revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 31, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Fee revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Reimbursed out-of-pocket engagement expenses |
|
|
4.2 |
|
|
|
4.6 |
|
|
|
4.4 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
104.2 |
|
|
|
104.6 |
|
|
|
104.4 |
|
|
|
105.0 |
|
Compensation and benefits |
|
|
68.8 |
|
|
|
72.8 |
|
|
|
68.8 |
|
|
|
74.9 |
|
General and administrative expenses |
|
|
14.8 |
|
|
|
19.4 |
|
|
|
15.5 |
|
|
|
21.5 |
|
Out-of-pocket engagement expenses |
|
|
7.1 |
|
|
|
6.8 |
|
|
|
7.0 |
|
|
|
7.1 |
|
Depreciation and amortization |
|
|
1.7 |
|
|
|
2.0 |
|
|
|
1.7 |
|
|
|
2.2 |
|
Restructuring charges, net |
|
|
1.1 |
|
|
|
2.0 |
|
|
|
0.6 |
|
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
10.7 |
|
|
|
1.6 |
|
|
|
10.8 |
|
|
|
(8.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
7.4 |
% |
|
|
2.0 |
% |
|
|
6.8 |
% |
|
|
(4.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
19
The following tables summarize the results of our operations by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31, |
|
|
Six Months Ended October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
Dollars |
|
|
% |
|
|
Dollars |
|
|
% |
|
|
Dollars |
|
|
% |
|
|
Dollars |
|
|
% |
|
|
|
(dollars in thousands) |
|
Fee revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive recruitment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
94,066 |
|
|
|
51 |
% |
|
$ |
68,230 |
|
|
|
49 |
% |
|
$ |
184,041 |
|
|
|
51 |
% |
|
$ |
123,522 |
|
|
|
48 |
% |
EMEA |
|
|
37,424 |
|
|
|
20 |
|
|
|
35,376 |
|
|
|
25 |
|
|
|
73,692 |
|
|
|
20 |
|
|
|
64,597 |
|
|
|
25 |
|
Asia Pacific |
|
|
24,098 |
|
|
|
13 |
|
|
|
13,563 |
|
|
|
10 |
|
|
|
45,240 |
|
|
|
13 |
|
|
|
25,934 |
|
|
|
10 |
|
South America |
|
|
8,478 |
|
|
|
5 |
|
|
|
6,122 |
|
|
|
4 |
|
|
|
15,964 |
|
|
|
4 |
|
|
|
10,567 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total executive
recruitment |
|
|
164,066 |
|
|
|
89 |
|
|
|
123,291 |
|
|
|
88 |
|
|
|
318,937 |
|
|
|
88 |
|
|
|
224,620 |
|
|
|
87 |
|
Futurestep |
|
|
21,284 |
|
|
|
11 |
|
|
|
16,854 |
|
|
|
12 |
|
|
|
41,525 |
|
|
|
12 |
|
|
|
32,328 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee revenue |
|
|
185,350 |
|
|
|
100 |
% |
|
|
140,145 |
|
|
|
100 |
% |
|
|
360,462 |
|
|
|
100 |
% |
|
|
256,948 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursed out-of-pocket engagement expense |
|
|
7,854 |
|
|
|
|
|
|
|
6,411 |
|
|
|
|
|
|
|
15,904 |
|
|
|
|
|
|
|
12,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
193,204 |
|
|
|
|
|
|
$ |
146,556 |
|
|
|
|
|
|
$ |
376,366 |
|
|
|
|
|
|
$ |
269,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31, |
|
|
Six Months Ended October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
Dollars |
|
|
Margin (1) |
|
|
Dollars |
|
|
Margin (1) |
|
|
Dollars |
|
|
Margin (1) |
|
|
Dollars |
|
|
Margin (1) |
|
|
|
(dollars in thousands) |
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive recruitment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
19,595 |
|
|
|
20.8 |
% |
|
$ |
12,529 |
|
|
|
18.4 |
% |
|
$ |
39,270 |
|
|
|
21.3 |
% |
|
$ |
16,736 |
|
|
|
13.5 |
% |
EMEA |
|
|
84 |
|
|
|
0.2 |
|
|
|
(4,204 |
) |
|
|
(11.9 |
) |
|
|
3,137 |
|
|
|
4.3 |
|
|
|
(21,824 |
) |
|
|
(33.8 |
) |
Asia Pacific |
|
|
1,561 |
|
|
|
6.5 |
|
|
|
(26 |
) |
|
|
(0.2 |
) |
|
|
4,630 |
|
|
|
10.2 |
|
|
|
949 |
|
|
|
3.7 |
|
South America |
|
|
2,698 |
|
|
|
31.8 |
|
|
|
1,375 |
|
|
|
22.5 |
|
|
|
4,577 |
|
|
|
28.7 |
|
|
|
689 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total executive
recruitment |
|
|
23,938 |
|
|
|
14.6 |
|
|
|
9,674 |
|
|
|
7.8 |
|
|
|
51,614 |
|
|
|
16.2 |
|
|
|
(3,450 |
) |
|
|
(1.5 |
) |
Futurestep |
|
|
1,183 |
|
|
|
5.6 |
|
|
|
2,617 |
|
|
|
15.5 |
|
|
|
2,172 |
|
|
|
5.2 |
|
|
|
1,802 |
|
|
|
5.6 |
|
Corporate |
|
|
(5,346 |
) |
|
|
|
|
|
|
(10,073 |
) |
|
|
|
|
|
|
(14,739 |
) |
|
|
|
|
|
|
(21,086 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) |
|
$ |
19,775 |
|
|
|
10.7 |
% |
|
$ |
2,218 |
|
|
|
1.6 |
% |
|
$ |
39,047 |
|
|
|
10.8 |
% |
|
$ |
(22,734 |
) |
|
|
(8.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Margin calculated as a percentage of fee revenue by business segment. |
Three Months Ended October 31, 2010 Compared to Three Months Ended October 31, 2009
Fee Revenue
Fee Revenue. Fee revenue increased $45.3 million, or 32%, to $185.4 million in the three
months ended October 31, 2010 compared to $140.1 million in the three months ended October 31,
2009. The increase in fee revenue was primarily attributable to a 28% increase in the number of
executive search engagements billed during the three months ended October 31, 2010 as compared to
the three months ended October 31, 2009 and a 4% increase in the weighted-average fees billed per
engagement during the same period. Exchange rates unfavorably impacted fee revenues by $0.5
million in the three months ended October 31, 2010.
Executive Recruitment. Executive recruitment reported fee revenue of $164.1 million, an
increase of $40.8 million, or 33%, in the three months ended October 31, 2010 compared to $123.3
million in the three months ended October 31, 2009. The increase in executive recruitment fee
revenue was mainly due to a 28% increase in the number of engagements billed in the three months
ended October 31, 2010 as compared to the three months ended October 31, 2009, and a 4% increase in
the weighted-average fees billed per engagement during the same period. Exchange rates unfavorably
impacted fee revenues by $0.5 million in the three months ended October 31, 2010.
20
North America reported fee revenue of $94.1 million, an increase of $25.9 million, or 38%, in
the three months ended October 31, 2010 compared to $68.2 million in the three months ended October
31, 2009, primarily due to a 37% increase in the number of engagements billed during the three
months ended October 31, 2010 as compared to the three months ended October 31, 2009 and an
increase of 1% in the weighted-average fees billed per engagement in the region during the same
period. Exchange rates favorably impacted North America fee revenue by $0.4 million in the three
months ended October 31, 2010.
EMEA reported fee revenue of $37.4 million, an increase of $2.0 million, or 6%, in the three
months ended October 31, 2010 compared to $35.4 million in the three months ended October 31, 2009.
EMEAs increase in fee revenue was primarily driven by an 8% increase in the number of engagements
billed in the three months ended October 31, 2010 as compared to the three months ended October 31,
2009, offset by a 2% decrease in weighted-average fees billed per engagement during the same
period. The decrease in the weighted-average fees billed per engagement was mainly due to
unfavorable exchange rates in EMEA during the three months ended October 31, 2010, which
unfavorably impacted EMEA fee revenue by $1.8 million during the three months ended October 31,
2010. The performance in existing offices in the United Kingdom and Germany were the primary
contributors to the increase in fee revenue in the three months ended October 31, 2010 in
comparison to the three months ended October 31, 2009. In terms of sectors, industrial and
technology sectors experienced the largest increases in fee revenue in the three months ended
October 31, 2010 as compared to the three months ended October 31, 2009.
Asia Pacific reported fee revenue of $24.1 million, an increase of $10.6 million, or 79%, in
the three months ended October 31, 2010 compared to $13.5 million in the three months ended October
31, 2009 mainly due to a 36% increase in the number of engagements billed and a 31% increase in
weighted-average fees billed per engagement in the three months ended October 31, 2010 compared to
the three months ended October 31, 2009. The increase in performance in Hong Kong, Singapore,
Australia and China were the primary contributors to the increase in fee revenue in the three
months ended October 31, 2010 compared to the three months ended October 31, 2009. The largest
increase in fee revenue was experienced in the financial services, technology and industrial
sectors. Exchange rates favorably impacted fee revenue for Asia Pacific by $1.1 million in the
three months ended October 31, 2010.
South America reported fee revenue of $8.5 million, an increase of $2.3 million, or 37%, in
the three months ended October 31, 2010 compared to $6.2 million in the three months ended October
31, 2009 mainly due to a 62% increase in the number of engagements billed, offset by a 15% decrease
in the average fees billed per engagement in the three months ended October 31, 2010 compared to
the three months ended October 31, 2009. The increase in performance in the industrial and
technology sectors were the primary contributor to the increase in fee revenue in the three months
ended October 31, 2010 compared to the three months ended October 31, 2009. Brazil was the main
contributor to the increase in fee revenue in the three months ended October 31, 2010 compared to
the three months ended October 31, 2009. Exchange rates unfavorably impacted fee revenue for South
America by $0.2 million in the three months ended October 31, 2010.
Futurestep. Futurestep reported fee revenue of $21.3 million, an increase of $4.5 million, or
27%, in the three months ended October 31, 2010 compared to $16.8 million in the three months ended
October 31, 2009. The increase in Futuresteps fee revenue was due to a 30% increase in the number
of engagements billed, slightly offset by a 3% decrease in the average fees billed per engagement
in the three months ended October 31, 2010 compared to the three months ended October 31, 2009.
The increase in Futuresteps fee revenue consisted of North America fee revenue increase of $2.3
million, or 38%, to $8.3 million; Europe fee revenue increase of $2.1 million, or 49%, to $6.4
million; and an increase in Asia Pacific fee revenue of $0.1 million, or 2%, to $6.6 million.
Improvement in Futurestep fee revenue is due to increases in middle-management recruitment and RPO.
Compensation and Benefits
Compensation and benefits expense increased $25.5 million, or 25%, to $127.6 million in the
three months ended October 31, 2010 from $102.1 million in the three months ended October 31, 2009.
The increase in compensation and benefits expenses is primarily due to a $16.0 million increase in
the variable component of compensation, coupled with an approximately 6% increase in global
headcount, primarily in execution staff, in the three months ended October 31, 2010 as compared to
the three months ended October 31, 2009.
Executive recruitment compensation and benefits expense increased $26.6 million, or 32%, to
$109.9 million in the three months ended October 31, 2010 compared to $83.3 million in the three
months ended October 31, 2009, primarily due to a $15.6 million increase in the variable component
of compensation, coupled with an approximately 4% increase in executive recruitment headcount,
primarily in execution staff, in the three months ended October 31, 2010 as compared to the three
months ended October 31, 2009. Executive recruitment compensation and benefits expenses, as a
percentage of fee revenue, was 67% in the three months ended October 31, 2010 compared to 68% in
the three months ended October 31, 2009.
21
Futurestep compensation and benefits expense increased $1.8 million, or 14%, to $14.5 million
in the three months ended October 31, 2010 from $12.7 million in the three months ended October 31,
2009, primarily due to an increase of $0.8 million and $0.6 million in contractors and direct and
variable compensation, respectively. Futurestep compensation and benefits expense, as a percentage
of fee revenue, decreased to 68% in the three months ended October 31, 2010 from 75% in the three
months ended October 31, 2009.
Corporate compensation and benefits expense decreased $2.9 million, or 48%, to $3.2 million in
the three months ended October 31, 2010 from $6.1 million in the three months ended October 31,
2009, partly due to a $1.2 million decrease in certain deferred compensation liabilities during the
three months ended October 31, 2010 as compared to the three months ended October 31, 2009. We
hold marketable securities, classified as trading securities, in a trust for settlement of these
deferred compensation obligations. The change in fair value of these marketable securities is
included in other income, net, and substantially offsets the decrease in compensation and benefits
expense created by the change in these deferred compensation liabilities. We have other deferred
compensation retirement liabilities, which decreased by $1.2 million due to an increase in cash
surrender value (CSV) of company owned life insurance (COLI) during the three months ended
October 31, 2010 as compared to the three months ended October 31, 2009.
General and Administrative Expenses
General and administrative expenses increased $0.2 million, or 1%, to $27.4 million in the
three months ended October 31, 2010 compared to $27.2 million in the three months ended October 31,
2009 primarily due to increases of $1.7 million, $1.0 million and $0.4 million in bad debt expense,
net foreign exchange and business development expenses, respectively. These were offset by a $1.9
million reduction in the estimated fair value of acquisition-related contingent consideration and
$0.9 million in premises and office expense. Exchange rates favorably impacted general and
administrative expenses by $0.4 million in the three months ended October 31, 2010. General and
administrative expenses as a percentage of fee revenue were 15% in the three months ended October
31, 2010 as compared to 19% in the three months ended October 31, 2009.
Executive recruitment general and administrative expenses increased $0.8 million, or 4%, to
$21.0 million in the three months ended October 31, 2010 from $20.2 million in the three months
ended October 31, 2009. The increase in general and administrative expenses was driven by an
increase of $1.3 million in bad debt expense, coupled with increases in business development
expenses of $0.3 million and $0.9 million in net foreign exchange loss, which were partially
offset by decreases of $1.0 million in premises and office expense and $0.7 million in all other
general and administrative expense. Business development expense increased primarily due to the
increase in our overall business activities. The increase in bad debt expense was in line with the
increase in our account receivable balances and revenues. Executive recruitment general and
administrative expenses, as a percentage of fee revenue, was 13% in the three months ended October
31, 2010 compared to 16% in the three months ended October 31, 2009.
Futurestep general and administrative expenses increased $1.1 million, or 31%, to $4.7 million
in the three months ended October 31, 2010 compared to $3.6 million in the three months ended
October 31, 2009, primarily due to increases of $0.3 million in business development expense, $0.3
million in bad debt expense, $0.2 million in premises and office expense, and $0.2 million in other
general and administrative expense. The increase in bad debt expense was in line with the increase
in our account receivable balances and revenues. General expenses increased primarily due to the
increase in our overall business activities. Futurestep general and administrative expenses, as a
percentage of fee revenue, was 22% in the three months ended October 31, 2010 compared to 21% in
the three months ended October 31, 2009.
Corporate general and administrative expenses decreased $1.7 million, or 50%, to $1.7 million
in the three months ended October 31, 2010 compared to $3.4 million in the three months ended
October 31, 2009, primarily due to a $1.9 million decrease in the estimated fair value of
acquisition-related contingent consideration, partially offset by $0.3 million increase in other
professional fees.
22
Out-of-Pocket Engagement Expenses
Out-of-pocket engagement expenses consist of expenses incurred by candidates and our
consultants that are normally billed to clients. Out-of-pocket engagement expenses increased $3.7
million, or 39%, to $13.2 million in the three months ended October 31, 2010, compared to $9.5
million in the three months ended October 31, 2009, driven by the increase in the volume of
business activity. Out-of-pocket engagement expenses as a percentage of fee revenue were both 7% in
the three months ended October 31, 2010 and 2009.
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $3.1 million and $2.9 million in the three months
ended October 31, 2010 and 2009, respectively. This expense relates mainly to computer equipment,
software, furniture and fixtures and leasehold improvements.
Restructuring Charges, Net
Restructuring charges decreased $0.7 million, or 25%, to $2.1 million in the three months
ended October 31, 2010 compared to $2.8 million in the three months ended October 31, 2009. In the
three months ended October 31, 2010, we incurred net restructuring charges from previous
restructurings of $2.1 million, which primarily relates to higher facility lease costs than
originally estimated.
In the three months ended October 31, 2009 we reorganized our go-to-market and operating
structure in EMEA and as a result, incurred restructuring charges of $7.6 million to reduce the
combined work force. This restructuring expense was partially offset by $4.8 million of reductions
from previous restructuring charges ($1.9 million in severance costs and $2.9 million in facilities
costs) resulting in net restructuring costs of $2.8 million in three months ended October 31, 2009.
Operating Income (Loss)
Operating income increased $17.5 million, to $19.8 million in the three months ended October
31, 2010 compared to $2.3 million in the three months ended October 31, 2009. This increase in
operating income resulted from a $45.3 million increase in fee revenue during the three months
ended October 31, 2010 as compared to the three months ended October 31, 2009, partially offset by
a $25.5 million increase in compensation and benefits.
Executive recruitment operating income increased $14.2 million, to $23.9 million in the three
months ended October 31, 2010 compared to $9.7 million in the three months ended October 31, 2009.
The increase in executive recruitment operating income is attributable to a $40.8 million increase
in fee revenue during the three months ended October 31, 2010 as compared to the three months ended
October 31, 2009. The increase in fee revenue was primarily offset by a $26.6 million increase in
compensation and benefits expense, resulting from an increase in the variable component of
compensation. Executive recruitment operating income during the three months ended October 31,
2010, as a percentage of fee revenue, was 15% compared to 8% in the three months ended October 31,
2009.
Futurestep operating income decreased by $1.4 million, to $1.2 million in the three months
ended October 31, 2010, as compared to $2.6 million in the three months ended October 31, 2009.
During the three months ended October 31, 2010, operating income included recoveries from
previously recorded restructuring costs of $0.1 million, compared to $2.5 million during the three
months ended October 31, 2009. A $4.5 million increase in fee revenue during the three months
ended October 31, 2010, as compared to the three months ended October 31, 2009, was offset by
increases of $1.8 million and $1.1 million in compensation and benefits and general and
administrative expenses, respectively. Futurestep operating income, as a percentage of fee
revenue, was 6% in the three months ended October 31, 2010, compared to 16% in the three months
ended October 31, 2009.
Other Income, Net
Other income, net increased by $1.2 million, to $2.9 million in the three months ended October
31, 2010 as compared to $1.7 million in the three months ended October 31, 2009, primarily due to
larger net trading gains on marketable securities in the three months ended October 31, 2010 as
compared to the three months ended October 31, 2009. The increase in other income, net reflects a
$1.1 million increase in the market value of mutual funds held in trust for settlement of our
obligations under certain deferred compensation plans (see Note 5 of the condensed consolidated
financial statements) during the three months ended October 31, 2010 as compared to the three
months ended October 31, 2009. Offsetting this increase is a $1.1 million increase in certain
deferred compensation retirement plan liabilities during the same period, which is reflected in
compensation and benefits expense.
23
Interest Expense, Net
Interest expense, net primarily relates to borrowings under our COLI policies, which is
partially offset by interest earned on cash and cash equivalent balances. Interest expense, net
was $1.2 million in the three months ended October 31, 2010 as compared to $0.5 million in three
months ended October 31, 2009.
Income Taxes Provision (Benefit)
The provision for income taxes was $8.3 million in the three months ended October 31, 2010
compared to $0.9 million in the three months ended October 31, 2009. The provision for income taxes
in the three months ended October 31, 2010 reflects a 39% effective tax rate, compared to a 26%
effective tax rate for the three months ended October 31, 2009. The effective income tax rate in
the three months ended October 31, 2009 is lower than the three months ended October 31, 2010,
primarily due to the use of net operating losses in the first half of fiscal 2010, associated with
the restructurings in EMEA.
Equity in Earnings of Unconsolidated Subsidiary
Equity in earnings of unconsolidated subsidiary is comprised of our less than 50% interest in
our Mexican subsidiary. We report our interest in earnings or loss of our Mexican subsidiary on the
equity basis as a one-line adjustment to net income (loss), net of taxes. Equity in earnings was
$0.5 million in the three months ended October 31, 2010 compared to $0.2 million in the three
months ended October 31, 2009.
Six Months Ended October 31, 2010 Compared to Six Months Ended October 31, 2009
Fee Revenue
Fee Revenue. Fee revenue increased $103.6 million, or 40%, to $360.5 million in the six months
ended October 31, 2010 compared to $256.9 million in the six months ended October 31, 2009. The
increase in fee revenue was primarily attributable to a 36% increase in the number of executive
search engagements billed during the six months ended October 31, 2010 as compared to the six
months ended October 31, 2009 and a 4% increase in the weighted-average fees billed per engagement
during the same period. Exchange rates unfavorably impacted fee revenues by $1.9 million in the
six months ended October 31, 2010.
Executive Recruitment. Executive recruitment reported fee revenue of $319.0 million, an
increase of $94.4 million, or 42%, in the six months ended October 31, 2010 compared to $224.6
million in the six months ended October 31, 2009. The increase in executive recruitment fee revenue
was mainly due to a 36% increase in the number of engagements billed in the six months ended
October 31, 2010 as compared to the six months ended October 31, 2009, and a 4% increase in the
weighted-average fees billed per engagement during the same period. Exchange rates unfavorably
impacted fee revenues by $1.8 million in the six months ended October 31, 2010.
North America reported fee revenue of $184.1 million, an increase of $60.6 million, or 49%, in
the six months ended October 31, 2010 compared to $123.5 million in the six months ended October
31, 2009, primarily due to a 43% increase in the number of engagements billed during the six months
ended October 31, 2010 as compared to the six months ended October 31, 2009 and a 4% increase in
the weighted-average fees billed per engagement in the region during the same period. The overall
increase in fee revenue was driven by increases in fee revenue in the industrial, financial
services and technology sectors. Exchange rates favorably impacted North America fee revenue by
$1.1 million in the six months ended October 31, 2010.
24
EMEA reported fee revenue of $73.7 million, an increase of $9.1 million, or 14%, in the six
months ended October 31, 2010 compared to $64.6 million in the six months ended October 31, 2009.
Excluding fee revenue from the acquisition of Whitehead Mann of approximately $20.2 million and
$16.2 million, in the six months ended October 31, 2010 and 2009, respectively, fee revenue would
have been $53.5 million and $48.4 million during the same periods, an increase of $5.1 million, or
11%. EMEAs increase in fee revenue, excluding fee revenue from this acquisition, which is
included in EMEAs results from June 11, 2009, the effective date of the acquisition, was primarily
driven by a 29% increase in the number of engagements billed in the six months ended October 31,
2010 as compared to the six months ended October 31, 2009, offset by a 14% decrease in
weighted-average fees billed per engagement during the same period. The decrease in the
weighted-average fees billed per engagement was mainly due to unfavorable exchange rates in EMEA
during the six months ended October 31, 2010, which unfavorably impacted EMEA fee revenue by $4.6
million during the six months ended October 31, 2010. The performance in existing offices in the
United Kingdom and United Arab Emirates were the primary contributors to the increase in fee
revenue in the six months ended October 31, 2010 in comparison to the six months ended October 31,
2009. The industrial and financial services sectors experienced the largest increase in fee
revenue in the six months ended October 31, 2010 as compared to the six months ended October 31,
2009.
Asia Pacific reported fee revenue of $45.2 million, an increase of $19.3 million, or 75%, in
the six months ended October 31, 2010 compared to $25.9 million in the six months ended October 31,
2009 mainly due to a 36% increase in the number of engagements billed and a 28% increase in
weighted-average fees billed per engagement in the six months ended October 31, 2010 compared to
the six months ended October 31, 2009. The increase in performance in Hong Kong, Australia,
Singapore, China and India were the primary contributors to the increase in fee revenue in the six
months ended October 31, 2010 compared to the six months ended October 31, 2009. The largest
increases in fee revenue were experienced in the financial services, technology and industrial
sectors. Exchange rates favorably impacted fee revenue for Asia Pacific by $1.8 million in the six
months ended October 31, 2010.
South America reported fee revenue of $16.0 million, an increase of $5.4 million, or 51%, in
the six months ended October 31, 2010 compared to $10.6 million in the six months ended October 31,
2009 mainly due to a 53% increase in the number of engagements billed, offset by a 1% decrease in
the average fees billed per engagement. The increase in performance in the industrial and
technology sectors were the primary contributors to the increase in fee revenue. Exchange rates
unfavorably impacted fee revenue for South America by $0.1 million in the six months ended October
31, 2010.
Futurestep. Futurestep reported fee revenue of $41.5 million, an increase of $9.2 million, or
28%, in the six months ended October 31, 2010 compared to $32.3 million in the six months ended
October 31, 2009. The increase in Futuresteps fee revenue was due to a 26% increase in the number
of engagements billed in the six months ended October 31, 2010 as compared to the six months ended
October 31, 2009. The increase in Futuresteps fee revenue consisted of North America fee revenue
increase of $4.2 million, or 36%, to $15.6 million; Europe fee revenue increase of $4.0 million, or
46%, to $12.7 million; and an increase in Asia Pacific fee revenue of $1.0 million, or 8%, to $13.2
million. Improvement in Futurestep fee revenue is attributed to increases in middle-management
recruitment and RPO. Exchange rates unfavorably impacted fee revenue for Futurestep by $0.1
million in the six months ended October 31, 2010.
Compensation and Benefits
Compensation and benefits expense increased $55.3 million, or 29%, to $247.8 million in the
six months ended October 31, 2010 from $192.5 million in the six months ended October 31, 2009. The
increase in compensation and benefits expenses is primarily due to an increase in the
weighted-average compensation in the six months ended October 31, 2010 as compared to the six
months ended October 31, 2009, resulting from an increase in the variable component of
compensation. Exchange rates favorably impacted compensation and benefits expenses by $1.2 million
during the six months ended October 31, 2010.
Executive recruitment compensation and benefits expense increased $54.6 million, or 35%, to
$210.1 million in the six months ended October 31, 2010 compared to $155.5 million in the six
months ended October 31, 2009, primarily due to a $35.6 million increase in the variable component
of compensation. Executive recruitment compensation and benefits expenses, as a percentage of fee
revenue, were 66% in the six months ended October 31, 2010 compared to 69% in the six months ended
October 31, 2009.
Futurestep compensation and benefits expense increased $3.6 million, or 14%, to $28.7 million
in the six months ended October 31, 2010 from $25.1 million in the six months ended October 31,
2009 primarily due to an increase of $2.0 million for external contractors and $0.9 million in the
variable component of compensation. Futurestep compensation and benefits expense, as a percentage
of fee revenue, decreased to 69% in the six months ended October 31, 2010 from 77% in the six
months ended October 31, 2009.
25
Corporate compensation and benefits expense decreased $2.9 million, or 24%, to $9.0 million in
the six months ended October 31, 2010 compared to $11.9 million in the six months ended October 31,
2009 primarily due to a decrease in certain deferred compensation liabilities of $3.9 million
during the same period. We hold marketable securities, classified as trading securities, in a trust
for settlement of these deferred compensation obligations. The change in fair value of these
marketable securities is included in other income, net, which substantially offsets the decrease in
compensation and benefits expense created by the change in these deferred compensation liabilities.
We have other deferred compensation retirement liabilities, which increased by $2.0 million due to
a decrease in cash surrender value (CSV) of company owned life insurance (COLI) during the six
months ended October 31, 2010 as compared to the six months ended October 31, 2009.
General and Administrative Expenses
General and administrative expenses increased $0.7 million, or 1%, to $56.0 million in the six
months ended October 31, 2010 compared to $55.3 million in the six months ended October 31, 2009
due to $2.8 million and $1.2 million increases in bad debt expense and business development
expenses, respectively, which was partially offset by a reduction of $1.9 million in the estimated
fair value of acquisition-related contingent consideration and a $0.7 million increase in net
foreign exchange gains. Exchange rates favorably impacted general and administrative expenses by
$0.7 million in the six months ended October 31, 2010. General and administrative expenses as a
percentage of fee revenue was 16% in the six months ended October 31, 2010 as compared to 22% in
the six months ended October 31, 2009.
Executive recruitment general and administrative expenses increased $2.0 million, or 5%, to
$42.3 million in the six months ended October 31, 2010 from $40.3 million in the six months ended
October 31, 2009. The increase in general and administrative expenses was driven by increases of
$2.4 million in bad debt expense and $0.6 million in business development expenses, which were
partially offset by a $0.7 million decrease in premises and office expense. The increase in bad
debt expense was in line with the increase in our revenues. Business development expenses
increased primarily due to the increase in our overall business activities. Executive recruitment
general and administrative expenses, as a percentage of fee revenue, was 13% in the six months
ended October 31, 2010 compared to 18% in the six months ended October 31, 2009.
Futurestep general and administrative expenses increased $1.9 million, or 27%, to $8.9 million
in the six months ended October 31, 2010 compared to $7.0 million in the six months ended October
31, 2009 primarily due to increases of $0.5 million in business development expense, $0.4 million
in bad debt expense and $0.5 million in travel and meetings expense. Business development and
travel and meetings expenses increased primarily due to the increase in our overall business
activities. Futurestep general and administrative expenses, as a percentage of fee revenue, was
21% in the six months ended October 31, 2010 and 2009.
Corporate general and administrative expenses decreased $3.2 million, or 40%, to $4.8 million
in the six months ended October 31, 2010 compared to $8.0 million in the six months ended October
31, 2009 primarily due to a $1.9 million decrease in the estimated fair value of
acquisition-related contingent consideration, $0.7 million increase in net foreign exchange gains
and $0.5 million decrease in legal and professional fees, which were higher than normal in the six
months ended October 31, 2009, due to fees incurred in connection with the acquisition of Whitehead
Mann.
Out-of-Pocket Engagement Expenses
Out-of-pocket engagement expenses consist of expenses incurred by candidates and our
consultants that are normally billed to clients. Out-of-pocket engagement expenses increased $7.0
million, or 38%, to $25.3 million in the six months ended October 31, 2010, compared to $18.3
million in the six months ended October 31, 2009, in line with the increase in fee revenue.
Out-of-pocket engagement expenses as a percentage of fee revenue were both 7% in the six months
ended October 31, 2010 and 2009.
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $6.1 million and $5.7 million in the six months
ended October 31, 2010 and 2009, respectively. This expense relates mainly to computer equipment,
software, furniture and fixtures and leasehold improvements.
26
Restructuring Charges, Net
Restructuring charges decreased $18.9 million, or 90%, to $2.1 million in the six months ended
October 31, 2010 compared to $21.0 million in the six months ended October 31, 2009. In the six
months ended October 31, 2010 we incurred restructuring charges, net of recoveries, of $2.1
million, which primarily relate to higher facility lease costs than originally estimated.
In the six months ended October 31, 2009, we reorganized our go-to-market and operating
structure in EMEA and in an effort to reduce redundancy attributed to the acquisition of Whitehead
Mann, we incurred restructuring charges of $25.8 million to reduce the combined workforce and to
consolidate premises. These restructuring expenses were partially offset by $4.8 million of
reductions from previous restructuring charges ($2.9 million in premise and facilities costs and
$1.9 million in severance costs), resulting in net restructuring costs of $21.0 million.
Operating Income (Loss)
Operating income increased $61.8 million, to $39.1 million in the six months ended October 31,
2010 compared to operating loss of $22.7 million in the six months ended October 31, 2009. This
increase in operating income resulted from a $103.6 million increase in fee revenue and an $18.9
million decrease in net restructuring expenses, which were partially offset by a $55.3 million
increase in compensation and benefits.
Executive recruitment operating income increased $55.0 million, to $51.6 million in the six
months ended October 31, 2010 compared to an operating loss of $3.4 million in the six months ended
October 31, 2009. The increase in executive recruitment operating income is attributable to a $94.4
million increase in fee revenue and a decrease in net restructuring expenses of $21.2 million.
These items positively impacting operating income were offset by a $54.6 million increase in
compensation and benefits expense, resulting from an increase in the variable component of
compensation in the first half of fiscal 2011. Executive recruitment operating income during the
six months ended October 31, 2010, as a percentage of fee revenue, was 16% compared to operating
loss, as a percentage of fee revenue, of 2% in the six months ended October 31, 2009.
Futurestep operating income increased by $0.4 million, to $2.2 million in the six months ended
October 31, 2010 as compared to $1.8 million in the six months ended October 31, 2009. The change
in Futurestep operating income is primarily due to $9.2 million increase in fee revenue, offset by
increases of $3.6 million and $1.9 million in compensation and benefits and general and
administrative expenses, respectively. These increases were partially offset by recoveries of
previously recorded restructuring expenses of $0.1 million and $2.5 million in the three months
ended October 31, 2010 and 2009, respectively, which primarily relates to lower facility lease
costs than originally recorded. Futurestep operating income, as a percentage of fee revenue, was
5% in the six months ended October 31, 2010, compared to 6% in the six months ended October 31,
2009.
Other Income, Net
Other income, net decreased by $4.3 million, to $1.4 million in the six months ended October
31, 2010 compared to $5.7 million in the six months ended October 31, 2009. Other income, net is
primarily due to lower net trading gains on marketable securities in the six months ended October
31, 2010 as compared to the six months ended October 31, 2009. The decrease in other income, net
reflects a $4.4 million decrease in net trading gains in the market value of mutual funds held in
trust for settlement of our obligations under certain deferred compensation plans (see Note 5 of
the condensed consolidated financial statements). Partially offsetting this decline is a $2.7
million decrease in certain deferred compensation retirement plan liabilities during the same
period, of which changes in the corresponding liability are reflected in compensation and benefit
expense.
Interest Expense, Net
Interest expense, net primarily relates to borrowings under our COLI policies, which is
partially offset by interest earned on cash and cash equivalent balances. Interest expense, net
was $2.0 million in the six months ended October 31, 2010 as compared to $1.2 million in six months
ended October 31, 2009.
27
Income Taxes Provision (Benefit)
The provision for income taxes was $14.8 million in the six months ended October 31, 2010
compared to a benefit for income taxes $6.5 million in the six months ended October 31, 2009. The
provision for income taxes in the six months ended October 31, 2010 reflects a 39% effective tax
rate, compared to a 36% tax benefit for the six months ended October 31, 2009. The effective
income tax rate in the six months ended October 31, 2009 is lower when compared to the effective
income tax rate in the six months ended October 31, 2010, as we did not recognize tax benefits in
certain countries in Europe associated with net operating losses from the restructurings during the
six month ended October 31, 2009.
Equity in Earnings of Unconsolidated Subsidiary
Equity in earnings of unconsolidated subsidiary is comprised of our less than 50% interest in
our Mexican subsidiary. We report our interest in earnings or loss of our Mexican subsidiary on the
equity basis as a one-line adjustment to net income (loss), net of taxes. Equity in earnings was
$0.9 million in the six months ended October 31, 2010 compared to $0.2 million in the six months
ended October 31, 2009.
Liquidity and Capital Resources
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
shown improvement in the first half of fiscal 2011 but further recovery may be gradual. 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.
Although global economic conditions and demand for our services continued to show signs of
improvement during the first half of fiscal 2011, the demand for executive searches remains below
its peak level. In response to the uncertain economic environment and labor markets, we took steps
to align our cost structure with anticipated revenue levels in fiscal 2009 and 2010, in an effort
to retain positive cash flows. Although current conditions do not include such a situation, adverse
changes in our revenue, however, could require us to institute additional cost cutting measures.
To the extent our efforts are insufficient, we may incur negative cash flows, and if such
conditions persist over an extended period of time, it might require us to obtain additional
financing to meet our capital needs. We believe that our 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.
As of October 31, 2010 and April 30, 2010, our marketable securities of $113.6 million and
$77.2 million, respectively, included $67.0 million (net of unrealized gains of $3.4 million) and
$69.0 million (net of unrealized gains of $2.0 million), respectively, held in trust for settlement
of our obligations under certain deferred compensation plans, of which $61.0 million and $64.9
million, respectively, are classified as non-current. Our obligations for which these assets were
held in trust totaled $66.4 million and $69.0 million as of October 31, 2010 and April 30, 2010,
respectively. During the six months ended October 31, 2010, we purchased marketable securities
classified as available-for-sale with a balance of $46.6 million at October 31, 2010. These
securities represents excess cash invested, under our investment policy, with a professional money
manager.
The net decrease in our working capital of $5.1 million as of October 31, 2010 compared to
April 30, 2010 is primarily attributable to a net decrease in cash and cash equivalents, partially
offset by an increase in cash provided by operating activities. Cash and cash equivalents
decreased mainly due to the payment of annual bonuses, paid in July 2010 relating to fiscal year
2010. Cash provided by operating activities increased due to an increase in the number of
engagements billed during the six months ended October 31, 2010 compared to six months ended April
30, 2010.
Cash and cash equivalents and marketable securities were $264.7 million and $296.5 million as
of October 31, 2010 and April 30, 2010, respectively. Cash and cash equivalents consisted of cash
and highly liquid investments purchased with original maturities of three months or less.
Marketable securities consist primarily of mutual funds with some corporate bonds, U.S. Treasury
and agency securities and commercial paper. The primary objectives of the mutual funds are
liquidity or to meet the obligations under certain of our deferred compensation plans, while the
other securities are available for general corporate purposes.
28
Cash used in operating activities was $7.7 million in the six months ended October 31, 2010, a
decrease of $61.1 million, from cash used in operating activities of $68.8 million in the six
months ended October 31, 2009. The decrease in cash used in operating activities is primarily due
to decreases in accounts payable and accrued liabilities of $33.1 million and an increase in net
income of $36.1 million, partially offset by an increase in receivables of $15.7 million. The
decrease in accounts payable and accrued liabilities is mainly attributable to fiscal 2010 bonus
payments made in the first half of fiscal 2011, while increases in net income and receivables are
due to an increase in fee revenue and engagements billed during the six months ended October 31,
2010, as compared to the six months ended October 31, 2009.
The compensation and benefits payable on the Companys consolidated balance sheet as of
October 31, 2010 includes $15.8 million of bonuses that were earned in fiscal 2009 and 2010 but for
which the cash payment was deferred due to economic conditions. Of this amount, $10.2 million will
be paid in December 2010 and $5.6 million will be paid in December 2011, regardless of whether the
recipients continue to be employed by the Company on the relevant payment date and notwithstanding
any earlier communications to the recipients to the contrary. In fiscal 2009 and 2010, the Company
accrued the entire amount of cash bonus expense ($89.3 million and $73.3 million in fiscal 2009 and
2010, respectively), which includes the amounts that were fully earned by recipients during the
fiscal years but for which the cash payment was delayed, resulting in a corresponding decrease to
operating income during those periods. Though the Company accrued the bonus liability for the
delayed payments in fiscal 2009 and 2010 as they had been fully earned, these payments will result
in an increase to cash used in operating activities when made. In addition, $8.1 million in
bonuses earned in fiscal 2009, the payment of which was deferred due to economic conditions, were
paid during the three months ended July 31, 2010, and increased cash used in operating activities
during the six months ended October 31, 2010 by a corresponding amount.
Cash used in investing activities was $53.5 million in the six months ended October 31, 2010,
an increase of $40.1 million, from cash used in investing activities of $13.4 million in the six
months ended October 31, 2009. This increase in cash used in investing activities is attributable
to a $37.6 million increase in net purchases of marketable securities, and a $14.5 million increase
in the purchase of property and equipment. These increases were partially offset by a reduction of
$10.0 million in cash used for acquisitions in the six months ended October 31, 2009.
Cash used in financing activities was $8.1 million in the six months ended October 31, 2010, a
decrease of $10.8 million from cash provided by financing activities of $2.7 million in the six
months ended October 31, 2009. Cash used to repurchase shares of common stock increased by $12.0
million during the same period, coupled with decreases in borrowings under life insurance policies
and proceeds from issuances of common stock related to employee stock options and our stock
purchase plan increased by $2.7 million and $2.0 million, respectively, in the six months ended
October 31, 2010 as compared to the six months ended October 31, 2009. Partially offsetting the
decreases were $3.0 million of cash proceeds from the exercise of warrants during the six months
ended October 31, 2010, and decrease in tax expense during the same period. As of October 31,
2010, $24.4 million remained available for repurchase under our repurchase program, approved by the
Board of Directors on November 2, 2007.
Cash Surrender Value of Company Owned Life Insurance Policies, Net of Loans
Total outstanding borrowings against the CSV of COLI contracts were $67.4 million and
$66.9 million as of October 31, 2010 and April 30, 2010, respectively. Generally, we borrow under
our COLI contracts to pay related premiums. Such borrowings do not require annual principal
repayments, bear interest primarily at variable rates and are secured by the CSV of the COLI
contracts of $139.3 million and $136.0 million as of October 31, 2010 and April 30, 2010,
respectively.
Long-Term Debt
The aggregate availability under our Senior Secured Revolving Credit Facility (the Facility)
is up to $50 million, with a $15 million sub-limit for letters of credit, subject to satisfaction
of borrowing base requirements based on eligible domestic accounts receivable and cash held on
deposit. As of October 31, 2010 and April 30, 2010, the borrowing base was $41.5 million and $33.2
million, respectively. The maturity date of the Facility is March 14, 2011. The Facility is
secured by substantially all of our assets and assets of significant subsidiaries, including
certain accounts receivable balances and guarantees by and pledges of the capital stock of
significant subsidiaries. The financial covenants include a maximum consolidated leverage ratio,
minimum consolidated quick ratio and minimum consolidated earnings before taxes, interest and
depreciation and amortization tests. As of October 31, 2010 and April 30, 2010, we had no
borrowings under our Facility; however, at October 31, 2010 and April 30, 2010 there were $8.5
million and $8.2 million of standby letters of credit issued under this Facility, respectively, for
which we pledged $9.0 million in cash in both periods.
29
We are not aware of any other trends, demand 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 rates. 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
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. During the
six months ended October 31, 2010, we recognized foreign currency gains, on an after tax basis, of
$0.2 million as compared to foreign currency losses, on an after tax basis, of $0.3 million, during
the six months ended October 31, 2009.
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 $1.1 million, $1.8 million and $2.6 million, respectively, based on outstanding balances
at October 31, 2010. 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
$1.1 million, $1.8 million and $2.6 million, respectively, based on outstanding balances at October
31, 2010.
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 of
October 31, 2010, we had no outstanding borrowings under our Facility. We had $67.4 million and
$66.9 million of borrowings against the CSV of COLI contracts as of October 31, 2010 and April 30,
2010, respectively, bearing interest primarily at variable rates. The risk of fluctuations in these
variable rates is minimized by the fact that we receive a corresponding adjustment to our borrowed
funds crediting rate on the CSV on our COLI contracts.
30
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Based on their evaluation of our disclosure controls and procedures conducted as of the end
of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are
effective.
(b) Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting during the three
months ended October 31, 2010 that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting. In accordance with Rule 13a-15
under the Exchange Act, the Company continues to review its internal control over financial
reporting, including controls relating to variable incentive
compensation, and as a result is in the process of implementing
additional controls in the compensation area to enhance its internal control over financial reporting.
31
PART II.
Item 1. Legal Proceedings
From time to time, we are involved in litigation both as a plaintiff and a defendant, relating
to claims arising out of our operations. As of the date of this report, we are not engaged in any
legal proceedings that are expected, individually or in the aggregate, to have a material adverse
effect on our business, financial condition or results of operations.
Item 1A. Risk Factors
In our Form 10-K for the year ended April 30, 2010, we described material risk factors facing
our business. Additional risks not presently known to us or that we currently deem immaterial may
also impair our business operations. As of the date of this report, there have been no material
changes to the risk factors described in our Form 10-K.
Item 2. Unregistered Sale of Equity Securities, Use of Proceeds and Issuers Purchases of Equity
Securities
Issuer Purchases of Equity Securities
The following table summarizes common stock repurchased by us during the quarter ended October
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
Value of Shares |
|
|
|
|
|
|
|
Average |
|
|
as Part of Publicly- |
|
|
That May Yet be |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced |
|
|
Purchased Under the |
|
|
|
Purchased |
|
|
Per Share |
|
|
Programs (2) |
|
|
Programs (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2010-August 31, 2010 |
|
|
157,425 |
|
|
$ |
13.48 |
|
|
|
157,425 |
|
|
$24.4 million |
September 1, 2010-September 30, 2010 |
|
|
8,977 |
(1) |
|
$ |
15.90 |
|
|
|
|
|
|
$24.4 million |
October 1, 2010-October 31, 2010 |
|
|
67 |
(1) |
|
$ |
16.51 |
|
|
|
|
|
|
$24.4 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
166,469 |
|
|
$ |
14.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents withholding of a portion of restricted shares to cover taxes on vested restricted
shares and shares purchased as part of our publicly announced programs. |
|
(2) |
|
On November 2, 2007, the Board of Directors approved the repurchase of $50 million of our
common stock in a common stock repurchase program. The shares can be repurchased in open
market transactions or privately negotiated transactions at our discretion. |
Item 6. Exhibits
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
31.1 |
|
Chief Executive Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act. |
|
|
|
|
|
31.2 |
|
Chief Financial Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act. |
|
|
|
|
|
32.1 |
|
Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
|
|
|
|
|
101.INS
|
|
XBRL Instance Document. |
|
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document. |
|
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document. |
|
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
Korn/Ferry International
|
|
|
By: |
/s/ Michael A. DiGregorio
|
|
|
|
Michael A. DiGregorio |
|
|
|
Executive Vice President and Chief Financial Officer |
|
Date: December 10, 2010
33
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
31.1 |
|
Chief Executive Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act. |
|
|
|
|
|
31.2 |
|
Chief Financial Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act. |
|
|
|
|
|
32.1 |
|
Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
|
|
|
|
|
101.INS
|
|
XBRL Instance Document. |
|
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document. |
|
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document. |
|
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document. |