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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2022

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to ___________

 

Commission File Number 001-14505

 

KORN FERRY

 

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

95-2623879

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

1900 Avenue of the Stars, Suite 1500, Los Angeles, California 90067

(Address of principal executive offices) (Zip Code)

(310552-1834

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share

KFY

New York Stock Exchange

 

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    No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes    No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

 

 

Accelerated filer        

 

 

 

 

Non-accelerated filer  

 

 

Smaller reporting company 

 

 

 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No  

 

The number of shares outstanding of our common stock as of September 2, 2022 was 53,379,890 shares.

 

 


 

KORN FERRY

Table of Contents

Item #

 

Description

 

Page

 

 

 

 

 

 

 

Part I. Financial Information

 

 

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of July 31, 2022 (unaudited) and April 30, 2022

 

1

 

 

 

 

 

 

 

Consolidated Statements of Income (unaudited) for the three months ended July 31, 2022 and 2021

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the three months ended July 31, 2022 and 2021

 

3

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity (unaudited) for three months ended July 31, 2022 and 2021

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the three months ended July 31, 2022 and 2021

 

5

 

 

 

 

 

 

 

Notes to Consolidated Unaudited Financial Statements

 

6

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

39

 

 

 

 

 

Item 1A.

 

Risk Factors

 

39

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

 

Item 6.

 

Exhibits

 

40

 

 

 

 

 

 

 

Signatures

 

41

 

 

 

 

 

 

 


 

 

Item 1. Consolidated Financial Statements

KORN FERRY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

July 31,

2022

 

 

April 30,

2022

 

 

 

(unaudited)

 

 

 

 

 

 

 

(in thousands, except per share data)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

639,784

 

 

$

978,070

 

Marketable securities

 

 

71,172

 

 

 

57,244

 

Receivables due from clients, net of allowance for doubtful accounts of $39,432 and $36,384 at July 31, 2022 and April 30, 2022, respectively

 

 

637,061

 

 

 

590,260

 

Income taxes and other receivables

 

 

35,186

 

 

 

31,884

 

Unearned compensation

 

 

60,726

 

 

 

60,749

 

Prepaid expenses and other assets

 

 

53,363

 

 

 

41,763

 

Total current assets

 

 

1,497,292

 

 

 

1,759,970

 

 

 

 

 

 

 

 

 

 

Marketable securities, non-current

 

 

185,492

 

 

 

175,783

 

Property and equipment, net

 

 

147,117

 

 

 

138,172

 

Operating lease right-of-use assets, net

 

 

158,918

 

 

 

167,734

 

Cash surrender value of company-owned life insurance policies, net of loans

 

 

184,742

 

 

 

183,308

 

Deferred income taxes

 

 

81,422

 

 

 

84,712

 

Goodwill

 

 

724,426

 

 

 

725,592

 

Intangible assets, net

 

 

84,167

 

 

 

89,770

 

Unearned compensation, non-current

 

 

117,346

 

 

 

118,238

 

Investments and other assets

 

 

23,157

 

 

 

21,267

 

Total assets

 

$

3,204,079

 

 

$

3,464,546

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

55,003

 

 

$

50,932

 

Income taxes payable

 

 

37,552

 

 

 

34,450

 

Compensation and benefits payable

 

 

250,818

 

 

 

547,826

 

Operating lease liability, current

 

 

46,700

 

 

 

48,609

 

Other accrued liabilities

 

 

295,981

 

 

 

302,408

 

Total current liabilities

 

 

686,054

 

 

 

984,225

 

 

 

 

 

 

 

 

 

 

Deferred compensation and other retirement plans

 

 

380,137

 

 

 

357,175

 

Operating lease liability, non-current

 

 

140,611

 

 

 

151,212

 

Long-term debt

 

 

395,653

 

 

 

395,477

 

Deferred tax liabilities

 

 

4,052

 

 

 

2,715

 

Other liabilities

 

 

26,338

 

 

 

24,153

 

Total liabilities

 

 

1,632,845

 

 

 

1,914,957

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Common stock: $0.01 par value, 150,000 shares authorized, 76,568 and 75,409 shares issued and 53,502 and 53,190 shares outstanding at July 31, 2022 and April 30, 2022, respectively

 

 

470,127

 

 

 

502,008

 

Retained earnings

 

 

1,203,067

 

 

 

1,134,523

 

Accumulated other comprehensive loss, net

 

 

(108,444

)

 

 

(92,185

)

Total Korn Ferry stockholders' equity

 

 

1,564,750

 

 

 

1,544,346

 

Noncontrolling interest

 

 

6,484

 

 

 

5,243

 

Total stockholders' equity

 

 

1,571,234

 

 

 

1,549,589

 

Total liabilities and stockholders' equity

 

$

3,204,079

 

 

$

3,464,546

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

1


KORN FERRY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

 

 

Three Months Ended

July 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands, except per share data)

 

Fee revenue

 

$

695,903

 

 

$

585,395

 

Reimbursed out-of-pocket engagement expenses

 

 

7,245

 

 

 

2,703

 

          Total revenue

 

 

703,148

 

 

 

588,098

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

465,626

 

 

 

396,236

 

General and administrative expenses

 

 

64,457

 

 

 

50,267

 

Reimbursed expenses

 

 

7,245

 

 

 

2,703

 

Cost of services

 

 

37,992

 

 

 

21,993

 

Depreciation and amortization

 

 

16,229

 

 

 

15,644

 

          Total operating expenses

 

 

591,549

 

 

 

486,843

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

111,599

 

 

 

101,255

 

Other income, net

 

 

775

 

 

 

4,447

 

Interest expense, net

 

 

(7,612

)

 

 

(5,426

)

Income before provision for income taxes

 

 

104,762

 

 

 

100,276

 

Income tax provision

 

 

26,226

 

 

 

23,879

 

Net income

 

 

78,536

 

 

 

76,397

 

          Net income attributable to noncontrolling interest

 

 

(1,289

)

 

 

(1,574

)

Net income attributable to Korn Ferry

 

$

77,247

 

 

$

74,823

 

 

 

 

 

 

 

 

 

 

Earnings per common share attributable to Korn Ferry:

 

 

 

 

 

 

 

 

     Basic

 

$

1.46

 

 

$

1.38

 

     Diluted

 

$

1.45

 

 

$

1.37

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

     Basic

 

 

51,771

 

 

 

52,760

 

     Diluted

 

 

52,106

 

 

 

53,320

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share:

 

$

0.15

 

 

$

0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

2


KORN FERRY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

Three Months Ended

July 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Net income

 

$

78,536

 

 

$

76,397

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(16,305

)

 

 

(8,344

)

Deferred compensation and pension plan adjustments, net of tax

 

 

51

 

 

 

341

 

Net unrealized (loss) gain on marketable securities, net of tax

 

 

(53

)

 

 

4

 

Comprehensive income

 

 

62,229

 

 

 

68,398

 

Less: comprehensive income attributable to noncontrolling interest

 

 

(1,241

)

 

 

(1,598

)

Comprehensive income attributable to Korn Ferry

 

$

60,988

 

 

$

66,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


 

 

KORN FERRY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

Total

Korn Ferry

 

 

 

 

 

 

Total

 

 

Common Stock

 

 

Retained

 

 

Comprehensive

 

 

Stockholders'

 

 

Noncontrolling

 

 

Stockholder's

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Loss, Net

 

 

Equity

 

 

Interest

 

 

Equity

 

 

(in thousands)

 

Balance as of April 30, 2022

 

53,190

 

 

$

502,008

 

 

$

1,134,523

 

 

$

(92,185

)

 

$

1,544,346

 

 

$

5,243

 

 

$

1,549,589

 

Net income

 

 

 

 

 

 

 

77,247

 

 

 

 

 

 

77,247

 

 

 

1,289

 

 

 

78,536

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

(16,259

)

 

 

(16,259

)

 

 

(48

)

 

 

(16,307

)

Dividends paid to shareholders

 

 

 

 

 

 

 

(8,703

)

 

 

 

 

 

(8,703

)

 

 

 

 

 

(8,703

)

Purchase of stock

 

(735

)

 

 

(44,276

)

 

 

 

 

 

 

 

 

(44,276

)

 

 

 

 

 

(44,276

)

Issuance of stock

 

1,047

 

 

 

4,857

 

 

 

 

 

 

 

 

 

4,857

 

 

 

 

 

 

4,857

 

Stock-based compensation

 

 

 

 

7,538

 

 

 

 

 

 

 

 

 

7,538

 

 

 

 

 

 

7,538

 

Balance as of July 31, 2022

 

53,502

 

 

$

470,127

 

 

$

1,203,067

 

 

$

(108,444

)

 

$

1,564,750

 

 

$

6,484

 

 

$

1,571,234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

Total

Korn Ferry

 

 

 

 

 

 

Total

 

 

Common Stock

 

 

Retained

 

 

Comprehensive

 

 

Stockholders'

 

 

Noncontrolling

 

 

Stockholder's

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Loss, Net

 

 

Equity

 

 

Interest

 

 

Equity

 

 

(in thousands)

 

Balance as of April 30, 2021

 

54,008

 

 

$

583,260

 

 

$

834,949

 

 

$

(51,820

)

 

$

1,366,389

 

 

$

2,386

 

 

$

1,368,775

 

Net income

 

 

 

 

 

 

 

74,823

 

 

 

 

 

 

74,823

 

 

 

1,574

 

 

 

76,397

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

(8,023

)

 

 

(8,023

)

 

 

24

 

 

 

(7,999

)

Dividends paid to shareholders

 

 

 

 

 

 

 

(6,866

)

 

 

 

 

 

(6,866

)

 

 

 

 

 

(6,866

)

Purchase of stock

 

(297

)

 

 

(20,091

)

 

 

 

 

 

 

 

 

(20,091

)

 

 

 

 

 

(20,091

)

Issuance of stock

 

795

 

 

 

3,992

 

 

 

 

 

 

 

 

 

3,992

 

 

 

 

 

 

3,992

 

Stock-based compensation

 

 

 

 

6,962

 

 

 

 

 

 

 

 

 

6,962

 

 

 

 

 

 

6,962

 

Balance as of July 31, 2021

 

54,506

 

 

$

574,123

 

 

$

902,906

 

 

$

(59,843

)

 

$

1,417,186

 

 

$

3,984

 

 

$

1,421,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4


 

KORN FERRY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Three Months Ended

July 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

78,536

 

 

$

76,397

 

Adjustments to reconcile net income to net cash used by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

16,229

 

 

 

15,644

 

Stock-based compensation expense

 

 

7,757

 

 

 

7,158

 

Provision for doubtful accounts

 

 

5,546

 

 

 

4,599

 

Gain on cash surrender value of life insurance policies

 

 

(2,029

)

 

 

(531

)

Gain on marketable securities

 

 

(58

)

 

 

(5,242

)

Deferred income taxes

 

 

3,831

 

 

 

4,587

 

Change in other assets and liabilities:

 

 

 

 

 

 

 

 

Deferred compensation

 

 

23,469

 

 

 

17,861

 

Receivables due from clients

 

 

(52,347

)

 

 

(68,787

)

Income taxes and other receivables

 

 

(2,431

)

 

 

2,527

 

Prepaid expenses and other assets

 

 

(11,600

)

 

 

(10,325

)

Unearned compensation

 

 

915

 

 

 

(37,274

)

Income taxes payable

 

 

3,887

 

 

 

5,536

 

Accounts payable and accrued liabilities

 

 

(302,289

)

 

 

(173,520

)

Other

 

 

(1,302

)

 

 

825

 

Net cash used in operating activities

 

 

(231,886

)

 

 

(160,545

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(16,646

)

 

 

(9,010

)

Purchase of marketable securities

 

 

(39,308

)

 

 

(26,566

)

Proceeds from sales/maturities of marketable securities

 

 

15,612

 

 

 

23,108

 

Premium on company-owned life insurance policies

 

 

(276

)

 

 

(277

)

Proceeds from life insurance policies

 

 

50

 

 

 

2,277

 

Dividends received from unconsolidated subsidiaries

 

 

150

 

 

 

115

 

          Net cash used in investing activities

 

 

(40,418

)

 

 

(10,353

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments of tax withholdings on restricted stock

 

 

(21,870

)

 

 

(17,627

)

Proceeds from issuance of common stock upon exercise of employee

   stock options and in connection with an employee stock purchase plan

 

 

4,371

 

 

 

3,593

 

Dividends paid to shareholders

 

 

(8,703

)

 

 

(6,866

)

Principal payments on finance leases

 

 

(412

)

 

 

(289

)

Repurchases of common stock

 

 

(24,385

)

 

 

(2,464

)

Payments on life insurance policy loans

 

 

(50

)

 

 

 

          Net cash used in financing activities

 

 

(51,049

)

 

 

(23,653

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(14,933

)

 

 

(6,923

)

Net decrease in cash and cash equivalents

 

 

(338,286

)

 

 

(201,474

)

Cash and cash equivalents at beginning of period

 

 

978,070

 

 

 

850,778

 

Cash and cash equivalents at end of the period

 

$

639,784

 

 

$

649,304

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


 

KORN FERRY AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

July 31, 2022

 

 

1. Organization and Summary of Significant Accounting Policies

Nature of Business

Korn Ferry, a Delaware corporation, and its subsidiaries (the “Company”) is a global organizational consulting firm. The Company helps clients synchronize strategy and talent to drive superior performance. The Company works with organizations to design their structures, roles and responsibilities. The Company helps organizations hire the right people to bring their strategy to life and advise them on how to reward, develop and motivate their people.

The Company is pursuing a strategy designed to help Korn Ferry to focus on clients and collaborate intensively across the organization. This approach is intended to build on the best of the Company’s past and give the Company a clear path to the future with focused initiatives to increase its client and commercial impact. Korn Ferry is transforming how clients address their talent management needs. The Company has evolved from a mono-line to a diversified business, giving its consultants more frequent and expanded opportunities to engage with clients. In the past year, the Company has acquired companies that have added critical mass to our existing professional search and interim executive operations, as described in Note 10. This provided us with the opportunity to reassess how we manage our Recruitment Process Outsourcing (“RPO”) & Professional Search segment. Therefore, beginning in fiscal 2023, we separated RPO & Professional Search into two segments to align with the Company’s strategy and the decisions of the Company’s chief operating decision maker, who has begun to regularly make separate resource allocation decisions and assess performance separately between Professional Search & Interim and RPO.

The Company now has eight reportable segments that operate through the following five lines of business:

1.

Consulting aligns organization structure, culture, performance and people to drive sustainable growth by addressing four fundamental needs: Organizational Strategy, Assessment and Succession, Leadership and Professional Development, and Total Rewards. This work is supported by a comprehensive range of some of the world’s leading intellectual property (“lP”) and data. The Consulting teams employ an integrated approach across core solutions each one strengthening our work and thinking of the next, to help clients execute their strategy in a digitally enabled world.

 

2.

Digital delivers scalable tech-enabled solutions that identify the best structures, roles, capabilities and behaviors to drive businesses forward. Powered by the Korn Ferry Intelligence Cloud, the end-to-end system combines Korn Ferry proprietary data, client data and external market data to deliver clear insights with the training and tools needed to align organizational structure with business strategy.

 

3.

Executive Search helps organizations recruit board level, chief executive and other senior executive and general management talent to deliver lasting impact. Korn Ferry’s approach to placing talent brings together our research-based IP, proprietary assessments and behavioral interviewing with our practical experience to determine ideal organizational fit. Salary benchmarking then builds appropriate frameworks for compensation and retention. This business is managed and reported on a geographic basis and represents four of the Company’s reportable segments (Executive Search North America, Executive Search Europe, the Middle East and Africa (“EMEA”), Executive Search Asia Pacific and Executive Search Latin America).

 

4.

Professional Search & Interim delivers enterprise talent acquisition solutions for professional level middle and upper management. The Company helps clients source high-quality candidates at speed and at scale globally, covering single hire to multi hire permanent placements and interim contractors.

 

5.

RPO offers scalable recruitment outsourcing solutions leveraging customized technology and talent insights. Our scalable solutions, built on science and powered by best-in-class technology and consulting expertise, enable us to act as a strategic partner in clients’ quest for superior recruitment outcomes and better candidate fit.

 

Basis of Consolidation and Presentation

The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended April 30, 2022 for the Company and its wholly and majority owned/controlled domestic and international subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The preparation of the consolidated financial statements conform with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and prevailing practice within our different industries. The consolidated financial statements include all adjustments, consisting of normal recurring accruals and any other adjustments

6


KORN FERRY AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

July 31, 2022 (continued)

 

that management considers necessary for a fair presentation of the results for these periods. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year.

The Company has control of a Mexican subsidiary and consolidates the operations of this subsidiary. Noncontrolling interest, which represents the Mexican partners’ 51% interest in the Mexican subsidiary, is reflected on the Company’s consolidated financial statements.

The Company considers events or transactions that occur after the balance sheet date but before the consolidated financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.

Use of Estimates and Uncertainties

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates, and changes in estimates are reported in current operations as new information is learned or upon the amounts becoming fixed or determinable. The most significant areas that require management’s judgment are revenue recognition, deferred compensation, annual performance-related bonuses, evaluation of the carrying value of receivables, goodwill and other intangible assets, share-based payments, leases and the recoverability of deferred income taxes.

Revenue Recognition

Substantially all fee revenue is derived from talent and organizational consulting services and digital sales, stand-alone or as part of a solution, fees for professional services related to executive and professional recruitment performed on a retained basis and RPO, either stand-alone or as part of a solution.

Revenue is recognized when control of the goods and services are transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Revenue contracts with customers are evaluated based on the five-step model outlined in Accounting Standards Codification (“ASC”) 606 (“ASC 606”), Revenue from Contracts with Customers: 1) identify the contract with a customer; 2) identify the performance obligation(s) in the contract; 3) determine the transaction price; 4) allocate the transaction price to the separate performance obligation(s); and 5) recognize revenue when (or as) each performance obligation is satisfied.

Consulting fee revenue is primarily recognized as services are rendered, measured by total hours incurred as a percentage of the total estimated hours at completion. It is possible that updated estimates for consulting engagements may vary from initial estimates with such updates being recognized in the period of determination. Depending on the timing of billings and services rendered, the Company accrues or defers revenue as appropriate.

Digital fee revenue is generated from IP platforms enabling large-scale, technology-based talent programs for pay, talent development, engagement, and assessment and is consumed directly by an end user or indirectly through a consulting engagement. Revenue is recognized as services are delivered and the Company has a legally enforceable right to payment. Revenue also comes from the sale of the Company’s proprietary IP subscriptions, which are considered symbolic IP due to the dynamic nature of the content. As a result, revenue is recognized over the term of the contract. Functional IP licenses grant customers the right to use IP content via the delivery of a flat file. Because the IP content license has significant stand-alone functionality, revenue is recognized upon delivery and when an enforceable right to payment exists. Revenue for tangible and digital products sold by the Company, such as books and digital files, is recognized when these products are shipped.

Fee revenue from executive and professional search activities is generally one-third of the estimated first-year cash compensation of the placed candidate, plus a percentage of the fee to cover indirect engagement-related expenses. In addition to the search retainer, an uptick fee is billed when the actual compensation awarded by the client for a placement is higher than the estimated compensation. In the aggregate, upticks have been a relatively consistent percentage of the original estimated fee; therefore, the Company estimates upticks using the expected value method based on historical data on a portfolio basis. In a standard search engagement, there is one performance obligation, which is the promise to undertake a search. The Company generally recognizes such revenue over the course of a search and when it is legally entitled to payment as outlined in the billing terms of the contract. Any revenues associated with services that are provided on a contingent basis are recognized once the contingency is resolved, as this is when control is transferred to the customer. These assumptions determine the timing of revenue recognition for the reported period. In addition to talent acquisition for permanent placement roles, the Professional Search & Interim segment also offers recruitment services for interim roles. Interim roles are short term in duration, generally less than 12 months. Generally, each interim role is a separate performance obligation. The Company recognizes fee revenue over the duration that the interim resources’ services are provided which also aligns to the contracted invoicing plan and enforceable right to payment.

7


KORN FERRY AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

July 31, 2022 (continued)

 

RPO fee revenue is generated through two distinct phases: 1) the implementation phase and 2) the post-implementation recruitment phase. The fees associated with the implementation phase are recognized over the period that the related implementation services are provided. The post-implementation recruitment phase represents end-to-end recruiting services to clients for which there are both fixed and variable fees, which are recognized over the period that the related recruiting services are performed.

Reimbursements

The Company incurs certain out-of-pocket expenses that are reimbursed by its clients, which are accounted for as revenue in the consolidated statements of income.

Allowance for Doubtful Accounts

An allowance is established for doubtful accounts by taking a charge to general and administrative expenses. The Company’s expected credit loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers’ trade accounts receivable. Due to the short-term nature of such receivables, the estimate of amount of accounts receivable that may not be collected is primarily based on historical loss-rate experience. When required, the Company adjusts the loss-rate methodology to account for current conditions and reasonable and supportable expectations of future economic and market conditions. The Company generally assesses future economic condition for a period of sixty to ninety days, which corresponds with the contractual life of its accounts receivables. After the Company exhausts all collection efforts, the amount of the allowance is reduced for balances written off as uncollectible.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. As of July 31, 2022 and April 30, 2022, the Company’s investments in cash equivalents consisted of money market funds, and as of April 30, 2022 also consisted of commercial paper with initial maturity of less than 90 days for which market prices are readily available.

Marketable Securities

The Company currently has investments in marketable securities and mutual funds that are classified as either equity securities or available-for-sale debt securities. The classification of the investments in these marketable securities and mutual funds is assessed upon purchase and reassessed at each reporting period. These investments are recorded at fair value and are classified as marketable securities in the accompanying consolidated balance sheets. The investments that the Company may sell within the next 12 months are carried as current assets.

The Company invests in mutual funds (for which market prices are readily available) that are held in trust to satisfy obligations under the Company’s deferred compensation plans. Such investments are classified as equity securities and mirror the employees’ investment elections in their deemed accounts in the Executive Capital Accumulation Plan and similar plans in Asia Pacific and Canada (“ECAP”) from a pre-determined set of securities. Realized gains (losses) on marketable securities are determined by specific identification. Interest is recognized on an accrual basis; dividends are recorded as earned on the ex-dividend date. Interest, dividend income and the changes in fair value in marketable securities are recorded in the accompanying consolidated statements of income in other income, net.

The Company also invests cash in excess of its daily operating requirements and capital needs primarily in marketable fixed income (debt) securities in accordance with the Company’s investment policy, which restricts the type of investments that can be made. The Company’s investment portfolio includes commercial paper, corporate notes/bonds and US Treasury and Agency securities. These marketable fixed income (debt) securities are classified as available-for-sale securities based on management’s decision, at the date such securities are acquired, not to hold these securities to maturity or actively trade them. The Company carries these marketable debt securities at fair value based on the market prices for these marketable debt securities or similar debt securities whose prices are readily available. The changes in fair values, net of applicable taxes, are recorded as unrealized gains or losses as a component of comprehensive income unless the change is due to credit loss. A credit loss is recorded in the statements of income in other income, net; any amount in excess of the credit loss is recorded as unrealized losses as a component of comprehensive income. Generally, the amount of the loss is the difference between the cost or amortized cost and its then current fair value; a credit loss is the difference between the discounted expected future cash flows to be collected from the debt security and the cost or amortized cost of the debt security. During the three months ended July 31, 2022 and 2021, no amount was recognized as a credit loss for the Company’s available for sales debt securities.

Fair Value of Financial Instruments

Fair value is the price the Company would receive to sell an asset or transfer a liability (exit price) in an orderly transaction between market participants. For those assets and liabilities recorded or disclosed at fair value, the Company determines the fair value based upon the quoted market price, if available. If a quoted market price is not available for identical assets, the fair

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KORN FERRY AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

July 31, 2022 (continued)