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Form 10-Q KORN FERRY For: Oct 31

December 9, 2022 2:15 PM EST

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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 October 31, 2022
OR
oTRANSITION 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)
Delaware95-2623879
(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)
(310) 552-1834
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per shareKFYNew 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 o
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 o
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 o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
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. o
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 December 2, 2022 was 52,709,950 shares.


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KORN FERRY
Table of Contents
Item #DescriptionPage


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Item 1. Consolidated Financial Statements
KORN FERRY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31,
2022
April 30,
2022
(unaudited)
(in thousands, except per share data)
ASSETS
Cash and cash equivalents$593,900 $978,070 
Marketable securities59,188 57,244 
Receivables due from clients, net of allowance for doubtful accounts of $40,959 and $36,384 at October 31, 2022 and April 30, 2022, respectively
670,408 590,260 
Income taxes and other receivables48,070 31,884 
Unearned compensation62,411 60,749 
Prepaid expenses and other assets46,388 41,763 
Total current assets1,480,365 1,759,970 
Marketable securities, non-current178,565 175,783 
Property and equipment, net153,041 138,172 
Operating lease right-of-use assets, net151,537 167,734 
Cash surrender value of company-owned life insurance policies, net of loans184,230 183,308 
Deferred income taxes83,899 84,712 
Goodwill790,063 725,592 
Intangible assets, net94,408 89,770 
Unearned compensation, non-current122,361 118,238 
Investments and other assets23,266 21,267 
Total assets$3,261,735 $3,464,546 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable$48,623 $50,932 
Income taxes payable26,094 34,450 
Compensation and benefits payable327,949 547,826 
Operating lease liability, current49,039 48,609 
Other accrued liabilities303,470 302,408 
Total current liabilities755,175 984,225 
Deferred compensation and other retirement plans369,960 357,175 
Operating lease liability, non-current127,886 151,212 
Long-term debt395,831 395,477 
Deferred tax liabilities2,776 2,715 
Other liabilities27,387 24,153 
Total liabilities1,679,015 1,914,957 
Stockholders' equity
Common stock: $0.01 par value, 150,000 shares authorized, 76,622 and 75,409 shares issued and 52,909 and 53,190 shares outstanding at October 31, 2022 and April 30, 2022, respectively
446,280 502,008 
Retained earnings1,268,437 1,134,523 
Accumulated other comprehensive loss, net(136,665)(92,185)
Total Korn Ferry stockholders' equity1,578,052 1,544,346 
Noncontrolling interest4,668 5,243 
Total stockholders' equity1,582,720 1,549,589 
Total liabilities and stockholders' equity$3,261,735 $3,464,546 
The accompanying notes are an integral part of these consolidated financial statements.
1

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KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
October 31,
Six Months Ended
October 31,
2022202120222021
(in thousands, except per share data)
Fee revenue$727,849 $639,443 $1,423,752 $1,224,838 
Reimbursed out-of-pocket engagement expenses7,870 3,955 15,115 6,658 
Total revenue735,719 643,398 1,438,867 1,231,496 
Compensation and benefits464,766 431,640 930,392 827,876 
General and administrative expenses65,086 64,065 129,543 114,332 
Reimbursed expenses7,870 3,955 15,115 6,658 
Cost of services61,257 24,329 99,249 46,322 
Depreciation and amortization17,093 15,633 33,322 31,277 
Total operating expenses616,072 539,622 1,207,621 1,026,465 
Operating income119,647 103,776 231,246 205,031 
Other (loss) income, net(9,048)5,066 (8,273)9,513 
Interest expense, net(7,098)(6,365)(14,710)(11,791)
Income before provision for income taxes103,501 102,477 208,263 202,753 
Income tax provision28,886 26,145 55,112 50,024 
Net income74,615 76,332 153,151 152,729 
Net income attributable to noncontrolling interest(1,074)(560)(2,363)(2,134)
Net income attributable to Korn Ferry$73,541 $75,772 $150,788 $150,595 
Earnings per common share attributable to Korn Ferry:
Basic$1.39 $1.40 $2.85 $2.78 
Diluted$1.38 $1.38 $2.83 $2.75 
Weighted-average common shares outstanding:
Basic51,86853,11451,82052,937
Diluted52,00553,56852,14353,494
Cash dividends declared per share:$0.15 $0.12 $0.30 $0.24 
The accompanying notes are an integral part of these consolidated financial statements.
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KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended
October 31,
Six Months Ended
October 31,
2022202120222021
(in thousands)
Net income$74,615 $76,332 $153,151 $152,729 
Other comprehensive (loss) income:  
Foreign currency translation adjustments(27,774)(7,195)(44,079)(15,539)
Deferred compensation and pension plan adjustments, net of tax54 351 105 692 
Net unrealized loss on marketable securities, net of tax(258)(21)(311)(17)
Comprehensive income46,637 69,467 108,866 137,865 
Less: comprehensive income attributable to noncontrolling interest(1,317)(382)(2,558)(1,980)
Comprehensive income attributable to Korn Ferry$45,320 $69,085 $106,308 $135,885 
The accompanying notes are an integral part of these consolidated financial statements.
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KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
Common Stock Retained
Earnings
Accumulated
Other
Comprehensive
Loss, Net
Total
Korn Ferry
Stockholders'
Equity
Noncontrolling
Interest
Total
Stockholder's
Equity
Shares Amount
(in thousands)
Balance as of April 30, 202253,190$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 stock1,0474,857 — — 4,857 — 4,857 
Stock-based compensation7,538 — — 7,538 — 7,538 
Balance as of July 31, 202253,502470,127 1,203,067 (108,444)1,564,750 6,484 1,571,234 
Net income— 73,541 — 73,541 1,074 74,615 
Other comprehensive loss— — (28,221)(28,221)243 (27,978)
Dividends paid to shareholders— (8,171)— (8,171)— (8,171)
Dividends paid to noncontrolling interest— — — — (3,133)(3,133)
Purchase of stock(627)(33,286)— — (33,286)— (33,286)
Issuance of stock34— — — — —  
Stock-based compensation9,439 — — 9,439 — 9,439 
Balance as of October 31, 202252,909$446,280 $1,268,437 $(136,665)$1,578,052 $4,668 $1,582,720 
Common Stock Retained
Earnings
Accumulated
Other
Comprehensive
Loss, Net
Total
Korn Ferry
Stockholders'
Equity
Noncontrolling
Interest
Total
Stockholder's
Equity
Shares Amount
(in thousands)
Balance as of April 30, 202154,008$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 stock7953,992 — — 3,992 — 3,992 
Stock-based compensation6,962 — — 6,962 — 6,962 
Balance as of July 31, 202154,506574,123 902,906 (59,843)1,417,186 3,984 1,421,170 
Net income— 75,772 — 75,772 560 76,332 
Other comprehensive loss— — (6,687)(6,687)(178)(6,865)
Dividends paid to shareholders— (6,683)— (6,683)— (6,683)
Purchase of stock(99)(7,353)— — (7,353)— (7,353)
Issuance of stock59— — — — —  
Stock-based compensation7,288 — — 7,288 — 7,288 
Balance as of October 31, 202154,466$574,058 $971,995 $(66,530)$1,479,523 $4,366 $1,483,889 
The accompanying notes are an integral part of these consolidated financial statements.
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KORN FERRY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
October 31,
20222021
(in thousands)
Cash flows from operating activities:
Net income$153,151 $152,729 
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization33,322 31,277 
Stock-based compensation expense17,426 14,649 
Impairment of right of use assets 7,392 
Impairment of fixed assets 1,915 
Provision for doubtful accounts11,018 9,629 
Gain on cash surrender value of life insurance policies(4,890)(2,184)
Loss (gain) on marketable securities9,691 (10,041)
Deferred income taxes(817)3,006 
Change in other assets and liabilities:
Deferred compensation18,871 30,339 
Receivables due from clients(71,747)(169,037)
Income taxes and other receivables(12,220)(1,588)
Prepaid expenses and other assets(4,209)(6,330)
Unearned compensation(5,785)(44,955)
Income taxes payable(6,582)(1,832)
Accounts payable and accrued liabilities(235,729)(56,852)
Other(218)(641)
Net cash used in operating activities(98,718)(42,524)
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired(99,322) 
Purchase of marketable securities(52,085)(54,070)
Proceeds from sales/maturities of marketable securities37,186 38,725 
Purchase of property and equipment(36,867)(18,988)
Proceeds from life insurance policies1,050 3,163 
Premium on company-owned life insurance policies(289)(295)
Dividends received from unconsolidated subsidiaries150 195 
Net cash used in investing activities(150,177)(31,270)
Cash flows from financing activities:
Repurchases of common stock(56,891)(9,386)
Payments of tax withholdings on restricted stock(22,060)(18,058)
Proceeds from issuance of common stock upon exercise of employee stock options and in connection with an employee stock purchase plan4,371 3,593 
Dividends paid to shareholders(16,874)(13,549)
Dividends - noncontrolling interest(3,133) 
Principal payments on finance leases(814)(592)
Payments on life insurance policy loans(662)(64)
Net cash used in financing activities(96,063)(38,056)
Effect of exchange rate changes on cash and cash equivalents(39,212)(13,537)
Net decrease in cash and cash equivalents(384,170)(125,387)
Cash and cash equivalents at beginning of period978,070 850,778 
Cash and cash equivalents at end of the period$593,900 $725,391 
The accompanying notes are an integral part of these consolidated financial statements.
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KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 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 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.
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KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2022 (continued)
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.
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
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KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2022 (continued)
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 October 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 (loss) 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 (loss) 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 and six months ended October 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,
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KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2022 (continued)
the fair value is based upon the quoted market price of similar assets. The fair values are assigned a level within the fair value hierarchy as defined below:
Level 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 entity’s own assumptions.
As of October 31, 2022 and April 30, 2022, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included cash, cash equivalents, accounts receivable, marketable securities and foreign currency forward contracts. The carrying amount of cash, cash equivalents and accounts receivable approximates fair value due to the short-term maturity of these instruments. The fair values of marketable securities classified as equity securities are obtained from quoted market prices, and the fair values of marketable securities classified as available-for-sale and foreign currency forward contracts are obtained from a third party, which are based on quoted prices or market prices for similar assets and financial instruments.
Foreign Currency Forward Contracts Not Designated as Hedges
The Company has established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures primarily originating from intercompany balances due to cross border work performed in the ordinary course of business. These foreign currency forward contracts are neither used for trading purposes nor are they designated as hedging instruments pursuant to ASC 815, Derivatives and Hedging. Accordingly, the fair value of these contracts is recorded as of the end of the reporting period in the accompanying consolidated balance sheets, while the change in fair value is recorded to the accompanying consolidated statements of income.
Business Acquisitions
Business acquisitions are accounted for under the acquisition method. The acquisition method requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity, and recognize and measure goodwill or a gain from the purchase. The acquiree’s results are included in the Company’s consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill, or if the fair value of the assets acquired exceeds the purchase price consideration, a bargain purchase gain is recorded. Adjustments to fair value assessments are generally recorded to goodwill over the measurement period (not longer than 12 months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense as committed and requires the Company to recognize and measure certain assets and liabilities including those arising from contingencies and contingent consideration in a business combination.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and current and non-current operating lease liability, in the consolidated balance sheets. Finance leases are included in property and equipment, net, other accrued liabilities and other liabilities in the consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term, and the lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term on the commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the periods in which they are incurred.
The Company has lease agreements with lease and non-lease components. For all leases with non-lease components the Company accounts for the lease and non-lease components as a single lease component.
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KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2022 (continued)
Impairment of Long-Lived Assets
Long-lived assets include property, equipment, ROU assets and software developed or obtained for internal use. In accordance with ASC 360, Property, Plant and Equipment, management reviews the Company’s recorded long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company determines the extent to which an asset may be impaired based upon its expectation of the asset’s future usability, as well as on a reasonable assurance that the future cash flows associated with the asset will be in excess of its carrying amount. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. During the three and six months ended October 31, 2022 there were no impairment charges recorded. During the three and six months ended October 31, 2021, the Company reduced its real estate footprint and as a result, the Company took an impairment charge of ROU assets of $7.4 million and an impairment of leasehold improvements and furniture and fixtures of $1.9 million, both recorded in the consolidated statements of income in general and administrative expenses.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of assets acquired. Goodwill is tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Results of the annual qualitative impairment test performed as of January 31, 2022, indicated that the fair value of each of the reporting units exceeded its carrying amount and no reporting units were at risk of failing the impairment test. As a result, no impairment charge was recognized. As of October 31, 2022 and April 30, 2022, there were no indicators of impairment with respect to the Company’s goodwill.
Intangible assets primarily consist of customer lists, non-compete agreements, proprietary databases and IP. Intangible assets are recorded at their estimated fair value at the date of acquisition and are amortized in a pattern in which the asset is consumed, if that pattern can be reliably determined, or using the straight-line method over their estimated useful lives, which range from one to 24 years. For intangible assets subject to amortization, an impairment loss is recognized if the carrying amount of the intangible assets is not recoverable and exceeds fair value. The carrying amount of the intangible assets is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from use of the asset. The Company reviewed its intangible assets and noted no impairment as of October 31, 2022 and April 30, 2022.
Compensation and Benefits Expense
Compensation and benefits expense in the accompanying consolidated statements of income consist of compensation and benefits paid to consultants (employees who originate business), executive officers and administrative and support personnel. The most significant portions of this expense are salaries and the amounts paid under the annual performance-related bonus plan to employees. The portion of the expense applicable to salaries is comprised of amounts earned by employees during a reporting period. The portion of the expenses applicable to annual performance-related bonuses refers to the Company’s annual employee performance-related bonus with respect to a fiscal year, the amount of which is communicated and paid to each eligible employee following the completion of the fiscal year.
Each quarter, management makes its best estimate of its annual performance-related bonuses, which requires management to, among other things, project annual consultant productivity (as measured by engagement fees billed and collected by Executive Search and Professional Search consultants and revenue and other performance/profitability metrics for Consulting, Digital, Interim and RPO consultants), the level of engagements referred by a consultant in one line of business to a different line of business, and Company performance, including profitability, competitive forces and future economic conditions and their impact on the Company’s results. At the end of each fiscal year, annual performance-related bonuses take into account final individual consultant productivity (including referred work), Company/line of business results, including profitability, the achievement of strategic objectives, the results of individual performance appraisals and the current economic landscape. Accordingly, each quarter the Company reevaluates the assumptions used to estimate annual performance-related bonus liability and adjusts the carrying amount of the liability recorded on the consolidated balance sheet and reports any changes in the estimate in current operations.
Because annual performance-based bonuses are communicated and paid only after the Company reports its full fiscal year results, actual performance-based bonus payments may differ from the prior year’s estimate. Such changes in the bonus estimate historically have been immaterial and are recorded in current operations in the period in which they are determined. The performance-related bonus expense was $99.8 million and $201.6 million during the three and six months ended October 31, 2022, respectively, included in compensation and benefits expense in the consolidated statements of income. The performance-related bonus expense was $119.2 million and $215.2 million during the three and six months ended October 31, 2021, respectively, included in compensation and benefits expense in the consolidated statements of income.
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KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2022 (continued)
Other expenses included in compensation and benefits expense are due to changes in deferred compensation and pension plan liabilities, changes in cash surrender value (“CSV”) of company-owned life insurance (“COLI”) contracts, amortization of stock-based compensation awards, commissions, payroll taxes and employee insurance benefits. Unearned compensation on the consolidated balance sheets includes long-term retention awards that are generally amortized over four-to-five years.
Stock-Based Compensation
The Company has employee compensation plans under which various types of stock-based instruments are granted. These instruments principally include restricted stock units, restricted stock and an Employee Stock Purchase Plan (“ESPP”). The Company recognizes compensation expense related to restricted stock units, restricted stock and the estimated fair value of stock purchases under the ESPP on a straight-line basis over the service period for the entire award.
Reclassifications
Certain reclassifications have been made to the amounts in the prior periods in order to conform to the current period’s presentation.
Recently Proposed Accounting Standards - Not Yet Adopted
In October 2021, the Financial Accounting Standards Board (“FASB”) issued an amendment in accounting for contract assets and contract liabilities from contracts with customers, which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. The amendment of this standard becomes effective in fiscal years beginning after December 15, 2022. The amendment should be applied prospectively to business combinations that occur after the effective date. The Company will adopt this guidance in its fiscal year beginning May 1, 2023. The Company is currently evaluating the impact of this accounting guidance but does not anticipate that it will have a material impact on the consolidated financial statements.
2. Basic and Diluted Earnings Per Share
ASC 260, Earnings Per Share, requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends prior to vesting as a separate class of securities in calculating earnings per share. The Company has granted and expects to continue to grant to certain employees under its restricted stock agreements, grants that contain non-forfeitable rights to dividends. Such grants are considered participating securities. Therefore, the Company is required to apply the two-class method in calculating earnings per share. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The dilutive effect of participating securities is calculated using the more dilutive of the treasury method or the two-class method.
Basic earnings per common share was computed using the two-class method by dividing basic net earnings attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per common share was computed using the two-class method by dividing diluted net earnings attributable to common stockholders by the weighted-average number of common shares outstanding plus dilutive common equivalent shares. Dilutive common equivalent shares include all in-the-money outstanding options or other contracts to issue common stock as if they were exercised or converted. Financial instruments that are not in the form of common stock, but when converted into common stock increase earnings per share, are anti-dilutive and are not included in the computation of diluted earnings per share.
During the three and six months ended October 31, 2022, restricted stock awards of 1.6 million shares and 1.2 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. During the three and six months ended October 31, 2021, restricted stock awards of 1.2 million shares and 1.3 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.
11

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KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2022 (continued)
The following table summarizes basic and diluted earnings per common share attributable to common stockholders:
Three Months Ended
October 31,
Six Months Ended
October 31,
2022202120222021
(in thousands, except per share data)
Net income attributable to Korn Ferry$73,541 $75,772 $150,788 $150,595 
Less: distributed and undistributed earnings to nonvested restricted stockholders1,615 1,654 3,295 3,321 
Basic net earnings attributable to common stockholders71,926 74,118 147,493 147,274 
Add: undistributed earnings to nonvested restricted stockholders1,436 1,510 2,945 3,005 
Less: reallocation of undistributed earnings to nonvested restricted stockholders1,432 1,497 2,927 2,974 
Diluted net earnings attributable to common stockholders$71,930 $74,131 $147,511 $147,305 
Weighted-average common shares outstanding:
Basic weighted-average number of common shares outstanding51,868 53,114 51,820 52,937 
Effect of dilutive securities:   
Restricted stock134 453 319 555 
ESPP3 1 4 2 
Diluted weighted-average number of common shares outstanding52,005 53,568 52,143 53,494 
Net earnings per common share:
Basic earnings per share$1.39 $1.40 $2.85 $2.78 
Diluted earnings per share$1.38 $1.38 $2.83 $2.75 
3. Comprehensive Income
Comprehensive income is comprised of net income and all changes to stockholders’ equity, except those changes resulting from investments by stockholders (changes in paid in capital) and distributions to stockholders (dividends) and is reported in the accompanying consolidated statements of comprehensive income. Accumulated other comprehensive loss, net of taxes, is recorded as a component of stockholders’ equity.
The components of accumulated other comprehensive loss, net were as follows:
October 31,
2022
April 30,
2022
(in thousands)
Foreign currency translation adjustments$(136,991)$(92,717)
Deferred compensation and pension plan adjustments, net of tax1,066 961 
Marketable securities unrealized loss, net of tax(740)(429)
Accumulated other comprehensive loss, net$(136,665)$(92,185)
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KORN FERRY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
October 31, 2022 (continued)
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the three months ended October 31, 2022:
Foreign
Currency
Translation
Deferred
Compensation
and Pension
Plan
Unrealized Losses on
Marketable Securities (2)
Accumulated
Other
Comprehensive
Loss
(in thousands)
Balance as of July 31, 2022$(108,974)$1,012 $(482)$(108,444)
Unrealized losses arising during the period(28,017) (258)(28,275)
Reclassification of realized net losses to net income 54  54 
Balance as of October 31, 2022$(136,991)$1,066 $(740)$(136,665)
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the six months ended October 31, 2022:
Foreign
Currency
Translation
Deferred
Compensation
and Pension
Plan (1)
Unrealized Losses on
Marketable Securities (2)
Accumulated
Other
Comprehensive
Loss
(in thousands)
Balance as of April 30, 2022$(92,717)$961 $(429)$(92,185)
Unrealized losses arising during the period(44,274) (311)(44,585)
Reclassification of realized net losses to net income 105  105 
Balance as of October 31, 2022$(136,991)$1,066 $(740)$(136,665)
___________________
(1)
The tax effect on the reclassifications of realized net losses was $0.1 million for the six months ended October 31, 2022.
(2)
The tax effect on the unrealized losses were $0.1 million and $0.1 million for the three and six months ended October 31, 2022.
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the three months ended October 31, 2021:
Foreign
Currency
Translation
Deferred
Compensation
and Pension
Plan (1)
Unrealized Losses on
Marketable Securities
Accumulated
Other
Comprehensive
Loss
(in thousands)
Balance as of July 31, 2021$(42,034)$(17,794)$(15)$(59,843)
Unrealized (losses) gains arising during the period(7,017)15 (21)(7,023)
Reclassification of realized net losses to net income 336  336 
Balance as of October 31, 2021$(49,051)$(17,443)$(36)$(66,530)
The following table summarizes the changes in each component of accumulated other comprehensive loss, net for the six months ended October 31, 2021:
Foreign
Currency
Translation
Deferred
Compensation
and Pension
Plan (1)
Unrealized Losses on
Marketable Securities
Accumulated
Other
Comprehensive
Loss
(in thousands)
Balance as of April 30, 2021$(33,666)$(18,135)$(19)$(51,820)
Unrealized (losses) gains arising during the period(15,385)15 (18)(15,388)
Reclassification of realized net losses to net income 677 1 678 
Balance as of October 31, 2021$(