1

Table of Contents

Executive Summary 6

Industry Analysis 7 Accounting Analysis 9

Financial Analysis 10 Valuation Analysis 14

Company Overview 14 Industry Overview 16

Five Force Model 16 Rivalry Among Existing Firms 17

Industry Growth 19 Concentration 21

Switching Costs 21 Fixed to Variable Cost Ratio 22

Conclusion 22 Threats of New Entrants 23

Economies of Scale 23 First Mover Advantage 24

Assess to Channels of Distribution and Relationships 24

Legal Barriers 25 Conclusion 25

Threat of Substitute Products 26 Efficiency and Price 26

Customers’ Willingness to Switch 27 Conclusion 27

Bargaining Power of Customers 28 Switching Costs 28

Differentiation 28 Importance of Product for Cost and Quality 29

2

Number of Customers 29

Conclusion 30 Bargaining Power of Suppliers 30

Switching Costs 31 Differentiation 31

Number and Quality of Suppliers 32 Conclusion 32

Conclusion 32 Key Success Factors 33

Cost Leadership 33 Differentiation 34

Functionality Segmentation 34 Superior Customer Service 36

Brand Image 37 Competitive Advantages Analysis 38

Functionality Segmentation 38 Superior Customer Service 40

Brand Image 43 Conclusion 44

Introduction to Accounting Analysis 45

Key Accounting Policies 45 Type One Key Accounting Policies 46

Economies of Scale 46 Value Adding Services 47

Type Two Key Accounting Policies 48 Goodwill 49

Operating Lease 50 Defined Benefit Pension Plan 50

Assessing the Degree of Potential Accounting Policies 50

3

Goodwill 51

Leasing Activities 52 Conclusion 52

Evaluation of Actual Accounting Strategy 52 Goodwill 53

Pension Plans 55 Leasing Activities 55

Conclusion 56 Quality of Disclosure 56

Pension Plans 57 Goodwill 58

Operating and Capital Leases 58 Potential Red Flags 59

Accounting Distortions 60 Goodwill 60

Operating Leases 62 Conclusion 65

Financial Statements 65 Balance Sheet 75

Income Statement 75

Conclusion 75 Financial Analysis 76

Liquidity Analysis 76 Current Ratio 77

Quick Asset Ratio 78 Conclusion 80

Operating Efficiency Ratios 80 Inventory Turnover 80

Days’ Supply of Inventory 80

4

Accounts Receivable Turnover 81

Days Sales Outstanding 83 Cash-to-Cash Cycle 84

Working Capital Turnover 86 Conclusion 87

Profitability Ratio 87 Gross Profit Margin 88

Operating Profit Margin 89 Net Profit Margin 90

Asset Turnover 92 Return on Assets 93

Return on Equity 95 Conclusion 96

Capital Structure Ratios 96 Internal Growth Rate 97

Sustainable Growth Rate 98 Plant, Property, and Equipment Turnover 99

Debt to Equity Ratio 100 Times Interest Earned 102

Debt Service Margin 103

Altman Z-Score 104 Conclusion 106

Financial Forecasting 106 Income Statement 106

Dividends Forecasting 113 Balance Sheet 113

Statement of Cash Flows 120 Cost of Capital Estimation 124

Cost of Debt 124

5

Cost of Equity 125

Backdoor Cost of Equity 128 Weighted Average Cost of Capital 128

Conclusion 130 Method of Comparables 130

Trailing P/E Ratio 131 Forward P/E Ratio 132

Price to Book Ratio 132 Dividends to Price Ratio 133

Price Earnings Growth Ratio 134 Price to EBITDA 135

Price to Free Cash Flows 136 Enterprise Value to EBITDA 137

Conclusion 138 Intrinsic Valuation Models 138

Discounted Dividends Models 138 Discounted Free Cash Flow Model 140

Residual Income Model 142 Long Run Residual Model 144

Abnormal Earnings Growth 147

Analyst Recommendation 149 References 151

Appendix 152 Industry Growth 152

Financial Statements 152 Balance Sheet 152

Income Statement 154

6

Executive Summary

2012

2013

2014

2015

2016

OberservedPrice(11/1/16

)$2

0.39

As-Stated

3.52

2.95

3.15

3.22

2.05

Re-Stated

2.62

2.31

2.61

2.51

1.55

52W

eekRa

nge

$18.57

$38.20

Revene

1.35

BAs-Stated

Re-Stated

As-StatedRe-Stated

MarketC

ap1.18

BRO

E3.79

%-2.82%

IGR

0.70

%-0.40%

SharesOutstanding

57.92M

ROA

2.30

%-1.40%

SGR

6.50

%-0.80%

As-Stated

Re-Stated

BookValueofEqu

ity1.04

7B

870M

Comparable

P/ETrailing

9.49

$

Overvalued

N/A

N/A

20YearB

ondRe

gressio

nsR^

2Be

ta2FactorKe

P/EForw

ard

29.04

$

Und

ervalued

14.30

$

Overvalued

72Mon

th35

.24%

1.89

17.13%

P/B

28.62

$

Und

ervalued

24.54

$

Und

ervalued

60Mon

th18

.01%

1.26

12.77%

Dividend

/Price

26.69

$

Und

ervalued

26.69

$

Und

ervalued

48Mon

th14

.90%

1.17

12.14%

P.E.G

6.98

$

Overvalued

N/A

N/A

36Mon

th13

.07%

1.06

11.33%

P/EB

ITDA

11.96

$

Overvalued

2.26

$

Overvalued

24Mon

th7.68

%0.70

8.81

%EV

/EBITD

A12

.07

$

Overvalued

12.07

$

Overvalued

P/FCF

26.05

$

Und

ervalued

26.05

$

Und

ervalued

Backdo

orKe

8.76

%WAC

CBT

8.22

%WAC

CAT

8.06

%Va

luationMod

elAs-StatedRe

sult

Re-StatedRe

sult

Publish

edBeta(Goo

gleFinance)

1.28

Discou

ntedDividends

8.72

N/A

Discou

ntedFreeCa

shFlows

22.13

N/A

Resid

ualIncom

e20

.31

13.02

LowerBou

ndExpectedValue

Upp

erBou

ndLongRun

ResidualIncom

e19

.73

15.60

CostofEqu

ityKe

7.81

%12

.70%

17.73%

Abno

rmalEarningsG

rowth

18.61

10.85

Size-AdjustedKe

6.70

%8.76

%13

.70%

Instrin

sicV

alua

tionMod

els

AnalystR

ecom

men

datio

n:Hold(fa

irvalue)

KornFerry-NYSE11

/1/16

Altm

an'sZ-Score

RelevantRatios

Metho

dofCom

parablesValua

tion

CostofC

apita

lAs-StatedRe

sult

Re-StatedRe

sult

7

Industry Analysis

Korn/Ferry International is a human resources firm operating within the staffing and outsourcing services industry. The firm’s primary competitors include Manpower Group,

On Assignment, Heidrick & Struggles, and Kelly Services. Korn Ferry has three

segments: Executive Recruitment, which matches executives to companies; Hay Group, which provides leadership and talent consulting for both temporary and permanent

employees; and Futurestep as an online tool for recruiting professional talent. These competitors were selected because of their similar business models to Korn Ferry,

specifically functional segmentation.

We analyzed the staffing industry based on Porter’s Five Forces Model. According to this model, the intensity of the competition between firms determines the potential for

creating profits. The competitive nature of this industry is demonstrated below in figure 1.

Figure 1

CATEGORY QUALITIES COMPETITION

RivalryAmongExistingFirms

•Cyclicalindustrygrowth•Lowlevelsofconcentration•Highswitchingcosts

High

ThreatofNewEntrants

•Lowbarrierstoentry•Presenceoffirstmoveradvantage High

ThreatofSubstituteProducts

•Lowbarrierstoentry•Buyers'willingnesstoswitchfirms High

BargainingPowerofCustomers

•Lowswitchingcosts•Moderatedifferentiation•Highimportanceofproductforcost/quality•Lownumberofcustomers,highnumberoffirms

Mixed-High

BargainingPowerofSuppliers

•Moderateswitchingcosts•Moderatedifferentiation•Highimportanceofproductforcost/quality•Moderatenumberofsuppliers,highnumberoffirms

Mixed-High

FIVEFORCESMODEL

8

From our analysis, we have determined that the degree of actual and potential competition is high.

The fluctuation in industry growth is dependent on economic growth. Demand for the

firms’ service is hindered by slowed economic activities. Because the industry is not growing rapidly, firms need not take market share from each other to grow.

Additionally, no one firm currently represents a large enough market share to dominate the entire industry, making it a price taking industry. Though firms attempt to

differentiate their services, it is still easy for clients to switch to a different firm. Considering these factors, the rivalry among existing firms is somewhat high.

The threat of new entrants is also high. This is due to the low barriers of entry into the

industry. Demonstrating economies of scale by expanding physical presence is becoming less important of a factor in competing due to the increase in technology.

Clients are now able to perform services online through web-based systems and easily switch from a traditional firm to a more convenient one. In addition to this, firms that

are first movers into the online staffing industry may gain a competitive advantage against traditional firms by offering a lower-cost, similar quality service. Though existing

relationships between firms and clients and some mild legal barriers to entry may have a small effect on the threat of new entrants, we concluded these factors were

secondary to the very low switching costs for customers to switch to a new firm.

With the flexibility brought about by technology-based services, the threat of substitute products is high as well. These firms are often able to offer a similar service at a similar

or even higher quality than existing firms. Because these new firms may have no physical location, their services are often priced lower than traditional staffing firms’. It

does not cost the client much to switch firms, increasing their willingness to do so.

Again, though the industry does have low switching costs, the industry is moderately differentiated. Because this industry’s product is a service, the buyer is more likely to

expend the resources necessary to search for a lower cost, higher quality alternative

9

rather than bargain with their existing firm to lower the cost of service. The buyers in

this industry are moderately price sensitive and posses a relatively high bargaining power. However, a strong bargaining position is more important in determining

bargaining power of buyers than a higher price sensitivity. The bargaining power of buyers is mixed-high due to the presence of many alternative firms within the industry.

Because the firms are extremely reliant on the supplier’s services, the bargaining power of suppliers is also mixed-high. Suppliers in this industry are individuals seeking

employment by the firms’ clients. In the executive search segments, the bargaining

power of suppliers is low, as contracts and the inability to qualify for certain positions hinder suppliers from lowering firm costs. However, for most temporary and staff level

recruiting, the bargaining power is high since there are many individuals who can fill the firms’ clients’ needs. Additionally, because the firms in the industry are almost entirely

dependent on the presence of individuals seeking employment, the overall bargaining power of these suppliers is mixed-high.

In conclusion, due to the high degree of competition amongst the firms, the industry

profitability is also high.

Accounting Analysis

After obtaining a better understanding of the staffing and operating service industry in

which Korn Ferry operates, we will analyze Korn Ferry’s disclosures in the accounting aspects of the firm. Although it’s not illegal, firms have found ways to get around

GAAP’s set accounting standards which leads to misleading investors about the actual worth of the firm. We will view the accounting policies and where Korn Ferry is

compared to the industry, followed by analyzing the potential red flags and undoing the

accounting distortions found in the financial statements.

Type One accounting policies allow for examination of firms’ disclosure and are directly

related to the reporting practices regarding the industry’s key success factors. For the staffing and outsourcing services industry, our team will analyze the following key

success factors: economies of scale and value adding services.

10

Type Two accounting policies involve potential items in a firm's financial statements

that can ultimately distort the analysis of the firm. These distortions mislead investors, typically making a firm seem more profitable than it is. The Type Two accounting

policies our team will analyze are goodwill, leasing activities, and defined benefit pension plans. For Korn Ferry, goodwill and operating leases were the only distortions

which may mislead investors beyond their thresholds and therefore had to be restated. Pension plan values were not significant enough to do this. Consequently, we will

restate Korn Ferry’s balance sheet and income statements to get a more accurate view on how much the firm is actually worth.

When examining potential red flags in Korn Ferry’s financials, our team discovered two

concerning red flags. We first noticed that there was an increasing gap between a firm’s reported income and its cash flow from operating activities (Palepu 3-12). For Korn

Ferry the reported operating income was $52,692,000 where the cash flow from operating activities was $-107,586,000. After examining this gap further our team

concluded that goodwill need to be restated. Therefore, we impaired Korn Ferry’s goodwill for the past five years.

The second red flag found in Korn Ferry’s financials was the tendency to use financing

mechanisms such as research and development partnerships, special-purpose entities, and the sale of receivables with recourse (Palepu 3-13). This red flag is an indicator

that liabilities would be understated. We concluded that operating and capital leases would increase noncurrent liabilities by a high enough percentage so that they need to

be restated.

Financial Analysis

We performed a financial analysis of Korn Ferry and the staffing and outsourcing services industry to assess the performance of Korn Ferry against their peers. We

computed the restated liquidity, operating efficiency, profitability, and capital structure ratios.

11

We began with our analysis of the liquidity ratios. Liquidity ratios measure a firm’s

ability to repay its current liabilities. One of the liquidity ratios we computed is the current ratio, which allows us to gain an understanding of a firm’s short term liquidity.

Korn Ferry has a current ratio of 1.39, a larger number than most of their benchmark competitors. A current ratio of more than one indicates that Korn Ferry has a decreased

sensitivity to liquidity risk. Although Korn Ferry has a ratio above the industry average, it is important to note that the average current ratio for the industry is well above 1,

proving that the services firms in this industry are safe from liquidity shock.

The second analysis we performed was of operating efficiency. Operating efficiency ratios measure how well a firm’s management uses assets to generate income. After evaluating Korn Ferry’s efficiency ratios, we believe that Korn Ferry is in good financial

health. However, Korn Ferry performs below the industry average for most operating efficiency ratios and can benefit from increasing their efficiency.

The profitability ratio analysis includes gross profit margin, net profit margin, operating

profit margin, asset turnover, PPE turnover, return on assets, and return on equity to measure the profitability across the industry. The ratios indicate that Korn Ferry has

profitability ratios well above the industry average. This indicates that Korn Ferry will have a significant competitive advantage if they are able to generate a high amount of

sales.

Capital structure ratios represent how a company finances their operations. Our capital structure analysis includes the debt to equity ratio, times interest earned, Altman’s Z-

Score, and debt service margin. We conclude that Korn Ferry was at the industry average for the capital structure ratios. However, for debt to equity specifically, Korn

Ferry had one of the lowest ratios since their total liabilities was low. This means that Korn Ferry is more aggressive in their equity financing. Also, Korn Ferry had a Z-Score

around 3 which shows that they are unlikely to go bankrupt.

For the growth rate analysis, Korn Ferry had a higher IGR and SGR than the industry. The IGR is high because Korn Ferry pays a low payout ratio of dividends to its

12

shareholder. Because the plowback ratio is multiplied by ROA, a high IGR means that

they have more money to reinvest. For SGR, a high rate shows that a firm has ample room for growth while maintaining its capital structure. Korn Ferry’s SGR is high

because they have a high ROE.

After conducting our ratio analysis, we forecasted Korn Ferry’s financials out for 10

years and used growth rates to predict their yearly progress. Additionally, it was necessary to compute Korn Ferry’s as-stated and restated cost of debt, cost of equity,

and weighted average cost of capital. The as-stated and restated cost of equity was the

same at 17.73%, while the as-stated and restated cost of debt was 3.70% and 3.25%, respectively. Additionally, the after-tax cost of debt as-stated and restated was 2.26%

and 1.98%, respectively. Therefore, for the before-tax portion, we calculated an as-stated WACC and restated WACC of 16.24% and 13.71%, respectively. For the after-tax

portion, we calculated an as-stated WACC and restated WACC of 16.09% and 13.36%.

Valuation Analysis

To accurately evaluate Korn Ferry, it is important to decide our analytical position. For

this analysis, we will be using a 10% position. Values above 10% of our observed price

will state Korn Ferry is undervalued, while 10% under our observed price will state Korn Ferry is overvalued. Within 10% of our November 1, 2016 stock price, we evaluate as

Korn Ferry being fairly valued.

In our valuation analysis, we will be using the method of comparables and intrinsic

valuation models. For the method of comparables, we computed eight different ratios and averaged the as-stated and restated results. The averaged as-stated and restated

prices of $18.86 and $17.65 respectively, led us to determine Korn Ferry is fairly valued

as-stated and overvalued restated. However, we decided to only use the results from the method of comparables as a reference as opposed to a valuation tool. Using this

method to actually value Korn Ferry is unreliable because there a multiple factors in the model that are potentially error filled.

13

Our second valuation approach included the intrinsic valuation models. These included

the discounted dividends, discounted free cash flows, residual income, long run residual income, and abnormal earnings growth models. As with the methods of comparables

approach, we averaged the as-stated and restated results. The averaged as-stated and restated prices, $20.20 and $13.16 respectively led us to determine that Korn Ferry

fairly valued as-stated and overvalued restated. It is important to point out that we ruled against using the discounted dividends model because it only accounts for the

dividends effect on the stock. Normally, the discounted free cash flows model is not used due to the fact that it heavily relies on the forecasting of future cash flows.

However, from our computations, we have chosen to include it as a key determinate in Korn Ferry's valuation. Because of the models' lower potential for forecasting error and

various factors involved, with the two residual income models being based on net income, dividends, and book value of equity and the abnormal earnings growth model

relying on net income and reinvested dividends, we decided to also rely on these three for the best analysis of Korn Ferry's value. Therefore, after considering the various

valuation tools, we have decided to recommend Korn Ferry as being fair valued.

14

Company Overview

Korn/Ferry International (referred to herein as “Korn Ferry”) first founded in 1969 and

headquartered in Los Angeles, California, advises firm executives on talent to best suit their quality of operations. Partners Lester Korn and Richard Ferry departed from Peat

Marwick Mitchell & Co. (now KPMG) to create their own executive human resources company. Korn Ferry went public twice—once in 1972 before returning to private in

1974, and again in 1999 where it has since remained public. After a successful online recruitment trial run, in 1998 Korn Ferry decided to merge with Futurestep, a leadership

and talent practice (Feintzig). In 2015, Korn Ferry acquired the Hay Group for $452 million. With its 7,000 employees, Korn Ferry has become the number one executive

recruitment firm. Each month, they develop 100,000 people through their leadership programs. Currently, Korn Ferry collaborates with 93% of Fortune 100 companies (Korn

Ferry).

Korn Ferry operates in three different segments: Executive Recruitment, which matches executives to companies; Hay Group, which provides leadership and talent consulting

for both temporary and permanent employees; and Futurestep as an online tool for recruiting professional talent. Overall, the firm is dedicated to attracting top talent and

providing successful management solutions.

Industry Overview

As an outsourcing resource company, Korn Ferry's main competitors are Manpower Group, On Assignment, Heidrick & Struggles, and Kelly Services. These competitors

have very similar business models to Korn Ferry's. For example, all the competitors involve Korn Ferry's core business principles: executive search, leadership, and talent

consulting. Manpower Group is the oldest company among their competitors, providing human resources services for their clients including recruitment, training, outsourcing,

and workforce consulting. On Assignment is more focused on technical and scientific professional search, while Heidrick & Struggles operates in the international executive

search segment. Lastly, Kelly Services operates in temporary staffing and provides

15

workforce solutions. According to the sales table and corresponding graph of the past

five years shown below, Manpower Group and On Assignment have the most market capital and net income (Figure 2). Therefore, Manpower Group carries the largest

market value and is the most profitable based on having the highest market capital and net income.

Figure 2

Over the past five years, staffing and outsourcing has become a highly competitive industry. Due to the cyclical nature of the economy, the growth of professional demand

has recently increased. The average growth is skewed upwards of 5%. In fiscal year 2014, Korn Ferry’s sales growth increased almost 20% with the acquisition of

Minneapolis-based PDI Ninth House in 2013 (Korn Ferry 10K). Heidrick & Struggles also had a significant increase in sales in the most recent years, which indicates that the

executive search industry has become more popular.

Taking into consideration the remaining competitors, the market can be identified as large and diversified. According to the MorningStar Investment Research Database,

approximately 88% of companies in this industry are consistently making a profit.

Firm Market Capital (in millions) Net Income (in millions)

Korn Ferry 1,421 31

Manpower Group 4,888 419

On Assignment 2,010 98

Heidrick & Struggles 352.68 17

Kelly Services 1,423 54

Market Capital and Net Income for Korn Ferry and their Competitors as of September 1st, 2016

16

Five Forces Model

Porter’s Five Forces is an effective way to communicate to investors the factors that

have a potential impact on a company’s long run attractiveness and profitability. We will be evaluating the following five forces in detail: rivalry among existing firms, threat of

new entry, threat of substitutes, bargaining power of customers, and bargaining power of suppliers. The model allows us to draw conclusions regarding the industry and

provide a macro-perspective on the business environment in which the firms compete. Analyzing the industry in which Korn Ferry operates, independent of Korn Ferry itself,

will help us conclude what direction the company is going, its growth potential, and its threats. Our analysis is based on the staffing and outsourcing services industry.

As shown in figure 3 below, we have determined the level of competition for each of

the five forces.

Figure: 3

Rivalry Among Existing Firms

We will be analyzing the intensity of the rivalry among existing firms within the staffing

and outsourcing services industry. A firm’s average level of profitability is directly correlated to rivalry within the industry. An intense competitive environment may result

in companies being forced to reduce their prices to preserve clients. This would give

CATEGORY COMPETITIONRivalryAmongExistingFirms HighThreatofNewEntrants HighThreatofSubstituteProducts HighBargainingPowerofCustomers Mixed-HighBargainingPowerofSuppliers Mixed-High

FIVEFORCESMODEL

17

suppliers the ability to raise prices. Because of these restrictions on price control, firms

within the industry would be forced to become price takers. To reach a conclusion about rivalry, we analyzed industry growth, concentration, and switching costs.

Industry Growth

Industry growth is the average growth experienced by all firms within an industry. Increased industry growth requires less competition among firms to reach individual

firm growth goals. If every firm is growing, it is less necessary for each to extract market share from another firm. Low industry growth translates to higher competition,

and price conflicts. Firms are pressured to compete on price to increase market share, and lower prices mean lower profits.

We determined industry growth by comparing five firms’ net sales within the staffing

and outsourcing services industry over the course of five years. As shown in figure 5 below, the growth rate has fluctuated from 18.06% in 2012 to a more level rate

between 5% and 9% in the coming years.

Figure 4: Sales for Korn Ferry and Related companies

Firm 2011 2012 2013 2014 2015

Korn Ferry 744.25 790.5 812.8 960.3 1,028.15

Manpower Group 22,006.00 20,678.00 20,250.50 20,762.80 19,329.90

On Assignment 597.28 1,239.71 1,523.10 1,724.74 2,065.00

Heidrick & Struggles 527.79 443.78 462 494.29 531.14

Kelly Services 5,551.00 5,450.50 5,413.10 5,562.70 5,518.20

Sales for Korn Ferry and Related Companies (in millions)

18

Figure 5: Percent Change in Net Sales

Each firm appears to be growing at relatively consistent rates. Korn Ferry acquired another firm in 2013, which may explain the drastic increase in sales between 2013 and

2014. This same situation occurred between 2015 and 2016, when Korn Ferry made

two more acquisitions: one at the end of fiscal year 2015 and another at the beginning of fiscal year 2016. On Assignment grew rapidly between 2011 and 2012 due to their

acquisition of Valesta, a Western European provider of clinical research staff.

Firm 2011 2012 2013 2014 2015 2016Korn Ferry 6.51% 2.77% 17.17% 7.08% 26.32%Manpower Group -6.03% -2.07% 2.53% -6.90%On Assignment 107.56% 22.86% 13.24% 19.73%Heidrick & Struggles -15.92% 4.11% 6.99% 7.46%Kelly Services -1.81% -0.69% 2.76% -0.80%Industry 18.06% 5.40% 8.54% 5.31%

Percent Change in Net Sales

19

Most growth in this industry comes inorganically. Additionally, the staffing and

outsourcing services industry is highly dependent on the cyclical nature of the economy. The healthier the state of the economy, the greater demand for jobs. The greater the

demand for jobs, the greater demand for the firms’ services and the more growth the firms all experience. Increased growth usually results in low competition. The weaker

the economy, the lower the demand for the industry’s services, and the higher the competition within the industry. According to Kelly Services, “During an economic

downturn, we must balance competitive pricing pressures with the need to retain a qualified workforce [for our clients],” (Kelly 10K).

Concentration

The degree of concentration is determined by how much of the market belongs to each firm. By finding this, we are able to conclude how firms within an industry coordinate

their pricing and competitive moves. If the degree of concentration is dominated by one

firm, that firm has the ability to set prices and enforce rules within the industry. However, if there are several equally sized players, they can help coordinate the future

prices, encouraging pricing competition. In figure 6 below, we looked at the different market concentration levels of the staffing and outsourcing services industry,

determining the number of existing firms and their portion of the market shares.

Figure 6

Firm 2011 2012 2013 2014 2015 2016KornFerry 776.25 826.76 849.70 995.56 1,066.07 1,346.71ManpowerGroup 22,006.00 20,678.00 20,250.50 20,762.80 19,329.90OnAssignment 597.28 1,239.71 1,523.10 1,724.74 2,065.00Heidrick&Struggles 527.79 443.78 462.00 494.29 531.14KellyServices 5,551.00 5,450.50 5,413.10 5,562.70 5,518.20IndustryTotalServices 29,458.32 28,638.75 28,498.40 29,540.09 28,510.31

TotalSalesperFirm(inmillions)

20

The figure above demonstrates that strictly based off sales (in thousands), Manpower has a significantly higher market share than the other firms we compared. However,

according to Korn Ferry’s 10K, no one firm is entirely dominant and able to set prices compared to other firms within the industry. The industry consists of much more than

just the firms we compared—the staffing and outsourcing services industry represents a $600 billion global market opportunity (Korn Ferry 10K). Manpower’s 10K states, “Our

industry is large and fragmented, comprised of thousands of firms employing millions of people and generating billions of United States dollars in annual revenues. In most

areas, no single company has a dominant share of the employment services market,” (Manpower 10K). When considering the massive size of the industry, the concentration

of each firm is comparatively low, implying that no one firm is dominant.

Firm 2011 2012 2013 2014 2015KornFerry 2.64% 2.89% 2.98% 3.37% 3.74%ManpowerGroup 74.70% 72.20% 71.06% 70.29% 67.80%OnAssignment 2.03% 4.33% 5.34% 5.84% 7.24%Heidrick&Struggles 1.79% 1.55% 1.62% 1.67% 1.86%KellyServices 18.84% 19.03% 18.99% 18.83% 19.36%IndustryTotalServices 100.00% 100.00% 100.00% 100.00% 100.00%

MarketShareBasedonSales

21

Switching Costs

Switching costs are the costs incurred by the firm if it was to switch to another industry. Firms within the staffing industry are highly segmented by geographic location and

industry specialization, making it costly for the firms to take on another industry when they are specialized in specific operating functions. Additionally, because it is a service

industry with human capital, performing different services would require hiring new employees or training existing employees in new service skills—doing so may be time

consuming and costly. Because of the difficulty in entering a different industry with less

competition in a cost-effective way, we determined that it is very risky for firms to switch.

Fixed to Variable Cost Ratio

To determine the volatility of a firm we calculated the fixed to variable cost ratios. To calculate this, we divided fixed costs by variable costs.

When a firm has high fixed to variable cost, then a firm is a price setter. The benefits of

high fixed to variable cost is that firms can use it as operating leverage which allows them to generate additional revenue per sale without having to increase cost to

produce more sales. Thus, profit margin expands and earnings grow faster than revenue. Firms are typically encouraged to utilize their fixed costs by lowering prices to

sell more goods. Vice versa, when a firm has low fixed to variable cost, then a firm is a price taker. Because variable cost varies with production, less units are produced when

a firm has low fixed to variable cost. When competing, firms have similar fixed to variable cost ratios it often results in price wars.

Below in figure 7 we calculated the fixed to variable ratios for the staffing and

outsourcing services industry. We can conclude that this industry overall has low fixed variable costs ratio making them price takers.

22

Figure 7: Fixed to Variable Cost Ratio

Conclusion

In the staffing and outsourcing services industry, we conclude that the rivalry between firms is somewhat high. The fluctuation in industry growth is dependent on economic

growth. According to Heidrick’s 10K, “Demand for our services is affected by global economic conditions and the general level of economic activity in the geographic

regions in which we operate. During periods of slowed economic activity many

KornFerry 2012 2013 2014 2015 2016TC 743,893.00 805,825.00 903,951.00 952,038.00 1,294,022.00TVC 536,789.76 551,950.15 652,089.16 698,163.15 877,404.30TFC 207,103.24 253,874.85 251,861.84 253,874.85 416,617.70FC/VC 0.385818169 0.459959735 0.386238347 0.363632548 0.474829786

ManPower 2011 2012 2013 2014 2015TC 18,299.70 17,236.00 16,883.80 17,274.60 16,034.10TVC 16,786.93 15,773.89 15,447.78 15,838.58 14,745.51TFC 1,512.77 1,462.11 1,436.02 1,436.02 1,288.59FC/VC 0.09011587 0.092691979 0.092959952 0.090666265 0.087388614

OnAssignment 2011 2012 2013 2014 2015TC 337,896.00 781,905.00 1,068,226.00 1,167,306.00 1,386,263.00TVC 253,342.90 557,516.14 748,407.30 847,487.30 1,014,684.55TFC 84,553.10 224,388.86 319,818.70 319,818.70 371,578.45FC/VC 0.333749624 0.402479569 0.427332425 0.37737286 0.366200954

KellyServices 2011 2012 2013 2014 2015TC 4,667.70 4,553.90 4,523.60 4,654.30 4,597.90TVC 3,924.26 3,853.21 3,826.77 3,932.53 3,901.07TFC 743.44 700.69 696.83 721.77 696.83FC/VC 0.189448411 0.181846431 0.182094094 0.183539172 0.178625918

Heidrick&Struggles 2011 2012 2013 2014 2015TC 564,895.00 445,442.00 465,428.00 486,586.00 514,249.00TVC 372,662.59 313,340.81 326,204.12 349,008.30 375,025.12TFC 192,232.41 132,101.19 139,223.88 137,577.70 139,223.88FC/VC 0.515835012 0.421589486 0.426799868 0.394196079 0.3712388

23

companies hire fewer permanent employees, and our financial condition and results of

operations can be adversely affected. If unfavorable changes in economic conditions occur, our business, financial condition and results of operations could suffer,” (Heidrick

& Struggles 10K). We also conclude that it is a price taking industry, due to the relatively even concentration levels of competing firms.

Threat of New Entrants

Threat of new entrants refers to the possibility of new firms’ entrance into an industry and capitalizing potential market share from existing firms. Analyzing a firm’s ability to

penetrate the industry will allows us to determine if the industry is price taking or price

setting. The worldwide employment services industry is a highly competitive, limited barrier industry (Manpower 10K). According to Korn Ferry’s 10K, “increased

competition could require us to charge lower prices, and/or cause us to lose market share, each of which could reduce our fee revenue,” (Korn Ferry 10K). New firms’

entrance into an industry is dependent on four factors: economies of scale, first mover advantage, access to channels of distribution and relationships, and legal barriers.

Economies of Scale

Economies of scale is the cost advantage a firm establishes by expanding, which decreases their cost per unit of output. When there are large economies of scale, new

entrants face the choice of either having to invest in large capacity which may not be used right away, or having to enter with less than ideal capacity (Palepu). For this

industry, economies of scale may arise from large investments in brand advertising or in physical office locations. “We [leverage our] established strengths, including one of the

employment services industry’s most recognized and respected brands; geographic

diversification; size and service scope; an innovative product mix; and a strong client base,” (Manpower 10-K).

To attract and maintain clients, new entrants may need location diversification. However, according to Korn Ferry’s 10K, “There are no extensive barriers to entry into

the executive search industry and new recruiting firms continue to enter the market.

24

We believe the continuing development and increased availability of information

technology will continue to attract new competitors, especially web-enabled professional and social networking website providers and these providers may be

facilitating a company’s ability to insource their recruiting capabilities,” (Korn Ferry 10K). New entrants will most likely initially only suffer from a cost disadvantage due to

lack of multiple locations at the time of entry. Additionally, it is possible that the presence of diversified locations may be declining as a competitive advantage due to

the increase in online platforms. We have determined that the barriers of entry are low regarding economies of scale.

First Mover Advantage

First mover advantage is the advantage gained by the initial occupant of an industry. First movers may be able to set industry standards or enter into exclusive arrangements

with suppliers. “The employment services industry is closely regulated in all of the

major markets in which [firms] operate,” (Manpower 10K) however, first movers may also acquire government licenses to operate in regulated industries such as this

(Palepu). According to Kelly’s 10K, “The emergence of online staffing platforms or other forms of disintermediation may pose a competitive threat to our services, which

operate under a more traditional staffing business model,” (Kelly Services 10K). Because technology is constantly advancing, a first mover advantage is possible for a

firm who is able to enter into the online employment service industry. Because of this, the threat of new entrants into an innovative segment of the staffing industry is high if

existing firms do not continue to evolve.

Assess to Channels of Distribution and Relationships

RPO (recruitment process outsourcing) contracts are an essential aspect of staffing.

Relationships in the staffing and outsourcing industry are crucial, as customers create

the value of the individual firms. These relationships encourage the clients to maintain their contracts, which the staffing and outsourcing services industry’s primary

distribution channel. Heidrick’s 10K states, “Our success depends upon our ability to

25

develop and maintain strong, long-term relationships with our clients,” (Heidrick &

Struggles 10K). New entrants may initially find it difficult to build these relationships with clients if other firms in the industry already hold contracts and relationships with

customers.

Existing relationships between firms and customers act as a barrier that make it difficult

for new firms to inter the industry. Additionally, legally binding contracts force clients to keep with a firm for a specified period. Because existing clientele is a vital aspect of

the staffing industry, the threat of new entrants regarding access to channels of distribution and relationships is low.

Legal Barriers

The staffing and outsourcing services industry is highly regulated. According to Heidrick, “We are exposed to the risk of changes in social, political, legal and economic conditions inherent in international operations, which could have a significant impact on

our business, financial condition and results of operations.” With these regulations come costs that limit entry. On Assignment, “takes reasonable steps to ensure that

[their] contract professionals possess all current licenses and certifications required for each placement…. These expenses have a direct effect on [their] cost of services,

margins, and likelihood of achieving or maintaining profitability,” (On Assignment 10K).

Manpower’s 10K states that employment service firms are subject to several guidelines such as regulation of the employer/employee relationship between the firm and its

temporary and contract employees; registration, licensing, record keeping, and reporting requirements; and substantive limitations on the clients’ operations or use of

temporary and contract employees (Manpower 10K). Because of these, the threat of new entrants in this sense is low.

Conclusion

Although there is limited access to client relationships and high industry regulations, we

have concluded that the threat of new entrants is high due to the low barriers of entry

26

regarding economies of scale and a possibility of high first mover advantage. The

increased availability of technological innovations allows for the creation and evolution of new staffing and outsourcing services firms.

Threat of Substitute Products

Substitution threats within an industry constantly must be monitored by firms. Substitute services are alternatives clients may use in place of an existing service.

Firms that experience substitution of their services do not necessarily get replaced by a new product. Rather, they get taken over by a firm that performs their same function

better. There is a high threat of substitution when it comes to the staffing and

outsourcing industry because of the growth in technology. Technology staffing could eventually replace individual consultants in the firms due to its increase in demand and

heightened presence in society. Additionally, On Assignment’s 10K stated that their agreements with clients do not provide for exclusive use of their services. In some

instances, services are even provided without entering into contracts. Clients are free to place orders with other competing firms within the industry and each consultant’s

contract with the client is terminable at the client’s will (On Assignment 10K). This makes it very easy for clients to substitute their provided service. We will analyze the

probability of this phenomenon based on efficiency, price, and performance.

Efficiency and Price

Korn Ferry stated that, “Increased competition, whether as a result of professional and

social networking website providers, traditional executive search firms, or sole proprietors and in-house human resource professionals, may lead to pricing pressures

that could negatively impact our business,” (Korn Ferry 10K). Specifically, web-based

services pose a threat to the existing firms because of the advantages these online services bring to the client. Heidrick stated that web-based staffing platforms offer

similar or more expansive services than their own and at the client’s convenience (Heidrick & Struggles 10K). Many of these online services may be used by the client at

whichever time or location they please. This targets clients who may not live near a

27

traditional staffing firm’s location. Additionally, because the employment service can be

performed by the client themselves, these services are often offered at a lower cost than a traditional firm’s (Manpower 10K).

Customers’ Willingness to Switch

To compete with the web-based platforms, existing firms have also begun to utilize technology for many aspects of their operations such as applicant on-boarding and

tracking systems, order management, billing, and client data analytics (Manpower 10K). However, due to new trends in the quality of technology and cloud support services,

clients are often still willing to substitute traditional human resources practices with online and social media employment services. Korn Ferry believes that because there

are no extensive barriers of entry into the executive search industry, IT advancements will continue to attract new competitors, especially web-enabled professionals and

social networking website providers (Korn Ferry 10K).

Additionally, in many cases, clients do not enter into contracts that require them to solely utilize one firm. Often, they will use several firms’ services to obtain

employment. For example, Manpower’s “large and multinational clients will frequently inter into non-exclusive agreements with several firms, with the ultimate choice among

them being left to the local managers,” (Manpower 10K). This also makes it simple for customers to switch firms.

Conclusion

Because the staffing and outsourcing industry has little to no switching costs and low

barriers of entry, customers can go from traditional to new technologies at ease. With the flexibility brought upon by technology, customers are engaging with multiple

providers to reap the benefits from specialized vendors (Deloitte). In this industry, the threat of substitute services is high.

28

Bargaining Power of Customers

Bargaining power of customers depends on five major factors: switching costs, differentiation, importance of product for costs and quality, number of buyers, and

volume per buyers. Bargaining power refers to the clients’ ability to affect price and

different options within the market. In this industry, bargaining power of clients is high since it is a price taking industry. If prices are too high for a particular firm, clients can

switch to a different firm with low switching costs.

Switching Costs

Switching costs are the specific costs incurred by a client when switching to a different

firm. Switching costs can take form in different ways such as fees due to cancellations or the amount of time it takes to find a replacement supplier. The staffing and

outsourcing services industry is highly dependent on clients and the value they contribute to their firms. Because it is a competitive industry that is dependent on the

nature of the economy, these firms often compete via prices charged. Competitive pricing allows for low switching costs which in turn gives clients increased bargaining

power and allows them to leave their suppliers at their discretion.

Many clients looking to be staffed utilize multiple agencies simultaneously which requires firms to staff customers quickly and efficiently (On Assignment). Additionally,

none of the firms we compared seemed to charge a contract cancellation fee. The advantages of different IT capabilities have also caused low switching costs. Clients

can easily switch to a web-based service, oftentimes paying less for that service than the traditional firms.

Differentiation

Differentiation is the process that allows the firm to make their products or services

stand apart from those in the rivalry firms. For firms in the staffing and outsourcing services industry to differentiate themselves, they must create incremental value for

their clients through a vast array of effective solutions. Many firms distinguish

29

themselves by adding operational concentrations to their companies. Korn Ferry and

Heidrick both focus on executive recruitment. On Assignment focuses on an IT segment of technical and scientific placement which makes up 72% of their revenue.

Manpower focuses on large multinational clients’ relationships and geographical locations. 54% of their revenues came from large multinational clients and 84% of

revenues were generated outside of the U.S (Manpower). Based on Kelly Services’ recent data, they focus mainly on commercial staffing which makes up for 67% of

revenues and 59% of their gross profits. Each firm’s strategies assist them in developing their own segments and allow them to offer different services.

Importance of Product for Cost and Quality

The importance of the product to the buyers’ own products’ quality determines whether price becomes the most significant determinant of buying decisions (Palepu). Because

this is a service industry, the buyer is reliant on their firm’s entire service to provide

their desired outcome: employment.

Clients desire a high quality of service in addition to lower costs. According to Korn

Ferry’s 10K, “Our failure to… maintain the quality of service to which our clients are accustomed… could result in a loss of clients, which could in turn cause our fee revenue

to decline and our business to be harmed,” (Korn Ferry). Customers can easily switch to a lower-cost, similar quality supplier to provide the service. Because the firms

provide a whole service as opposed to components of a product, clients have a

considerable bargaining power when selecting a supplier.

Number of Customers

Relative bargaining power depends on the cost of each buyer not doing business with

another firm. For this industry, it is relatively easy for customers to switch to a different firm since there are so many. An essential part of any industry is the firms’ ability to

retain a diversified spread of clients in different geographic locations. According to the 10Ks of the different firms stated previously, the staffing and outsourcing services

industry is diverse when it comes to geographical regions, containing both national and

30

international firms. Manpower states in their annual report that they work with more

than 400,000 clients across 80 countries (Manpower). Although the firms have varied locations, clients still hold strong bargaining power because they are easily able to find

a different location which offers the same service at a lower cost. However, in countries with weak currencies, clients have less bargaining power due to exchange rates.

Conclusion

We have concluded that there is a mixed-high bargaining power of customers in the

staffing and outsourcing services industry. Clients are more price sensitive when the service is undifferentiated and there are few switching costs (Palepu). Though the

industry does have low switching costs, the industry is moderately differentiated. Sensitivity to price also depends on the importance of the product to the buyer’s own

cost structure. Because this industry’s product is a service, the buyer is more likely to expend the resources necessary to search for a lower cost, higher quality alternative

rather than bargain with their existing firm to lower the cost of service. The buyers in this industry are moderately price sensitive and posses a relatively high bargaining

power. However, a strong bargaining position is more important in determining bargaining power of buyers than a higher price sensitivity. Because of the low

switching costs and presence of several alternatives, we have determined that clients have an overall mixed-high degree of bargaining power.

Bargaining Power of Suppliers

Suppliers’ ability to dominate certain terms and conditions for an industry is defined as the bargaining power of suppliers. Suppliers are powerful when there are few

substitutes available to their customers. Bargaining power of suppliers also increases when the suppliers’ product is critical to the buyers’ business (Palepu). For the staffing

and outsourcing services industry, the suppliers are the individuals seeking employment by our clients. The same five factors that influenced the bargaining power of customers

also influence the bargaining power of suppliers.

31

Switching Costs

The costs incurred by firm from switching suppliers are known as switching costs.

These costs depend upon how many suppliers exist for the industry’s use. Firms in the staffing and outsourcing services industry experience supplier switching costs when

individuals terminate their contract with the firm. Relationship-specific investments take place within contractual agreements in the industry. Contracts can range anywhere

from a few days to several years. As the business environment becomes more competitive, contract use is growing due to the increase in special projects and

fluctuations in staff volumes (Kelly). There is a mixed-high level of switching costs, as switching costs are significantly higher in long-term contracts but low with short-term

contracts. Suppliers risk fines and termination of client-consultant relationships when prematurely separating from contracts. Although it is common for fines to be added

when terminating outside of a contractual agreement date, not every firm is the same.

According to On Assignments 10-K, contracts with clients can terminate with a notice period ranging from less than a week to 30 days. Many people seeking employment do

so with several means, including other staffing agencies. This increases the likelihood the firms will experience switching costs.

Differentiation

Segmentation is the most common way for firms within the human resources industry to differentiate themselves. These segmentations allow the firms to gain competitive

advantages by becoming dominant leaders within these functions. Though there are many substitute firms available, a high degree of differentiation among the firms makes

it so individuals seeking employment are less powerful in their bargaining power. However, suppliers have increased power when their service is critical to the firm’s

service. Without the individual potential staff member to place with a client, the firms

would have no product or purpose. Because of this, we have determined there is a mixed-high level of bargaining power regarding differentiation.

32

Number and Quality of Suppliers

In the staffing and outsourcing services industry, suppliers are individuals with the credentials to get hired by firms’ clients. In a fundamental sense, the amount of

suppliers greatly exceeds the number of firms. The initial bargaining power of suppliers is high. However, bearing in mind the executive search segments and recruitment for

high-end jobs, the number of suppliers drastically decreases. Since many suppliers are not fit to work C-level or executive jobs, the quality of suppliers does not always suit

the needs of the firm, causing the bargaining power of suppliers decreases.

Considering the number and quality of suppliers, there is a mixed-low level of bargaining power.

Conclusion

We have concluded that within the staffing and outsourcing services industry, the bargaining power of suppliers is overall mixed-high. We acknowledge that in the

executive search segments, the bargaining power of suppliers is low, as contracts and the inability to qualify for certain positions hinder suppliers from lowering firm costs.

However, for most temporary and staff level recruiting, the bargaining power is high. For example, in the computer programming industry, the demand is high for essentially

any level of knowledge in programming. Additionally, because the firms in the industry are almost entirely dependent on the presence of individuals seeking employment, the

overall bargaining power of these suppliers is mixed-high.

Conclusion

From our analysis, we have determined that the degree of actual and potential competition is high. The rivalry among existing firms, threat of new entrants, and

threat of substitute products are all high primarily due to clients’ ability to switch firms with little to no cost. The bargaining power of buyers is mixed-high due to the

presence of many alternative firms within the industry. Because the firms are extremely reliant on the supplier’s services, on the he bargaining power of suppliers is

33

also mixed-high. In conclusion, the industry profitability is high as a result of the high

degree of competition amongst the firms.

Key Success Factors

Upon analyzing the industry, we conclude that the staffing and outsourcing services

industry consists of firms that must deal with accepting prices, but attempt to use differentiation strategies to set themselves apart. There essentially exists no one firm in

the industry with a large enough market share to be identified as a price setter, making

the competitors of the industry price takers. Cost leadership and differentiation are often seen as mutually exclusive and firms that attempt both find themselves unable to

perfectly achieve the two, rather, falling short in both aspects (Palepu). The industry identifies with differentiation, using functionality segmentation, superior customer

service, and brand image as their value drivers.

Cost Leadership

A company demonstrates cost leadership when it provides its clients with the same

service as its competitors but for a lower price (Palepu 2-12). Due to the highly-

specialized nature of the industry, the strategy of cost leadership is not frequently utilized.

Although the industry does not commonly utilize the strategy of cost leadership, the firms understand their dependency on the estimated 70% price taking, 30% price

setting standpoint in the industry. For example, as seen below in Figure 8, the various firms in the industry have an average profit margin of 2.77%. Many of the firms must

operate with the cyclical features of the economy in addition to their clients’ needs for

employees. Of course, as the economy slows, so does the demand for executive employees. It is important to notice that in most years Korn Ferry nearly doubles the

industry average in profit margin. Using differentiation, Korn Ferry separates itself from an industry filled with price takers.

34

Figure 8

Differentiation

Firms that follow differentiation strategies uniquely set themselves apart from the

competition. Within this industry, firms are subject to an estimated 30% price setting standpoint, where each firm must demonstrate how they are superior. Although firms

that target these strategies do not completely ignore costs— since the implementation of various strategies must remain at a reasonable cost for them to be accomplished—

these firms seek distinction in their products and services.

Functionality Segmentation

Functionality segmentation refers to firms in the industry’s multiple segments in their

business model that are either functional or geographical. By having multiple business

segments, the firms are better equipped to handle the demands of their clients.

Kelly Services is currently divided into Americas Commercial, Americas Professional and

Technical, EMEA Commercial, EMEA Professional and Technical, APAC Commercial, APAC Professional and Technical, and Outsourcing and Consulting Group. Ranging from

specialties like Engineering, Finance, Accounting, Healthcare, IT, and Science, and offering options like permanent placement, temporary staffing, and temporary to full-

time employment, Kelly Services’ business segments are an essential part of their

business model (Kelly Services 10K). Kelly’s website also states that it conducts

Firms 2011 2012 2013 2014 2015 Average

Korn Ferry 6.53% 3.88% 7.33% 8.26% 2.30% 5.66%

Manpower Group 1.15% 0.96% 1.42% 2.06% 2.17% 1.55%

On Assignment 4.02% 3.47% 5.21% 4.14% 4.75% 4.32%

Heidrick & Struggles 0.00% 1.29% 1.25% 1.36% 3.10% 1.40%

Kelly Services 1.15% 0.92% 1.09% 0.43% 0.98% 0.91%

Profit Margin of the Staffing and Outsourcing Services Industry

35

business in the Americas, Europe, Middle East, Africa, and Asia Pacific. Unfortunately,

there were no metrics regarding the number of branches or revenue generated within these locations.

Between searching for the top talent, shaping the environments of business, and sorting clients in distinct categories, Heidrick & Struggles uses functionality

segmentation to stay relevant. Their Executive Search segment focuses on the entire process of guiding a client to their respective job, while their Culture Shaping segment

creates thriving organizational cultures for a range of different circumstances. In

Heidrick and Struggles’s most recent 10k, we found there to be 346 consultants, spanning the Americas, Europe, and the Asian Pacific. (Heidrick & Struggles 10K).

On Assignment has two main segments, the Apex Segment and the Oxford Segment. The Apex Segment consists of Apex Systems, Lab Support, and Creative Circle, and

their responsibilities range from information technology to healthcare to marketing. The

Oxford Segment consists of Oxford Global Resources, CyberCoders, and Life Sciences Europe, and their main goal is to help satisfy STEM clients. Through their functionality

segmentation, On Assignment competes with its diverse dealings and strategic organization (On Assignment 10K). It is unclear as to how many offices On Assignment

has, though their website states they possess branches in the US, Canada, UK, and Europe.

Manpower Group utilizes functionality segmentation by splitting their company based on

geographic location, with one segment called Right Management that oversees specialized tasks like Talent Assessment, Leader Development, and Organizational

Effectiveness.In Manpower’s most recent 10K, we determined the number of branches and franchises for Manpower to be 2,770 and 229, respectively, spanning the United

States, Latin America, Southern Europe, Northern Europe, and the Asian Pacific (Manpower Group 10K)

36

Superior Customer Service

Superior customer service is another way that firms in this industry survive in the market. To enhance their customer service, firms seek to provide the optimal

experience for their clients, and creating enjoyable transactions for both parties. Each firm strives for superior customer service, and it is important to point out the different

approach that each of them take.

Kelly Services’ superior customer service begins with its relationship based decisions. For example, the firm allows clients to “get a feel of the place,” see if they will fit well in

the business environment, and then decide of if they want to continue their relationship. The firm aims to deliver solutions that meet the needs of the client. (Kelly

Services 10K).

Heidrick & Struggles’ superior customer service begins with its consultants. The consultants use targeted client calling and industry networking to develop a relationship

with their clients. Through proprietary databases, consultants have client referral information ready and available. Heidrick & Struggles also employs practice teams who

author and publish articles with provide leadership and talent topics to their clients, and white papers on a variety of leadership and talent topics and trends around the world.

The firm seeks to maintain strong client relationships and attempts to avoid the adverse effects of recruiting off-limits clients (Heidrick & Struggles 10K).

A leading global provider in the industry, On Assignment also emphasizes providing

superior customer service. The firm seeks to understand their client’s needs and provide them with qualified professionals. On Assignment believes that effective engagements

require a certain degree of expertise, assessing potential executives for their clients regarding their industry knowledge. Furthermore, extensive databases and deep

relationships are used to provide the optimal recruiting service for their client base (On

Assignment 10K).

With Manpower Group’s Recruitment and Assessment segment, the firm identifies

the right talent in the right place. Through their assessments, Manpower gains a better

37

understanding to more accurately places candidates in their correct cultural match. By

offering tailored training courses, Manpower trains candidates to specification for their clients. Additionally, outsourcing is an option there is outcome based, resulting in a

sharing of risk and reward with the firm’s clients (Manpower Group 10K).

Brand Image

Providing unique solutions and superior customer services enhances a firm’s brand

image. The section previously discussed not only adds to brand image, but plays a huge role in defining it. To reduce redundancy, we will not be repeat previously stated

material regarding the superior customer service. This section is to provide additional facts about how the industry adds to their brand image. The reason that clients are

willing to select a firm in this industry is because firms use their brand to build relationships, develop communities, and discover candidates. A strong brand image

attributes to the attraction of talented employees willing to provide high quality service

for their clients.

Kelly Services’ brand image starts with its vision “to provide the world’s best workforce

solutions.” From there, the firm has many service marks associated with its brand image, allowing them to offer experiences not found at other companies in the industry.

Furthermore, to remain a transparent firm, Kelly Services uses their website to make all financial documents available to the public (Kelly Services 10K).

Heidrick & Struggles attempts to market it brand through its 60-year history and its

marketing techniques. The firm benefits from a significant number of referrals generated, creating a reputation for high quality service and successfully completed

assignments. Through their relationships and referrals, Heidrick & Struggles has a steady stream of repeat business. Additionally, the firm demonstrates its transparency

by placing all financial documents on their website (Heidrick & Struggles 10K).

On Assignment has a plethora of associated service marks and tradenames, including On Assignment®, Apex Systems®, Creative Circle®, Cyber Coders®, Lab Support®,

Lab Resource®, Oxford Global Resources®, Oxford International®, Oxford Healthcare

38

IT®, Valesta®, The Right Talent Right Now®, and Because People Are The Future of

Technology®. Through these, the firm’s brand image carries significant value, supports an image of differentiation, and plays a critical role in the firm’s business model. The

firm is also a proponent of transparency, placing all its financial data on its website (On Assignment 10K).

Manpower Group leverages its 65-year history and industry knowledge to create a brand image that clients can trust. Because of the firm’s magnitude, Manpower does

not invest a large amount invested in marketing and advertising, relying more on its

breadth of services to generate word of mouth and praise for its services. With the numerous business segments under the Manpower brand image, the firm attempts to

portray to its clients how they can accommodate them in any way. Also, being a proponent of transparency, the firm makes all its financial information readily available

to the public.

Competitive Advantages Analysis

Korn Ferry attempts to bring a somewhat unique service to the industry in that it recruits board-level, chief executive, and other senior executive positions for clients.

This allows them to compete on the industry’s key success factors of functionality segmentation, superior customer service, and brand image.

Functionality Segmentation

Korn Ferry exhibits superior service variety in that they organize executive search centers that place executives into director and C-level positions. Their Board & CEO

Services group exists exclusively to achieve this function, recruiting global talent for

every purpose and organization.

Comprised of several business segments, Korn Ferry strives to achieve their goals by

providing flexible delivery of services. Korn Ferry Executive Search focuses on recruiting executive talent for clients of every industry, primarily the consumer, financial services,

39

industrial, healthcare provider, technology, and nonprofit industries. These services

focus on positions with annual salaries of over $300,000.

Korn Ferry Hay Group’s purpose is to develop, engage, and reward employees by

aligning them to their employer’s strategy. Divided into Advisory and Productized Services, Hay Group’s Advisory assists the successful implementation of employer

strategies by addressing how people work and how to motivate them, while Productized Services encompasses a range of tools that support human resources processes such as

pay, talent, and engagement.

Korn Ferry Futurestep offers scalable and customizable services to assist companies attract individual talent while reducing hiring costs in the process. Their portfolio

includes Recruitment Process Outsourcing, Project Recruitment, Professional Search, Talent Consulting, and Talent Communications. Currently, Futurestep is the fastest

growing segment.

Because of these segments, Korn Ferry can specialize within clients’ industries and location. Rather than focus on just one element of human resources— whether that be

retaining talent, recruiting high-level positions, or recruiting staff-level positions— Korn Ferry’s segments allow them to do all the continue their extensive operations while

maintaining quality in every aspect.

Korn Ferry’s services to different industries include Industrial, Life Sciences/Healthcare Provider, Financial Services, Consumer, Technology, and Education/Not-for-Profit.

Because Korn Ferry has experience in the human resources of these lines of work, they remain competitive by maintaining the ability to provide a more quality service.

According to their 10k, Korn Ferry has a 20% stake in Life Sciences/Healthcare, and with the firm specializing and working a larger margin in this industry, clients can use

the knowledge to distinguish Korn Ferry from its competitors.

Korn Ferry operates out of several different global regions, with the US and Canada generating the most revenue and engaging with the most consultants. In the first

quarter earnings conference call, the CEO expressed interest in stepping up efforts in

40

business development with advertising in the US and the UK to target C-level positions

in those areas. By operating in different areas of the world, Korn Ferry can gain a competitive edge by acquiring a larger talent pool to search within, easier access to this

talent, and the ability to place employees geographically more conveniently to Korn Ferry’s clients.

For Korn Ferry to remain competitive, it must continue operating in various locations. From their most recent 10k, we determined the number of offices for Korn Ferry to be

totaling 71, spanning across North America, Europe, the Middle East, Africa, the Asian

Pacific, and Latin America. Coupled with the fee revenue, the North American segment proved to be the largest geographical consumer with approximately $371 million (Korn

Ferry 10K).

Superior Customer Service

One of the most important differentiators for Korn Ferry is its ability to provide the best

experience for its clients. Within an industry with a low barrier of entry, customer service is a way that these executive search companies can secure their place in the

market. To provide this remarkable service, Korn Ferry seeks to provide what they call

World-class Intellectual Property.

Korn Ferry is a company that prides itself on its intellectual property, delivering the best

outcomes for their customers through their deep knowledge base. This is particularly imperative in the service industry, as no tangible product is sold. The company lists

three examples that they believe to be key in accomplishing their clients’ goals. These include an understanding of what a great leader is comprised of, the distinguishing

traits that these leaders possess, and the damaging pitfalls a leader might experience.

With the help of social scientists and a database filled with millions of assessments and candidates, Korn Ferry can discover the relative state of individuals and companies, as

well as the essentials of performance and leadership. Additionally, with the acquisitions of Legacy Hay Group, Pivot Leadership, PDI Ninth House, and Global Novations, Korn

Ferry is now able to expand their solutions, resulting in a more well-rounded approach

41

to connecting the best fit of a leader to an organization’s specific strategy. With these

acquisitions, Korn Ferry currently has one of the largest human resource databases in the world. Spanning across 114 countries, this database consists of reward data,

engagements data, and assessment data on nearly 20 million candidates (Korn Ferry 10K). This, in turn, enables Korn Ferry to obtain a plethora of knowledge available for

their clients.

It is important to point out Korn Ferry’s handling of their acquisitioned material. To

facilitate the integration across Korn Ferry’s Executive Search, Legacy Hay Group, and

Futurestep, the firm utilized their global SAP and Salesforce enterprise systems. These systems allow for the unification of Korn Ferry’s wealth of knowledge across all its

services and platforms.

The key to Korn Ferry’s intellectual success is its dedicated investment to research.

Although they lack a proper research and development expense on their financial

statements, research is a key component of the jobs their scientists, statisticians, and intellectual property development specialists perform. With this acquired research, Korn

Ferry makes strategic talent decisions, thus contributing to a successful experience for their clients.

Currently, clients enjoy Korn Ferry’s subscription services that allow them to perform essential business activities such as organizational, individual, and team development;

job profiling; selection; training; and succession planning. These online products also

allow Korn Ferry and their clients to develop long term relationships, for example, by using their various human resource programs.

With their acquisitions, Korn Ferry is hoping to shift its current candidate identification service to a candidate assessment approach, where there is more research flowing into

finding the right fit and attraction for the potential candidate. Additionally, due to the

natural progression of technology, Korn Ferry uses the Internet, databases, and online talent communities to reach a greater number of qualified candidates. Thanks to their

new and innovative tools, Futurestep and Foresight, Korn Ferry is discovering the most

42

desirable candidates for their clients. Currently, more than 70% of Korn Ferry’s

Executive Search clients use their assessments and those candidates who use these tools usually retain organizational loyalty while progressing through the ranks (Korn

Ferry). These kinds of discoveries are what drives Korn Ferry to provide a superior customer experience to their clients.

Korn Ferry, in 2015, introduced its Four Dimensions of Leadership & Talent, which is comprised of four areas that they deem to have the greatest impact on individual and

organizational success. With the new integration of Legacy Hay Group into Korn Ferry’s

Four Dimensions of Leadership & Talent, Korn Ferry will provide its clients the most superior individual and enterprise diagnostics available. Additionally, this data will

provide their clients with their strengths, development needs, and current standings among competitors. Currently, Korn Ferry’s Four Dimensions of Leadership is the

strongest assessment the firm has and is currently utilized by their Executive Search, Hay Group and Futurestep divisions (Korn Ferry).

Korn Ferry’s Four Dimensions of Leadership & Talent are shown below in Figure 9.

Figure 9

43

Throughout 2016, Korn Ferry continues to fund their Four Dimensions of Leadership &

Talent, believing that it contributes to their competitive advantage.

With the integration of data from their acquisitions, Korn Ferry’s Four Dimensions of

Leadership & Talent hopes to provide its clients with an optimal engine for recruiting, hiring, developing, consulting, and outsourcing. Additionally, the assessment engine

contains a different perspective for organizations, rewards, and leaders that only Korn Ferry’s client can experience.

To further this goal of providing superior customer service to its clients, Korn Ferry

invests regularly in to their Information Technology security infrastructure, ensuring that all confidential and sensitive material is kept safe from cyber-attacks. Through the

enhancement of new and existing technologies and expanding their executive search services, Korn Ferry hopes to build stronger relationship with their clients, as well as

profit from new delivery channels (Korn Ferry).

Brand Image

Critical to Korn Ferry’s success is its ability to maintain a positive brand image. Considered by Korn Ferry to be their strongest asset, their brand represents a firm that

seeks an aggressive global presence and strives to maintain growth. Through each of their lines of business, Korn Ferry is using its brand to elevate its current market share.

Therefore, Korn Ferry must maintain a certain standard, employing techniques and strategies to establish a brand that exemplifies their business practices. With Executive

Search, Korn Ferry desires an increased number of recruitment assignments per client. Additionally, Korn Ferry uses its brand to build relationships, develop communities, and

discover candidates that they otherwise would not find. This in turn results in the

development of unique solutions and services for their clients.

Korn Ferry also enhances its brand using high profile engagements. Korn Ferry uses

their Board & CEO Services recruiting work as advertisement for their various solutions to human resources problems. When the company is successful with its handling of

high profile clients, the Korn Ferry brand inevitably spreads throughout the

44

organization, allowing them more opportunities to offer their other products and

services. Korn Ferry also utilizes more conventional means of advertising such as magazines, sponsorships, social media, events, and speakers (Korn Ferry).

Additionally, Korn Ferry’s talent strategy enables them to attract the best talent for their own company, thus offering superior service to their clients. As Korn Ferry’s functional

strategies are heightened by intellectual property and technology, their internal culture is enhanced. They strive to be a strong competitor in not only the human resources

industry, but in the career industry. By they themselves recruiting and maintaining top

talent, they are more able to efficiently and effectively carry out their mission of providing quality, customer-oriented services to their clients.

In 2017, Korn Ferry plans to introduce a training program for their consultants entitled Reimagine. The purpose of this program is to educate employees on strategies,

solutions, and building stronger relationships with clients. Korn Ferry competes with

other companies in the industry in this regard, as attracting top consultants is imperative in this line of work— select consultants do essentially hold responsibility for

the client relationship and the loss of these consultants could lead to the loss of the client.

The firm’s investment in their internal talent is an investment in their brand in the sense that, in theory, if Korn Ferry itself hires the best, they can assist other firms in doing the

same.

Conclusion

The advantages that Korn Ferry has over its competitors are in the key drivers of functionality segmentation, superior customer service, and brand image. These specific

sections allow Korn Ferry to differentiate themselves from their industry competitors, and strive to show the kind of experience you can expect when you work with them.

After further analysis, we believe Korn Ferry will continue to grow and strengthen their relationships with their clients so long as they continue to improve upon differentiating

themselves from their peers in the three specific categories.

45

Introduction to Accounting Analysis

In the following section, we will analyze the key accounting aspects for Korn Ferry and

its respective staffing and outsourcing services industry based on the key success factors previously discussed. By identifying and evaluating the key accounting policies,

assessing the degree of potential flexibility, evaluating Korn Ferry’s accounting strategy to date, identifying potential “red flags,” and lastly undoing any distortions within the

disclosed financial statements, we will determine the flexibility and accuracy of the industry’s accounting strategies. While it is a requirement to disclose financial

information, it is up to the firm to choose how much they disclose and what they disclose. Accounting flexibility is the margin an industry has to manipulate accounting

policies. Ultimately, we will be able to determine the level of disclosure provided by the company’s actual strategies and identify the areas within disclosure statements that

may qualify as “red flags” and restate the financials to provide a more accurate representation of Korn Ferry in relation to the industry in which it operates.

Key Accounting Policies

Key accounting policies are important to consider when analyzing a firm’s value because

simply analyzing financial statements can often be misleading. Key accounting policies help our team figure out what needs to be restated to get a more accurate value of the

firm. There are two types of accounting policies: Type One and Type Two. Type One policies are directly related to decision usefulness disclosure. They are also based on

the key success factors we have discussed previously. Type Two policies are based on firms’ practices that may make a firm’s balance sheet misleadingly more favorable to

investors. Analyzing key accounting policies enables us to have a more transparent view of the firm. For the staffing and outsourcing services industry, Type One policies include

economies of scale and value adding services. Type Two policies include goodwill,

pensions, and leasing activities.

46

Type One Key Accounting Policies

Type One policies allow for examination of firms’ disclosure and are directly related to the reporting practices with regard to the industry’s key success factors. For the staffing

and outsourcing services industry, the policies analyzed include economies of scale and

value adding services. After disclosing the aforementioned factors, we will be able to successfully form conclusions for the firm in relation to the entire industry from which it

operates.

Economies of Scale

Firms within the staffing and outsourcing services industry can gain a competitive

advantage by dispersing costs throughout broad spectrums with the use of economies of scale. Large scale operations allow firms to gain a competitive advantage over the

competition. Below, figure 10 presents the number of offices Korn Ferry and its

competitors have held over the past 5 years. Korn Ferry, On Assignment, and Heidrick are all relatively on the same playing field. However, Heidrick falls a little short with

offices ranging from 48-57 where both Korn Ferry and On Assignment are closer with about 76-157. Although Manpower is an extreme outlier in our comparison, with offices

ranging from 2,900-3,800, it is not necessarily an outlier when considering the whole staffing and outsourcing industry. As previously stated, this industry consists of much

more than just Korn Ferry’s closest competitors. Economies of scales can be illustrated in this industry by firms increasing the number of offices. This allows for a greater

ability in dispersing costs.

Figure 10

2012 2013 2014 2015 2016KornFerry 76 87 84 78 150ManPower 3800 3500 3100 3000 2900OnAssignment 76 130 150 143 157Heidrick 57 53 50 49 48

NumberofOffices

47

Below in figure 11 is the percent change in net sales. To calculate this, we took the current year’s sales minus the previous year’s sales all divided by the previous year’s

sales. An increase in percent change of net sales is directly related to an increases in the number of firms that each firm in the industry operates in.

Figure 11

Value Adding Services

Because the staffing and outsourcing services industry is predominantly based on

relationships with clientele, it is important that they add value and distinguish themselves from their competitors. Augmentation of services is vital for the staffing and

Firm 2012 2013 2014 2015 2016Korn Ferry 6.51% 2.77% 17.17% 7.08% 26.32%Manpower Group -6.03% -2.07% 2.53% -6.90%On Assignment 107.56% 22.86% 13.24% 19.73%Heidrick & Struggles -15.92% 4.11% 6.99% 7.46%Kelly Services -1.81% -0.69% 2.76% -0.80%Industry 18.06% 5.40% 8.54% 5.31%

Percent Change in Net Sales

48

outsourcing industry success. For example, Korn Ferry’s services have been enhanced

by their technology platform which has allowed them to support the delivery of Korn Ferry's Four Dimensions of Leadership (also known as KF4D) the newest and most

rigorous assessment for Executive Search, Hay Group, and Future Step. Additionally, they have enhanced their global SAP and Salesforce enterprise system to support the

integration of Legacy Hay Group into Korn Ferry, providing them with consistent finance, HR, business development and operations processes (Korn Ferry 10K). Their

client retention rates have increased due to their database technology and the internet enabling them to better identify, target, and reach potential candidates.

Heidrick creates value by creating and maintaining contracts with various small clients.

“No single client accounted for more than 1% of our net revenue in 2015, 2014 or 2013. As a percentage of total revenue, our top ten clients in aggregate accounted for

approximately 7% in 2015, 2014 and 2013,” (Heidrick & Struggles 10K). They seek to mitigate adverse effects of having only a few large clients (and the possibility they may

choose to switch to a competing firm’s service) by focusing on strengthening relationships with multiple, smaller clients.

By demonstrating value added services, firms within the industry are able to create

competitive advantages for themselves which allows our team to determine how much of their overall profits are linked to their investments in value adding services.

Type Two Key Accounting Policies

Type Two accounting policies involve potential items in a firm's financial statements that can ultimately distort the analysis of the firm. Restating the firm’s balance sheet

and income statement must be done if the distortions are significant. These distortions

commonly lead to an overstatement of assets and net income and an understatement of liabilities. For the staffing and outsourcing services industry, goodwill, leasing

activities, and defined benefit pension plans are items that can cause distortions.

49

Goodwill

Goodwill is an intangible asset that emerges when a firm acquires another firm for a premium amount. Goodwill is the excess of purchase price over the fair market value of

the identifiable net assets acquired. Goodwill represents the competitive advantage of

acquiring a company. Issues arise when a firm fails to properly disclose their goodwill impairments. Rather, they keep it on their books as an asset longer than the

competitive advantage of impairing it would last. At the end of the fiscal year, a firm is required to do a test of their goodwill which is based off assumptions and speculations

in order to determine if they need to write a portion of the goodwill off. Figure 12 below shows an overview of goodwill for the staffing and outsourcing services industry.

Figure 12

For nearly every firm in the industry, reported goodwill greatly exceeds net fixed assets. Firms desire to keep goodwill as an intangible asset because when goodwill is impaired

it increases the firms’ expenses. Write downs reduce overall book value and increase leverage ratios. Therefore, by making no goodwill impairments, goodwill is overstated

and the firm appears more profitable.

Year 2012 2013 2014 2015 2016GoodwillReported 176,338.00$ 257,293.00$ 257,582.00$ 254,440.00$ 590,072.00$NetFixedAssets 49,808.00$ 53,628.00$ 60,434.00$ 62,088.00$ 95,436.00$%ofNetFixedAssets 354.04% 479.77% 426.22% 409.81% 618.29%GoodwillReported 90,696.00$ 120,940.00$ 123,274.00$ 122,176.00$ 131,122.00$NetFixedAssets 44,781.00$ 42,362.00$ 34,961.00$ 30,417.00$ 36,498.00$%ofNetFixedAssets 202.53% 285.49% 352.60% 401.67% 359.26%GoodwillReported 90,200.00$ 89,500.00$ 90,300.00$ 90,300.00$ 90,300.00$NetFixedAssets 90,600.00$ 89,900.00$ 92,000.00$ 93,000.00$ 88,900.00$%ofNetFixedAssets 99.56% 99.56% 98.15% 97.10% 101.57%GoodwillReported 984,700.00$ 1,041,300.00$ 1,090,900.00$ 1,075,200.00$ 1,257,400.00$NetFixedAssets 174,500.00$ 184,800.00$ 166,000.00$ 149,100.00$ 147,100.00$%ofNetFixedAssets 564.30% 563.47% 657.17% 721.13% 854.79%GoodwillReported 299,234.00$ 496,158.00$ 573,063.00$ 512,060.00$ 874,906.00$NetFixedAssets 18,057.00$ 26,862.00$ 38,128.00$ 44,311.00$ 53,196.00$%ofNetFixedAssets 1657.16% 1847.06% 1503.00% 1155.60% 1644.68%

Goodwill(inthousands)

OnAssignment

ManPowerGroup

KellyServices

Heidrick&Struggles

KornFerry

50

Operating Lease Activities

There are two methods to record a lease and comply with GAAP: capital leases or operating leases. Capital leases are reflected on the balance sheet as a fixed asset and

depreciate over time. Firms in the staffing and outsourcing services industry depreciate

their assets using the straight-line depreciation method. Firms that use operating leases as opposed to capital leases do not record the lease as an asset nor do they reflect that

a liability has incurred. Typically, the expense will be recorded as a rent expense which causes liabilities to be understated and portrays the firm as less risky. For the staffing

and outsourcing services industry, operating leases are most commonly reported.

Defined Benefit Pension Plan

Throughout an employee's career at a firm, a portion of their earning goes towards a

retirement fund called a pension plan. Korn Ferry's pension plan (also referred to as

“WEB” or Worldwide Executive Benefit) is set up to pay out “...monthly benefit payments that are equal to the sum of the percentages accrued over such participant’s

term of employment, up to a maximum of 20 years, multiplied by the participant's highest average monthly salary during the 36 consecutive months in the final 72

months of active full-time employment…” (Korn Ferry 10K). A key assumption in pension reporting is the future benefit monthly payout the firms are expected to give at

the end of a participant’s employment. The fund is based on estimates, so the firms begin to accumulate a pool of funds to meet those future liabilities. Firms are also

required to account for expenses incurred in the future to properly adjust the fund. Because the fund is based on a future estimated value, the firm would essentially end

up with an overstated or understated pension plan if they calculated incorrectly.

Assessing the Degree of Potential Accounting Flexibility

Flexibility is the ability of a firm to choose their accounting policies and estimates related to key success factors. Industries that have little flexibility in this choice may

have more accurate accounting data, as they are more restricted in how they report

51

assets and liabilities. However, the accounting data is less likely to be useful to

comprehend the economics of the firm. High flexibility may translate to skewed analysts’ view of the financials because certain information may or may not be

disclosed. Additionally, they may be able to alter financial data to be interpreted how the firm desires. For the staffing and outsourcing services industry, we will analyze the

flexibility of the firms’ in reporting goodwill, pensions, and leasing activities.

Goodwill

Goodwill is an intangible asset that occurs when a firm acquires another firm for a

premium. Oftentimes, goodwill is difficult to quantify—this gives firms their own ability

to determine the worth of their goodwill. This can be accomplished through goodwill impairment tests that compare the fair value with carrying amount. Korn Ferry

measures the amount of impairment loss the same way as they determine the amount of goodwill. If the carrying amount of goodwill is greater than fair value, an impairment

loss of the value of the excess is recognized. Figure 13 below shows goodwill impairment.

Figure 13

No impairment charge was recognized from 2012-2016 for Korn Ferry. In 2016, they had $590,072,000 in ending goodwill, which is 618% of the net fixed assets of

$95,436,000, found in figure 14 on page 53. Because of the high percentage, a restatement is required for a more effective valuation of Korn Ferry. Due to the nature

of this industry, the level of reporting flexibility is high. By choosing to not report

2012 2013 2014 2015 2016BeginningGoodwill 183,952.00$ 147,161.60$ 191,326.20$ 138,633.80$ 85,652.40$NewGoodwill - 80,955.00$ 289.00$ - 335,632.00$Didimpair (7,614.00)$ - - (3,142.00)$ -plusadditionalimpairment 29,176.40$ 36,790.40$ 52,981.40$ 49,839.40$ 52,981.40$EndingGoodwill-Restated 147,161.60$ 191,326.20$ 138,633.80$ 85,652.40$ 368,303.00$

GoodwillImpairmentExpense(inthousands)

52

impairment, firms can potentially skew the view of an analyst, since they are essentially

overstating assets.

Leasing Activities

Operating lease activity is one of the most flexible areas in reporting. Korn Ferry

utilizes operating leases, and their payments are treated as operating expenses in the income statement. This makes it appear as if the firm does not have as high of

liabilities, as the operating leases are kept off the balance sheet. These will need to be capitalized and restated to accurately reflect loan amounts, as they would increase non-

current liabilities by more than 20%. To capitalize lease agreements, a firm can record

the present value of the minimum lease payments then recognize it as an asset. Over the last five years, the ratio of total non-current liabilities to Korn Ferry’s operating

leases has averaged 96.41%, thus requiring restatement.

Conclusion

There are several means by which firms in the staffing and outsourcing services

industry can present reporting as more favorable to themselves. With high levels of flexibility in goodwill and operating lease recording, firms in this industry are able to

exercise their own discretion when reporting financial statements.

Evaluation of Actual Accounting Strategy

Accounting strategies fall into two categories, conservative and aggressive. These categories are dictated by the specific procedures, rules, and principles implemented.

With these strategies allowing for different methods in recording depreciation, recognizing goodwill, and preparing financials, firms can choose the most advantageous

policies for their financial reports.

When evaluating a firm’s accounting policies, one can see if management is conservative or aggressive. The earnings management team will seek to use accounting

rules that inflate total assets, revenue, and earnings to create optimal financial

53

statements. Policies will allow smoothing of earnings, resulting in a more consistent

profit each month and year.

For Korn Ferry, we will be evaluating how these strategies distort the value of their

earnings. The management’s aggressive approach may present higher retained earnings, where a conservative approach will result in lower retained earnings. Since

retained earnings is critical in determining firm value, we will discuss goodwill, pension plans, and operating and capital leases.

Goodwill

Goodwill stems from activities such as mergers and acquisitions. Within the past five

years, Korn Ferry acquired PDI Ninth House in 2013 for $95 million, Pivot Leadership in early 2015 for $17.5 million, and Hay Group in late 2015 for $452 million. These

acquisitions contribute to the high amount of Korn Ferry’s goodwill. From 2012 to 2013, the goodwill increased a total of $80,955, with an increase of 125.73% in goodwill’s

percentage of net fixed assets. An increase is seen again from the 2015 to 2016 period, when the goodwill increased a total of $335,632 and 208.48% in goodwill’s percentage

of net fixed assets. In the figure below, we have recorded the percentage of goodwill

over net fixed assets for the past five years.

Figure 14

As one can see, the percentage increased from 2012 to 2013, as well as from 2015 to 2016. These two increases are indicative of the acquisitions referenced above.

Additionally, it is evident that the increase between 2015 to 2016 more than doubled Korn Ferry’s goodwill.

Year 2012 2013 2014 2015 2016GoodwillReported 176,338 257,293 257,582 254,440 590,072NetFixedAssets 49,808 53,628 60,434 62,088 95,436%ofNetFixedAssets 354.04% 479.77% 426.22% 409.81% 618.29%

Goodwill(inthousands)

54

In their 10K, Korn Ferry states that “while goodwill is not amortized, it is reviewed for

impairment at least annually or more frequently if impairment indicators are present.” Korn Ferry explicitly documents that they are the ones who decide exactly how much to

impair, and when to impair it. Additionally, “in assessing the carrying value of goodwill, [Korn Ferry] make[s] qualitative and quantitative assumptions and estimates about

revenues, operating margins, growth rates and discount rates based on [their] business plans, economic projections, anticipated future cash flows and marketplace data. There

are inherent uncertainties related to these factors and management’s judgment in applying these factors.” This statement from the 10K completely undermines the

creditability of Korn Ferry’s recorded goodwill, as well as its impairment.

Figure 15

As seen in Figure 15 above, the staffing and outsourcing services industry does not meet the requirement of goodwill accounting for less than 30% of net fixed assets.

Therefore, Korn Ferry requires a restatement of goodwill due to the aggressive accounting of the industry.

Year 2012 2013 2014 2015 2016GoodwillReported 176,338.00$ 257,293.00$ 257,582.00$ 254,440.00$ 590,072.00$NetFixedAssets 49,808.00$ 53,628.00$ 60,434.00$ 62,088.00$ 95,436.00$%ofNetFixedAssets 354.04% 479.77% 426.22% 409.81% 618.29%GoodwillReported 90,696.00$ 120,940.00$ 123,274.00$ 122,176.00$ 131,122.00$NetFixedAssets 44,781.00$ 42,362.00$ 34,961.00$ 30,417.00$ 36,498.00$%ofNetFixedAssets 202.53% 285.49% 352.60% 401.67% 359.26%GoodwillReported 90,200.00$ 89,500.00$ 90,300.00$ 90,300.00$ 90,300.00$NetFixedAssets 90,600.00$ 89,900.00$ 92,000.00$ 93,000.00$ 88,900.00$%ofNetFixedAssets 99.56% 99.56% 98.15% 97.10% 101.57%GoodwillReported 984,700.00$ 1,041,300.00$ 1,090,900.00$ 1,075,200.00$ 1,257,400.00$NetFixedAssets 174,500.00$ 184,800.00$ 166,000.00$ 149,100.00$ 147,100.00$%ofNetFixedAssets 564.30% 563.47% 657.17% 721.13% 854.79%GoodwillReported 299,234.00$ 496,158.00$ 573,063.00$ 512,060.00$ 874,906.00$NetFixedAssets 18,057.00$ 26,862.00$ 38,128.00$ 44,311.00$ 53,196.00$%ofNetFixedAssets 1657.16% 1847.06% 1503.00% 1155.60% 1644.68%

Goodwill(inthousands)

OnAssignment

ManPowerGroup

KellyServices

Heidrick&Struggles

KornFerry

55

Pension Plans

Currently, Korn Ferry is moving their company to solely offer defined contribution plans. The firms current defined benefit pension plan is known as the Worldwide Executive

Benefit (WEB). The plan is designed to only cover certain executives in the United

States and foreign countries. The WEB provides a monthly benefit to vice presidents upon retirement from the company, which is “equal to the sum of the percentages

accrued over such participant’s term of employment, up to a maximum of 20 years, multiplied by the participant’s highest average monthly salary during the 36 consecutive

months in the final 72 months of active full-time employment,” (Korn Ferry 10K). However, in June of 2003, Korn Ferry ended the WEB, no longer allowing new entrants,

accruals, or salary increases. With the pension plan expected payouts a year averaging approximately $300,000, we have determined that pension plans do not have a strong

enough effect on the value of Korn Ferry, as seen below in figure 16.

Figure 16

Leasing Activities

Based on Korn Ferry’s 10K, the firm only utilizes operating leases and does not report having any capital leases. The firm states that these leases are for office premises and

office equipment that is currently in use. Figure 17 below depicts the last five years’ operating lease amounts to total noncurrent liabilities amounts.

ChangeinBenefitObligation2012 2013 2014 2015 2016

BenefitObligation,BeginningofYear 3,952 4,214 4,536 4,424 5,252InterestCost 189 154 137 154 167ActuarialCost 289 426 92 1,001 122BenefitsPaid (216) (258) (341) (317) (332)BenefitObligation,EndofYear 4,214 4,536 4,424 5,262 5,219Less:CurrentPortionofBenefitObligation (212) (232) (274) (287) (289)Non-CurrentBenefitObligation 4,002 4,304 4,150 4,984 4,930

YearEndedApril30(thousands)

56

Figure 17

Due to the overwhelming number of operating leases, we have determined that they

must be capitalized and restated for a more accurate valuation of Korn Ferry. This is because of the firm’s aggressive accounting policies.

Conclusion

Overall, Korn Ferry is regarded as having an aggressive account strategy because of

their need to restate of goodwill and operating leases. Although the firm does follow GAAP procedures, they use the flexibility allowed to distort their financial statements.

Currently, one can assume that Korn Ferry has overstated assets and owner’s equity. This is harmful when attempting to accurately value the firm. It is important to have

complete transparency when analyzing the financial statements. We will now further our report by restating the required financials.

Quality of Disclosure

Publicly traded firms are obligated to comply with GAAP, which sets the standards to

determine how and what a firm must disclose within its financials. Although firms must comply with these regulations, they are still given a great amount of flexibility by being

able to make adjustments according to the industry in which they are set. Managers can affect analysts’ ability to “assess the firm’s accounting quality and use its financial

statements to understand business reality,” (Palepu). Less detailed disclosures make it more difficult for investors to properly value the firm.

CapitalandOperating TotalNon-CurrentYear Liability Liabilty Percentage2012 176,611 163,489 108.03%2013 156,246 182,210 85.75%2014 137,803 191,197 72.07%2015 235,829 196,542 119.99%2016 360,827 375,035 96.21%

57

The reporting of pension plans, goodwill, and operating leases are commonly distorted.

It is important to evaluate the quality of information disclosed regarding these areas.

Pension Plans

Korn Ferry, according to their 10K, estimates both the present value of the pension

plans’ future benefits payable and the period of remaining employment time. Each year during the period of estimated employment, Korn Ferry accrues a liability and

recognizes a portion of the future benefit as an expense.

In calculating the accrual for future benefit payments, management makes assumptions about employee turnover, participant vesting, violation of non-competition provisions,

and discount rate. Korn Ferry’s pension plan disclosure is moderate in quality because interest cost and the discount rate are presented, but not explained in detail. This is

shown below in figure 18. Management periodically reevaluates all assumptions and because the pension plan has been frozen, Korn Ferry is more easily able to make these

future estimations as the payments are made.

Figure 18

The figure below illustrates the components of Korn Ferry’s pension plan benefits to yield the net periodic benefit costs.

Figure 19

2014 2015 2016DiscountRateBeginningofYear 3.12% 3.60% 3.28%DiscountRateEndofYear 3.60% 3.28% 3.05%RateofCompensationIncrease 0% 0% 0%

RateofCompensation

(inthousands) 2014 2015 2016 2017 2018 2019 2020 2021 2022-2026InterestCost 137$ 154$ 167$ - - - - - -AmortizationofActurialCost 8$ 21$ 128$ - - - - - -NetPeriodicBenefitCosts 145$ 175$ 295$ 325$ 330$ 328$ 331$ 324$ 1,480$

PensionBenefits

58

Korn Ferry lumps the estimated future payments for 2022 through 2026, withholding

more information than they would if the years were presented individually. Because of these, their quality of disclosure could be more detailed.

Goodwill

For Korn Ferry, goodwill is the largest asset requiring valuation. According to their 10K, fair value determinations require considerable judgment and are sensitive to changes in

underlying assumptions and factors. “There can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove

to be accurate predictions of the future,” (Korn Ferry 10K).

When making acquisitions, the Korn Ferry 10-K states that they “do not amortize goodwill and intangible assets acquired in a purchase business combination that are

determined to have indefinite useful lives, but instead review them annually” (Korn Ferry 10K). For as long as Korn Ferry has goodwill with indefinite life, it must be

amortized and there should be an impairment of goodwill each year. The current numbers incorrectly reflect that the firm has more value than its actual worth.

Korn Ferry has a low quality of disclosure because they maintain the right to

“considerable judgment” in determining goodwill.

Operating Leases

For Korn Ferry, operating leases are classified as temporary assets and are not shown

on the balance sheet. Operating leases must be restated by capitalizing them. Korn Ferry does not disclose a large amount of information in regards to their operating

leases.

Korn Ferry's operating leasing agreements come mainly from leasing office space and office equipment. “[Korn Ferry leases] all 150 of [their] Executive Search, Hay Group

and Futurestep offices,” (Korn Ferry 10K). As of April 30th, 2016 they have leased approximately 1,641,449 square feet of office space and the firm expects to have a

total of $446,900 in future “...non-cancelable operating leases with lease terms in

59

excess of one year excluding commitments accrued in the restructuring liabilities,”

(Korn Ferry 10K). Aside from this information, Korn Ferry essentially provides no other details regarding leasing activities.

We have determined that Korn Ferry Korn Ferry does not provide detailed or rich disclosure that allows us to judge accomplishments of the firm. The firm uses

aggressive accounting policies that result in operating leases that must be capitalized.

Potential Red Flags

Red flags are any areas of concern that is typically used to make a firm look more valuable than it actually is. Although red flags typically come about by using certain

accounting policies which can misrepresent a firm’s worth, they are not illegal. This tactic is most commonly used to attract stockholders. It is important to look for

“potential red flags” that might point towards questionable accounting, when analyzing

the quality of accounting provided by a firm (Palepu 3-12). In this section we will search for red flags within Korn Ferry. Some common red flags are unexplained transactions

that boosts profits, unusual increases in accounts receivable in relation to sales increase, and an increasing gap between a firm’s reported income and its cash flow

from operating activities (Palepu 3-12). Red flags are an important place to look at when analyzing a firm, especially when viewing the accounting in financial statements.

One red flag found in Korn Ferry’s financials was the tendency to use financing

mechanisms such as research and development partnerships, special-purpose entities, and the sale of receivables with recourse (Palepu 3-13). When finding this red flag in

the financials we see that liabilities were understated and assets were overstated. This is where we analyzed that operating and capital leases would increase noncurrent

liabilities enough to be noted as an accounting distortion that needs to be restated.

Another red flag found in Korn Ferry’s financials was an increasing gap between a firm’s

reported income and its cash flow from operating activities (Palepu 3-12). As seen in

Korn Ferry’s financials, the reported operating income from operating activities for 2016

60

is $52,692,000 where the cash flow from operating activities was actually -

$107,586,000. This red flag results an overstatement of goodwill. Through this analysis, we discovered that goodwill exceeded net fixed assets by enough so that it would also

be considered an accounting distortion and would need to be restated.

Accounting Distortions

Though GAAP guidelines are provided, there is room for flexibility in financial reporting.

Accounting distortions allow a firm’ s financial statements to appear more profitable

than they really are. If the reported numbers are in any way misleading, it is important to reduce the distortions and restate the reported numbers. The three most common

accounting distortions are goodwill, research and development, and operating and capital leases. It must be determined whether these accounting distortions must be

restated if each are exceeding its threshold. The financials must be restated if goodwill exceeds 30% net fixed assets, research and development reduces operating income by

20%, and if operating and capital leases increase non-current liabilities by more than 20%. Because Korn Ferry is a service industry, there is no research and development

asset that appears on the balance sheet. Therefore, our analysis for accounting distortions will focus on goodwill and operating and capital leases.

Goodwill

As an intangible asset, goodwill adds value to a firm. When a firm acquires an asset for

more than book value, the difference of the price purchased and fair value is recorded as goodwill. Goodwill is sometimes considered a competitive advantage. However, this

competitive advantage has a limited life and cannot be kept forever. Goodwill should be amortized. By failing to amortize the correct amount, firms often inflate the value of

goodwill which, leads to increasing the value of the firm and consequently misleading investors on how much the firm is actually worth. To fix this inflation, we restate the

financial statements for five years by amortizing goodwill. In the figures below, we look at the goodwill and how inflated it is.

61

Figure 20: Korn Ferry Goodwill Impairment Expense

Presented above in figure 20 impairment on goodwill was recorded only in 2012 for $7,614,000 and 2015 for $3,142,000 with all other years having no impairment. It is

clear that goodwill was inflated. For example, in the year 2012 goodwill should have

been impaired $29,176,400 but was impaired only $7,614,000 according to Korn Ferry’s 10K. Below in figure 21, a five-year straight-line depreciation method was applied to

obtain the corrected amount of goodwill which should be impaired each year. The new impaired goodwill amounts for each year are then used in figure 20 to calculate the new

ending goodwill. Further down, we will present how the inflated goodwill effects both Korn Ferry’s balance sheet and income statement by restating them with the adjusted

goodwill values.

Figure 21: Korn Ferry Goodwill Impairment Expense

The information provided in the Korn Ferry 10K is not a faithful representation of how much the company is worth. This is because goodwill is significantly inflated which

results in a major impact on operating income.

2012 2013 2014 2015 2016BeginningGoodwill 183,952.00$ 147,161.60$ 191,326.20$ 138,633.80$ 85,652.40$NewGoodwill - 80,955.00$ 289.00$ - 335,632.00$Didimpair (7,614.00)$ - - (3,142.00)$ -plusadditionalimpairment 29,176.40$ 36,790.40$ 52,981.40$ 49,839.40$ 52,981.40$EndingGoodwill-Restated 147,161.60$ 191,326.20$ 138,633.80$ 85,652.40$ 368,303.00$

GoodwillImpairmentExpense(inthousands)

2012 2013 2014 2015 2016 2017CarryOverGoodwillfrom2011 183,952 36,790.40 36,790.40 36,790.40 36,790.40 36,790.40NewGoodwill2012 0NewGoodwill2013 80,955 16,191 16,191 16,191 16,191NewGoodwill2014 0NewGoodwill2015 0NewGoodwill2016 335,632 67,126.40TotalshouldImpair 600,539 36,790.40 36,790.40 52,981.40 52,981.40 52,981.40 83,317.40Didimpair (7,614) (3,142)Additionalimpairment 29,176.40 36,790.40 52,981.40 49,839.40 52,981.40 83,317.40

GoodwillImpairmentExpense(inthousands)

62

Operating Leases

Depending on the type of lease, all business must assume financial risk. Operating leases do not show up on the balance sheet because according to GAAP, operating

leases are considered temporary assets. The operating leases for Korn Ferry need to be

restated by capitalizing them, which can be seen in the tables below.

Present values and future values must be determined to capitalize operating leases.

We used the same discount rate (APR) as stated in Korn Ferry’s 10K. In the figures below we find the present values of these leases for each year. After finding the

present values of these operating leases, we find that they have increased both assets

and liabilities. Later, we present how this effects Korn Ferry’s balance sheet and income statement. Due to the fact that Korn Ferry has more liabilities than previously

presented, we show both the as-stated and restated financials to reflect the changes for a more accurate outlook on the true value of the firm.

Figure 22: 2013 Capitalizing Operating Leases

APR 3.79%

Year #ofyears FV PVfactor PV Beg.Bal Interest Payment End.Bal Depreciation2013 1 38,588 0.96 37178.919 176611.4 6693.57 38,588 144,717 22076.422014 2 34,609 0.93 32127.581 144,717 5484.77 34,609 115,593 22076.422015 3 29,695 0.89 26559.3104 115,593 4380.96 29,695 90,279 22076.422016 4 21,619 0.86 18630.03 90,279 3421.56 21,619 72,081 22076.422017 5 15,951 0.83 13243.7311 72,081 2731.88 15,951 58,862 22076.422018 6 11,152 0.8 8921.12632 58,862 2230.87 11,152 49,941 22076.422019 7 11,152 0.77 8595.3621 49,941 1892.76 11,152 40,682 22076.422020 8 11,152 0.74 8281.4935 40,682 1541.84 11,152 31,072 22076.422021 9 11,152 0.72 7979.08613 31,072 1177.61 11,152 21,097 22076.422022 10 11,152 0.69 7687.72149 21,097 799.58 11,152 10,745 22076.422023 11 11,152 0.66 7406.99633 10,745 407.23 11,152 0 22076.42

TotalPV $176,611.36

63

Figure 23: 2014 Capitalizing Operating Leases

Figure 24: 2015 Capitalizing Operating Leases

APR 3.12%

Year #ofyears FV PVfactor PV Beg.Bal Interest Payment End.Bal Depreciation2014 1 44,096 0.97 42761.8309 188140.3 5869.98 44,096 149914.3 20904.482015 2 37,623 0.94 35380.7972 149914.3 4677.33 37,623 116968.6 20904.482016 3 27,833 0.91 25382.3195 116968.6 3649.42 27,833 92785.04 20904.482017 4 20,893 0.88 18476.9033 92785.04 2894.89 20,893 74786.93 20904.482018 5 16,788 0.86 14397.4122 74786.93 2333.35 16,788 60332.28 20904.482019 6 13,219 0.83 10993.6315 60332.28 1882.37 13,219 48995.65 20904.482020 7 13,219 0.81 10661.0081 48995.65 1528.66 13,219 37305.31 20904.482021 8 13,219 0.78 10338.4485 37305.31 1163.93 13,219 25250.24 20904.482022 9 13,219 0.76 10025.6483 25250.24 787.81 13,219 12819.05 20904.482023 10 13,219 0.74 9722.31212 12819.05 399.95 13,219 0 20904.48

TotalPV $188,140.31

APR 3.60%

Year #ofyears FV PVfactor PV Beg.Bal Interest Payment End.Bal Depreciation2015 1 41,177 0.97 39746.139 176029.8 6337.07 41,177 141189.9 19558.872016 2 32,092 0.93 29900.4189 141189.9 5082.84 32,092 114180.7 19558.872017 3 25,329 0.9 22779.2163 114180.7 4110.51 25,329 92962.21 19558.872018 4 22,137 0.87 19216.7413 92962.21 3346.64 22,137 74171.85 19558.872019 5 18,857 0.84 15800.6089 74171.85 2670.19 18,857 57985.04 19558.872020 6 12,879 0.81 10416.543 57985.04 2087.46 12,879 47193.5 19558.872021 7 12,879 0.78 10054.5782 47193.5 1698.97 12,879 36013.47 19558.872022 8 12,879 0.75 9705.19129 36013.47 1296.48 12,879 24430.95 19558.872023 9 12,879 0.73 9367.94526 24430.95 879.51 12,879 12431.47 19558.872024 10 12,879 0.7 9042.41821 12431.47 447.53 12,879 0 19558.87

TotalPV $176,029.80

64

Figure 25: 2016 Capitalizing Operating Leases

Figure 26: 2017 Capitalizing Operating Leases

APR 3.28%

Year #ofyears FV PVfactor PV Beg.Bal Interest Payment End.Bal Depreciation2016 1 41,624 0.97 40302.0914 270669 8877.94 41,624 237923 30074.342017 2 39,542 0.94 37070.3062 237923 7803.874 39,542 206184.9 30074.342018 3 35,958 0.91 32639.7513 206184.9 6762.864 35,958 176989.7 30074.342019 4 32,126 0.88 28235.2565 176989.7 5805.263 32,126 150669 30074.342020 5 30,715 0.85 26137.8206 150669 4941.943 30,715 124895.9 30074.342021 6 27,490 0.82 22650.4776 124895.9 4096.587 27,490 101502.5 30074.342022 7 27,490 0.8 21931.1364 101502.5 3329.283 27,490 77341.81 30074.342023 8 27,490 0.77 21234.6402 77341.81 2536.811 27,490 52388.62 30074.342024 9 27,490 0.75 20560.2635 52388.62 1718.347 27,490 26616.96 30074.342025 10 27,490 0.72 19907.3039 26616.96 873.0364 27,490 0 30074.34

TotalPV $270,669.05

APR 3.05%

Year #ofyears FV PVfactor PV Beg.Bal Interest Payment End.Bal Depreciation2017 1 65,002 0.97 63078.1174 388485.5 11848.81 65,002 335,332 43165.062018 2 62,257 0.94 58626.261 335,332 10227.64 62,257 283,303 43165.062019 3 55,633 0.91 50838.0041 283,303 8640.74 55,633 236,311 43165.062020 4 49,396 0.89 43802.5907 236,311 7207.48 49,396 194,122 43165.062021 5 43,965 0.86 37832.6791 194,122 5920.73 43,965 156,078 43165.062022 6 34,129 0.84 28499.3915 156,078 4760.38 34,129 126,709 43165.062023 7 34,129 0.81 27655.8869 126,709 3864.63 34,129 96,445 43165.062024 8 34,129 0.79 26837.3478 96,445 2941.57 34,129 65,258 43165.062025 9 34,129 0.76 26043.0352 65,258 1990.35 34,129 33,119 43165.062026 10 34,129 0.74 25272.2321 33,119 1010.13 34,129 0 43165.06

TotalPV $388,485.55

65

Conclusion

After analyzing both goodwill and operating leases, we found that it was necessary to restate both goodwill and operating leases. This conclusion came by the fact that

goodwill surpasses the 30% threshold of net fixed assets and operating leases increase

non-current liabilities by more than 20%.

Financial Statements

For Korn Ferry specifically there are two areas of concern: goodwill and operating

leases. Korn Ferry’s financial statements would need to be restated if the threshold was exceeded in these respected area. Goodwill must be restated if goodwill exceeds 30%

of net fixed assets. In figure 27 goodwill exceeds net fixed assets well over 30%

between 2012-2016. To calculate the percentage of net fixed assets we divided the goodwill reported by net fixed assets. To determine if Korn Ferry’s capital and operating

leases need to be restated we had to calculate the percentage of how much capital and operating leases increased non-current liabilities. To do this we divided capital and

operating liability by total non-current liability for each year which is done in figure 28. As seen in figure 28, capital and operating leases increase non-current liabilities by

more than 20% and therefore need to be restated.

Figure 27: Goodwill (in millions) for Korn Ferry

Year 2012 2013 2014 2015 2016GoodwillReported 176,338 257,293 257,582 254,440 590,072NetFixedAssets 49,808 53,628 60,434 62,088 95,436%ofNetFixedAssets 354.04% 479.77% 426.22% 409.81% 618.29%

Goodwill(inthousands)

66

Figure 28: Capital and Operating Leases for Korn Ferry

To begin the restatement process for both the balance sheet and the income statement

we created trial balance for all accounts. Next we debited and credited the appropriate accounts with the correct amounts.

It’s important to show both the as-stated and restated balance sheet and income

statements for comparative purposes to see what the firm’s actual value is. The as-stated balance sheet and income statements and then the trial balances, followed by

the restated balance sheet and income statement are stated on the following pages.

CapitalandOperating TotalNon-CurrentYear Liability Liabilty Percentage2012 176,611 163,489 108.03%2013 156,246 182,210 85.75%2014 137,803 191,197 72.07%2015 235,829 196,542 119.99%2016 360,827 375,035 96.21%

67

Figure 29: As-Stated Balance Sheet

BalanceSheet(As-Stated) Apri302012 Apri302013 Apri302014 Apri302015 Apri302016(inthousands)AssetsCurrentAssetsCashandcashequivalents $282,005 $224,066 $333,717 $380,838 $273,252Marketablesecurities 40,936 20,347 9,566 25,757 11,338Receivablesduefromclients,net 126,579 161,508 175,986 188,543 315,975Incometaxesandotherreceivables 11,902 8,944 8,244 10,966 20,579Prepaidexpensesandotherassets 27,815 28,724 29,955 31,054 43,130Totalcurrentassets 489,237 443,589 557,468 637,158 664,274

Marketablesecurities,non-current 94,798 121,569 124,993 118,819 130,092Propertyandequipment,net 49,808 53,628 60,434 62,088 95,436Cashsurrendervalueofcompanyownedlifeinsurancepolicies,netofloans 77,848 85,873 94,274 102,691 107,296Deferredincometaxes,net 68,120 66,714 59,525 59,841 27,163Goodwill,net 176,338 257,293 257,582 254,440 590,072Intangibleassets,net 20,413 58,187 49,560 47,901 233,027Investmentsandotherassets 38,127 28,376 29,830 34,863 51,240

TotalAssets 1,014,689 1,115,229 1,233,666 1,317,801 1,898,600

LIABILITIESANDSTOCKHOLDERS’EQUITYAccountspayable $14,667 $19,460 $19,375 $19,238 $26,634Incometaxespayable 8,720 5,502 13,014 3,813 8,396Compensationandbenefitspayable 160,810 160,298 192,035 219,364 266,211Termloan - - - - 30,000Otheraccruedliabilities 37,527 83,291 62,509 63,595 145,023Totalcurrentliabilities 221,724 268,551 286,933 306,010 476,264

Deferredcompensationandotherretirementplans 142,577 159,706 169,235 173,432 216,113Termloan,non-current - - - - 110,000Deferredtaxliabilities - - - - 5,088Otherliabilities 20,912 22,504 21,962 23,110 43,834Totalliabilities 385,213 450,761 478,130 502,552 851,299

Commitmentsandcontingencies

Stockholders’equity:Commonstock:$0.01parvalue 419,998 431,508 449,631 463,839 702,098Retainedearnings 202,797 236,090 308,781 392,033 401,113Accumulatedothercomprehensiveloss,net 7,191 -2,631 -2,388 -40,623 -57,911TotalKorn/FerryInternationalstockholders’equity 629,986 664,967 756,024 815,249 1,045,300Less:notesreceivablefromstockholders -510 -499 -488 - -Noncontrollinginterest - - - - 2001Totalstockholders’equity 629,476 664,468 755,536 815,249 1,047,301

Totalliabilitiesandstockholders’equity 1,014,689 1,115,229 1,233,666 1,317,801 1,898,600

68

Figure 30: Trial Balance for Korn Ferry (Apr 2012 - Apr 2013)

Balance SheetAs Stated Dr Cr Restated As Stated Dr Cr Restated

(in thousands)AssetsCurrent AssetsCash and cash equivalents $282,005 $282,005 $224,066 $224,066Marketable securities 40,936 40,936 20,347 20,347Receivables due from clients, net 126,579 126,579 161,508 161,508Income taxes and other receivables 11,902 11,902 8,944 8,944Prepaid expenses and other assets 27,815 27,815 28,724 28,724Total current assets 489,237 489,237 443,589 443,589

Marketable securities, non-current 94,798 94,798 121,569 121,569Property and equipment, net 49,808 49,808 53,628 53,628Cash surrender value of company owned life insurance policies, net of loans 77,848 77,848 85,873 85,873Deferred income taxes, net 68,120 68,120 66,714 66,714Goodwill, net 176,338 29,176.40 139,547.60 257,293 65,967 191,326Intangible assets, net 20,413 20,413 58,187 58,187Investments and other assets 38,127 38,127 28,376 28,376Capital Operating lease asset - 176,611.40 176,611.40 - 188,140.30 22,076.42 166,063.88

Total Assets 1,014,689 1,154,510 1,115,229 1,215,326

LIABILITIES AND STOCKHOLDERS’ EQUITYAccounts payable $14,667 $14,667 $19,460 $19,460Income taxes payable 8,720 8,720 5,502 5,502Compensation and benefits payable 160,810 160,810 160,298 160,298Term loan - - - -Other accrued liabilities 37,527 37,527 83,291 83,291Total current liabilities 221,724 221,724 268,551 268,551

Deferred compensation and other retirement plans 142,577 142,577 159,706 159,706Term loan, non-current - - - -Deferred tax liabilities - - - -Capital Operating Lease Liabilty 176,611.40 176,611.40 31,894.43 188,140.30 156,245.08Other liabilities 20,912 20,912 22,504 22,504Total liabilities 385,213 561,824 450,761 607,006

Commitments and contingencies

Stockholders’ equity:Common stock: $0.01 par value 419,998 419,998 431,508 431,508Retained earnings 202,797 29,176.40 173,621 236,090 56,148.00 179,942Accumulated other comprehensive loss, net 7,191 7,191 -2,631 -2,631Total Korn/Ferry International stockholders’ equity 629,986 593,196 664,967 608,819Less: notes receivable from stockholders -510 -510 -499 -499Noncontrolling interest - - - -Total stockholders’ equity 629,476 592,686 664,468 608,320

Total liabilities and stockholders’ equity 1,014,689 1,154,510 1,115,229 1,215,326

2012 2013

69

Figure 31: Trial Balance for Korn Ferry (Apr 2014 - Apr 2016)

Balance SheetAs Stated Dr Cr Restated As Stated Dr Cr Restated As Stated Dr Cr Restated

(in thousands)AssetsCurrent AssetsCash and cash equivalents $333,717 $333,717 $380,838 $380,838 $273,252 $273,252Marketable securities 9,566 9,566 25,757 25,757 11,338 11,338Receivables due from clients, net 175,986 175,986 188,543 188,543 315,975 315,975Income taxes and other receivables 8,244 8,244 10,966 10,966 20,579 20,579Prepaid expenses and other assets 29,955 29,955 31,054 31,054 43,130 43,130Total current assets 557,468 557,468 637,158 637,158 664,274 664,274

Marketable securities, non-current 124,993 124,993 118,819 118,819 130,092 130,092Property and equipment, net 60,434 60,434 62,088 62,088 95,436 95,436Cash surrender value of company owned life insurance policies, net of loans 94,274 94,274 102,691 102,691 107,296 107,296Deferred income taxes, net 59,525 59,525 59,841 59,841 27,163 27,163Goodwill, net 257,582 118,948 138,634 254,440 3,142 171,929 85,653 590,072 221,769 368,303Intangible assets, net 49,560 49,560 47,901 47,901 233,027 233,027Investments and other assets 29,830 29,830 34,863 34,863 51,240 51,240Capital Operating lease asset - 176,029.80 20,904.48 155,125.32 - 270,669.00 19,558.87 251,110.13 - 388,485.50 30,074.34 358,411.16

Total Assets 1,233,666 1,269,843 1,317,801 1,400,124 1,898,600 2,035,243

LIABILITIES AND STOCKHOLDERS’ EQUITYAccounts payable $19,375 $19,375 $19,238 $19,238 $26,634 $26,634Income taxes payable 13,014 13,014 3,813 3,813 8,396 8,396Compensation and benefits payable 192,035 192,035 219,364 219,364 266,211 266,211Term loan - - - - 30,000 30,000Other accrued liabilities 62,509 62,509 63,595 63,595 145,023 145,023Total current liabilities 286,933 286,933 306,010 306,010 476,264 476,264

Deferred compensation and other retirement plans 169,235 169,235 173,432 173,432 216,113 216,113Term loan, non-current - - - - 110,000 110,000Deferred tax liabilities - - - - 5,088 5,088Capital Operating Lease Liabilty - 48,045.02 176,029.80 127,984.78 - 61,979.90 270,669.00 208,689.10 - 75,167.10 388,485.50 313,318.40Other liabilities 21,962 21,962 23,110 23,110 43,834 43,834Total liabilities 478,130 606,115 502,552 711,241 851,299 1,164,617

Commitments and contingencies

Stockholders’ equity:Common stock: $0.01 par value 449,631 449,631 463,839 463,839 702,098 702,098Retained earnings 308,781 91,808 216,973 392,033 126,366 265,667 401,113 176,676 224,437Accumulated other comprehensive loss, net -2,388 -2,388 -40,623 -40,623 -57,911 -57,911Total Korn/Ferry International stockholders’ equity 756,024 664,216 815,249 688,883 1,045,300 868,624Less: notes receivable from stockholders -488 -488 - - - -Noncontrolling interest - - - 2001 2001Total stockholders’ equity 755,536 663,728 815,249 688,883 1,047,301 870,625

Total liabilities and stockholders’ equity 1,233,666 1,269,843 1,317,801 1,400,124 1,898,600 2,035,242

2014 2015 2016

70

Figure 32: Restated Balance Sheet

Balance Sheet (Restated) 2012 2013 2014 2015 2016

(in thousands)AssetsCurrent AssetsCash and cash equivalents $282,005 $224,066 $333,717 $380,838 $273,252Marketable securities 40,936 20,347 9,566 25,757 11,338Receivables due from clients, net 126,579 161,508 175,986 188,543 315,975Income taxes and other receivables 11,902 8,944 8,244 10,966 20,579Prepaid expenses and other assets 27,815 28,724 29,955 31,054 43,130Total current assets 489,237 443,589 557,468 637,158 664,274

Marketable securities, non-current 94,798 121,569 124,993 118,819 130,092Property and equipment, net 49,808 53,628 60,434 62,088 95,436Cash surrender value of company owned life insurance policies, net of loans 77,848 85,873 94,274 102,691 107,296Deferred income taxes, net 68,120 66,714 59,525 59,841 27,163Goodwill, net 139,547.60 191,326 138,634 85,653 368,303Intangible assets, net 20,413 58,187 49,560 47,901 233,027Investments and other assets 38,127 28,376 29,830 34,863 51,240Capital Operating lease asset 176,611.40 166,063.88 155,125.32 251,110.13 358,411.16

Total Assets 1,154,510 1,215,326 1,269,843 1,400,124 2,035,243

LIABILITIES AND STOCKHOLDERS’ EQUITYAccounts payable $14,667 $19,460 $19,375 $19,238 $26,634Income taxes payable 8,720 5,502 13,014 3,813 8,396Compensation and benefits payable 160,810 160,298 192,035 219,364 266,211Term loan - - - - 30,000Other accrued liabilities 37,527 83,291 62,509 63,595 145,023Total current liabilities 221,724 268,551 286,933 306,010 476,264

Deferred compensation and other retirement plans 142,577 159,706 169,235 173,432 216,113Term loan, non-current - - - - 110,000Deferred tax liabilities - - - - 5,088Capital Operating Lease Liabilty 176,611.40 156,245.08 127,984.78 208,689.10 313,318.40Other liabilities 20,912 22,504 21,962 23,110 43,834Total liabilities 561,824 607,006 606,115 711,241 1,164,617

Commitments and contingencies

Stockholders’ equity:Common stock: $0.01 par value 419,998 431,508 449,631 463,839 702,098Retained earnings 173,621 179,942 216,973 265,667 224,437

Accumulated other comprehensive loss, net 7,191 -2,631 -2,388 -40,623 -57,911Total Korn/Ferry International stockholders’ equity 593,196 608,819 664,216 688,883 868,624Less: notes receivable from stockholders -510 -499 -488 - -Noncontrolling interest - - - 2001Total stockholders’ equity 592,686 608,320 663,728 688,883 870,625

Total liabilities and stockholders’ equity 1,154,510 1,215,326 1,269,843 1,400,124 2,035,242

71

Figure 33: As-Stated Income Statement for Korn Ferry

IncomeStatem

entsAsS

tated

2012

2013

2014

2015

2016

(inth

ousand

s)

FeeRe

venu

e79

0,50

581

2,83

196

0,30

11,02

8,15

21,29

2,11

2Re

imbu

rsedout-of-p

ockete

ngagem

ente

xpenses

36,254

36,870

35,258

37,914

54,602

TotalR

evenue

826,75

984

9,70

199

5,55

91,06

6,06

61,34

6,71

4

Compenstatio

nsand

benefits

534,18

655

5,34

664

6,88

969

1,45

089

7,34

5Ge

neraland

adm

insitrativ

eexpenses

138,87

214

2,77

115

2,04

014

5,91

721

3,01

8Re

imbu

rsedexpenses

36,254

36,870

35,258

37,914

54,602

Costofservices

19,635

28,977

39,910

39,692

59,824

Depreciatio

nandam

ortization

14,017

19,004

26,172

27,597

36,220

Restructuringcharges,net

929

22,857

3,68

29,46

833

,013

Totaloperatin

gexpenses

743,89

380

5,82

590

3,95

195

2,03

81,29

4,02

2

Operatin

gincome

82,866

43,876

91,608

114,02

852

,692

Other(loss)income,net

-271

6,30

99,76

97,45

8-4,167

Interestincome(expense),net

-1,791

-2,365

-2,363

-1,784

237

Incomebeforeprovisio

nforincom

etaxesa

ndequ

ityinearningso

funcon

solidatedsu

bsidiarie

s80

,804

47,820

99,014

119,70

248

,762

Equityinearningso

funcon

solidatedsu

bsidiarie

s,net

1,85

02,11

02,16

92,18

11,63

1Incometaxprovision

-28,35

1-16,63

7-28,49

2-33,52

6-18,96

0Netincome

54,303

33,293

72,691

88,357

31,433

Netincomeattributableto

non

controllinginterest

--

--

-520

Netin

comeattributab

leto

KornFerryInternationa

l54

,303

33,293

72,691

88,357

30,913

KornFerryInternationaland

Sub

sidiarie

sCon

solidatedStatementsofIncom

e

72

Figure 34: Trial Balance for Korn Ferry (Apr 2012 – Apr 2013)

Inco

me

Stat

emen

t (in

thou

sand

s)As

Sta

ted

DrCr

Rest

ated

As S

tate

dDr

CrRe

stat

ed

Fee

Reve

nue

790,

505

790,

505

812,

831

812,

831

Reim

burs

ed o

ut-o

f-poc

ket

enga

gem

ent e

xpen

ses

36,2

5436

,254

36,8

7036

,870

Tota

l Rev

enue

826,

759

826,

759

849,

701

849,

701

Com

pens

tatio

ns a

nd b

enef

its53

4,18

653

4,18

655

5,34

655

5,34

6Ge

nera

l and

adm

insit

rativ

e ex

pens

es13

8,87

213

8,87

214

2,77

122

,076

38,5

8812

6,25

9Re

imbu

rsed

exp

ense

s36

,254

36,2

5436

,870

36,8

70Co

st o

f ser

vices

19,6

3519

,635

28,9

7728

,977

Depr

ecia

tion

and

amor

tizat

ion

14,0

1714

,017

19,0

0419

,004

Rest

ruct

urin

g ch

arge

s, n

et92

992

922

,857

22,8

57Go

odw

ill Im

pairm

ent E

xpen

se-

36,7

90.4

076

1429

,176

.40

-36

,790

.40

36,7

90.4

0To

tal o

pera

ting

expe

nses

743,

893

773,

069.

4080

5,82

582

6,10

3.82

Oper

atin

g in

com

e82

,866

53,6

89.6

43,8

7623

,597

.18

Othe

r (lo

ss) i

ncom

e, n

et-2

71-2

716,

309

6,30

9In

tere

st in

com

e (e

xpen

se),

net

-1,7

91-1

,791

-2,3

656,

693.

57-9

,059

Inco

me

befo

re p

rovis

ion

for i

ncom

e ta

xes

and

equi

ty i

80,8

0451

,628

47,8

2020

,847

.61

Equi

ty in

ear

ning

s of

unc

onso

lidat

ed

subs

idia

ries,

net

1,85

01,

850

2,11

02,

110

Inco

me

tax

prov

ision

-28,

351

-28,

351

-16,

637

-16,

637

Net i

ncom

e54

,303

25,1

2733

,293

6,32

1Ne

t inc

ome

attri

buta

ble

to

nonc

ontro

lling

inte

rest

--

--

Net i

ncom

e at

tribu

tabl

e to

Kor

n Fe

rry

Inte

rnat

iona

l54

,303

25,1

2733

,293

6,32

1

2012

2013

73

Figure 35: Trial Balance for Korn Ferry (Apr 2014 – Apr 2016)

Inco

me

Stat

emen

t (in

thou

sand

s)As

Sta

ted

DrCr

Rest

ated

As S

tate

dDr

CrRe

stat

edAs

Sta

ted

DrCr

Rest

ated

Fee

Reve

nue

960,

301

960,

301

1,02

8,15

21,

028,

152

1,29

2,11

21,

292,

112

Reim

burs

ed o

ut-o

f-poc

ket

enga

gem

ent e

xpen

ses

35,2

5835

,258

37,9

1437

,914

54,6

0254

,602

Tota

l Rev

enue

995,

559

995,

559

1,06

6,06

61,

066,

066

1,34

6,71

41,

346,

714

Com

pens

tatio

ns a

nd b

enef

its64

6,88

964

6,88

969

1,45

069

1,45

089

7,34

589

7,34

5Ge

nera

l and

adm

insit

rativ

e ex

pens

es15

2,04

020

,904

.48

44,0

9612

8,84

814

5,91

719

,558

.87

41,1

7712

4,29

921

3,01

830

,074

.34

41,6

2420

1,46

8Re

imbu

rsed

exp

ense

s35

,258

35,2

5837

,914

37,9

1454

,602

54,6

02Co

st o

f ser

vices

39,9

1039

,910

39,6

9239

,692

59,8

2459

,824

Depr

ecia

tion

and

amor

tizat

ion

26,1

7226

,172

27,5

9727

,597

36,2

2036

,220

Rest

ruct

urin

g ch

arge

s, n

et3,

682

3,68

29,

468

9,46

833

,013

33,0

13Go

odw

ill Im

pairm

ent E

xpen

se-

52,9

8152

,981

-52

,981

3,14

2

49,8

39-

52,9

8152

,981

Tota

l ope

ratin

g ex

pens

es90

3,95

193

3,74

195

2,03

898

0,25

91,

294,

022

1,33

5,45

4

Oper

atin

g in

com

e91

,608

61,8

1811

4,02

885

,807

52,6

9211

,260

Othe

r (lo

ss) i

ncom

e, n

et9,

769

9,76

97,

458

7,45

8-4

,167

-4,1

67In

tere

st in

com

e (e

xpen

se),

net

-2,3

635,

869.

98-8

,233

-1,7

846,

337.

07-8

,121

237

8,87

7.94

-8,6

41In

com

e be

fore

pro

visio

n fo

r inc

ome

taxe

s an

d eq

uity

i99

,014

63,3

54.1

411

9,70

285

,143

.66

48,7

62-1

,547

.68

Equi

ty in

ear

ning

s of

unc

onso

lidat

ed

subs

idia

ries,

net

2,16

92,

169

2,18

12,

181

1,63

11,

631

Inco

me

tax

prov

ision

-28,

492

-28,

492

-33,

526

-33,

526

-18,

960

-18,

960

Net i

ncom

e72

,691

37,0

3188

,357

53,7

9931

,433

-18,

877

Net i

ncom

e at

tribu

tabl

e to

no

ncon

trollin

g in

tere

st-

--

--5

20-5

20Ne

t inc

ome

attri

buta

ble

to K

orn

Ferr

y In

tern

atio

nal

72,6

9137

,031

88,3

5753

,799

30,9

13-1

9,39

7

2014

2015

2016

74

Figure 36: Restated Income Statement for Korn Ferry

Inco

me

Stat

emen

t (Re

stat

ed)

2012

2013

2014

2015

2016

(in th

ousa

nds)

Fee

Reve

nue

790,

505

812,

831

960,

301

1,02

8,15

21,

292,

112

Reim

burs

ed o

ut-o

f-poc

ket e

ngag

emen

t exp

ense

s36

,254

36,8

7035

,258

37,9

1454

,602

Tota

l Rev

enue

826,

759

849,

701

995,

559

1,06

6,06

61,

346,

714

Com

pens

tatio

ns a

nd b

enef

its53

4,18

655

5,34

664

6,88

969

1,45

089

7,34

5Ge

nera

l and

adm

insit

rativ

e ex

pens

es13

8,87

212

6,25

912

8,84

812

4,29

920

1,46

8Re

imbu

rsed

exp

ense

s36

,254

36,8

7035

,258

37,9

1454

,602

Cost

of s

ervic

es19

,635

28,9

7739

,910

39,6

9259

,824

Depr

ecia

tion

and

amor

tizat

ion

14,0

1719

,004

26,1

7227

,597

36,2

20Re

stru

ctur

ing

char

ges,

net

929

22,8

573,

682

9,46

833

,013

Good

will

Impa

irmen

t Exp

ense

29,1

76.4

036

,790

.40

52,9

8149

,839

52,9

81To

tal o

pera

ting

expe

nses

773,

069.

4082

6,10

3.82

933,

741

980,

259

1,33

5,45

4

Oper

atin

g in

com

e53

,689

.623

,597

.18

61,8

1885

,807

11,2

60Ot

her (

loss

) inc

ome,

net

-271

6,30

99,

769

7,45

8-4

,167

Inte

rest

inco

me

(exp

ense

), ne

t-1

,791

-9,0

59-8

,233

-8,1

21-8

,641

Inco

me

befo

re p

rovis

ion

for i

ncom

e ta

xes

and

equi

ty i

51,6

2820

,847

.61

63,3

54.1

485

,143

.66

-1,5

47.6

8Eq

uity

in e

arni

ngs

of u

ncon

solid

ated

sub

sidia

ries,

net

1,85

02,

110

2,16

92,

181

1,63

1In

com

e ta

x pr

ovisi

on-2

8,35

1-1

6,63

7-2

8,49

2-3

3,52

6-1

8,96

0Ne

t inc

ome

25,1

276,

321

37,0

3153

,799

-18,

877

Net i

ncom

e at

tribu

tabl

e to

non

cont

rollin

g in

tere

st-

--

--5

20Ne

t inc

ome

attri

buta

ble

to K

orn

Ferr

y In

tern

atio

nal

25,1

276,

321

37,0

3153

,799

-19,

397

75

Balance Sheet

Determining which accounts must be debited and credited is a necessity in the process of restating the balance sheet. We assumed goodwill is depreciated over the past 5

years. We restated the financial statements between the years 2012-2016. The ending

goodwill for 2011 had to be found to restate the goodwill starting in 2012. We were able to find the amount of goodwill that needed to be impaired by totaling up the

depreciated amount of goodwill. In addition, we had to capitalize the capital and operating leases. Next, we debited and credited the appropriate accounts by the

appropriate amounts which can be found in the trial balances located in figures 30 and 31. The restated balance sheet can be found in figure 32.

Income Statement

The depreciated amounts that were calculated for the balance sheet were used to

restate the income statement. A goodwill impairment expense account was created. The amount that needed to be depreciated was debited and then the years that

goodwill that was already impaired was credited which can be seen in the trial balances located in figures 34 and 35. An overstatement of goodwill can clearly be seen when

comparing both as-stated and restated income statements. In figure 36 the restated income statement can be found.

Conclusion

In conclusion, accounting distortions make a company look more profitable than it actually is. The two distortions we analyzed in Korn Ferry’s financials were goodwill and

operating and capital leases. In this section, we examined the as-stated balance sheet

and income statement. Then we took the corrected amounts we calculated earlier and made trial balances with adjusted debits and credits for both the balance sheet and

income statement to get the restated financials. By doing so we were able to get a more accurate view on the value of the firm.

76

Financial Analysis

To determine the value of a firm, several steps must to be taken to draw a presentable

conclusion. Financial analysis is used to evaluate the overall performance of a firm. It consists of two major components, a ratio analysis and cash flow analysis. A ratio

analysis serves as the foundation for drawing future forecasts and compares a firm’s performance over time against the industry average in which they perform. A cash flow

analysis is used to examine a firm’s liquidity and assess the management of their operating, investing, and financial cash flows. We will be using the ratio and cash flow

analyses to assess Korn Ferry’s execution of their liquidity, efficiency, profitability, and capital structures. By analyzing this information, we will be able to estimate rational

future forecasts and the weighted average cost of capital (WACC). We analyzed Korn Ferry and their benchmark competitors’ most recent five years (six years for Korn Ferry)

beginning at 2011. Korn Ferry is the only firm to include 2016, and this is simply due to the variation in fiscal years between the different firms.

Liquidity Analysis Liquidity measures how quickly a firm is able to convert assets into cash, which ultimately represents how well the firm is able to meet their short-term debt

obligations. Some assets held by the firm are not very liquid, making them impractical to pay off bills because of the length of time it takes for the assets to convert into cash.

When firms have a high liquidity ratio, they are able to borrow money at cheaper interest rates since lenders believe the firm will be able to pay their bills on time. We

looked at current and quick asset ratios to assess Korn Ferry’s financial health; when ratios reflect good financial health they not only add value to the firm itself, but to their

stocks as well. To truly understand a firm's overall liquidity, it is important to compare these ratios to competitors’. Because Korn Ferry and its benchmark competitors have

different fiscal years, we have set up the tables to show each firm's five most recent years and the difference Korn Ferry makes in the industry average when the years line

up.

77

Current Ratio

The current ratio of a firm is principal measure for determining a firm's short term liquidity. The ratio is calculated by simply dividing the current assets over the current

liabilities. A desirable result would be a ratio above one, which represents the firm's ability to cover their current liabilities with their current assets while still having some

current assets left over. However, even if a firm has a ratio above one, it is still possible that the firm struggles to cover their current liabilities due to some assets

being more difficult to liquidate. The following chart will give us a visual representation

of how Korn Ferry's current ratios for the past five years differs from those of its competitors.

Figure 37: Current Ratios

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 1.89 2.21 1.65 1.94 2.08 1.39Manpower 1.33 1.38 1.49 1.49 1.48Kelly 1.60 1.65 1.62 1.50 1.50On Assignment 2.32 2.31 2.08 2.22 2.58Heidrick 1.68 1.48 1.65 1.60 1.35Industry 1.76 1.81 1.70 1.75 1.80

Current Ratio

78

Korn Ferry has a current ratio of 1.39, meaning they can pay off $1.39 for every dollar

of current debt. Figure 37 proves that Korn Ferry holds the second to largest ratios compared to its benchmark competitors. Their ratio decreased after its acquisition of

PDI Ninth House in 2013 and increased again in 2014 and 2015. The ratio fell back down in 2016 to the lowest it has been in the past five years (1.39) after the acquisition

of Hay Group. On Assignment has the largest current asset ratio for all five years. From 2013 to 2014, their current ratio increased from 2.08 to 2.33. The ratio increase could

be a result of their sale of Allied Health Care Unit (“Allied Unit”) in 2013. On Assignment also acquired CyberCoders and Whitaker Medical, LLC in 2013 which increased their

overall account receivables. ManPower holds the lowest current ratios when compared to the other firms—their accounts receivable account makes up for about 80% of their

current assets, while their accounts payable account consistently increased from 2011-2015, increasing their overall current liabilities. ManPower, Kelly Services, and On

Assignments’ lower-than-industry-average-ratios could be a result of the firms borrowing too much or selling services without turning profits enough. Our analysis of

Korn Ferry’s current ratios has led us to conclude that they have the ability to cover their current liabilities by simply using their current assets.

Quick Asset Ratio

The quick asset ratio, also known as the acid-test ratio, is measured by taking the

current assets that have a high liquidity and can easily be converted into cash (such as cash, cash equivalents, accounts receivables, and short-term investments) and dividing

the sum by the current liabilities. Because we do not include current assets that are not easily converted to cash (such as prepaid expenses and inventories), this ratio is more

conservative than the current ratio. The quick asset ratio measures the dollar amount per liquid assets available per each dollar of liabilities. The purpose of this ratio is to

calculate liquidity under poor economic conditions. Figure 38 below shows a comparison of Korn Ferry and its industry benchmark competitors based on their quick

asset ratios and the industry average.

79

Figure 38: Quick Asset Ratio

Per the table above, Korn Ferry has a quick asset ratio of 1.26, which means they can

pay $1.26 for every dollar of current debt. Korn Ferry has been able to maintain a quick ratio above the industry average every year except in 2013 when they acquired

PDI Ninth House. On Assignment has held the highest ratio. Consistent with the current ratios, Korn Ferry and On Assignment hold the largest quick asset ratios, most

likely due to their higher accounts receivable and increasing cash and cash equivalents. ManPower once again holds the lowest quick asset ratio which could be a result of the

credit terms ManPower has negotiated with its clients, which takes them longer to receive cash.

- 0.50

1.00

1.50

2.00

2.50

3.00

2011 2012 2013 2014 2015 2016

QuickAssetRatio

KornferryAsStated KornferryRestated Manpower

Kelly OnAssignment Heidrick

Industry

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 1.7 2.03 1.51 1.81 1.94 1.26ManPower 1.33 1.38 1.49 1.49 1.48 - Kelly 1.6 1.65 1.62 1.5 1.5 - On Assignment 2.32 2.31 2.08 2.22 2.58 - Heidrick 1.68 1.48 1.65 1.6 1.35 - Industry 1.73 1.77 1.67 1.73 1.77 -

Quick Asset Ratio

80

Conclusion

After analyzing the current ratio and the quick asset ratio, we were able to determine Korn Ferry's solvency. Korn Ferry’s ratios show above-average liquidity, which reflects

good financial health. We conclude that Korn Ferry and its benchmark competitors’ quick asset ratios demonstrate the firms’ ability to cover their short-term debts easily.

It can be inferred that all the firms will also be able to receive larger loans at lower interest rates.

Operating Efficiency Ratios

Operating efficiency ratios are used to measure how quickly firms can turn their assets

(inventories, accounts receivables, and working capital) into revenues. The following ratios will be included to measure efficiency: accounts receivable turnover ratio, days’

sales outstanding, cash-to-cash cycle, and working capital. Although inventory turnover and days’ supply of inventory are included within the operating efficiency ratios, they

are not applicable to the staffing and outsourcing services industry due to the industry’s lack of inventory.

Inventory Turnover

The inventory turnover ratio indicates how many times inventory is sold in a given

period and is a measure of how efficiently a firm can sell their existing inventory and convert it to revenue. A firm's inventory turnover ratio can be found by dividing its cost

of goods sold over inventory. Inventory is not applicable in the staffing and outsourcing services industry because the firms do not sell inventory to create profit. Rather, they

sell services.

Days’ Supply of Inventory

Days’ supply of inventory measures how many days a firm takes to convert its entire inventory on hand to sales. Because of the costs incurred on storing, advertising, and

selling inventory, is vital for a firm to sell its inventory as soon as possible. The lower the ratio the better. Days’ supply of inventory is directly related to the inventory

81

turnover ratio and it is calculated by taking the inventory turnover ratio and dividing it

by 365. Days’ supply of inventory is not applicable for the staffing and outsourcing services industry due to the lack of inventory.

Accounts Receivable Turnover

When firms sell their services on credit, they face the risk of the borrower either prolonging the payback period or defaulting on the loan. Because a dollar today is

worth more than a dollar tomorrow, a firm faces a loss every time they lend out cash, accept credit for a service, or the client extends the period in which they pay back. The

accounts receivable turnover ratio measures how quickly a firm is able to turn their account receivables into cash. This ratio indicates how many times per period accounts

receivable are collected. This is calculated by dividing the firm’s total sales over account receivables. When a firm has a high accounts receivable turnover ratio they

are perceived to be in better financial health because of the reduction in risk in their

doubtful accounts. A higher accounts receivable also indicates a company’s ability to generate cash flow and meet current debt obligations. When a firm has a very low

accounts receivable turnover ratio that could mean they abide by negative credit policy restrictions which may cause a decrease in potential sales. Below we analyzed Korn

Ferry’s accounts receivable ratio compared to its four competitors.

82

Figure 39: Accounts Receivable Turnover Ratio

As shown in Figure 39, Korn Ferry's ability to convert its accounts receivables into cash has decreased since 2012. After Korn Ferry’s acquisition of PDI Ninth House in 2013,

their ratio increased from 5.26 to 5.66. However, the ratio decreased from 2015 to 2016 possibly due to the firm’s acquisitions of Pivot Leadership in 2015 and Hay Group

in 2016. This could mean that Pivot Leadership and Hay Group had more pending accounts receivables than their previous acquisition in 2013. Korn Ferry currently “has

no restricted cash requirement under [their] current senior unsecured revolving credit agreement,” (Korn Ferry 10K).

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 6.02 6.53 5.26 5.66 5.65 4.26Manpower 5.26 4.95 4.73 5.02 4.56 - Kelly 5.24 5.47 5.33 4.82 4.88 - On Assignment 5.49 4.63 5.81 6.22 5.82 - Heidrick 7.64 6.42 6.45 7.23 6.98 - Industry 5.93 5.6 5.52 5.79 5.58 -

Accounts Receivable Turnover

83

The industry average has remained somewhat consistent over the last five years but it

could be relatively high because of Heidrick & Struggles’ high accounts receivable turnover ratios. This ratio is important to the staffing and outsourcing services industry

because when a firm acquires or merges with another firm, they acquire those contracts as well, which may affect their accounts receivable total.

Days’ Sales Outstanding

Days’ sales outstanding reflects how many days it takes for a firm to collect sales revenue. Firms prefer a lower days’ outstanding because that displays a quicker ability

to collect revenue. The longer the debtors take to pay back the firm, the less likely it is the firm will receive the cash. The days’ sales outstanding ratio is 365 divided by the

accounts receivable turnover ratio. This quotient is how many days it will take for each of the firm’s accounts receivable accounts to be paid off. We calculated the days’ sales

outstanding for each firm to determine who has the highest probability of debtors

defaulting on their payments and losing money due to the time value of money principle.

Figure 40: Days’ Sales Outstanding

84

Korn Ferry has been performing slightly above the industry average from 2013 to 2014

when their ratio significantly increased to 69.39 following their 2013 acquisition. PDI Ninth House was most likely taking too many days to receive cash from clients. When

Korn Ferry acquired them, this increased their ratio and decreased their overall efficiency. Korn Ferry’s days’ sales outstanding increased to its highest value in 2016,

from 64.60 to 85.68, which could have been a result of their acquisition of Hay Group. There seems to be an industry norm, since most of the firms project a similar days’

sales outstanding ratio. The staffing and outsourcing services industry average falls

between the 60-70 day range. ManPower holds the highest overall days’ sales outstanding. This could be a result of the different contractual agreements they offer

such as permanent placement, contract-to-permanent, volume, and project-based recruitment.

Cash-to-Cash Cycle

The cash-to-cash cycle ratio measures the number of days it takes a firm to convert their accounts receivables and inventory into cash. The ratio can be calculated by

adding the days’ sales of inventory and days’ sales outstanding. The lower the cash-to-cash ratio the better because that indicates a smaller amount of time for a firm to

receive cash. Because the staffing and outsourcing services industry does not use inventory, the cash-to-cash cycle ratio is equal to the days’ sales outstanding.

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 60.63 55.90 69.39 64.49 64.60 85.68Manpower 69.39 73.74 77.17 72.71 80.04 - Kelly 69.66 66.73 68.48 75.73 74.80 - On Assignment 66.48 78.83 62.82 58.68 62.71 - Heidrick 47.77 56.85 56.59 50.48 52.29 - Industry 61.55 65.18 66.12 63.04 65.41 -

Days' Sales Outstanding

85

Figure 41: Cash-to-Cash Cycle

As stated in Figure 41, there is an increase in Korn Ferry’s ratio in 2013, from 55.90 days to 64.49 days. The reason for the increase may be their acquisition in 2013, which

gave them a lower accounts receivable turnover ratio and increased their overall days’

sales outstanding and cash-to-cash cycle. The same situation occurred after Korn Ferry’s 2015 and 2016 acquisitions. ManPower and Kelly Services hold the highest cash-

to-cash ratios. Because the staffing and outsourcing services industry is more dependent on debt than cash, it is normal for the cash-to-cash cycle ratios to be higher

with an industry average of 65.41 days.

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 60.63 55.90 69.39 64.49 64.60 85.68Manpower 69.39 73.74 77.17 72.71 80.04Kelly 69.66 66.73 68.48 75.73 74.80On Assignment 66.48 78.83 62.82 58.68 62.71Heidrick 47.77 56.85 56.59 50.48 52.29Industry 61.55 65.18 66.12 63.04 65.41

Cash-to-Cash Cycle

86

Working Capital Turnover

When firms are efficient in utilizing their assets and turning them into sales revenues, they increase their capacity for paying back investors in income. Working capital

demonstrates the potential a firm has in using its working capital to create sales. It is computed by dividing sales over working capital, or current assets minus current

liabilities. The graph and table below illustrate which firm is more efficient with the use of their assets.

Figure 42: Working Capital Turnover

The industry leaders in working capital are Manpower and Kelly Services, as their ratios

are consistently above industry average. Manpower has had a decrease in ratios since 2011, which peaked at 17.92. This may be a result of the significant decrease in its

short-term borrowing and current maturities of long-term debt. For Kelly Services, this

2011 2012 2013 2014 2015 2016Korn ferry As Stated 3.58 2.96 4.64 3.55 3.1 6.87Korn ferry Restated 3.58 2.96 4.64 3.55 3.1 6.87Manpower 17.92 14.95 11.68 12.51 11.78 - Kelly 13.31 11.59 11.41 12.99 13.42 - OnAssignment 6.9 6.4 8.36 8.57 8.13 - Heidrick 4.21 6.01 4.02 3.97 6.68 - Industry 9.18 8.38 8.02 8.32 8.62 -

Working Capital Turnover

87

could be a result of an increase in their sales revenues since 2011. Korn Ferry is the

least efficient of its benchmark competitors. We concluded that Korn Ferry’s low ratios are due to their large portions of receivables in current assets and pensions payable

(compensation and benefits) in current liabilities. Working capital for the overall staffing and outsourcing services industry averages around 8.23, which Manpower and

Kelly Services both surpass.

Conclusion

After evaluating Korn Ferry's performance by their accounts receivable turnover ratio,

days’ sales outstanding, and working capital turnover, we concluded that Korn Ferry ultimately is in overall good financial health. Their ability to turn accounts receivables

into cash is just slightly lower than the overall industry average but at similar pace as their competitors. However, their receivables as well as their compensation and benefit

liabilities have a negative effect on their overall working capital turnover, making them

the least efficient firm in the industry in that sense. Korn Ferry is also the second to lowest performer regarding days’ sales outstanding. The larger the ratio, the greater

the risk of potential default, increased time in collecting debt, and losing money—this may ultimately reduce Korn Ferry's overall firm value.

Profitability Ratios

Profitability ratios show how well a firm generates profit relative to sales, assets, and equity. These ratios determine a firm's ultimate short and long term success. It is

necessary to measure these ratios across an industry level because if a firm does not generate profits at the same level as the industry average, or above its benchmark

competitors, that could signal future problems. The larger the firm's profitability ratios,

the better. We used the gross profit, net profit, operating profit, asset turnover, return on assets, and return on equity to measure the profitability across the staffing and

outsourcing services industry and Korn Ferry as an individual firm.

88

Gross Profit Margin

Gross profit margin is one of the measures used to calculate a firm's profitability. It is calculated by taking revenues minus cost of goods sold, all over total revenues. Gross

profit does not account for interest, operating expenses, or tax, so the higher the percentage, the more profitable. A high gross profit displays that a firm can pay for

additional costs incurred and how much the firm is able to mark up their services. The chart below displays the comparisons between Korn Ferry and their benchmark

competitors.

Figure 43: Gross Profit Margin

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 97.50% 97.60% 96.60% 96.00% 96.30% 95.60%Manpower 16.80% 16.60% 16.60% 16.80% 17.10%Kelly 15.90% 16.40% 16.40% 16.30% 16.70%On Assignment 34.50% 31.10% 29.90% 32.30% 32.90%Heidrick 90.50% 90.80% 92.10% 92.60% 93.70%Industry 51.04% 50.53% 50.32% 50.81% 51.32%

Gross Profit Margin

89

Korn Ferry and Heidrick & Struggles contain a much higher percentage in their gross

profit margins compared to their competitors. This may be justified by Korn Ferry and Heidrick & Struggles’ different segments and acquisitions, as well as their

enhancements in technology which may distinguish them from the rest of the firms. Despite their significant difference in percentages, the industry average has remained

fairly stable in the past five years.

Operating Profit Margin

Similar to gross profit margin, operating profit margin demonstrates the ability to

determine how well a firm is generating cash. This ratio represents the revenues that remain after operating expense is taken out. Operating profit margin can be calculated

by taking the operating income and dividing it by total revenue. The higher the operating profit margin the better for the firm.

Figure 44: Operating Profit Margin

90

Figure 44 shows a clear distinction of On Assignment’s percentages compared to the

overall industry average and individual firms. Their high percentages could be a result of their increase in amortization of intangible assets. When a firm amortizes their

intangible assets, they are reducing expenses. This has been the effect for On

Assignment, along with an increase in their revenues and gross profit. Korn Ferry’s as-stated and restated operating profit margin are very distinct. This may be because they

have increased their restructuring charges and their goodwill impairment expenses as well, which was added in the restatement process. Goodwill impairment is a charge

firms record when goodwill's carrying value on the financial statements exceed their fair value. We can note that Korn Ferry's operating profit margin decreased to its lowest

percentage in 2016, from 8.36% to 0.84% on a restated basis. Korn Ferry made two of their biggest acquisitions in 2015 and 2016, which is also when their goodwill

impairments expense increased. This may mean that they purchased them at a higher value than their worth or the expected future cash flows decreased more than

expected.

Net Profit Margin

Net profit margin is calculated by dividing net income by sales. Net income involves all the gains and losses that are not involved in operating activities, taxes, and interest

expense. Because of this, net profit margin makes for a reliable measure on how well the firm's sales helps sustain the firm itself, or how well they turn those sales into

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 11.10% 10.30% 5.40% 9.60% 11.10% 4.10%Korn Ferry Restated 11.30% 6.70% 2.90% 6.50% 8.40% 0.80%Manpower 2.40% 2.00% 2.50% 3.50% 3.60%Kelly 1.00% 1.30% 1.00% 0.40% 1.20%On Assignment 7.50% 7.30% 7.70% 8.00% 7.40%Heidrick -2.00% 4.20% 3.20% 5.20% 6.20%Industry 4.00% 5.01% 3.95% 5.33% 5.89%

Operating Profit Margin

91

income. Companies that contain higher net profit margins are said to be generating

more income per dollar of sales. A higher net profit margin is ideal. This ratio is illustrated in the figure below.

Figure 45: Net Profit Margin

The chart above shows that after the restatement process, Korn Ferry's ratios significantly decreased compared to the as-stated, even becoming negative in 2016.

The fact that Korn Ferry’s restated goodwill led them to have negative net profit margin

could have been an influence on their overstatement of goodwill. When a firm has a negative net profit margin, the firm may be falling apart—this could have a major

influence on their investors. Investors will not want to lend which may ultimately hurt

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 7.80% 6.70% 4.10% 7.60% 8.60% 2.40%Korn Ferry Restated 7.90% 3.10% 0.80% 3.90% 5.20% -1.50%Manpower 1.10% 1.00% 1.40% 2.10% 2.20%Kelly 1.20% 0.90% 1.10% 0.40% 1.00%On Assignment 4.70% 3.80% 5.60% 4.50% 4.70%Heidrick -6.40% 1.40% 1.40% 1.40% 3.20%Industry 1.68% 2.76% 2.70% 3.19% 3.94%

Net Profit Margin

92

the firm. Negatives not only drive away potential investors, but current investors as

well due to fear of default. It is clear why Korn Ferry would overstate goodwill to keep its net income and net profit margins positive. Over the past five years, the industry

has experienced an increase in the net profit margin signaling an increase in net earnings throughout the entire industry. Heidrick & Struggles started off with a

negative net profit margin in 2011, but it soon became positive in 2012.

Asset Turnover

The asset turnover ratio is calculated by dividing annual sales by the prior year’s total

assets. This ratio represents the amount of sales generated for the year based on total assets from the previous year. A high turnover ratio means a company is efficiently

generating sales off their assets.

Figure 46: Asset Turnover Ratio

93

We included Korn Ferry’s restated financials in the data and there is a slight variation

between the restated and as-stated turnover ratio. Compared to the industry average, Kelly Services and Manpower have a much higher asset turnover while Korn Ferry and

Heidrick have a lower asset turnover. Since Kelly Services and Manpower Group are

larger than their competitors, they are able to penetrate more markets and generate more sales of their assets. Korn Ferry and Heidrick are smaller companies and focus

more on one specific segment, executive search.

Return on Assets

Return on assets represents how much net income is generated by a company’s total

assets from the previous year. Return on assets is calculated by dividing net income by the previous year’s total assets. A high return on assets reflects intelligent purchases of

useful assets that grow a company. Return on assets is one of the ratios investors look at to understand how effective a company’s purchases of assets are.

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated - 0.85 0.84 0.89 0.86 1.02Korn Ferry Restated - 0.85 0.74 0.82 0.84 0.96Manpower 3.19 2.95 2.78 2.89 2.57Kelly 4.06 3.54 3.31 3.09 2.88On Assignment 1.51 2.76 1.37 1.37 1.65Heidrick 1.02 0.9 0.97 0.93 0.96Industry 1.95 2.2 1.85 1.83 1.79

Asset Turnover

94

Figure 47: Return on Assets

As shown in Figure 47, before Korn Ferry’s restatement of goodwill, they consistently fell above the industry average implying that their assets contributed a sizeable amount

towards net income. After the restatement, Korn Ferry’s ROA dropped significantly due to the goodwill capitalization since goodwill and accounts receivable make up for two of

largest portion of the firm’s total assets. The pick up from 2013 to 2014 is a result of the steady increases of the Korn Ferry’s net profit margin and asset turnover. Heidrick

& Struggles began with a negative ROA in 2011 but steadily increased it back to a positive value throughout 2012-2015. Their negative ratio could be a result of the new

team acquisition of MENA operations that specializes in the Saudi market, in 2010, and the negative net income for the year 2011. Based on the overall industry average, On

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated - 5.60% 3.30% 6.50% 7.20% 2.30%Korn Ferry Restated - 2.60% 0.50% 3.00% 4.20% -1.40%Manpower 3.60% 2.80% 4.00% 6.00% 5.60% - Kelly 4.70% 3.20% 3.60% 1.30% 2.80% - On Assignment 7.10% 10.40% 7.60% 6.10% 7.80% - Heidrick -6.20% 1.20% 1.30% 1.20% 3.00% - Industry 2.30% 4.30% 3.40% 4.00% 5.10% -

Return on Assets

95

Assignment has the highest overall ratios, inferring that their total assets are a large

contribution to their overall net income.

Return on Equity

Return on equity (ROE) measures how much equity contributes to net income. The

ratio is calculated by dividing net income by the previous year’s total stockholder equity. The higher the return on equity, the better. A company with a high return on equity

shows that equity is efficiently contributing to income.

Figure 48

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated - 9.40% 5.30% 10.90% 11.70% 3.80%Korn Ferry Restated - 4.30% 1.10% 6.10% 8.10% -2.80%Manpower 10.10% 7.90% 9.90% 14.50% 15.60%Kelly 10.20% 7.40% 7.90% 2.90% 6.50%On Assignment 11.10% 17.30% 15.90% 12.10% 15.40%Heidrick -6.20% 1.20% 1.30% 1.20% 3.00%Industry 6.30% 7.90% 6.90% 8.00% 10.00%

Return on Equity

96

As show in Figure 48, Korn Ferry’s as-stated ROE ratios are notably larger than

restated. Because Korn Ferry did not capitalize goodwill or operating leases, as-stated net income is significantly higher than restated. This capitalization decreases the

restated ROE, with the 2016 restated value even coming up as negative. A negative ROE indicates the generation of negative profit per dollar of shareholders’ investments.

The large decrease from 2012 to 2013 then again from 2015 to 2016 could be due to Korn Ferry’s acquisitions. The 2013 net income was much lower than 2012 because of

the required expenses to make the acquisition. This is also the case for 2015 and 2016—the 2016 as-stated net income was $31.43 million in as opposed to $88.36

million in 2015.

Conclusion

With the exception of asset turnover, Korn Ferry has profitability ratios well above the

industry average while their competitors mostly lie around the industry average. These

ratios imply that the assets in possession by Korn Ferry are highly profitable and thus generate a significant amount of sales. Because their competitors lie around the

industry average, Korn Ferry will have a significant competitive advantage over their peers if they can maintain their profitability.

Capital Structure Ratios

Capital Structure ratios reveal the combination of debt and equity used to finance a company’s assets. They allow investors to see how a company finances projects and

how quickly they can make a return on their investment. Also, these ratios are a good measure of a company’s ability to pay off its debt obligations. This information helps

investors decide whether they want to invest in a company and whether they should be

a debt investor or equity investor. There are various pros and cons of financing assets with debt rather than equity. First, the cost of debt is lower than the cost of equity.

Secondly, debt financing is tax deductible while dividends paid to shareholders cannot be claimed as tax deductions. Lastly, debt financing provides incentive for management

97

to invest in positive NPV projects. In this section, we will discuss various capital

structure ratios and compare Korn Ferry and their competitors against the industry.

Internal Growth Rate

The internal growth rate represents the total growth a firm can achieve if they pay out

dividends using only their earnings, excluding debt or equity. The IGR is calculated by multiplying the return on assets by the plowback ratio, which is one minus net income

over dividends. If a firm pays only a few dividends to its shareholders the ratio will be high, but if the firm has a high dividend payout then the ratio will be low. The reason

for this is that the plowback ratio represents how much was not given to shareholders in dividends. When a firm multiplies that by their ROA, the result represents how much

they could reinvest.

Figure 49: Internal Growth Rate

98

Sustainable Growth Rate

The sustainable growth rate (SGR) shows how much a firm can grow while maintaining

its current capital structure. To calculate the SGR, multiply one plus the debt-to-equity ratio by the IGR. A firm can achieve a larger SGR ratio by either cutting their dividends

or increasing their return on equity, meaning that the firm will neither issue new stock for equity or take on debt.

Figure 50: Sustainable Growth Rate

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 5.60% 3.30% 6.50% 6.70% 0.70%Korn Ferry Restated 2.60% 0.50% 3.00% 4.00% -0.40%Manpower 2.70% 1.90% 3.00% 7.00% 4.00%Kelly 5.30% 3.60% 4.10% 1.50% 3.70%On Assignment 7.10% 10.40% 7.60% 6.10% 7.80%Heidrick -8.00% -1.10% -0.20% -0.60% 1.30%Industry 1.20% 3.80% 3.10% 3.90% 4.60%

IGR

99

As seen in the figure above, On Assignment holds the largest ratios. This is not

surprising because On Assignment was also the industry leader in ROE, which is a dependent factor of calculating the SGR. On Assignment will be able to reach its

maximum firm goal without having to take out extra leverage. Korn Ferry’s restated

SGR fell below the industry average, meaning that if they want to maximize their growth they need to reduce some of their leverage.

Indicated by the brackets in the graph, an industry trend can be seen emerging between 2014 and 2016 when every firm except Manpower experienced similar growth.

Plant, Property, and Equipment Turnover

Plant, property, and equipment (PPE) turnover is used by investors to measure

operating performance. The ratio is an indicator of how profitable a company is from using their fixed assets. A higher PPE turnover ratio represents a company that

effectively utilizes their investments in PPE to generate revenue.

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 9.40% 5.30% 10.90% 12.40% 6.50%Korn Ferry Restated 4.30% 1.10% 6.10% 7.60% -0.80%Manpower 7.50% 5.20% 7.40% 17.20% 11.10%Kelly 12.20% 8.00% 9.10% 3.40% 8.10%On Assignment 11.10% 17.30% 15.90% 12.10% 15.40%Heidrick -14.80% -2.30% -0.40% -1.20% 2.90%Industry 4.00% 7.00% 6.40% 8.10% 9.60%

SGR

100

Figure 51: PPE Turnover

Korn Ferry has a low PPE turnover compared to its competitors. However, Manpower

represents an outlier from the group because it is significantly above the industry average. This may mean that Manpower is using their fixed assets effectively and are

generating a high number of sales per fixed asset.

Debt to Equity Ratio

Debt to equity measures a company’s debt relative to the total value of its equity. The

ratio is calculated by dividing total liabilities by total stockholder’s equity. The debt to equity ratio is primarily used to understand the capital structure of a company. A high

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 19.16 17.06 18.56 17.64 21.69Korn Ferry Restated 19.16 17.06 18.56 17.64 21.69Manpower 129.22 118.5 109.58 125.08 129.64Kelly 53.38 60.16 60.21 60.46 59.34On Assignment 28.55 42.24 39.95 38.92 38.82Heidrick 12.37 10.98 13.76 16.87 15.02Industry 37.25 45.03 42.94 46.41 46.35

PPE Turnover

101

debt to equity ratio means that a company finances its growth with debt. As a result,

high debt can lead to high levels of risk and volatile earnings from the increase in interest expense.

Figure 52

Korn Ferry restated and as-stated were below the industry average as a result of low total liabilities. Manpower group is more aggressive in their debt financing and has the

highest debt-to equity ratio.

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 0.68 0.61 0.68 0.63 0.62 0.81Korn Ferry Restated 0.68 0.95 1 0.91 1.03Manpower 1.84 1.82 1.75 1.45 1.64Kelly 1.28 1.21 1.19 1.3 1.17On Assignment 0.66 1.09 0.97 0.97 1.25Heidrick 0.85 0.98 1.01 1.23 1.32Industry 0.89 1.06 1.09 1.1 1.15

Debt to Equity

102

Times Interest Earned

Times interest earned is used to measure a company’s ability to pay off its debt obligations with operating income. It is calculated by taking a company’s EBIT and

dividing the total interest payable. This indicates how many times the annual interest expenses are covered on a pretax earnings basis.

Figure 53: Times Interest Earned

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated (33.84) (46.27) (18.55) (38.77) (63.92) 222.33 Korn Ferry Restated (33.84) (29.98) (2.60) (7.51) (10.57) (1.30) Manpower (13.07) (11.65) (15.35) (22.95) (20.95)Kelly (25.42) (30.08) (21.50) (7.84) (18.94)On Assignment (13.16) (5.22) (8.37) (10.82) (5.75)Heidrick (9.80) 17.54 (86.50) (74.03) (283.83)Industry (19.06) (15.14) (30.05) (30.88) (78.68)

Times Interest Earned

103

As shown in the figure above, 2016 is a positive value for Korn Ferry as-stated because

the firm earned interest instead of paying out interest as they did in the previous years. This also occurred in 2012 for Heidrick. Most of the competitors are around the

industry average for times interest earned. Heidrick in 2015 can be considered an outlier, as they experienced increased earnings from operations and decreased interest

expense that year.

Debt Service Margin

Debt service margin is a measure of the operating cash flow available to pay current

debt obligations. A debt service margin greater than one means a company is generating sufficient income to meet payments and debt obligations. In 2012, Kelly

Services had a high times interest earned ratio because interest expense was low and EBIT increased significantly.

Figure 54: Debt Service Margin

104

Korn Ferry has no interest-bearing debt which gives them a debt service margin of

infinity. Compared to the industry average, Manpower is in line with or above the industry average for debt service margin because Manpower has accumulated a great

amount of long term debt in recent years.

Altman Z Score

The Altman Z Score Model uses five ratios to compute a bankruptcy score. “The range between 1.81 and 2.67 is labeled the ‘grey area,’” (Palepu). The formula to compute

Altman Z Score is as follows:

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated - - - - - - Korn Ferry Restated - - - - - - Manpower 0.1 0.47 0.52 0.59 1.09 - Kelly 0.24 0.63 1.8 -2.47 0.26 - On Assignment 1.44 1.27 0.28 0.24 0.27 - Heidrick - - - 0 0 - Industry 0.73 0.92 0.85 0.06 0.74 -

Debt Service Margin

105

Figure 54: Altman’s Z Score

Korn Ferry has a Z Score below the industry average for 2012-2013 but a Z Score

slightly above the average for 2014-2015. Since Korn Ferry has a Z Score around 3, Korn Ferry is not likely to go bankrupt. However, Heidrick & Struggles, the outlier, has

a Z score in the low twos. This indicates that Heidrick is a company in distress and is nearing the 1.81 level of probable bankruptcy.

2011 2012 2013 2014 2015 2016Korn Ferry As-Stated 3.22 2.73 3.84 4.12 2.5Korn Ferry Restated 3.06 2.59 3.66 3.92 2.4Manpower 4.24 4.03 4.48 4.57 4.26Kelly 5 4.82 4.58 4.12 4.52On Assignment 3.36 2.64 3.68 3.76 3.28Heidrick 2.32 2.06 2.05 2.19 2.39Industry 2.98 3.35 3.51 3.7 3.71

Altman's Z Score

106

Conclusion

We concluded that Korn Ferry was at the industry average for all capital structure ratios. If Korn ferry maintains these ratios, they will be able to successfully compete in

the staffing and outsourcing services industry. Most of the competitors fell in line with the industry average. However, Kelly Services was an outlier for debt service margin

and times interest earned while Manpower was an outlier for debt to equity ratio. Heidrick was an outlier for the Altman’s Z Score. This is because Kelly services had high

growth from 2011-2013 while decreasing interest expense. Manpower is an outlier

because they choose to finance a high percentage of projects with debt. Lastly, Heidrick is at a high risk of bankruptcy with a very low Z Score.

Financial Forecasting

Financial forecasting identifies trends in historical data such as ratios and assumptions

to determine the firm’s future direction. To figure out a firm’s intrinsic value, we will use forecasting. These forecasts assume that Korn Ferry will have no future acquisitions and

effects from inflation. In respect to Korn Ferry, we will forecast the following as-stated and restated financial statements: income statement, balance sheet, and the statement

of cashflows. With the acquisition of Ninth House in 2013 and Hay Group in 2015, the financials between years 2013-2016 are a bit skewed. Since these forecasts are based

on assumptions and trends they are not 100% accurate.

Income Statement

To forecast Korn Ferry’s financials, we begin with the income statement. To forecast

both as-stated and restated income statements we found the financial ratios separately

for the past 5 years and applied them.

When forecasting the income statement, we start with sales growth. To find sales

growth we found the average sales growth for the past 5 years (2011-2016). We left out the fiscal years 2014 and 2016, considering the acquisitions left distorted growths.

We then added in the industry growth rate of 0.15 for the next five years found on

107

Yahoo Finance to get our projected sales growth rate. Before the income statements

could be forecasted, the gross profit and cost of services had to be calculated. Shown in figure 55, we had to first find gross profit by multiplying total revenue by operating

profit margin. Next the cost of service was found by subtracting total revenue from gross profit. To find net income, we multiplied gross profit by net profit margin. Net

profit margin for the next 10 years was found by the average net profit margin of past 6 years, leaving out 2013 and 2016. Korn Ferry’s net income in 2017 was 3.36 times

the net income in 2016. This is because we assume that 2017 will have no acquisitions, which would cause a lower net income. The trend presented in the past 6 years of the

income statement shows an increase in all years besides years in which there were acquisitions. Then we created a common sized income statement by finding each

account as a percentage of total sale.

108

Figure 55:

20112012

20132014

20152016

20172018

20192020

20212022

20232024

20252026

2027Tota

l Revenue

776,251

826

,759

849,701

995

,559

1,066,06

6

1,346,71

4

1,422,12

9.98

1,503,90

2.46

1,591,12

8.80

1,685,80

0.96

1,770,09

1.01

1,858,59

5.56

1,951,52

5.34

2,049,10

1.61

2,151,55

6.69

2,259,13

4.52

2,372,09

1.25

Cost of s

ervices

19,734

19,6

35

28,977

39,9

10

39,692

59,8

24

68,973.3

0

70,683.4

2

72,396.3

6

74,175.2

4

75,228.8

7

78,990.3

1

82,939.8

3

87,086.8

2

91,441.1

6

96,013.2

2

100,813

.88

Gross Pro

fit756

,517

807,124

820

,724

955,649

1,02

6,374

1,28

6,890

1,35

3,156.68

1,43

3,219.04

1,51

8,732.44

1,61

1,625.72

1,69

4,862.14

1,77

9,605.25

1,86

8,585.51

1,96

2,014.79

2,06

0,115.53

2,16

3,121.31

2,27

1,277.37

109

Figure 56: As-Stated Forecasted Income Statement for Korn Ferry

Inco

me

Stat

emen

t As-

Stat

ed20

1120

1220

1320

1420

1520

1620

1720

1820

1920

2020

2120

2220

2320

2420

2520

2620

27(in

thou

sand

s)Fe

e Re

venu

e74

4,24

9

79

0,50

5

812,

831

96

0,30

1

1,02

8,15

2

1,29

2,11

2

Rei

mbu

rsed

out

-of-p

ocke

t en

gage

men

t exp

ense

s 32

,002

36

,254

36

,870

35

,258

37

,914

54,6

02

To

tal R

even

ue77

6,25

1

82

6,75

9

849,

701

99

5,55

9

1,06

6,06

6

1,34

6,71

4

1,42

2,13

0

1,50

3,90

2

1,59

1,12

9

1,68

5,80

1

1,77

0,09

1

1,85

8,59

6

1,95

1,52

5

2,04

9,10

2

2,15

1,55

7

2,25

9,13

5

2,37

2,09

1

Com

pens

tatio

ns a

nd b

enef

its50

7,40

5

53

4,18

6

555,

346

64

6,88

9

691,

450

897,

345

Gen

eral

and

adm

insit

rativ

e ex

pens

es

116,

494

138,

872

14

2,77

1

152,

040

14

5,91

7

21

3,01

8

Re

imbu

rsed

exp

ense

s32

,002

36

,254

36

,870

35

,258

37

,914

54,6

02

Co

st o

f ser

vices

19,7

34

19,6

35

28,9

77

39,9

10

39,6

92

59

,824

68,9

73

70

,683

72,3

96

74

,175

75,2

29

78

,990

82,9

40

87

,087

91,4

41

96

,013

100,

814

Depr

ecia

tion

and

amor

tizat

ion

12,6

71

14,0

17

19,0

04

26,1

72

27,5

97

36

,220

Res

truct

urin

g ch

arge

s, n

et

2,13

0

92

9

22,8

57

3,68

2

9,

468

33

,013

Good

will

Impa

irmen

t Exp

ense

--

--

--

Tota

l ope

ratin

g ex

pens

es69

0,46

6

74

3,89

3

805,

825

90

3,95

1

952,

038

1,29

4,02

2

1,30

0,34

6

1,37

4,91

3

1,45

4,44

3

1,54

0,75

5

1,61

7,55

3

1,69

8,43

1

1,78

3,35

3

1,87

2,52

0

1,96

6,14

6

2,06

4,45

4

2,16

7,67

6

Oper

atin

g in

com

e85

,785

82

,866

43

,876

91

,608

11

4,02

8

52

,692

121,

784

128,

990

136,

686

145,

046

152,

538

160,

164

168,

173

176,

581

185,

410

194,

681

204,

415

Othe

r (lo

ss) i

ncom

e, n

et6,

454

(271

)

6,30

9

9,

769

7,45

8

(4,1

67)

In

tere

st in

com

e (e

xpen

se),

net

(2,5

35)

(1

,791

)

(2

,365

)

(2

,363

)

(1

,784

)

237

Inco

me

befo

re p

rovis

ion

for

inco

me

taxe

s an

d eq

uity

in

earn

ings

of u

ncon

solid

ated

su

bsid

iarie

s 89

,704

80

,804

47

,820

99

,014

11

9,70

2

48

,762

Equ

ity in

ear

ning

s of

un

cons

olid

ated

sub

sidia

ries,

net

1,

862

1,85

0

2,

110

2,16

9

2,

181

1,

631

In

com

e ta

x pr

ovisi

on32

,692

(2

8,35

1)

(16,

637)

(2

8,49

2)

(33,

526)

(18,

960)

Net i

ncom

e58

,874

54

,303

33

,293

72

,691

88

,357

31,4

33

10

3,92

2

11

0,07

1

11

6,63

9

12

3,77

3

13

0,16

5

13

6,67

4

14

3,50

7

15

0,68

3

15

8,21

7

16

6,12

8

17

4,43

4

N

et in

com

e at

tribu

tabl

e to

no

ncon

trollin

g in

tere

st

--

--

-(5

20)

Net

inco

me

attri

buta

ble

to

Korn

Fer

ry In

tern

atio

nal

58,8

74

54,3

03

33,2

93

72,6

91

88,3

57

30

,913

103,

922

110,

071

116,

639

123,

773

130,

165

136,

674

143,

507

150,

683

158,

217

166,

128

174,

434

110

Figure 57: Restated Forecasted Income Statement for Korn Ferry

Inco

me

Stat

emen

t Res

tate

d

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

(in th

ousa

nds)

Fee

Reve

nue

744,

249

79

0,50

5

812,

831

96

0,30

1

1,02

8,15

2

1,29

2,11

2

Rei

mbu

rsed

out

-of-p

ocke

t en

gage

men

t exp

ense

s 32

,002

36

,254

36

,870

35

,258

37

,914

54,6

02

To

tal R

even

ue77

6,25

1

826,

759

84

9,70

1

995,

559

1,

066,

066

1,

346,

714

1,

422,

130

1,

503,

902

1,

591,

129

1,

685,

801

1,

770,

091

1,

858,

596

1,

951,

525

2,

049,

102

2,

151,

557

2,

259,

135

2,

372,

091

Com

pens

tatio

ns a

nd b

enef

its50

7,40

5

534,

186

55

5,34

6

646,

889

69

1,45

0

89

7,34

5

G

ener

al a

nd a

dmin

sitra

tive

expe

nses

11

6,49

4

138,

872

12

6,25

9

128,

848

12

4,29

9

20

1,46

8

Re

imbu

rsed

exp

ense

s32

,002

36

,254

36

,870

35

,258

37

,914

54,6

02

Co

st o

f ser

vices

19,7

34

19,6

35

28,9

77

39,9

10

39,6

92

59

,824

68,9

73

70

,683

72,3

96

74

,175

75,2

29

78

,990

82,9

40

87

,087

91,4

41

96

,013

100,

814

Dep

recia

tion

and

amor

tizat

ion

12,6

71

14,0

17

19,0

04

26,1

72

27,5

97

36

,220

Rest

ruct

urin

g ch

arge

s, n

et2,

130

929

22

,857

3,

682

9,46

8

33,0

13

Go

odw

ill Im

pairm

ent E

xpen

se-

29,1

76

36,7

90

52,9

81

49,8

39

52

,981

Tota

l ope

ratin

g ex

pens

es69

0,46

6

773,

069

82

6,10

4

933,

741

98

0,25

9

1,

335,

454

1,

339,

587

1,

416,

476

1,

498,

486

1,

587,

492

1,

666,

704

1,

750,

040

1,

837,

542

1,

929,

419

2,

025,

890

2,

127,

184

2,

233,

543

Oper

atin

g in

com

e85

,785

53

,690

23

,597

61

,818

85

,807

11,2

60

82

,543

87,4

26

92

,643

98,3

09

10

3,38

7

10

8,55

6

11

3,98

4

11

9,68

3

12

5,66

7

13

1,95

0

13

8,54

8

Ot

her (

loss

) inc

ome,

net

6,45

4

(2

71)

6,

309

9,76

9

7,

458

(4

,167

)

Inte

rest

inco

me

(exp

ense

), ne

t(2

,535

)

(1

,791

)

(9

,059

)

(8

,233

)

(8

,121

)

(8,6

41)

In

com

e be

fore

pro

visio

n fo

r in

com

e ta

xes

and

equi

ty in

ea

rnin

gs o

f unc

onso

lidat

ed

subs

idia

ries

89,7

04

51,6

28

20,8

48

63,3

54

85,1

44

(1

,548

)

Equ

ity in

ear

ning

s of

un

cons

olid

ated

sub

sidia

ries,

net

1,

862

1,85

0

2,

110

2,16

9

2,

181

1,

631

In

com

e ta

x pr

ovisi

on32

,692

(2

8,35

1)

(16,

637)

(2

8,49

2)

(33,

526)

(18,

960)

Net i

ncom

e58

,874

25

,127

6,

321

37,0

31

53,7

99

(1

8,87

7)

51

,420

54,4

62

57

,712

61,2

42

64

,405

67,6

25

71

,006

74,5

57

78

,284

82,1

99

86

,309

Net

inco

me

attri

buta

ble

to

nonc

ontro

lling

inte

rest

-

--

--

(520

)

N

et in

com

e at

tribu

tabl

e to

Kor

n Fe

rry

Inte

rnat

iona

l 58

,874

25

,127

6,

321

37,0

31

53,7

99

(1

9,39

7)

51

,420

54,4

62

57

,712

61,2

42

64

,405

67,6

25

71

,006

74,5

57

78

,284

82,1

99

86

,309

111

Figure 58: Common Sized As-Stated Forecasted Income Statement for Korn Ferry

Com

mon

Size

d In

com

e St

atem

ents

As-

Stat

ed20

1120

1220

1320

1420

1520

1620

1720

1820

1920

2020

2120

2220

2320

2420

2520

2620

27(in

thou

sand

s)

Fee

Reve

nue

95.88%

95.61%

95.66%

96.46%

96.44%

95.95%

Reim

burs

ed o

ut-o

f-poc

ket

enga

gem

ent e

xpen

ses

4.12%

4.39%

4.34%

3.54%

3.56%

4.05%

Tota

l Rev

enue

100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%

100.00%100.00%

100.00%100.00%100.00%100.00%100.00%

Com

pens

tatio

ns a

nd b

enef

its65.37%

64.61%

65.36%

64.98%

64.86%

66.63%

Gene

ral a

nd a

dmin

sitra

tive

expe

nses

15.01%

16.80%

16.80%

15.27%

13.69%

15.82%

Reim

burs

ed e

xpen

ses

4.12%

4.39%

4.34%

3.54%

3.56%

4.05%

Cost

of s

ervic

es2.54%

2.37%

3.41%

4.01%

3.72%

4.44%

4.85%

4.70%

4.55%

4.40%

4.25%

4.25%

4.25%

4.25%

4.25%

4.25%

4.25%

Depr

ecia

tion

and

amor

tizat

ion

1.63%

1.70%

2.24%

2.63%

2.59%

2.69%

Rest

ruct

urin

g ch

arge

s, n

et0.27%

0.11%

2.69%

0.37%

0.89%

2.45%

Good

will

Impa

irmen

t Exp

ense

--

--

--

Tota

l ope

ratin

g ex

pens

es88.95%

89.98%

94.84%

90.80%

89.30%

96.09%

91.44%

91.42%

91.41%

91.40%

91.38%

91.38%

91.38%

91.38%

91.38%

91.38%

91.38%

Oper

atin

g in

com

e11.05%

10.02%

5.65%

9.20%

10.70%

3.91%

8.56%

8.58%

8.59%

8.60%

8.62%

8.62%

8.62%

8.62%

8.62%

8.62%

8.62%

Othe

r (lo

ss) i

ncom

e, n

et0.83%

-0.03%

0.74%

0.98%

0.70%

-0.31%

Inte

rest

inco

me

(exp

ense

), ne

t-0.33%

-0.22%

-0.28%

-0.24%

-0.17%

0.02%

Inco

me

befo

re p

rovis

ion

for

inco

me

taxe

s an

d eq

uity

in

earn

ings

of u

ncon

solid

ated

su

bsid

iarie

s11.56%

9.77%

5.63%

9.95%

11.23%

3.62%

Equi

ty in

ear

ning

s of

un

cons

olid

ated

sub

sidia

ries,

net

0.24%

0.22%

0.25%

0.22%

0.20%

0.12%

Inco

me

tax

prov

ision

4.21%

-3.43%

-1.96%

-2.86%

-3.14%

-1.41%

Net i

ncom

e7.58%

6.57%

4.29%

7.30%

8.29%

2.33%

7.31%

7.32%

7.33%

7.34%

7.35%

7.35%

7.35%

7.35%

7.35%

7.35%

7.35%

Net i

ncom

e at

tribu

tabl

e to

no

ncon

trollin

g in

tere

st-

--

--

-0.04%

Net i

ncom

e at

tribu

tabl

e to

Kor

n Fe

rry

Inte

rnat

iona

l7.58%

6.57%

3.92%

7.30%

8.29%

2.30%

7.31%

7.32%

7.33%

7.34%

7.35%

7.35%

7.35%

7.35%

7.35%

7.35%

7.35%

112

Figure 59: Common Sized Restated Forecasted Income Statement for Korn Ferry

Com

mon

Size

d In

com

e St

atem

ents

Res

tate

d20

1120

1220

1320

1420

1520

1620

1720

1820

1920

2020

2120

2220

2320

2420

2520

2620

27(in

thou

sand

s)

Fee

Reve

nue

95.88%

95.61%

95.66%

96.46%

96.44%

95.95%

Reim

burs

ed o

ut-o

f-poc

ket

enga

gem

ent e

xpen

ses

4.12%

4.39%

4.34%

3.54%

3.56%

4.05%

Tota

l Rev

enue

100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%

100.00%100.00%100.00%

Com

pens

tatio

ns a

nd b

enef

its65.37%

64.61%

65.36%

64.98%

64.86%

66.63%

Gene

ral a

nd a

dmin

sitra

tive

expe

nses

15.01%

16.80%

14.86%

12.94%

11.66%

14.96%

Reim

burs

ed e

xpen

ses

4.12%

4.39%

4.34%

3.54%

3.56%

4.05%

Cost

of s

ervic

es2.54%

2.37%

3.41%

4.01%

3.72%

4.44%

4.85%

4.70%

4.55%

4.40%

4.25%

4.25%

4.25%

4.25%

4.25%

4.25%

4.25%

Depr

ecia

tion

and

amor

tizat

ion

1.63%

1.70%

2.24%

2.63%

2.59%

2.69%

Rest

ruct

urin

g ch

arge

s, n

et0.27%

0.11%

2.69%

0.37%

0.89%

2.45%

Good

will

Impa

irmen

t Exp

ense

-3.53%

4.33%

5.32%

4.68%

3.93%

Tota

l ope

ratin

g ex

pens

es88.95%

93.51%

97.22%

93.79%

91.95%

99.16%

94.20%

94.19%

94.18%

94.17%

94.16%

94.16%

94.16%

94.16%

94.16%

94.16%

94.16%

Oper

atin

g in

com

e11.05%

6.49%

2.78%

6.21%

8.05%

0.84%

5.80%

5.81%

5.82%

5.83%

5.84%

5.84%

5.84%

5.84%

5.84%

5.84%

5.84%

Othe

r (lo

ss) i

ncom

e, n

et0.83%

-0.03%

0.74%

0.98%

0.70%

-0.31%

Inte

rest

inco

me

(exp

ense

), ne

t-0.33%

-0.22%

-1.07%

-0.83%

-0.76%

-0.64%

Inco

me

befo

re p

rovis

ion

for

inco

me

taxe

s an

d eq

uity

in

earn

ings

of u

ncon

solid

ated

su

bsid

iarie

s11.56%

6.24%

2.45%

6.36%

7.99%

-0.11%

Equi

ty in

ear

ning

s of

un

cons

olid

ated

sub

sidia

ries,

net

0.24%

0.22%

0.25%

0.22%

0.20%

0.12%

Inco

me

tax

prov

ision

4.21%

-3.43%

-1.96%

-2.86%

-3.14%

-1.41%

Net i

ncom

e7.58%

3.04%

0.74%

3.72%

5.05%

-1.40%

3.62%

3.62%

3.63%

3.63%

3.64%

3.64%

3.64%

3.64%

3.64%

3.64%

3.64%

Net i

ncom

e at

tribu

tabl

e to

no

ncon

trollin

g in

tere

st-

--

--

-0.04%

Net i

ncom

e at

tribu

tabl

e to

Kor

n Fe

rry

Inte

rnat

iona

l7.58%

3.04%

0.74%

3.72%

5.05%

-1.44%

3.62%

3.62%

3.63%

3.63%

3.64%

3.64%

3.64%

3.64%

3.64%

3.64%

3.64%

113

Dividends Forecasting

Korn Ferry started paying their dividends of $0.10 per share at the last quarter of fiscal year 2015 on a quarterly basis. We assume that the dividend payout ratio for the next 3

years should be 23.11% because there were no dividends from 2011-2014 and an acquisition in 2016. This skews net income and leaves the 2015 dividend payout ratio

to be the only reasonable assumption. We then must multiply the dividend payout ratio of 5.78% by 4 to get 23.11% because 2015 only paid out one quarter of dividends. For

the next 7 years, we used the dividend payout ratio industry average of 15.28%,

leaving out On Assignment and Heidrick & Struggles because On Assignment has a 0 dividend payout ratio and Heidrick’s dividend payout ratio is abnormal (as shown in

figure 60). The reason we assume the dividends will pay out less than the first 3 years is because we believe Korn Ferry has not yet reached a point of maturity where they

would choose to reinvest the majority of their earnings to grow more.

Figure 60: Industry Dividend Payout Ratio

Balance Sheet

After the forecasting for the income statement and dividends was finished, we used those forecasts and applied them to the forecasting of the balance sheet. The most

important accounts to forecast would include: total current assets, total non-current assets, total assets, total current liabilities, total liabilities, retained earnings, total

stockholders’ equity, and total liabilities and stockholders’ equity. When forecasting out

the as-stated and restated balance sheet we used the asset turnover, current ratio, and days sales outstanding. Since Korn Ferry is a service industry, days’ supply of inventory

2011 2012 2013 2014 2015 2016 AverageOnAssignment - - - - - - 0ManpowerGroup -23.07% -26.95% -36.44% -26.84% -28.30% -28.32%KellyService -5.97% -15.17% -12.90% -32.07% -14.31% -16.08%KornFerry - - - -5.78% -70.63% -1.44%Heidrick 28.83% -192.16% -114.38% -145.12% -58.32% -96%IndustryAvg. -15.28%

Dividendpayoutratio

114

cannot be calculated and therefore left out. The asset turnover, current asset

percentage of total assets, and days sales outstanding for 2016 are skewed consequently from the acquisition and merger with Hay group.

To connect the income statement and balance sheet we first must start with the asset turnover. To forecast total assets for the next 10 years we use total sales divided by the

past 5 years’ average asset turnover leaving out 2016. The total asset in 2017 is smaller than 2016. However, we assume the 2017 forecasted total asset would actually be

larger than 2016 because we expect the firm would be increasing their assets over

time. We assume that the current asset is 38% of the total assets for the following years. For the current ratio at first we use the average of the past 5 years of 1.6 for

year 2017. Then for 2018 we increase by .05 to make it 1.65. Then, for the next 8 years we use a current ratio of 1.7. Lastly, days sales outstanding was like the asset

turnover. Where we found the average of the past years leaving out the fiscal year of 2016 then adding in the 0.15 predicted industry growth rate by Yahoo Finance. To find

the ending retained earnings for both as-stated and restated we added previous retained earnings and net income then subtracted out dividends which can be found in

figures 61 and 62. Followed by creating a common sized balance sheet, by making each account a percentage of total assets.

115

Figu

re 6

1: N

ew F

orec

aste

d As

-Sta

ted

Endi

ng R

etai

ned

Earn

ings

Figu

re 6

2: N

ew F

orec

aste

d Re

stat

ed E

ndin

g Re

tain

ed E

arni

ngs

As-S

tate

d 20

1120

1220

1320

1420

1520

1620

1720

1820

1920

2020

2120

2220

2320

2420

2520

2620

27Be

g.Re

tain

ed E

arni

ngs

90,2

20

148,

494

20

2,79

7

236,

090

30

8,78

1

392,

033

40

1,11

3

481,

019

56

5,65

3

655,

336

76

0,19

4

870,

468

98

6,25

5

1,

107,

832

1,

235,

488

1,

369,

526

1,

510,

266

Pl

us N

et In

com

e58

,874

54

,303

33

,293

72

,691

88

,357

30

,913

10

3,92

2

110,

071

11

6,63

9

123,

773

13

0,16

5

136,

674

14

3,50

7

15

0,68

3

15

8,21

7

16

6,12

8

17

4,43

4

Le

ss D

ivide

nds

(600

)

(5,1

05)

(21,

833)

(2

4,01

6)

(25,

437)

(2

6,95

5)

(18,

915)

(1

9,89

2)

(20,

886)

(2

1,93

1)

(2

3,02

7)

(2

4,17

8)

(2

5,38

7)

(2

6,65

7)

En

d. R

etai

ned

Earn

ings

148,

494

20

2,79

7

236,

090

30

8,78

1

392,

033

40

1,11

3

481,

019

56

5,65

3

655,

336

76

0,19

4

870,

468

98

6,25

5

1,10

7,83

2

1,23

5,48

8

1,36

9,52

6

1,51

0,26

6

1,65

8,04

4

Rest

ated

20

1120

1220

1320

1420

1520

1620

1720

1820

1920

2020

2120

2220

2320

2420

2520

2620

27Be

g.Re

tain

ed E

arni

ngs

90,2

20

148,

494

17

3,62

1

179,

942

21

6,97

3

265,

667

22

4,43

7

251,

840

28

0,86

5

311,

622

35

3,94

9

398,

462

44

5,20

1

49

4,27

6

54

5,80

6

59

9,91

2

65

6,72

3

Pl

us N

et In

com

e58

,874

25

,127

6,

321

37,0

31

53,7

99

(19,

397)

51

,420

54

,462

57

,712

61

,242

64

,405

67

,625

71

,006

74,5

57

78

,284

82,1

99

86

,309

Less

Divi

dend

s(6

00)

-

-

-

(5

,105

)

(2

1,83

3)

(24,

016)

(2

5,43

7)

(26,

955)

(1

8,91

5)

(19,

892)

(2

0,88

6)

(21,

931)

(23,

027)

(24,

178)

(25,

387)

(26,

657)

End.

Ret

aine

d Ea

rnin

gs14

8,49

4

173,

621

17

9,94

2

216,

973

26

5,66

7

224,

437

25

1,84

0

280,

865

31

1,62

2

353,

949

39

8,46

2

445,

201

49

4,27

6

54

5,80

6

59

9,91

2

65

6,72

3

71

6,37

5

116

Figure 63: As-Stated Forecasted Balance Sheet for Korn Ferry

Bala

nce

Shee

t (As

-Sta

ted)

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

(in th

ousa

nds)

Asse

tsCu

rren

t Ass

ets

Cash

and

cas

h eq

uiva

lent

s24

6,85

6.00

28

2,00

5.00

224,

066.

00

33

3,71

7.00

380,

838.

00

27

3,25

2.00

Mar

keta

ble

secu

ritie

s20

,868

.00

40

,936

.00

20

,347

.00

9,

566.

00

25,7

57.0

0

11,3

38.0

0

Rece

ivabl

es d

ue fr

om c

lient

s, n

et12

8,85

9.00

12

6,57

9.00

161,

508.

00

17

5,98

6.00

188,

543.

00

31

5,97

5.00

319,

492.

22

33

7,86

3.02

357,

459.

07

37

8,72

7.89

397,

664.

28

41

7,54

7.50

438,

424.

87

46

0,34

6.11

483,

363.

42

50

7,53

1.59

Inco

me

taxe

s an

d ot

her r

ecei

vabl

es5,

138.

00

11

,902

.00

8,

944.

00

8,24

4.00

10

,966

.00

20

,579

.00

Pr

epai

d ex

pens

es a

nd o

ther

ass

ets

29,6

62.0

0

27,8

15.0

0

28,7

24.0

0

29,9

55.0

0

31,0

54.0

0

43,1

30.0

0

Tota

l cur

rent

ass

ets

441,

597.

00

489,

237.

00

44

3,58

9.00

557,

468.

00

63

7,15

8.00

664,

274.

00

76

9,46

6.72

818,

171.

78

86

8,61

6.09

913,

285.

25

96

0,90

6.55

1,01

1,01

5.17

1,

061,

565.

93

1,11

4,64

4.23

1,

170,

376.

44

1,22

8,89

5.26

Mar

keta

ble

secu

ritie

s, n

on-c

urre

nt10

1,36

3.00

94

,798

.00

12

1,56

9.00

124,

993.

00

11

8,81

9.00

130,

092.

00

Pr

oper

ty a

nd e

quip

men

t, ne

t43

,142

.00

49

,808

.00

53

,628

.00

60

,434

.00

62

,088

.00

95

,436

.00

96

,089

.86

10

0,26

0.16

106,

075.

25

11

2,38

6.73

118,

006.

07

12

3,90

6.37

130,

101.

69

13

6,60

6.77

143,

437.

11

15

0,60

8.97

Cash

sur

rend

er v

alue

of c

ompa

ny

owne

d lif

e in

sura

nce

polic

ies,

net

of

loan

s70

,987

.00

77

,848

.00

85

,873

.00

94

,274

.00

10

2,69

1.00

107,

296.

00

De

ferr

ed in

com

e ta

xes,

net

64,4

18.0

0

68,1

20.0

0

66,7

14.0

0

59,5

25.0

0

59,8

41.0

0

27,1

63.0

0

Good

will,

net

183,

952.

00

176,

338.

00

25

7,29

3.00

257,

582.

00

25

4,44

0.00

590,

072.

00

In

tang

ible

ass

ets,

net

22,2

89.0

0

20,4

13.0

0

58,1

87.0

0

49,5

60.0

0

47,9

01.0

0

233,

027.

00

In

vest

men

ts a

nd o

ther

ass

ets

43,9

32.0

0

38,1

27.0

0

28,3

76.0

0

29,8

30.0

0

34,8

63.0

0

51,2

40.0

0

Tota

l non

cur

rent

ass

ets

530,

083.

00

525,

452.

00

67

1,64

0.00

676,

198.

00

68

0,64

3.00

1,23

4,32

6.00

1,

255,

445.

70

1,33

4,91

1.85

1,

417,

215.

73

1,49

0,09

6.98

1,

567,

794.

90

1,64

9,55

1.07

1,

732,

028.

63

1,81

8,63

0.06

1,

909,

561.

56

2,00

5,03

9.64

To

tal A

sset

s97

1,68

0.00

1,

014,

689.

00

1,11

5,22

9.00

1,

233,

666.

00

1,31

7,80

1.00

1,

898,

600.

00

2,02

4,91

2.43

2,

153,

083.

63

2,28

5,83

1.82

2,

403,

382.

23

2,52

8,70

1.45

2,

660,

566.

25

2,79

3,59

4.56

2,

933,

274.

29

3,07

9,93

8.00

3,

233,

934.

90

LIAB

ILIT

IES

AND

STOC

KHOL

DERS

’ EQ

UITY

Acco

unts

pay

able

12

,504

.00

14

,667

.00

19

,460

.00

19

,375

.00

19

,238

.00

26

,634

.00

In

com

e ta

xes

paya

ble

4,67

4.00

8,72

0.00

5,

502.

00

13,0

14.0

0

3,81

3.00

8,

396.

00

Com

pens

atio

n an

d be

nefit

s pa

yabl

e

173,

097.

00

160,

810.

00

16

0,29

8.00

192,

035.

00

21

9,36

4.00

266,

211.

00

Ot

her a

ccru

ed li

abilit

ies

43,5

91.0

0

37,5

27.0

0

83,2

91.0

0

62,5

09.0

0

63,5

95.0

0

145,

023.

00

To

tal c

urre

nt li

abilit

ies

233,

866.

00

221,

724.

00

26

8,55

1.00

286,

933.

00

30

6,01

0.00

476,

264.

00

48

0,91

6.70

495,

861.

68

51

0,95

0.64

537,

226.

62

56

5,23

9.15

594,

714.

81

62

4,45

0.55

655,

673.

08

68

8,45

6.73

722,

879.

57

19

,077

.00

De

ferr

ed c

ompe

nsat

ion

and

othe

r re

tirem

ent p

lans

13

9,55

8.00

14

2,57

7.00

159,

706.

00

16

9,23

5.00

173,

432.

00

21

6,11

3.00

Defe

rred

tax

liabi

litie

s-

--

--

5,08

8.00

Ot

her l

iabi

litie

s19

,919

.00

20

,912

.00

22

,504

.00

21

,962

.00

23

,110

.00

43

,834

.00

To

tal l

iabi

litie

s39

3,34

3.00

38

5,21

3.00

450,

761.

00

47

8,13

0.00

502,

552.

00

85

1,29

9.00

897,

705.

47

94

1,24

2.91

984,

307.

64

99

7,00

0.00

1,01

2,04

5.51

1,

028,

122.

92

1,03

9,57

4.47

1,

051,

598.

60

1,06

4,22

3.94

1,

077,

480.

54

Com

mitm

ents

and

con

tinge

ncie

s

Stoc

khol

ders

’ equ

ity:

Com

mon

sto

ck: $

0.01

par

val

ue40

4,70

3.00

41

9,99

8.00

431,

508.

00

44

9,63

1.00

463,

839.

00

70

2,09

8.00

Reta

ined

ear

ning

s14

8,49

4.00

20

2,79

7.00

236,

090.

00

30

8,78

1.00

392,

033.

00

40

1,11

3.00

481,

018.

96

56

5,65

2.72

655,

336.

18

76

0,19

4.23

870,

467.

94

98

6,25

5.33

1,10

7,83

2.09

1,

235,

487.

68

1,36

9,52

6.06

1,

510,

266.

36

Accu

mul

ated

oth

er c

ompr

ehen

sive

loss

, net

25

,660

.00

7,

191.

00

(2,6

31.0

0)

(2,3

88.0

0)

(40,

623.

00)

(57,

911.

00)

Tota

l Kor

n/Fe

rry

Inte

rnat

iona

l st

ockh

olde

rs’ e

quity

57

8,85

7.00

62

9,98

6.00

664,

967.

00

75

6,02

4.00

815,

249.

00

1,

045,

300.

00

Less

: not

es re

ceiva

ble

from

st

ockh

olde

rs(5

20.0

0)

(510

.00)

(499

.00)

(488

.00)

--

Nonc

ontro

lling

inte

rest

--

--

-2,

001.

00

Tota

l sto

ckho

lder

s’ eq

uity

578,

337.

00

629,

476.

00

66

4,46

8.00

755,

536.

00

81

5,24

9.00

1,04

7,30

1.00

1,

127,

206.

96

1,21

1,84

0.72

1,

301,

524.

18

1,40

6,38

2.23

1,

516,

655.

94

1,63

2,44

3.33

1,

754,

020.

09

1,88

1,67

5.68

2,

015,

714.

06

2,15

6,45

4.36

0.

09

0.

06

0.

14

0.

08

0.

28

0.

08

0.

08

0.

07

To

tal l

iabi

litie

s an

d st

ockh

olde

rs’

equi

ty

971,

680.

00

1,01

4,68

9.00

1,

115,

229.

00

1,23

3,66

6.00

1,

317,

801.

00

1,89

8,60

0.00

2,

024,

912.

43

2,15

3,08

3.63

2,

285,

831.

82

2,40

3,38

2.23

2,

528,

701.

45

2,66

0,56

6.25

2,

793,

594.

56

2,93

3,27

4.29

3,

079,

938.

00

3,23

3,93

4.90

117

Figure 64: Restated Forecasted Balance Sheet for Korn Ferry

Bala

nce

Shee

t (Re

stat

ed)

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

(in th

ousa

nds)

Asse

tsCu

rren

t Ass

ets

Cash

and

cas

h eq

uiva

lent

s24

6,85

6.00

28

2,00

5.00

224,

066.

00

33

3,71

7.00

380,

838.

00

27

3,25

2.00

Mar

keta

ble

secu

ritie

s20

,868

.00

40

,936

.00

20

,347

.00

9,

566.

00

25,7

57.0

0

11,3

38.0

0

Rece

ivabl

es d

ue fr

om c

lient

s, n

et12

8,85

9.00

12

6,57

9.00

161,

508.

00

17

5,98

6.00

188,

543.

00

31

5,97

5.00

319,

492.

22

33

7,86

3.02

357,

459.

07

37

8,72

7.89

397,

664.

28

41

7,54

7.50

438,

424.

87

46

0,34

6.11

483,

363.

42

50

7,53

1.59

Inco

me

taxe

s an

d ot

her

rece

ivabl

es5,

138.

00

11

,902

.00

8,

944.

00

8,24

4.00

10

,966

.00

20

,579

.00

Pr

epai

d ex

pens

es a

nd o

ther

ass

ets

29,6

62.0

0

27,8

15.0

0

28,7

24.0

0

29,9

55.0

0

31,0

54.0

0

43,1

30.0

0

Tota

l cur

rent

ass

ets

441,

597.

00

489,

237.

00

44

3,58

9.00

557,

468.

00

63

7,15

8.00

664,

274.

00

74

0,34

9.59

768,

364.

29

79

6,37

8.99

824,

393.

69

86

9,66

3.70

914,

981.

74

96

0,73

0.83

1,00

8,76

7.37

1,

059,

205.

74

1,11

2,16

6.02

Mar

keta

ble

secu

ritie

s, n

on-c

urre

nt10

1,36

3.00

94

,798

.00

12

1,56

9.00

124,

993.

00

11

8,81

9.00

130,

092.

00

Pr

oper

ty a

nd e

quip

men

t, ne

t43

,142

.00

49

,808

.00

53

,628

.00

60

,434

.00

62

,088

.00

95

,436

.00

Ca

sh s

urre

nder

val

ue o

f com

pany

ow

ned

life

insu

ranc

e po

licie

s, n

et

of lo

ans

70,9

87.0

0

77,8

48.0

0

85,8

73.0

0

94,2

74.0

0

102,

691.

00

10

7,29

6.00

Defe

rred

inco

me

taxe

s, n

et64

,418

.00

68

,120

.00

66

,714

.00

59

,525

.00

59

,841

.00

27

,163

.00

Go

odw

ill, n

et18

3,95

2.00

13

9,54

7.60

191,

326.

20

13

8,63

3.80

85,6

52.8

0

368,

303.

40

In

tang

ible

ass

ets,

net

22,2

89.0

0

20,4

13.0

0

58,1

87.0

0

49,5

60.0

0

47,9

01.0

0

233,

027.

00

In

vest

men

ts a

nd o

ther

ass

ets

43,9

32.0

0

38,1

27.0

0

28,3

76.0

0

29,8

30.0

0

34,8

63.0

0

51,2

40.0

0

Capi

tal o

pera

ting

leas

e as

set

-17

6,61

1.40

166,

063.

88

15

5,12

5.32

251,

110.

13

35

8,41

1.16

Tota

l non

-cur

rent

ass

ets

530,

083.

00

665,

273.

00

77

1,73

7.08

712,

375.

12

76

2,96

5.93

1,37

0,96

8.56

1,

374,

934.

96

1,42

6,96

2.25

1,

478,

989.

55

1,53

1,01

6.84

1,

615,

089.

73

1,69

9,25

1.80

1,

784,

214.

39

1,87

3,42

5.11

1,

967,

096.

37

2,06

5,45

1.19

To

tal A

sset

s97

1,68

0.00

1,

154,

510.

00

1,21

5,32

6.08

1,

269,

843.

12

1,40

0,12

3.93

2,

035,

242.

56

2,11

5,28

4.55

2,

195,

326.

54

2,27

5,36

8.54

2,

355,

410.

53

2,48

4,75

3.43

2,

614,

233.

54

2,74

4,94

5.22

2,

882,

192.

48

3,02

6,30

2.11

3,

177,

617.

21

LIAB

ILIT

IES

AND

STOC

KHOL

DERS

’ EQ

UITY

Acco

unts

pay

able

12

,504

.00

14

,667

.00

19

,460

.00

19

,375

.00

19

,238

.00

26

,634

.00

In

com

e ta

xes

paya

ble

4,67

4.00

8,72

0.00

5,

502.

00

13,0

14.0

0

3,81

3.00

8,

396.

00

Com

pens

atio

n an

d be

nefit

s pa

yabl

e

173,

097.

00

160,

810.

00

16

0,29

8.00

192,

035.

00

21

9,36

4.00

266,

211.

00

Te

rm lo

an

--

--

-30

,000

.00

Ot

her a

ccru

ed li

abilit

ies

43,5

91.0

0

37,5

27.0

0

83,2

91.0

0

62,5

09.0

0

63,5

95.0

0

145,

023.

00

To

tal c

urre

nt li

abilit

ies

233,

866.

00

221,

724.

00

26

8,55

1.00

286,

933.

00

30

6,01

0.00

476,

264.

00

49

3,56

6.40

512,

242.

86

53

0,91

9.33

549,

595.

79

57

9,77

5.80

609,

987.

83

64

0,48

7.22

672,

511.

58

70

6,13

7.16

741,

444.

02

Defe

rred

com

pens

atio

n an

d ot

her

retir

emen

t pla

ns

139,

558.

00

142,

577.

00

15

9,70

6.00

169,

235.

00

17

3,43

2.00

216,

113.

00

Te

rm lo

an, n

on-c

urre

nt-

--

--

110,

000.

00

De

ferr

ed ta

x lia

bilit

ies

--

--

-5,

088.

00

Capi

tal o

pera

ting

leas

e lia

bilit

y-

176,

611.

40

15

6,24

5.08

127,

984.

78

20

8,68

9.10

313,

318.

40

Ot

her l

iabi

litie

s19

,919

.00

20

,912

.00

22

,504

.00

21

,962

.00

23

,110

.00

43

,834

.00

To

tal l

iabi

litie

s39

3,34

3.00

56

1,82

4.00

607,

006.

08

60

6,11

4.78

711,

241.

10

1,

164,

617.

40

1,21

7,25

6.07

1,

268,

273.

20

1,31

7,55

8.55

1,

355,

273.

57

1,44

0,10

3.42

1,

522,

844.

83

1,60

4,48

0.86

1,

690,

198.

70

1,78

0,20

2.43

1,

874,

706.

35

Com

mitm

ents

and

con

tinge

ncie

s

Stoc

khol

ders

’ equ

ity:

Com

mon

sto

ck: $

0.01

par

val

ue40

4,70

3.00

41

9,99

8.00

431,

508.

00

44

9,63

1.00

463,

839.

00

70

2,09

8.00

Reta

ined

ear

ning

s14

8,49

4.00

17

3,62

0.60

179,

942.

00

21

6,97

3.00

265,

667.

00

22

4,43

7.00

251,

840.

48

28

0,86

5.34

311,

621.

98

35

3,94

8.96

398,

462.

01

44

5,20

0.72

494,

276.

36

54

5,80

5.78

599,

911.

68

65

6,72

2.87

Accu

mul

ated

oth

er c

ompr

ehen

sive

loss

, net

25

,660

.00

7,

191.

00

(2,6

31.0

0)

(2,3

88.0

0)

(40,

623.

00)

(57,

911.

00)

Tota

l Kor

n/Fe

rry

Inte

rnat

iona

l st

ockh

olde

rs’ e

quity

57

8,85

7.00

59

3,19

6.00

608,

819.

00

66

4,21

6.00

688,

883.

00

86

8,62

4.00

Less

: not

es re

ceiva

ble

from

st

ockh

olde

rs(5

20.0

0)

(510

.00)

(499

.00)

(488

.00)

--

Nonc

ontro

lling

inte

rest

--

--

2,00

1.00

To

tal s

tock

hold

ers’

equi

ty57

8,33

7.00

59

2,68

6.00

608,

320.

00

66

3,72

8.00

688,

883.

00

87

0,62

5.00

898,

028.

48

92

7,05

3.34

957,

809.

98

1,

000,

136.

96

1,04

4,65

0.01

1,

091,

388.

72

1,14

0,46

4.36

1,

191,

993.

78

1,24

6,09

9.68

1,

302,

910.

87

Tota

l lia

bilit

ies

and

stoc

khol

ders

’ eq

uity

97

1,68

0.00

1,

154,

510.

00

1,21

5,32

6.08

1,

269,

842.

78

1,40

0,12

4.10

2,

035,

242.

40

2,11

5,28

4.55

2,

195,

326.

54

2,27

5,36

8.54

2,

355,

410.

53

2,48

4,75

3.43

2,

614,

233.

54

2,74

4,94

5.22

2,

882,

192.

48

3,02

6,30

2.11

3,

177,

617.

21

118

Figure 65: Common Sized As-Stated Forecasted Balance Sheet for Korn Ferry

Bala

nce

Shee

t (As

-Sta

ted)

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

(in th

ousa

nds)

Asse

tsCu

rren

t Ass

ets

Cash

and

cas

h eq

uiva

lent

s25.41%

27.79%

20.09%

27.05%

28.90%

14.39%

Mar

keta

ble

secu

ritie

s2.15%

4.03%

1.82%

0.78%

1.95%

0.60%

Rece

ivabl

es d

ue fr

om c

lient

s, n

et13.26%

12.47%

14.48%

14.27%

14.31%

16.64%

15.78%

15.69%

15.64%

15.76%

15.73%

15.69%

15.69%

15.69%

15.69%

15.69%

Inco

me

taxe

s an

d ot

her

rece

ivabl

es0.53%

1.17%

0.80%

0.67%

0.83%

1.08%

Prep

aid

expe

nses

and

oth

er a

sset

s3.05%

2.74%

2.58%

2.43%

2.36%

2.27%

Tota

l cur

rent

ass

ets

45.45%

48.22%

39.78%

45.19%

48.35%

34.99%

38.00%

38.00%

38.00%

38.00%

38.00%

38.00%

38.00%

38.00%

38.00%

38.00%

Mar

keta

ble

secu

ritie

s, n

on-c

urre

nt10.43%

9.34%

10.90%

10.13%

9.02%

6.85%

Prop

erty

and

equ

ipm

ent,

net

4.44%

4.91%

4.81%

4.90%

4.71%

5.03%

Cash

sur

rend

er v

alue

of c

ompa

ny

owne

d lif

e in

sura

nce

polic

ies,

net

of

loan

s7.31%

7.67%

7.70%

7.64%

7.79%

5.65%

Defe

rred

inco

me

taxe

s, n

et6.63%

6.71%

5.98%

4.83%

4.54%

1.43%

Good

will,

net

18.93%

17.38%

23.07%

20.88%

19.31%

31.08%

Inta

ngib

le a

sset

s, n

et2.29%

2.01%

5.22%

4.02%

3.63%

12.27%

Inve

stm

ents

and

oth

er a

sset

s4.52%

3.76%

2.54%

2.42%

2.65%

2.70%

Tota

l non

cur

rent

ass

ets

54.55%

51.78%

60.22%

54.81%

51.65%

65.01%

62.00%

62.00%

62.00%

62.00%

62.00%

62.00%

62.00%

62.00%

62.00%

62.00%

Tota

l Ass

ets

100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%

LIAB

ILIT

IES

AND

STOC

KHOL

DERS

’ EQ

UITY

Acco

unts

pay

able

1.29%

1.45%

1.74%

1.57%

1.46%

1.40%

Inco

me

taxe

s pa

yabl

e0.48%

0.86%

0.49%

1.05%

0.29%

0.44%

Com

pens

atio

n an

d be

nefit

s pa

yabl

e 17.81%

15.85%

14.37%

15.57%

16.65%

14.02%

Othe

r acc

rued

liab

ilitie

s4.49%

3.70%

7.47%

5.07%

4.83%

7.64%

Tota

l cur

rent

liab

ilitie

s24.07%

21.85%

24.08%

23.26%

23.22%

25.09%

23.75%

23.03%

22.35%

22.35%

22.35%

22.35%

22.35%

22.35%

22.35%

22.35%

0.00%

0.00%

0.00%

1.45%

0.00%

Defe

rred

com

pens

atio

n an

d ot

her

retir

emen

t pla

ns

14.36%

14.05%

14.32%

13.72%

13.16%

11.38%

Defe

rred

tax

liabi

litie

s-

--

--

0.27%

Othe

r lia

bilit

ies

2.05%

2.06%

2.02%

1.78%

1.75%

2.31%

Tota

l lia

bilit

ies

40.48%

37.96%

40.42%

38.76%

38.14%

44.84%

44.33%

43.72%

43.06%

41.48%

40.02%

38.64%

37.21%

35.85%

34.55%

33.32%

Com

mitm

ents

and

con

tinge

ncie

s

Stoc

khol

ders

’ equ

ity:

Com

mon

sto

ck: $

0.01

par

val

ue41.65%

41.39%

38.69%

36.45%

35.20%

36.98%

Reta

ined

ear

ning

s15.28%

19.99%

21.17%

25.03%

29.75%

21.13%

23.76%

26.27%

28.67%

31.63%

34.42%

37.07%

39.66%

42.12%

44.47%

46.70%

Accu

mul

ated

oth

er c

ompr

ehen

sive

loss

, net

2.64%

0.71%

-0.24%

-0.19%

-3.08%

-3.05%

Tota

l Kor

n/Fe

rry

Inte

rnat

iona

l st

ockh

olde

rs’ e

quity

59.57%

62.09%

59.63%

61.28%

61.86%

55.06%

Less

: not

es re

ceiva

ble

from

st

ockh

olde

rs-0.05%

-0.05%

-0.04%

-0.04%

-No

ncon

trollin

g in

tere

st-

--

--

0.11%

Tota

l sto

ckho

lder

s’ eq

uity

59.52%

62.04%

59.58%

61.24%

61.86%

55.16%

55.67%

56.28%

56.94%

58.52%

59.98%

61.36%

62.79%

64.15%

65.45%

66.68%

Tota

l lia

bilit

ies

and

stoc

khol

ders

’ eq

uity

100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%

119

Figure 66: Common Sized Restated Forecasted Balance Sheet for Korn Ferry

Bala

nce

Shee

t (As

-Sta

ted)

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

(in th

ousa

nds)

Asse

tsCu

rren

t Ass

ets

Cash

and

cas

h eq

uiva

lent

s25.41%

24.43%

18.44%

26.28%

27.20%

13.43%

Mar

keta

ble

secu

ritie

s2.15%

3.55%

1.67%

0.75%

1.84%

0.56%

Rece

ivabl

es d

ue fr

om c

lient

s, n

et13.26%

10.96%

13.29%

13.86%

13.47%

15.53%

15.10%

15.39%

15.71%

16.08%

28.40%

15.97%

15.97%

15.97%

15.97%

15.97%

Inco

me

taxe

s an

d ot

her r

ecei

vabl

es0.53%

1.03%

0.74%

0.65%

0.78%

1.01%

Prep

aid

expe

nses

and

oth

er a

sset

s3.05%

2.41%

2.36%

2.36%

2.22%

2.12%

Tota

l cur

rent

ass

ets

45.45%

42.38%

36.50%

43.90%

45.51%

32.64%

35.00%

35.00%

35.00%

35.00%

35.00%

35.00%

35.00%

35.00%

35.00%

35.00%

Mar

keta

ble

secu

ritie

s, n

on-c

urre

nt10.43%

8.21%

10.00%

9.84%

8.49%

6.39%

Prop

erty

and

equ

ipm

ent,

net

4.44%

4.31%

4.41%

4.76%

4.43%

4.69%

Cash

sur

rend

er v

alue

of c

ompa

ny

owne

d lif

e in

sura

nce

polic

ies,

net

of

loan

s7.31%

6.74%

7.07%

7.42%

7.33%

5.27%

Defe

rred

inco

me

taxe

s, n

et6.63%

5.90%

5.49%

4.69%

4.27%

1.33%

Good

will,

net

18.93%

12.09%

15.74%

10.92%

6.12%

18.10%

Inta

ngib

le a

sset

s, n

et2.29%

1.77%

4.79%

3.90%

3.42%

11.45%

Inve

stm

ents

and

oth

er a

sset

s4.52%

3.30%

2.33%

2.35%

2.49%

2.52%

Capi

tal o

pera

ting

leas

e as

set

-15.30%

13.66%

12.22%

17.93%

17.61%

Tota

l non

-cur

rent

ass

ets

54.55%

57.62%

63.50%

56.10%

54.49%

67.36%

65.00%

65.00%

65.00%

65.00%

65.00%

65.00%

65.00%

65.00%

65.00%

65.00%

Tota

l Ass

ets

100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%

LIAB

ILIT

IES

AND

STOC

KHOL

DERS

’ EQ

UITY

Acco

unts

pay

able

1.29%

1.27%

1.60%

1.53%

1.37%

1.31%

Inco

me

taxe

s pa

yabl

e0.48%

0.76%

0.45%

1.02%

0.27%

0.41%

Com

pens

atio

n an

d be

nefit

s pa

yabl

e

17.81%

13.93%

13.19%

15.12%

15.67%

13.08%

Term

loan

-

--

--

1.47%

Othe

r acc

rued

liab

ilitie

s4.49%

3.25%

6.85%

4.92%

4.54%

7.13%

Tota

l cur

rent

liab

ilitie

s24.07%

19.21%

22.10%

22.60%

21.86%

23.40%

23.33%

23.33%

23.33%

23.33%

23.33%

23.33%

23.33%

23.33%

23.33%

23.33%

Defe

rred

com

pens

atio

n an

d ot

her

retir

emen

t pla

ns

14.36%

12.35%

13.14%

13.33%

12.39%

10.62%

Term

loan

, non

-cur

rent

--

--

-5.40%

Defe

rred

tax

liabi

litie

s-

--

--

0.25%

Capi

tal o

pera

ting

leas

e lia

bilit

y-

15.30%

12.86%

10.08%

14.91%

15.39%

Othe

r lia

bilit

ies

2.05%

1.81%

1.85%

1.73%

1.65%

2.15%

Tota

l lia

bilit

ies

40.48%

48.66%

49.95%

47.73%

50.80%

57.22%

57.55%

57.77%

57.91%

57.54%

57.96%

58.25%

58.45%

58.64%

58.82%

59.00%

Com

mitm

ents

and

con

tinge

ncie

s

Stoc

khol

ders

’ equ

ity:

Com

mon

sto

ck: $

0.01

par

val

ue41.65%

36.38%

35.51%

35.41%

33.13%

34.50%

Reta

ined

ear

ning

s15.28%

15.04%

14.81%

17.09%

18.97%

11.03%

11.91%

12.79%

13.70%

15.03%

16.04%

17.03%

18.01%

18.94%

19.82%

20.67%

Accu

mul

ated

oth

er c

ompr

ehen

sive

loss

, net

2.64%

0.62%

-0.22%

-0.19%

-2.90%

-2.85%

Tota

l Kor

n/Fe

rry

Inte

rnat

iona

l st

ockh

olde

rs’ e

quity

59.57%

51.38%

50.10%

52.31%

49.20%

42.68%

Less

: not

es re

ceiva

ble

from

st

ockh

olde

rs-0.05%

-0.04%

-0.04%

-0.04%

--

Nonc

ontro

lling

inte

rest

--

--

-0.10%

Tota

l sto

ckho

lder

s’ eq

uity

59.52%

51.34%

50.05%

52.27%

49.20%

42.78%

42.45%

42.23%

42.09%

42.46%

42.04%

41.75%

41.55%

41.36%

41.18%

41.00%

Tota

l lia

bilit

ies

and

stoc

khol

ders

’ equ

ity 100.00%

100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%100.00%

120

Statement of Cash Flows

Forecasting the statement of cash flows can only be done after forecasting both the income statement and the balance sheet. It has been noted as the hardest financial

statement to forecast. For forecasting the statement of cash flows we forecasted the

activities from operations and the change in net current assets for activities for investing.

When forecasting operating activities, we started by dividing CFFO by sales, operating income and then net income from the previous 6 years. Next we found the average of

these results followed by finding the standard deviation and Sharpe ratio. However, in

our average we leave out 2013 and 2016 because of acquisitions which make the numbers skewed. On CFFO divided by operating income, we additionally left out year

2014. To forecast we used the lowest Sharpe ratio. Korn Ferry’s lowest Sharpe ratio of 0.09 was a result from CFFO divided by operating income.

To find the forecast in investing activities we had to first find the change in net non-current assets and the change in PPE. To do this we found the difference between 2

continuous years. We computed the capital expenditures (CAPEX) then divided CAPEX

by change in non-current assets and CAPEX divided by change in PPE. Next we computed the average, standard deviation, and Sharpe ratio. We determined the

Sharpe ratio of CAPEX/change in PPE is smaller than CAPEX/change in non-current assets. We decided to use the average of CAPEX/change in PPE to calculate the

forecasted investing activities for the next 10 years. When we forecasted CAPEX for 2017, the value was less than that of 2016. This is inaccurate because we expect the

company to grow each year. Fiscal year 2017’s first quarter CAPEX has already been released. To correct the forecasting error, we added together the previous year

(FY2016’s) second, third, and fourth quarters and multiplied this value by 1.1. We then added this to the recently released FY2017 quarter one value to forecast the remaining

quarters of FY2017.

121

Figure 67: Korn Ferry’s Forecasted Statement of Cash Flows for Operating Activities

$ in

thou

sand

s20

1120

1220

1320

1420

1520

1620

1720

1820

1920

2020

2120

2220

2320

2420

2520

26Ca

sh F

low

s fro

m O

pera

ting

activ

ities

Net I

ncom

e58

,874

54

,303

33

,293

72

,691

88

,357

31

,433

Ad

just

men

tsDe

prec

iatio

n an

d am

ortiz

atio

n12

,671

14

,017

19

,004

26

,172

27

,597

36

,220

St

ock-

base

d co

mpe

nsat

ion

expe

nse

15,5

47

13,3

99

11,9

06

12,1

06

13,8

99

18,8

95

Impa

irmen

t of i

ntan

gibl

e as

sets

880

-

--

--

Prov

ision

for d

oubt

ful a

ccou

nts

7,65

0

5,

732

6,74

8

7,

840

7,74

1

8,

570

Gain

on

cash

sur

rend

er v

alue

of l

ife

insu

ranc

e po

licie

s(7

,218

)

(6,2

68)

(6

,502

)

(8,2

42)

(1

0,50

9)

(3,9

84)

Lo

ss (g

ain)

on

mar

keta

ble

secu

ritie

s(7

,599

)

(1,0

13)

(7

,556

)

(9,4

98)

(8

,829

)

3,33

3

Ch

ange

in fa

ir va

lue

of a

cqui

sitio

n-re

late

d co

ntin

gent

con

sider

atio

n(4

,919

)

(2,1

96)

-

--

-De

ferr

ed in

com

e ta

xes

5,95

4

6,

512

(176

)

7,

598

(316

)

(1

8,91

3)

Chan

ge in

oth

er a

sset

s an

d lia

bilit

ies,

ne

t of e

ffect

of a

cqui

sitio

nsDe

ferr

ed c

ompe

nsat

ion

11,5

88

6,32

0

8,

477

12,1

86

10,1

30

(4,6

05)

Re

ceiva

bles

due

from

clie

nts

(29,

294)

(4

,227

)

(16,

011)

(2

2,31

8)

(17,

213)

(1

6,62

2)

Inco

me

taxe

s an

d ot

her r

ecei

vabl

es1,

154

(6,6

64)

4,

616

896

11

5

(191

)

Pr

epai

d ex

pens

es a

nd o

ther

ass

ets

(6,1

72)

2,

194

750

(1

,255

)

(1,1

45)

(6

,310

)

Inve

stm

ent i

n un

cons

olid

ated

su

bsid

iarie

s(1

,862

)

1,85

0

(2

,110

)

(2,1

69)

(2

,181

)

(1,6

31)

In

com

e ta

xes

paya

ble

(1,6

86)

4,

058

(3,3

99)

7,

533

(9,1

94)

89

9

Acco

unts

pay

able

and

acc

rued

liab

ilitie

s40

,885

(2

0,51

9)

8,49

4

29

,104

17

,790

18

,862

Ot

her n

oncu

rren

t ass

ets

and

liabi

litie

s(8

19)

7,17

7

4,

173

(3,1

62)

(8

,966

)

(1,8

75)

Net c

ash

prov

ided

by

oper

atin

g ac

tiviti

es

9563

470

975

6170

712

9482

1072

7664

081

149,

663

$ 14

0,34

9$

148,

489

$ 15

7,32

5$

165,

191

$ 17

3,45

0$

182,

123

$ 19

1,22

9$

200,

790

$ 21

0,83

0$

Aver

age

Stde

vSh

arpe

CFFO

/Sal

es0.

12

0.09

0.

07

0.13

0.

10

0.05

0.

09

0.

03

0.

33

CF

FO/O

pera

ting

Inco

me

1.11

1.

32

2.62

2.

09

1.25

5.

69

1.23

0.11

0.09

best

CFFO

/Net

Inco

me

1.62

2.

82

9.76

3.

50

1.99

(3

.30)

2.48

0.84

0.34

122

Figure 68: Korn Ferry’s Forecasted Statement of Cash Flows for Investing Activities

Cash

flow

s fro

m in

vest

ing

activ

ities

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Cash

pai

d fo

r acq

uisit

ions

, net

of c

ash

acqu

ired

and

earn

out

-

(4

42)

(1

12,0

64)

-

(15,

296)

(2

56,0

82)

Ac

quisi

tion

of M

exica

n su

bsid

iary

, cas

h ac

quire

d-

-

-

-

-

3,

973

Pu

rcha

se o

f pro

perty

and

equ

ipm

ent

(27,

889)

(1

8,63

2)

(13,

101)

(28,

559)

(2

1,86

0)

(26,

144)

Purc

hase

of i

ntan

gibl

e as

sets

-

(3

25)

-

-

-

-

Pu

rcha

se o

f mar

keta

ble

secu

ritie

s(6

5,96

4)

(55,

718)

(5

0,43

7)

(2

8,15

0)

(22,

843)

(3

0,39

7)

Pr

ocee

ds fr

om s

ales

/mat

uriti

es o

f m

arke

tabl

e se

curit

ies

28,6

18

43

,181

51,5

11

44,4

75

21

,362

30,0

66

Chan

ge in

rest

ricte

d ca

sh(1

0,00

7)

(221

)

7,22

2

2,86

1

-

-

Pa

ymen

t of c

ontin

gent

con

sider

atio

n fro

m a

cqui

sitio

n(5

,795

)

-

-

(15,

000)

-

-

Paym

ent o

f pur

chas

e pr

ice h

eld

back

fro

m p

revio

us a

cqui

sitio

-

(800

)

-

-

-

-

Prem

ium

s on

com

pany

-ow

ned

life

insu

ranc

e po

licie

s(1

,702

)

(1

,739

)

(1

,739

)

(1,7

27)

(1,6

76)

(1,6

23)

Pr

ocee

ds fr

om li

fe in

sura

nce

polic

ies

-

-

-

388

8,08

7

3,25

6

Divid

ends

rece

ived

from

un

cons

olid

ated

sub

sidia

ries

1,60

8

1,66

9

1,89

7

2,12

0

1,65

6

2,37

3

Net c

ash

used

in in

vest

ing

activ

ities

(81,

131)

(3

3,02

7)

(116

,711

)

(23,

592)

(3

0,57

0)

(274

,578

)

(37,

804)

(5

8,91

1)

(82,

146)

(8

9,15

8)

(79,

380)

(8

3,34

9)

(87,

517)

(9

1,89

3)

(96,

487)

(1

01,3

12)

Com

pute

d "C

apex

"(2

7,88

9)

(19,

074)

(1

25,1

65)

(2

8,55

9)

(37,

156)

(2

78,2

53)

(3

7,80

4)

(58,

911)

(8

2,14

6)

(89,

158)

(7

9,38

0)

(83,

349)

(8

7,51

7)

(91,

893)

(9

6,48

7)

(101

,312

)

Chan

ge in

Non

-Cur

rent

Ass

et4,

631

(1

46,1

88)

(4

,558

)

(4

,445

)

(5

53,6

83)

(2

1,12

0)

(79,

466)

(8

2,30

4)

(72,

881)

(7

7,69

8)

(81,

756)

(8

2,47

8)

(86,

601)

Ch

ange

in P

PE(6

,666

)

(3

,820

)

(6,8

06)

(1,6

54)

(33,

348)

(654

)

(4,1

70)

(5,8

15)

(6,3

11)

(5,6

19)

(5,9

00)

(6,1

95)

(6,5

05)

(6,8

30)

(7,1

72)

Av

erag

eSt

dev

Com

pute

d CA

PEX/

chan

ge in

NCA

(4.1

2)

0.86

6.27

8.

36

0.50

2.37

4.

97

2.10

Co

mpu

ted

CAPE

X/ch

ange

in P

PE2.

86

32.7

7

4.20

22

.46

8.

34

14

.13

13

.00

0.

92

123

Figure 69: Korn Ferry’s Forecasted Statement of Cash Flows for Financing Activities

Cash

flow

s fro

m fi

nanc

ing

activ

ities

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Proc

eeds

from

term

loan

facil

ity-

--

150,

000

Pr

incip

al p

aym

ent o

n te

rm lo

an

facil

ity-

--

(10,

000)

Bo

rrow

ings

und

er li

fe in

sura

nce

polic

ie6,

039

36

6

-

--

-Pu

rcha

se o

f com

mon

sto

ck13

,844

(4

,215

)

(2,8

38)

(2

,249

)

(4,0

38)

(7

,410

)

Pr

ocee

ds fr

om e

xerc

ise o

f w

arra

nts

2,98

3

--

--

-Pr

ocee

ds fr

om is

suan

ce o

f co

mm

on s

tock

upo

n ex

ercis

e of

em

ploy

ee s

tock

opt

ions

and

in

conn

ectio

n w

ith a

n em

ploy

ee s

tock

pu

rcha

se p

lan

10,0

84

4,37

1

2,13

4

8,80

5

2,99

3

4,03

8

Ta

x be

nefit

rela

ted

to s

tock

-bas

ed

com

pens

atio

n1,

287

1,

664

29

4

(5

93)

1,51

6

4,90

8

Di

viden

ds p

aid

to s

hare

hold

ers

(600

)

-

--

(5,1

05)

(2

1,83

3)

(24,

016.

47)

(2

5,43

7.46

)

(26,

955.

19)

(1

8,91

4.81

)

(19,

891.

71)

(2

0,88

6.29

)

(21,

930.

61)

(2

3,02

7.14

)

(24,

178.

50)

(2

5,38

7.42

)

Paym

ents

on

life

insu

ranc

e po

licy

loan

s-

--

(388

)

(3

,301

)

(1,2

51)

Net c

ash

prov

ided

by

(use

d in

) fin

ancin

g ac

tiviti

es

5,94

9

2,18

6

(410

)

5,

575

(7

,935

)

118,

452

124

Cost of Capital Estimation To most accurately value Korn Ferry, we determined the firm’s weighted average cost

of capital (WACC) to discount the financials. WACC and firm value have an inverse relationship: the higher the WAAC, the lower the firm value. WACC is the average rate

of return of securities used to finance a firm’s assets and it is derived from debt and equity. Debt consists of borrowing funds and repaying the principal with interest at a

later time. The cost of debt is the required rate of return for lenders. Equity is ownership in a firm and does not require repayment of interest. Rather, investors earn

returns on the growth of their shares as well as dividend payments. The cost of equity is the required rate of return for shareholders. To calculate WACC, we must first find

the cost of debt and equity.

Cost of Debt

The cost of debt is the weighted average interest owed by Korn Ferry. An explicit cost of debt was not stated in the 10-K, but the balance sheet did give a total loan amount

of $140,000,000. The 10-K stated that Korn Ferry refinanced this amount at an as-stated interest rate of 1.65%. However, this amount is too small to use to determine

cost of debt. Rather, we utilized Yahoo Finance’s Bond Center. We assumed a maturity between 8 and 10 years and Korn Ferry’s rate to be between BBB and AA. From the

table below, we then averaged the yield to maturity values, totaling 3.70%.

125

To find the cost, we found the weight of each interest-bearing item in regards to total

interest-bearing debt then found the product between that value and the individual interest rate. Since the market interest rate was used for both long term and short

term debt, the final stated weighted average cost of debt was also 3.70%. Additionally, we calculated the after-tax cost of debt to be 2.26%.

For the restated cost of debt, we factored in capital leases for a total of $453,318,400 in debt. The interest rate for the capital leases is 3.05%. By adding this additional

$313,318,400 in, the weights of each item changes. The final restated weighted

average cost of debt to 3.25%. The after-tax cost of debt was calculated as 1.98%.

The tables below illustrate these processes, respectively.

Figure 70

Figure 71

Cost of Equity

The cost of equity can be determined with the Capital Asset Pricing Model (CAPM). The formula is included below, where Ke is the cost of equity, Rf is the risk free rate, MRP is

the market risk premium, and SP is the size premium.

Ke=Rf+(Beta)(MRP)+SP

AsStatedCostofDebt Amount InterestRate Weight Weight*Rate KdShortTermLoan 30,000 3.70% 0.214285714 0.79%LongTermLoan 110,000 3.70% 0.785714286 2.91%TotalDebt 140,000 3.70% 3.70%

TaxRate 39% 2.26%

RestatedCostofDebt Amount InterestRate Weight Weight*Rate KdShortTermLoan 30,000 3.70% 0.066178651 0.24%LongTermLoan 110,000 3.70% 0.242655052 0.90%CapitalLease 313,318 3.05% 0.691166297 2.11%TotalDebt 453,318 3.25% 3.25%

TaxRate 39% 1.98%

126

The risk free rate was found from the calculated October 2016 20-year treasury bill to

be 2.02%. This information was obtained from the St. Louis Federal Reserve website.

The table below illustrates the various size premiums for different firm sizes. Korn Ferry

falls into the fourth decile with a size premium is 1.9%.

Figure 72

Beta explains a firm’s risk relative to the S&P 500. To determine beta for Korn Ferry, we used a regression analysis to observe how the monthly holding period returns for

Korn Ferry compare to the monthly returns of the market. We ran five regressions with five different periods: 24, 36, 48, 60, and 72 months. These betas ranged from 1.8912

to 0.6981. This regression analysis is illustrated below. The regression chart also includes lower and upper bound costs of equity as a 95% confidence interval.

SizeDecile

MarketValueofLargestCompanyin

Decilein2010(millions)

FractionofTotalMarketValueRepresentedbyDecilein2010

AverageAnnualStockReturn(1926-

2010) Beta(1926-2010)

SizePremium(ReturninExcessof

CAPM)1 235.6 1.0% 21.0% 1.41 6.4%2 477.5 1.3% 17.2% 1.35 2.9%3 771.8 1.7% 16.5% 1.30 2.7%4 1,212.3 2.2% 15.4% 1.24 1.9%5 1,776.0 2.6% 15.0% 1.19 1.8%6 2,509.2 3.5% 14.8% 1.16 1.8%7 3,711.0 4.3% 13.9% 1.12 1.2%8 6,793.9 7.4% 13.6% 1.10 1.0%9 15,079.5 13.6% 12.9% 1.03 0.8%10 314,622.6 62.3% 10.9% 0.91 -0.4%

127

Figure 73

We selected the 20-year regression because it is less likely to be biased, as it has the most data. Within this, the 60-month regression was chosen. The beta values for 72

months and 24 months were too high and low, respectively, and were not considered. The 60 months, 48 months, and 36 months betas were very close. Of these, we

selected 60 months because it had the highest r-squared of 0.18 —meaning that about

Months R^2 t-stat Beta BetaLB BetaUB Rf(%) SizePremium(%)MRP(%) Ke(%) Ke-LB(%) Ke-UB(%)72 0.3524 6.1712 1.8868 1.2770 2.4966 2.02 1.9 7 17.1277 12.8592 21.396260 0.1801 3.5697 1.2644 0.5554 1.9734 2.02 1.9 7 12.7707 7.8076 17.733748 0.1490 2.8379 1.1738 0.3412 2.0064 2.02 1.9 7 12.1369 6.3087 17.965136 0.1307 2.2608 1.0587 0.1070 2.0103 2.02 1.9 7 11.3307 4.6690 17.992424 0.0768 1.3531 0.6982 -0.3720 1.7684 2.02 1.9 7 8.8076 1.3163 16.2990

Months R^2 t-stat Beta BetaLB BetaUB Rf(%) SizePremium(%)MRP(%) Ke(%) Ke-LB(%) Ke-UB(%)72 0.3525 6.1729 1.8867 1.2771 2.4963 2.02 1.9 7 17.1270 12.8599 21.394160 0.1804 3.5733 1.2643 0.5560 1.9725 2.02 1.9 7 12.7699 7.8123 17.727448 0.1496 2.8450 1.1750 0.3437 2.0064 2.02 1.9 7 12.1453 6.3256 17.965036 0.1309 2.2632 1.0592 0.1081 2.0102 2.02 1.9 7 11.3342 4.6766 17.991724 0.0768 1.3528 0.6981 -0.3721 1.7683 2.02 1.9 7 8.8067 1.3155 16.2979

Months R^2 t-stat Beta BetaLB BetaUB Rf(%) SizePremium(%)MRP(%) Ke(%) Ke-LB(%) Ke-UB(%)72 0.3527 6.1758 1.8865 1.2773 2.4957 2.02 1.9 7 17.1256 12.8609 21.390260 0.1808 3.5778 1.2643 0.5570 1.9717 2.02 1.9 7 12.7703 7.8187 17.721948 0.1504 2.8532 1.1765 0.3465 2.0066 2.02 1.9 7 12.1558 6.3455 17.966136 0.1313 2.2667 1.0600 0.1096 2.0104 2.02 1.9 7 11.3400 4.6874 17.992624 0.0768 1.3532 0.6982 -0.3719 1.7683 2.02 1.9 7 8.8077 1.3170 16.2984

Months R^2 t-stat Beta BetaLB BetaUB Rf(%) SizePremium(%)MRP(%) Ke(%) Ke-LB(%) Ke-UB(%)72 0.3546 6.2013 1.8903 1.2823 2.4982 2.02 1.9 7 17.1520 12.8964 21.407760 0.1827 3.6008 1.2703 0.5642 1.9765 2.02 1.9 7 12.8124 7.8691 17.755848 0.1520 2.8718 1.1823 0.3536 2.0111 2.02 1.9 7 12.1964 6.3953 17.997536 0.1331 2.2843 1.0663 0.1177 2.0149 2.02 1.9 7 11.3839 4.7436 18.024224 0.0780 1.3643 0.7038 -0.3661 1.7738 2.02 1.9 7 8.8469 1.3574 16.3364

Months R^2 t-stat Beta BetaLB BetaUB Rf(%) SizePremium(%)MRP(%) Ke(%) Ke-LB(%) Ke-UB(%)72 0.3549 6.2052 1.8912 1.2833 2.4990 2.02 1.9 7 17.1583 12.9033 21.413360 0.1830 3.6039 1.2719 0.5654 1.9783 2.02 1.9 7 12.8231 7.8780 17.768148 0.1521 2.8722 1.1832 0.3540 2.0124 2.02 1.9 7 12.2023 6.3979 18.006736 0.1333 2.2867 1.0676 0.1188 2.0163 2.02 1.9 7 11.3929 4.7514 18.034424 0.0785 1.3688 0.7061 -0.3637 1.7759 2.02 1.9 7 8.8627 1.3743 16.3511

20Year

10year

7Year

2Year

1Year

128

18% of the overall risk is systematic and 82% is firm-specific. The estimated beta for

the selected regression is 1.2644. The upper and lower limit betas are 1.9734 and 0.5554, meaning there a 95% confidence that the firm’s actual beta is within these

realms.

The estimated beta according to Google Finance is 1.28, very similar to our estimate

and well within the confidence interval.

The final cost of equity from the CAPM was calculated to be 12.70%. The upper and lower limits cost of equity is 17.73% and 7.81%, respectively. This implies that with

95% confidence, the true cost of equity will fall within these limits.

Backdoor Cost of Equity

The backdoor cost of equity can be used as an alternative to calculate the cost of equity. The formula utilizes the firm’s ratios and financials and is stated below:

Price/Book = 1+(ROE-Ke)/(Ke–g)

The formula must be manipulated to solve for Ke, the cost of equity. ROE is the firm’s return on equity that we forecasted and g represents the forecasted average sales

growth rate.

To calculate as-stated cost of equity, we used an ROE of 9.21%, a price-to-book-ratio of 1.13, and growth rate of 5.28%. This yielded a 8.76% cost of equity.

To calculate restated cost of equity, we used an ROE of 6.35%, a price-to-book ratio of

1.36, and a growth rate of 5.28%. This yielded a 6.23% cost of equity.

Since the as-stated Ke from this formula is within the confidence interval of 17.73% and 7.81%, we elected to use the backdoor cost of equity instead of CAPM.

Weighted Average Cost of Capital

A firm’s weighted average cost of capital (WACC) is calculated by multiplying the proportion of debt or equity by their respective rate to determine the cost of capital.

129

The formula is stated below:

WACC=(Weight of Debt)(Cost of Debt)+(Weight of Equity)(Cost of Equity)

WACC After Taxes=(Weight of Debt)(Cost of Debt)+(Weight of Equity)(Cost of Equity)(1- Tax Rate)

The weights of debt and equity are the percentages of debt and equity compared to the

total sum of the market values.

The market value of equity is the share price multiplied by total shares outstanding. On

October 31st, 2016, Korn Ferry had a share price of $20.39 and 57,920 shares

outstanding. The product of these gives a $1.181 billion market value of equity. This process is demonstrated below

Figure 74

The market value of debt is the sum of all interest-bearing debt, totaling $140,000,000.

The process of determining the weights of debt and equity is demonstrated below.

Figure 75

The as-stated cost of debt was calculated to be 3.70%, and the as-stated cost of equity was 12.70%. The restated cost of debt was calculated to be 3.25% once capital leases

were accounted for, and the restated cost of equity remained at 12.72%.

PriceStockPriceOctober31st 20.39Volume 57,920.55MarketValueofEquity 1,181,000.00

AsStated Amount Percentage ReStated Amount PercentageWeightofDebt 140,000.00 10.60% WeightofDebt 453,318.40 28%WeightofEquity 1,181,000.00 89.40% WeightofEquity 1,181,000.00 72%Total 1,321,000.00 100.00% Total 1,634,318.40 100%

130

The process of computing WACC and after-tax WACC is demonstrated below.

Figure 76

Conclusion

The WACC is the rate at which a firm is able to finance its operations through debt and

equity. For Korn Ferry, the before tax as-stated cost of capital is 11.75%. The after tax as-stated cost of capital is 11.59%. Both of these values fall within the appropriate

limits.

Method of Comparables

In this section, we use a variety of ratios to compare Korn Ferry’s stock price against

their competitors. We took an industry average for each ratio and excluded Korn Ferry.

The benchmark competitors used in this analysis include Kelly Services, Manpower Group, On Assignment, and Heidrick & Struggles. For purpose of this analysis, we used

Korn Ferry’s stock price of $20.39 as of the valuation date: November 1, 2016. Additionally, we set a lower bound and upper bound price of $18.35 and $22.43,

respectively (10% in each direction). Any price below the lower bound indicates that

AsStatedWACC(BeforeTax) WeightofDebt CostofDebt + WeightofEquity CostofEquity11.75% 10.60% 3.70% + 89.40% 12.70%

UB 16.24% 10.60% 3.70% + 89.40% 17.73%LB 7.37% 10.60% 3.70% + 89.40% 7.81%

RestatedWACC(BeforeTax) WeightofDebt CostofDebt + WeightofEquity CostofEquity10.08% 28% 3.25% + 72% 12.70%

UB 13.71% 28% 3.25% + 72% 17.73%LB 6.55% 28% 3.25% + 72% 7.81%

AsStatedWACC(AfterTax) WeightofDebt CostofDebt + WeightofEquity CostofEquity11.59% 10.60% 2.26% + 89.40% 12.70%

UB 16.09% 10.60% 2.26% + 89.40% 17.73%LB 7.22% 10.60% 2.26% + 89.40% 7.81%

RestatedWACC(AfterTax) WeightofDebt CostofDebt + WeightofEquity CostofEquity9.73% 28% 1.98% + 72% 12.70%

UB 13.36% 28% 1.98% + 72% 17.73%LB 6.19% 28% 1.98% + 72% 7.81%

131

Korn Ferry is overvalued while any price above the upper bound represents that they

are undervalued.

Trailing P/E Ratio

First, we computed Korn Ferry’s estimated price per share using the trailing price to

earnings ratio. Trailing P/E is calculated by dividing the observed stock price at November 1, 2016 by the earnings per share (EPS) for the past year. To compute Korn

Ferry’s value using trailing P/E, we took the industry average trailing P/E and multiplied it by Korn Ferry’s as-stated and restated trailing EPS to estimate the stock price on an

as-stated and restated basis. We used both the as-stated and restated values for Korn

Ferry to compare where Korn Ferry projects they are and where they are when restatements for goodwill are considered. To create a more accurate picture, we did not

include the P/E for our restated Korn Ferry financials.

Figure 77: Trailing Price/Earnings

Using the trailing P/E ratio, we received an estimated PPS for Korn Ferry of $9.49. The

restated PPS is not applicable due to our EPS being a negative number, which represents a loss. When only looking at the as-stated PPS, Korn Ferry is considered

overvalued at $20.39. It is also important to point out that this model is only reprehensive of the past, and future performance is irrelevant. Therefore, it is

Company Trailing EPS PPS P/E Adjusted PPSKorn Ferry As-stated 0.58 20.39$ 35.16 9.49$ Korn Ferry Re-stated (0.36) 20.39$ (0.02) Kelly Services 1.39 18.49$ 13.30 Manpower 5.46 76.14$ 13.95 On Assignment 1.87 34.24$ 18.31 Heidrick & Struggles 0.93 18.50$ 19.89 Industry Average 16.36

Trailing P/E Ratio

132

necessary for us to use additional ratios to gain a more accurate picture of the firm’s

value.

Forward P/E Ratio

While being very similar, the forward P/E ratio provides a picture that includes the

forecasting for future fiscal years. When forecasting is used, the reliability is less trusted, since the trailing P/E ratio relies on historical data. Although less reliable, the

fact that the ratio accounts for future performance is its redeeming quality. Since investments are based on the expectation of future gains, this ratio is a valuable tool

for potential investors. Once again, an industry average was required to compute Korn

Ferry’s forward P/E ratio.

Figure 78: Forward Price/Earnings Ratio

For the as-stated and restated PPS, we calculated values of $29.05 and $14.30,

respectively. When compared to the stock price of $20.39, the forward P/E ratio returns an as-stated value that states Korn Ferry is undervalued, while the restated value

claims Korn Ferry is an overvalued company. We believe that our restated adjusted PPS is a more confident representation compared to the as-stated adjusted PPE.

Price to Book Ratio

Price to book is calculated by dividing market cap by total stockholders’ equity. When

evaluating the P/B ratio, it is important to understand that a high P/B ratio may be

Company Forward EPS PPS P/E Adjusted PPSKorn Ferry As-stated 1.95 20.39$ 9.10 29.05$ Korn Ferry Re-stated 0.96 20.39$ 21.24 14.30$ Kelly Services 1.47 18.49$ 12.58 Manpower 6.08 76.14$ 12.52 On Assignment 2.69 34.24$ 12.72 Heidrick & Struggles 0.85 18.50$ 21.76 Industry Average 14.90

Forward P/E Ratio

133

indicative of an overvalued company, while a low P/B may be indicative of an

undervalued company. By taking the average P/B of the industry, we received a value of 1.58. We then multiplied the industry average by the firm’s total stockholder’s equity.

After dividing by total shares outstanding, we arrived at the firm’s adjusted PPS.

Figure 79: Price to Book

For the as-stated and restated PPS, we calculated values of $28.62 and $24.54,

respectively. When compared to the stock price of $20.39, the P/B ratio returns an as-stated value that states Korn Ferry is undervalued, and the restated value also claims

Korn Ferry is an undervalued company.

Dividends to Price Ratio

Dividend to price is calculated by taking the dividends per share over the price per share. The industry average for Kelly Services, Manpower, On Assignment, and Heidrick

& Struggles DPS is .40. We then used the firm’s DPS and multiplied it by the industry average to get an adjusted price per share. It is important to notice that restatements

did not affect DPS.

Company Market Cap (in billions) Total Stockholders Equity (in billions) P/B Adjusted PPSKorn Ferry As-stated 1.18 1.05 1.13 28.62$ Korn Ferry Re-stated 1.18 0.90 1.32 24.54$ Kelly Services 0.71 1.01 0.70 Manpower 5.26 2.39 2.20 On Assignment 1.86 0.87 2.13 Heidrick & Struggles 0.34 0.27 1.29 Industry Average 1.58

Price to Book Ratio

134

Figure 80: Dividend to Price Ratio

For the as-stated and restated PPS, we calculated a value of $26.69, due to the as-stated and restated values being the same. When compared to the stock price of

$20.39, the D/P ratio returns an as-stated and restated value that states Korn Ferry is undervalued.

Price Earnings Growth Ratio

The price to earnings growth ratio is calculated by using the trailing price to earnings

ratio divided by the five-year earnings per share growth rate. The higher the PEG ratio the more the market expects a firm to grow its earnings. Although a desirable PEG ratio

is dependent upon the industry and function of a company, a PEG ratio below one is preferred by investors. To calculate the PEG multiple, we first had to divide our trailing

P/E by our EPS growth. When we got the industry average, we multiplied it by the EPS growth, and then multiplied by earnings per share, computing PPS.

Company DPS PPS D/P Adjusted PPSKorn Ferry As-stated 0.40 20.39$ 0.02 26.69$ Korn Ferry Re-stated 0.40 20.39$ 0.02 Kelly Services 0.20 18.49$ 0.01 Manpower 1.60 76.14$ 0.02 On Assignment - 34.24$ - Heidrick & Struggles 0.52 18.50$ 0.03 Industry Average 0.01

Dividend to Price Ratio

135

Figure 81: Price to Earnings Growth Ratio

For the as-stated and re-stated PPS, we calculated a value of $26.69, due to the re-stated PPS being N/A from a negative trailing P/E ratio from a loss. When compared to

the stock price of $20.39, the PEG ratio returns an as-stated value that Korn Ferry is overvalued.

Price to EBITDA

The price to EBITDA ratio is calculated by dividing market capitalization by EBITDA.

Market Capitalization is price per share multiplied by shares outstanding while EBITDA is earnings before interest, taxes, depreciation, and amortization. In order to find the

adjusted PPS, we multiplied the industry average P/EBITDA by the firm’s EBITDA, and then divided by shares outstanding.

Figure 82: Price to EBITDA

Copmpany Trailing P/E % EPS Growth P.E.G. Multiple Adjusted PPSKorn Ferry As-stated 35.16 5.96% 590.23 3.63$ Korn Ferry Re-stated (0.02) -17.46% 0.10 Kelly Services 13.30 15.56% 85.47 Manpower 13.95 19.08% 73.08 On Assignment 18.31 33.13% 55.27 Heidrick & Struggles 19.89 9.66% 205.90 Industry Average 104.93

Price to Earnings Growth Ratio

Company Market Cap (in billions) EBITDA P/EBITDA Adjusted PPSKorn Ferry As-stated 1.18 0.09 13.28 11.96$ Korn Ferry Re-stated 1.18 0.02 70.14 2.26$ Kelly Services 0.71 0.09 8.03 Manpower 5.26 0.77 6.80 On Assignment 1.86 0.20 9.15 Heidrick & Struggles 0.34 0.05 7.20 Industry Average 7.79

Price to EBITDA

136

For the as-stated and restated PPS, we calculated $11.96 and $2.26, respectively. When compared to the stock price of $20.39, the P/EBITDA ratio returns an as-stated

value that states Korn Ferry is overvalued, while the restated value also claims Korn Ferry is an overvalued company.

Price to Free Cash Flows

To calculate the price to free cash flows, one must divide market capitalization by the

free cash flows. By subtracting operating cash flows from capital expenditures, we found the FCF, which represents the money left over after a firm’s investment activities.

For Korn Ferry, there is no reason to include restated price to free cash flows, since our restatements do not affect market capitalization and free cash flows.

Figure 83: Price to Free Cash Flow

To find Korn Ferry’s estimated PPS, we must calculate the industry’s average for price

to free cash flows. By multiplying the industry average by Korn Ferry’s FCF, we determined that the firm has an overvalued PPS at $26.05. We conclude that the ratio

is beneficial in considering market value and cash flows for Korn Ferry, but by using other valuation methods, we can determine a more accurate PPS.

Company Market Cap (in billions) FCF P/FCF Adjusted PPSKorn Ferry As-stated 1.18 0.04 32.00 26.05$ Korn Ferry Re-stated 1.18 0.04 32.00 Kelly Services 0.71 0.04 118.92 Manpower 5.26 0.57 11.47 On Assignment 1.86 0.14 20.03 Heidrick & Struggles 0.34 0.02 8.38 Industry Average 39.70

Price to Free Cash Flow

137

Enterprise Value to EBITDA

Enterprise value to EBITDA is found by dividing EV by EBITDA. Enterprise value is market value of equity plus book value of liabilities minus cash minus investments.

EBITDA is defined as earnings before interest, taxes, depreciation, and amortization.

After calculating EV/EBITDA, we took the industry average and multiplied it by the firm’s EBITDA. This computation results in an adjusted PPS.

Figure 84: Enterprise Value to EBITDA Ratio

For the as-stated and restated PPS, we calculated $12.07, due to the as-stated and re-stated values being the same. When compared to the stock price of $20.39, the D/P

ratio returns an as-stated and restated value that states Korn Ferry is overvalued.

Company Enterprise Value EBITDA EV/EBITDA Adjusted PPSKorn Ferry As-stated 1.21 0.09 13.58 12.07$ Korn Ferry Re-Stated 1.21 0.09 13.58 Kelly Services 0.69 0.09 7.77 Manpower 5.67 0.77 7.32 On Assignment 2.47 0.20 12.12 Heidrick & Struggles 0.24 0.05 4.95 Industry Average 8.04

Enterprise Value to EBITDA Ratio

138

Conclusion

Figure 85: Method of Comparables Summary

After estimating the various ratios for Korn Ferry, we averaged the 8 ratios, as-stated and restated, to calculate a more accurate PPS. For Korn Ferry’s as-stated PPS, we

calculated $18.86, which is fairly valued compared to the observed price of $20.39.

Additionally, For Korn Ferry’s restated PPS, we calculated $17.65, which states Korn Ferry is overvalued. Although we did get PPSs that were close to fairly valued, we do

not trust method of comparables, since the ratios are dependent on our choices for industry competitors. For example, Manpower Group is massive compared to our other

competitors, and we believe their ratios might skew our computed PPSs. Therefore, we cannot honestly recommend method of comparables as a trusted decision making tool.

Intrinsic Valuation Models

Discounted Dividends Model

Korn Ferry’s valuation begins with was the discounted dividends model. The discounted

dividends model strives to derive value for a firm by only using dividends. To accurately run the model, our valuation used our forecasted dividends for the first 10 years, and

then we ran the dividends perpetuity value starting at year 11. Unfortunately, the discounted dividends model does not account for other value sources that can come

Ratio Market Price 11/1/2016 As-Stated Price Analysis Re-Stated Price AnalysisTrailing P/E Ratio 20.39$ 9.49$ Overvalued N/A N/AForeward P/E Ratio 20.39$ 29.04$ Undervalued 14.30$ OvervaluedPrice to Book Ratio 20.39$ 28.62$ Undervalued 24.54$ UndervaluedDividend to Price Ratio 20.39$ 26.69$ Undervalued 26.69$ UndervaluedPrice Earning Growth Ratio 20.39$ 6.98$ Overvalued N/A N/APrice to EBITDA 20.39$ 11.96$ Overvalued 2.26$ OvervaluedEnterprise Value to EBITDA Ratio 20.39$ 12.07$ Overvalued 12.07$ OvervaluedPrice to Free Cash Flow 20.39$ 26.05$ Undervalued 26.05$ UndervaluedOverall 20.39$ 18.86$ Fairly valued 17.65$ Overvalued

Method of Comparables

10%LE FairValue 10%UE18.35 22.43

139

from stock prices. Additionally, this model requires the assumption of the terminal value

being a perpetuity.

To begin the discounted dividends model, we used our forecasted statement of cash

flows and found the 2017-2026 forecasted dividends per share. By discounting our forecasted dividends back by our backdoor cost of equity of 8.73%, we calculated the

total present value of the 10-year forecasted dividends to be $2.75. Additionally, we had to discount the terminal perpetuity from time 11 to forever, which we did so by

dividing out dividends in 2027 by Korn Ferry’s backdoor cost of equity, minus our

dividend expected growth rate, which was 5%. This 5% is calculated by sales growth rate for the next 10 years. By performing the aforementioned process, we determined

Korn Ferry’s dividend perpetuity value to be $13.09, which was discounted back to year zero at the present value factor for backdoor cost of equity, 0.433, giving us a value of

$5.67. For the April 30th, 2016 fiscal year, we found Korn Ferry’s intrinsic value to be equal to $8.42. However, to account for the extra time between this date and

November 1st, 2016, we grew this value by the future value factor, 1.04, for the time between these two dates. Therefore, our time consistent price is $8.78.

At these parameters, the model states that Korn Ferry is overvalued, compared to its

stock price of $20.39. However, it is important to point out that this model is a good indication for dividend value, but not for the stock’s total value, with the dividend value

only contributing 43%. As shown below in figure 86, a sensitivity analysis was computed with comparable ranges to generate more results for a more accurate

analysis. Our perpetuity growth rate ranged between 4.5% to 5.5%, for five different intervals. We believe that our perpetuity growth rate will remain close to the 5.0% rate

we previously estimated. Additionally, for our ranges in cost of equity, we included the backdoor cost of equity of 8.76% and CAPM cost of equity of 12.70% to develop a

more accurate picture than relying on just one of the cost of equity computations.

140

Figure 86: Discounted Dividends Model

Our sensitivity analysis returned every result as Korn Ferry being overvalued. Therefore, the discounted dividends model is not a good model to determine the value of Korn

Ferry.

Discounted Free Cash Flow Model

The next model to determine Korn Ferry’s value is the discounted free cash flow model.

Due to the difficulty of forecasting cash flows, the DCFM proves to be an unstable model in comparison to the other valuation models. To calculate free cash flow, the

following formula was used:

Free Cash Flow = CF from Operating Activities +/- CF from Investing Activities

Through our calculations, we could derive the yearly growth for the next 10 years. Because of Korn Ferry’s most recent acquisition, the yearly growth was sporadic from

2017 to 2021, but leveled off to 5% for the remaining 5 years. To find the present value of these forecasted cash flows, we used our CAPM WACCAT (since after tax is

more reprehensive than before tax, due to its practicality), 11.59%, in the following formula:

1/(1+WACCAT)t

4.50% 4.75% 5.00% 5.25% 5.50%7.73% 10.44 11.06 11.8 12.69 13.78

BackdoorKe 8.76% 8.03 8.35 8.72 9.13 9.619.70% 6.66 6.86 7.08 7.32 7.59

10.70% 5.66 5.79 5.92 6.07 6.2411.70% 4.94 5.02 5.11 5.21 5.32

CAPMKe 12.70% 4.39 4.45 4.51 4.58 4.65

10%LE 10%UE18.351 22.429

141

After discounting the forecasted 10 years back to time 0, the model requires an

estimated perpetuity and accompanied growth rate. We estimated our perpetuity to be equal to the free cash flow for time 11, $115 million, at the same stable growth rate for

the past 5 years. Additionally, we had to discount this perpetuity from time 11 to forever, which we did so by dividing out free cash flow in 2027 by Korn Ferry’s CAPM

WACCAT, minus the expected growth rate. By performing the aforementioned process, we determined Korn Ferry’s free cash flow perpetuity value to be $1.745 billion, which

was then discounted back to year zero with Korn Ferry’s present value factor for CAPM WACCAT, 0.334, giving us a value of $583 million. For the April 30th, 2016 fiscal year,

we found Korn Ferry’s value to be equal to $1.097 billion. From this point, we subtracted the book value of debt and preferred stock, to get a market value of equity

of $957 million. However, to account for the extra time between this date and November 1st, 2016, we grew this value by the future value factor, 1.06, for the time

between these two dates. The time consistent price is $1.014 billion. After dividing by Korn Ferry’s shares outstanding, we computed a time consistent stock price of $18.52,

which states Korn Ferry is overvalued.

Since Korn Ferry’s CAPM WACC and perpetuity growth can unpredictably change in to the future, it is important to run a sensitivity model to analyze potential and reasonable

percentage changes. Our perpetuity growth rate ranged between 4.5% to 5.5%, for five different intervals. We believe that our perpetuity growth rate will remain close to

the 5.0% rate we previously estimated. Additionally, for our ranges in WACC, we included the backdoor WACCAT of 8.06% and CAPM WACCAT 11.59% to develop a more

accurate picture than relying on just one of the WACCAT computations.

As shown below in figure 87, our DFCF model and sensitivity analysis returned results that stated Korn Ferry’s value was even, in the sense that there were an equal number

of overvalued and undervalued prices. Additionally, our findings included 5 prices that valued Korn Ferry as fair.

142

Figure 87: Discounted Free Cash Flow Model

Residual Income Model

Using forecasted net income, dividends, and book value of equity, the residual income model tries to assign value to a firm. With its increased explanatory value, the model is

pulls value from the current book value of equity and is less responsive to short-run changes. Stated below is the residual income model formula:

We began the model by finding Korn Ferry’s FY2016 book value of equity and the 10-year forecasted net income and total dividends. We then forecasted out the book value

of equity, added forecasted net income to the forecasted book value of equity, and then subtracted out forecasted total dividends. Additionally, to find a benchmark annual

normal income, we took Korn Ferry’s lagged book value of equity and multiplied it by their initial cost of equity. To determine the firm’s annual residual income, we

subtracted the benchmark annual normal income and subtracted the forecasted net income. By multiplying the present value factor and annual residual income, we found

the year by year present value residual income. To find the perpetuity of residual income at time 11 to forever, we applied the average percentage change of present

value residual income for the previous 10 years. Finally, by adding Korn Ferry’s book

4.50% 4.75% 5.00% 5.25% 5.50%BackdoorWACC(AT) 8.06% 37.12 39.27 41.76 44.69 48.19

9.59% 25.42 26.31 27.30 28.41 29.6610.59% 20.94 21.51 22.13 22.81 23.55

CAPMWACC(AT) 11.59% 17.73 18.11 18.52 18.97 19.4512.59% 15.31 15.58 15.86 16.17 16.50

10%LE 10%UE18.351 22.429

143

value of equity at time 0, its total present value of the year by year residual value, and

the terminal value of the perpetuity of residual income at time 11 to forever, and using a negative 30% growth and backdoor cost of equity of 8.76%, we calculated a market

value of equity at April 30, 2016 to be 1.063 billion. However, to account for the extra time between this date and November 1st, 2016, we grew this value by the future value

factor, 1.04, for the time between these two dates. Therefore, the time consistent price is $1.108 billion. After dividing by Korn Ferry’s shares outstanding, we computed a time

consistent stock price of $20.31, which states Korn Ferry is fairly valued.

Since Korn Ferry’s backdoor cost of equity and perpetuity growth can unpredictably change in to the future, it is important to run a sensitivity model to analyze potential

and reasonable percentage changes. Our perpetuity growth rate ranged between -10% to -50%, for five different intervals. The reason that we use a negative growth rate in

the perpetuity is because we expect the residual income growth to approach zero. Additionally, for our ranges in cost of equity, we included the backdoor cost of equity of

8.76% and CAPM cost of equity at 12.70% to develop a more accurate picture than relying on just one of the cost of equity computations. Due to Korn Ferry requiring

restatement of their goodwill and capitalization of their leases, we filled out charts for both the as-stated financials and the restated financials.

We decided to include a larger range of cost of equity percentages to encompass both

the backdoor cost of equity and CAMP cost of equity. In figure 88 below, the as-stated sensitivity model, using the backdoor cost of equity, returns fairly valued prices.

However, with the CAPM cost of equity, the model states that Korn Ferry is currently overvalued.

144

Figure 88: As-Stated Residual Income Model

In figure 89 below, the restated sensitivity model returns values that all state Korn Ferry as being overvalued. Only the top right value gets close to the 10% lower bound

price, yet it is still more than $2 away in price.

Figure 89: Restated Residual Income

Long Run Residual Model

Although strongly similar to the residual income model, the long run residual model

includes sensitivity analysis encompassing the cost of equity, growth rates, and the

-10% -20.00% -30.00% -40.00% -50%6.70% 26.23 25.56 25.26 25.09 24.977.70% 22.97 22.81 22.73 22.69 22.66

BackdoorKe 8.76% 19.93 20.18 20.31 20.38 20.439.70% 17.79 18.25 18.48 18.62 18.71

10.70% 15.78 16.41 16.73 16.92 17.0511.70% 14.06 14.79 15.17 15.4 15.56

CAPMKe 12.70% 12.57 13.36 13.79 14.05 14.2313.70% 11.28 12.11 12.55 12.83 13.03

10%LE 10%UE18.351 22.429

-10% -20.00% -30.00% -40.00% -50%6.70% 15.94 15.97 15.98 15.98 15.997.70% 14.07 14.33 14.45 14.52 14.57

BackdoorKe 8.76% 12.39 12.82 13.02 13.15 13.239.70% 11.12 11.64 11.90 12.06 12.16

10.70% 9.96 10.54 10.84 11.02 11.1411.70% 8.96 9.57 9.89 10.09 10.22

CAPMKe 12.70% 8.09 8.72 9.05 9.26 9.4013.70% 7.34 7.96 8.30 8.51 8.66

10%LE 10%UE18.351 22.429

145

average of the forecasted 10-year return on equity. To find the market value of equity,

we use the following formula:

To create our long run residual model for Korn Ferry, we used a backdoor cost of equity

of 8.76%, a growth rate of -30%, an as-stated ROE of 3.79%, and a re-stated ROE of -2.82%. It is important to take note of the fact that Korn Ferry’s most recent acquisition

is the reason for the negative re-stated ROE. Additionally, the reason that we use a negative growth rate in the perpetuity is because we expect the residual income growth

to approach zero. After calculating the as-stated market value of equity, 913 million, and to account for the extra time between this date and November 1st, 2016, we grew

this value by the future value factor, 1.04, for the time between these two dates. Therefore, the time consistent price is $952 million. After dividing by Korn Ferry’s

shares outstanding, we computed a time consistent stock price of $17.44. However, to run the three-variable analysis, we ran various charts while holding variable constant.

The figures below are the as-stated and restated values, respectively.

Figure 90: As-Stated Centered ROE Long Run Residual Income

ROE 3.79% GrowthRate-10% -20.00% -30.00% -40.00% -50%

6.70% 16.37 17.66 18.25 18.58 18.807.70% 15.51 17.10 17.85 18.28 18.56

BackdoorKe 8.76% 14.71 16.55 17.44 17.97 18.329.70% 14.07 16.10 17.10 17.71 18.11

10.70% 13.45 15.64 16.76 17.44 17.8911.70% 12.89 15.22 16.43 17.18 17.68

Ke 12.70% 12.37 14.82 16.12 16.93 17.4713.70% 11.90 14.44 15.82 16.68 17.28

10%LE 10%UE18.351 22.429

146

Figure 91: As-Stated Centered Growth Rate Long Run Residual Income

Figure 92: As-Stated Centered Cost of Equity Long Run Residual Income

Figure 93: Restated Centered ROE Long Run Residual Income

GrowthRate -30% ROE3.79% 7.72% 8.22% 8.72% 9.22%

6.70% 18.25 20.37 20.64 20.91 21.187.70% 17.85 19.92 20.19 20.45 20.72

BackdoorKe 8.76% 17.44 19.47 19.73 19.99 20.259.70% 17.10 19.09 19.35 19.60 19.85

10.70% 16.76 18.71 18.96 19.21 19.4511.70% 16.43 18.34 18.59 18.83 19.07

Ke 12.70% 16.12 17.99 18.23 18.47 18.7113.70% 15.82 17.66 17.89 18.13 18.36

10%LE 10%UE18.351 22.429

BackdoorKe 8.76% ROE3.79% 7.72% 8.22% 8.72% 9.22%

-10.00% 14.71 18.90 19.43 19.97 20.50-20.00% 16.55 19.29 19.63 19.98 20.33

GrowthRate -30.00% 17.44 19.47 19.73 19.99 20.25-40.00% 17.97 19.58 19.79 19.99 20.20-50.00% 18.32 19.66 19.83 20.00 20.17

10%LE 10%UE18.351 22.429

ROE -2.82% GrowthRate-10% -20.00% -30.00% -40.00% -50%

6.70% 7.08 10.60 12.20 13.12 13.717.70% 6.71 10.27 11.93 12.90 13.54

BackdoorKe 8.76% 6.37 9.94 11.66 12.68 13.369.70% 6.09 9.66 11.44 12.50 13.20

10.70% 5.82 9.39 11.21 12.31 13.0411.70% 5.58 9.14 10.99 12.12 12.89

Ke 12.70% 5.36 8.90 10.78 11.95 12.7413.70% 5.15 8.67 10.58 11.78 12.60

10%LE 10%UE18.351 22.429

147

Figure 94: Restated Centered Growth Rate Long Run Residual Income

Figure 95: Restated Centered Cost of Equity Long Run Residual Income

Abnormal Earnings Growth

Similar to the residual income model through its use of forecasted net income and

forecasted dividends. the abnormal earnings growth model has high explanatory power. However, the AEG model does not take in account the forecasted book value of equity.

First, we computed the benchmark normal income by taking Korn Ferry’s previous year

net income and multiplying by one plus the backdoor cost of equity. Next, we solved for cumulative dividend earnings by adding forecasted net income and adding the dividend

reinvested earnings at the expected return of our backdoor cost of equity. To solve for abnormal earnings, we subtracted Korn Ferry’s normal earnings from cumulative

dividend earnings, and then discounted the value back to present value at the backdoor cost of equity. Additionally, to find the present value of the perpetuity from time 11 to

GrowthRate -30% ROE-2.82% 5.85% 6.35% 6.85% 7.35%

6.70% 12.20 16.09 16.32 16.54 16.777.70% 11.93 15.74 15.96 16.18 16.40

BackdoorKe 8.76% 11.66 15.39 15.60 15.81 16.039.70% 11.44 15.09 15.30 15.51 15.72

10.70% 11.21 14.78 14.99 15.19 15.4011.70% 10.99 14.49 14.69 14.90 15.10

Ke 12.70% 10.78 14.22 14.41 14.61 14.8113.70% 10.58 13.95 14.15 14.34 14.54

10%LE 10%UE18.351 22.429

BackdoorKe 8.76% ROE-2.82% 5.85% 6.35% 6.85% 7.35%

-10.00% 6.37 14.05 14.50 14.94 15.38-20.00% 9.94 14.95 15.24 15.53 15.82

GrowthRate -30.00% 11.66 15.39 15.60 15.81 16.03-40.00% 12.68 15.64 15.81 15.98 16.15-50.00% 13.36 15.81 15.95 16.09 16.24

10%LE 10%UE18.351 22.429

148

forever, which we did so by dividing the terminal value by the cost of equity, minus the

dividend expected growth rate. After adding Korn Ferry’s present value of net income and present value of abnormal earnings, we calculated a market value of 85 million for

April 30th, 2016 using a negative 30% growth and backdoor cost of equity of 8.76%. However, to account for the extra time between this date and November 1st, 2016, we

grew this value by the future value factor, 1.04, for the time between these two dates. Therefore, the time consistent price is 89 billion. After dividing by Korn Ferry’s shares

outstanding, we computed a time consistent stock price of $18.61, which states Korn Ferry as overvalued.

Since Korn Ferry’s backdoor cost of equity and perpetuity growth can unpredictably

change in to the future, it is important to run a sensitivity model to analyze potential and reasonable percentage changes. Our perpetuity growth rate ranged between -10%

to -50%, for five different intervals. The reason that we use a negative growth rate in the perpetuity is because we expect the residual income growth to approach zero.

Additionally, for our ranges in cost of equity, we included the backdoor cost of equity of 8.76% and CAPM cost of equity at 12.70% to develop a more accurate picture than

relying on just one of the cost of equity computations. Due to Korn Ferry requiring restatement of their goodwill and capitalization of their leases, we filled out charts for

both the as-stated financials and the restated financials.

We decided to include a larger range of cost of equity percentages to encompass both the backdoor cost of equity and CAMP cost of equity. In figure 96 below, the as-stated

sensitivity model, using the backdoor cost of equity, returns fairly valued prices. However, with the CAPM cost of equity, the model states that Korn Ferry is currently

overvalued.

149

Figure 96: As-Stated Abnormal Earnings Growth Model

In figure 97 below, the restated sensitivity model returns values that all state Korn

Ferry as being overvalued. Only the top right value gets close to the 10% lower bound price, yet it is still more than $2.50 away in price.

Figure 97: Restated Abnormal Earnings Growth Model

Analyst Recommendation

To arrive at a final recommendation for Korn Ferry's value, we complied our separate analyses of the industry, accounting, financials, and valuation models. Due to the

method of comparables being dependent on the competitors we selected to analyze, we

-10.00% -20.00% -30.00% -40.00% -50.00%6.70% 27.98 28.38 28.56 28.66 28.737.70% 21.99 22.64 22.95 23.13 23.24

BackdoorKe 8.76% 17.48 18.24 18.61 18.83 18.979.70% 14.52 15.31 15.70 15.93 16.09

10.70% 12.12 12.89 13.28 13.51 13.6711.70% 10.26 10.99 11.36 11.59 11.75

CAPMKe 12.70% 8.80 9.47 9.83 10.05 10.2013.70% 7.63 8.25 8.59 8.80 8.94

10%LE 10%UE18.351 22.429

-10.00% -20.00% -30.00% -40.00% -50.00%6.76% 15.88 15.79 15.75 15.72 15.717.76% 12.82 12.90 12.94 12.96 12.97

BackdoorKe 8.76% 10.60 10.77 10.85 10.89 10.939.70% 9.03 9.23 9.34 9.40 9.44

10.70% 7.73 7.95 8.07 8.14 8.1811.70% 6.71 6.94 7.06 7.13 7.18

CAPMKe 12.70% 5.9 6.12 6.24 6.31 6.3613.70% 5.25 5.46 5.57 5.64 5.69

10%LE 10%UE18.351 22.429

150

will not consider it in our final recommendation, but we will use it to compare against

the valuation models.

The three valuation models that have the most weight in our decision are the

discounted free cash flows, residual income, long run residual income, and the abnormal earnings growth models. Because of the models' lower potential for

forecasting error and various factors involved, with the two residual income models being based on net income, dividends, and book value of equity and the abnormal

earnings growth model relying on net income and reinvested dividends, we have

chosen to put less weight on the discounted dividends model. For example, the discounted dividends model supports only 42.8% of the November 1, 2016 stock price,

but it does not account for the other 57.2% of Korn Ferry's value. Normally, the discounted free cash flows model is not used due to relying heavily on the forecasting

of future cash flows, but from our computations, we have also chosen to include it as a key determinate in Korn Ferry's valuation.

After considering the various valuation tools, we have decided to recommend Korn

Ferry as being fair valued. This is because our evaluation of the discounted free cash flows, residual income, long run residual income, and the abnormal earnings growth

models led us to the conclusion that Korn Ferry is a fair valued company.

151

References

Beyond the Crisis: Sustained Global Economic Growth? Publication. N.p.: A.T. Kearney, n.d.

Print.

"Deloitte's 2014 Global Outsourcing and Insourcing Survey." Deloitte Development, LLC. (2014):

n. pag. Web. 7 Sept. 2016.

Feintzeig, Rachel. "Korn/Ferry to Buy HR Consultancy Hay Group for $452 Million." WSJ. Wsj.com, 24 Sept. 2015. Web. 14 Sept. 2016.

Heidrick & Struggles International, Inc. Annual 10-K report, 2015. Web. Sep. 5, 2016

Kelly Services, Inc. Annual 10-K report, 2015. Web. Sep. 5, 2016

"Korn Ferry: About Us." Kornferry. N.p., n.d. Web. 10 Sept. 2016.

Korn/Ferry International. Annual 10-K reports, 2015-2016. Web. Sep. 5, 2016.

"Korn/Ferry International." History of – FundingUniverse. N.p., n.d. Web. 14 Sept. 2016.

Korn Ferry International. Q1 2017 Korn Ferry International Earnings Conference Call.

Kornferry.com. N.p., n.d. Web.

"Korn/ Ferry International Stock Performance." MorningStar. Texas Tech Libraries, 16 Sept.

2016. Web. 16 Sept. 2016.

Manpowergroup, Inc. Annual 10-K report, 2015. Web. Sep. 5, 2016

On Assignment, Inc. Annual 10-K report, 2015. Web. Sep. 5, 2016

"The Service Sector: Projections and Current Stats." Dpeaflcio.org. DPE Research Department,

May 2011. Web. Sept. 1.

Services - Staffing & Outsourcing Services Industry - Company List. Biz.Yahoo. Yahoo Finance,

16 Sept. 2016. Web. 16 Sept. 2016.

152

Appendix

Industry Growth

Figure 98

Financial Statements

Balance Sheet

Firm 2012 2013 2014 2015

Korn Ferry 6.21 2.82 18.15 7.07

Manpower Group -6.03 -2.07 2.53 -6.9

On Assignment 107.56 22.86 13.24 19.73

Heidrick & Struggles -15.92 4.1 6.99 7.46

Kelly Services -1.81 -0.69 2.76 -0.8

Average of Growth 18 5.4 8.73 5.31

Sales Growth for Korn Ferry and Related Companies (in %)

-20

-15

-10

-5

0

5

10

15

20

25

PercentageSaleGrowthintheIndustryfrom2011-2015

KornFerry ManpowerGroup Heidrick&Struggles

KellyService OnAssignment Average

153

Figure 99: Trial Balance for Korn Ferry (Apr 2012 - Apr 2013)

Balance SheetAs Stated Dr Cr Restated As Stated Dr Cr Restated

(in thousands)AssetsCurrent AssetsCash and cash equivalents $282,005 $282,005 $224,066 $224,066Marketable securities 40,936 40,936 20,347 20,347Receivables due from clients, net 126,579 126,579 161,508 161,508Income taxes and other receivables 11,902 11,902 8,944 8,944Prepaid expenses and other assets 27,815 27,815 28,724 28,724Total current assets 489,237 489,237 443,589 443,589

Marketable securities, non-current 94,798 94,798 121,569 121,569Property and equipment, net 49,808 49,808 53,628 53,628Cash surrender value of company owned life insurance policies, net of loans 77,848 77,848 85,873 85,873Deferred income taxes, net 68,120 68,120 66,714 66,714Goodwill, net 176,338 29,176.40 139,547.60 257,293 65,967 191,326Intangible assets, net 20,413 20,413 58,187 58,187Investments and other assets 38,127 38,127 28,376 28,376Capital Operating lease asset - 176,611.40 176,611.40 - 188,140.30 22,076.42 166,063.88

Total Assets 1,014,689 1,154,510 1,115,229 1,215,326

LIABILITIES AND STOCKHOLDERS’ EQUITYAccounts payable $14,667 $14,667 $19,460 $19,460Income taxes payable 8,720 8,720 5,502 5,502Compensation and benefits payable 160,810 160,810 160,298 160,298Term loan - - - -Other accrued liabilities 37,527 37,527 83,291 83,291Total current liabilities 221,724 221,724 268,551 268,551

Deferred compensation and other retirement plans 142,577 142,577 159,706 159,706Term loan, non-current - - - -Deferred tax liabilities - - - -Capital Operating Lease Liabilty 176,611.40 176,611.40 31,894.43 188,140.30 156,245.08Other liabilities 20,912 20,912 22,504 22,504Total liabilities 385,213 561,824 450,761 607,006

Commitments and contingencies

Stockholders’ equity:Common stock: $0.01 par value 419,998 419,998 431,508 431,508Retained earnings 202,797 29,176.40 173,621 236,090 56,148.00 179,942Accumulated other comprehensive loss, net 7,191 7,191 -2,631 -2,631Total Korn/Ferry International stockholders’ equity 629,986 593,196 664,967 608,819Less: notes receivable from stockholders -510 -510 -499 -499Noncontrolling interest - - - -Total stockholders’ equity 629,476 592,686 664,468 608,320

Total liabilities and stockholders’ equity 1,014,689 1,154,510 1,115,229 1,215,326

2012 2013

154

Figure 100: Trial Balance for Korn Ferry (Apr 2014 - Apr 2016)

Income Statement

Balance SheetAs Stated Dr Cr Restated As Stated Dr Cr Restated As Stated Dr Cr Restated

(in thousands)AssetsCurrent AssetsCash and cash equivalents $333,717 $333,717 $380,838 $380,838 $273,252 $273,252Marketable securities 9,566 9,566 25,757 25,757 11,338 11,338Receivables due from clients, net 175,986 175,986 188,543 188,543 315,975 315,975Income taxes and other receivables 8,244 8,244 10,966 10,966 20,579 20,579Prepaid expenses and other assets 29,955 29,955 31,054 31,054 43,130 43,130Total current assets 557,468 557,468 637,158 637,158 664,274 664,274

Marketable securities, non-current 124,993 124,993 118,819 118,819 130,092 130,092Property and equipment, net 60,434 60,434 62,088 62,088 95,436 95,436Cash surrender value of company owned life insurance policies, net of loans 94,274 94,274 102,691 102,691 107,296 107,296Deferred income taxes, net 59,525 59,525 59,841 59,841 27,163 27,163Goodwill, net 257,582 118,948 138,634 254,440 3,142 171,929 85,653 590,072 221,769 368,303Intangible assets, net 49,560 49,560 47,901 47,901 233,027 233,027Investments and other assets 29,830 29,830 34,863 34,863 51,240 51,240Capital Operating lease asset - 176,029.80 20,904.48 155,125.32 - 270,669.00 19,558.87 251,110.13 - 388,485.50 30,074.34 358,411.16

Total Assets 1,233,666 1,269,843 1,317,801 1,400,124 1,898,600 2,035,243

LIABILITIES AND STOCKHOLDERS’ EQUITYAccounts payable $19,375 $19,375 $19,238 $19,238 $26,634 $26,634Income taxes payable 13,014 13,014 3,813 3,813 8,396 8,396Compensation and benefits payable 192,035 192,035 219,364 219,364 266,211 266,211Term loan - - - - 30,000 30,000Other accrued liabilities 62,509 62,509 63,595 63,595 145,023 145,023Total current liabilities 286,933 286,933 306,010 306,010 476,264 476,264

Deferred compensation and other retirement plans 169,235 169,235 173,432 173,432 216,113 216,113Term loan, non-current - - - - 110,000 110,000Deferred tax liabilities - - - - 5,088 5,088Capital Operating Lease Liabilty - 48,045.02 176,029.80 127,984.78 - 61,979.90 270,669.00 208,689.10 - 75,167.10 388,485.50 313,318.40Other liabilities 21,962 21,962 23,110 23,110 43,834 43,834Total liabilities 478,130 606,115 502,552 711,241 851,299 1,164,617

Commitments and contingencies

Stockholders’ equity:Common stock: $0.01 par value 449,631 449,631 463,839 463,839 702,098 702,098Retained earnings 308,781 91,808 216,973 392,033 126,366 265,667 401,113 176,676 224,437Accumulated other comprehensive loss, net -2,388 -2,388 -40,623 -40,623 -57,911 -57,911Total Korn/Ferry International stockholders’ equity 756,024 664,216 815,249 688,883 1,045,300 868,624Less: notes receivable from stockholders -488 -488 - - - -Noncontrolling interest - - - 2001 2001Total stockholders’ equity 755,536 663,728 815,249 688,883 1,047,301 870,625

Total liabilities and stockholders’ equity 1,233,666 1,269,843 1,317,801 1,400,124 1,898,600 2,035,242

2014 2015 2016

155

Figure 101: Trial Balance for Korn Ferry (Apr 2012 – Apr 2013)

Inco

me

Stat

emen

t (in

thou

sand

s)As

Sta

ted

DrCr

Rest

ated

As S

tate

dDr

CrRe

stat

ed

Fee

Reve

nue

790,

505

790,

505

812,

831

812,

831

Reim

burs

ed o

ut-o

f-poc

ket

enga

gem

ent e

xpen

ses

36,2

5436

,254

36,8

7036

,870

Tota

l Rev

enue

826,

759

826,

759

849,

701

849,

701

Com

pens

tatio

ns a

nd b

enef

its53

4,18

653

4,18

655

5,34

655

5,34

6Ge

nera

l and

adm

insit

rativ

e ex

pens

es13

8,87

213

8,87

214

2,77

122

,076

38,5

8812

6,25

9Re

imbu

rsed

exp

ense

s36

,254

36,2

5436

,870

36,8

70Co

st o

f ser

vices

19,6

3519

,635

28,9

7728

,977

Depr

ecia

tion

and

amor

tizat

ion

14,0

1714

,017

19,0

0419

,004

Rest

ruct

urin

g ch

arge

s, n

et92

992

922

,857

22,8

57Go

odw

ill Im

pairm

ent E

xpen

se-

36,7

90.4

076

1429

,176

.40

-36

,790

.40

36,7

90.4

0To

tal o

pera

ting

expe

nses

743,

893

773,

069.

4080

5,82

582

6,10

3.82

Oper

atin

g in

com

e82

,866

53,6

89.6

43,8

7623

,597

.18

Othe

r (lo

ss) i

ncom

e, n

et-2

71-2

716,

309

6,30

9In

tere

st in

com

e (e

xpen

se),

net

-1,7

91-1

,791

-2,3

656,

693.

57-9

,059

Inco

me

befo

re p

rovis

ion

for i

ncom

e ta

xes

and

equi

ty i

80,8

0451

,628

47,8

2020

,847

.61

Equi

ty in

ear

ning

s of

unc

onso

lidat

ed

subs

idia

ries,

net

1,85

01,

850

2,11

02,

110

Inco

me

tax

prov

ision

-28,

351

-28,

351

-16,

637

-16,

637

Net i

ncom

e54

,303

25,1

2733

,293

6,32

1Ne

t inc

ome

attri

buta

ble

to

nonc

ontro

lling

inte

rest

--

--

Net i

ncom

e at

tribu

tabl

e to

Kor

n Fe

rry

Inte

rnat

iona

l54

,303

25,1

2733

,293

6,32

1

2012

2013

156

Figure 102: Trial Balance for Korn Ferry (Apr 2014 – Apr 2016)

Inco

me

Stat

emen

t (in

thou

sand

s)As

Sta

ted

DrCr

Rest

ated

As S

tate

dDr

CrRe

stat

edAs

Sta

ted

DrCr

Rest

ated

Fee

Reve

nue

960,

301

960,

301

1,02

8,15

21,

028,

152

1,29

2,11

21,

292,

112

Reim

burs

ed o

ut-o

f-poc

ket

enga

gem

ent e

xpen

ses

35,2

5835

,258

37,9

1437

,914

54,6

0254

,602

Tota

l Rev

enue

995,

559

995,

559

1,06

6,06

61,

066,

066

1,34

6,71

41,

346,

714

Com

pens

tatio

ns a

nd b

enef

its64

6,88

964

6,88

969

1,45

069

1,45

089

7,34

589

7,34

5Ge

nera

l and

adm

insit

rativ

e ex

pens

es15

2,04

020

,904

.48

44,0

9612

8,84

814

5,91

719

,558

.87

41,1

7712

4,29

921

3,01

830

,074

.34

41,6

2420

1,46

8Re

imbu

rsed

exp

ense

s35

,258

35,2

5837

,914

37,9

1454

,602

54,6

02Co

st o

f ser

vices

39,9

1039

,910

39,6

9239

,692

59,8

2459

,824

Depr

ecia

tion

and

amor

tizat

ion

26,1

7226

,172

27,5

9727

,597

36,2

2036

,220

Rest

ruct

urin

g ch

arge

s, n

et3,

682

3,68

29,

468

9,46

833

,013

33,0

13Go

odw

ill Im

pairm

ent E

xpen

se-

52,9

8152

,981

-52

,981

3,14

2

49,8

39-

52,9

8152

,981

Tota

l ope

ratin

g ex

pens

es90

3,95

193

3,74

195

2,03

898

0,25

91,

294,

022

1,33

5,45

4

Oper

atin

g in

com

e91

,608

61,8

1811

4,02

885

,807

52,6

9211

,260

Othe

r (lo

ss) i

ncom

e, n

et9,

769

9,76

97,

458

7,45

8-4

,167

-4,1

67In

tere

st in

com

e (e

xpen

se),

net

-2,3

635,

869.

98-8

,233

-1,7

846,

337.

07-8

,121

237

8,87

7.94

-8,6

41In

com

e be

fore

pro

visio

n fo

r inc

ome

taxe

s an

d eq

uity

i99

,014

63,3

54.1

411

9,70

285

,143

.66

48,7

62-1

,547

.68

Equi

ty in

ear

ning

s of

unc

onso

lidat

ed

subs

idia

ries,

net

2,16

92,

169

2,18

12,

181

1,63

11,

631

Inco

me

tax

prov

ision

-28,

492

-28,

492

-33,

526

-33,

526

-18,

960

-18,

960

Net i

ncom

e72

,691

37,0

3188

,357

53,7

9931

,433

-18,

877

Net i

ncom

e at

tribu

tabl

e to

no

ncon

trollin

g in

tere

st-

--

--5

20-5

20Ne

t inc

ome

attri

buta

ble

to K

orn

Ferr

y In

tern

atio

nal

72,6

9137

,031

88,3

5753

,799

30,9

13-1

9,39

7

2014

2015

2016