Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended June 30, 2018 (unaudited), compared with the three months ended June 30, 2017. The company provides corporate finance, financial restructuring, and financial advisory services.
Key financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $220.0 million | $217.5 million | +1% |
| Operating income | $40.1 million | $46.9 million | -14% |
| Net income | $29.7 million | $39.2 million | -24% |
| Diluted EPS | $0.45 | $0.59 | Lower |
| Operating cash flow | $(119.0) million | $(61.0) million | Greater outflow |
- Operating expenses rose 5% to $179.9 million. Compensation expense declined 4% to $139.2 million; the reported compensation ratio was 63.3%, versus 66.9%.
- Non-compensation expense increased 62% to $40.7 million, reflecting the new revenue presentation, acquisition and offering costs, and other expense growth.
- Effective tax rate was 28.9%, compared with 18.9%; management cited state taxes, GILTI, and executive-compensation deductibility limits. The prior-year rate benefited from stock-award tax effects.
Segments and period-to-period changes
- Corporate Finance: revenue $132.9 million, up 7%; segment profit $40.1 million, down 4%. Higher closed transaction volume contributed to revenue growth.
- Financial Restructuring: revenue $50.5 million, down 14%, due to fewer closed transactions and lower average transaction fees; segment profit increased 15% to $12.4 million, mainly on lower compensation expense relative to revenue.
- Financial Advisory Services: revenue $36.7 million, up 6%, while segment profit fell 12% to $7.4 million, primarily due to higher non-compensation expense relative to revenue.
- Corporate expenses increased 42% to $19.7 million, reflecting company growth and costs associated with acquisitions and secondary offerings.
- International revenue increased to $36.8 million from $17.2 million, while U.S. revenue declined to $183.2 million from $200.3 million.
Liquidity, cash flow, and debt
- At June 30, 2018, cash and cash equivalents were $144.2 million, investment securities were $15.7 million, and restricted cash was $0.4 million. Unrestricted cash and investments totaled $159.9 million; $86 million of cash was held in foreign subsidiaries.
- Operating cash outflow of $119.0 million was primarily attributable to cash bonus payments. Investing cash inflow of $121.2 million mainly reflected investment-security maturities; financing cash outflow of $148.4 million mainly reflected dividends, share repurchases, and settlement of the January 2018 forward purchase agreement.
- No borrowings were outstanding under the $75 million revolving credit facility. The company reported compliance with its covenants and expected continued compliance. The facility matures in August 2019.
- Reported loans payable included $2.9 million to former shareholders and $8.9 million to non-affiliates. A $10.5 million non-interest-bearing convertible loan from the Quayle Munro acquisition is included in other liabilities.
- Net accounts receivable was $84.8 million and unbilled work in process was $32.9 million. Management noted that liquidity depends substantially on client receipts and successful transaction completion.
Accounting, acquisitions, outlook, and risks
- Effective April 1, 2018, the company adopted ASC 606 using the modified retrospective method. Adoption reduced opening retained earnings by $17.7 million, reduced deferred tax liabilities by $6.7 million, and increased deferred income by $24.4 million. It also shifted certain Corporate Finance retainers and progress fees to deferred income until transaction completion or termination.
- ASC 606 changed the presentation of reimbursable out-of-pocket costs to gross revenue and expense. The filing attributes approximately $11.1 million of Q1 revenue and related expense to this presentation change, with no material net-income impact. The adoption reconciliation separately reports a $10.6 million revenue adjustment and a $0.3 million reduction in net income; prior-period results were not restated. Excluding adoption, Q1 revenue was $209.4 million, below prior-year reported revenue of $217.5 million.
- The company acquired Quayle Munro Limited in April and BearTooth Advisors in May 2018. Goodwill rose to $597.5 million, principally reflecting acquisitions and foreign-currency translation.
- No specific financial guidance was provided. Management cautioned that results are not necessarily indicative of the full fiscal year. Corporate Finance and restructuring revenue can depend on successful deal completion; transaction timing and fee levels can make results variable.
- Foreign-currency translation reduced other comprehensive income by $12.6 million, versus a $5.1 million gain in the prior-year quarter. Management expected currency translation to remain more volatile amid Brexit negotiations but did not expect a material effect on operating results or financial position. The company entered euro/sterling forward contracts with approximately €5.7 million notional value.
- Routine legal matters were not expected to have a material adverse effect; the filing reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Other notable items
- Cash dividends paid during the quarter were $16.8 million. After quarter-end, the board declared a $0.27 per-share dividend payable September 15, 2018.
- The company repurchased and retired 732,841 shares during the quarter for approximately $36.0 million. In July 2018, the board authorized up to $100 million of additional common-stock repurchases.
- Future minimum operating lease commitments were $164.1 million as of June 30, 2018.
Important facts for investors to verify
- Assess underlying revenue trends against the ASC 606 gross-presentation effect and the non-restated prior-year comparison.
- Track whether Corporate Finance growth offsets continued softness in Financial Restructuring, and whether segment profitability recovers.
- Monitor cash generation after seasonal bonus payments, client collections, and the mix of cash held outside the United States.
- Review acquisition integration, goodwill and intangible-asset assumptions, and the effect of acquisition-related financing and costs.
- Confirm compliance with revolving-credit covenants and evaluate planned dividends, repurchases, and lease commitments against liquidity needs.