Houlihan Lokey, Inc. — Form 10-Q Summary
Business context and period. The unaudited filing covers the three and nine months ended December 31, 2016, Houlihan Lokey’s fiscal third quarter and year-to-date period, respectively. The company provides investment banking and financial advisory services through Corporate Finance, Financial Restructuring, and Financial Advisory Services (FAS). Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2016 | Year to date ended Dec. 31, 2016 | Comparable 2015 period |
|---|---|---|---|
| Fee revenue | $247.7 million | $615.0 million | $205.5 million; $510.2 million |
| Operating income | $56.8 million | $124.7 million | $43.7 million; $84.9 million |
| Net income attributable to Houlihan Lokey | $34.0 million | $74.3 million | $22.7 million; $47.0 million |
| Diluted earnings per share | $0.51 | $1.11 | $0.35; $0.75 |
| Operating cash flow | Not separately stated | $151.8 million | Year to date: $(36.3) million |
Year-to-date fee revenue increased 21%, operating income 47%, and net income attributable to the company 58% year over year. Third-quarter growth was also 21% in revenue and 50% in net income. Approximate operating margin was 22.9% for the quarter and 20.3% year to date, compared with 21.3% and 16.6%, respectively, in the comparable periods. Approximate quarterly net margin rose to 13.7% from 11.0%.
Employee compensation and benefits were $165.0 million for the quarter and $411.7 million year to date, each up 21%. The reported compensation ratio was 67% in both year-to-date periods (66% in the prior-year quarter). The effective tax rate was 39.0% for the quarter and 39.1% year to date, down from 46.8% and 44.6%, largely because the 2015 comparison included nondeductible IPO-related professional fees.
Segments and material changes
- Financial Restructuring was the main growth driver: revenue increased 80% to $90.2 million for the quarter and 56% to $203.4 million year to date. Management attributed growth to more closings and higher average transaction fees.
- Corporate Finance revenue declined 1% to $123.2 million for the quarter as closings fell to 50 from 52; year-to-date revenue rose 9% to $319.5 million, with 154 closings versus 122.
- FAS revenue increased 10% to $34.3 million for the quarter and 5% to $92.1 million year to date. Management cited stronger transaction advisory, portfolio valuation, and strategic consulting activity, partly offset by weaker transaction opinions.
- U.S. revenue rose to $225.3 million from $165.2 million in the quarter, while international revenue fell to $22.4 million from $40.4 million. Year-to-date U.S. revenue was $555.3 million versus $440.7 million; international revenue was $59.7 million versus $69.4 million.
- Year-to-date non-compensation expenses declined 7%, principally reflecting the absence of $12.8 million of prior-year IPO, reorganization, and related costs. Other expenses increased year to date, including higher joint-venture losses and interest expense, and lower affiliate interest income.
Cash, liquidity, debt, and capital
- Cash and cash equivalents were $253.6 million at December 31, 2016, up from $166.2 million at March 31, 2016. Year-to-date operating cash flow was $151.8 million; investing cash flow was $6.4 million and financing cash flow was $(63.8) million. The company cited higher earnings, noncash share compensation, and lower receivables as contributors to operating cash flow.
- Net accounts receivable was $33.2 million and unbilled work in process was $41.8 million, down from $58.1 million and $51.3 million, respectively, at March 31. The allowance for doubtful accounts increased to $8.5 million from $4.3 million.
- Reported loans totaled $43.8 million: $22.5 million payable to affiliate, $5.9 million payable to former shareholders, and $15.3 million payable to non-affiliates. No balance was outstanding under the $75 million revolving facility, which was scheduled to expire August 18, 2017. Management reported covenant compliance and expected continued compliance.
- Year-to-date dividends paid were $35.9 million. A quarterly dividend of $0.17 per share was declared in November; on February 1, 2017, after the reporting date, the board declared $0.20 per share, payable March 15, 2017.
- Operating lease commitments totaled $138.3 million. The company reported $71 million of cash in foreign subsidiaries at December 31.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management stated a target Adjusted Awarded Compensation Ratio of approximately 65%–66%, while noting it may exceed that range to support growth or other business needs.
- Revenue, particularly in Corporate Finance and Financial Restructuring, depends on successful transaction completion; failed or delayed transactions can limit fees. Cash generation also depends on client receipts and collection timing.
- Management noted that the stronger U.S. dollar and Brexit-related uncertainty contributed to a $12.4 million year-to-date foreign-currency translation loss in other comprehensive income. It expected currency translation to remain more volatile but did not expect a material effect on operating results or financial position. A $3.0 million sterling forward contract had a $0.2 million loss included in quarterly expenses.
- Legal proceedings arise in the ordinary course; management did not expect their resolution to materially affect the company. The company also disclosed lease indemnities and subsidiary lease guarantees for which a maximum obligation could not be estimated; no liability was recorded.
- Management reported no material change to previously disclosed risk factors, effective disclosure controls, and no material subsequent event requiring disclosure.
Important facts for investors to verify
- Whether Financial Restructuring’s strong growth and transaction fees persist, and how Corporate Finance closing volumes develop.
- How fee mix, transaction timing, and collections affect receivables, unbilled work, and operating cash flow.
- Whether compensation remains aligned with revenue growth and management’s stated adjusted compensation-ratio target.
- Debt repayment schedule, revolving-facility renewal or replacement, and compliance with covenants.
- Foreign-exchange exposure and the potential effect of Brexit-related developments on international revenue and reported results.
- Dividend sustainability, lease commitments, and the voting control associated with Class B shares, which carry ten votes per share versus one vote for Class A.