Houlihan Lokey, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2016; filed June 23, 2016. The filing is an annual report, not a standalone 2015 Q4 report. It does include unaudited quarterly results, including the quarter ended March 31, 2016.
Business context
Houlihan Lokey is a global independent investment bank providing Corporate Finance, Financial Restructuring and Financial Advisory Services. At year-end it had 837 financial professionals, including 165 Managing Directors, and operated through 19 offices plus joint-venture offices. The company completed its IPO in August 2015; existing shareholders sold shares, and the company received no IPO proceeds.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Fee revenue | $693.8 million | $680.9 million | +2% |
| Operating income | $126.4 million | $128.7 million | -2% |
| Operating margin | 18.2% | 18.9% | -0.7 percentage points |
| Net income attributable to Houlihan Lokey | $69.7 million | $79.9 million | -13% |
| Diluted earnings per share | $1.10 | $1.33 | -17% |
| Operating cash flow | $13.5 million | $196.5 million | Down substantially |
Net margin was approximately 10.1%, compared with 11.7% in FY2015. The effective tax rate rose to 44.5% from 39.5%, primarily because certain IPO-related costs were not tax deductible. Compensation expense fell 3% to $461.6 million, while non-compensation expense rose 37% to $105.8 million, reflecting IPO and reorganization costs, acquisitions, public-company costs and expanded staffing.
By segment, Corporate Finance revenue was $371.8 million (+1%), Financial Restructuring $202.3 million (-3%), and Financial Advisory Services $119.6 million (+14%). Segment profit increased 2% in Corporate Finance to $103.4 million, 5% in Restructuring to $55.0 million, and 25% in Advisory Services to $30.3 million.
Cash and cash equivalents were $166.2 million at March 31, 2016, versus $88.7 million a year earlier; $57 million was held in foreign subsidiaries. The company also reported $27.4 million receivable from affiliates, including $20.1 million due from an ORIX affiliate. Total loan obligations were $76.6 million. No borrowings were outstanding under the $75 million revolving credit facility; the company reported compliance with its covenants. Operating cash flow fell largely with changes in accrued compensation, payables and taxes. Investing cash flow was positive $179.6 million, principally reflecting collection of affiliate receivables; financing cash outflow was $116.0 million, primarily dividends.
For the quarter ended March 31, 2016, revenue was $183.6 million, operating income $41.5 million and net income attributable to the company $22.8 million. In the comparable prior-year quarter, revenue was $186.5 million and attributable net income was $24.8 million.
Material changes and unusual items
- Revenue growth was modest as Financial Advisory Services growth was partly offset by lower Restructuring revenue; management attributed the latter to fewer completed transactions in a slow restructuring environment.
- Fiscal 2016 included three acquisitions (MESA, McQueen and Leonardo-related European businesses), supporting expansion but adding transaction costs, amortization and lease commitments. Goodwill and other intangibles totaled $717.4 million.
- The company recorded $12.8 million of IPO, reorganization and related professional fees, along with IPO-related compensation expense. Non-compensation expenses also reflected acquisition and public-company costs.
- Before the IPO, the company distributed $270 million in value to existing owners through cash-related notes and non-operating assets. It began regular quarterly dividends in December 2015, paying $0.15 per share in December and March; a $0.17 dividend was declared for June 2016.
- Management described client dialogue and mid-market capital availability as supportive of M&A and capital-markets activity, while noting financing had become somewhat more challenging. It also cited continuing restructuring demand from industry and geographic dislocations. No quantitative earnings or revenue guidance was provided.
Risks, contingencies and governance
- Results are volatile because a substantial share of Corporate Finance and Restructuring fees depends on transaction milestones or successful completion; market conditions and client decisions affect both timing and realization.
- Key risks include retaining senior professionals, competition and fee pressure, economic and market shifts, acquisitions and integration, international and currency exposure, cybersecurity, regulatory compliance, litigation, and potential impairment of goodwill and intangibles.
- The company disclosed continuing potential exposure to certain pre-IPO ORIX USA tax liabilities and dependence on ORIX-affiliated services and cash-management arrangements. Tax audits and uncertain tax positions remain relevant; unrecognized tax benefits were $1.0 million at year-end.
- Management stated that ordinary-course legal and regulatory matters were not expected, based on current knowledge, to have a material adverse effect; the filing did not quantify potential losses for matters whose outcomes could not be estimated.
- ORIX USA and the HL Voting Trust collectively controlled approximately 97.8% of voting power at March 31, 2016 through the dual-class structure. The company qualified as a controlled company and relied on certain NYSE governance exemptions.
Investor verification points
- Review subsequent quarterly results to assess whether revenue growth and margins recovered after the FY2016 decline in net income.
- Track cash conversion and working-capital movements, especially accrued compensation, receivables and unbilled work in process.
- Assess acquisition integration, incremental revenue and costs, and the growth in goodwill, intangibles and lease commitments.
- Monitor debt repayments, revolving-facility covenant compliance, affiliate receivables and related-party arrangements.
- Verify the sustainability of dividends against cash generation and contractual restrictions, and consider the voting-control and governance implications of the dual-class shares.
- Follow resolution of tax uncertainties, legal or regulatory proceedings, and any indicators of impairment in goodwill or other intangible assets.