Houlihan Lokey, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended December 31, 2021. The quarter is the company’s fiscal third quarter; amounts below are in U.S. dollars unless noted.
Business context and results
Houlihan Lokey provides Corporate Finance (CF), Financial Restructuring (FR), and Financial and Valuation Advisory (FVA) services. Results include GCA Corporation from its October 4, 2021 acquisition date. The company acquired GCA for approximately $589.6 million in cash, funded from cash on hand.
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $888.8M | $537.9M | $1,798.8M | $1,024.7M |
| Operating income | $249.3M | $158.4M | $514.3M | $267.9M |
| Net income attributable to Houlihan Lokey | $173.7M | $118.5M | $372.6M | $213.4M |
| Diluted EPS | $2.54 | $1.71 | $5.44 | $3.11 |
| Operating margin | 28.0% | 29.5% | 28.6% | 26.1% |
Financial position, cash flow, and liquidity
- For the nine months, operating cash flow was $672.1M, versus $307.2M a year earlier. Investing cash outflow was $146.4M, including the GCA acquisition; financing cash outflow was $310.0M, chiefly reflecting share repurchases, dividends, and employee tax withholding on share awards.
- At December 31, 2021, cash and cash equivalents were $1,058.6M and investment securities were $39.8M, for $1,098.4M of unrestricted cash and securities. Cash, cash equivalents, and restricted cash totaled $1,059.0M.
- Accounts receivable, net, was $195.9M and unbilled work in progress, net, was $86.5M. Total assets were $3,045.8M and stockholders’ equity was $1,529.4M.
- No principal was outstanding on the $100M revolving credit facility, which matured August 23, 2022. The company reported compliance with its covenants. Operating lease liabilities were $187.3M; the filing also disclosed approximately $131M of additional leases not yet commenced.
- Cash rose from $846.9M at March 31, 2021, while investment securities declined from $208.6M. The company reported $508M held in foreign subsidiaries at December 31, compared with $283M at March 31.
Material changes and management commentary
- Quarterly revenue grew 65%; nine-month revenue grew 76%. Management attributed growth principally to GCA and stronger CF transaction volumes and average fees. GCA contributed $210.5M of revenue and $12.1M of net income from acquisition through December 31.
- CF revenue increased 134% for the quarter and 162% for the nine months. FR revenue decreased 50% and 31%, respectively, primarily on fewer closed transactions. FVA revenue increased 56% and 64%, respectively.
- Quarterly operating expenses rose 69%, faster than revenue, while nine-month expenses rose 70%. Compensation expense was $549.4M for the quarter and $1,115.1M for the nine months; the compensation ratio improved to 61.8% and 62.0%, respectively, from 63.2% and 63.8%.
- Higher non-compensation costs reflected GCA expenses, acquisition and integration costs, acquired-intangible amortization, and increased travel and other expenses. The effective tax rate rose to 30.0% for the quarter and 27.3% for the nine months, from 25.3% and 20.8%, respectively.
- GCA added $403.8M of goodwill and $74.3M of acquired finite-lived intangible assets; purchase-price allocation remained preliminary. The remaining $57.7M payment for GCA shares was completed January 20, 2022. The board declared a $0.43-per-share quarterly dividend on January 26, payable March 15, 2022.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management cautions that results are affected by transaction completion and fee timing, client collections, compensation and headcount, and factors outside the company’s control. CF fees are substantially success-based; a transaction that does not close may generate only retainer or progress fees. Foreign-currency movements may affect reported results, and one £/€ forward contract had a €4.1M notional value at December 31. Management reported no material change to previously disclosed risk factors. Ordinary-course legal matters were not expected to have a material adverse effect; lease indemnity obligations have no stated maximum, and no liability was recorded for them.
Key facts for investors to verify
- How much of reported growth and future earnings reflects GCA, and how preliminary purchase accounting and acquired-intangible amortization develop.
- Whether CF transaction activity and fees remain strong, and whether FR revenue stabilizes after its marked decline.
- Cash conversion and collections, including movements in receivables and unbilled work in progress.
- Compensation, integration, and other costs relative to revenue, as well as the effective tax rate.
- Liquidity and capital allocation after the GCA payment, dividends, repurchases, lease commitments, and the revolving facility’s August 2022 maturity.