Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2018; filed February 5, 2019. Dollar amounts below are in millions unless noted. The company provides corporate finance, financial restructuring, and financial advisory services.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Prior-year quarter | Nine months ended Dec. 31, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $298.0 | $258.9 | $793.0 | $718.6 |
| Operating income | $62.3 | $54.5 | $158.6 | $154.7 |
| Net income | $44.0 | $61.6 | $113.8 | $134.2 |
| Diluted earnings per share | $0.67 | $0.93 | $1.72 | $2.02 |
| Operating margin | 20.9% | 21.0% | 20.0% | 21.5% |
Quarterly revenue grew 15% and nine-month revenue grew 10%; operating income increased 14% for the quarter and 3% for the nine-month period. Net income fell 29% and 15%, respectively, in large part because the prior-year periods benefited from unusual tax effects. The effective tax rate was 30.2% for the quarter and 29.7% for the nine months, versus a tax benefit of 11.7% and a rate of 14.5% in the corresponding 2017 periods.
For the quarter, Corporate Finance revenue rose 43% to $184.0 million, while Financial Restructuring revenue declined 20% to $75.0 million; Financial Advisory Services revenue rose 9% to $39.0 million. Restructuring segment profit fell 66% to $11.1 million, while Corporate Finance segment profit increased 84% to $62.4 million. For the nine months, revenue increased 16% in Corporate Finance, 1% in Restructuring, and 8% in Financial Advisory Services.
Employee compensation and benefits were $187.2 million for the quarter and $501.7 million for the nine months. Non-compensation expenses increased 61% and 60%, respectively, partly reflecting the new gross presentation of reimbursed deal costs, as well as higher rent, professional fees, travel, and other costs. The compensation ratio improved to 62.8% for the quarter and 63.3% for the nine months, from 67.3% and 67.0%.
Cash flow, liquidity and obligations
- Operating cash flow was $92.1 million for the nine months, down from $140.7 million. Management cited strong operating performance; the cash-flow statement also shows a larger outflow from operating assets and liabilities, including accrued salaries and bonuses.
- Investing activities provided $94.1 million, primarily from investment-security maturities and sales, partly offset by $71.4 million of net acquisition spending. Financing activities used $218.9 million, including $50.3 million of dividends, $69.2 million of other share repurchases, and $93.5 million to settle the forward share purchase agreement.
- Cash, cash equivalents and restricted cash totaled $256.8 million at period-end. Unrestricted cash and investment securities totaled $297.4 million; restricted cash was $0.4 million. The company reported $148 million of cash in foreign subsidiaries.
- No borrowings were outstanding under the $75 million revolving credit facility, which matures August 18, 2019. The company reported compliance with its financial covenants. Scheduled loan and note repayments totaled $31.9 million; operating lease commitments were $148.8 million.
- Total assets were $1.260 billion and total liabilities were $409.5 million at December 31, 2018. Stockholders’ equity was $850.7 million. The board declared a quarterly dividend of $0.27 per share after quarter-end, payable March 15, 2019.
Material changes, outlook and risks
- Effective April 1, 2018, the company adopted ASC 606 using the modified retrospective method. It recorded a $19.7 million reduction to opening retained earnings, a $7.4 million reduction in deferred tax liabilities, and a $24.4 million increase in deferred income. Revenue for 2018 periods includes certain reimbursed expenses presented gross rather than net; this added $13.4 million to quarterly revenue and $29.7 million to nine-month revenue. Prior-year periods were not restated, so reported growth is not fully comparable.
- The acquisitions of Quayle Munro Limited and BearTooth Advisors were completed in April and May 2018. Goodwill increased by $65.1 million from March 31, 2018, primarily due to acquisitions and foreign-currency translation.
- Management provided no numerical earnings or revenue guidance in the filing. It noted that results are not necessarily indicative of the full fiscal year. Revenue depends partly on successful transaction completions and client collections; many Corporate Finance completion fees are contingent on closing transactions.
- Foreign-currency translation reduced comprehensive income by $19.0 million for the nine months. Management expects currency translation to be more volatile amid Brexit negotiations but did not expect a material impact on operating results or financial position at that time.
- The company reported routine legal matters that management did not expect to materially affect financial condition, operations, or cash flows, and no material changes to previously disclosed risk factors. It identified lease guarantees and indemnities whose maximum potential payment could not be estimated; no liability was recorded. Disclosure controls were considered effective, and no material change in internal control was reported.
Important facts for investors to verify
- Assess underlying revenue growth against the ASC 606 gross presentation change and the absence of prior-period restatement.
- Track transaction completion activity and the sharp quarterly decline in Restructuring revenue and profitability.
- Reconcile lower operating cash flow with earnings, bonus-payment timing, and changes in accrued compensation and other working-capital items.
- Review the effective tax rate and the prior-year tax benefits when comparing net income and EPS.
- Monitor acquisition performance, lease commitments, foreign-currency exposure, and liquidity after dividends and share repurchases.