Business context and reporting period
Houlihan Lokey, Inc. provides corporate finance, financial restructuring and financial advisory services. This unaudited Form 10-Q covers the three months ended June 30, 2016 (the first quarter of fiscal 2017); comparisons are with the three months ended June 30, 2015. Amounts below are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Fee revenue | $180.8 million | $146.3 million | +24% |
| Operating income | $32.9 million | $23.8 million | +38% |
| Income before taxes | $32.0 million | $25.1 million | +27% |
| Net income attributable to Houlihan Lokey | $19.4 million | $15.0 million | +29% |
| Diluted earnings per share | $0.29 | $0.25 | — |
| Operating margin | 18.2% | 16.3% | +1.9 percentage points |
| Net margin | 10.7% | 10.3% | +0.4 percentage points |
Operating expenses increased 21% to $147.9 million. Employee compensation and benefits rose 30% to $121.8 million; non-compensation expenses fell 9% to $26.1 million. The effective tax rate was 39.3%, versus 40.0%.
Cash and cash equivalents were $106.0 million at June 30, down from $166.2 million at March 31, 2016. Cash from operations was negative $67.8 million, compared with negative $106.5 million a year earlier; management attributed the current-quarter outflow primarily to annual cash bonus payments. Investing activities provided $12.5 million, principally from reduced affiliate receivables, partly offset by $7.5 million of capital expenditures. Financing activities used $3.8 million. The filing reports $25.0 million outstanding on a $75.0 million revolving credit facility, leaving $50.0 million of capacity, subject to its terms and covenants.
Outstanding loans totaled $93.6 million: $37.5 million payable to affiliate, $16.2 million payable to former shareholders, and $39.9 million payable to non-affiliates. Total liabilities were $307.2 million and stockholders’ equity was $676.7 million. The company reported compliance with the revolving facility’s covenants. Operating lease commitments totaled $139.5 million.
Material changes and segment results
- Corporate Finance revenue grew 22% to $96.0 million, supported by more closings and a higher average fee per transaction. Segment profit was approximately flat at $23.4 million.
- Financial Restructuring revenue rose 44% to $56.3 million and segment profit rose 74% to $16.7 million, driven by higher average transaction fees and increased retainer fees from active mandates.
- Financial Advisory Services revenue declined 2% to $28.4 million, while segment profit was flat at $6.7 million. Management cited softness in transaction-based opinions, partly offset by growth in non-transaction product lines.
- Compensation expense growth reflected higher revenue and vesting of pre-IPO awards. The reported compensation ratio was 67%, versus 64% a year earlier. Non-compensation expenses benefited from the absence of $6.0 million of prior-year IPO and reorganization costs.
- Other expense was $0.9 million, versus $1.3 million of other income a year earlier, mainly reflecting lower interest income, new borrowing costs and start-up losses in Australian and Italian joint ventures.
Outlook, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management states a target adjusted awarded compensation ratio of approximately 65%–66%, while noting it may exceed that target to support growth or respond to market conditions. The company declared a quarterly dividend of $0.17 per share payable September 15, 2016.
Results and cash receipts depend in part on successful transaction completions, client collections and the timing of incentive-compensation payments. Management noted that the U.K. vote to leave the European Union contributed to a $3.9 million foreign-currency translation loss; the effects on European operations remain uncertain. Management expected greater currency volatility but did not expect it to materially affect operating results or financial position. A $3.0 million notional sterling forward contract had a $0.2 million loss for the quarter. The company also identified exposure to foreign-exchange movements and credit risk on receivables.
Share-based compensation expense was $11.3 million, and $116.7 million of unrecognized compensation cost remained, expected to be recognized over a weighted-average 1.74 years. Management reported no material litigation, no material change in disclosed risk factors, and no subsequent event requiring disclosure. Disclosure controls were considered effective; no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether the strong revenue growth—particularly in Financial Restructuring—continues, given the contingent nature of many advisory fees.
- How compensation expense, equity awards and the 65%–66% adjusted compensation target affect margins and cash outflows.
- Cash conversion and liquidity after seasonal bonus payments, dividends, debt repayments and the collection of receivables.
- Revolver availability and covenant compliance, along with scheduled repayments of affiliate and other loans.
- Any further impact from Brexit-related currency movements or changes in European business activity.