Houlihan Lokey, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended June 30, 2022; unaudited. The comparable period is the three months ended June 30, 2021. Houlihan Lokey provides Corporate Finance (CF), Financial Restructuring (FR), and Financial and Valuation Advisory (FVA) services.
Key financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $418.6 million | $372.7 million | +12% |
| Operating income | $77.6 million | $107.7 million | -28% |
| Net income | $70.8 million | $86.0 million | -18% |
| Diluted EPS | $1.03 | $1.25 | -18% |
| Operating margin | 18.5% | 28.9% | -10.4 percentage points |
| Net margin | 16.9% | 23.1% | -6.2 percentage points |
| Net cash from operating activities | -$278.0 million | -$90.1 million | Outflow increased |
Amounts are in U.S. dollars. Margins are calculated from reported revenue and income figures.
Business segments
| Segment | Revenue | Year-over-year change | Segment profit |
|---|---|---|---|
| Corporate Finance | $264.0 million | +26% | $91.6 million, +8% |
| Financial Restructuring | $78.8 million | -20% | $26.7 million, +2% |
| Financial and Valuation Advisory | $75.9 million | +19% | $19.0 million, -14% |
Management attributed CF growth mainly to more closed transactions; FR revenue declined with fewer closed transactions. FVA growth reflected higher average fees and more fee events. Segment profit excludes corporate expenses, other income/expense, and taxes.
Financial position and liquidity
- At June 30, 2022, cash and cash equivalents were $488.9 million and investment securities were $35.6 million, compared with $833.7 million and $109.1 million, respectively, at March 31, 2022. Cash, cash equivalents, and restricted cash totaled $489.3 million.
- Total assets were $2.436 billion and total liabilities were $1.018 billion. Stockholders’ equity was $1.418 billion.
- No principal was outstanding on the $100 million revolving credit facility at quarter-end. Loans payable to former shareholders were $0.5 million. The filing does not report other material funded borrowings.
- Operating lease liabilities were $188.0 million. Additional office leases of approximately $207 million had been signed but had not yet commenced.
- Operating cash outflow was primarily attributed to cash bonus payments in May. Investing cash inflow of $68.2 million mainly reflected sales or maturities of investment securities. Financing cash outflow of $123.7 million included dividends, share repurchases, and employee tax-withholding payments.
Material changes and notable items
- Operating expenses rose 29% to $341.1 million. Compensation expense increased 14% to $265.7 million; the compensation ratio increased to 63.5% from 62.3%.
- Non-compensation expense increased 130% to $75.3 million, mainly reflecting GCA expenses and amortization of acquisition-related intangible assets. GCA was acquired in October 2021, so the current quarter includes GCA while the prior-year quarter does not.
- The effective tax rate fell to 6.6% from 20.2%, primarily because of release of an uncertain tax position following the successful closure of a state audit. The company recognized a $7.3 million decrease in unrecognized tax benefits.
- Foreign currency translation reduced other comprehensive income by $22.3 million, versus a $1.6 million gain in the prior-year quarter.
- The board authorized a new share repurchase program of up to $500 million. The company also declared a $0.53-per-share quarterly dividend payable September 15, 2022.
Outlook, risks, and contingencies
- The filing provides no specific revenue, earnings, or other financial guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Revenue—particularly CF and FR completion fees—depends on transactions closing and other events outside the company’s control. Cash receipts and liquidity are also affected by collections and the timing of incentive-compensation payments.
- Foreign exchange movements affect reported results and accumulated other comprehensive income; the company reported no open foreign currency forward contracts at June 30, 2022.
- The company reported ordinary-course legal proceedings and lease-related indemnities, but management did not expect them to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- On August 2, 2022, after quarter-end, the revolving credit facility was amended to extend maturity to August 23, 2025, replace LIBOR with Term SOFR plus an applicable adjustment, and modify certain covenants. The company reported covenant compliance at June 30, 2022.
Important facts for investors to verify
- Whether CF transaction activity and the FR revenue decline persist, given reliance on successful deal completion.
- How GCA-related expenses and intangible-asset amortization affect ongoing margins and year-over-year comparisons.
- Whether operating cash flow recovers after the seasonal bonus-payment outflow, and how cash levels evolve alongside dividends and repurchases.
- The effect of the unusually low effective tax rate and state-audit resolution on future tax expense.
- Potential currency impacts, lease commitments, and the terms and covenant requirements of the amended credit facility.