Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2022. The company provides corporate finance, financial restructuring, and financial and valuation advisory services. Results include GCA, acquired in October 2021; the comparable 2021 periods do not include GCA.
Financial performance
| Metric | Three months ended September 30, 2022 | Change vs. 2021 | Six months ended September 30, 2022 | Change vs. 2021 |
|---|---|---|---|---|
| Revenue | $489.5 million | Down 9% | $908.2 million | Approximately flat |
| Operating income | $89.4 million | Down 43% | $166.9 million | Down 37% |
| Net income | $60.7 million | Down 46% | $131.5 million | Down 34% |
| Diluted EPS | $0.87 | vs. $1.65 | $1.90 | vs. $2.90 |
| Operating margin | 18.3% | vs. 29.3% | 18.4% | vs. 29.1% |
Quarterly revenue declined as corporate finance transaction volume and average transaction fees fell. Restructuring and FVA revenue each increased 17%, partly offsetting a 19% decline in corporate finance. For the six-month period, FVA revenue rose 18%, while corporate finance and restructuring revenue each fell 3%.
Operating expenses increased 5% in the quarter and 15% over six months. Non-compensation expense rose 94% and 109%, respectively, reflecting GCA-related costs, acquisition-related intangible amortization, integration costs, and higher travel and other operating expenses. Compensation expense fell 7% in the quarter but rose 2% for the six months. The compensation ratio was 63.3% for the quarter and 63.4% year to date.
Cash flow, liquidity, and capital
- Cash and cash equivalents were $503.8 million at September 30, 2022, down from $833.7 million at March 31. Including investment securities, unrestricted cash and investments totaled $539.5 million.
- Operating cash flow was negative $192.9 million for the six months, versus positive $120.1 million in 2021. Management attributed the outflow primarily to cash bonus payments made in May and working-capital movements, including higher unbilled work in progress.
- Investing cash flow was positive $53.5 million; financing cash flow was negative $168.9 million, primarily from dividends, share repurchases, and employee tax withholding on share awards.
- No principal was outstanding under the $100 million revolving credit facility. Its maturity was extended to August 2025 and its benchmark changed from LIBOR to Term SOFR. The company reported compliance with its covenants. The filing reports no material debt balance beyond the revolver, acquisition-related notes, and lease obligations.
- Operating lease liabilities were $188.9 million. Additional office leases not yet commenced represent approximately $190.2 million of future commitments.
- The company paid $73.8 million in dividends and repurchased $48.9 million of shares during the six months. A new share repurchase authorization permits purchases of up to $500 million. A $0.53-per-share quarterly dividend was declared after period-end, payable December 15, 2022.
Material changes, outlook, and risks
- Profitability declined substantially despite nearly flat six-month revenue, with higher non-compensation and corporate costs and lower corporate finance segment profit weighing on results.
- Other expense increased to $5.1 million for the quarter and $6.9 million for the six months, primarily due to an increased acquisition earnout liability and a periodic warrant revaluation loss.
- The six-month effective tax rate fell to 17.9% from 24.7%, mainly because of a release related to a successfully closed New York state audit. The company said up to $0.5 million of gross unrecognized tax benefits could decrease within the next 12 months.
- Foreign-currency translation reduced comprehensive income by $50.9 million for the six months; management cited the stronger U.S. dollar. The company had two pound sterling/euro forward contracts outstanding.
- Management provided no specific financial guidance in the filing. It cautioned that results depend on successful transaction closings, client cash receipts, market conditions, and other factors; advisory completion fees can be delayed or not earned if transactions fail to close.
- Management stated that ordinary-course legal matters were not expected to have a material adverse effect and reported no material changes to the risk factors in its latest annual report. Disclosure controls were deemed effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether corporate finance transaction activity and fees recover, and how restructuring and FVA trends develop.
- Whether higher acquisition-related amortization, integration costs, and other non-compensation expenses persist or moderate.
- Cash conversion and working-capital trends, particularly bonus-payment timing and growth in unbilled work in progress and receivables.
- The scale and timing of the $190.2 million in leases not yet commenced, alongside existing lease liabilities and ongoing dividends and repurchases.
- Foreign-exchange effects, acquisition earnout and warrant revaluations, and resolution of remaining uncertain tax positions.