Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2020, the company’s fiscal first quarter of 2021. Unaudited results are compared with the three months ended June 30, 2019. Amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $211.1 | $250.3 | (16%) |
| Operating expenses | $168.5 | $202.6 | (17%) |
| Operating income | $42.6 | $47.8 | (11%) |
| Income before taxes | $43.8 | $49.4 | (11%) |
| Net income | $46.1 | $42.8 | 8% |
| Diluted EPS | $0.69 | $0.65 | 6% |
| Cash used in operating activities | $(115.2) | $(109.2) | Greater outflow |
Operating margin was approximately 20.2%, compared with 19.1% a year earlier. Net margin was approximately 21.8%, versus 17.1%; the increase in net income despite lower pretax income primarily reflects a tax benefit. The effective tax rate was (5.4%), compared with 13.5%, mainly due to tax benefits from share vesting at higher prices.
Segments and material changes
- Corporate Finance: Revenue declined 34% to $88.0 million and segment profit declined 39% to $22.7 million. Management cited fewer closed transactions amid the COVID-19 pandemic, partly offset by higher average transaction fees.
- Financial Restructuring: Revenue rose 12% to $88.6 million and segment profit increased 51% to $36.2 million. The filing attributes growth to more closed transactions and higher monthly retainers from new engagements driven by the pandemic.
- Financial and Valuation Advisory: Revenue fell 8% to $34.5 million and segment profit fell 11% to $7.4 million, primarily reflecting lower average fees from a pandemic-related shift in product mix.
- Overall compensation expense declined 16% to $137.1 million; the compensation ratio was 64.9%, versus 65.2%. Non-compensation expense declined 20% to $31.4 million, mainly because work-from-home policies reduced travel and entertainment costs; technology expense increased.
Cash, liquidity and capital
- At June 30, 2020, cash and cash equivalents were $422.2 million and investment securities were $123.5 million, for $545.7 million in combined unrestricted cash and investments. Restricted cash was $0.4 million.
- Operating cash outflow of $115.2 million primarily reflected cash bonus payments in May. Financing provided $145.3 million, principally from the May public offering, which generated approximately $188.7 million in net proceeds. Cash, cash equivalents and restricted cash ended the quarter at $422.5 million, up $41.8 million from the beginning of the period.
- No principal was outstanding on the $100 million revolving credit facility, which matures in August 2022. The company reported compliance with its financial covenants and expected continued compliance. Loans payable to former shareholders and a non-affiliate totaled approximately $4.7 million; other acquisition-related obligations are also reported.
- Operating lease liabilities were $172.9 million. A new 15-year office lease, expected to commence in January 2021, had not yet commenced at quarter-end.
- The company paid $26.2 million in dividends during the quarter. After quarter-end, the board declared a $0.33-per-share dividend payable September 15, 2020.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or other formal financial guidance. Management cautions that results depend on client receipts and successful transaction completion; CF and FR success fees can be delayed or lost if transactions do not close.
- COVID-19 affected transaction activity and service mix: CF closures declined, while restructuring engagements and retainers increased. The filing does not quantify a future pandemic impact, and results for this quarter are not necessarily indicative of the full fiscal year.
- Credit-loss accounting guidance adopted April 1, 2020 reduced retained earnings by $0.7 million after tax. The quarter’s credit-loss provision was $1.9 million; management said adoption had an immaterial impact on quarterly net income.
- Management reported no impairment indicators for goodwill or intangible assets at June 30. Ordinary-course legal matters were not expected to have a material adverse effect; lease-related indemnities and subsidiary lease guarantees had no recorded liability, and their maximum exposure could not be estimated.
- Subsequent to quarter-end, the board authorized a share repurchase program of up to $125 million. No additional shares were repurchased during the quarter; shares withheld to meet employee tax obligations are distinct from discretionary buybacks.
Important facts for investors to verify
- Whether CF transaction closings recover and whether restructuring growth persists, including the conversion of new engagements and retainers into fees.
- How much of the quarter’s higher net income and EPS reflects the unusually negative tax provision from share vesting, rather than operating performance.
- Cash conversion and bonus-payment timing: operating cash flow was materially negative despite reported net income.
- Receivable collectibility and credit-loss allowances amid economic uncertainty; receivables and unbilled work in process totaled about $87.9 million net at quarter-end.
- Share dilution and capital allocation following the $188.7 million net offering proceeds, the new buyback authorization, and the declared dividend.
- Future commitments under the substantial operating lease portfolio, including the 15-year lease not yet commenced at quarter-end.