Houlihan Lokey, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended March 31, 2021; comparisons are primarily with the year ended March 31, 2020. This is an annual filing, not a calendar fourth-quarter report. Amounts are in U.S. dollars.
Business context
Houlihan Lokey is a global independent investment bank providing Corporate Finance (M&A and capital markets), Financial Restructuring, and Financial and Valuation Advisory services. It had 1,574 employees, including 1,132 financial professionals, across 23 offices at year-end. International operations generated 22% of FY2021 revenue. The company completed its acquisition of MVP Capital in August 2020.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $1,525.5 million | $1,159.4 million | +32% |
| Operating income | $408.2 million | $229.6 million | +78% |
| Net income | $312.8 million | $183.8 million | +70% |
| Diluted EPS | $4.55 | $2.80 | +63% |
| Operating margin | 26.8% | 19.8% | +7.0 percentage points |
| Net margin | 20.5% | 15.9% | +4.6 percentage points |
| Operating cash flow | $579.8 million | $287.7 million | +102% |
Segment revenue rose across the board: Corporate Finance was $802.9 million (+24%), Financial Restructuring $534.7 million (+52%), and Financial and Valuation Advisory $187.9 million (+17%). Segment profit increased 39%, 108%, and 33%, respectively. The compensation ratio remained approximately 64% of revenue. Total operating expenses increased 20%; employee compensation rose 32%, while non-compensation expense fell 24%, mainly because of reduced travel and other pandemic-related costs.
The effective tax rate was 23.6%, versus 22.0% in FY2020; the prior-year rate benefited from a state tax true-up that did not recur. Interest and other items were not a major earnings driver.
Liquidity, cash flow and capital
- Cash and cash equivalents were $846.9 million; investment securities were $208.6 million, bringing unrestricted cash and securities to $1.055 billion, versus $515.8 million a year earlier.
- Operating cash flow was $579.8 million. Investing activities used $99.7 million and financing activities used $26.8 million. The operating cash flow increase reflected higher earnings and a $228.5 million increase in accrued salaries and bonuses; receivables and unbilled work also rose.
- Accounts receivable were $108.4 million and unbilled work in progress $118.1 million, up from $80.9 million and $39.8 million, respectively.
- No principal was outstanding on the $100 million revolving credit facility at March 31, 2021; the facility matures in August 2022 and is subject to financial covenants, which the company reported it was meeting.
- Loans payable to former shareholders, other liabilities, and loan payable to non-affiliates totaled approximately $55.9 million in scheduled repayment obligations; the Leonardo-related loan was fully repaid during the year. Operating lease liabilities were $174.5 million.
- The company received approximately $189 million net proceeds from a May 2020 share offering, paid $92.0 million in dividends, and repurchased $102.2 million of shares. The board declared a subsequent quarterly dividend of $0.43 per share, payable June 15, 2021.
Changes, outlook and key risks
Growth was broad-based, with especially strong restructuring results and higher transaction completions and average fees in Corporate Finance. Management said the pandemic did not have a material adverse impact on FY2021 results, but noted that remote work and travel restrictions affected operations and that transaction timing remains uncertain. The filing does not provide quantitative earnings or revenue guidance.
Management described record liquidity and low interest rates as supportive of M&A and capital markets activity, citing good client dialogue and available mid-market capital. It expected restructuring activity to remain below FY2021 levels in the near term, while expressing optimism about medium- and long-term opportunities given elevated corporate leverage and pandemic-related dislocation.
Results remain exposed to market cycles and the timing of contingent completion fees, which can make quarterly revenue and profit volatile. Other material risks include retaining senior professionals, competition and fee pressure, client collections and bankruptcy-related fee challenges, international and foreign-exchange exposure, regulation and litigation, cybersecurity, Brexit, and the continuing uncertainty surrounding COVID-19. Goodwill and other intangible assets totaled $866.2 million; management reported no impairment indication at year-end. Legal matters were described as ordinary-course matters not expected to have a material adverse effect, though the company said loss estimates may be unavailable for some proceedings.
The HL Voting Trust controlled approximately 76.8% of voting power at year-end through the dual-class share structure. The company relies on certain NYSE controlled-company governance exemptions. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether strong transaction completions and fee levels persist, particularly as management expects restructuring activity to moderate.
- How much of the increase in operating cash flow reflects sustainable earnings versus timing of accrued bonuses, receivables, and unbilled work.
- Collection quality and credit-loss exposure, including the growth in unbilled work and the $7.3 million FY2021 bad-debt provision.
- Use of cash for dividends and repurchases, and compliance with credit-facility covenants and dividend restrictions.
- Potential effects of foreign exchange, tax audits and uncertain tax positions, and the concentration of voting control and governance exemptions.