Houlihan Lokey, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended March 31, 2020; the filing also reports fourth-quarter results for the three months ended March 31, 2020. Filed May 15, 2020. Houlihan Lokey is a global independent investment bank focused on Corporate Finance (CF), Financial Restructuring (FR), and Financial and Valuation Advisory (FVA).
Financial results
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $1,159.4 million | $1,084.4 million | +7% |
| Operating income | $229.6 million | $219.1 million | +5% |
| Operating margin | 19.8% | 20.2% | Down 0.4 percentage points |
| Net income | $183.8 million | $159.1 million | +16% |
| Diluted EPS | $2.80 | $2.42 | +16% |
| Operating cash flow | $287.7 million | $224.3 million | +28% |
| Cash, cash equivalents and investments | $515.8 million | $411.0 million | +$104.8 million |
Net margin was approximately 15.9%, versus 14.7% in FY2019. The effective tax rate declined to 22.0% from 29.1%, contributing to faster net-income growth than operating-income growth. Compensation expense rose 7% to $737.8 million; the compensation ratio remained 64%. Non-compensation expense rose 11% to $192.0 million.
Business segments and fourth quarter
| Segment | FY2020 revenue | Year-over-year change | FY2020 segment profit | Profit change |
|---|---|---|---|---|
| Corporate Finance | $646.8 million | +6% | $179.7 million | -7% |
| Financial Restructuring | $352.5 million | +11% | $107.7 million | +29% |
| Financial and Valuation Advisory | $160.1 million | Approximately flat | $35.2 million | +22% |
For Q4 FY2020, revenue was $302.7 million, operating income $68.7 million, net income $59.0 million, and diluted EPS $0.90. Q4 revenue was below the preceding quarter’s $333.5 million, while net income increased from $48.9 million.
Liquidity, debt and capital
At March 31, 2020, cash and cash equivalents were $380.4 million, investment securities $135.4 million, and restricted cash $0.4 million. The company generated $287.7 million in operating cash flow and ended the year with $380.7 million of cash, cash equivalents and restricted cash. Financing cash outflow was $152.1 million, principally dividends, employee share-award tax settlements, and share repurchases.
No borrowings were outstanding on the $100 million revolving credit facility, which matures in August 2022; subject to conditions, its capacity can expand to $200 million. The filing reports $36.7 million of scheduled loan and other-liability repayments, while operating lease liabilities were $154.2 million. Total liabilities were $692.6 million and stockholders’ equity $984.4 million. The company reported compliance with its credit-facility covenants. Dividends declared were $1.24 per share for FY2020; a subsequent quarterly dividend of $0.31 per share was declared for payment in June 2020.
Changes, outlook and risks
- Annual revenue and profit increased, but results diverged by segment: FR expanded strongly, while CF segment profit fell despite higher revenue and FVA revenue was roughly unchanged.
- COVID-19 disrupted markets from March 2020. Management said CF and FVA transaction closings had slowed or been delayed and expected the slowdown to continue. FR saw increased new-business opportunities, but management cautioned that restructuring completions could lag and might not offset weaker CF activity in the short term.
- The filing gives no quantified earnings or revenue guidance. Management described the firm as having substantial liquidity, while emphasizing uncertainty about the pandemic’s duration, recovery pace, client activity, and financial impact.
- Other material risks include contingent, transaction-based fees and quarterly earnings volatility; retention and recruitment of senior professionals; client collections and credit losses; competition; cybersecurity and remote-work operational risks; foreign exchange and international operations; and regulatory, litigation, tax, and Brexit-related exposures.
- Accounting comparability: adoption of revenue-recognition rules led to gross presentation of certain reimbursed expenses, increasing both revenue and expense by approximately $33.8 million in FY2020 and $33.6 million in FY2019. Adoption of lease accounting added a $135.2 million right-of-use asset and $154.2 million lease liability at year-end; the filing says adoption had no retained-earnings impact.
- FY2020 acquisitions included Fidentiis Capital and Freeman & Co.; the company also acquired the remaining interest in its Italian business. Goodwill and other intangible assets totaled $812.8 million; management reported no impairment identified in its annual reviews.
Investor verification points
- Track post-year-end CF and FVA completions, fee collections, and FR conversion of new opportunities into completed engagements and revenue.
- Assess cash-flow durability alongside accrued compensation, receivables, unbilled work in process, and the increased bad-debt provision ($4.9 million versus $1.7 million).
- Review the effect of lease commitments, including a new 16-year office lease with approximately $23 million of commitments, and distinguish lease liabilities from funded debt.
- Monitor acquisition integration, goodwill and intangible-asset valuation, and whether the pandemic creates impairment indicators.
- Consider the dual-class structure: the HL Voting Trust controlled approximately 80.7% of voting power at year-end; substantially all remaining IPO-related employee lock-ups were scheduled to expire August 18, 2020.
- Review the timing and outcome of tax audits and uncertain tax positions ($9.9 million unrecognized at year-end), as well as developments affecting European operations after Brexit.