Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017, the company’s fiscal second quarter of fiscal 2018; comparisons are with the quarter and six-month period ended September 30, 2016. Amounts below are in U.S. dollars.
Business context and results
Houlihan Lokey provides advisory services through Corporate Finance, Financial Restructuring, and Financial Advisory Services. Revenue is substantially fee-based; much of Corporate Finance and Restructuring revenue depends on transaction completion.
| Metric | Three months 2017 | Three months 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Fee revenue | $242.2 million | $186.5 million | $459.7 million | $367.3 million |
| Operating income | $53.3 million | $35.0 million | $100.2 million | $67.8 million |
| Net income | $33.4 million | $20.9 million | $72.6 million | $40.3 million |
| Diluted earnings per share | $0.50 | $0.31 | $1.09 | $0.61 |
| Operating margin | 22.0% | 18.8% | 21.8% | 18.5% |
Quarterly revenue grew 30%, operating income 52%, and net income 60%. For the six months, revenue increased 25%, operating income 48%, and net income 80%. Compensation expense rose 29% for the quarter and 24% for the six months, largely alongside revenue growth. The compensation ratio improved to 66.6% for the quarter and 66.7% for the six months, from 67.0% and 67.2%, respectively.
Segments and material changes
- Corporate Finance: Revenue increased 46% for the quarter and 37% for the six months. Segment profit increased 96% and 87%, respectively, supported by more closed transactions and higher average fees.
- Financial Restructuring: Revenue rose 11% for the quarter and 8% for the six months, but segment profit declined 45% and 40%, respectively. Management cited higher compensation as a share of revenue; average transaction fees also declined.
- Financial Advisory Services: Revenue increased 12% for the quarter and 17% for the six months; segment profit rose 3% and 14%, respectively. Fee events increased in both periods.
Six-month effective tax rate fell to 28.8% from 39.1%, primarily reflecting adoption of stock-compensation accounting guidance and tax benefits from previously accelerated award vesting. Quarterly effective tax rate was 37.7%, versus 39.0%.
Cash flow, balance sheet, debt, and liquidity
- Six-month operating cash flow was $67.7 million, compared with $38.6 million in 2016. Investing cash outflow was $67.7 million, mainly from purchasing investment securities. Financing cash outflow was $250.4 million, principally dividends, the forward share purchase settlement, and share repurchases.
- Cash and cash equivalents were $245.4 million at September 30; investment securities were $60.6 million, for total cash and short-term investments of $305.9 million. Restricted cash was zero. Cash, cash equivalents, and restricted cash decreased $247.3 million during the six months.
- Total assets were $1.169 billion, down from $1.386 billion at March 31, 2017; stockholders’ equity was $785.7 million. Net accounts receivable was $39.4 million and unbilled work in process was $34.5 million.
- No borrowings were outstanding on the $75 million revolving credit facility, extended to August 18, 2019. The company reported $16.2 million in loans payable, including $12.2 million owed to non-affiliates. The $15 million ORIX affiliate note was repaid in May 2017. Management reported compliance with credit covenants.
- The company repurchased 430,237 shares for approximately $15.1 million during the six months under a $50 million authorization. Dividends paid were $24.9 million.
Outlook, risks, and unusual items
The filing provides no quantified revenue or earnings guidance. Management targets an adjusted awarded compensation ratio of approximately 65% to 66%, while noting it may exceed that range to support growth or other business needs. Results are not necessarily indicative of the full fiscal year.
Key business sensitivities include transaction completion and fee timing, client collections, compensation expense, and foreign exchange movements. Foreign currency translation contributed $7.8 million of other comprehensive income for the six months; management expected greater currency volatility as international operations expand but did not expect a material impact on results or financial position. The company reported ordinary-course legal matters that it did not expect to have a material adverse effect, and no material changes to previously disclosed risk factors.
In July 2017, the company acquired the remaining interest in its Australian joint venture. The six-month results also include a gain related to reducing an earnout liability; lower equity-method losses and interest expense contributed to improved other income. Subsequent to quarter-end, the board declared a $0.20-per-share dividend, and existing holders sold shares in an offering at $42 per share; the company received no proceeds from that secondary offering. Certain awards were accelerated in connection with the offering.
Important facts for investors to verify
- Whether Corporate Finance growth and fee levels are sustainable, and whether Restructuring profitability recovers.
- Cash conversion and collection of receivables and unbilled work, given transaction-dependent fee timing.
- Effect of compensation awards and accelerated vesting on future expense, dilution, and tax rates.
- Use of the remaining share-repurchase authorization, dividend sustainability, and the impact of the post-quarter share sale on ownership and governance.
- Future foreign-exchange exposure, lease commitments of $129.9 million, and any developments in legal or other contingencies.