Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2018 (the company’s fiscal second quarter and first half of fiscal 2019). Amounts are in U.S. dollars; financial figures below are shown in millions unless noted. The filing was signed November 6, 2018.
Business context and key results
Houlihan Lokey provides Corporate Finance, Financial Restructuring, and Financial Advisory Services. Its advisory fees—particularly Corporate Finance and restructuring completion fees—can depend on transactions closing, court approval, and other factors outside the company’s control.
| Metric | Three months ended September 30, 2018 | Year-over-year change | Six months ended September 30, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $275.0 | +14% | $495.0 | +8% |
| Operating income | $56.2 | +5% | $96.3 | -4% |
| Operating margin | 20.4% | Down from 22.0% | 19.5% | Down from 21.8% |
| Net income | $40.1 | +20% | $69.8 | -4% |
| Diluted earnings per share | $0.61 | Up from $0.50 | $1.06 | Down from $1.09 |
| Effective tax rate | 29.8% | Down from 37.7% | 29.4% | Up from 28.8% |
Quarterly net margin was 14.6%, versus 13.8% a year earlier; first-half net margin was 14.1%, versus 15.8%. First-half operating cash flow was $15.9 million, down from $67.7 million. Investing activities provided $109.0 million, chiefly from investment-security maturities; financing activities used $185.4 million, including dividends, share repurchases, and settlement of the forward share purchase. Cash, cash equivalents, and restricted cash fell $72.3 million over the six-month period to $228.0 million.
Financial position and capital
- At September 30, 2018, cash and cash equivalents were $227.6 million, investment securities were $26.6 million, and restricted cash was $0.4 million. Unrestricted cash and investment securities totaled $254.2 million; $107 million of cash was held in foreign subsidiaries.
- Total assets were $1.220 billion and stockholders’ equity was $828.3 million. The company reported $66.0 million in net accounts receivable and $31.8 million in unbilled work in process.
- No borrowings were outstanding under the $75 million revolving credit facility; the company reported compliance with its covenants. Loans and note obligations listed in the filing totaled $33.3 million, including $8.9 million payable to non-affiliates and $2.6 million payable to former shareholders.
- The board authorized up to $100 million of additional share repurchases in July 2018. During the first half, 1.146 million shares were repurchased and retired for approximately $56.0 million at a weighted-average $48.86 per share. The company paid $33.6 million in dividends. A $0.27-per-share quarterly dividend was declared October 18, payable December 14, 2018.
Changes versus the prior comparable period
- Financial Restructuring was the principal growth and profit driver: second-quarter revenue rose 46% to $92.7 million and segment profit rose to $29.4 million from $7.8 million. First-half revenue increased 17% and segment profit increased 125%.
- Corporate Finance second-quarter revenue was essentially flat at $146.1 million, while segment profit declined 19% to $43.8 million. First-half revenue increased 3%, but segment profit declined 12% to $83.9 million, reflecting higher compensation and non-compensation costs relative to revenue.
- Financial Advisory Services second-quarter revenue rose 10% to $36.3 million, with profit roughly flat at $6.7 million. First-half revenue rose 8%, while profit declined 7% to $14.1 million.
- First-half non-compensation expense increased 60% to $84.2 million; management cited the revenue-accounting change, higher rent and professional fees, and increased travel and other costs. Corporate expenses rose 48% to $43.5 million, partly due to growth, acquisitions, secondary offerings, and setup costs for the new HL Finance platform.
Outlook, accounting changes, and risks
- No numerical guidance was provided. Management cautioned that interim results do not necessarily indicate full-year results. Results are sensitive to the timing and successful completion of advisory transactions, client collections, compensation decisions, and market conditions.
- The company adopted ASC 606 on April 1, 2018 using the modified retrospective method. The adoption changed the timing of certain fee recognition and the presentation of reimbursed expenses. Grossing up reimbursed expenses increased reported revenue and related expenses by approximately $5.6 million for the quarter and $16.3 million for the half, with no material profit effect. The cumulative adoption adjustment reduced retained earnings by $19.7 million and increased deferred income by $24.4 million, partly offset by a $7.4 million reduction in deferred tax liabilities.
- Management cited transaction completion and variable-fee uncertainty, foreign-currency exposure, and potential effects of Brexit negotiations. First-half foreign-currency translation reduced comprehensive income by $16.3 million; management did not expect the translation change to materially affect operating results or financial position. The company had approximately $154.6 million in future minimum operating lease commitments.
- Ordinary-course legal matters were not expected to have a material adverse effect, and the filing reported no material change in risk factors. Disclosure controls were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported revenue growth reflects underlying advisory fees and transaction activity versus ASC 606’s gross presentation of reimbursed expenses and changes in recognition timing.
- Whether Financial Restructuring’s strong results persist, and whether Corporate Finance can improve segment profitability after its first-half decline.
- Why first-half operating cash flow was substantially below net income and the prior-year period, including the timing of incentive-compensation payments and other working-capital movements.
- The effects of acquisitions, foreign exchange, and the company’s $100 million repurchase authorization on future earnings, cash, and share count.
- Completion-fee and receivables exposure, lease commitments, credit-facility covenants, and any developments in the stated legal, tax, or Brexit-related uncertainties.