Business context and reporting period
Houlihan Lokey, Inc. filed this unaudited Form 10-Q for its fiscal third quarter and nine months ended December 31, 2019. The global financial advisory firm reports Corporate Finance (CF), Financial Restructuring (FR), and Financial and Valuation Advisory (FVA). Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2019 | Prior-year quarter | Nine months ended Dec. 31, 2019 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $333.5 | $298.0 | $856.7 | $793.0 |
| Operating income | $68.0 | $62.2 | $160.9 | $158.5 |
| Net income | $48.9 | $44.0 | $124.8 | $113.8 |
| Diluted EPS | $0.75 | $0.67 | $1.90 | $1.72 |
| Operating margin | 20.4% | 20.9% | 18.8% | 20.0% |
- Quarterly revenue increased 12%, operating income 9%, and net income 11% year over year. For the nine-month period, revenue rose 8%, operating income 2%, and net income 10%.
- Quarterly operating expenses rose 13% to $265.5 million. Employee compensation and benefits increased 14% to $213.1 million; the compensation ratio rose to 63.9% from 62.8%. Nine-month compensation ratio was 64.3%, versus 63.3%.
- Cash from operating activities was $110.8 million for nine months, compared with $92.1 million. Investing activities provided $14.9 million, versus $94.1 million; financing activities used $131.3 million, versus $218.9 million. Cash, cash equivalents, and restricted cash decreased $9.0 million to $277.1 million during the period.
- At December 31, 2019, cash and cash equivalents were $276.7 million and investment securities $91.2 million. The company reported $62.4 million of net accounts receivable and $68.0 million of net unbilled work in process.
- No principal was outstanding on the $100 million revolving credit facility; it matures August 2022 and has a conditional expansion option to $200 million. The company reported compliance with its financial covenants. Other scheduled loan and acquisition-related obligations totalled $40.9 million. Operating lease liabilities were $150.2 million.
- Total assets were $1.539 billion and stockholders’ equity $946.7 million at December 31, 2019. The filing does not present a single current-ratio figure.
Material changes versus prior comparable periods
- FR was the strongest growth driver: quarterly revenue increased 24% and segment profit 155%; nine-month revenue rose 14% and segment profit 43%. Management attributed quarterly growth mainly to more closed transactions.
- CF revenue increased 9% for the quarter and 6% year to date, but segment profit declined 6% and 5%, respectively, primarily due to higher compensation costs.
- FVA revenue increased 1% for the quarter and 4% year to date; segment profit increased 14% and 20%, respectively.
- Corporate expenses grew 48% in the quarter and 28% for nine months, driven by higher compensation and non-compensation costs. This contributed to operating-margin compression.
- The nine-month effective tax rate decreased to 24.3% from 29.7%, primarily due to stock vesting in April and May 2019. Quarterly rates were 29.2% and 30.2%.
Outlook, commentary, risks, and unusual items
- The filing provides no specific revenue, earnings, or margin guidance. Management cautions that results are not necessarily indicative of the full fiscal year.
- Revenue and liquidity depend substantially on client fees, including completion fees contingent on transactions closing; transaction timing and collections can vary. Management says receivables are typically collected within 60 days of billing.
- The company completed acquisitions of Fidentiis Capital in November 2019 and Freeman & Co. in December 2019, and acquired the remaining 51% of Lara in June 2019.
- Adoption of lease accounting on April 1, 2019 resulted in recognition of right-of-use assets and lease liabilities. Three additional office leases, not yet commenced at quarter-end, represented approximately $32 million of commitments.
- Management noted uncertainty surrounding the UK’s withdrawal from the EU and expected greater foreign-currency translation volatility, but did not expect a material impact on operating results or financial position. Foreign-currency translation increased quarterly comprehensive income by $14.4 million; the nine-month adjustment was positive $1.0 million.
- Routine legal matters were not expected to materially affect the company. Management reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting; disclosure controls were deemed effective at the reasonable-assurance level.
- After quarter-end, the board declared a $0.31-per-share quarterly dividend, payable March 16, 2020.
Important facts for investors to verify
- Whether transaction closings and fee collections sustain revenue growth, particularly in CF and FR, given the contingent nature of completion fees.
- Whether compensation and corporate-cost growth continues to outpace revenue and weigh on margins.
- Cash conversion and capital returns: operating cash flow was $110.8 million, while dividends and share repurchases contributed to financing cash outflows.
- Integration and financial effects of the recent acquisitions, together with lease commitments and the company’s ability to remain within credit-facility covenants.
- Exposure to foreign exchange movements and any evolving impact of Brexit on international operations.