Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2020. The unaudited filing was dated November 5, 2020. Amounts below are in millions unless noted.
Business context and results
Houlihan Lokey provides Corporate Finance (CF), Financial Restructuring (FR), and Financial and Valuation Advisory (FVA) services. Many CF and FR fees depend on transactions closing; FVA fees are generally less transaction-contingent. The company completed its acquisition of MVP Capital in August 2020.
| Metric | Quarter ended Sep. 30, 2020 | Year-over-year change | Six months ended Sep. 30, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $275.7 | +1% | $486.9 | -7% |
| Operating income | $66.9 | +48% | $109.5 | +18% |
| Net income | $48.8 | +47% | $94.9 | +25% |
| Diluted EPS | $0.70 | vs. $0.50 | $1.39 | vs. $1.15 |
| Operating margin | 24.2% | vs. 16.5% | 22.5% | vs. 17.8% |
Quarterly net margin was approximately 17.7%, compared with 12.1% a year earlier. For the six-month period, net margin was approximately 19.5%, versus 14.5%. These margins are calculated from reported revenue and income.
Segments and material period changes
- CF: Revenue fell 31% in the quarter to $108.0 million and 32% for six months to $196.0 million. Management attributed the declines mainly to fewer closed transactions amid the COVID-19 pandemic; quarterly segment profit fell 44%.
- FR: Revenue rose 62% in the quarter to $125.4 million and 37% for six months to $214.0 million, supported by more completed matters and increased new engagements and retainers. Quarterly segment profit increased 132%.
- FVA: Quarterly revenue rose 7% to $42.3 million; six-month revenue was essentially flat at $76.8 million. Six-month segment profit increased 12%.
- Quarterly operating expenses declined 8% to $208.9 million. Non-compensation costs fell 40%, with management citing reduced travel and entertainment during the pandemic and lower marketing and office-related costs. Compensation was $177.2 million; the compensation ratio was 64.3%, compared with 64.0%.
- For six months, non-compensation expenses fell 32%; compensation expense fell 7%. The six-month effective tax rate declined to 14.4% from 20.7%, primarily due to tax benefits associated with share vesting. The quarter’s effective tax rate was 27.3%, compared with 28.4%.
Cash flow, liquidity and capital
- At September 30, cash and cash equivalents were $422.0 million and investment securities were $178.3 million; together, unrestricted cash and investments totaled $600.3 million. Cash, cash equivalents and restricted cash totaled $422.3 million.
- Six-month operating cash flow was a $1.3 million outflow, versus $13.1 million provided in the prior-year period. The company cited cash outflow from lower accrued salaries and bonuses. Investing cash flow was a $61.2 million outflow; financing cash flow was $99.8 million in, largely reflecting the May stock offering.
- The May 2020 offering of 3.0 million Class A shares generated approximately $188.7 million net proceeds. The company repurchased approximately $23.2 million of shares during the six months and paid $48.4 million in dividends.
- No principal was outstanding on the $100 million revolving credit facility, which matures in August 2022. The company reported compliance with its covenants. Loans payable to former shareholders and a non-affiliate totaled approximately $4.7 million on the balance sheet; operating lease liabilities were $170.7 million.
- In July, the board authorized a share repurchase program of up to $125 million. Approximately $102.3 million remained available at quarter-end. A quarterly dividend of $0.33 per share was declared October 22, payable December 15, 2020.
Outlook, risks and unusual items
The filing provides no numerical earnings or revenue guidance. Management cautions that results depend on client fee receipts, transaction completion and collection timing; completion fees may be constrained until transactions close. The pandemic was associated with fewer CF transactions and greater FR activity, while reduced travel lowered costs. Other disclosed exposures include receivable collectability, foreign exchange movements and acquisition-related estimates. The company had one currency forward contract with a €3.2 million notional value. Management reported no material goodwill impairment indicators at September 30; routine legal matters were not expected to have a material adverse effect. No material changes to the prior annual report’s risk factors were reported.
Investor facts to verify
- Whether CF transaction closings recover and whether elevated FR engagement and fee levels persist.
- Cash conversion and the timing of incentive-compensation payments, given negative six-month operating cash flow despite higher net income.
- MVP acquisition performance, including the $17.0 million contingent consideration liability and integration-related assumptions.
- Use of the $125 million repurchase authorization and the impact of share issuance, repurchases and Class B conversions on dilution and voting control.
- Receivable quality, credit-loss allowances and foreign-currency exposure as economic and market conditions evolve.