Houlihan Lokey, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2017. Financial statements are unaudited; amounts below are in U.S. dollars, generally millions unless noted. The company provides corporate finance, financial restructuring, and financial advisory services.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2017 | Change year over year | Nine months ended Dec. 31, 2017 | Change year over year |
|---|---|---|---|---|
| Fee revenue | $258.9 | +5% | $718.6 | +17% |
| Operating income | $54.5 | -4% | $154.7 | +24% |
| Net income | $61.6 | +81% | $134.2 | +81% |
| Diluted EPS | $0.93 | vs. $0.51 | $2.02 | vs. $1.11 |
| Operating margin | 21.0% | vs. 22.9% | 21.5% | vs. 20.3% |
| Net cash from operating activities | — | — | $140.7 | vs. $151.8 |
Quarterly net income growth substantially exceeded operating income growth, principally because of a $6.5 million income tax benefit, versus $21.8 million of tax expense in the prior-year quarter. The nine-month effective tax rate was 14.5%, compared with 39.1%.
- Cash and investments: At December 31, 2017, cash and cash equivalents were $197.2 million and investment securities were $132.8 million, totaling approximately $330.0 million in unrestricted cash and investments. Restricted cash was zero.
- Debt and facilities: No borrowings were outstanding on the $75 million revolving credit facility, extended to August 2019. Loans payable totaled $12.2 million, including $8.8 million to non-affiliates and $3.4 million to former shareholders. The $15 million ORIX note was repaid in May 2017.
- Balance sheet: Total assets were $1,197.6 million and total liabilities were $369.0 million at December 31, 2017. Net accounts receivable was $33.5 million and unbilled work in process was $41.5 million.
- Cash uses: Nine-month investing outflow was $138.9 million, primarily for investment securities. Financing outflow was $300.6 million, including the $192.4 million forward-share purchase settlement, dividends, repurchases, and employee tax withholding on share awards. Cash, cash equivalents, and restricted cash decreased $295.5 million over the period.
Material changes and segment results
- Nine-month revenue increased across all segments: Corporate Finance +25% to $398.8 million; Financial Restructuring +6% to $216.5 million; and Financial Advisory Services +12% to $103.3 million.
- Quarterly revenue increased in each segment by 4%–5%. Corporate Finance segment profit fell 16% to $33.9 million, while Restructuring profit rose 33% to $32.8 million and Financial Advisory Services profit fell 34% to $5.6 million.
- For the nine months, Corporate Finance segment profit rose 42% to $129.7 million; Restructuring profit declined 8% to $51.4 million; and Financial Advisory Services profit declined 5% to $20.8 million.
- Nine-month employee compensation and benefits rose 17% to $481.1 million, in line with revenue growth. Non-compensation expenses rose 5% to $82.8 million. Management cited higher travel, meals and entertainment and professional fees.
- Total assets declined from $1,385.7 million at March 31, 2017, mainly alongside the use of cash for the forward-share settlement and other financing activities. Investment securities increased to $132.8 million from none reported at fiscal year-end.
Outlook, commentary, risks, and notable items
- Management targets an adjusted awarded compensation ratio of approximately 65%–66%, while noting it may exceed the range to support growth or other business needs.
- Management expects the annual effective tax rate beginning in FY2019 to be approximately 27%–29% before discrete adjustments. The reported-quarter tax benefit includes the Tax Act’s effects, including a $16.9 million benefit; related estimates remain subject to refinement and could change.
- The Tax Act reduced the federal corporate tax rate to 21% beginning January 1, 2018. The company cautioned that implementation, state and local tax effects, and future interpretations may affect its tax estimates and results.
- Revenue and cash receipts depend partly on successful completion of client transactions and timing of collections. The filing also identifies foreign-currency exposure; management did not consider it materially adverse at present, but expects currency effects to become more variable as international operations expand.
- On January 16, 2018, the company announced an agreement to acquire London-based Quayle Munro, subject to regulatory approvals and customary closing conditions; completion was not assured.
- On January 25, 2018, the board declared a $0.20-per-share quarterly dividend, payable March 15, 2018 to holders of record March 2, 2018.
- Routine legal matters were not expected by management to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the earnings increase reflects recurring operating performance versus the one-time and estimated Tax Act effects and share-award tax benefits.
- Whether revenue growth and segment profitability—particularly the quarter’s lower Corporate Finance and Financial Advisory Services profit—are sustainable.
- Cash conversion, receivable and unbilled-work-in-process collection, and the effects of compensation payments and shareholder distributions on cash balances.
- Final tax accounting, including the repatriation tax and deferred-tax remeasurement, as additional information and guidance become available.
- Closing conditions, purchase terms, and potential financial impact of the proposed Quayle Munro acquisition.