Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended June 30, 2019. Unless otherwise stated, amounts are in millions of dollars. Houlihan Lokey provides Corporate Finance (CF), Financial Restructuring (FR), and Financial Advisory Services (FAS).
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $250.3 | $220.0 | +14% |
| Operating income | $47.9 | $40.1 | +19% |
| Net income | $42.8 | $29.7 | +44% |
| Diluted EPS | $0.65 | $0.45 | +44% |
| Operating margin | 19.1% | 18.2% | +0.9 percentage points |
| Compensation ratio | 65.2% | 63.3% | +1.9 percentage points |
FR drove the revenue increase: its revenue rose 57% to $79.4 million, while CF revenue was nearly flat at $133.6 million (+1%) and FAS revenue increased 2% to $37.4 million. FR segment profit increased 94% to $24.0 million; CF segment profit declined 7% to $37.4 million; FAS segment profit rose 12% to $8.3 million.
Employee compensation and benefits rose 17% to $163.3 million, faster than revenue. Non-compensation expenses declined 4% to $39.1 million, mainly due to lower professional fees and other operating costs. The effective tax rate fell to 13.5% from 28.9%, primarily due to stock vesting in April and May; the company recorded a $7.6 million excess tax benefit related to vesting.
Cash flow, liquidity, and obligations
- Operating cash flow was negative $109.2 million, versus negative $119.0 million a year earlier. The company attributed the outflow primarily to cash bonus payments in May.
- Investing cash flow was positive $93.5 million, mainly from investment security sales and maturities. Financing cash flow was negative $56.7 million, primarily from dividends and share-related payments.
- Cash, cash equivalents, and restricted cash totaled $212.1 million at quarter-end. Including investment securities, unrestricted liquid resources were $244.8 million, down from $411.0 million at March 31, 2019. The company reported $111 million of cash in foreign subsidiaries.
- Accounts receivable was $67.9 million and unbilled work in process was $72.0 million. Management noted that liquidity depends on client collections and successful transaction completions; collections typically occur within 60 days of billing.
- No borrowings were outstanding on the $75 million revolving credit facility. It was due to mature August 18, 2019; the company was discussing a replacement $100 million facility, with no assurance it would be completed timely or at all. The company reported compliance with facility covenants.
- The company reported a $15.4 million unsecured loan payable to a non-affiliate, assumed in connection with acquiring the remaining interest in its Italian business, as well as loans payable to former shareholders of $2.0 million. Adoption of lease accounting added $131.6 million of operating right-of-use assets and $147.4 million of lease liabilities at June 30.
Material changes and notable items
- Revenue growth was concentrated in Financial Restructuring, reflecting more closed transactions; CF closed 61 transactions versus 69, while FR closed 25 versus 13.
- In June 2019, Houlihan Lokey acquired the remaining 51% of Lara (Italy Holdco) Limited and consolidated its Italian advisory business.
- The company adopted the new lease accounting standard on April 1, 2019. Adoption recognized lease assets and liabilities, with no retained earnings impact.
- On May 30, ORIX USA sold 3 million Class A shares in a public offering. This was a shareholder sale, not a company share issuance. On August 1, ORIX USA sold its remaining 3.38 million Class A shares and no longer owned company stock.
- The board declared a quarterly dividend of $0.31 per share, payable September 16, 2019.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results. CF and FR fees are substantially dependent on successful transaction completions, which can be delayed or fail for reasons outside the company’s control. Other disclosed exposures include foreign currency movements, receivable collectability, and the pending revolving-credit-facility replacement. Management said Brexit-related currency translation may become more volatile but did not expect a material impact on operating results or financial position. The company reported ordinary-course legal matters that it did not expect to have a material adverse effect; it disclosed no material changes to previously reported risk factors or contractual obligations.
Key facts for investors to verify
- Whether FR’s sharp growth in revenue and profit is sustainable and how transaction volumes evolve across all three segments.
- Whether the revolving credit facility was replaced before its August 18, 2019 maturity and on what terms.
- Whether cash conversion improves after the seasonal bonus-payment outflow, given the substantial receivable and unbilled-work balances.
- The ongoing effect of stock-based compensation, share withholding payments, and the unusually low 13.5% effective tax rate on future earnings and cash flow.
- The financial and operational contribution of the newly consolidated Italian business, and the governance implications of the dual-class structure, in which Class B shares carry ten votes per share.