Houlihan Lokey, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018. Although the request metadata says “2017 Q4,” this filing reports the full fiscal year 2018 and includes quarterly results. Houlihan Lokey is a global independent advisory firm with Corporate Finance, Financial Restructuring, and Financial Advisory Services businesses.
Financial performance and position
- Revenue: Fee revenue was $963.4 million, up 10% from $872.1 million. Corporate Finance revenue rose 22% to $528.6 million; Financial Restructuring fell 4% to $294.1 million; Financial Advisory Services increased 8% to $140.6 million.
- Profit and margins: Operating income increased 18% to $214.4 million, an operating margin of approximately 22.3% (up from 20.9%). Net income rose 59% to $172.3 million; diluted EPS was $2.60 versus $1.63. Net margin was approximately 17.9%, compared with 12.4%.
- Costs: Operating expenses rose 9% to $748.9 million. Compensation expense was $636.6 million; the compensation ratio improved to 66% from 67%.
- Cash flow: Operating cash flow was $250.6 million. Investing cash flow was negative $218.6 million, largely reflecting $209.3 million of investment-security purchases. Financing cash flow was negative $225.3 million, including dividends and the forward-share-purchase settlement. Cash, cash equivalents, and restricted cash totaled $300.2 million at year-end.
- Liquidity and debt: Unrestricted cash and investment securities totaled $416.0 million; an additional $93.5 million was restricted for a forward share purchase settled on April 5, 2018. The company had no borrowings under its $75 million revolving facility, which matures in August 2019. Loans payable totaled approximately $11.9 million, including $8.8 million due to a non-affiliate; operating lease commitments were $122.8 million.
- Balance sheet: Total assets were $1.419 billion, liabilities $566.0 million, and stockholders’ equity $852.8 million. Goodwill and other intangible assets were $723.3 million before related deferred tax liabilities.
Changes versus prior year
- Revenue growth was slower than FY2017’s 26% increase. Corporate Finance drove FY2018 growth, while restructuring revenue and segment profit declined.
- Corporate Finance segment profit rose 48% to $177.6 million. Financial Restructuring segment profit fell 21% to $73.7 million; Financial Advisory Services segment profit fell 9% to $26.3 million despite revenue growth.
- The effective tax rate declined to 20.9% from 39.3%. The Tax Act, including a deferred-tax remeasurement benefit and a provisional $2.5 million deemed-repatriation tax, and $16.2 million of share-award-related tax benefits affected the year’s tax provision.
- Cash and cash equivalents declined from $300.3 million to $206.7 million, while the company added $209.3 million of short-term investment securities. Unrestricted cash plus securities increased to $416.0 million from $300.3 million.
Outlook, risks, and unusual items
- Management gave qualitative—not quantified—outlook: it viewed high corporate cash balances and lower but rising interest rates as supportive of M&A and capital-markets activity, while noting ongoing restructuring demand in certain industries and geographies. No specific revenue or earnings guidance was provided.
- Management targeted an adjusted compensation ratio of approximately 60.5%–61.5% after adopting the new revenue-recognition standard on April 1, 2018; its prior adjusted awarded-compensation-ratio target was approximately 65%–66%. The measures are not directly equivalent.
- Revenue and profits can be volatile because significant Corporate Finance and Restructuring fees depend on transaction milestones or completion. Other key risks include retaining and recruiting senior professionals, market conditions, competition, client collections, regulatory and litigation exposure, cybersecurity, foreign exchange, Brexit-related uncertainty, and goodwill impairment.
- Revenue from international operations was $133.3 million, about 14% of total revenue. Goodwill and intangible assets were substantial; management reported no impairment in FY2018. The company noted that its Tax Act estimates remained provisional and that tax audits and uncertain tax positions could affect future results.
- Management said it was not currently party to material pending proceedings expected to materially affect the company, while noting that loss amounts for ordinary-course matters could not be estimated. Routine lease indemnities and subsidiary lease guarantees were not quantified.
- After year-end, the company completed the Quayle Munro acquisition on April 4, 2018, settled the $93.5 million forward purchase on April 5, and completed the BearTooth acquisition on May 22. The board declared a $0.27-per-share dividend payable June 15, 2018.
- Class B shares carry ten votes each. ORIX USA and the HL Voting Trust collectively controlled approximately 92% of voting power after giving effect to the forward purchase, and the company relied on NYSE controlled-company governance exemptions.
- The financial statements received an unqualified audit opinion, and the auditor and management concluded internal control over financial reporting was effective as of March 31, 2018.
Key facts for investors to verify
- Whether Corporate Finance growth and higher average transaction fees can continue, and whether restructuring weakness persists.
- How adoption of the new revenue standard changes fee timing, opening retained earnings, deferred income, and gross presentation of reimbursed expenses.
- The composition and availability of liquidity, including restricted cash, investment-security maturities, and cash held in foreign subsidiaries.
- The sustainability of the lower effective tax rate and the final Tax Act and uncertain-tax-position impacts.
- Potential effects of key-person departures, market volatility, client nonpayment, Brexit, and the company’s concentrated voting control.