Business context and reporting period
Houlihan Lokey, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2016, its fiscal second quarter, and the six months then ended. The global financial advisory firm reports Corporate Finance, Financial Restructuring, and Financial Advisory Services. Results are compared with the corresponding 2015 periods.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended September 30, 2016 | Year to date |
|---|---|---|
| Fee revenue | $186.5; up 18% | $367.3; up 21% |
| Operating income | $35.0; up 101% | $67.8; up 65% |
| Operating margin | 18.7%, versus 11.0% | 18.5%, versus 13.5% |
| Net income attributable to Houlihan Lokey | $20.9; up 126% | $40.3; up 66% |
| Diluted earnings per share | $0.31, versus $0.15 | $0.61, versus $0.39 |
Quarterly revenue growth came from all three segments, led by Financial Restructuring (+39%); Corporate Finance grew 11% and Financial Advisory Services 7%. Year-to-date segment revenue increased 42%, 17%, and 3%, respectively. Financial Restructuring growth reflected higher average fees per closed transaction; Corporate Finance benefited from more closings. Financial Advisory Services cited stronger portfolio valuation and strategic consulting, partly offset by softer M&A-related activity.
For the six months, operating cash flow was $38.6 million, versus an outflow of $59.0 million a year earlier. Investing cash flow was $11.4 million inflow, versus $164.7 million inflow, largely reflecting the prior-period affiliate-receivable collection; financing cash flow was a $56.9 million outflow. Cash decreased $10.1 million to $156.1 million. At September 30, accounts receivable was $45.7 million and unbilled work in process was $35.7 million. Cash held by foreign subsidiaries was $63 million.
Total assets were $1.008 billion and total liabilities $311.8 million. Debt and loans payable totaled $51.2 million: $30.0 million to an affiliate, $6.2 million to former shareholders, and $15.0 million to non-affiliates. No borrowings were outstanding under the $75 million revolving credit facility, which expires in August 2017; the company reported covenant compliance. Shareholders’ equity was $694.4 million. The board declared a quarterly dividend of $0.17 per share, payable December 15, 2016.
Material changes versus the prior comparable periods
- Revenue and income increased substantially, while operating expenses rose more slowly than revenue. The six-month compensation ratio was 67%, unchanged year over year; management’s target for the adjusted awarded compensation ratio is approximately 65%–66%.
- Non-compensation expense fell 10% in both the quarter and six-month period, primarily because the prior-year periods included IPO, corporate reorganization, and related costs ($6.8 million for the quarter; $12.8 million year to date).
- The effective tax rate declined to 39.0% for the quarter and 39.1% year to date, from 45.9% and 42.4%, respectively. Management attributed the decrease mainly to expected growth and improved profitability outside the U.S. and prior-year nondeductible IPO costs.
- Cash was down from $166.2 million at March 31, 2016. The affiliate receivable declined from $27.4 million to $7.9 million, including repayment in May of a $20.1 million affiliate balance.
Outlook, risks, contingencies, and unusual items
The filing gives no numerical earnings or revenue guidance. Management notes that results are not necessarily indicative of the full fiscal year. Corporate Finance and Financial Restructuring fees often depend on successful transaction completion, making revenue sensitive to closings and market conditions; Financial Advisory Services fees are generally less contingent on closing.
Foreign currency translation reduced six-month other comprehensive income by $6.2 million, compared with a $1.3 million reduction in the prior year. The company cited the U.K. vote to leave the EU and said European currency translation may become more volatile, but did not expect a material impact on operating results or financial position. A $3.0 million GBP/USD forward contract generated a reported $0.2 million gain for the quarter. Management also cited foreign-exchange exposure as international operations expand.
Ordinary-course legal matters were not expected to have a material adverse effect. Lease guarantees and indemnities exist, but management had recorded no liability for them. Minimum future operating lease commitments totaled $151.8 million. The company disclosed no material change to previously reported risk factors; it reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the strong revenue growth, particularly in Financial Restructuring, is sustained and how transaction closings and fee sizes develop.
- How compensation costs, including share-based awards and the targeted adjusted compensation ratio, affect margins; $104.8 million of unrecognized share-award compensation remained, expected to be recognized over a weighted-average 1.63 years.
- Cash conversion and working-capital movements, especially collections of receivables and unbilled work in process, alongside dividend and debt repayments.
- Debt repayment terms, revolving-facility covenants and expiration, and the euro-denominated non-affiliate loan due in 2040.
- Foreign-currency impacts, the consequences of Brexit for European operations, and any developments in legal, lease, or other contingent obligations.