Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2015; unaudited. The quarter was the company’s fiscal third quarter. Dollar amounts below are in millions unless stated otherwise.
Business context
Houlihan Lokey provides corporate finance, financial restructuring and financial advisory services. It completed its IPO on August 18, 2015, following a corporate reorganization. Existing shareholders sold the IPO shares; the company received no proceeds. Its two common-stock classes have different voting rights: Class A has one vote per share and Class B has ten.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Prior-year quarter | Nine months ended Dec. 31, 2015 | Prior-year period |
|---|---|---|---|---|
| Fee revenue | $205.5 | $196.6 | $510.2 | $494.4 |
| Operating income | $43.7 | $36.6 | $84.9 | $88.0 |
| Net income attributable to Houlihan Lokey | $22.7 | $24.2 | $47.0 | $55.1 |
| Diluted earnings per share | $0.35 | $0.40 | $0.75 | $0.92 |
Quarterly operating margin was approximately 21.3%, up from 18.6%; nine-month operating margin was 16.6%, down from 17.8%. Net margin was approximately 11.0% for the quarter and 9.2% year to date, versus 12.3% and 11.2%, respectively.
- Segment trends: Quarterly revenue rose 15% in Corporate Finance and 18% in Financial Advisory Services, while Financial Restructuring fell 19%. For nine months, the respective changes were +5%, +18% and -8%.
- Costs and taxes: Nine-month operating expenses increased 5%, as non-compensation expense rose 41%, partly reflecting IPO and reorganization costs, acquisitions, public-company costs and staff expansion. The effective tax rate was 44.6% for nine months, versus 39.5%; the filing attributes the increase primarily to nondeductible IPO-related costs.
- Cash flow: Nine-month operating cash flow was negative $34.5, compared with positive $123.1 a year earlier, primarily due to annual bonus payments and working-capital movements. Investing cash flow was positive $182.8, largely reflecting repayment of affiliate receivables; financing cash flow was negative $106.3, primarily due to dividends. Cash increased $43.3 to $131.9.
- Balance sheet and debt: At December 31, cash was $131.9, accounts receivable $43.1, unbilled work in process $68.3 and total assets $1,026.2. Debt obligations reported were $77.7: $45.0 payable to an affiliate, $17.5 to former shareholders and $15.2 to a non-affiliate. The company had no borrowings under its $75.0 revolving credit facility. It reported a $20.0 receivable from an ORIX affiliate.
Changes, outlook and risks
Revenue grew 5% in the quarter and 3% year to date, but nine-month operating income declined 4% and net income attributable to the company declined 15%. Management cited stronger Corporate Finance transaction closings and Financial Advisory activity, offset by a slow restructuring environment and fewer restructuring closings. A change effective October 1 lowered the targeted adjusted compensation ratio to 65%–66% from a historical approximate range of 67%–71%.
The company provided no specific financial guidance. It noted that advisory revenue depends in part on successful transaction completion, fee collection and timing, and that results may fluctuate. The $45.0 affiliate note requires quarterly principal repayments of $7.5 beginning June 30, 2016, with remaining principal due on the second anniversary of the IPO. The credit facility includes minimum EBITDA and leverage covenants; the company reported compliance and expected continued compliance. A $0.15-per-share quarterly dividend was declared after quarter-end, payable March 15, 2016.
Other items to monitor include $149.3 of future minimum operating lease commitments, increased partly by acquisitions and new office leases; acquisition-related goodwill and integration; and the elevated IPO-period tax and professional costs. Management reported no material litigation, no material change in risk factors from the IPO prospectus, and effective disclosure controls. It identified no goodwill impairment indicators during the reported periods.
Important facts for investors to verify
- Whether Corporate Finance and Financial Advisory growth can offset continued weakness in Financial Restructuring.
- Whether operating cash flow normalizes after the bonus-related outflow and whether unbilled work in process converts to billed and collected fees.
- The continuing impact of IPO-related costs, public-company expenses, acquisition costs and the revised compensation model on margins and earnings.
- Repayment timing and terms for affiliate and other debt, covenant headroom, and the company’s ongoing affiliate receivable and cash-management arrangements.
- Execution and costs of acquisitions, including Leonardo, and the effect of additional lease commitments on liquidity.