Business context and reporting period
Houlihan Lokey, Inc. is an independent global investment bank providing Corporate Finance, Financial Restructuring and Financial Advisory Services. Although the request metadata labels the period “2016 Q4,” this Form 10-K reports the fiscal year ended March 31, 2017, with fiscal 2016 as the principal comparison.
Financial performance and liquidity
Unless noted otherwise, amounts are in millions of U.S. dollars. Financial statements were audited by KPMG, which issued an unqualified opinion.
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Fee revenue | $872.1 | $693.8 | +26% |
| Operating income | $182.0 | $126.4 | +44% |
| Operating margin | 20.9% | 18.2% | +2.7 percentage points |
| Net income attributable to Houlihan Lokey | $108.3 | $69.7 | +55% |
| Diluted EPS | $1.63 | $1.10 | +48% |
| Net cash from operating activities | $229.3 | $11.7 | Higher |
- Revenue by segment: Corporate Finance $434.6 million (+17%); Financial Restructuring $307.6 million (+52%); Financial Advisory Services $129.9 million (+9%). Restructuring segment profit rose 69% to $92.8 million; Financial Advisory Services segment profit fell 5% to $28.9 million.
- Operating expenses increased 22% to $690.1 million. Employee compensation and benefits rose 26% to $582.2 million; the reported compensation ratio remained 67% of revenue. Non-compensation expenses rose 2% to $107.9 million. The effective tax rate declined to 39.3% from 44.5%, largely because FY2016 included nondeductible IPO-related costs.
- At March 31, 2017, unrestricted cash and cash equivalents were $300.3 million; a further $192.4 million was restricted for the forward share purchase. Total cash, cash equivalents and restricted cash was $492.7 million. The restriction ended when the purchase settled on April 5, 2017.
- Accounts receivable was $60.7 million and unbilled work in process $57.7 million. The allowance for doubtful accounts was $11.2 million; bad-debt expense was $4.0 million, up from $2.5 million.
- Debt and loan obligations totaled $32.6 million at year-end, including a $15.0 million ORIX USA note, $5.5 million owed to former shareholders and a $12.1 million non-affiliate loan. The ORIX note was repaid in May 2017. The $75 million revolving facility had no borrowings outstanding; it was scheduled to expire in August 2017, and the company reported covenant compliance.
- Operating lease commitments totaled $135.9 million. Goodwill and other intangible assets were $715.3 million, a significant share of total assets of $1.386 billion.
Material changes versus the prior comparable period
- Growth was led by Financial Restructuring: revenue rose 52%, driven by more completed transactions and higher average fees. Corporate Finance benefited from more closed transactions; Financial Advisory Services growth came from transaction advisory, portfolio valuation and strategic consulting.
- Operating cash flow improved from $11.7 million to $229.3 million, reflecting higher earnings, increased bonus accruals and higher payables and tax liabilities. The FY2016 comparison was also affected by IPO-related cash flows and affiliate receivable collections.
- The company completed a follow-on offering in February and March 2017, issuing 6.9 million Class A shares at $29.25 per share. It used the proceeds to repurchase 6.9 million Class B shares from ORIX USA on April 5, 2017; the year-end balance sheet reflected the related restricted cash and forward purchase liability.
- Foreign currency translation reduced other comprehensive income by $7.3 million, versus a $3.3 million reduction in FY2016. Management also reported a $4.0 million net cash loss from exchange-rate fluctuations in FY2017.
Outlook, commentary, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided. Management described client dialogue and mid-cap financing availability as supportive of M&A and capital-markets activity, while noting continuing restructuring demand in disrupted industries and geographies.
- Results are inherently volatile: much Corporate Finance and Financial Restructuring revenue depends on transaction milestones or successful completion, and the timing is often outside the firm’s control. Management targets an adjusted awarded compensation ratio of approximately 65%–66%, but says it may exceed that range to support growth or through challenging markets.
- Key risks include retaining and recruiting senior professionals, market-dependent deal volumes, competition and fee pressure, client nonpayment, litigation and conflicts, cybersecurity and operational failures, international regulation and currency movements, and potential impairment of goodwill and intangibles. Brexit’s effects on European operations were uncertain. Goodwill and intangible impairment reviews found no impairment indicators in the periods reported.
- The company stated that it was not aware of material pending legal proceedings expected to materially affect it, while noting that losses on ordinary-course matters may be difficult to estimate. It also disclosed continuing contingent tax exposure linked to the former ORIX USA tax group and $3.7 million of unrecognized tax benefits at year-end.
- Control and governance are notable: ORIX USA and the HL Voting Trust together controlled 95.2% of voting power at March 31, 2017, reflecting the ten-votes-per-share Class B structure. The company relied on controlled-company governance exemptions. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not provide an internal-control attestation because the company qualified for the emerging-growth-company exemption.
Most important facts for investors to verify
- Whether FY2017’s 26% revenue growth—especially the 52% increase in restructuring—was sustainable, given contingent fees and quarterly volatility.
- How the post-year-end Class B share repurchase, ORIX note repayment and release of restricted cash affect current share count, liquidity and leverage.
- Cash conversion and receivable quality, including the rise in bad-debt expense and unbilled work in process.
- Future compensation and expense trends, including equity-award costs, public-company costs and the adjusted compensation-ratio target.
- Developments in Brexit-related regulation, foreign-exchange exposure, contingent tax matters and the firm’s concentrated voting control.