Houlihan Lokey, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended June 30, 2021; comparisons are with the three months ended June 30, 2020 unless stated otherwise. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context
Houlihan Lokey provides advisory services through Corporate Finance (CF), Financial Restructuring (FR), and Financial and Valuation Advisory (FVA). CF and FR fees can depend on transaction completion; FVA fees are generally less contingent. The filing states that interim results are not necessarily indicative of the full fiscal year.
Financial and operating performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $372.7 million | $211.1 million | +77% |
| Operating income | $107.7 million | $42.6 million | +153% |
| Operating margin | 28.9% | 20.2% | +8.7 percentage points |
| Net income | $86.0 million | $46.1 million | +86% |
| Net margin | 23.1% | 21.8% | +1.3 percentage points |
| Diluted EPS | $1.25 | $0.69 | +81% |
| Operating cash flow | $(90.1) million | $(115.2) million | Outflow narrowed |
CF revenue rose 139% to $210.0 million, FR revenue rose 11% to $98.8 million, and FVA revenue rose 85% to $64.0 million. Segment profit increased 276% for CF and 200% for FVA, but declined 28% for FR to $26.1 million. Management attributed CF growth mainly to more closed transactions, FR growth to higher average fees on closed transactions, and FVA growth to more fee events.
Employee compensation and benefits were $232.3 million, up 69%; the compensation ratio improved to 62.3% from 64.9%. Non-compensation expense increased 4% to $32.7 million. The effective tax rate was 20.2%, versus a tax benefit and effective rate of (5.4%) in the prior-year quarter; the filing attributes the increase mainly to a smaller stock-compensation tax deduction.
Liquidity, balance sheet, and cash flows
- At June 30, 2021, cash and cash equivalents were $782.2 million, investment securities were $47.9 million, and restricted cash was $0.4 million. Cash, cash equivalents, and securities totaled $830.1 million, down from $1,055.5 million at March 31, 2021.
- Total assets were $2.149 billion and stockholders’ equity was $1.385 billion. Accrued salaries and bonuses fell to $390.9 million from $648.4 million at March 31, reflecting the timing of bonus payments.
- No principal was outstanding on the $100 million revolving credit facility. The company reported covenant compliance. Lease liabilities were $168.6 million; scheduled payments on former-shareholder loans, other liabilities, and a non-affiliate loan totaled $46.1 million.
- Operating cash outflow was primarily driven by cash bonuses paid in May. Investing inflow of $159.0 million mainly reflected sales or maturities of securities. Financing outflow of $133.7 million included $67.5 million of share repurchases, $31.2 million of dividends, and $33.7 million of employee tax-withholding payments on share awards.
Material changes, outlook, and risks
- Revenue and profitability increased substantially year over year, particularly in CF and FVA; FR segment profit declined despite modest revenue growth.
- The filing provides no financial guidance or quantified outlook. Management notes that cash receipts depend significantly on successful transaction completions and receivables timing; most receivables are typically collected within 60 days. Completion-fee revenue can be uncertain because transactions may not close.
- Subsequent events: Baylor Klein acquisition closed July 12, 2021; the board declared a $0.43-per-share dividend on July 22 and increased the share-repurchase authorization to $250 million; on August 3, the company agreed to commence a tender offer to acquire GCA Corporation for approximately $591 million in cash.
- Management said there were no material changes to the risk factors in the 2021 Form 10-K and no material adverse effect was expected from ordinary-course legal matters. Disclosed exposures include foreign-currency movements, receivable credit losses, transaction-dependent revenue, and retention and compensation costs. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the strong CF and FVA activity and improved margins persist, and whether FR profitability recovers.
- Cash conversion and working-capital trends, including the seasonal timing of incentive-compensation payments and collections.
- Funding, integration, and transaction terms for the proposed approximately $591 million GCA acquisition, as well as the effect of the Baylor Klein acquisition.
- Remaining share-repurchase authorization, future repurchases, dividend payments, and potential dilution from share-based compensation.
- Compliance with revolving-credit covenants and the company’s ability to manage contingent transaction revenue and foreign-exchange exposure.