Business context and reporting period
Houlihan Lokey, Inc. provides financial advisory services through Corporate Finance (CF), Financial Restructuring (FR), and Financial and Valuation Advisory (FVA). This Form 10-Q covers the quarter and nine months ended December 31, 2020. The quarter is fiscal 2021 Q3, notwithstanding the request’s “2020 Q3” label. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2020 | Prior-year quarter | Nine months ended Dec. 31, 2020 | Prior-year period |
|---|---|---|---|---|
| Revenue | $537.9 (+61%) | $333.5 | $1,024.7 (+20%) | $856.7 |
| Operating income | $158.4 | $68.0 | $267.9 | $160.9 |
| Net income | $118.5 | $48.9 | $213.4 | $124.8 |
| Diluted EPS | $1.71 | $0.75 | $3.11 | $1.90 |
| Operating margin | 29.5% | 20.4% | 26.1% | 18.8% |
| Net margin | 22.0% | 14.7% | 20.8% | 14.6% |
Compensation expense was $339.7 million for the quarter and $654.1 million for nine months; compensation ratios improved to 63.2% and 63.8%, respectively, from 63.9% and 64.3%. Non-compensation expense fell 24% in the quarter and 29% year to date, principally reflecting lower travel and other costs during the COVID-19 pandemic.
For the nine months, operating cash flow was $307.2 million, versus $110.8 million a year earlier. Investing cash outflow was $122.1 million, primarily from net purchases of investment securities; financing cash inflow was $57.2 million, including proceeds from the May 2020 stock offering, partly offset by dividends and repurchases. Cash and cash equivalents were $633.7 million at December 31, 2020, and investment securities were $234.6 million. Combined unrestricted cash and investments were $868.2 million.
No principal was outstanding on the $100 million revolving credit facility; the company reported compliance with its covenants. The facility matures in August 2022 and has a conditional expansion option. The balance sheet also included $168.6 million of operating lease liabilities. The filing reports $48.6 million of scheduled repayments across loans payable to former shareholders, other liabilities, and non-affiliate loans; this total should not be read as funded debt alone.
Material changes versus prior periods
- Quarterly growth was broad-based: CF revenue rose 52%, FR 92%, and FVA 36%. Year-to-date, CF grew 2%, FR 57%, and FVA 12%.
- FR was the largest year-to-date growth driver, with revenue of $392.0 million and segment profit of $169.8 million, up 57% and 124%. Management attributed gains to more closed transactions and higher average transaction fees.
- Quarterly CF revenue increased with transaction volume and average fees. Year-to-date CF revenue growth was modest, as higher average fees were partly offset by fewer closed transactions.
- Net income and EPS increased substantially. Weighted-average diluted shares rose to 69.4 million for the quarter from 65.6 million, reflecting share issuance and other share activity.
- Cash and investments increased from $515.8 million at March 31, 2020. The May 2020 offering raised approximately $188.7 million net. The company acquired MVP Capital in August 2020; goodwill and other intangibles increased to $866.4 million from $812.8 million at fiscal year-end.
Outlook, risks, contingencies, and unusual items
The filing provides no specific revenue, earnings, or margin guidance. Management cautions that interim results are not necessarily indicative of the full fiscal year. Results depend in part on transaction completions: most CF success fees and some FR fees are contingent on events outside the company’s control, while FVA revenue is generally less transaction-contingent. Client fee timing and receivable collection also affect liquidity.
Management cited COVID-related reductions in travel and other expenses; such savings may not persist. Other relevant risks include changes in transaction activity, employee compensation costs, credit losses on receivables and unbilled work, and foreign exchange movements. The company had no foreign-exchange forward contracts outstanding at December 31, 2020. Management reported no material change to previously disclosed risk factors, and said ordinary-course legal matters were not expected to materially affect financial condition, operations, or cash flows. Lease indemnities and subsidiary lease guarantees have no stated maximum exposure; no liability was recorded.
Effective April 1, 2020, adoption of the credit-loss accounting standard reduced retained earnings by $0.7 million net of tax; the filing says its impact on current-period net income was immaterial. Subsequent to quarter-end, the board declared a $0.33 per-share dividend payable March 15, 2021, and increased the share repurchase authorization from $125 million to $200 million.
Most important facts for investors to verify
- Whether unusually strong FR activity and higher transaction fees are sustainable, and how the pipeline converts into completed, fee-generating transactions.
- How much of recent margin improvement reflects temporary pandemic-related expense reductions versus ongoing operating leverage; compensation remains the largest cost.
- Cash conversion and collection trends, especially unbilled work in process of $53.1 million, accounts receivable of $79.0 million, and the $9.8 million credit-loss allowance.
- The effects of the MVP acquisition, related contingent consideration, and the May 2020 share offering on future results, cash, and per-share measures.
- Capital returns and liquidity after dividends and repurchases, while distinguishing the undrawn revolver from lease obligations and acquisition-related liabilities.