Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2019. Unless otherwise indicated, amounts below are in millions of dollars. The filing is unaudited.
Business context
Houlihan Lokey provides advisory services through Corporate Finance (CF), Financial Restructuring (FR), and Financial Advisory Services (FAS). CF and FR fees can depend substantially on successful transaction completions; FAS revenue is generally less contingent on transaction completion.
Financial performance
| Metric | Quarter ended Sept. 30, 2019 | Year-over-year | Six months ended Sept. 30, 2019 | Year-over-year |
|---|---|---|---|---|
| Revenue | $272.8 | -0.8% | $523.2 | +5.7% |
| Operating income | $45.2 | -19.6% | $92.9 | -3.5% |
| Net income | $33.1 | -17.5% | $75.9 | +8.7% |
| Diluted EPS | $0.50 | vs. $0.61 | $1.15 | vs. $1.06 |
| Operating margin | 16.5% | vs. 20.4% | 17.8% | vs. 19.5% |
| Net margin | 12.1% | vs. 14.6% | 14.5% | vs. 14.1% |
Quarterly segment revenue was CF $156.0 million (+7%), FR $77.3 million (-17%), and FAS $39.6 million (+9%). For the six-month period, revenue rose in all three segments: CF +4%, FR +9%, and FAS +6%. Quarterly segment profit declined in CF and FR but increased in FAS; six-month segment profit rose overall, led by FR and FAS.
For the quarter, operating expenses rose 4% to $227.7 million. Compensation was $174.6 million, with a 64.0% compensation ratio, compared with 63.8% a year earlier. Non-compensation expense increased 22% to $53.0 million, primarily reflecting the London office consolidation and higher rent and other operating costs. For six months, compensation expense increased 7% and non-compensation expense increased 10%.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $13.1 million, compared with $15.9 million a year earlier. Investing activities provided $34.9 million; financing activities used $105.7 million, primarily for dividends and share repurchases. Cash, cash equivalents and restricted cash fell $65.5 million to $220.6 million.
- At September 30, unrestricted cash and investment securities totaled $305.1 million, down from $411.0 million at March 31. Receivables were $64.8 million and unbilled work in process was $62.7 million.
- The company had no borrowings under its new $100 million revolving credit facility, which matures in August 2022; an expansion option could increase the facility to $200 million, subject to conditions. The facility carries interest at LIBOR plus 1.00% and financial covenants. The company reported covenant compliance.
- Other reported borrowings included $6.5 million payable to a non-affiliate and $1.8 million payable to former shareholders. Operating lease liabilities were $151.7 million, following adoption of the new lease standard.
- Stockholders’ equity was $891.9 million. The company paid $42.2 million in dividends and spent $23.5 million on share repurchases during the six months.
Material changes, outlook and risks
- Quarterly revenue was broadly flat, but lower FR revenue and higher corporate and non-compensation costs reduced operating and net income. Six-month revenue increased, while operating income declined as expenses grew faster than revenue.
- The six-month effective tax rate fell to 20.7% from 29.4%, primarily because of share vesting in April and May 2019; a $7.6 million excess tax benefit was recognized in the first quarter. This helped lift six-month net income despite lower operating income.
- The company acquired the remaining 51% of its Italian operations, Lara, in June 2019. ORIX USA sold its remaining ownership stake in the company in an August 2019 offering.
- Management provided no specific numerical earnings or revenue guidance in this filing. It cautioned that results may fluctuate, particularly because a substantial portion of CF and FR fees depends on transactions closing. Client receipts and liquidity also depend on collections and transaction timing.
- Foreign-currency translation reduced comprehensive income by $13.4 million for the six months. Management noted potential additional currency volatility amid Brexit negotiations, but did not expect a material impact on operating results or financial position. The filing also identifies routine legal matters and lease-related indemnities; management did not expect legal matters to materially affect results.
- The board declared a quarterly dividend of $0.31 per share on October 17, payable December 16, 2019. Management 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 quarterly weakness in FR and lower operating margins persist, and how transaction closings affect contingent fee revenue.
- How much of six-month earnings growth reflects the one-time tax benefit, versus underlying operating performance.
- Cash conversion and working-capital movements, particularly compensation payments, receivables and unbilled work in process.
- The effects of London office costs, lease commitments, and foreign-exchange movements on future expenses and comprehensive income.
- Facility covenant terms and headroom, as well as the company’s capital allocation among dividends, buybacks and acquisitions.