Business context and reporting period
Houlihan Lokey, Inc. (NYSE: HLI) filed this Form 10-K for the fiscal year ended March 31, 2019; it is not a report for calendar-year 2018 or solely for the fourth quarter. The firm is a global independent investment bank operating through Corporate Finance, Financial Restructuring and Financial Advisory Services. It reported 1,354 employees and 969 financial professionals at year-end. The filing includes unaudited quarterly results, including the quarter ended March 31, 2019.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1,084.4 million | $963.4 million |
| Operating income | $219.5 million | $214.4 million |
| Net income | $159.1 million | $172.3 million |
| Diluted EPS | $2.42 | $2.60 |
| Operating cash flow | $224.3 million | $250.6 million |
| Cash and cash equivalents | $285.7 million | $206.7 million |
| Investment securities | $125.3 million | $209.3 million |
| Total assets | $1,423.1 million | $1,418.8 million |
| Total liabilities | $531.7 million | $566.0 million |
- Reported revenue grew 13%, while operating income increased 2%; net income fell 8%. Operating margin was approximately 20.2%, down from 22.3%, and net margin was approximately 14.7%, down from 17.9%.
- The effective tax rate rose to 29.1% from 20.9%, contributing to lower net income despite higher pretax income. Employee compensation was 64% of revenue versus 66%.
- Year-end unrestricted cash plus investment securities totaled $411.0 million. The company had no borrowings under its $75 million revolving facility; stated debt and other loan obligations totaled $31.2 million. Operating lease commitments were $148.3 million.
- Dividends paid were $66.9 million; annual dividends per share were $1.08 versus $0.80. A $0.31-per-share quarterly dividend was declared after year-end.
Material changes versus prior comparable period
- Segment revenue increased: Corporate Finance 15% to $607.3 million, Financial Restructuring 8% to $317.8 million, and Financial Advisory Services 13% to $159.3 million. Segment profit rose 9%, 13% and 9%, respectively.
- Non-compensation expense rose 54%, partly because the company began reporting certain reimbursed deal expenses gross in revenue and expenses rather than netting them. This presentation change added about $34 million to both revenue and expenses in FY2019 and had little reported effect on net income. On a basis excluding the new standard’s impact, revenue was $1,050.4 million.
- The company adopted the new revenue-recognition standard using the modified retrospective method. The transition reduced opening retained earnings by $19.3 million and increased deferred income by $26.2 million, with a related $6.9 million reduction in deferred tax liabilities.
- Operating cash flow declined by $26.4 million. Financing outflows included dividends, settlement of forward purchase contracts and share repurchases; the company repurchased and retired about 1.48 million shares during the year.
- International revenue rose to $205.5 million from $133.3 million, or about 19% of total revenue. Foreign-currency effects included an $8.7 million cash-flow impact and a $16.3 million translation loss in other comprehensive income.
Outlook, commentary, risks and unusual items
- Management described client dialogue and mid-cap capital availability as supportive of M&A and capital-markets activity, while noting continuing restructuring demand from industry and geographic dislocations. The filing provides no quantified revenue or earnings guidance.
- Management cautioned that advisory revenue and profits are volatile because a substantial portion of fees depends on transaction completion and timing. Failed or delayed deals may yield limited fees.
- Key risks include economic and transaction-market changes, talent retention and recruitment, competition and fee pressure, acquisitions and integration, client collections, litigation and reputation, cybersecurity, regulation, foreign exchange and Brexit. The firm was preparing a German EU hub to address possible loss of UK passporting rights; related costs and effects remained uncertain.
- Goodwill and other intangible assets totaled $794.6 million, a significant portion of assets; no impairment was identified in the annual review. The company acquired Quayle Munro and BearTooth Advisors during FY2019.
- The company reported no material pending legal proceedings expected to materially affect it. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Compare reported growth with the gross presentation of reimbursed expenses and the adoption-related changes to revenue recognition, particularly Corporate Finance fees deferred until transaction completion.
- Assess whether the increase in operating costs, corporate expenses and lease commitments is sustainable relative to revenue growth and margins.
- Track fee collections, unbilled work in process ($71.9 million at year-end), deferred income and the effect of transaction closings on cash flow.
- Monitor the effective tax rate, foreign-currency exposure and Brexit-related operating and compliance costs.
- Consider governance and share structure: Class B shares carry ten votes each; ORIX USA and the HL Voting Trust together controlled approximately 89% of voting power at March 31, 2019. The company relied on controlled-company governance exemptions.