Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2017 (the first quarter of fiscal 2018), unaudited. Comparisons are with the three months ended June 30, 2016 unless stated otherwise. Houlihan Lokey provides financial advisory services through Corporate Finance, Financial Restructuring, and Financial Advisory Services.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Fee revenue | $217.5 million | $180.8 million | +20% |
| Operating expenses | $170.6 million | $147.9 million | +15% |
| Operating income | $46.9 million | $32.9 million | +43% |
| Operating margin | 21.6% | 18.2% | +3.4 percentage points |
| Net income | $39.2 million | $19.4 million | +102% |
| Net margin | 18.0% | 10.7% | +7.3 percentage points |
| Diluted earnings per share | $0.59 | $0.29 | +$0.30 |
| Operating cash flow | $(61.0) million | $(67.8) million | Outflow narrowed |
Revenue growth was led by Corporate Finance (+29%); Financial Advisory Services rose 21% and Financial Restructuring rose 5%. Compensation and benefits increased 19% to $145.5 million, while non-compensation expenses declined 4% to $25.1 million. The reported compensation ratio was 66.9%, versus 67.4% a year earlier. Management says its target adjusted awarded compensation ratio is approximately 65%–66%; the filing does not provide a current-quarter adjusted ratio.
Segments, liquidity, and debt
- Segment revenue and profit: Corporate Finance revenue was $124.0 million and segment profit $41.6 million (up 29% and 78%). Financial Restructuring revenue was $59.0 million and profit $10.7 million (up 5%; profit down 36%). Financial Advisory Services revenue was $34.5 million and profit $8.5 million (up 21% and 26%).
- Cash and investments: Cash and cash equivalents were $183.2 million at June 30, 2017, with no restricted cash. Investment securities were $19.1 million, putting cash and investments at approximately $202.3 million. The company reported $74 million of cash in foreign subsidiaries.
- Working capital indicators: Net accounts receivable was $62.5 million and unbilled work in process was $35.7 million. Management notes liquidity depends on client receipts and successful transaction completion; collections typically occur within 60 days of billing.
- Debt and credit: The $15 million ORIX affiliate note was repaid in May 2017. Other loans totaled approximately $17.5 million, including $12.1 million payable to non-affiliates and $5.4 million to former shareholders. The $75 million revolving credit facility had no borrowings at quarter-end. Its maturity was extended after quarter-end to August 18, 2019; the company reported covenant compliance.
- Cash deployment: Financing cash outflow was $227.5 million, mainly reflecting settlement of the $192.4 million forward share purchase, dividends, and debt repayment. Investing cash outflow was $23.3 million, including purchases of investment securities and capital expenditures. Operating cash outflow primarily reflected annual cash bonus payments.
Changes, outlook, and risks
- Net income benefited from higher revenue and a lower effective tax rate: 18.9%, versus 39.3%. The company attributed the tax-rate decline primarily to adoption of stock-compensation accounting guidance and tax deductions related to previously accelerated share-award vesting.
- Other income was $1.5 million, compared with a $0.9 million expense a year earlier. Management cited an earnout-liability reduction gain, improved joint-venture results, lower interest expense after repayment of the ORIX note, and higher interest income.
- The filing provides no specific revenue or earnings forecast. Management cautions that a substantial portion of Corporate Finance fees—and, less commonly, Financial Restructuring fees—depends on successful transaction completion. Results can also vary with compensation, transaction timing, collections, and foreign exchange movements.
- Foreign currency translation generated $5.1 million of other comprehensive income, compared with a $3.9 million loss in the prior-year quarter. Management expects currency translation to be more volatile following the U.K. vote to leave the EU, but did not expect a material effect on operating results or financial position at that time.
- The company reported no material change in risk factors or legal proceedings, and said routine legal matters were not expected to materially affect its financial condition, operations, or cash flows. Disclosure controls were assessed as effective at the reasonable-assurance level.
- After quarter-end, the board declared a $0.20-per-share quarterly dividend, payable September 15, 2017. The company also exercised a call option to acquire the remaining Class B1 shares of its Australian operation, making it wholly owned.
Important facts for investors to verify
- Confirm the sustainability of Corporate Finance growth and the reversal in Financial Restructuring segment profitability.
- Assess the effect of transaction completion timing, bonus-payment seasonality, and receivable collection on operating cash flow.
- Review the tax benefit’s effect on year-over-year net income comparability and whether it is recurring.
- Check the filing’s share-repurchase disclosures: the equity note text states “166,774,000” shares, while the repurchase table and program disclosure report 166,774 Class A shares at a weighted average price of $34.26. The table also lists 71,913 Class B shares repurchased under a separate contractual arrangement.
- Monitor the extended revolving-credit facility, remaining debt maturities, foreign-currency exposure, and the company’s execution of its stated compensation-ratio target.