Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended September 30, 2015, compared with the corresponding 2014 periods. The company provides corporate finance, financial restructuring, and financial advisory services. It completed its IPO and corporate reorganization on August 18, 2015; shares sold in the IPO were sold by existing holders, and the company received no proceeds.
Key financial results
| Metric | Three months ended September 30, 2015 | Year-over-year change | Six months ended September 30, 2015 | Year-over-year change |
|---|---|---|---|---|
| Fee revenue | $158.4 million | +1% | $304.6 million | +2% |
| Operating income | $17.4 million | -36% | $41.2 million | -20% |
| Net income | $9.3 million | -44% | $24.3 million | -21% |
| Net income attributable to Houlihan Lokey | $9.3 million | -44% | $24.3 million | -21% |
| Diluted earnings per share | $0.15 | vs. $0.27 | $0.39 | vs. $0.52 |
| Operating margin | 11.0% | vs. 17.5% | 13.5% | vs. 17.3% |
Compensation expense was $111.3 million in the quarter and $204.9 million for six months. The compensation ratio was 70% for the quarter (unchanged) and 67% for six months (down from 70%). Non-compensation expense rose 52% in both comparison periods, to $29.7 million for the quarter and $58.5 million for six months. IPO and reorganization costs, acquisition costs, and costs of operating as a public company contributed to the increase. IPO-related professional-service costs were $6.8 million for the quarter and $12.8 million for six months.
Segments and material changes
- Corporate Finance: Revenue declined 3% to $89.9 million for the quarter and 1% to $168.3 million for six months, mainly due to fewer transaction closings.
- Financial Restructuring: Revenue declined 3% to $40.9 million for the quarter and was essentially flat at $79.9 million for six months.
- Financial Advisory Services: Revenue increased 27% to $27.5 million for the quarter and 18% to $56.4 million for six months. Management cited M&A-market strength, growth in non-transaction work, and contributions from the Bridge Strategy Group acquisition.
- Corporate expenses increased 113% for the quarter and 77% for six months, reflecting IPO/reorganization costs, acquisition-related costs, and public-company expenses. The effective tax rate rose to 45.9% for the quarter and 42.4% for six months, primarily because some IPO professional fees were nondeductible.
Cash flow, balance sheet, and liquidity
- Cash and cash equivalents were $97.8 million at September 30, 2015, versus $88.7 million at March 31, 2015. Total assets were $981.0 million and total liabilities were $366.3 million.
- Six-month operating cash flow was negative $59.0 million, versus positive $17.3 million in 2014; management attributed the outflow primarily to annual bonuses paid in April.
- Investing cash flow was positive $163.3 million, mainly reflecting repayment of the ORIX USA affiliate receivable. Financing cash flow was negative $94.8 million, primarily due to dividend distributions. Cash increased by $9.1 million over the six months.
- At September 30, the balance sheet reported a $45.0 million loan payable to an affiliate and $17.0 million of loans payable to former shareholders. The company also had a $75.0 million revolving credit facility, with no borrowings outstanding; it stated it was in compliance with its covenants. A $45.0 million note payable to ORIX USA bears interest at LIBOR plus 165 basis points and has scheduled principal repayments beginning June 30, 2016.
- The balance sheet lists $55.9 million receivable from affiliates; MD&A separately reports a $54.9 million loan receivable from OGC. The filing describes the OGC balance as a demand receivable under a cash management arrangement.
- The company declared a quarterly dividend of $0.15 per share, payable December 15, 2015. The pre-IPO dividend to existing owners totaled approximately $270 million, paid through a combination of notes, non-cash assets, and other settlements.
Outlook, risks, and unusual items
- The filing provides no specific financial guidance. Management cautions that interim results are not necessarily indicative of full-year results. Revenue and liquidity depend in part on successful transaction closings, fee approvals, and collection timing; most billed receivables are typically collected within 60 days.
- Other income and expense weakened, including a quarterly net expense of $0.3 million, reflecting lower interest income after the dividend and start-up losses from the Australian joint venture.
- Goodwill and other intangibles totaled $688.9 million. Management reported no impairment indicators or impairment charges during the period.
- The company disclosed ordinary-course legal matters and stated that their resolution was not expected to have a material adverse effect; it reported no current material litigation. It also described lease indemnities and subsidiary lease guarantees for which a maximum exposure could not be estimated, but management did not expect material losses.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It stated there had been no material changes to the IPO-prospectus risk factors.
Important facts for investors to verify
- Whether revenue growth and segment trends persist, particularly the strength in Financial Advisory Services and the decline in transaction closings in the other segments.
- How much elevated corporate and non-compensation expense is recurring after IPO and acquisition-related costs, and the future effect of share-based compensation; $97.1 million of unrecognized compensation cost remained at September 30.
- The terms, collectability, and ongoing balance of the OGC/affiliate receivable, and the repayment schedule and covenants for the ORIX note and revolving credit facility.
- The impact of the large pre-IPO dividend, the quarterly dividend policy, and the company’s cash needs given bonus-payment seasonality and transaction-dependent collections.
- Potential effects of acquisition integration, contingent consideration, foreign-currency movements, and the pending adoption of the new revenue-recognition standard; the company had not yet determined that standard’s impact.