Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2023, compared with the periods ended December 31, 2022. Balance-sheet comparisons are against March 31, 2023. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and financial performance
Houlihan Lokey provides Corporate Finance (CF), Financial Restructuring (FR), and Financial and Valuation Advisory (FVA) services. Many CF and FR fees depend on transactions closing, making revenue sensitive to deal markets and timing.
| Metric | Three months ended Dec. 31, 2023 | Year-over-year change | Nine months ended Dec. 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $511.1 | +12% | $1,393.9 | +2% |
| Operating income | $96.5 | +15% | $260.2 | +4% |
| Net income | $70.8 | +12% | $199.2 | +2% |
| Diluted EPS | $1.04 | vs. $0.90 | $2.93 | vs. $2.80 |
| Operating margin | 18.9% | vs. 18.4% | 18.7% | vs. 18.4% |
Margins are calculated from reported revenue and operating income. The compensation ratio was 63.4% in both comparable periods for the quarter and nine-month period. Quarterly non-compensation expense rose 9%, primarily from professional fees and rent; nine-month non-compensation expense was broadly flat.
Segments and material changes
- CF: Revenue increased 6% in the quarter to $310.5 million, but declined 6% for nine months to $819.2 million. Management attributed the nine-month decline to fewer closed transactions amid M&A market softness.
- FR: Revenue rose 30% in the quarter to $128.6 million and 33% for nine months to $366.6 million. Management cited higher transaction fees in the quarter and more closings amid favorable restructuring conditions over nine months.
- FVA: Revenue increased 9% in the quarter to $72.1 million, but fell 5% for nine months to $208.1 million, reflecting fewer fee events and M&A softness over the nine-month period.
- Nine-month segment profit rose 41% for FR, but declined 9% for CF and 15% for FVA. Total segment profit increased 1% to $413.6 million.
Quarterly other income was $6.0 million, versus expense of $0.6 million a year earlier; nine-month other income was $12.3 million, versus expense of $7.4 million. The company cited increased interest and dividend income and investment gains, as well as the prior-year write-off of an equity-method investment. Effective tax rates increased to 31.0% for the quarter and 26.9% for nine months, from 24.6% and 20.2%, respectively; management cited higher state and foreign taxes and, for the nine-month comparison, a prior-year uncertain-tax-position benefit.
Cash flow, liquidity, and obligations
- Nine-month operating cash flow was positive $103.1 million, compared with negative $101.9 million a year earlier. The company attributed the current-period inflow primarily to net income and share-based award expense, partly offset by cash bonus payments.
- Investing cash outflow was $55.7 million, primarily reflecting $54.5 million of net property and equipment purchases. Financing cash outflow was $214.4 million, including $112.9 million of dividends, $25.0 million of share repurchases, and $70.1 million to settle employee tax obligations on share awards.
- Cash and cash equivalents were $555.5 million and investment securities were $35.4 million at December 31, 2023; combined, $590.9 million, down from $751.7 million at March 31, 2023. Cash, cash equivalents, and restricted cash declined by $158.9 million during the nine months.
- No principal was outstanding on the $100 million revolving credit facility, which matures August 2025. The company reported compliance with its covenants and expected continued compliance. It also reported no outstanding principal under the facility at March 31, 2023.
- Operating lease liabilities totaled $420.1 million; the company also disclosed approximately $20.1 million of leases not yet commenced. Accounts receivable were $152.8 million and unbilled work in progress was $174.2 million, both net of credit-loss allowances.
Outlook, risks, and unusual items
The filing provides no specific financial guidance. Management cautions that nine-month results are not necessarily indicative of the full fiscal year. Revenue and liquidity depend partly on successful transaction completion and collection timing; management also identified M&A market softness as affecting CF and FVA. Other disclosed exposures include receivable credit risk and foreign-currency movements. The filing states that risk factors were not materially changed from the 2023 annual report.
The company completed its SEC settlement concerning preservation of business communications sent through off-channel messaging platforms: it admitted the SEC’s factual findings, agreed to a cease-and-desist order and compliance undertakings including an independent consultant, and paid a $15.0 million civil penalty in August 2023. The penalty had been accrued in the prior fiscal year. The company acquired 7 Mile Advisors in December 2023; the filing reports $3.9 million of net cash outflow for the acquisition, shares issued as consideration, and $40.8 million of goodwill growth primarily related to the acquisition. On January 25, 2024, the board declared a $0.55-per-share quarterly dividend, payable March 15, 2024.
Management concluded disclosure controls were effective at the reasonable-assurance level as of December 31, 2023, and reported no material change in internal control over financial reporting during the quarter. The company said ordinary-course legal matters were not expected to have a material adverse effect; it reported no material changes to legal proceedings or risk factors from its annual report.
Important facts for investors to verify
- Whether the improvement in quarterly results and FR growth persists, given transaction timing and the softness affecting nine-month CF and FVA results.
- Cash conversion and working-capital trends, particularly the buildup in unbilled work in progress and the timing of incentive-compensation payments.
- Future effects of higher effective tax rates, professional fees, lease costs, and the SEC settlement’s compliance undertakings.
- Acquisition integration and the performance of 7 Mile Advisors, including contingent consideration and related goodwill.
- Dividend and repurchase activity relative to cash needs, with $457.7 million remaining under the repurchase authorization at December 31, 2023.