Houlihan Lokey, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 31, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions unless stated otherwise.
Business context
Houlihan Lokey provides financial advisory services through Corporate Finance (CF), Financial Restructuring (FR), and Financial and Valuation Advisory (FVA). CF fees are largely dependent on successful transaction completions; FVA fees are generally less transaction-contingent. The prior-year comparison includes GCA, acquired in October 2021.
Financial results
| Metric | Three months 2022 | Three months 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $456.5 | $888.8 | $1,364.7 | $1,798.8 |
| Operating income | $84.2 | $249.3 | $251.1 | $514.3 |
| Operating margin | 18.4% | 28.0% | 18.4% | 28.6% |
| Net income attributable to Houlihan Lokey | $63.1 | $173.7 | $194.6 | $372.6 |
| Diluted EPS | $0.90 | $2.54 | $2.80 | $5.44 |
| Operating cash flow | Not presented separately | Not presented separately | $(101.9) | $672.1 |
Quarterly revenue fell 49% and net income attributable to the company fell 64%; nine-month revenue fell 24% and net income fell 48%. Quarterly and nine-month operating margins were lower year over year. The compensation ratio was 63.4% in both 2022 periods, versus 61.8% for the prior-year quarter and 62.0% for the prior-year nine-month period.
Segments and material changes
| Segment revenue | Three months 2022 | Change year over year | Nine months 2022 | Change year over year |
|---|---|---|---|---|
| Corporate Finance | $291.7 | (59%) | $870.7 | (34%) |
| Financial Restructuring | $98.8 | 11% | $275.4 | 2% |
| Financial and Valuation Advisory | $65.9 | (21%) | $218.6 | 2% |
Management attributed the overall decline principally to fewer closed transactions. CF also had lower average fees on closed transactions. FR grew, with higher closed-transaction activity and improved segment profitability. Nine-month non-compensation expenses rose 47%, primarily reflecting GCA-related amortization, costs, and other operating expenses; corporate expenses increased 23% for similar GCA-related reasons. Nine-month depreciation and amortization was $51.9 million, versus $28.6 million.
Liquidity, debt, and balance sheet
- At December 31, 2022, cash and cash equivalents were $549.4 million and investment securities were $36.8 million, down from $833.7 million and $109.1 million, respectively, at March 31, 2022. Cash, cash equivalents, and restricted cash totaled $549.8 million.
- Nine-month operating cash outflow was $101.9 million, mainly reflecting reductions in accrued salaries and bonuses and income taxes payable. Investing cash inflow was $36.5 million; financing cash outflow was $207.8 million, mainly dividends, share repurchases, and employee tax withholding on share awards.
- No principal was outstanding on the $100 million revolving credit facility. It matures in August 2025; the company reported compliance with its covenants. Total balance-sheet liabilities were $1,131.0 million, including $283.7 million of operating lease liabilities.
- Accounts receivable, net, was $138.0 million and unbilled work in progress, net, was $152.1 million. The allowance for credit losses was $19.9 million.
- Operating lease right-of-use assets were $255.7 million. Additional office leases of approximately $142.4 million had been signed but had not commenced.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific revenue, earnings, or other financial guidance. Management cautions that results depend on transaction activity, timing of client receipts, and other factors; CF completion fees are particularly exposed to whether transactions close.
- Foreign currency translation reduced other comprehensive income by $26.7 million for the nine-month period; the quarter included a $24.2 million translation gain. Management cited the stronger U.S. dollar as an unusually large source of translation adjustments. One pound/euro forward contract had a €15.3 million notional value.
- Other expense included the write-off of the company’s equity-method investment in Advanced Merger Partners, Inc. and, for the nine-month period, earnout-liability and warrant revaluation losses, partly offset by investment gains and interest income.
- The effective tax rate was 20.2% for the nine months, versus 27.3% a year earlier. A New York state audit resolution reduced unrecognized tax benefits by $7.3 million; management said up to $0.5 million of gross unrecognized tax benefits could decrease within 12 months.
- Management said ordinary-course legal proceedings are not expected to have a material adverse effect. The company also provides lease-related indemnifications and guarantees for which a maximum potential payment cannot be estimated; no liability was recorded.
- The board declared a $0.53-per-share quarterly dividend on January 25, 2023, payable March 15, 2023. The company reported $482.7 million remaining under its $500 million repurchase authorization at December 31, 2022.
- Disclosure controls were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was identified during the quarter.
Key facts for investors to verify
- Whether CF transaction completions and fees recover, and whether continued FR activity offsets weakness in CF.
- How client collections, unbilled work in progress, incentive-compensation payments, and tax payments affect cash generation.
- The trajectory of compensation and non-compensation costs, including GCA-related amortization and integration expenses.
- Credit-loss exposure, future earnout or contingent-consideration changes, and remaining uncertain tax positions.
- The cash and expense impact of new office leases, ongoing dividends, and any future repurchases.
- Foreign-exchange effects on reported earnings, cash balances, and accumulated other comprehensive loss.