HOULIHAN LOKEY, INC. Forward-Looking Statements The following discussion should be read together with our consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q. We make statements in this discussion that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "should," "expects," "plans," "anticipates," "could," "targets," "projects," "contemplates," "believes," "estimates," "intends," "predicts," "potential" or "continue," the negative of these terms or other similar expressions. These forward-looking statements, which are subject to risks, uncertainties, and assumptions about us, may include projections of our future financial performance, based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including but not limited to, the factors listed under the heading "Cautionary Note Regarding Forward-Looking Statements" in our Annual Report on Form 10-K for the year endedMarch 31, 2021 (the "2021 Annual Report"). Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements speak only as of the date of this filing. You should not rely upon forward-looking statements as a prediction of future events. We are under no duty to and we do not undertake any obligation to update or review any of these forward-looking statements after the date of this filing to conform our prior statements to actual results or revised expectations whether as a result of new information, future developments or otherwise. Key Financial Measures Revenues Revenues include fee revenues and reimbursements of expenses (see Note 2 and Note 3 to our unaudited consolidated financial statements in this Form 10-Q for additional information). Revenues reflect revenues from our Corporate Finance ("CF"), Financial Restructuring ("FR"), and Financial and Valuation Advisory ("FVA") business segments that substantially consist of fees for advisory services. Revenues for all three business segments are recognized upon satisfaction of the performance obligation and may be satisfied over time or at a point in time. The amount and timing of the fees paid vary by the type of engagement. In general, advisory fees are paid at the time an engagement letter is signed ("Retainer Fees"), during the course of the engagement ("Progress Fees"), or upon the successful completion of a transaction or engagement ("Completion Fees"). CF provides general financial advisory services in addition to advice on mergers and acquisitions and capital markets offerings. We advise public and private institutions on a wide variety of situations, including buy-side and sell-side transactions, as well as leveraged loans, private mezzanine debt, high-yield debt, initial public offerings, follow-ons, convertibles, equity private placements, private equity, and liability management transactions, and advise financial sponsors on all types of transactions. The majority of our CF revenues consists of Completion Fees. A CF transaction can fail to be completed for many reasons that are outside of our control. In these instances, our fees are generally limited to Retainer Fees and in some cases Progress Fees that may have been received. FR provides advice to debtors, creditors and other parties-in-interest in connection with recapitalization/deleveraging transactions implemented both through bankruptcy proceedings and through out-of-court exchanges, consent solicitations or other mechanisms, as well as in distressed mergers and acquisitions and capital markets activities. As part of these engagements, our FR business segment offers a wide range of advisory services to our clients, including: the structuring, negotiation, and confirmation of plans of reorganization; structuring and analysis of exchange offers; corporate viability assessment; dispute resolution and expert testimony; and procuring debtor-in-possession financing. Although atypical, FR transactions can fail to be completed for many reasons that are outside of our control. In these instances, our fees are generally limited to the Retainer Fees and/or Progress Fees. FVA primarily provides valuations of various assets, including: companies; illiquid debt and equity securities; and intellectual property (among other assets and liabilities). These valuations are used for financial reporting, tax reporting, and other purposes. In addition, our FVA business segment renders fairness opinions in connection with mergers and acquisitions and other transactions, and solvency opinions in connection with corporate spin-offs and dividend recapitalizations, and other types of financial opinions in connection with other transactions. Also, our FVA business segment provides dispute resolution services to clients where fees are usually based on the hourly rates of our financial professionals. Unlike our CF or FR segments, the fees generated in our FVA segment are generally not contingent on the successful completion of a transaction. 25 -------------------------------------------------------------------------------- Table of Contents Operating Expenses Our operating expenses are classified as employee compensation and benefits expense and non-compensation expense; revenue and headcount are the primary drivers of our operating expenses. Reimbursements of certain out-of-pocket deal expenses are recorded on a gross basis and are therefore included in both Revenues and Operating expenses on the Consolidated Statements of Comprehensive Income. Employee Compensation and Benefits Expense. Our employee compensation and benefits expense, which accounts for the majority of our operating expenses, is determined by management based on revenues earned, headcount, the competitiveness of the prevailing labor market, and anticipated compensation expectations of our employees. These factors may fluctuate, and as a result, our employee compensation and benefits expense may fluctuate materially in any particular period. Accordingly, the amount of employee compensation and benefits expense recognized in any particular period may not be consistent with prior periods or indicative of future periods. Our employee compensation and benefits expense consists of base salary, payroll taxes, benefits, annual incentive compensation payable as cash bonus awards, deferred cash bonus awards, and the amortization of equity-based bonus awards. Base salary and benefits are paid ratably throughout the year. Our annual equity-based bonus awards include fixed share compensation awards and liability classified fixed dollar awards as a component of the annual bonus awards for certain employees. These equity awards are generally subject to annual vesting requirements over a four-year period beginning at the date of grant, which occurs in the first quarter of each fiscal year; accordingly, expenses are amortized over the stated vesting period. In most circumstances, the unvested portion of these awards is subject to forfeiture should the employee depart from the Company. Cash bonuses, which are accrued monthly, are discretionary and dependent upon a number of factors including the Company's performance, and are generally paid in the first fiscal quarter of each fiscal year with respect to prior year performance. Generally, a portion of the cash bonus is deferred and paid in the third quarter of the fiscal year in which the bonus is awarded. We refer to the ratio of our employee compensation and benefits expenses to our revenues is referred to as our "Compensation Ratio." Non-Compensation Expense. The balance of our operating expenses includes costs for travel, meals and entertainment, rent, depreciation and amortization, information technology and communications, professional fees, and other operating expenses. We refer to all of these expenses as non-compensation expenses. A portion of our non-compensation expenses fluctuates in response to changes in headcount. Other Income, Net Other income, net includes (i) interest income earned on non-marketable and investment securities, cash and cash equivalents, loans receivable from affiliates, employee loans, and commercial paper, (ii) interest expense and fees on our 2015 Line of Credit or 2019 Line of Credit (each defined herein), (iii) interest expense on the loan payable to affiliate, loans payable to former shareholders, and the loan payable to non-affiliates, (iv) equity income and/or gains or losses from funds and partnership interests where we have more than a minor ownership interest or more than minor influence over operations, but do not have a controlling interest and are not the primary beneficiary, and (v) gains and/or losses associated with the reduction/increase of earnout liabilities. Results of Consolidated Operations The following is a discussion of our results of operations for the three months endedJune 30, 2021 and 2020. For a more detailed discussion of the factors that affected the revenues and the operating expenses of our CF, FR, and FVA business segments in these periods, see Part I, Item 2 of this Form 10-Q under the heading "Business Segments" below. 26
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Three Months Ended June 30,
($ in thousands) 2021 2020 Change
Revenues $ 372,722 $ 211,136 77 %
Operating expenses:
Employee compensation and benefits 232,304 137,121 69 %
Non-compensation 32,742 31,425 4 %
Total operating expenses 265,046 168,546 57 %
Operating income 107,676 42,590 153 %
Other income, net (101) (1,161) (91) %
Income before provision/(benefit) for income taxes 107,777 43,751 146 %
Provision/(benefit) for income taxes 21,817 (2,349) NM
Net income attributable to Houlihan Lokey, Inc. $ 85,960 $ 46,100 86 %
Three Months Ended June 30, 2021 versus June 30, 2020
Revenues were $372.7 million for the three months ended June 30, 2021 , compared
with $211.1 million for the three months ended June 30, 2020 , representing an
increase of 77%. For the quarter, CF revenues increased 139%, FR revenues
increased 11%, and FVA revenues increased 85% when compared with the three
months ended June 30, 2020 .
Operating expenses were $265.0 million for the three months ended June 30, 2021 ,
compared with $168.5 million for the three months ended June 30, 2020 ,
representing an increase of 57%. Employee compensation and benefits expense, as
a component of operating expenses, was $232.3 million for the three months ended
June 30, 2021 , compared with $137.1 million for the three months ended June 30,
2020 , representing an increase of 69%. The increase in employee compensation and
benefits expense was primarily a result of an increase in revenues for the
quarter when compared with the same quarter last year. The Compensation Ratio
was 62.3% for the three months ended June 30, 2021 , compared with 64.9% for the
three months ended June 30, 2020 . Non-compensation expense, as a component of
operating expenses, was $32.7 million for the three months ended June 30, 2021 ,
compared with $31.4 million for the three months ended June 30, 2020 ,
representing an increase of 4%. The increase in non-compensation expense was
primarily a result of an increase in professional fees, partially offset by a
decrease in other operating expenses and travel, meals, and entertainment
expenses.
Other income, net decreased (91)% to $(0.1) million for the three months ended
June 30, 2021 , compared with $(1.2) million for the three months ended June 30,
2020 , primarily due to lower interest (income) and an unrealized loss generated
by our investment securities.
The provision for income taxes for the three months ended June 30, 2021 was
$21.8 million , which reflected an effective tax rate of 20.2%. The provision for
income taxes for the three months ended June 30, 2020 was $(2.3) million which
reflected an effective tax rate of (5.4)%. The increase in the Company's tax
rate during the three months ended June 30, 2021 relative to the same period in
2020 was primarily a result of a decreased stock compensation deduction.
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Business Segments
The following table presents revenues, expenses and contributions from our
continuing operations by business segment. The revenues by segment represents
each segment's revenues, and the profit by segment represents profit for each
segment before corporate expenses, other income, net, and income taxes.
Three Months Ended June 30,
($ in thousands) 2021 2020 Change
Revenues by Segment
Corporate Finance $ 209,991 $ 87,971 139 %
Financial Restructuring 98,775 88,620 11 %
Financial and Valuation Advisory 63,956 34,545 85 %
Revenues $ 372,722 $ 211,136 77 %
Segment Profit (1)
Corporate Finance $ 85,149 $ 22,650 276 %
Financial Restructuring 26,093 36,169 (28) %
Financial and Valuation Advisory 22,209 7,397 200 %
Total Segment Profit 133,451 66,216 102 %
Corporate Expenses (2) 25,775 23,626 9 %
Other income, net (101) (1,161) (91) %
Income before provision/(benefit) for income taxes $ 107,777 $ 43,751 146 %
Segment Metrics
Number of Managing Directors
Corporate Finance 127 117 9 %
Financial Restructuring 52 48 8 %
Financial and Valuation Advisory 35 31 13 %
Number of Closed Transactions/Fee Events (3)
Corporate Finance 84 35 140 %
Financial Restructuring 24 29 (17) %
Financial and Valuation Advisory 820 512 60 %
(1)We adjust the compensation expense for a business segment in situations where
an employee residing in one business segment is performing work in another
business segment where the revenues are accrued. Segment Profit may vary
significantly between periods depending on the levels of collaboration among the
different segments.
(2)Corporate expenses represent expenses that are not allocated to individual
business segments such as office of the executives, accounting, information
technology, compliance, legal, marketing, and human capital.
(3)Fee Events applicable to FVA only; a Fee Event includes any engagement that
involves revenue activity during the measurement period with a revenue minimum
of one thousand dollars . References to closed transactions should be understood
to be the same as transactions that are "effectively closed" as described in
Note 2 of our Consolidated Financial Statements.
Corporate Finance
Three Months Ended June 30, 2021 versus June 30, 2020
Revenues for CF were $210.0 million for the three months ended June 30, 2021 ,
compared with $88.0 million for the three months ended June 30, 2020 ,
representing an increase of 139%. Revenues increased primarily due to a
significant increase in the number of closed transactions when compared to the
same quarter last year.
Segment profit for CF was
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Financial Restructuring
Three Months Ended June 30, 2021 versus June 30, 2020
Revenues for FR were $98.8 million for the three months ended June 30, 2021 ,
compared with $88.6 million for the three months ended June 30, 2020 ,
representing an increase of 11%. Revenues increased primarily due to a
significant increase in the average transaction fee on closed transactions when
compared to the same quarter last year.
Segment profit for FR was $26.1 million for the three months ended June 30,
2021 , compared with $36.2 million for the three months ended June 30, 2020 , a
decrease of (28)%. Profitability decreased as a result of increased compensation
and non-compensation expenses when compared to the same quarter last year.
Financial and Valuation Advisory
Three Months Ended June 30, 2021 versus June 30, 2020
Revenues for FVA were $64.0 million for the three months ended June 30, 2021 ,
compared with $34.5 million for the three months ended June 30, 2020 ,
representing an increase of 85%. Revenues increased primarily as a result of a
significant increase in the number of fee events when compared to the same
quarter last year.
Segment profit for FVA was $22.2 million for the three months ended June 30,
2021 , compared with $7.4 million for the three months ended June 30, 2020 , an
increase of 200%. Profitability increased primarily as a result of an increase
in revenues and a lesser non-commensurate increase in compensation and
non-compensation expenses when compared to the same quarter last year.
Corporate Expenses
Three Months Ended June 30, 2021 versus June 30, 2020
Corporate expenses were $25.8 million for the three months ended June 30, 2021 ,
compared with $23.6 million for the three months ended June 30, 2020 . This 9%
increase was primarily driven by an increase in compensation expenses, offset by
a decline in non-compensation expenses when compared to the same quarter last
year.
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Liquidity and Capital Resources
Our current assets comprise cash and cash equivalents, investment securities,
receivables from affiliates, accounts receivable, and unbilled work in progress
related to fees earned from providing advisory services. Our current liabilities
include deferred income, accounts payable and accrued expenses, accrued salaries
and bonuses, income taxes payable, and current portion of loan obligations.
Our cash and cash equivalents include cash held at banks. We maintain moderate
levels of cash on hand in support of regulatory requirements for our registered
broker-dealer. As of June 30, 2021 and March 31, 2021 , we had $291 million and
$283 million of cash in foreign subsidiaries, respectively. Our excess cash may
be invested from time to time in short term investments, including treasury
securities, commercial paper, certificates of deposit, and investment grade
corporate debt securities, and special purpose acquisition companies. Please
refer to Note 6 for further detail.
As of
June 30, 2021 March 31, 2021
Cash and cash equivalents $ 782,194 $ 846,851
Investment securities 47,856 208,618
Total unrestricted cash and cash equivalents, including investment securities
830,050 1,055,469
Restricted cash (1) 373 373
Total cash, cash equivalents, and restricted cash, including investment securities
$
830,423
(1)Represents a deposit in support of a letter of credit issued for our
Our liquidity is highly dependent upon cash receipts from clients that are generally dependent upon the successful completion of transactions, as well as the timing of receivables collections, which typically occur within 60 days of billing. As ofJune 30, 2021 , accounts receivable, net of credit losses was$90.8 million . As ofJune 30, 2021 , unbilled work in progress, net of credit losses was$87.8 million . Our previously active revolving line of credit pursuant to the loan agreement, dated as ofAugust 18, 2015 , by and amongHoulihan Lokey , certain domestic subsidiaries ofHoulihan Lokey party thereto andBank of America, N.A ., amendedJuly 28, 2017 andAugust 15, 2019 (the "2015 Line of Credit"), which provided a revolving line of credit of$75.0 million , was refinanced and replaced with the 2019 Line of Credit (as defined below). OnAugust 23, 2019 , the Company entered into a new syndicated revolving line of credit with theBank of America, N.A . and certain other financial institutions party thereto, which allows for borrowings of up to$100 million (and, subject to certain conditions, provides the Company with an expansion option, which, if exercised in full, would provide for a total credit facility of$200 million ) and matures onAugust 23, 2022 (the "2019 Line of Credit"). As ofJune 30, 2021 , no principal was outstanding under the 2019 Line of Credit. The agreement governing this facility provides that borrowings bear interest at an annual rate of LIBOR plus 1.00%, commitment fees apply to unused amounts, and contains debt covenants which require that the Company maintain certain financial ratios. The loan agreement requires compliance with certain loan covenants including but not limited to the maintenance of minimum consolidated earnings before interest, taxes, depreciation and amortization of no less than$150 million as of the end of any quarterly 12-month period and certain leverage ratios including a consolidated leverage ratio of less than 2.00 to 1.00. As ofJune 30, 2021 , we were, and expect to continue to be, in compliance with such covenants. The majority of the Company's payment obligations and commitments pertain to routine operating leases. The Company also has various obligations relating to notes payable and contingent consideration issued in connection with businesses previously acquired (see Note 10 included in Part I, Item 1 of this Form 10-Q). In connection with certain acquisitions, certain employees may be entitled to deferred consideration, primarily in the form of retention payments, should certain service and/or performance conditions be met in the future. As a result of these conditions, such deferred consideration would be expensed as compensation in current and future periods and has been accrued as liabilities on the Consolidated Balance Sheets as ofJune 30, 2021 andMarch 31, 2021 . 30 -------------------------------------------------------------------------------- Table of Contents Cash Flows Our operating cash flows are primarily influenced by the amount and timing of receipt of advisory fees and the payment of operating expenses, including payments of incentive compensation to our employees. We pay a significant portion of our incentive compensation during the first and third quarters of each fiscal year. A summary of our operating, investing, and financing cash flows is as follows: Three Months Ended June 30, (In thousands) 2021 2020 Change Operating activities: Net income$ 85,960 $ 46,100 86 % Non-cash charges 40,040 31,169 28 % Other operating activities (216,093) (192,509) 12 % Net cash used in operating activities (90,093) (115,240) (22) % Net cash provided by investing activities 158,972 9,229 1,723 % Net cash provided by/(used in) financing activities (133,718) 145,282 (192) %
Effects of exchange rate changes on cash, cash equivalents, and restricted cash
182 2,520 NM
Net increase/(decrease) in cash, cash equivalents, and restricted cash
(64,657) 41,791 NM
Cash, cash equivalents, and restricted cash - beginning of period
847,224 380,746 123 %
Cash, cash equivalents, and restricted cash - end of period
85 %
Three Months Ended June 30, 2021
Operating activities resulted in a net outflow of $(90.1) million , primarily
attributable to cash bonus payments paid in May 2021 . Investing activities
resulted in a net inflow of $159.0 million , primarily attributable to sales or
maturities of investment securities. Financing activities resulted in a net
outflow of $(133.7) million , primarily attributable to share repurchases,
payments to settle employee tax obligations on share-based awards, and dividends
paid at our most recently increased rate of $0.43 per share. See Note 15 to our
unaudited consolidated financial statements in this Form 10-Q for additional
information.
Three Months Ended June 30, 2020
Operating activities resulted in a net outflow of $(115.2) million , primarily
attributable to cash bonus payments paid in May 2020 . Investing activities
resulted in a net inflow of $9.2 million , primarily attributable to sales or
maturities of investment securities, partially offset by purchases of investment
securities. Financing activities resulted in a net inflow of $145.3 million ,
primarily attributable to proceeds from the Company's May 2020 offering.
Contractual Obligations
There have been no material changes outside of the ordinary course of business
to our known contractual obligations, which are set forth in the table included
in Item 7 in our 2021 Annual Report.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates. Estimates and assumptions are
reviewed periodically, and the effects of revisions are reflected in the period
for which they are determined to be necessary.
There have been no material changes to the critical accounting policies
disclosed in our 2021 Annual Report. For additional information on critical
accounting policies and estimates, see "Critical Accounting Policies and
Estimates" in the MD&A of the 2021 Annual Report.
Recent Accounting Developments
For information on recently issued accounting developments and their impact or
potential impact on our consolidated financial statements, see Note 2 to our
unaudited consolidated financial statements in this Form 10-Q.
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