Houlihan Lokey(US:HLI)2022-05-26 16:00markdown Part I [Business](index=6&type=section&id=Item%201.%20Business) Houlihan Lokey is a global independent investment bank specializing in M&A, restructuring, and valuation, expanding its global reach - Houlihan Lokey is a global independent investment bank with expertise in M&A, capital markets, financial restructurings, and financial and valuation advisory[19](index=19&type=chunk) - The company operates through three primary business practices: Corporate Finance (CF), Financial Restructuring (FR), and Financial and Valuation Advisory (FVA)[19](index=19&type=chunk) - As of March 31, **2022**, the company had a team of **1,686 financial professionals** across **35** offices globally[21](index=21&type=chunk) - In October **2021**, the company acquired GCA Corporation, a global technology-focused investment bank, for approximately **$589.6 million** to expand its presence in Asia and Europe and enhance its technology sector capabilities[76](index=76&type=chunk)[151](index=151&type=chunk) - The company is a "controlled company" as the HL Voting Trust controls a majority of the voting power (**78.9%** as of March 31, **2022**), allowing it to elect a majority of the board and influence corporate matters[64](index=64&type=chunk)[67](index=67&type=chunk)[112](index=112&type=chunk) [Advisory Services](index=6&type=section&id=Item%201.%20Business-Advisory%20Services) The company offers advisory services via its Corporate Finance, Financial Restructuring, and Financial and Valuation Advisory segments - Corporate Finance (CF): Provides M&A and capital markets advisory, with a focus on mid-cap transactions. As of March 31, **2022**, it had **202 Managing Directors**[22](index=22&type=chunk) - Financial Restructuring (FR): One of the largest restructuring groups, advising on complex situations globally. It serves as a countercyclical hedge to the M&A business. As of March 31, **2022**, it had **53 Managing Directors**[31](index=31&type=chunk)[33](index=33&type=chunk) - Financial and Valuation Advisory (FVA): A large valuation and financial opinion practice known for its analytical product and technical skills. As of March 31, **2022**, it had **34 Managing Directors**[36](index=36&type=chunk) [Human Capital and Competition](index=10&type=section&id=Item%201.%20Business-Human%20Capital%20and%20Competition) The company retains talent via ownership and compensation, competing with global investment banks and accounting firms - As of March 31, **2022**, approximately **839 present and former employee shareholders** collectively owned about **27%** of the company's equity[38](index=38&type=chunk) Employee Headcount Trend | Fiscal Year End | Total Employees | | :--- | :--- | | March 31, 2022 | 2,257 | | March 31, 2021 | 1,574 | | March 31, 2020 | 1,491 | - Key competitors vary by practice: CF competes with firms like Jefferies and Lazard; FR with Evercore and PJT Partners; and FVA with the 'big four' accounting firms and Duff & Phelps[42](index=42&type=chunk) [Regulation](index=11&type=section&id=Item%201.%20Business-Regulation) Houlihan Lokey is extensively regulated globally by various authorities, requiring compliance with financial laws - In the U.S., subsidiaries Houlihan Lokey Capital, Inc. and Houlihan Lokey Advisors, LLC are registered broker-dealers subject to SEC and FINRA regulation, including the uniform net capital rule (Rule **15c3-1**)[45](index=45&type=chunk)[46](index=46&type=chunk) - European advisory business is primarily regulated by the U.K.'s Financial Conduct Authority (FCA) and Germany's BaFin, with passporting rights across the EEA[52](index=52&type=chunk)[53](index=53&type=chunk)[54](index=54&type=chunk) - The firm is also subject to regulation in Asia (SFC in Hong Kong, SEBI in India, MAS in Singapore), Australia (ASIC), and the Middle East (DFSA in Dubai)[55](index=55&type=chunk)[56](index=56&type=chunk)[58](index=58&type=chunk)[59](index=59&type=chunk)[61](index=61&type=chunk) [Risk Factors](index=17&type=page&id=Item%201A.%20Risk%20Factors) The company faces significant risks from revenue volatility, acquisition integration, personnel retention, and concentrated voting power - A substantial portion of revenue is derived from advisory fees contingent on the completion of transactions, leading to highly volatile quarterly revenue and profits[73](index=73&type=chunk) - Goodwill and other intangible assets totaled **$1.32 billion** as of March 31, **2022**, representing a significant portion of assets subject to impairment risk[78](index=78&type=chunk) - International operations, which accounted for approximately **26%** of fiscal **2022** revenue, are subject to risks such as currency fluctuations, regulatory changes, and political instability[79](index=79&type=chunk) - The business is highly dependent on its ability to retain Managing Directors and other senior professionals in a competitive market[85](index=85&type=chunk) - The dual-class stock structure and the HL Voting Trust concentrate **78.9%** of voting control, limiting the influence of Class A stockholders and qualifying the company as a "controlled company" under NYSE rules[111](index=111&type=chunk)[112](index=112&type=chunk)[114](index=114&type=chunk) - The business faces general risks from global events, including the ongoing impact of the COVID-19 pandemic and consequences of the conflict between Russia and Ukraine[129](index=129&type=chunk)[131](index=131&type=chunk) [Unresolved Staff Comments](index=29&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that it has no unresolved staff comments from the SEC - None[132](index=132&type=chunk) [Properties](index=29&type=section&id=Item%202.%20Properties) The company does not own any real property, with all offices located in leased spaces adequate for its needs - The company's headquarters is in a leased office space in Los Angeles, California. All other offices in the U.S. and internationally are also leased[133](index=133&type=chunk) - The company does not own any real property[134](index=134&type=chunk) [Legal Proceedings](index=29&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various legal and regulatory matters, none expected to materially affect its financial condition - The company is not currently party to any material pending legal proceedings that would have a material effect on its financial condition[135](index=135&type=chunk) [Mine Safety Disclosures](index=29&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[136](index=136&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=30&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Houlihan Lokey's Class A common stock trades on the NYSE, with regular dividends and active share repurchases - Class A common stock is traded on the New York Stock Exchange under the symbol 'HLI'. There is no public market for Class B common stock[139](index=139&type=chunk) - The company has regularly declared and paid quarterly dividends and plans to continue this policy, subject to board discretion[141](index=141&type=chunk) Share Repurchases (Quarter Ended March 31, 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | Total Cost (Approx.) | | :--- | :--- | :--- | :--- | | Jan 2022 | 307,338 | $104.26 | $32.0M | | Feb 2022 | 340,400 | $105.64 | $36.0M | | Mar 2022 | 596,727 | $96.53 | $57.6M | | **Total** | **1,244,465** | **$100.93** | **$125.6M** | - In April **2022**, the board authorized a new share repurchase program for up to **$500 million** of Class A and Class B common stock, replacing the previous program[147](index=147&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Fiscal **2022** saw record revenues for Houlihan Lokey, driven by Corporate Finance and the GCA acquisition, with strong liquidity [Results of Consolidated Operations](index=34&type=section&id=Item%207.%20MD%26A-Results%20of%20Consolidated%20Operations) Fiscal **2022** revenues surged **49%** to **$2.27 billion**, driven by Corporate Finance, with operating income up **50%** Consolidated Operations (Fiscal Year Ended March 31) | Metric ($ in millions) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | **Revenues** | $2,269.9 | $1,525.5 | 49% | | Employee compensation & benefits | $1,408.6 | $971.2 | 45% | | Non-compensation expenses | $248.5 | $146.1 | 70% | | **Operating income** | $612.9 | $408.2 | 50% | | **Net income attributable to HLI** | $437.8 | $312.8 | 40% | - The compensation-to-revenue ratio improved, decreasing to **62%** in FY**2022** from **64%** in FY**2021**[171](index=171&type=chunk) - The effective tax rate increased to **27%** in FY**2022** from **24%** in FY**2021**, primarily due to higher state and foreign taxes and lower stock compensation deductions[173](index=173&type=chunk) [Business Segments](index=36&type=section&id=Item%207.%20MD%26A-Business%20Segments) Fiscal **2022** segment performance varied, with Corporate Finance revenue nearly doubling, Financial Restructuring declining, and FVA growing Segment Revenues and Profit (Fiscal Year Ended March 31) | Segment ($ in millions) | Revenue 2022 | Revenue 2021 | % Change | Segment Profit 2022 | Segment Profit 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Corporate Finance | $1,593.1 | $802.9 | 98% | $606.3 | $250.5 | 142% | | Financial Restructuring | $392.8 | $534.7 | (27)% | $100.9 | $224.2 | (55)% | | Financial and Valuation Advisory | $284.1 | $187.9 | 51% | $88.1 | $46.6 | 89% | - The number of closed transactions/fee events for CF increased by **67%** to **600**, while FR decreased by **35%** to **90**. FVA fee events increased by **42%** to **2,183**[176](index=176&type=chunk) [Liquidity and Capital Resources](index=37&type=section&id=Item%207.%20MD%26A-Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with **$942.8 million** in cash and investments, supported by an undrawn credit line Cash and Investment Position (as of March 31) | (In millions) | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $833.7 | $846.9 | | Investment securities | $109.1 | $208.6 | | **Total unrestricted cash & investments** | **$942.8** | **$1,055.5** | - As of March 31, **2022**, the company had no principal outstanding under its **$100 million** **2019** Line of Credit and was in compliance with all covenants[192](index=192&type=chunk) - Net cash provided by operating activities was **$736.6 million** in FY**2022**, an increase from **$579.8 million** in FY**2021**, primarily due to higher net income[196](index=196&type=chunk)[197](index=197&type=chunk) - Net cash used in investing activities was **$273.9 million**, mainly for the GCA acquisition. Net cash used in financing activities was **$459.1 million**, primarily for share repurchases[197](index=197&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=41&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risk is foreign currency exchange rate fluctuations, particularly for pound sterling and euro - The company's business is not capital intensive and is not subject to significant market risk, such as interest rate risk, or credit risk[210](index=210&type=chunk) - The primary market risk exposure is from foreign currency exchange rates, mainly the pound sterling and euro[211](index=211&type=chunk)[215](index=215&type=chunk) Impact of Foreign Currency Translation (Net, in Other Comprehensive Income) | Fiscal Year Ended March 31 | Net Impact ($ in millions) | | :--- | :--- | | 2022 | $(23.2) | | 2021 | $23.0 | | 2020 | $(13.0) | - The company periodically uses derivative instruments, such as foreign currency forward contracts, to hedge its exposure to currency fluctuations[216](index=216&type=chunk) [Financial Statements](index=42&type=section&id=Item%208.%20Financial%20Statements) This section presents the company's audited consolidated financial statements and KPMG's report, highlighting critical audit matters - The financial statements were audited by KPMG LLP, which issued an unqualified opinion[222](index=222&type=chunk)[223](index=223&type=chunk) - Critical Audit Matters identified by KPMG were (**1**) the recognition of revenue for Completion Fees in the CF and FR segments, and (**2**) the valuation of the backlog intangible asset acquired in the GCA business combination[227](index=227&type=chunk)[228](index=228&type=chunk)[231](index=231&type=chunk) Key Balance Sheet Data (as of March 31, in millions) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | $2,886.8 | $2,426.1 | | Goodwill | $1,070.4 | $671.1 | | Total Liabilities | $1,443.1 | $1,042.5 | | Total Stockholders' Equity | $1,443.7 | $1,383.6 | Key Income Statement Data (Year Ended March 31, in millions) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | $2,270.0 | $1,525.5 | $1,159.4 | | Operating Income | $612.9 | $408.2 | $229.6 | | Net Income Attributable to HLI | $437.8 | $312.8 | $183.8 | | Diluted EPS | $6.41 | $4.55 | $2.80 | - Note **19** (Business Combinations) details the acquisition of GCA Corporation for total cash consideration of approximately **$589.6 million**, resulting in the recognition of **$394.2 million** in goodwill[373](index=373&type=chunk)[375](index=375&type=chunk)[379](index=379&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=77&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes or disagreements with its accountants regarding accounting principles or financial disclosure - None[385](index=385&type=chunk) [Controls and Procedures](index=77&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective, excluding the recently acquired GCA Corporation - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, **2022**[386](index=386&type=chunk) - Management's assessment concluded that internal control over financial reporting was effective as of March 31, **2022**[388](index=388&type=chunk) - The assessment of internal controls excluded the recently acquired GCA Corporation, which represented approximately **12%** of total consolidated revenue for FY**2022** and **6%** of total consolidated assets at year-end[390](index=390&type=chunk) [Other Information](index=78&type=section&id=Item%209B.%20Other%20Information) The board appointed a new director and adopted an Executive Officer Transition Program for succession planning and talent retention - On May **26**, **2022**, the board appointed Todd J. Carter as a new Class I Director, increasing the board size to eleven members[395](index=395&type=chunk) - The board adopted an Executive Officer Transition Program on May **26**, **2022**, to facilitate succession planning and retain executive talent post-resignation from their officer roles[397](index=397&type=chunk)[398](index=398&type=chunk) [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=80&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This item is not applicable to the company - Not applicable[406](index=406&type=chunk) Part III Part III incorporates information on directors, executive officers, corporate governance, compensation, and security ownership by reference from the proxy statement [Directors, Executive Officers and Corporate Governance](index=81&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information is incorporated by reference to the Company's definitive proxy statement - Information is incorporated by reference to the Company's definitive proxy statement[409](index=409&type=chunk) [Executive Compensation](index=81&type=section&id=Item%2011.%20Executive%20Compensation) Information is incorporated by reference to the Company's definitive proxy statement - Information is incorporated by reference to the Company's definitive proxy statement[410](index=410&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=81&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information is incorporated by reference to the Company's definitive proxy statement - Information is incorporated by reference to the Company's definitive proxy statement[411](index=411&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=81&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information is incorporated by reference to the Company's definitive proxy statement - Information is incorporated by reference to the Company's definitive proxy statement[412](index=412&type=chunk) [Principal Accounting Fees and Services](index=81&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information is incorporated by reference to the Company's definitive proxy statement - Information is incorporated by reference to the Company's definitive proxy statement[413](index=413&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=82&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K - This section lists all exhibits filed with the Form **10-K**, including the Amended and Restated Certificate of Incorporation, bylaws, credit agreements, and incentive plans[419](index=419&type=chunk) [Form 10-K Summary](index=84&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company did not provide a summary for this item - None[421](index=421&type=chunk)