☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2021
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ______________
Commission File Number: 001-37537
Houlihan Lokey, Inc.
(Exact name of registrant as specified in its charter)
Delaware
95-2770395
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
10250 Constellation Blvd.
5th Floor
Los Angeles, California90067
(Address of principal executive offices) (Zip Code)
(310)788-5200
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.001
HLI
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of February 4, 2022, the registrant had 50,643,089 shares of Class A common stock, $0.001 par value per share, and 16,724,964 shares of Class B common stock, $0.001 par value per share, outstanding.
(In thousands, except share data or as otherwise stated)
Note 1 — Background
Houlihan Lokey, Inc. ("Houlihan Lokey" or "HL, Inc.," also referred to as the "Company," "we," "our," or "us") is a Delaware corporation that controls the following primary subsidiaries:
•Houlihan Lokey Capital, Inc., a California corporation ("HL Capital, Inc."), is a wholly owned direct subsidiary of HL, Inc. HL Capital, Inc. is registered as a broker-dealer under Section 15(b) of the Securities Exchange Act of 1934 and a member of Financial Industry Regulatory Authority, Inc.
•Houlihan Lokey Financial Advisors, Inc., a California corporation ("HL FA, Inc."), is a wholly owned direct subsidiary of HL, Inc.
•HL Finance, LLC ("HL Finance"), a syndicated leveraged finance platform established to arrange senior secured leveraged loans for financial sponsor-backed, privately-held, and public corporate entities. HL Finance acts as an arranger on syndicated loan transactions and has entered into an agreement with an unaffiliated third party investor that may provide commitments with respect to certain syndicated loans arranged by HL Finance.
•Houlihan Lokey EMEA, LLP, a limited liability partnership registered in England ("HL EMEA, LLP"), is an indirect subsidiary of HL, Inc. HL EMEA, LLP is regulated by the Financial Conduct Authority in the United Kingdom ("U.K.").
The Company offers financial services and financial advice to a broad clientele located throughout the United States of America, Europe, the Middle East, and the Asia-Pacific region. The Company has U.S. offices in Los Angeles, San Francisco, Chicago, New York City, Minneapolis, McLean (Virginia), Boston, Dallas, Houston, Miami, and Atlanta as well as foreign offices in London, Paris, Frankfurt, Milan, Madrid, Amsterdam, Dubai, Sydney, Tokyo, Hong Kong, Beijing, Singapore, Birmingham, Lausanne, Manchester, Munich, Stockholm, Tel Aviv, Zurich, Fukuoka, Ho Chi Minh City, Kyoto, Mumbai, Nagoya, New Delhi, Osaka, and Shanghai. Together, the Company and its subsidiaries form an organization that provides financial services to meet a wide variety of client needs. The Company concentrates its efforts toward the earning of professional fees with focused services across the following three business segments:
•Corporate Finance ("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 fees paid upon the successful completion of the transaction or engagement ("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 the fees paid at the time an engagement letter is signed ("Retainer Fees") and in some cases fees paid during the course of the engagement ("Progress Fees") that may have been received.
•Financial Restructuring ("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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
•Financial and Valuation Advisory ("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.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP"), pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"), and include all information and footnotes required for consolidated financial statement presentation. The results of operations for the nine months ended December 31, 2021 are not necessarily indicative of the results of operations to be expected for the fiscal year ending March 31, 2022. The unaudited interim consolidated financial statements and notes to consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2021 (the "2021 Annual Report").
Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. These reclassifications had no impact on net income, shareholders' equity or cash flows as previously reported.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries where it has a controlling financial interest. All intercompany balances and transactions have been eliminated.
The Company carries its investments in unconsolidated entities over which it has significant influence but does not control using the equity method, and includes its ownership share of the income and losses in Other (income)/expense, net in the Consolidated Statements of Comprehensive Income.
The Company’s equity method investments include variable interest entities (VIEs), which are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary, and is generally the entity with (i) the power to direct the activities that most significantly impact the VIE’s economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE.
Our involvement with VIEs arises from our variable interest related to a recently sponsored special purpose acquisition company. The Company's exposure to loss from such VIEs is not material to our operating results and financial position.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Management estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period, and disclosure of contingent assets and liabilities at the reporting date. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Items subject to such estimates and assumptions include, but are not limited to: the allowance for credit losses; the valuation of deferred tax assets, valuation of acquired intangibles and goodwill, accrued expenses, and share based compensation; the allocation of goodwill and other assets across the reporting units (segments); and reserves for income tax uncertainties and other contingencies.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Revenues
Revenues consist of fee revenues from advisory services and reimbursed costs incurred in fulfilling the contracts. Revenues reflect fees generated from our CF, FR, and FVA business segments.
The Company generates revenues from contractual advisory services and reimbursed costs incurred in fulfilling the contracts for such services. Revenues for all three business segments (CF, FR, and FVA) are recognized upon satisfaction of the performance obligation, which 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.
The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised services (i.e., the “transaction price”). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as market volatility or the judgment and actions of third parties. The substantial majority of the Company’s advisory fees (i.e., the success related Completion Fees) are considered variable and constrained as they are contingent upon a future event which includes factors outside of our control (e.g., completion of a transaction or third party emergence from bankruptcy or approval by the court).
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.
Revenues from CF engagements primarily consist of fees generated in connection with advisory services related to corporate finance, mergers and acquisitions, and capital markets offerings. Completion Fees from these engagements are recognized at a point in time when the related transaction has been effectively closed. At that time, the Company has transferred control of the promised service and the customer obtains control. CF contracts generally contain a variety of promised services that may be capable of being distinct, but they are not distinct within the context of the contract as the various services are inputs to the combined output of successfully brokering a specific transaction.
Revenues from FR engagements primarily consist of fees generated in connection with advisory services to debtors, creditors and other parties-in-interest involving recapitalization or 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. Retainer Fees and Progress Fees from restructuring engagements are recognized over timeusing a time elapsed measure of progressas our clients simultaneously receive and consume the benefits of those services as they are provided. Completion Fees from these engagements are considered variable and constrained until the related transaction has been effectively closed as they are contingent upon a future event, which includes factors outside of our control (e.g., completion of a transaction or third party emergence from bankruptcy or approval by the court).
Revenues from FVA engagements primarily consist of fees generated in connection with valuation and diligence services and rendering fairness, solvency and other financial opinions. Revenues are recognized at a point in time as these engagements include a singular objective that does not transfer any notable value to the Company’s clients until the opinions have been rendered and delivered to the client. However, certain engagements consist of advisory services where fees are usually based on the hourly rates of our financial professionals. Such revenues are recognized over time as the benefits of these advisory services are transferred to the Company’s clients throughout the course of the engagement, and, as a practical expedient, the Company has elected to use the ‘as-invoiced’ approach to recognize revenue.
Taxes, including value added taxes, collected from customers and remitted to governmental authorities are accounted for on a net basis, and therefore, are excluded from revenue in the consolidated statements of comprehensive income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Operating Expenses
The majority of the Company’s operating expenses are related to compensation for employees, which includes the amortization of the relevant portion of the Company’s share-based incentive plans (Note 14). Other types of operating expenses include: Travel, meals, and entertainment; Rent; Depreciation and amortization; Information technology and communications; Professional fees; and Other operating expenses.
Translation of Foreign Currency Transactions
The reporting currency for the consolidated financial statements of the Company is the U.S. dollar. The assets and liabilities of subsidiaries whose functional currency is other than the U.S. dollar are included in the consolidation by translating the assets and liabilities at the reporting period-end exchange rates; however, revenues and expenses are translated using the applicable exchange rates determined on a monthly basis throughout the fiscal year. Resulting translation adjustments are reported as a separate component of Accumulated other comprehensive loss, net of applicable taxes.
From time to time, we enter into transactions to hedge our exposure to certain foreign currency fluctuations through the use of derivative instruments or other methods. As of December 31, 2021, we had one foreign currency forward contract outstanding between the pound sterling and the euro with a notional balance of €4.1 million. The change in fair value of this contracts represented a net gain included in Other operating expenses of $11 during the three months ended December 31, 2021. We did not have any outstanding foreign currency forward contracts as of December 31, 2020.
Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels in accordance with Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurement:
•Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
•Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
•Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
For Level 3 investments in which pricing inputs are unobservable and limited market activity exists, management's determination of fair value is based upon the best information available, and may incorporate management's own assumptions or involve a significant degree of judgment.
The following methods and assumptions were used by the Company in estimating fair value disclosures:
•Corporate debt securities: All fair value measurements are obtained from a third-party pricing service and are not adjusted by management.
•U.S. treasury securities: Fair values for U.S. treasury securities are based on quoted prices from recent trading activity of identical or similar securities. All fair value measurements are obtained from a third-party pricing service and are not adjusted by management.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the instrument.
The fair values of the financial instruments represent the amounts that would be received to sell assets or that would be paid to transfer liabilities in an orderly transaction between market participants as of a specified date. Fair value measurements maximize the use of observable inputs; however, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk-adjusted discount rates, as well as available observable and unobservable inputs.
The carrying value of Cash and cash equivalents, Restricted cash, Accounts receivable, Unbilled work in progress, Accounts payable and accrued expenses, and Deferred income approximates fair value due to the short maturity of these instruments.
The carrying value of the loans to employees included in Other assets, Loans payable to former shareholders, and an unsecured loan which is included in Loan payable to non-affiliate approximates fair value due to the variable interest rate borne by those instruments.
Cash and Cash Equivalents, and Restricted Cash
Cash and cash equivalents include cash held at banks and highly liquid investments with original maturities of three months or less. As of December 31, 2021 and March 31, 2021, the Company had cash balances with banks in excess of insured limits. The Company believes it is not exposed to any significant credit risk with respect to Cash and cash equivalents.
The following table provides a reconciliation of Cash and cash equivalents, and Restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows.
December 31, 2021
March 31, 2021
Cash and cash equivalents
$
1,058,603
$
846,851
Restricted cash (1)
373
373
Total cash, cash equivalents, and restricted cash
$
1,058,976
$
847,224
(1)Restricted cash as of December 31, 2021 and March 31, 2021 consisted of a cash secured letter of credit issued for our Frankfurt office.
Investment Securities
Investment securities consist primarily of corporate debt and U.S. treasury securities with original maturities over 90 days. The Company classifies its corporate debt and U.S. treasury securities as trading and measures them at fair value in the Consolidated Balance Sheets. Unrealized holding gains and losses for trading securities are included in Other operating expenses in the accompanying Consolidated Statements of Comprehensive Income.
Allowance for Credit Losses
The allowance for credit losses on accounts receivable and unbilled work in progress reflects management’s best estimate of expected losses using the Company's internal current expected credit losses model. This model analyzes expected losses based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that could potentially affect the collectibility of the reported amounts. This is recorded through provision for bad debts, which is included in Other operating expenses in the accompanying Consolidated Statements of Comprehensive Income. Amounts deemed to be uncollectible are written off against the allowance for credit losses.
Property and Equipment
Property and equipment are stated at cost. Repair and maintenance charges are expensed as incurred and costs of renewals or improvements are capitalized at cost. Depreciation on furniture and office equipment is recognized on a straight-line basis over the estimated useful lives of the respective assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Income Taxes
The Company files consolidated federal income tax returns, as well as consolidated and separate returns in state and local jurisdictions, and the Company reports income tax expense on this basis.
We account for income taxes in accordance with ASC Topic 740, Income Taxes, which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax basis of our assets and liabilities. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The measurement of the deferred items is based on enacted tax laws and applicable tax rates. A valuation allowance related to a deferred tax asset is recorded if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company utilized a comprehensive model to recognize, measure, present, and disclose in its financial statements any uncertain tax positions that have been taken or are expected to be taken on a tax return. The impact of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest expense and penalties related to income taxes are included in the provision for income taxes in the accompanying Consolidated Statements of Comprehensive Income.
The Global Intangible Low-Taxed Income tax (“GILTI inclusion”) can be recognized in the financial statements through an accounting policy election by either recording a period cost (permanent item) or providing deferred income taxes stemming from certain basis differences that are expected to result in GILTI inclusion. The Company has elected to account for the tax impacts of the GILTI inclusion as a period cost.
Leases
We assess whether an arrangement is or contains a lease at the inception of the agreement. Right-of-use ("ROU") assets represent our right to use underlying assets for the lease term and lease liabilities represent our obligation to make lease payments arising from leases. ROU assets and lease liabilities are recognized at the commencement date based on the present value of future lease payments over the lease terms utilizing the discount rate implicit in the leases. If the discount rate implicit in the leases is not readily determinable, the present value of future lease payments is calculated utilizing the Company’s incremental borrowing rate, which approximates the interest that the Company would have to pay on a secured loan. The Company elected to utilize a portfolio approach and applies the rates to a portfolio of leases with similar terms and economic environments. The terms of our leases used to determine the ROU asset and lease liability account for options to extend when it is reasonably certain that we will exercise those options, if applicable. ROU assets and lease liabilities are subject to adjustment in the event of modification to lease terms, changes in probability that an option to extend or terminate a lease would be exercised and other factors. In addition, ROU assets are periodically reviewed for impairment.
Lease expense is recognized on a straight-line basis over the lease terms. Lease expense includes amortization of the ROU assets and accretion of the lease liabilities. Amortization of ROU assets is calculated as the periodic lease cost less accretion of the lease liability. The amortized period for ROU assets is limited to the expected lease term.
The Company has elected a practical expedient to combine the lease and non-lease components into a single lease component. The Company also elected the short-term lease measurement and recognition exemption and does not establish ROU assets or lease liabilities for operating leases with terms of 12 months or less.
Goodwill and Intangible Assets
Goodwill represents an acquired company’s acquisition cost over the fair value of acquired net tangible and intangible assets. Goodwill is the net asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Intangible assets identified and accounted for include tradenames and marks, backlog, developed technologies, and customer relationships. Those intangible assets with finite lives, including backlog and customer relationships, are amortized over their estimated useful lives.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Goodwill is reviewed annually for impairment and more frequently if potential impairment indicators exist. Goodwill is reviewed for impairment in accordance with Accounting Standards Update ("ASU") No. 2011-08, Testing Goodwill for Impairment, which permits management to make a qualitative assessment of whether it is more likely than not that one of its reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If management concludes that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then management would not be required to perform the two-step impairment test for that reporting unit. If the assessment indicates that it is more likely than not that the reporting unit’s fair value is less than its carrying value, management must test further for impairment utilizing a two-step progress. Step 1 compares the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying value of the reporting unit exceeds the estimated fair value, an impairment exists and is measured in Step 2 as the excess of the recorded amount of goodwill over the implied fair value of goodwill resulting from the valuation of the reporting unit. Impairment testing of goodwill requires a significant amount of judgment in assessing qualitative factors and estimating the fair value of the reporting unit, if necessary. The fair value is determined using an estimated market value approach, which considers estimates of future after tax cash flows, including a terminal value based on market earnings multiples, discounted at an appropriate market rate. As of December 31, 2021, management concluded that it was not more likely than not that the Company’s reporting units’ fair value was less than their carrying amount and no further impairment testing had been considered necessary.
Indefinite-lived intangible assets are reviewed annually for impairment in accordance with ASU 2012-02, Testing Indefinite-lived Intangible Assets for Impairment, which provides management the option to perform a qualitative assessment. If it is more likely than not that the asset is impaired, the amount that the carrying value exceeds the fair value is recorded as an impairment expense. As of December 31, 2021, management concluded that it was not more likely than not that the fair values were less than the carrying values.
Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group (inclusive of other long-lived assets) be tested for possible impairment, management first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. As of December 31, 2021, no events or changes in circumstances were identified that indicated that the carrying amount of the finite-lived intangible assets were not recoverable.
Business Combinations
Accounting for business combinations requires management to make significant estimates and assumptions. We allocate the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value as of the acquisition date, with the consideration in excess recorded a goodwill. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, expected asset lives, geographic risk premiums, discount rates, and more. The amounts and useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense.
Recent Accounting Pronouncements
On April 1, 2020, we adopted ASU 2016-13 Financial Instruments—Credit Losses — Measurement of Credit Losses on Financial Instruments, and all related amendments, under a modified retrospective approach. Upon adoption, a cumulative transition adjustment was recorded, which reduced retained earnings by $(924). The tax impact of this adjustment increased retained earnings by $242, resulting in a net decrease to retained earnings of $(682) as of April 1, 2020.
Note 3 — Revenue Recognition
Disaggregation of Revenues
The Company has disclosed disaggregated revenues based on its business segment and geographical area, which provides a reasonable representation of how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. See Note 18 for additional information.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Contract Balances
The timing of revenue recognition may differ from the timing of payment by customers. The Company records a receivable when revenue is recognized prior to payment and there is an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred income (contract liability) until the performance obligations are satisfied.
Costs incurred in fulfilling advisory contracts with point-in-time revenue recognition are recorded as a contract asset when the costs (i) relate directly to a contract, (ii) generate or enhance resources of the Company that will be used in satisfying performance obligations, and (iii) are expected to be recovered. The Company amortizes the contract asset costs related to fulfilling a contract based on recognition of fee revenues for the corresponding contract.
Costs incurred in fulfilling an advisory contract with over-time revenue recognition are expensed as incurred.
The change in the Company’s contract assets and liabilities during the period primarily reflects the timing difference between the Company’s performance and the customer’s payment. The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers:
April 1, 2021
Increase/(Decrease)
December 31, 2021
Receivables (1)
$
103,987
$
88,401
$
192,388
Unbilled work in progress, net of allowance for credit losses
118,115
(31,611)
86,504
Contract Assets (1)
4,422
(898)
3,524
Contract Liabilities (2)
27,868
(549)
27,319
(1)Included within Accounts receivable, net of allowance for credit losses in the December 31, 2021 Consolidated Balance Sheet.
(2)Included within Deferred income in the December 31, 2021 Consolidated Balance Sheet.
During the three and nine months ended December 31, 2021, $3 million and $19 million of Revenues, respectively, were recognized that were included in the Deferred income balance at the beginning of the period.
As a practical expedient, the Company does not disclose information about remaining performance obligations pertaining to (i) contracts that have an original expected duration of one year or less, and/or (ii) contracts where the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that is or forms part of a single performance obligation. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at December 31, 2021.
Note 4 — Related Party Transactions
Other assets in the accompanying Consolidated Balance Sheets includes loans receivable from certain employees of $14,763 and $16,657 as of December 31, 2021 and March 31, 2021, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Note 5 — Fair Value Measurements
The following table presents information about the Company's financial assets, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values:
December 31, 2021
Level I
Level II
Level III
Total
Corporate debt securities
$
—
$
30,121
$
—
$
30,121
U.S. treasury securities
—
4,866
—
4,866
Certificates of Deposit
—
516
—
516
Total asset measured at fair value (1)
$
—
$
35,503
$
—
$
35,503
(1) Included within Investment securities in the Consolidated Balance Sheets.
March 31, 2021
Level I
Level II
Level III
Total
Corporate debt securities
$
—
$
178,659
$
—
$
178,659
U.S. treasury securities
—
24,083
—
24,083
Total asset measured at fair value (1)
$
—
$
202,742
$
—
$
202,742
(1) Included within Investment securities in the Consolidated Balance Sheets.
The Company had no transfers between fair value levels during the nine months ended December 31, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Note 8 — Property and Equipment
Property and equipment, net of accumulated depreciation consists of the following:
December 31, 2021
March 31, 2021
Equipment
$
9,238
8,795
Furniture and fixtures
25,879
21,493
Leasehold improvements
56,505
52,561
Computers and software
14,060
10,772
Other
7,429
7,056
Total cost
113,111
100,677
Less: accumulated depreciation
(61,361)
(54,307)
Total net book value
$
51,750
$
46,370
Additions to property and equipment during the nine months ended December 31, 2021 were primarily related to leasehold improvement costs incurred.
Depreciation expense of $4,621 and $2,756 was recognized for the three months ended December 31, 2021 and 2020, respectively, and $10,460 and $8,212 for the nine months ended December 31, 2021 and 2020, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Note 9 — Goodwill and Other Intangible Assets
The following table provides a reconciliation of Goodwill and other intangibles, net reported on the Consolidated Balance Sheets.
Useful Lives
December 31, 2021
March 31, 2021
Goodwill
Indefinite
$
1,082,934
$
671,065
Tradename-Houlihan Lokey
Indefinite
192,210
192,210
Other intangible assets
Varies
93,264
6,809
Total cost
1,368,408
870,084
Less: accumulated amortization
(21,981)
(3,863)
Goodwill and other intangibles, net
$
1,346,427
$
866,221
Goodwill attributable to the Company’s business segments is as follows:
April 1, 2021
Change (1)
December 31, 2021
Corporate Finance
$
416,535
$
411,869
$
828,404
Financial Restructuring
162,815
—
162,815
Financial and Valuation Advisory
91,715
—
91,715
Goodwill
$
671,065
$
411,869
$
1,082,934
(1)Changes pertain primarily to the acquisition of GCA Corporation. See Note 19 for additional information.
Amortization expense of approximately $15,454 and $1,193 was recognized for the three months ended December 31, 2021 and 2020, respectively, and $18,130 and $3,079 for the nine months ended December 31, 2021 and 2020, respectively.
The estimated future amortization for finite-lived intangible assets for each of the next five years and thereafter are as follows:
Year Ended March 31,
Remainder of 2022
$
15,796
2023
45,120
2024
8,091
2025
1,877
2026 and thereafter
97
Note 10 — Loans Payable
On August 23, 2019, the Company entered into a syndicated revolving line of credit with Bank of America, N.A. and certain other financial institutions party thereto (the “2019 Line of Credit”), which allows for borrowings of up to $100.0 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 $200.0 million) and matures on August 23, 2022 (or if such date is not a business day, the immediately preceding business day). The agreement governing the 2019 Line of Credit 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. As of December 31, 2021 and March 31, 2021, no principal was outstanding under the 2019 Line of Credit.
Prior to our initial public offering in August 2015 of 12,075,000 shares of Houlihan Lokey, Inc. Class A common stock (the "IPO"), Fram Holdings, Inc., a Delaware corporation and, prior to our IPO, our indirect parent company, maintained certain loans payable to former shareholders consisting of unsecured notes payable which were transferred to the Company in conjunction with the IPO. The average interest rate on the individual notes was 1.38% and 1.46% as of December 31, 2021 and 2020, respectively, and the maturity dates range from 2020 to 2027. The Company incurred interest expense on these notes of $2 and $5 for the three months ended December 31, 2021 and 2020, respectively, and $8 and $18 for the nine months ended December 31, 2021 and 2020, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
In April 2018, the Company acquired Quayle Munro Limited. Total consideration included non-interest bearing unsecured convertible loans totaling GBP 10.5 million payable on May 31, 2022, which is included in Other liabilities in the accompanying Consolidated Balance Sheets. Under certain circumstances, the notes may be exchanged for Company Class B common stock over a three-year period in equal annual installments starting on May 31, 2020. The Company incurred imputed interest expense on these notes of $34 and $68 for the three months ended December 31, 2021 and 2020, respectively, and $128 and $218 for the nine months ended December 31, 2021 and 2020, respectively.
In May 2018, the Company acquired BearTooth Advisors. Total consideration included an unsecured note of $2.8 million bearing interest at an annual rate of 2.88% and payable on May 21, 2048. This note was subsequently assigned by the seller to the former BearTooth principals (who became employees of the Company), and, under certain circumstances, is convertible into Company Class B common stock after the fifth anniversary of the closing of the transaction. The Company incurred interest expense on this note of $26 for each of the three months ended December 31, 2021 and 2020 and $79 for each of the nine months ended December 31, 2021 and 2020.
In December 2019, the Company acquired Freeman & Co. Total consideration included an unsecured note of $4.0 million bearing interest at an annual rate of 2.75% and payable on December 16, 2049. The note issued by the Company to the seller was distributed to the former principals of Freeman & Co. (who became employees of the Company). Under certain circumstances, the note may be exchanged by each principal for Company stock over a four-year period in equal annual installments starting in December 2020. The Company incurred interest expense on this note of $20 and $28 for the three months ended December 31, 2021 and 2020, respectively, and $59 and $83 for the nine months ended December 31, 2021, and 2020, respectively.
In August 2020, the Company acquired MVP Capital, LLC (“MVP”). Total consideration included an unsecured non-interest bearing note of $4.5 million payable August 14, 2050. The note was issued by the Company to the former principals and sellers of MVP (who became employees of the Company). Under certain circumstances, the note may be exchanged by each seller for a combination of cash and Company stock over a three-year period in equal annual installments starting in August 2021. Contingent consideration was also issued in connection with the acquisition of MVP, which had a carrying value of $12.7 million as of December 31, 2021 and March 31, 2021, which is included in Other liabilities in our Consolidated Balance Sheets.
In July 2021, the Company acquired Baylor Klein, Ltd (“BK”). Contingent consideration was issued in connection with the acquisition of BK, which had a carrying value of $18.7 million as of December 31, 2021, which is included in Other Liabilities in our Consolidated Balance Sheet.
The scheduled aggregate repayments of our Loans payable to former shareholders, Other liabilities, and the Loan payable to non-affiliates in the accompanying Consolidated Balance Sheet on a fiscal year-end basis as of December 31, 2021 are as follows:
Remaining 2022 (1)
$
71,466
2023
28,020
2024
7,260
2025
15,863
2026
713
2027 and thereafter
10,227
Total
$
133,549
(1) Includes $57.7 million for the acquisition of GCA Corporation shares not purchased through the tender offer, included within Other liabilities. See Note 19 and Note 20 for additional information.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Note 11 — Accumulated Other Comprehensive (Loss)
Accumulated other comprehensive (loss) is comprised of Foreign currency translation adjustments of $(1,824) and $14,037 for the three months ended December 31, 2021 and 2020, respectively, and $(6,236) and $22,407 for the nine months ended December 31, 2021, and 2020, respectively. We do not expect the change in foreign currency translation to have a material impact on our operating results and financial position.
Accumulated other comprehensive (loss) as of December 31, 2021 was comprised of the following:
Balance, April 1, 2021
$
(20,176)
Foreign currency translation adjustment
(6,236)
Balance, December 31, 2021
$
(26,412)
Note 12 — Income Taxes
The Company’s provision for income taxes was $74,699 and $40,088 for the three months ended December 31, 2021 and 2020, respectively, and $140,099 and $56,020 for the nine months ended December 31, 2021, and 2020, respectively. These represent effective tax rates of 30.0% and 25.3% for the three months ended December 31, 2021 and 2020, respectively, and 27.3% and 20.8% for the nine months ended December 31, 2021, and 2020, respectively.
Note 13 — Earnings Per Share
The calculations of basic and diluted earnings per share attributable to holders of shares of common stock are presented below.
Three Months Ended December 31,
Nine Months Ended December 31,
2021
2020
2021
2020
Numerator:
Net income attributable Houlihan Lokey, Inc.
$
173,735
$
118,515
$
372,578
$
213,405
Denominator:
Weighted average shares of common stock outstanding — basic
64,914,373
66,547,587
65,259,927
65,680,516
Weighted average number of incremental shares pertaining to unvested restricted stock and issuable in respect of unvested restricted stock units, as calculated using the treasury stock method
3,365,566
2,808,760
3,260,922
2,915,987
Weighted average shares of common stock outstanding — diluted
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Note 14 — Employee Benefit Plans
Defined Contribution Plans
The Company sponsors a 401(k) defined contribution savings plan for its domestic employees and defined contribution retirement plans for its international employees. The Company contributed approximately $2,556 and $2,327 to these plans during the three months ended December 31, 2021 and 2020, respectively, and $5,304 and $4,368 during the nine months ended December 31, 2021 and 2020, respectively.
Share-Based Incentive Plans
Following the IPO, additional awards of restricted shares and restricted stock units have been and will be made under the Amended and Restated Houlihan Lokey, Inc. 2016 Incentive Award Plan (the "2016 Incentive Plan"), which became effective in August 2015 and was amended in October 2017. Under the 2016 Incentive Plan, it is anticipated that the Company will continue to grant cash and equity-based incentive awards to eligible service providers in order to attract, motivate and retain the talent necessary to operate the Company's business. Equity-based incentive awards issued under the 2016 Incentive Plan generally vest over a four-year period. Restricted shares of Class A common stock were granted under the 2016 Incentive Plan to (i) four independent directors in the first quarter of fiscal 2021 at $60.60 per share, (ii) two independent directors in the third quarter of fiscal 2021 at $63.01 per share, and (iii) six independent directors in the first quarter of fiscal 2022 at $73.19 per share.
No excess tax benefit was recognized during the three months ended December 31, 2021 or 2020. An excess tax benefit of $6,922 and $13,408 was recognized during the nine months ended December 31, 2021 and 2020, respectively, as a component of the provision for income taxes and an operating activity on the Consolidated Statements of Cash Flows. The excess tax benefits recognized during the nine months ended December 31, 2021 and 2020 were related to shares vested in April and May 2021 and 2020, respectively.
The share awards are classified as equity awards at the time of grant unless the number of shares granted is unknown. Awards that are settleable in shares based upon a future determinable stock price are classified as liabilities until the price is established and the resulting number of shares is known, at which time they are re-classified from liabilities to equity awards. Activity in equity classified share awards which relate to the Company's 2016 Incentive Plan during the nine months ended December 31, 2021 and 2020 is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Activity in liability classified share awards during the nine months ended December 31, 2021 and 2020 is as follows:
Awards Settleable in Shares
Fair Value
Balance, April 1, 2021
$
16,950
Offer to grant
2,076
Share price determined-converted to cash payments
(2,676)
Share price determined-transferred to equity grants
(4,269)
Forfeited
—
Balance, December 31, 2021
$
12,081
Balance, April 1, 2020
$
21,676
Offer to grant
6,410
Share price determined-converted to cash payments
(52)
Share price determined-transferred to equity grants
(6,457)
Forfeited
(274)
Balance, December 31, 2020
$
21,303
Compensation expenses for the Company associated with both equity and liability classified awards totaled $19,152 and $12,642 for the three months ended December 31, 2021 and 2020, respectively, and $72,398 and $46,779 for the nine months ended December 31, 2021 and 2020, respectively.
As of December 31, 2021 and 2020, there was $159,084 and $143,660, respectively, of total unrecognized compensation cost related to unvested share awards granted under the 2016 Incentive Plan. These costs are recognized over a weighted average period of 1.5 years and 1.4 years, as of December 31, 2021 and 2020, respectively.
On October 19, 2017, our board of directors approved an amendment (the “Amendment”) to the 2016 Incentive Plan reducing the number of shares of common stock available for issuance under the 2016 Incentive Plan by approximately 12.2 million shares. Under the Amendment, the aggregate number of shares of common stock that are available for issuance under awards granted pursuant to the 2016 Incentive Plan is equal to the sum of (i) 8.0 million and (ii) any shares of our Class B common stock that are subject to awards under our 2006 Incentive Plan that terminate, expire or lapse for any reason after October 19, 2017.
The number of shares available for issuance increases annually beginning on April 1, 2018 and ending on April 1, 2025, by an amount equal to the lowest of:
•6,540,659 shares of our Class A common stock and Class B common stock;
•Six percent of the shares of Class A common stock and Class B common stock outstanding on the final day of the immediately preceding fiscal year; and
•such smaller number of shares as determined by our board of directors.
Note 15 — Stockholders' Equity
There are two classes of authorized HL, Inc. common stock: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share, and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock may be converted into one share of Class A common stock at the option of its holder and will be automatically converted into one share of Class A common stock upon transfer thereof, subject to certain exceptions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Class A Common Stock
During the three months ended December 31, 2021 and 2020, 0 and 3,174 shares were issued to non-employee directors, respectively, and 642,693 and 790,025 shares were converted from Class B to Class A, respectively. During the nine months ended December 31, 2021 and 2020, 6,512 and 8,751 shares were issued to non-employee directors, respectively, and 1,745,778 and 3,121,294 shares were converted from Class B to Class A, respectively.
As of December 31, 2021, there were 50,870,525 Class A shares held by the public and 54,273 Class A shares held by non-employee directors. As of December 31, 2020, there were 51,578,208 Class A shares held by the public and 45,475 Class A shares held by non-employee directors.
Class B Common Stock
As of December 31, 2021 and 2020, there were 16,727,176 and 17,472,592, respectively, Class B shares held by the HL Voting Trust.
Dividends
Previously declared dividends related to unvested shares of $7,894 and $5,846 were unpaid as of December 31, 2021 and 2020, respectively.
Stock Subscriptions Receivable
Employees of the Company periodically issued notes receivable to the Company documenting loans made by the Company to such employees for the purchase of restricted shares of the Company.
Share Repurchases
In July 2021, the board of directors authorized an increase to the existing January 2021 share repurchase program to a new aggregate amount of up to $250 million of the Company's Class A common stock and Class B common stock.
During the three months ended December 31, 2021 and 2020, the Company repurchased 0 and 295 shares, respectively, of Class B common stock, to satisfy $0 and $19 of required withholding taxes in connection with the vesting of restricted awards, respectively. During the three months ended December 31, 2021, the Company repurchased an additional 644,900 shares of its outstanding Class A common stock at a weighted average price of $108.90 per share, excluding commissions, for an aggregate purchase price of $70,232. During the three months ended December 31, 2020, the Company repurchased an additional 283,035 shares of its outstanding Class A common stock at a weighted average price of $65.69 per share, excluding commissions, for an aggregate purchase price of $18,593.
During the nine months ended December 31, 2021 and 2020, the Company repurchased 455,402 and 286,730 shares, respectively, of Class B common stock, to satisfy $33,700 and $17,810 of required withholding taxes in connection with the vesting of restricted awards, respectively. During the nine months ended December 31, 2021 the Company repurchased an additional 2,072,934 shares of its outstanding Class A common stock at a weighted average price of $88.35 per share, excluding commissions, for an aggregate purchase price of $183,136. During the nine months ended December 31, 2020, the Company repurchased an additional 684,995 shares of its outstanding Class A common stock at a weighted average price of $65.69 per share, excluding commissions, for an aggregate purchase price of $18,593.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Note 16 — Leases
Lessee Arrangements
Operating Leases
We lease real estate and equipment used in operations from third parties. As of December 31, 2021, the remaining term of our operating leases ranged from 1 to 15 years with various automatic extensions.
The following table outlines the maturity of our existing operating lease liabilities on a fiscal year-end basis as of December 31, 2021.
Maturity of Operating Leases
Operating Leases
Remaining 2022
$
8,997
2023
32,830
2024
26,598
2025
26,486
2026
23,704
Thereafter
95,638
Total
214,253
Less: present value discount
(26,989)
Operating lease liabilities
$
187,264
As of December 31, 2021, the Company has entered into operating leases for additional office space that have not yet commenced for approximately $131 million. These operating leases will commence between fiscal year 2022 and fiscal year 2024 with lease terms of 3 years to 10 years.
Lease costs
Three Months Ended December 31,
Nine Months Ended December 31,
2021
2020
2021
2020
Operating lease expense
$
14,705
$
7,169
$
28,379
$
21,967
Variable lease expense (1)
(398)
2,913
5,131
8,040
Short-term lease expense
44
57
134
157
Less: Sublease income
—
(53)
(18)
(154)
Total lease costs
$
14,351
$
10,086
$
33,626
$
30,010
(1)Primarily consists of payments for property taxes, common area maintenance and usage based operating costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Supplemental cash flow information related to leases:
Nine Months Ended December 31,
2021
2020
Operating cash flows:
Cash paid for amounts included in the measurement of Operating lease liabilities
$
24,275
$
23,658
Non-cash activity:
Operating lease right-of-use assets obtained in exchange of Operating lease liabilities
$
7,736
$
30,246
Change in Operating lease right-of-use assets due to remeasurement
(7,760)
(1,208)
Note 17 — Commitments and Contingencies
The Company has been named in various legal actions arising in the normal course of business. In the opinion of the Company, in consultation with legal counsel, the final resolutions of these matters are not expected to have a material adverse effect on the Company’s financial condition, operations and cash flows.
The Company also provides routine indemnifications relating to certain real estate (office) lease agreements under which it may be required to indemnify property owners for claims and other liabilities arising from the Company’s use of the applicable premises. In addition, the Company guarantees the performance of its subsidiaries under certain office lease agreements. The terms of these obligations vary, and because a maximum obligation is not explicitly stated, the Company has determined that it is not possible to make an estimate of the maximum amount that it could be obligated to pay under such contracts. Based on historical experience and evaluation of specific indemnities, management believes that judgments, if any, against the Company related to such matters are not likely to have a material effect on the consolidated financial statements. Accordingly, the Company has not recorded any liability for these obligations as of December 31, 2021 or March 31, 2021.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Note 18 — Segment and Geographical Information
The Company’s reportable segments are described in Note 1 and each are individually managed and provide separate services that require specialized expertise for the provision of those services. Revenues by segment represent fees earned on the various services offered within each segment. Segment profit consists of segment revenues, less (1) direct expenses including compensation, travel, meals and entertainment, professional fees, and bad debt and (2) expenses allocated by headcount such as communications, rent, depreciation and amortization, and office expense. The corporate expense category includes costs not allocated to individual segments, including charges related to incentive compensation and share-based payments to corporate employees, as well as expenses of senior management and corporate departmental functions managed on a worldwide basis, including office of the executives, accounting, human capital, marketing, information technology, and compliance and legal. The following tables present information about revenues, profit and assets by segment and geography.
Three Months Ended December 31,
Nine Months Ended December 31,
2021
2020
2021
2020
Revenues by segment
Corporate Finance
$
715,663
$
306,171
$
1,314,064
$
502,191
Financial Restructuring
89,273
177,995
271,232
392,006
Financial and Valuation Advisory
83,862
53,710
213,496
130,551
Revenues
$
888,798
$
537,876
$
1,798,792
$
1,024,748
Segment profit (1)
Corporate Finance
$
277,546
$
96,431
$
513,880
$
143,167
Financial Restructuring
15,310
78,855
61,485
169,832
Financial and Valuation Advisory
28,127
13,901
68,703
33,213
Total segment profit
320,983
189,187
644,068
346,212
Corporate expenses (2)
71,723
30,771
129,813
78,331
Other (income)/expense, net
253
(187)
1,005
(1,544)
Income before provision for income taxes
$
249,007
$
158,603
$
513,250
$
269,425
(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.
December 31, 2021
March 31, 2021
Assets by segment
Corporate Finance
$
996,830
$
575,241
Financial Restructuring
188,796
181,239
Financial and Valuation Advisory
152,888
136,761
Total segment assets
1,338,514
893,241
Corporate assets
1,707,248
1,532,826
Total assets
$
3,045,762
$
2,426,067
Three Months Ended December 31,
Nine Months Ended December 31,
2021
2020
2021
2020
Income before provision for income taxes by geography
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Three Months Ended December 31,
Nine Months Ended December 31,
2021
2020
2021
2020
Revenues by geography
United States
$
646,301
$
414,891
$
1,390,754
$
815,904
International
242,497
122,985
408,038
208,844
Revenues
$
888,798
$
537,876
$
1,798,792
$
1,024,748
December 31, 2021
March 31, 2021
Assets by geography
United States
2,034,207
1,837,332
International
1,011,555
588,735
Total assets
$
3,045,762
$
2,426,067
Note 19 — Business Combinations
On October 4, 2021 ("the Acquisition Date"), the Company completed a tender offer process resulting in the Company's acquisition of approximately 90% of GCA Corporation's (“GCA”) common stock for cash consideration of $531.9 million. The Company then acquired the GCA shares not purchased through the tender offer by way of a second-step transaction, which occurred on November 5, 2021 for $57.7 million (included within Other liabilities in the December 31, 2021 Consolidated Balance Sheet). The consideration for these shares was paid on January 20, 2022, subsequent to the period ended December 31, 2021. This all-cash transaction was valued at approximately $589.6 million, based on the consideration of ¥1,398 per share of GCA. Total GCA related transaction costs included in non-compensation expenses were $(5,436) and $(6,513) for the three and nine months ended December 31, 2021, respectively.
GCA is a global technology-focused investment bank providing M&A advisory and capital markets advisory services in Europe, Japan/Asia, and the United States. The addition of GCA significantly increases the Company's position in the technology sector, which is critical to meeting the needs of our clients as technology increasingly touches every business sector. GCA also increases the depth and breadth of our UK and European operations and this significant increase in scale has a direct impact on our ability to better serve our clients, both corporate and private equity, and meaningfully expands our geographic footprint in the UK and Europe. GCA also creates a significant platform for us to build from in the Asia Pacific region, meaningfully increasing our presence there and allowing us to begin to reach for scale in this rapidly growing part of the world.
Acquisition Consideration
GCA common shares, including employee share-based payment awards outstanding, as of the Acquisition Date
49,382,808
Cash consideration per share
¥
1,398
Cash consideration for tendered common shares
$
531,883
Cash consideration for remaining shares purchased
57,686
Total cash consideration
$
589,569
The Company financed the acquisition with cash on hand.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Purchase Price Allocation
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as part of the GCA acquisition. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The intangible assets subject to amortization will be amortized on a straight-line basis over their estimated useful lives as of the acquisition date.
Fair Value
Weighted-Average Amortization Period
Assets acquired:
Cash and cash equivalents
$
226,550
Investment securities
515
Accounts receivable
53,431
Unbilled work in progress
4,672
Property and equipment
8,727
Operating lease right-of-use assets
27,383
Receivable from affiliates
1,288
Other assets
20,503
Intangible assets other than goodwill
Backlog
42,000
1.2 years
Trade name
17,100
2.0 years
Customer relationships
15,200
1.0 year
Total intangible assets acquired
74,300
1.3 years
Total assets
417,369
Liabilities assumed:
Accrued salaries and bonuses
152,409
Accounts payable and accrued expenses
22,627
Payable to affiliates
15
Deferred income
78
Income taxes payable
5,857
Deferred income taxes
3,199
Operating lease liabilities
27,527
Other liabilities
19,897
Total liabilities
231,609
Net identifiable assets acquired
185,760
Goodwill
403,809
Total GCA equity value
$
589,569
We applied the acquisition method of accounting in accordance with Financial Accounting Standards Board ("FASB") ASC Topic 805, Business Combinations ("ASC 805"). Goodwill of $403.8 million was recognized as a result of the transaction and relates to (i) the value of assets that do not meet the definition of an identifiable intangible asset under ASC 805, but that do contribute to the value of the acquired business, including the assembled workforce and relationships with customers that are not tracked; (ii) the assemblage value associated with acquiring an on-going business whose value is worth more than simply the sum of its parts; and (iii) the expected synergies associated with combining global operations. None of the goodwill recognized is expected to be deductible for income tax purposes. The goodwill recognized is attributable to our CF business segment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
The results of operations for GCA have been included in the Company's Consolidated Financial Statements since the acquisition date. GCA contributed $210.5 million and $12.1 million, to Revenue and Net income, respectively, for the period from the Acquisition Date to December 31, 2021.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information is presented to illustrate the estimated effects of the acquisition of GCA on the Company as if it had occurred on April 1, 2020, the first day of the Company's fiscal year-end 2021, and is not necessarily indicative of either future results of operations or results that may have been achieved had the acquisition been consummated as of this date. The below unaudited pro forma results include certain pro forma adjustments to net earnings that were directly attributable to the acquisition, as if the acquisition had occurred on April 1, 2020, including the following:
•Elimination of transaction costs incurred by the Company directly attributable to the GCA acquisition of $(5,436) and $(6,513) for the three and nine months ended December 31, 2021, respectively.
•An increase/(decrease) of amortization expense of $(12,117) and $14,688 for the three months ended December 31, 2021 and 2020, respectively, and $(437) and $43,589 for the nine months ended December 31, 2021 and 2020, respectively, directly attributable to the GCA acquisition. This amortization was recognized as a result of the allocation of purchase consideration to the definite-lived intangible assets subject to amortization, noted above.
•Resulting tax impact of above adjustments of $5,266 and $(3,716), for the three months ended December 31, 2021 and 2020, respectively, and $1,897 and $(9,067) for the nine months ended December 31, 2020 and 2021, respectively.
(Unaudited)
Three Months Ended December 31,
Nine Months Ended December 31,
2021
2020
2021
2020
Revenue
$
888,798
$
625,791
$
2,047,030
$
1,198,360
Net income
186,595
110,913
397,285
187,270
Note 20 — Subsequent Events
On January 20, 2022, the Company completed its final payment of $57.7 million for the remaining shares of GCA. See Note 19 for additional information.
On January 26, 2022, the Company's board of directors declared a quarterly cash dividend of $0.43 per share of Class A and Class B common stock, payable on March 15, 2022, to shareholders of record on March 2, 2022.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 ended March 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.
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. Annual bonuses paid to employees of GCA Corporation (“GCA”) were historically paid in the first calendar quarter of each year and we will maintain that schedule for calendar year 2022 and pay all GCA bonuses in the first calendar quarter of 2022 with respect to calendar year 2021 performance. Bonuses paid to GCA employees in 2022 will include both cash and Houlihan Lokey Class B common stock awards subject to vesting similar to what is described above. After the first calendar quarter 2022 payment, GCA will be on the same bonus schedule as Houlihan Lokey referred to above. We refer to the ratio of our employee compensation and benefits expenses to our revenues 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/(Expense), Net
Other (income)/expense, 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 2019 Line of Credit (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 nine months ended December 31, 2021 and 2020. As described in Note 19 of Part I, Item 1 of this Form 10-Q, on October 4, 2021 ("the Acquisition Date"), the Company completed step one of a two step the acquisition of GCA. Our results of consolidated operations include those of GCA from the Acquisition Date through December 31, 2021. 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.
Net income attributable to noncontrolling interest
$
(573)
$
—
100
%
$
(573)
$
—
100
%
Net income attributable to Houlihan Lokey, Inc.
$
173,735
$
118,515
47
%
$
372,578
$
213,405
75
%
Three Months Ended December 31, 2021 versus December 31, 2020
Revenues were $888.8 million for the three months ended December 31, 2021, compared with $537.9 million for the three months ended December 31, 2020, representing an increase of 65%. Revenues increased primarily as a result of (i) the completion of our acquisition of GCA during the third quarter ended December 31, 2021, resulting in the consolidation of their operating results and (ii) a significant increase in the number of closed transactions and the average transaction fee on closed transactions for our CF business segment. For the quarter, CF revenues increased 134%, FR revenues decreased (50)%, and FVA revenues increased 56% when compared with the three months ended December 31, 2020. All revenues associated with GCA for the third quarter ended December 31, 2021 are included in our CF business segment.
Operating expenses were $639.5 million for the three months ended December 31, 2021, compared with $379.5 million for the three months ended December 31, 2020, representing an increase of 69%. Employee compensation and benefits expense, as a component of operating expenses, was $549.4 million for the three months ended December 31, 2021, compared with $339.7 million for the three months ended December 31, 2020, representing an increase of 62%. 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 61.8% for the three months ended December 31, 2021, compared with 63.2% for the three months ended December 31, 2020. Non-compensation expense, as a component of operating expenses, was $90.2 million for the three months ended December 31, 2021, compared with $39.7 million for the three months ended December 31, 2020, representing an increase of 127%. The increase in non-compensation expense was primarily a result of non-compensation expenses attributable to GCA, amortization of intangible assets recognized in connection with the acquisition of GCA, integration and acquisition related costs associated with our acquisition of GCA and an increase in travel, meals, and entertainment expenses and other operating expenses.
Other (income)/expense, net decreased (235)% to $0.3 million for the three months ended December 31, 2021, compared with $(0.2) million for the three months ended December 31, 2020, primarily due to a loss recognized on an equity method investment.
The provision for income taxes for the three months ended December 31, 2021 was $74.7 million, which reflected an effective tax rate of 30.0%. The provision for income taxes for the three months ended December 31, 2020 was $40.1 million which reflected an effective tax rate of 25.3%. The increase in the Company’s tax rate during the third quarter ended December 31, 2021 relative to the same period in 2020 was primarily a result of increased state taxes, increased non-deductible expenses and increased foreign taxes.
Nine Months Ended December 31,2021 versus December 31, 2020
Revenues were $1,798.8 million for the nine months ended December 31, 2021, compared with $1,024.7 million for the nine months ended December 31, 2020, representing an increase of 76%. Revenues increased primarily as a result of (i) the completion of our acquisition of GCA during the third quarter ended December 31, 2021, resulting in the consolidation of their operating results and (ii) a significant increase in the number of closed transactions and the average transaction fee on closed transactions for our CF business segment. For the nine months ended December 31, 2021, CF revenues increased 162%, FR revenues decreased (31)%, and FVA revenues increased 64% when compared with the nine months ended December 31, 2020.
Operating expenses were $1,284.5 million for the nine months ended December 31, 2021, compared with $756.9 million for the nine months ended December 31, 2020, an increase of 70%. Employee compensation and benefits expense, as a component of operating expenses, was $1,115.1 million for the nine months ended December 31, 2021, compared with $654.1 million for the nine months ended December 31, 2020, an increase of 70%. The increase in employee compensation and benefits expense was primarily a result of higher revenues when compared with the same period last year. The Compensation Ratio was 62.0% for the nine months ended December 31, 2021, compared with 63.8% for the nine months ended December 31, 2020. Non-compensation expense, as a component of operating expenses, was $169.5 million for the nine months ended December 31, 2021, compared with $102.8 million for the nine months ended December 31, 2020, an increase of 65%. The increase in non-compensation expense was primarily a result of non-compensation expenses attributable to GCA, amortization of intangible assets recognized in connection with the acquisition of GCA, integration and acquisition related costs associated with our acquisition of GCA and an increase in travel, meals, and entertainment expenses and other operating expenses.
Other (income)/expense, net decreased (165)% to $1.0 million for the nine months ended December 31, 2021, compared with $(1.5) million for the nine months ended December 31, 2020, primarily due to a loss recognized on an equity method investment.
The provision for income taxes for the nine months ended December 31, 2021 was $140.1 million, which reflected an effective tax rate of 27.3%. The provision for income taxes for the nine months ended December 31, 2020 was $56.0 million, which reflected an effective tax rate of 20.8%. The increase in the Company's tax rate during the nine months ended December 31, 2021 relative to the same period in 2020 was primarily a result of increased state taxes, increased foreign taxes and decreased stock compensation deductions.
The following table presents revenues, expenses and contributions from our continuing operations by business segment. The revenues by segment represents each segment’s revenues, and the profit by segment represents profit for each segment before corporate expenses, other (income)/expense, net, and income taxes.
Three Months Ended December 31,
Nine Months Ended December 31,
($ in thousands)
2021
2020
Change
2021
2020
Change
Revenues by Segment
Corporate Finance
$
715,663
$
306,171
134
%
$
1,314,064
$
502,191
162
%
Financial Restructuring
89,273
177,995
(50)
%
271,232
392,006
(31)
%
Financial and Valuation Advisory
83,862
53,710
56
%
213,496
130,551
64
%
Revenues
$
888,798
$
537,876
65
%
$
1,798,792
$
1,024,748
76
%
Segment Profit (1)
Corporate Finance
$
277,546
$
96,431
188
%
$
513,880
$
143,167
259
%
Financial Restructuring
15,310
78,855
(81)
%
61,485
169,832
(64)
%
Financial and Valuation Advisory
28,127
13,901
102
%
68,703
33,213
107
%
Total Segment Profit
320,983
189,187
70
%
644,068
346,212
86
%
Corporate Expenses (2)
71,723
30,771
133
%
129,813
78,331
66
%
Other (income)/expense, net
253
(187)
(235)
%
1,005
(1,544)
(165)
%
Income before provision for income taxes
$
249,007
$
158,603
57
%
$
513,250
$
269,425
90
%
Segment Metrics
Number of Managing Directors
Corporate Finance
198
123
61
%
198
123
61
%
Financial Restructuring
52
47
11
%
52
47
11
%
Financial and Valuation Advisory
34
31
10
%
34
31
10
%
Number of Closed Transactions/Fee Events (3)
Corporate Finance
238
121
97
%
456
209
118
%
Financial Restructuring
21
44
(52)
%
65
103
(37)
%
Financial and Valuation Advisory
901
639
41
%
1,673
1,134
48
%
(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 December 31, 2021 versus December 31, 2020
Revenues for CF were $715.7 million for the three months ended December 31, 2021, compared with $306.2 million for the three months ended December 31, 2020, representing an increase of 134%. Revenues increased primarily due to (i) the completion of our acquisition of GCA during the third quarter ended December 31, 2021, resulting in the consolidation of their revenues into our CF business segment and (ii) a significant increase in the number of closed transactions and the average transaction fee on closed transactions.
Segment profit for CF was $277.5 million for the three months ended December 31, 2021, compared with $96.4 million for the three months ended December 31, 2020, representing an increase of 188%. Profitability increased primarily as a result of an increase in revenues and a decrease in compensation expenses as a percentage of revenues when compared to the same quarter last year.
Nine Months Ended December 31,2021 versus December 31, 2020
Revenues for CF were $1,314.1 million for the nine months ended December 31, 2021, compared with $502.2 million for the nine months ended December 31, 2020, representing an increase of 162%. Revenues increased primarily due to a significant increase in the number of closed transactions and an increase in the average transaction fee on closed transactions when compared to the same period last year. Revenues also increased for the nine months ended December 31, 2021 due to the completion of our acquisition of GCA during the third quarter ended December 31, 2021, resulting in the consolidation of their revenues into our CF business segment.
Segment profit for CF was $513.9 million for the nine months ended December 31, 2021, compared with $143.2 million for the nine months ended December 31, 2020, representing an increase of 259%. Profitability increased primarily as a result of an increase in revenues and a decrease in compensation and non-compensation expenses as a percentage of revenues when compared to the same period last year.
Financial Restructuring
Three Months Ended December 31, 2021 versus December 31, 2020
Revenues for FR were $89.3 million for the three months ended December 31, 2021, compared with $178.0 million for the three months ended December 31, 2020, representing a decrease of (50)%. Revenues decreased primarily due to a decrease in the number of closed transactions when compared to the same quarter last year.
Segment profit for FR was $15.3 million for the three months ended December 31, 2021, compared with $78.9 million for the three months ended December 31, 2020, a decrease of (81)%. Profitability decreased primarily as a result of lower revenues and an increase in compensation expenses as a percentage of revenues when compared to the same quarter last year.
Nine Months Ended December 31,2021 versus December 31, 2020
Revenues for FR were $271.2 million for the nine months ended December 31, 2021, compared with $392.0 million for the nine months ended December 31, 2020, representing a decrease of (31)%. The decrease in revenues was primarily a result of a decrease in the number of closed transactions when compared to the same period last year.
Segment profit for FR was $61.5 million for the nine months ended December 31, 2021, compared with $169.8 million for the nine months ended December 31, 2020, a decrease of (64)%. Profitability decreased primarily as a result of lower revenues and an increase in compensation expenses as a percentage of revenues when compared to the same period last year.
Financial and Valuation Advisory
Three Months Ended December 31, 2021 versus December 31, 2020
Revenues for FVA were $83.9 million for the three months ended December 31, 2021, compared with $53.7 million for the three months ended December 31, 2020, representing an increase of 56%. Revenues increased primarily as a result of an increase in the number of Fee Events when compared to the same quarter last year.
Segment profit for FVA was $28.1 million for the three months ended December 31, 2021, compared with $13.9 million for the three months ended December 31, 2020, an increase of 102%. Profitability increased primarily as a result of an increase in revenues when compared to the same quarter last year.
Nine Months Ended December 31,2021 versus December 31, 2020
Revenues for FVA were $213.5 million for the nine months ended December 31, 2021, compared with $130.6 million for the nine months ended December 31, 2020, representing an increase of 64%. The increase in revenues was primarily a result of an increase in the number of Fee Events when compared to the same period last year.
Segment profit for FVA was $68.7 million for the nine months ended December 31, 2021, compared with $33.2 million for the nine months ended December 31, 2020, an increase of 107%. Profitability increased primarily as a result of an increase in revenues when compared to the same period last year.
Three Months Ended December 31, 2021 versus December 31, 2020
Corporate expenses were $71.7 million for the three months ended December 31, 2021, compared with $30.8 million for the three months ended December 31, 2020. This 133% increase was primarily driven by corporate expenses attributable to GCA, integration and acquisition related costs associated with our acquisition of GCA and amortization and depreciation.
Nine Months Ended December 31,2021 versus December 31, 2020
Corporate expenses were $129.8 million for the nine months ended December 31, 2021, compared with $78.3 million for the nine months ended December 31, 2020. This 66% increase was primarily driven by the aforementioned integration and acquisition related costs associated with our acquisition of GCA and amortization and depreciation.
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 December 31, 2021 and March 31, 2021, we had $508 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 December 31, 2021 and March 31, 2021, our restricted cash, cash and cash equivalents, and investment securities were as follows:
(In thousands)
December 31, 2021
March 31, 2021
Cash and cash equivalents
$
1,058,603
$
846,851
Investment securities
39,829
208,618
Total unrestricted cash and cash equivalents, including investment securities
1,098,432
1,055,469
Restricted cash (1)
373
373
Total cash, cash equivalents, and restricted cash, including investment securities
$
1,098,805
$
1,055,842
(1)Represents a deposit in support of a letter of credit issued for our Frankfurt office.
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 of December 31, 2021, accounts receivable, net of credit losses was $195.9 million. As of December 31, 2021, unbilled work in progress, net of credit losses was $86.5 million.
On August 23, 2019, the Company entered into a syndicated revolving line of credit with the Bank 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 on August 23, 2022 (the "2019 Line of Credit"). As of December 31, 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 of December 31, 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 of December 31, 2021 and March 31, 2021.
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:
Nine Months Ended December 31,
(In thousands)
2021
2020
Change
Operating activities:
Net income
$
373,151
$
213,405
75
%
Non-cash charges
118,975
77,332
54
%
Other operating activities
180,009
16,447
994
%
Net cash provided by operating activities
672,135
307,184
119
%
Net cash used in investing activities
(146,352)
(122,067)
20
%
Net cash provided by/(used in) financing activities
(309,976)
57,181
(642)
%
Effects of exchange rate changes on cash, cash equivalents, and restricted cash
(4,055)
10,988
(137)
%
Net increase in cash, cash equivalents, and restricted cash
211,752
253,286
(16)
%
Cash, cash equivalents, and restricted cash — beginning of period
847,224
380,746
123
%
Cash, cash equivalents, and restricted cash — end of period
$
1,058,976
$
634,032
67
%
Nine Months Ended December 31, 2021
Operating activities resulted in a net inflow of $672.1 million, primarily attributable to strong performance across the Company. Investing activities resulted in a net outflow of $(146.4) million, primarily attributable to the acquisition of GCA, as described in Note 19. Financing activities resulted in a net outflow of $(310.0) million, primarily attributable to share repurchases, dividend payments, and payments to settle employee tax obligations on share-based awards.
Nine Months Ended December 31, 2020
Operating activities resulted in a net inflow of $307.2 million primarily attributable to strong performance across the Company. Investing activities resulted in a net outflow of $(122.1) million primarily attributable to purchases of investment securities, partially offset by sales or maturities of investment securities. Financing activities resulted in a net inflow of $57.2 million primarily attributable to proceeds from the Company's May 2020 offering, partially offset by dividends paid and share repurchases.
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.
Business Combinations
Accounting for business combinations requires management to make significant estimates and assumptions. We allocate the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value as of the acquisition date, with the consideration in excess recorded a goodwill. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, expected asset lives, geographic risk premiums, discount rates, and more. The amounts and useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense.
For additional information on critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in the MD&A of the 2021 Annual Report.
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.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
Market Risk and Credit Risk
Our business is not capital intensive and we generally do not issue debt or invest in derivative instruments, other than for foreign currency hedging purposes. As a result, we are not subject to significant market risk (including interest rate risk) or credit risk (except in relation to receivables). We maintain our cash and cash equivalents with financial institutions with high credit ratings. Although these deposits are generally not insured, management believes we are not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
Our cash and cash equivalents are denominated primarily in U.S. dollars, pound sterling and euros, and we face foreign currency risk in our cash balances and other assets and liabilities held in accounts outside the U.S. due to potential currency movements and the associated foreign currency translation accounting requirements.
We regularly review our accounts receivable and allowance for credit losses by considering factors such as historical experience, credit quality, age of the accounts receivable and recoverable expense balances, and the current economic conditions that may affect a customer’s ability to pay such amounts owed to us. We maintain an allowance for credit losses that, in our opinion, provides for an adequate reserve to cover losses that may be incurred.
Risks Related to Cash and Short Term Investments
Our cash is maintained in U.S. and non-U.S. bank accounts. We have exposure to foreign exchange risks through all of our international affiliates. However, we believe our cash is not subject to any material interest rate risk, equity price risk, credit risk or other market risk. Consistent with our past practice, we expect to maintain our cash in bank accounts or highly liquid securities.
Exchange Rate Risk
The exchange rate of the U.S. dollar relative to the currencies in the non-U.S. countries in which we operate may have an effect on the reported value of our non-U.S. dollar denominated or based assets and liabilities and, therefore, be reflected as a change in other comprehensive income. Our non-U.S. assets and liabilities that are sensitive to exchange rates consist primarily of trade payables and receivables, work in progress, and cash. The net impact of the fluctuation of foreign currencies in other comprehensive income within the Consolidated Statements of Comprehensive Income was $(1,824) and $14,037 during the three months ended December 31, 2021 and 2020, respectively, and $(6,236) and $22,407 during the nine months ended December 31, 2021 and 2020, respectively.
In addition, the reported amounts of our revenues and expenses may be affected by movements in the rate of exchange between the currencies in the non-U.S. countries in which we operate and the U.S. dollar, affecting our operating results. We have analyzed our potential exposure to changes in the value of the U.S. dollar relative to the pound sterling and euro, the primary currencies of our European operations, by performing a sensitivity analysis on our net income, and determined that while our earnings are subject to fluctuations from changes in foreign currency rates, at this time we do not believe we face any material risk in this respect.
From time to time, we enter into transactions to hedge our exposure to certain foreign currency fluctuations through the use of derivative instruments or other methods. As of December 31, 2021, we had one foreign currency forward contract outstanding between the pound sterling and the euro with a notional balance of €4.1 million. The change in fair value of this contracts represented a net gain included in Other operating expenses of $11 during the three months ended December 31, 2021. We did not have any outstanding foreign currency forward contracts as of December 31, 2020.
In summary, we have been impacted by changes in exchange rates and the potential impact of future currency fluctuation will increase as our international expansion continues. The magnitude of this impact will depend on the timing and volume of revenues and expenses of, and the amounts of assets and liabilities in, our foreign subsidiaries along with the timing of changes in the relative value of the U.S. dollar to the currencies of the non-U.S. countries in which we operate.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management, including the chief executive officer and chief financial officer, recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2021.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control over financial reporting performed during the fiscal quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. There has been no material change in the nature of our legal proceedings from the descriptions contained in our 2021 Annual Report.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our 2021 Annual Report.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
On October 22, 2021, the Company issued 31,954 shares of Class B common stock to certain former employees of a business acquired in 2020. The Company relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, for transactions not involving a public offering and received no proceeds in connection with this issuance.
The following table summarizes all of the repurchases of Houlihan Lokey, Inc. equity securities during the quarter ended December 31, 2021:
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1)
October 1, 2021 - October 31, 2021
—
$
—
—
$
239,252,908
November 1, 2021 - November 30, 2021
300,000
115.81
300,000
204,510,321
December 1, 2021 - December 31, 2021
344,900
102.90
344,900
169,021,404
Total
644,900
$
108.90
644,900
$
169,021,404
(1)The shares of Class A common stock repurchased through this program have been retired. In July 2021, the Company’s board of directors authorized an increase to the existing January 2021 share repurchase program, which provides for share repurchases of a new aggregate amount of up to $250 million of the Company's Class A common stock and Class B common stock.
Section 1350 Certification of Chief Financial Officer.
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Filed herewith.
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Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
