UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2018
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
(State or other jurisdiction of
incorporation or organization)
95-2770395
(I.R.S. Employer
Identification Number)
10250 Constellation Blvd.
5 th Floor
Los Angeles, California 90067
(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
Name of each exchange on which registered
Class A Common Stock, par value $.001
New York Stock Exchange
Securities Registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x
No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨
No x
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. Yes x
No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted 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 and post such files). Yes x
No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting 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. ¨
Emerging growth company
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 September 30, 2017, the aggregate market value of the voting and non-voting common equity held by non-affiliates was approximately $874 million.
¨
¨
¨
As of May 21, 2018, the registrant had 31,171,497 shares of Class A common stock, $0.001 par value per share, and 35,709,520 shares of Class B common stock,
$0.001 par value per share, outstanding.
HOULIHAN LOKEY, INC.
TABLE OF CONTENTS
PART I.
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
PART IV.
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Table of Contents
PART I
Unless the context otherwise requires, as used in this Annual Report on Form 10-K ( “ Form 10-K ” ) , the terms the “Company,” “Houlihan Lokey, Inc.,”
“Houlihan Lokey,” “HL,” “we,” “us” and “our” refer to (i) prior to the corporate reorganization described under “Organizational Structure,”
Houlihan Lokey, Inc., a California corporation (“HL CA”), and (ii) following such corporate reorganization, Houlihan Lokey, Inc., a Delaware
corporation (“HL DE”), and, in each case, unless otherwise stated, all of its subsidiaries. We use the term “ORIX USA” to refer to ORIX USA
Corporation, a Delaware corporation and a wholly owned subsidiary of ORIX Corporation, a Japanese corporation. References to ORIX USA as a
holder of our shares mean ORIX USA acting through its indirect wholly owned subsidiary, ORIX HLHZ Holding LLC, a Delaware limited liability
company. We use the term “HL Holders” to refer to our employees and members of our management who hold our Class B common stock through
the Houlihan Lokey Voting Trust (the "HL Voting Trust"). We use the term “Fram” to refer to Fram Holdings, Inc., a Delaware corporation and
formerly our indirect parent. References to the “IPO” mean our initial public offering in August 2015 of 12,075,000 shares of Houlihan Lokey, Inc.
Class A common stock in connection with which HL CA reorganized its business. Our fiscal year ends on March 31st; references to fiscal 2018 ,
fiscal 2017 and fiscal 2016 are to the fiscal years ended March 31, 2018 , 2017 and 2016 , respectively; references in this Form 10-K to years are to
calendar years unless otherwise noted.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements. All statements other than statements of historical facts contained in this Form 10-K may be forward-looking
statements. Statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations are
forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “should,” “expects,” “plans,”
“anticipates,” “could,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “intends,” “predicts,” “potential” or “continue,” or the negative of these terms or
other similar expressions.
Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We believe that these factors include,
but are not limited to, the following:
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our ability to retain our Managing Directors and our other senior professionals;
our ability to successfully identify, recruit and develop talent;
changing market conditions;
reputational risk;
our highly volatile revenue and profits on a quarterly basis;
risks associated with our acquisitions, joint ventures and strategic investments;
strong competition from other financial advisory and investment banking firms;
potential impairment of goodwill and other intangible assets, which represent a significant portion of our assets;
our ability to execute on our growth initiatives, business strategies or operating plans;
risks associated with the recent U.S. tax law changes;
risks associated with our international operations;
our management's limited experience managing a public company;
fluctuations in foreign currency exchange rates;
costs of compliance associated with international broker-dealer, employment, labor, benefits and tax regulations;
our potential to offer new products within our existing lines of business or enter into new lines of business, which
may result in additional risks and uncertainties in our business;
operational risks;
extensive and evolving regulation of our business and the business of our clients;
substantial litigation risks;
cybersecurity and other security risks;
continuing contingent tax liabilities;
our dependence on fee-paying clients;
our clients' ability to pay us for our services;
our ability to generate sufficient cash in the future to service our indebtedness; and
other factors beyond our control.
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We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our
business, financial condition and results of operations. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be
predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-
looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. For information about
other important factors that could adversely affect our future results, see “Risk Factors” in this Form 10-K.
These forward-looking statements speak only as of the date of this filing. Except as required by applicable law, we do not plan to publicly update or revise any forward-
looking statements contained in this Form 10-K after we file this Form 10-K, whether as a result of any new information, future events or otherwise.
Item 1.
Business
Established in 1972, Houlihan Lokey, Inc., is a leading global independent investment bank with expertise in mergers and acquisitions (M&A), financings,
financial restructurings and financial advisory services. Through our offices in the United States, Europe, Asia, and Australia, we serve a diverse set of clients worldwide
including corporations, financial sponsors and government agencies. We provide our financial professionals with an integrated platform that enables them to deliver
meaningful and differentiated advice to our clients. We advise our clients on critical strategic and financial decisions, employing a rigorous analytical approach coupled
with deep product and industry expertise. We market our services through our product areas, our industry groups and our Financial Sponsors group, serving our clients in
three primary business practices: Corporate Finance (encompassing M&A and capital markets advisory), Financial Restructuring (both out-of-court and in formal
bankruptcy or insolvency proceedings) and Financial Advisory Services (including financial opinions, and a variety of valuation and financial and strategic consulting
services).
We are committed to a set of principles that serve as the backbone to our success. Independent advice and intellectual rigor, combined with consistent senior-level
involvement, are hallmarks of our commitment to client service. Our entrepreneurial culture engenders our flexibility to collaborate across our business practices to provide
world-class solutions for our clients. Our broad-based employee ownership serves to align the interests of employees and shareholders and further encourages a
collaborative environment where our Corporate Finance, Financial Restructuring and Financial Advisory Services business practices work together productively and
creatively to solve our clients’ most critical financial issues. We enter into businesses or offer services where we believe we can excel based on our expertise, analytical
sophistication, industry focus and competitive dynamics. Finally, we remain independent and specialized, focusing on advisory products and market segments where our
expertise is both differentiating and less subject to conflicts of interest arising from non-advisory services, and where we believe we can be a market leader in a particular
segment. We do not lend or engage in any securities sales and trading operations or research which might conflict with our clients’ interests.
As of March 31, 2018 , we had a team of 884 financial professionals across 21 offices globally and an additional office through our joint venture in Italy, serving
more than 1,000 clients annually over the past several years, ranging from closely held companies to Fortune Global 500 corporations. Information on our segments is set
forth in "Management’s Discussion and Analysis of Financial Condition and Results of Operations."
Our Advisory Services
We provide our financial professionals with an integrated platform that enables them to deliver meaningful and differentiated advice to our clients. We market our
services through our three business practices described below, our industry groups and our Financial Sponsors group, who work collaboratively to deliver comprehensive
solutions and seamless execution for our clients. This marketing effort is combined with an extensive network of referral relationships with law firms, consulting firms,
accounting firms and other professional services firms that have been developed by our financial professionals who maintain those relationships as potential referral
sources and direct clients across all of our business practices.
Corporate Finance
As of March 31, 2018 , we had 92 Corporate Finance Managing Directors utilizing a collaborative, interdisciplinary approach in order to provide our clients with
extensive industry and product expertise and global reach in a wide variety of M&A and financing transactions. We compete with boutique firms focused on particular
industries or geographies as well as other international independent investment banks and bulge-bracket firms. A majority of our engagements represent mid-cap
transactions, which we believe is an attractive segment that is underserved by bulge-bracket investment banks. We believe that our deep sector expertise, significant senior
banker involvement and attention, strong financial sponsor relationships and global platform provide a compelling value for our clients, engendering long-term
relationships and making it difficult for our peers to compete against us in this segment of the market.
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We believe that through our industry groups we have a meaningful presence in every major industry segment, including: aerospace & defense; business services;
consumer, food & retail; energy; financial institutions; healthcare; industrials; real estate, lodging & leisure; technology, media & telecommunications; transportation &
logistics; and data & analytics. We continue to expand and deepen our specialized industry capabilities through a combination of internal promotion, external hires and
acquisitions. While the majority of our engagements are in the United States, we continue to enhance our presence in other geographies, including Europe, Asia and
Australia, and we believe there will be continued opportunities to grow in regions outside the United States.
Our Corporate Finance activities are comprised of two significant categories:
Mergers
&
Acquisitions:
We have extensive expertise in mergers, acquisitions, divestitures, and other related advisory services for a broad range of United States
and international clients. Our Corporate Finance professionals have relationships with thousands of companies and financial sponsors, providing us with valuable
insights into a wide variety of relevant markets.
Our M&A business consists primarily of sell-side and buy-side engagements. In particular, we believe we have developed a reputation in the marketplace as one
of the most prolific sell-side advisors, consistently selling more companies under $1 billion than any competitor. We offer our advice to a diverse set of parties,
including public and private company executives, boards of directors, special committees and financial sponsors.
We believe our team of experienced and talented financial professionals is well positioned to provide advice across a wide range of M&A advisory services
globally, including sell-side, buy-side, joint ventures, asset sales and divestitures that are less subject to conflicts of interest arising from non-advisory services.
Our global industry group model with embedded M&A capabilities brings sector-specific knowledge, experience and relationships to our clients, allowing us to
provide differentiated expert advice and connect buyers on a global basis.
Capital
Markets
Advisory:
We provide global financing solutions and capital-raising advisory services for a broad range of corporate and private equity clients
across most industry sectors, from large, publicly-held, multinational corporations to financial sponsors to privately-held companies founded and run by
entrepreneurs.
Our Capital Markets Advisory professionals leverage a wide array of longstanding, senior-level lender and investor relationships, including with traditional and
non-traditional direct capital providers (such as institutional credit funds, commercial finance companies, business development companies, insurance companies,
pension funds, mutual funds, global asset managers, special situations investors and structured equity providers). As the traditional syndicated capital markets are
becoming increasingly complex and more regulated, the private capital markets have developed to provide an alternative source of flexible capital that can be
tailored to meet clients’ needs.
We believe we excel in providing our clients with sophisticated and thoughtful advice and access to traditional and non-traditional capital providers in the private
and public capital markets. Our objective is to create a capital structure that enables our clients to achieve their strategic priorities on the best terms available in
the market, which often involves raising more than one type of capital.
Financial Restructuring
As of March 31, 2018 , we had 42 Financial Restructuring Managing Directors working around the globe, which we believe constitutes one of the largest
restructuring groups in the investment banking industry. Our Financial Restructuring group has earned a reputation for being the advisor of choice for many of the largest
and most complex restructurings, offering knowledge, experience and creativity to address challenging situations. We operate in all major worldwide markets as debt
issuances have increased around the world. Our Financial Restructuring professio nals bring to bear deep expertise and experience in restructurings in the United States,
Canada, Europe, Asia, Australia, the Middle East, Latin America and Africa. Given the depth and breadth of the team’s expertise and the high barriers to entry for this
expertise and experience, international and multi-jurisdictional restructurings represent an attractive opportunity for our Financial Restructuring group.
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The group employs an interdisciplinary approach to engagements, calling upon the expertise of our industry groups, Capital Markets Advisory group and
Financial Sponsors group, and drawing on the worldwide resources of the Financial Restructuring team as each situation may require. The Financial Restructuring group is
deeply experienced in evaluating complex, highly leveraged situations. In addition to comprehensive financial restructurings, we work with distressed companies on
engagements involving changes of control, asset sales and other M&A and capital markets activities, many times involving the sale of a company or its assets quickly, and
in contested or litigious settings on expedited timeframes. We advise companies undergoing financial restructuring and creditor constituencies at all levels of the capital
structure, in both out-of-court negotiations and in formal bankruptcy or insolvency proceedings. Our experience, geographic diversity and size allow us to provide the
immediate attention and staffing required for time-sensitive and mission-critical restructuring assignments, making us a valued partner for our clients.
Our dedicated team is active throughout business cycles. Our Financial Restructuring practice serves as a countercyclical hedge across macroeconomic cycles,
with increasing levels of restructuring opportunities occurring during periods when demand for M&A and capital markets advisory services may be reduced. In robust
macro-economic environments, demand for the services of our Financial Restructuring team generally continues due to opportunities arising from secular and cyclical
disruptions in certain industries. Our geographic diversity and global market leadership allow us to maintain significant levels of activity even when the U.S. capital
markets are vibrant.
Our broad base of clients and our extensive experience allow us to understand the dynamics of each restructuring situation and strengthen our negotiating
strategies by providing us insight into the needs, attitudes and positions of all parties-in-interest. Our clients include companies, bondholder groups, financial institutions,
banks and other secured creditor groups, trade creditors, official Chapter 11 creditors’ committees, equity holders, acquirers, equity sponsors and other parties-in-interest
involved with financially challenged companies.
Our Financial Restructuring professionals work closely with our Corporate Finance and Financial Advisory Services professionals to provide holistic advice. In
financial restructuring assignments, our team may represent the company, the creditors or other stakeholders.
Financial Advisory Services
As of March 31, 2018 , we had 35 Managing Directors in this practice, and we believe we have one of the largest and most respected valuation and financial
opinion practices in the United States. We believe we are a thought-leader in the field of valuation, and our professionals produce influential studies and publications,
which are recognized and valued throughout the financial industry. We believe our extensive transaction expertise and leadership in these fields inspire confidence in the
financial executives, boards of directors, special committees, retained counsel, investors and business owners that we serve. We believe that our reputation for delivering
an outstanding analytical product that will withstand legal or regulatory scrutiny coupled with our independence makes us the advisor of choice for clients that seek to
obtain a complex valuation or transaction opinion.
Our core competencies in our Financial Advisory Services practice are our ability to analyze and value companies, security interests, and different types of assets,
including intellectual property and liabilities, as well as our ability to analyze the financial aspects of transactions. We are organized around different service areas as each
area has different regulatory or compliance specializations, different valuation guidelines as well as different marketing channels.
Our People
Our goal is to attract, develop and retain the best talent in our industry across all levels. We believe our compensation programs are competitive, offering a portion
of compensation in deferred cash and a portion in deferred stock awards to provide incentives for our employees to remain with us. In addition, we strive to foster a
collaborative environment to attract and retain employees, and we seek individuals who fit our culture of entrepreneurship, integrity, creativity and commitment to our
clients. For over 20 years, we have emphasized broad employee ownership as a way to align the incentives of our employees and shareholders. As of March 31, 2018 , we
had approximately 505 present and former employee shareholders that collectively owned approximatel y 39% of our equity with no single employee owning more than
3% of our equity. We believe that a strong emphasis on cultural fit during our recruiting process combined with broad employee ownership results in high retention rates.
Our Managing Directors (other than our executive officers) are compensated based on their ability to deliver profitable revenues on a consistent basis to the firm,
the quality of advice and execution provided to our clients, and their collaboration with their colleagues across industries, products and regions. We do not compensate on a
commission-based pay model. Our compensation structure for junior financial professionals is based on a system of meritocracy whereby bankers are rewarded for past
performance and expectation of future development, and compensation levels are tested against prevailing market compensation for bankers at similar levels.
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The primary sources of recruitment for our junior financial professionals are leading undergraduate and graduate programs around the world. Our consistent
hiring practices year after year have created partnerships with these prestigious institutions and resulted in a steady and high-quality pipeline of junior financial
professionals. To supplement this annual class of new hires, we opportunistically and strategically hire professionals with experience and backgrounds relevant to our
various businesses. Regardless of title, we place a high degree of emphasis on cultural fit, technical capability and individual character. When we hire junior financial
professionals, we hire them directly into one of our business practices to enable them to begin to develop their relevant skill set from day one.
Across our firm, we devote significant time and resources to training and mentoring our employees to ensure every person achieves their highest possible
potential. We strive to identify and cultivate future leaders within our firm and are committed to developing our brightest and most ambitious junior professionals into
Managing Directors. This philosophy of investing in our people has been and will continue to be core to our culture and organization. As of March 31, 2018 , 2017 and
2016 , we employed 1,228, 1,171 and 1,171 people, respectively, worldwide.
Competition
Our competitors are other investment banking and financial advisory firms. We compete on both a global and a regional basis, and on the basis of a number of
factors, including industry knowledge, transaction execution skills, strength of client relationships, reputation and price. We believe our primary competitors vary by
product and industry expertise and would include the following: for our Corporate Finance practice, Jefferies LLC, Lazard Ltd, Evercore Partners, Moelis & Company,
N M Rothschild & Sons Limited, Piper Jaffray Companies, Robert W. Baird & Co. Incorporated, William Blair & Company, L.L.C. and the bulge-bracket investment
banking firms; for our Financial Restructuring practice, Lazard Ltd, PJT Partners, Moelis & Company and N M Rothschild & Sons Limited; and for our Financial
Advisory Services practice, Duff & Phelps Corp., the “big four” accounting firms, and various consulting firms.
We compete with all of the above as well as with regional and industry-focused boutique firms to attract and retain qualified employees. Our ability to continue to
compete effectively in our business will depend upon our ability to attract new employees and retain our existing employees. We may be at a competitive disadvantage in
certain situations with regard to certain of our competitors who are able to, and regularly do, provide financing or market making services that are often instrumental in
effecting transactions.
Regulation
United
States
Our business, as well as the financial services industry generally, is subject to extensive regulation in the United States and across the globe. As a matter of public
policy, regulatory bodies in the United States and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with
protecting the interests of customers participating in those markets, not with protecting the interests of our stockholders or creditors. In the United States, the United States
Securities and Exchange Commission (the "SEC") is the federal agency responsible for the administration of the federal securities laws. Houlihan Lokey Capital, Inc.
(“Houlihan Lokey Capital”), our wholly owned subsidiary, through which we conduct our Corporate Finance, Financial Restructuring and transaction opinion businesses in
the United States, is registered as a broker-dealer with the SEC. Houlihan Lokey Capital is subject to regulation and oversight by the SEC. In addition, the Financial
Industry Regulatory Authority, Inc. ("FINRA"), a self-regulatory organization that is subject to oversight by the SEC, adopts and enforces rules governing the conduct, and
examines the activities, of its broker-dealer member firms, including Houlihan Lokey Capital. State securities regulators also have regulatory or oversight authority over
Houlihan Lokey Capital in those states in which it does business.
Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices, the financing of customers’
purchases, capital structure, record-keeping and the conduct and qualifications of directors, officers and employees. In particular, as a registered broker-dealer and member
of a self-regulatory organization, we are subject to the SEC’s uniform net capital rule, Rule 15c3-1. Rule 15c3-1 specifies the minimum level of net capital a broker-dealer
must maintain and also requires that a significant part of a broker-dealer’s assets be kept in relatively liquid form. The SEC and FINRA impose rules that require
notification when net capital falls below certain predefined criteria, limit the ratio of subordinated debt to equity in the regulatory capital composition of a broker-dealer
and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the SEC’s uniform net capital rule imposes certain
requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain withdrawals
of capital.
5
Houlihan Lokey Financial Advisors, Inc. (“HLFA”), our wholly owned subsidiary, provides valuation services and related financial analyses of various
businesses and types of assets which are used by clients in connection with mergers and acquisitions, divestitures, recapitalizations, dispute analysis, and estate, gift and
income tax support. In rendering such analyses, HLFA does not: (i) make recommendations or provide advice with respect to the merits of any security or transaction, the
suitability of transacting in any security, or any investment decision with respect to any security, or (ii) manage or hold client accounts, securities or funds. In addition to
valuation and financial consulting and analytic services, HLFA provides dispute resolution services and strategic consulting services.
The Financial Crimes Enforcement Network (“FinCEN’’), a part of the United States Department of the Treasury, is charged with protecting the financial system
from illicit use, combating money laundering, and promoting national security through financial intelligence. As a final requirement of its Know Your Customer (“KYC”)
rules related to Anti-Money Laundering (“AML”), FinCEN issued the customer due diligence rule (“CDD”) requiring certain financial institutions such as Houlihan Lokey
Capital, to obtain and verify the identity of any individual person who directly or indirectly beneficially owns 25% or more of the equity interest in a legal entity client, and
of a single individual who exercises control over the legal entity at the time of account opening or engagement. FinCEN also requires maintenance of appropriate books
and records and maintenance of adequate internal controls to prevent and detect possible AML violations.
Certain parts of our business are subject to compliance with laws and regulations of United States federal and state governments, non-United States governments,
their respective agencies and/or various self-regulatory organizations or exchanges relating to, among other things, the privacy of client information, and any failure to
comply with these regulations could expose us to liability and/or reputational damage.
Europe
Our European advisory business is now conducted primarily through our subsidiary, Houlihan Lokey EMEA, LLP, a limited liability partnership organized under
the laws of England and Wales, with its main office in the United Kingdom and branches in France, Germany and Spain.
Houlihan Lokey EMEA, LLP is authorized and regulated by the United Kingdom’s Financial Conduct Authority. The current UK regulatory regime is based upon
the Financial Services and Markets Act 2000 (“FSMA”), together with secondary legislation and other rules made under FSMA. These rules govern our financial advisory
business in the United Kingdom, including regulated activities, record keeping, approval standards for individuals, anti-money laundering and periodic reporting.
Houlihan Lokey EMEA, LLP has exercised the appropriate European financial services passport rights to provide cross-border services into all other members of
the European Economic Area (the “EEA”) from the United Kingdom and to establish branches in France, Germany and Spain. These “passport” rights derive from the pan-
European regime established by the EU Markets in Financial Instruments Directive, which regulates the provision of investment services and activities throughout the
EEA.
On June 23, 2016, the United Kingdom voted to withdraw from the European Union (“Brexit”). The Article 50 European Union exit process was invoked by the
UK government on March 29, 2017. This provides for a two year period at the end of which the United Kingdom is scheduled to leave the EU, and during which time
period the parties can seek to negotiate the terms of separation. We are currently examining ways of reorganizing our European business in order to manage the effects of
Brexit on such business. Brexit may impact our European business in ways that are unknown at this time and/or may result in costs that are indeterminate at this time.
Further to the acquisition of Quayle Munro Limited (now renamed "Houlihan Lokey (Corporate Finance) Limited"), its business is for the time being continuing
to be run through such company. It is also authorized and regulated by the United Kingdom's Financial Conduct Authority and has exercised passport rights as referred to
above to provide cross-border services into other EEA states where it provides services time to time. In addition to Houlihan Lokey (Corporate Finance) Limited, we
provide corporate finance advisory services through other subsidiaries in Spain, Netherlands and Germany as well as holding a joint venture interest in an entity providing
such services in Italy.
Hong
Kong
In Hong Kong, the Securities and Futures Commission (the “SFC”) regulates our subsidiary, Houlihan Lokey (China) Limited. The compliance requirements of
the SFC include, among other things, various codes of conduct and certain capital requirements. The SFC licenses the activities of the officers, directors, employees of
Houlihan Lokey (China) Limited, and requires the registration of such individuals as licensed representatives.
6
Australia
In July 2017, the Company purchased the remaining interest of Houlihan Lokey (Australia) Pty Limited ("HL Australia") that we did not previous own, which
was historically operated as our joint venture in Australia. HL Australia is licensed and subject to regulation by the Australian Securities & Investments Commission and
must also comply with applicable provisions of the Corporations Act 2001 and other Australian legal and regulatory requirements, including capital adequacy rules,
customer protection rules, and compliance with other applicable trading and investment banking regulations.
Singapore
On April 26, 2017, the Monetary Authority of Singapore (“MAS”) acknowledged receipt of the lodgment by our subsidiary, Houlihan Lokey (Singapore) Private
Limited, on March 17, 2017 of the relevant form notifying MAS of its commencement of business as a person exempted from the requirement to hold a capital markets
services license to carry on business in advising on corporate finance activities, with effect from March 6, 2017. As a result of such lodgment, Houlihan Lokey
(Singapore) Private Limited is able to conduct business in Singapore as an “exempt corporate finance adviser,” subject to compliance with regulation governing such status
as applicable from time to time in Singapore.
Dubai
Effective September 25, 2017, the Dubai Financial Services Authority ("DFSA") granted a license under Article 48 of the Regulatory Law 2004 to Houlihan
Lokey (MEA Financial Advisory) Limited to carry on business on providing certain regulated financial services from its office in the Dubai International Financial Centre.
Such entity is subject, inter alia , to DFSA administered law and regulation (most notably as provided in the DFSA Rulebook), and individuals within it carrying out
"licensed functions" (essentially senior management roles) are required to be approved by DFSA to so act.
Other
The United States and non-United States government agencies and self-regulatory organizations, as well as state securities commissions in the United States, are
empowered to conduct periodic examinations and initiate administrative proceedings that can result in censure, fines, the issuance of cease-and-desist orders or the
suspension or expulsion of a broker-dealer or its directors, officers or employees.
The USA PATRIOT Act of 2001 and the Treasury Department’s implementing federal regulations require us, as a “financial institution,” to establish and
maintain an anti-money-laundering program. In connection with its administration and enforcement of economic and trade sanctions based on United States foreign policy
and national security goals, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) publishes a list of individuals and companies owned or controlled by,
or acting for or on behalf of, targeted countries. It also lists individuals, groups and entities, such as terrorists and narcotics traffickers, designated under programs that are
not country-specific. Collectively, such individuals and companies are called “Specially Designated Nationals” (“SDNs”). Assets of SDNs are blocked, and we are
generally prohibited from dealing with them. In addition, OFAC administers a number of comprehensive sanctions and embargoes that target certain countries,
governments and geographic regions. We are generally prohibited from engaging in transactions involving any country, region or government that is subject to such
comprehensive sanctions.
The United States Foreign Corrupt Practices Act of 1977 (the “FCPA”), the UK 2010 Bribery Act and similar laws to which we may be subject prohibit the
payment of bribes to foreign government officials and political figures. The FCPA has a broad reach, covering all United States companies and citizens doing business
abroad, and defining a foreign official to include not only those holding public office but also local citizens acting in an official capacity for or on behalf of foreign
government-run or -owned organizations or public international organizations. The FCPA also requires maintenance of appropriate books and records and maintenance of
adequate internal controls to prevent and detect possible FCPA violations. Similarly, the UK 2010 Bribery Act prohibits us from bribing, being bribed or making other
prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage.
Organizational Structure
Overview
Houlihan Lokey, Inc. is a holding company that operates our business through its subsidiaries, the primary subsidiaries being Houlihan Lokey Capital, HLFA and
Houlihan Lokey EMEA LLP (whose business was recently transferred from Houlihan Lokey (Europe) Limited), each of which is described above under “Regulation.”
7
Follow-on
Equity
Offerings
and
Forward
Equity
Repurchase
On Oc tober 25, 2017, pursuant to a registered underwritten public offering, ORIX USA sold 1,750,000 shares of our Class A common stock and certain of our
former and current employees and members of our management (the "Selling Stockholders") sold 1,750,000 shares of our Class A common stock, in each case, at a price to
the public of $42.00 per share, and such transaction closed on October 30, 2017 (the "October Follow-on Offering"). On November 3, 2017, ORIX USA sold an
additional 125,000 shares of Class A common stock and the Selling Stockholders sold an additional 125,000 shares of Class A common stock in connection with the
underwriters’ partial exercise of their option to purchase additional shares in the October Follow-on Offering.
On March 12, 2018, pursuant to a registered underwritten public offering, we issued and sold 2,000,000 shares of our Class A common stock and certain of our
former and current employees and members of our management sold 2,000,000 shares of our Class A common stock, in each case, at a price to the public of $47.25 per
share, and such transaction closed on March 15, 2018 (the "March Follow-on Offering").
In connection with, and prior to, the March Follow-on Offering, on January 26, 2018, we entered into a Forward Share Purchase Agreement (the "January 2018
Forward Share Purchase Agreement"), with an indirect wholly owned subsidiary of ORIX USA pursuant to which we agreed to repurchase from ORIX USA on April 5,
2018 the number of shares of our Class B common stock equal to the number of shares of our Class A common stock sold by us in the March Follow-on Offering for a
purchase price per share equal to the public offering price in the March Follow-on Offering, less underwriting discounts and commissions. The cash proceeds from the
March Follow-on Offering that were used to consummate the purchase pursuant to the Ja nuary 2018 Forward Share Purchase Agreement were held in an escrow account
as of March 31, 2018 and presented as restricted cash as discussed in note 2, 14, and 17. On April 5, 2018, we settled the transaction provided for in the January 2018
Forward Share Purchase Agreement and acquired 2,000,000 shares of Class B common stock from ORIX USA using the net proceeds we received from the March Follow-
on Offering. In accordance with the terms of the January 2018 Forward Share Purchase A greement, the purchase price per share was reduced by the per share amount of
the dividend paid to ORIX USA on the shares of our Class B common stock subject to the January 2018 Forward Share Purchase Agreement prior to the settlement of such
transaction. As the January 2018 Forward Share Purchase Agreement required physical settlement by purchase of a fixed number of shares in exchange for cash, the
2,000,000 shares that were purchased are excluded fr om our calculation of basic and diluted earnings per share in our financial statements for the years ended March 31,
2018 and 2017. In addition, as the agreement provides for the refund of any dividends paid during the period between the March Follow-on Offering and the settlement of
the January 2018 Forward Share Purchase Agreement on the underlying Class A common stock, such shares are not classified as participating securities and we do not
apply the two-class method for calculating earnings per share on our common stock.
8
The diagram below depicts our current organizational structure and the percentages are as of May 21, 2018:
HL
Voting
Trust
Agreement
In connection with the corporate reorganization and the IPO, we entered into the Voting Trust Agreement (the “HL Voting Trust Agreement”) dated as of August
18, 2015 with the HL Holders and the trustees of the HL Voting Trust. Pursuant to the HL Voting Trust Agreement, the trustees have the right to vote the shares of our
common stock deposited by any HL Holder, together with any shares of Class B common stock acquired by such HL Holder, in their sole and absolute discretion on any
matter, without fiduciary duties of any kind to the HL Holders. As of March 31, 2018 , the HL Voting Trust controlled approximately 66.6% of the total voting power of
the Company.
Lock-Up
Agreements
In connection with the corporate reorganization and subsequent grants of Class B common stock, each HL Holder depositing shares of our common stock into the
HL Voting Trust also entered into an individual lock-up agreement with the Company. Under these lock-up agreements, shares of our common stock deposited into the HL
Voting Trust and beneficially owned by the HL Holders will generally be locked up for a period of three years following the effective date of the IPO, after which these
shares will become transferable in three equal installments on each of the third, fourth and fifth anniversary of the IPO; provided that shares of our common stock held by
managing directors and certain senior corporate officers of the Company whose employment with us or any of our subsidiaries terminates prior to the third anniversary of
the IPO for reasons other than death or disability will be subject to transfer restrictions, and will be ineligible to participate in any follow-on offerings, in each case,
through the seventh anniversary of the IPO. Notwithstanding the foregoing, the lock-up agreements provide that:
•
•
up to 10% of each HL Holder’s shares held through the HL Voting Trust may be transferred for the purpose of charitable gifts and transfers to various
family trusts for estate planning purposes, with any shares transferred under this exception reducing the number of shares that become
transferable on the next transferability date; and
our board of directors may authorize sales in underwritten offerings in accordance with the terms of the registration rights agreement entered into
between HL and the HL Holders; provided that any shares sold under this exception will reduce the number of shares that become transferable
on the next transferability date.
9
Under the lock-up agreements, our board of directors may consent to exceptions to those transfer restrictions, subject to any limitations or conditions imposed by
it.
Stockholders’
Agreement
In connection with the IPO, we entered into the Stockholders’ Agreement dated as of August 18, 2015 (the "Stockholders' Agreement") with ORIX USA and the
trustees of the HL Voting Trust. Pursuant to the Stockholders’ Agreement, our board of directors will generally consist of eleven members, with ORIX USA and the
trustees on behalf of the HL Voting Trust each having the right to recommend the nomination of four of the eleven board members. The number of board members that
ORIX USA is entitled to recommend for nomination is subject to maintaining certain ownership thresholds. If ORIX USA loses its right to recommend for nomination any
director nominees pursuant to the terms of the Stockholders’ Agreement, these positions will generally be filled by individuals recommended for nomination by the trustees
of the HL Voting Trust. In addition, under the Stockholders’ Agreement, we have agreed with ORIX USA upon certain standards to be satisfied in order for shares of our
common stock subject to individual lock-up agreements to participate in underwritten offerings.
Controlled
Company
The HL Voting Trust and ORIX USA control a majority of the voting power of our outstanding common stock. As a result, we are a “controlled company” under
the rules of the New York Stock Exchange. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company
is a “controlled company” and may elect not to comply with certain corporate governance standards, including the requirements that (i) a majority of our board of directors
consist of independent directors and (ii) that our board of directors have compensation and nominating and corporate governance committees composed entirely of
independent directors, as independence is defined in Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and under the New York Stock
Exchange listing standards. We utilize, and intend to continue to utilize, these exemptions. As a result, although we have a fully independent audit committee as required
by the New York Stock Exchange, we do not expect that the majority of our directors will be independent for some time. See “Risk Factors—Risks Related to Our Class A
Common Stock—We are a “controlled company” within the meaning of the New York Stock Exchange listing standards and, as a result, qualify for, and rely on,
exemptions from certain corporate governance requirements. Holders of Class A common stock do not have the same protections afforded to stockholders of companies
that are subject to such requirements.” In the event that we cease to be a “controlled company” and our shares continue to be listed on the New York Stock Exchange, we
will be required to comply with these provisions by the expiration of the applicable transition periods.
Market and Industry Data
The industry, market and competitive position data referenced throughout this Form 10-K are based on research, industry and general publications, including
surveys and studies conducted by third parties. Industry rankings are as reported by Thomson Reuters unless otherwise noted. Thomson Reuters industry rankings are
sourced through direct deal submissions from financial institutions coupled with research performed by Thomson Reuters analysts. Industry publications, surveys and
studies generally state that they have been obtained from sources believed to be reliable. We have not independently verified such third party information. While we are not
aware of any misstatements regarding any industry, market or similar data presented herein, such data involve uncertainties and are subject to change based on various
factors, including those discussed under the headings “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in this Form 10-K.
In this Form 10-K, we use the term “independent investment banks” or “independent advisors” when referring to ourselves and other investment banks or
financial advisors that are primarily focused on advisory services and that conduct no or limited commercial banking, lending, or securities sales and trading activities,
which we believe are well positioned to provide uncompromised advice that is less subject to conflicts of interest arising from non-advisory services. In this Form 10-K,
we use the term “mid-cap” when referring to transactions with a value below $1 billion and “large-cap” when referring to transactions with a value equal to or in excess of
$1 billion.
10
Other Information
Our website address is www.hl.com. We make available free of charge in the Investor Relations section of our website ( http://investors.hl.com ) this Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically
filed or furnished with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also make available through our website other reports filed with or furnished to
the SEC under the Exchange Act, including our Proxy Statements and reports filed by officers and directors under Section 16(a) of that Act, as well as various governance
documents. From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding
the Company is routinely posted on and accessible at http://investors.hl.com . We do not intend for information contained in our website to be part of this Form 10-K. The
inclusion of our website address in this Form 10-K does not include or incorporate by reference the information on our website into this Form 10-K or any other document
into which this Form 10-K is incorporated by reference.
Any materials we file with the SEC may be inspected without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington,
D.C. 20549, and copies of all or any part of this Form 10-K may be obtained from the SEC upon payment of the prescribed fee. Information on the operation of the public
reference facilities may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and
other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov .
11
Table of Contents
Item 1A. Risk Factors
Risks Related to Our Business
Our
ability
to
retain
our
Managing
Directors
and
our
other
senior
professionals
is
critical
to
the
success
of
our
business.
We depend on the efforts and reputations of our senior management and financial professionals. Our Managing Directors’ and other senior professionals’ reputations
and relationships with clients and potential clients are critical elements in the success of our business. Our future success depends to a substantial degree on our ability to
retain qualified management and financial professionals within our organization, including our Managing Directors. However, we may not be successful in our efforts to
retain the required personnel as the market for qualified investment bankers is extremely competitive. Our investment bankers possess substantial experience and expertise
and have strong relationships with our advisory clients. As a result, the loss of these financial professionals could jeopardize our relationships with clients and result in the
loss of client engagements. For example, if our Managing Directors or other senior professionals, including our executive officers, or groups of professionals, were to join
or form a competing firm, some of our current clients could choose to use the services of that competitor rather than our services. Managing Directors and other senior
professionals have left Houlihan Lokey in the past and others may do so in the future, and the departure of any of these senior professionals may have an adverse impact on
our business. Our compensation arrangements and post-employment restriction agreements with our Managing Directors and other professionals may not provide sufficient
incentives or protections to prevent these professionals from resigning to join our competitors. In addition, some of our competitors have more resources than we do, which
may allow them to attract some of our existing employees by offering superior compensation and benefits or otherwise. The departure of a number of Managing Directors
or groups of senior professionals could have a material adverse effect on our business, financial condition and results of operations.
Our
future
growth
will
depend
on,
among
other
things,
our
ability
to
successfully
identify,
recruit
and
develop
talent
and
will
require
us
to
commit
additional
resources.
Our business involves the delivery of professional services and is largely dependent on the talents and efforts of highly skilled individuals. Our future growth will
depend on, among other things, our ability to successfully identify and recruit individuals and teams to join our firm. It typically takes time for these financial professionals
to become profitable and effective. During that time, we may incur significant expenses and expend significant time and resources toward training, integration and business
development aimed at developing this new talent. If we are unable to recruit and develop profitable financial professionals, we will not be able to implement our growth
strategy, which ultimately could materially adversely affect our financial results.
In addition, sustaining growth will require us to commit additional management, operational and financial resources and to maintain appropriate operational and
financial systems to adequately support expansion, especially in instances where we open new offices that may require additional resources before they become profitable.
We may not be able to recruit and develop talent and manage our expanding operations effectively, and any failure to do so could materially adversely affect our ability to
grow revenue and control our expenses.
Changing
market
conditions
can
adversely
affect
our
business
in
many
ways,
including
by
reducing
the
volume
of
the
transactions
involving
our
business,
which
could
materially
reduce
our
revenue.
As a financial services firm, we are materially affected by conditions in the global financial markets and economic conditions throughout the world. Unfavorable
market or economic conditions may adversely affect our businesses; in particular, where revenue generated is directly related to the volume and size of the transactions in
which we are involved. For example, weak market or economic conditions may adversely affect our Corporate Finance and Financial Advisory Services groups because, in
an economic downturn, the volume and size of transactions may decrease, thereby reducing the demand for our M&A, capital raising and opinion advisory services and
increasing price competition among financial services companies seeking such engagements. Moreover, in the period following an economic downturn, the volume and
size of transactions typically takes time to recover and lags a recovery in market and economic conditions. On the other hand, strong market or economic conditions may
adversely affect our Financial Restructuring group. In a strong economic environment, the volume and size of recapitalization and restructuring transactions may decrease,
thereby reducing the demand for the services provided by our Financial Restructuring business segment and increasing price competition among financial services
companies seeking such engagements. Changes in market and economic conditions are expected to impact our businesses in different ways, and we may not be able to
benefit from such changes. Further, our business, financial condition and results of operations could be adversely affected by changing market or economic conditions.
Our profitability may also be adversely affected by changes in market and economic conditions because we may not be able to reduce certain fixed costs within a time
frame sufficient to match any decreases in revenue. The future market and economic climate may deteriorate because of many factors beyond our control, including rising
interest rates or inflation, terrorism or political uncertainty.
12
Table of Contents
We
are
subject
to
reputational
and
legal
risk
arising
from,
among
other
things,
actual
or
alleged
employee
misconduct,
conflicts
of
interest,
failure
to
meet
client
expectations
or
cybersecurity
breaches
or
other
operational
failures.
As a professional services firm, our ability to secure new engagements is substantially dependent on our reputation and the individual reputations of our financial
professionals. Any factor that diminishes our reputation or that of our financial professionals, including not meeting client expectations or actual or alleged misconduct by
our financial professionals, including misuse of confidential information, could make it substantially more difficult for us to attract new engagements and clients.
In addition, we face the possibility of an actual, potential or perceived conflict of interest where we represent a client on a transaction in which an existing client is a
party. We may be asked by two potential clients to act on their behalf on the same transaction, including by two clients as potential buyers in the same acquisition
transaction In each of these situations, we face the risk that our current policies, controls and procedures may not timely identify or appropriately manage such conflicts of
interest. Conflicts may also arise from investments or activities of employees outside their business activities on behalf of the Company. It is possible that actual, potential
or perceived conflicts could give rise to client dissatisfaction, litigation or regulatory enforcement actions. Appropriately identifying and managing actual or perceived
conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual
conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation which could
materially adversely affect our business in a number of ways, including a reluctance of some potential clients and counterparties to do business with us.
Further, because we provide our services primarily in connection with significant or complex transactions, disputes or other matters that usually involve confidential
and sensitive information or are adversarial, and because our work is the product of myriad judgments of our financial professionals and other staff operating under
significant time and other pressures, we may not always perform to the standards expected by our clients. In addition, we may face reputational damage from, among other
things, litigation against us, our failure to protect confidential information and/or breaches of our cybersecurity protections or other inappropriate disclosure of confidential
information, including inadvertent disclosures.
There is also a risk that our employees could engage in misconduct that could adversely affect our business. If our employees were to improperly use or disclose
confidential information provided by our clients, we could be subject to regulatory sanctions and legal liability and suffer serious harm to our reputation, financial position,
current client relationships and ability to attract future clients. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent
misconduct may not be effective in all cases. In addition, our financial professionals and other employees are responsible for the security of the information in our systems
or under our control and for ensuring that non-public information is kept confidential. Should any employee not follow appropriate security measures, the improper release
or use of confidential information could result. If our employees engage in misconduct or fail to follow appropriate security measures, we could be subject to legal liability
and reputational harm, which could impair our ability to attract and retain clients and in turn materially adversely affect our business.
A
substantial
portion
of
our
revenue
is
derived
from
advisory
engagements
in
our
Corporate
Finance
and
Financial
Restructuring
business
segments,
including
engagements
under
which
our
fees
include
a
significant
component
based
upon
goals,
such
as
the
completion
of
a
transaction.
As
a
result,
our
revenue
and
profits
are
highly
volatile
on
a
quarterly
basis
and
may
cause
the
price
of
our
Class
A
common
stock
to
fluctuate
and
decline.
Revenue and profits derived from our Corporate Finance and Financial Restructuring business segments can be highly volatile. We derive a substantial portion of our
revenue from advisory fees, which are mainly generated at key transaction milestones, such as closing, the timing of which is outside of our control. From time to time, we
enter into engagement agreements under which our fees include a significant component based upon goals, such as the completion of a transaction. In many cases, for
advisory engagements that do not result in the successful consummation of a transaction, we are not paid a fee other than the reimbursement of certain out-of-pocket
expenses and, in some cases, a modest retainer, despite having devoted considerable resources to these transactions. The achievement of these contractually-defined goals
is often impacted by factors outside of our control, such as market conditions and the decisions and actions of our clients and interested third parties. For example, a client
could delay or terminate an acquisition transaction because of a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents or
board or shareholder approvals, failure to secure necessary financing, adverse market conditions or because the target's business is experiencing unexpected financial
problems. Anticipated bidders for client assets during a restructuring transaction may not materialize or our client may not be able to restructure its operations or
indebtedness due to a failure to reach agreement with its principal creditors. Because these fees are contingent, revenue on such engagements, which is recognized when all
revenue recognition criteria are met, is not certain and the timing of receipt is difficult to predict and may not occur evenly throughout the year.
13
Table of Contents
We expect that we will continue to rely on advisory fees, including fees based upon goals, such as the completion of a transaction, for a substantial portion of our
revenue for the foreseeable future. Accordingly, a decline in our advisory engagements or the market for advisory services would adversely affect our business. In addition,
our financial results will likely fluctuate from quarter to quarter based on when fees are earned, and high levels of revenue in one quarter will not necessarily be predictive
of continued high levels of revenue in future periods. Should these contingent fee arrangements represent a greater percentage of our business in the future, we may
experience increased volatility in our working capital requirements and greater variations in our quarter-to-quarter results, which could affect the price of our Class A
common stock. Because advisory revenue can be volatile and represents a significant portion of our total revenue, we may experience greater variations in our revenue and
profits than other larger, more diversified competitors in the financial services industry. Fluctuations in our quarterly financial results could, in turn, lead to large adverse
movements in the price of our Class A common stock or increased volatility in our stock price generally.
Our
acquisitions,
joint
ventures
and
strategic
investments
may
result
in
additional
risks
and
uncertainties
in
our
businesses.
In addition to recruiting and organic expansion, we have grown, and intend to continue to grow, our core businesses through acquisitions, joint ventures and strategic
investments.
We regularly evaluate opportunities to acquire other businesses. Unless and until acquisitions of other businesses generate meaningful revenues, the purchase prices
we pay to acquire such businesses could have a material adverse effect on our business, financial condition and results of operations. If we acquire a business, we may be
unable to manage it profitably or successfully integrate its operations with our own. Moreover, we may be unable to realize the financial, operational, and other benefits we
anticipate from acquisitions. Competition for future acquisition opportunities in our markets could increase the price we pay for businesses we acquire and could reduce the
number of potential acquisition targets. Further, acquisitions may involve a number of special financial and business risks, including expenses related to any potential
acquisition from which we may withdraw, diversion of our management's time, attention, and resources, decreased utilization during the integration process, loss of key
acquired personnel, difficulties in integrating diverse corporate cultures, increased costs to improve or integrate personnel and financial, accounting, technology and other
systems, including compliance with the Sarbanes-Oxley Act, dilutive issuances of equity securities, including convertible debt securities, the assumption of legal liabilities,
amortization of acquired intangible assets, potential write-offs related to the impairment of goodwill and additional conflicts of interest. If we are unable to successfully
manage these risks, we will not be able to implement our growth strategy, which ultimately could materially adversely affect our business, financial condition and results
of operations.
In the case of joint ventures, we are subject to additional risks and uncertainties relating to governance and controls. For example, we may be dependent upon, and
subject to, liability, losses or reputational damage relating to personnel, controls and systems that are not fully under our control. In addition, disagreements between us and
our joint venture partners may negatively impact our business and profitability.
We
face
strong
competition
from
other
financial
advisory
firms,
many
of
which
have
the
ability
to
offer
clients
a
wider
range
of
products
and
services
than
those
we
offer,
which
could
cause
us
to
lose
engagements
to
competitors
and
subject
us
to
pricing
pressures
that
could
materially
adversely
affect
our
revenue
and
profitability.
The financial services industry is intensely competitive, highly fragmented and subject to rapid change, and we expect it to remain so. Our competitors are other
investment banking and financial advisory firms. We compete on both a global and a regional basis, and on the basis of a number of factors, including depth of client
relationships, industry knowledge, transaction execution skills, our range of products and services, innovation, reputation and price. In addition, in our business, there are
usually no long-term contracted sources of revenue. Each revenue-generating engagement typically is separately solicited, awarded and negotiated. If we are unable to
compete successfully with our existing competitors or with any new competitors, we will not be able to implement our growth strategy, which ultimately could materially
adversely affect our business, financial condition and results of operations.
Our primary competitors include bulge-bracket institutions, many of which have far greater financial and other resources and greater name recognition than we do and
have a greater range of products and services, more extensive marketing resources, larger customer bases, more managing directors to serve their clients' needs, as well as
greater global reach and more established relationships with their customers than we have. These larger and better capitalized competitors may be better able to respond to
changes in the investment banking market, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally,
which puts us at a competitive disadvantage and could result in pricing pressures or loss of opportunities, which could materially adversely affect our revenue and
profitability. In particular, we may be at a competitive disadvantage with regard to certain of our competitors who are able to, and often do, provide financing or market
making services that are often a crucial component of the types of transactions on which we advise.
14
Table of Contents
In addition to our larger competitors, over the last few years, a number of independent investment banks that offer independent advisory services have emerged, with
several showing rapid growth. As these independent firms or new entrants into the market seek to gain market share there could be pricing pressures, which would
adversely affect our revenue and earnings. We have experienced intense competition over obtaining advisory engagements in recent years, and we may experience further
pricing pressures in our business in the future as some of our competitors may seek to obtain increased market share by reducing fees. In particular, when making proposals
for fixed-fee engagements, we estimate the costs and timing for completing the engagements. These estimates reflect our best judgment regarding the efficiencies of our
methodologies and financial professionals as we plan to deploy them on engagements. Any increased or unexpected costs or unanticipated delays in connection with the
performance of fixed-fee engagements, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which would
have an adverse effect on our profit margin.
Goodwill
and
other
intangible
assets
represent
a
significant
portion
of
our
assets,
and
an
impairment
of
these
assets
could
have
a
material
adverse
effect
on
our
financial
condition
and
results
of
operations.
Goodwill and other intangible assets represent a significant portion of our assets, and to taled $723.3 million as of March 31, 2018 . Goodwill is the excess of cost
over the fair market value of net assets acquired in business combinations. We review goodwill and intangible assets at least annually for impairment. We may need to
perform impairment tests more frequently if events occur or circumstances indicate that the carrying amount of these assets may not be recoverable. These events or
circumstance s could include a significant change in the business climate, attrition of key personnel, a prolonged decline in our stock price and market capitalization, legal
factors, operating performance indicators, competition, sale or disposition of a significant portion of one of our businesses and other factors. Although we determined that
it is not more likely than not that the fair values of our goodwill and intangible assets were less than their carrying values during our fiscal 2018 and fiscal 2017 , annual
impairment reviews of indefinite-lived intangible assets or any future impairment of goodwill or other intangible assets would result in a non-cash charge against earnings,
which would adversely affect our results of operations. The valuation of the reporting units requires judgment in estimating future cash flows, discount rates and other
factors. In making these judgments, we evaluate the financial health of our reporting units, including such factors as market performance, changes in our client base and
projected growth rates. Because these factors are ever changing, due to market and general business conditions, our goodwill and indefinite-lived intangible assets may be
impaired in future periods.
We
may
be
unable
to
execute
on
our
growth
initiatives,
business
strategies
or
operating
plans.
We are executing on a number of growth initiatives, strategies and operating plans designed to enhance our business. For example, we intend to continue to expand
our platform into new industry and product sectors, both organically and through acquisitions, and to expand our existing expertise into new geographies. The anticipated
benefits from these efforts are based on several assumptions that may prove to be inaccurate. Moreover, we may not be able to complete successfully these growth
initiatives, strategies and operating plans and realize all of the benefits, including growth targets and cost savings, we expect to achieve or it may be more costly to do so
than we anticipate. A variety of factors could cause us not to realize some or all of the expected benefits. These factors include, among others: delays in the anticipated
timing of activities related to such growth initiatives, strategies and operating plans; difficulty in competing in certain industries, product areas and geographies in which
we have less experience than others; negative attention from any failed initiatives; and increased or unexpected costs in implementing these efforts.
Moreover, our continued implementation of these programs may disrupt our operations and performance. As a result, we may not realize the expected benefits from
these plans. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans adversely
affect our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, we will not be able to implement our growth strategy,
whi ch ultimately could materially adversely affect our business, financial condition and results of operations.
15
Table of Contents
Recent
U.S.
tax
legislation
may
materially
adversely
affect
our
financial
condition,
results
of
operations
and
cash
flows.
Recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income
tax rate, limiting interest deductions, permitting immediate expensing of certain capital expenditures, adopting elements of a territorial tax system, imposing a one-time
transition tax (or “repatriation tax”) on all undistributed earnings and profits of certain U.S.-owned foreign corporations, revising the rules governing net operating losses
and the rules governing foreign tax credits, and introducing new anti-base erosion provisions. Many of these changes are effective immediately, without any transition
periods or grandfathering for existing transactions. ASC 740 requires all companies to reflect the effects of the new law in the financial statements for the period in which
the law was enacted. Accordingly, we reduced the statutory rate that applies to our year-to-date earnings, remeasured our deferred tax assets and liabilities based on the
new rate, and recorded a one-time deemed repatriation tax (a “toll charge”) on our foreign earnings in our reporting period ended December 31, 2017. The impacts of the
legislation, including both the adjustment to the deferred tax accounts and the toll charge, are our best estimates based on the information that is available at the time of
these financial statements and may change as additional information becomes available. Adjustments to deferred tax expense could arise if the actual timing of future
deferred tax reversals and originations differs from current estimates. As for the toll charge, the calculation involves a number of variables and assumptions, including state
tax impacts, which will continue to be refined by us from the fourth quarter through the filing date of our federal and state tax returns. In addition, the legislation is unclear
in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Department of the
Treasury and Internal Revenue Service (“IRS”), any of which could lessen or increase certain adverse impacts of the legislation. Furthermore, it is unclear how these U.S.
federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. If an
adjustment is required, it will be reflected as a discrete expense or benefit in the quarter that it is identified, as allowed by SEC Staff Accounting Bulletin No. 118. We urge
our investors to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our Class A common stock.
Our
international
operations
are
subject
to
certain
risks,
which
may
affect
our
revenue.
In fiscal 2018 , we earned approximately 14% of our revenue from our international operations. We intend to grow our no n-United States business, including growth
into new regions with which we have less familiarity and experience, and this growth is important to our overall success. In addition, many of our larger clients are non-
United States entities. Our international operations carry special financial and business risks, which could include the following:
•
•
•
•
•
•
•
•
•
•
•
•
greater difficulties in managing and staffing foreign operations;
fluctuations in foreign currency exchange rates that could adversely affect our results;
unexpected changes in trading policies, regulatory requirements, tariffs and other barriers;
cultural and language barriers and the need to adopt different business practices in different geographic areas;
longer transaction cycles;
higher operating costs;
local labor conditions and regulations;
adverse consequences or restrictions on the repatriation of earnings;
potentially adverse tax consequences, such as trapped foreign losses;
potentially less stable political and economic environments;
terrorism, political hostilities, war and other civil disturbances or other catastrophic events that reduce
business activity; and
difficulty collecting fees.
As part of our day-to-day operations outside the United States, we are required to create compensation programs, employment policies, compliance policies and
procedures and other administrative programs that comply with the laws of multiple countries. We also must communicate and monitor standards and directives across our
global operations. Our failure to successfully manage and grow our geographically diverse operations could impair our ability to react quickly to changing business and
market conditions and to enforce compliance with non-United States standards and procedures.
Any payment of distributions, loans or advances to and from our subsidiaries could be subject to restrictions on or taxation of, dividends or repatriation of earnings
under applicable local law, monetary transfer restrictions, foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate or other restrictions
imposed by current or future agreements, including debt instruments, to which our non-United States subsidiaries may be a party. Our business, financial condition and/or
results of operations could be adversely impacted, possibly materially, if we are unable to successfully manage these and other risks of international operations in a volatile
environment. If our international business increases relative to our total business, these factors could have a more pronounced effect on our operating results or growth
prospects.
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Table of Contents
In recent years, the United States Department of Justice and the SEC have devoted greater resources to enforcement of the FCPA. In addition, the United Kingdom
has significantly expanded the reach of its anti-bribery laws. While we have developed and implemented policies and procedures designed to ensure strict compliance by
us and our personnel with the FCPA and other anti-corruption laws, such policies and procedures may not be effective in all instances to prevent violations. Any
determination that we have violated the FCPA or other applicable anti-corruption laws could subject us to, among other things, civil and criminal penalties, material fines,
profit disgorgement, injunctions on future conduct, securities litigation and a general loss of investor confidence, any one of which could adversely affect our business
prospects, financial condition, results of operations or the market value of our Class A common stock.
Prior
to
our
IPO
in
August
2015,
our
management
had
not
previously
managed
a
public
company.
Prior to our IPO in August 2015, our management team had historically operated our business as a privately-owned company, and the individuals constituting our
management team had not previously managed a publicly traded company. Compliance with public company requirements places significant additional demands on our
management and has required us to enhance our investor relations, legal, financial reporting, internal audit, compliance with the Sarbanes-Oxley Act and corporate
communications functions. These additional efforts may strain our resources and divert management's attention from other business concerns, which could adversely affect
our business and profitability.
Fluctuations
in
foreign
currency
exchange
rates
could
adversely
affect
our
results.
Because our financial statements are denominated in United States dollars and we receive a portion of our net revenue in other currencies, we are exposed to
fluctuations in foreign currencies. In addition, we pay certain of our expenses in such currencies. Fluctuations in foreign currency exchange rates led to a net gain in cash of
$0.8 million for fiscal 2018 , compared to a net loss in cash of $4.0 million for fiscal 2017 . In particular, we are exposed to the Euro and the pound sterling, and the
weakening of the Euro and other currencies relative to the United States dollar has had, and may continue to have, an adverse effect on our revenue. From time to time, we
have entered into transactions to hedge our exposure to certain foreign currency fluctuations through the use of derivative instruments or other methods. Notwithstanding
our entry into such hedge transactions, a depreciation of any of the currencies to which we are exposed relative to the United States dollar could result in an adverse impact
to our business, financial condition, results of operations and/or cash flows.
The
cost
of
compliance
with
international
broker-dealer,
employment,
labor,
benefits
and
tax
regulations
may
adversely
affect
our
business
and
hamper
our
ability
to
expand
internationally.
Because we operate our business both in the United States and internationally, we are subject to many distinct securities, employment, labor, benefits and tax laws in
each country in which we operate, including regulations affecting our employment practices and our relations with our employees and service providers. If we are required
to comply with new regulations or new interpretations of existing regulations, or if we are unable to comply with these regulations or interpretations, our business could be
adversely affected or the cost of compliance may make it difficult to expand into new international markets. Additionally, our competitiveness in international markets may
be adversely affected by regulations requiring, among other things, the awarding of contracts to local contractors, the employment of local citizens and/or the purchase of
services from local businesses or favoring or requiring local ownership.
We
may
enter
into
new
lines
of
business,
which
may
result
in
additional
risks
and
uncertainties
in
our
business.
We currently generate substantially all of our revenue from advisory services. However, while we have no current plans to do so, we may grow our business by
entering into new lines of business other than advisory services. To the extent we enter into new lines of business, we will face numerous risks and uncertainties, including
risks associated with actual or perceived conflicts of interest because we would no longer be limited to the advisory business, the possibility that we have insufficient
expertise to engage in such activities profitably or without incurring inappropriate amounts of risk, the required investment of capital and other resources and the loss of
clients due to the perception that we are no longer focusing on a core business.
Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead
to increased litigation and regulatory risk. In addition, certain aspects of our cost structure, such as costs for compensation, occupancy and equipment rentals,
communication and information technology services, and depreciation and amortization will be largely fixed, and we may not be able to timely adjust these costs to match
fluctuations in revenue related to our entering into new lines of business. If a new business generates insufficient revenue or if we are unable to efficiently manage our
expanded operations, our business, financial condition and results of operations could be materially adversely affected.
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Table of Contents
We
are
subject
to
risks
relating
to
our
operations,
including
our
information
and
technology,
that
could
harm
our
business.
We operate a business that is highly dependent on information systems and technology. Any failure to keep accurate books and records can render us liable to
disciplinary action by governmental and self-regulatory authorities, as well as to claims by our clients. We rely on third-party service providers for certain aspects of our
business. Although we have yet to suffer any significant losses or other damages as a result of operational risks, any interruption or deterioration in the performance of
these third parties or failures of their information systems and technology could impair our operations, affect our reputation and adversely affect our business.
In addition, a disaster or other business continuity problem, such as a pandemic, other man-made or natural disaster or disruption involving electronic communications
or other services used by us or third parties with whom we conduct business, could lead us to experience operational challenges. The incidence and severity of catastrophes
and other disasters are inherently unpredictable, and our inability to timely and successfully recover could materially disrupt our business and cause material financial loss,
regulatory actions, reputational harm or legal liability.
Extensive
and
evolving
regulation
of
our
business
and
the
business
of
our
clients
exposes
us
to
the
potential
for
significant
penalties
and
fines
due
to
compliance
failures,
increases
our
costs
and
may
result
in
limitations
on
the
manner
in
which
our
business
is
conducted.
As a participant in the financial services industry, we are subject to extensive regulation in the United States and internationally. We are subject to regulation by
governmental and self-regulatory organizations in the jurisdictions in which we operate. As a result of market volatility and disruption in recent years, the United States
and other governments have taken unprecedented steps to try to stabilize the financial system, including providing assistance to financial institutions and taking certain
regulatory actions. The full extent of the effects of these actions and of legislative and regulatory initiatives (including the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”)) effected in connection with, and as a result of, such extraordinary disruption and volatility is uncertain, both as to the financial
markets and participants in general, and as to us in particular.
Our ability to conduct business and our operating results, including compliance costs, may be adversely affected as a result of any new requirements imposed by the
SEC, FINRA or other United States or foreign governmental regulatory authorities or self-regulatory organizations that regulate financial services firms or supervise
financial markets. We may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-
regulatory organizations. In addition, some of our clients or prospective clients may adopt policies that exceed regulatory requirements and impose additional restrictions
affecting their dealings with us. Accordingly, we may incur significant costs to comply with United States and international regulations. Our expenses incurred in
complying with these regulatory requirements, including legal fees and fees paid to the SEC, FINRA and United States or foreign governmental regulatory authorities or
self-regulatory organizations, have increased in recent years. We maintain an internal team that works full-time to develop and implement regulatory compliance policies
and procedures, monitor business activities to ensure compliance with such policies and procedures and reports to senior management. This team also uses various
software tracking and reporting systems and confers regularly with internal and outside legal counsel in the performance of its responsibilities. In addition, new laws or
regulations or changes in enforcement of existing laws or regulations applicable to our clients may adversely affect our business. For example, changes in antitrust
enforcement could affect the level of M&A activity and changes in applicable regulations could restrict the activities of our clients and their need for the types of advisory
services that we provide to them.
Our failure to comply with applicable laws or regulations could result in adverse publicity and reputational harm as well as fines, suspensions of personnel or other
sanctions, including revocation of any required registration of us or any of our subsidiaries and could impair executive retention or recruitment. In addition, any changes in
the regulatory framework under which we operate could impose additional expenses or capital requirements on us, result in limitations on the manner in which our
business is conducted, have an adverse impact upon our business, financial condition and results of operations and require substantial attention by senior management. In
addition, our business is subject to periodic examination by various regulatory authorities, and we cannot predict the outcome of any such examinations.
18
Table of Contents
New
accounting
standards
could
adversely
affect
future
reported
results.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. The Financial Accounting
Standards Board (the “FASB”) and the SEC have at times revised the financial accounting and reporting standards that govern the preparation of our financial statements.
In addition, accounting standard setters and those who interpret the accounting standards may change or even reverse their previous interpretations or positions on how
these standards should be applied. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of
operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. For further
discussion of some of our significant accounting policies and standards, see the “Critical Accounting Estimates” discussion within Item 7 in this report, and Note 2 of the
Notes to Consolidated Financial Statements in this Form 10-K. The FASB has issued several new accounting standards, including on the topics of revenue recognition and
leases. Specifically, ASU No. 2014-09, Revenue from Contracts with Customers will affect the timing of revenue recognition in that certain of our engagements which are
currently recognized on an over time basis will be recognized on a point in time basis under the new standard which is effective April 1, 2018. In addition, certain
reimbursable out-of-pocket expenses incurred by the Company are currently presented net against the related expenses in the accompanying consolidated statements of
comprehensive income however under the new standard these will be reported on a gross basis resulting in an increase to both fee revenue and operating expenses.
We
face
substantial
litigation
risks.
Our role as advisor to our clients involves complex analysis and the exercise of professional judgment, including rendering fairness opinions in connection with
mergers and other transactions. Our activities, and particularly those of our Financial Advisory Services group, may subject us to the risk of significant legal liabilities to
our clients and affected third parties, including shareholders of our clients who could bring securities class actions against us. In recent years, the volume of claims and
amount of damages claimed in litigation and regulatory proceedings against financial services companies have been increasing. Litigation alleging that we performed
below our agreed standard of care or breached any other obligations to a client or other parties could expose us to significant legal liabilities, particularly with respect to
our Financial Advisory Services group, and, regardless of outcome, is often very costly, could distract our management and could damage our reputation. These risks often
may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. Our engagements typically include broad
indemnities from our clients and provisions to limit our exposure to legal claims relating to our services, but these provisions may not protect us in all cases, including
when we perform below our agreed standard of care or a client does not have the financial capacity to pay under the indemnity. As a result, we may incur significant legal
expenses in defending against or settling litigation. In addition, we may have to spend a significant amount to adequately insure against these potential claims, or insurance
coverage may not be available on commercial terms or at all. Substantial legal liability or significant regulatory action against us could have material adverse financial
effects or cause significant reputational harm to us, which could seriously harm our business prospects, financial condition and results of operations.
Cyber-attacks
or
other
security
breaches
could
have
a
material
adverse
effect
on
our
business.
Our clients typically provide us with sensitive and confidential information. We are dependent on information technology networks and systems to securely process,
transmit and store such information and to communicate among our locations around the world and with our professional staff, clients, alliance partners and vendors. We
may be subject to attempted security breaches and cyber-attacks and, while none have had a material impact to date, a successful breach could lead to shutdowns or
disruptions of our systems or third-party systems on which we rely and potential unauthorized disclosure of sensitive or confidential information. Breaches of our security
systems or third-party network security systems on which we rely could involve attacks that are intended to obtain unauthorized access to our proprietary information,
client and third party information, destroy data or disable, degrade or sabotage our systems, often through the introduction of computer viruses, cyber-attacks and other
means and could originate from a wide variety of sources, including unknown third parties outside the Company. If our systems or third-party systems on which we rely
are compromised, do not operate properly or are disabled, we could suffer a disruption of our business, financial losses, liability to clients, regulatory sanctions and damage
to our reputation.
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Table of Contents
We
are
subject
to
continuing
contingent
tax
liabilities
of
ORIX
USA.
As a result of the corporate reorganization prior to our IPO, certain tax liabilities of ORIX USA may have become our obligations. Under the Internal Revenue Code
of 1986, as amended (the “Code”), and the related rules and regulations, each corporation that was a member of the ORIX USA consolidated United States federal income
tax reporting group during any taxable period or portion of any taxable period ending on or before the completion of the corporate reorganization is jointly and severally
liable for the United States federal income tax liability of the entire ORIX USA consolidated tax reporting group for that taxable period. As part of the Corporate
Reorganization, we agreed with ORIX USA to allocate the responsibility for prior period taxes of the ORIX USA consolidated tax reporting group between us and ORIX
USA. Thus, in the event that ORIX USA were to be assessed for taxes attributable to our business for any period, we would be required to compensate ORIX USA for such
liability. In addition, if ORIX USA is unable to pay any prior period taxes for which it is responsible, we could be required to pay the entire amount of such taxes.
Our
revenue
in
any
given
period
is
dependent
on
the
number
of
fee-paying
clients
in
such
period
and
the
size
of
transactions
on
which
we
are
advising,
and
a
significant
reduction
in
the
number
of
fee-paying
clients
in
any
given
period
could
reduce
our
revenue
and
adversely
affect
our
operating
results
in
such
period.
Our revenue in any given period is dependent on the number of fee-paying clients in such period and the size of transactions on which we are advising. We may lose
clients as a result of the sale or merger of a client, a change in a client's senior management, competition from other financial advisors and financial institutions and other
causes. A significant reduction in the number of fee-paying clients and/or the size of transactions on which we are advising in any given period could reduce our revenue
and adversely affect our operating results in such period.
Our
clients
may
be
unable
to
pay
us
for
our
services.
We face the risk that certain clients may not have the financial resources to pay our agreed-upon advisory fees, including in the bankruptcy or insolvency context. Our
clients include some companies that may from time to time encounter financial difficulties. If a client's financial difficulties become severe, the client may be unwilling or
unable to pay our invoices in the ordinary course of business, which could adversely affect collections of both our accounts receivable and unbilled services. On occasion,
some of our clients have entered bankruptcy, which has prevented us from collecting amounts owed to us. The bankruptcy of a number of our clients that, in the aggregate,
owe us substantial accounts receivable could have a material adverse effect on our business, financial condition and results of operations. In addition, if a number of clients
declare bankruptcy after paying us certain invoices, courts may determine that we are not properly entitled to those payments and may require repayment of some or all of
the amounts we received, which could adversely affect our business, financial condition and results of operations. In addition, some fees earned from certain activities in
our Financial Restructuring business segment are subject to approval by the United States Bankruptcy Courts and other interested parties, including United States Trustees,
which have the ability to challenge the payment of those fees. Fees earned and reflected in our revenue may from time to time be subject to successful challenges, which
could result in a reduction of revenue. Finally, certain clients may also be unwilling to pay our advisory fees in whole or in part, in which case we may have to incur
significant costs to bring legal action to enforce our engagement agreements to obtain our advisory fees. We accrued bad debt expense of $2.0 million in fiscal 2018 and
$4.0 million in fiscal 2017 , related to uncollectible or doubtful accounts receivable.
20
Table of Contents
We
may
not
be
able
to
generate
sufficient
cash
in
the
future
to
service
any
future
indebtedness.
Our ability to make scheduled payments on or to refinance our debt obligations will depend on our business, financial condition and results of operations. We cannot
provide assurance that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal of, and interest on, our indebtedness. If
our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to
sell assets, seek additional capital or restructure or refinance such indebtedness.
Risks Related to Our Class A Common Stock
The
dual
class
structure
of
our
common
stock
and
the
ownership
of
our
Class
B
common
stock
by
ORIX
USA
and
the
HL
Holders
through
the
HL
Voting
Trust
have
the
effect
of
concentrating
voting
control
with
ORIX
USA
and
the
HL
Voting
Trust
for
the
foreseeable
future,
which
limits
the
ability
of
our
Class
A
common
stockholders
to
influence
corporate
matters.
We
are
controlled
by
ORIX
USA
and
the
HL
Voting
Trust,
whose
interests
may
differ
from
those
of
our
Class
A
common
stockholders.
Each share of our Class B common stock is entitled to ten votes per share, and each share of our Class A common stock is entitled to one vote per share. Given the
greater number of votes per share attributed to our Class B common stock, as of March 31, 2018 and after giving effect to the January 2018 Forward Share Purchase
Agreement, ORIX USA and the HL Holders through the HL Voting Trust, which each hold shares of Class B common stock, collectively beneficially owned
35,187,932 shares of Class B common stock representing approximately 53.5% of the economic interest, and control 92.0% of the voting power of our outstanding capital
stock. ORIX USA and the HL Voting Trust will, for the foreseeable future, have significant influence over our corporate management and affairs, and will be able to
control virtually all matters requiring stockholder approval. ORIX USA and the HL Voting Trust are collectively able, subject to applicable law and voting arrangements
between them, to elect a majority of the members of our board of directors and control actions to be taken by us and our board of directors, including amendments to our
amended and restated certificate of incorporation and bylaws and approval of significant corporate transactions, including mergers and sales of substantially all of our
assets. The directors so elected will have the authority, subject to the terms of our indebtedness and applicable rules and regulations, to issue additional stock, implement
stock repurchase programs, declare dividends and make other decisions. This concentrated control will limit the ability of holders of our Class A common stock to
influence corporate matters for the foreseeable future and may materially adversely affect the market price of our Class A common stock. It is possible that the interests of
ORIX USA and the HL Voting Trust may in some circumstances conflict with our interests and the interests of our other stockholders. For example, ORIX USA and the
HL Voting Trust may have different tax positions or other differing incentives from other stockholders that could influence their decisions regarding whether and when to
cause us to dispose of assets, incur new or refinance existing indebtedness or take other actions. Additionally, the holders of our Class B common stock may cause us to
make strategic decisions or pursue acquisitions that could involve risks to holders of our Class A common stock or may not be in the best interests of holders of our Class
A common stock.
The holders of our Class B common stock will also be entitled to a separate vote in the event we seek to amend our amended and restated certificate of incorporation
to increase or decrease the par value of a class of our common stock or in a manner that alters or changes the powers, preferences or special rights of the Class B common
stock in a manner that affects its holders adversely. Future transfers by holders of Class B common stock will generally result in those shares converting on a one-for-one
basis to Class A common stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their
shares in the long-term.
We
are
a
“ controlled
company
” within
the
meaning
of
the
New
York
Stock
Exchange
listing
standards
and,
as
a
result,
qualify
for,
and
rely
on,
exemptions
from
certain
corporate
governance
requirements.
Holders
of
Class
A
common
stock
do
not
have
the
same
protections
afforded
to
stockholders
of
companies
that
are
subject
to
such
requirements.
ORIX USA and the HL Voting Trust control a majority of the voting power of our outstanding common stock. As a result, we qualify as a “controlled company”
within the meaning of the corporate governance standards of the New York Stock Exchange. Under these rules, a listed company of which more than 50% of the voting
power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements,
including the requirement that a majority of the board of directors consist of independent directors, the requirement that we have a nominating and corporate governance
committee that is composed entirely of independent directors, and the requirement that we have a compensation committee that is composed entirely of independent
directors.
We intend to continue to rely on some or all of these exemptions. As a result, we do not have a majority of independent directors and our compensation and
nominating and corporate governance committees do not consist entirely of independent directors. Accordingly, our stockholders do not have the same protections afforded
to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.
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Table of Contents
While
we
currently
pay
a
quarterly
cash
dividend
to
our
stockholders,
we
may
change
our
dividend
policy
at
any
time
and
we
may
not
continue
to
declare
cash
dividends.
Although we currently pay a quarterly cash dividend to our stockholders, we have no obligation to do so, and our dividend policy may change at any time. Returns on
stockholders' investments will primarily depend on the appreciation, if any, in the price of our Class A common stock. The amount and timing of dividends, if any, are
subject to capital availability and periodic determinations by our board of directors that cash dividends are in the best interest of our stockholders and are in compliance
with all applicable laws and any other contractual agreements limiting our ability to pay dividends. Under our current debt obligations (as described herein) we are
restricted from paying cash dividends in certain circumstances, and we expect these restrictions to continue in the future. Our ability to pay dividends may also be restricted
by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. Future dividends, including their timing and
amount, may be affected by, among other factors: general economic and business conditions; our financial condition and operating results; our available cash and current
anticipated cash needs; capital requirements; contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders; and
such other factors as our board of directors may deem relevant.
Our dividend payments may change from time to time, and we may not continue to declare dividends in any particular amounts or at all. The reduction in or
elimination of our dividend payments could have a negative effect on our stock price.
If
securities
analysts
do
not
publish
research
or
reports
about
our
business
or
if
they
publish
negative
evaluations
of
our
Class
A
common
stock,
the
price
of
our
Class
A
common
stock
could
decline.
The trading market for our Class A common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do
not control these analysts. If one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our Class A common stock could
decline. If one or more of these analysts cease to cover our Class A common stock, we could lose visibility in the market for our stock, which in turn could cause our
Class A common stock price to decline.
The
trading
price
of
our
Class
A
common
stock
may
be
volatile
or
may
decline
regardless
of
our
operating
performance,
which
could
cause
the
value
of
our
Class
A
common
stock
to
decline.
The market price for our Class A common stock is volatile, in part because of the limited number of shares of Class A common stock outstanding, and the limited
trading history of the Class A common stock. In addition, the market price of our Class A common stock may fluctuate significantly in response to a number of factors,
most of which we cannot control, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our operating and financial performance and prospects;
our quarterly or annual earnings or those of other companies in our industry;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
quarterly variations in our operating results compared to market expectations;
changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common
shares or the stock of other companies in our industry;
adverse publicity about us, the industries we participate in or individual scandals;
announcements of new offerings by us or our competitors;
stock price performance of our competitors;
changes in the evaluations of our Class A common stock by research analysts
fluctuations in stock market prices and volumes;
default on our indebtedness;
actions by competitors;
changes in senior management or key personnel;
changes in financial estimates by securities analysts;
our status as a “ controlled company ” ;
negative earnings or other announcements by us or other financial services companies;
downgrades in our credit ratings or the credit ratings of our competitors;
incurrence of indebtedness or issuances of capital stock;
global economic, legal and regulatory factors unrelated to our performance; and
the other factors listed in this “ Risk Factors ” section.
In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of
many companies in our industry. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in
securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.
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Table of Contents
Our
share
price
may
decline
due
to
the
large
number
of
shares
eligible
for
future
sale.
The market price of our Class A common stock could decline as a result of sales of a large number of shares of Class A common stock available for sale upon
conversion of Class B common stock or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more
difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
All of our executive officers and the other HL Holders who have deposited their shares into the HL Voting Trust are subject to lock-up agreements that restrict their
ability to transfer shares of our capital stock. These agreements restrict these holders’ ability to transfer shares of our capital stock until August 2018, subject to
acceleration in certain circumstances. After this period, shares of common stock held by HL Holders indirectly through the HL Voting Trust will become transferable in
three equal installments in each of August 2018, 2019 and 2020. In addition, shares of our common stock held by managing directors and certain senior corporate officers
of the Company whose employment with the Company or a subsidiary thereof terminates (other than due to a death or disability) before the third anniversary of the IPO
will be subject to transfer restrictions for seven years following the IPO. As of March 31, 2018 , 25,477,601 shares of our Class A common stock issuable upon conversion
of outstanding Class B common stock are eligible for sale, subject to the restrictions under the lock-up agreements described above, and subject to certain restrictions under
the Securities Act of 1933, as amended (the “ Securities Act ” ). Stockholders who are subject to any of the lock-up agreements described above may be permitted to sell
shares prior to the expiration of the applicable lock-up agreement in certain circumstances, including a secondary offering, or as a result of a waiver approved by the Board
of Directors.
We
have
incurred
and
will
continue
to
incur
increased
costs
as
a
result
of
becoming
a
public
company
and
in
the
administration
of
our
organizational
structure.
As a public company, we incur significant legal, accounting, insurance and other expenses that we did not previously incur as a private company, including costs
associated with public company reporting requirements. We also have incurred and will continue to incur costs associated with the Sarbanes-Oxley Act and related rules
implemented by the SEC. We also incur ongoing periodic expenses in connection with the administration of our organizational structure. The expenses incurred by public
companies generally for reporting and corporate governance purposes have been increasing as a result of additional rules and regulations. We expect this to continue which
will likely make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and
regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to
accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more
difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to
satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil
litigation.
The historical financial information in this Form 10-K for periods prior to the initial public offering of our Class A common stock presented herein do not reflect the
added costs we incur as a public company, including costs related to public company reporting, investor relations and compliance with the Sarbanes-Oxley Act. As a result
of these matters, among others, it may be difficult for investors to compare our current and future results to historical results or to evaluate our relative performance or
trends in our business. For more information on our historical financial information, see “ Selected Consolidated Financial and Other Data, ” “ Management's Discussion
and Analysis of Financial Condition and Results of Operations ” and the historical financial statements included elsewhere in this Form 10-K.
Failure
to
establish
and
maintain
effective
internal
controls
in
accordance
with
Section
404
of
the
Sarbanes-Oxley
Act
could
have
a
material
adverse
effect
on
our
business
and
stock
price.
We are required to comply with the SEC's rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and
other information in ou r quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Our independent
registered public accounting firm is now required to formally attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404. Our
independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented,
designed or operating.
23
Table of Contents
To comply with the requirements of being a public company, we hav e undertaken various actions, and may need to take additional actions, such as implementing new
internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal controls can divert our management's attention
from other matters that are important to the operation of our business. A material weakness is a deficiency, or combination of deficiencies, in internal controls, such that
there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A
significant deficiency is a deficiency, or combination of deficiencies, in internal controls that is less severe than a material weakness, yet important enough to merit
attention by those charged with governance. Although we have not identified a material weakness in the past two fiscal years, in the future when evaluating our internal
controls over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for
compliance with the requirements of Section 404. If we identify any material weaknesses in our internal controls over financial reporting or are unable to comply with the
requirements of Section 404 in a timely manner or assert that our internal controls over financial reporting is ineffective, or if our independent registered public accounting
firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting once, investors may lose confidence in the accuracy and
completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by
the stock exchange on which our securities are be listed, the SEC or other regulatory authorities, which could require additional financial and management resources and
could lead to a decline in our stock price.
Our
anti-takeover
provisions
could
prevent
or
delay
a
change
in
control
of
our
Company,
even
if
such
change
in
control
would
be
beneficial
to
our
stockholders.
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law could discourage, delay
or prevent a merger, acquisition or other change in control of our company, even if such change in control would be beneficial to our stockholders. Certain provisions of
our amended and restated certificate of incorporation and our amended and restated bylaws that could prevent or delay a change in control of our company include:
•
•
•
•
•
•
•
•
•
the ability to issue “ blank check ” preferred stock, which could increase the number of outstanding shares and thwart a takeover attempt;
a classified board of directors so that not all members of our board of directors are elected at one time;
the ability to remove directors only for cause;
no use of cumulative voting for the election of directors;
no ability of stockholders to call special meetings;
supermajority voting provisions for stockholder approval of amendments to our certificate of incorporation and by-laws;
the requirement that, to the fullest extent permitted by law and unless we agree otherwise, certain proceedings against or involving us or our directors,
officers or employees be brought exclusively in the Court of Chancery in the State of Delaware;
the ability of stockholders to take action by written consent; and
advance notice and duration of ownership requirements for nominations for election to the board of directors or for proposing matters that can be acted
upon by stockholders at stockholder meetings.
These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors of their choosing and cause us to take other
corporate actions they desire. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions could in turn
affect any attempt by our stockholders to replace current members of our management team.
In addition, the General Corporation Law of the State of Delaware (the “ DGCL ” ), to which we are subject, prohibits us, except under specified circumstances, from
engaging in any mergers, significant sales of stock or assets or business combinations with any stockholder or group of stockholders who owns at least 15% of our
common stock.
We
may
issue
shares
of
preferred
stock
in
the
future,
which
could
make
it
difficult
for
another
company
to
acquire
us
or
could
otherwise
adversely
affect
holders
of
our
Class
A
common
stock,
which
could
depress
the
price
of
our
Class
A
common
stock.
Our amended and restated certificate of incorporation authorizes us to issue one or more series of preferred stock. Our board of directors has the authority to
determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such
series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights
of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our Class A common stock at a
premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our Class A common stock.
24
Table of Contents
The
provision
of
our
amended
and
restated
certificate
of
incorporation
requiring
exclusive
venue
in
the
Court
of
Chancery
in
the
State
of
Delaware
for
certain
types
of
lawsuits
may
have
the
effect
of
discouraging
lawsuits
against
our
directors,
officers
and
stockholders.
Our amended and restated certificate of incorporation requires, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our
behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or stockholders to us or our stockholders, (iii) any action
asserting a claim arising pursuant to any provision of the DGCL or as to which the DGCL confers jurisdiction in the Court of Chancery of the State of Delaware or (iv) any
action asserting a claim governed by the internal affairs doctrine will have to be brought only in the Court of Chancery in the State of Delaware, unless we agree otherwise.
Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the
provision may have the effect of discouraging lawsuits against our directors, officers and stockholders.
25
Table of Contents
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our headquarters is located in leased offi ce space at 10250 Constellation Boulevard, Los Angeles, California 90067. We lease the space in the United States for
our offices in Atlanta, Chicago, Dallas, Houston, Minneapolis, Miami, New York, San Francisco and Washington D.C.; and internationally in Amsterdam, Beijing, Dubai,
Frankfurt, Hong Kong, London, Madrid, Paris, Singapore, Sydney and Tokyo.
We do not own any real property. We consider these arrangements to be adequate for our present and future needs.
Item 3. Legal Proceedings
In the ordinary course of business, from time to time the Company and its affiliates are involved in judicial or regulatory proceedings, arbitrations or mediations
concerning matters arising in connection with the conduct of its businesses, including contractual and employment matters. In addition, government agencies and self-
regulatory organizations conduct periodic examinations and initiate administrative proceedings regarding the Company’s business, including, among other matters,
compliance, accounting and operational matters, that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or
its directors, officers or employees. In view of the inherent difficulty of determining whether any loss in connection with such matters is probable and whether the amount
of such loss can be reasonably estimated, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in
the early stages, the Company cannot estimate the amount of such loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they
will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, the Company believes, based on current
knowledge and after consultation with counsel, that it is not currently party to any material pending proceedings, individually or in the aggregate, the resolution of which
would have a material effect on the Company. Where appropriate, provisions for losses are established in accordance with Accounting Standards Codification (ASC) 450,
“Contingencies” when warranted. Once established, such provisions are adjusted when there is more information available or when an event occurs requiring a change.
Item 4. Mine Safety Disclosures
Not applicable.
26
Table of Contents
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A common stock is traded on the New York Stock Exchange under the symbol “HLI.” There is no publicly traded market for our Class B common
stock. 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. Our fiscal year ends on March 31 of each year. The following table sets forth, for
the fiscal quarters indicated, the high and low sales prices per share of our Class A common stock, as reported in the consolidated transaction reporting system, and the
quarterly dividends declared on each share of our Class A and Class B common stock.
Fiscal Year Ended March 31, 2017
Quarter ended 6/30/2016
Quarter ended 9/30/2016
Quarter ended 12/31/2016
Quarter ended 3/31/2017
Fiscal Year Ended March 31, 2018
Quarter ended 6/30/2017
Quarter ended 9/30/2017
Quarter ended 12/31/2017
Quarter ended 3/31/2018
Sales Price
High
Low
Dividends per share
of common stock
$
$
$
$
$
$
$
$
25.54 $
25.99 $
31.75 $
34.95 $
36.65 $
39.68 $
46.99 $
52.81 $
21.53 $
20.96 $
23.19 $
29.51 $
32.08 $
34.41 $
38.89 $
43.22 $
0.17
0.17
0.17
0.20
0.20
0.20
0.20
0.20
As of May 21, 2018, there were approximately five holders of record of our Class A common stock and two holders of record of our Class B common stock. This
does not include the number of shareholders that hold shares in "street-name" through banks or broker-dealers or through the HL Voting Trust.
Dividend Payments and Dividend Policy
Prior to the consummation of the IPO, HL CA made a distribution to its direct holder that was ultimately distributed pro rata and paid to its then-existing owners
in the amount of $270.0 million, consisting of (i) a short-term note in the aggregate amount of $197.2 million, which was repaid immediately after the consummation of the
IPO, and was allocated $94.5 million to ORIX USA and $102.7 million to the HL Holders, (ii) a $45.0 million note issued to ORIX USA and (iii) certain of our non-
operating assets (consisting of non-marketable minority equity interests in four separate businesses that ranged in carrying value from $2.5 million to $11.0 million as of
June 30, 2015 and were valued in the aggregate at approximately $22.8 million as of June 30, 2015, together with $5.0 million in cash to be used to complete a potential
additional investment and in the administration of these assets in the future), which were distributed to certain of the HL Holders.
The Company has regularly declared and paid quarterly dividends and plans to continue paying regularly quarterly dividends.
The declaration and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors will take into account: general
economic and business conditions; our financial condition and operating results; our available cash and current anticipated cash needs; capital requirements; contractual,
legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders; and such other factors as our board of directors may deem
relevant.
Unregistered Sales of Equity Securities and Use of Proceeds
In August 2017, we issued an aggregate of 26,492 shares of Class B common stock at a price of $34.90 per share to certain former employees in connection with
the acquisition of Bridge Strategy Group ("Bridge").
In December 2017, we issued an additional 41,974 shares of Class B common stock at a price of $41.76 per share to sellers in connection with the acquisition of
McQueen Holdings Limited ("McQueen").
27
Table of Contents
In January 2018, we issued an aggregate of 24,666 shares of Class B common stock at a price of $23.14 per share to certain former employees in connection with
the acquisition of Archpoint.
None of the foregoing issuances of unregistered equity securities involved any underwriters, underwriting discounts or commissions, or any public offering, and,
to the extent any such issuances constituted sales of unregistered equity securities, we believe that such transactions were originally exempt from the registration
requirements of the Securities Act in reliance on Rule 701 promulgated under the Securities Act as transactions pursuant to a compensatory benefit plan approved by our
board of directors, or Section 4(a)(2) of the Securities Act and/or Rule 506(b) of Regulation D promulgated thereunder, as transactions by an issuer not involving a public
offering, based in part on representations from the recipients regarding their investment intention, sophistication, net worth and access to information concerning us.
Stock
Performance
The stock performance graph below compares the performance of an investment in our Class A common stock, from August 13, 2015 through March 29, 2018,
with that of the S&P 500 Index and the S&P Financial Index. The graph assumes $100 was invested in each of our Class A common stock on August 13, 2015 (at the
closing price on the first trading day following our initial public offering), the S&P 500 Index and the S&P Financial Index. It also assumes that dividends were reinvested
on the date of payment without payment of any commissions. The performance shown in the graph represents past performance and should not be considered an indication
of future performance.
28
Table of Contents
Purchases
of
Equity
Securities
The following table summarizes all of the repurchases of Houlihan Lokey, Inc. registered equity securities during the the fiscal year ended March 31, 2018 :
Period
April 1, 2017 - April 30, 2017
May 1, 2017 - May 31, 2017
June 1, 2017 - June 30, 2017
July 1, 2017 - July 31, 2017
August 1, 2017 - August 31, 2017
September 1, 2017 - September 30, 2017
October 1, 2017 - October 31, 2017
November 1, 2017 - November 30, 2017
December 1, 2017 - December 31, 2017
January 1, 2018 - January 31, 2018
February 1, 2018 - February 28, 2018
March 1, 2018 - March 31, 2018
Total
Total Number of
Shares Purchased
Average Price
Paid Per
Share
Total Number Of
Shares Purchased
As Part Of Publicly
Announced Plans
Or Programs
Maximum Number
Of Shares That May
Yet Be Purchased
Under The Plans Or
Programs
71,913 (1)
—
166,774 (2)
48,794 (2)
137,935 (2)
76,734 (2)
—
—
—
—
—
68,504 (1)
570,654
$25.52
—
$34.26
$35.31
$35.70
$36.10
—
—
—
—
—
$15.68
$31.61
—
—
166,774
48,794
137,935
76,734
—
—
—
—
—
—
430,237
—
—
—
—
—
—
—
—
—
—
—
—
—
____________________________________
1. Represents shares of Class B common stock repurchased from former employees pursuant to contractual arrangements entered into in connection with
a prior acquisition, or at a negotiated price.
2. On February 1, 2017, our board of directors approved a Class A common stock share repurchase program pursuant to which we may, from time to
time, purchase shares of our Class A common stock having an aggregate purchase price of up to $50.0 million in open market or negotiated
transactions of which $34.9 million remains unused as of March 31, 2018. The shares of Class A common stock repurchased through this program
have been retired.
Item 6.
Selected Financial Data
The following selected financial and other data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the historical financial statements and related notes included elsewhere in this Form 10-K.
The selected historical financial data for the years ended March 31, 2018 , 2017 , and 2016 and as of March 31, 2018 and 2017 have been derived from our
audited consolidated financial statements included in this Form 10-K.
29
Table of Contents
($ in thousands)
Consolidated Statements of Operations Data:
Fee revenue
Operating expenses:
Employee compensation and benefits
Non-compensation expenses
Total operating expenses
Operating income
Other (income) expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Net income attributable to noncontrolling interest
Net income attributable to Houlihan Lokey, Inc.
Weighted average number of shares outstanding (1)
Basic
Diluted
Net income attributable to Houlihan Lokey, Inc. per share (1)
Basic
Diluted
Cash dividends per share (2)
Consolidated Balance Sheets Data:
Cash and cash equivalents
Investment securities (3)
Total assets
Long-term obligations (4)
Total liabilities
Total stockholders' equity
Year ended March 31,
2018
2017
2016
$
963,364 $
872,091 $
693,765
636,631
112,287
748,918
214,446
(3,390)
217,836
45,553
172,283
—
582,244
107,852
690,096
181,995
3,508
178,487
70,144
108,343
—
$
172,283 $
108,343 $
461,609
105,756
567,365
126,400
770
125,630
55,863
69,767
(26)
69,741
62,494,275
66,324,093
61,100,497
66,579,130
59,044,981
63,475,903
$
$
$
$
2.76 $
2.60 $
1.77 $
1.63 $
0.80 $
0.71 $
206,723 $
300,314 $
209,319
1,418,841
10,872
566,028
852,813
—
1,385,707
15,112
655,252
726,617
1.18
1.10
0.30
166,169
—
1,070,884
76,620
417,329
651,160
_______________________________________________________________________________
(1) The number of shares and per share amounts for the periods presented have been retroactively restated to reflect the conversion of Fram shares to HLI
(2)
shares at a ratio of 10.425 shares to each share of Fram stock. See accompanying notes to consolidated financial statements.
In addition to the $0.30 per share paid to holders of HLI shares during the year ended March 31, 2016, prior to the consummation of the IPO, the
Company distributed to the existing owners an aggregate dividend of $270.0 million , consisting of (i) a short‑term note in the aggregate amount of
$197.2 million , which was repaid immediately after the consummation of the IPO, and was allocated $94.5 million to ORIX USA and $102.7 million
to the HL Holders, (ii) a note to ORIX USA in the amount of $45.0 million (see footnote 7), and (iii) certain of our non-operating assets (consisting of
non-marketable minority equity interests in four separate businesses that range in carrying value from $2.5 million to $11.0 million ) to certain of the
HL Holders.
Investment securities consists of corporate debt, certificates of deposit, and U.S. treasury securities with maturities less than one year.
(3)
(4) For further detail, please see Contractual Obligations included in Item 7. Management's Discussion and Analysis.
30
Table of Contents
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our historical financial statements
and related notes included elsewhere in this Form 10-K. Actual results and the timing of events may differ significantly from those expressed or implied in any forward-
looking statements due to a number of factors, including those set forth in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking
Statements” and elsewhere in this Form 10-K.
Executive Overview
Established in 1972, Houlihan Lokey is a leading global independent investment bank with expertise in M&A, financings, financial restructurings and financial
advisory services. Through our 21 offices in the United States, Europe, Middle East, and Asia and one office through our joint venture in Milan, we serve a diverse set of
clients worldwide including corporations, financial sponsors, and government agencies. We advise our clients on critical strategic and financial decisions employing a
rigorous analytical approach coupled with deep product and industry expertise.
We operate in three segments: Corporate Finance, Financial Restructuring and Financial Advisory Services. In our Corporate Finance business segment, we
believe we are an established leader in M&A and capital markets advisory services. Through our Financial Restructuring business segment, we advise on some of the
largest and most complex restructurings around the world. Our Financial Advisory Services business segment is one of the largest and most respected valuation and
financial opinion, and financial and strategic consulting practices in the United States.
As of March 31, 2018, we served our clients globally with 884 financial professionals, including 169 Managing Directors. We plan to continue to grow our firm
across industry sectors, geographies and products to deliver quality advice and innovative solutions to our clients, both organically and through acquisitions. Acquisitions
include: Milestone Advisors in December 2012, which we combined with our existing financial institutions group to create a more robust platform; ArchPoint Partners
LLC in March 2014, which significantly increased our expertise in the technology sector; Bridge in January 2015, which added strategic consulting to our current
consulting capabilities for C-suite relationships; M.E.S.A. Securities, Inc. in June 2015, which increased our capabilities in the digital and traditional media sectors;
McQueen in September 2015, which increased our capacity in the consumer, food and retail sectors, particularly in Europe; Leonardo & Co. NV in November 2015 in
Germany, the Netherlands and Spain, and a minority interest in a joint venture with the management team of Leonardo's investment banking operations in Italy
(collectively, "Leonardo"), which enables us to provide a much greater breadth of services and coverage to our clients both in continental Europe and across the globe; and
Black Stone IP LLC in January 2017, which increased our capabilities in the intellectual property sector.
We generate revenues primarily from providing advisory services on transactions that are subject to individually negotiated engagement letters that set forth our
fees. A significant portion of our engagements include Progress Fees (as defined herein) consisting of both periodic and milestone-related payments. The timing of
milestone-related payments, such as upon the closing of a transaction, is generally not within our control. Accordingly, fee revenue and net income in any period may not
be indicative of full year results or the results of any other period and may vary significantly from year to year and quarter to quarter.
Corporate expenses represent expenses that are not allocated to individual business segments such as office of the executives, accounting, information technology,
compliance and legal, marketing, human capital management and human resources, including related compensation expense for corporate employees.
Business Environment and Outlook
Economic and global financial conditions can materially affect our operational and financial performance. See “Risk Factors” for a discussion of some of the
factors that can affect our performance.
Our fiscal year ends on March 31 of each year. For the fiscal year ended March 31, 2018 , we earned fee revenue of $963.4 million , an increase of 10% from the
$872.1 million earned during the fiscal year ended March 31, 2017 . For the fiscal year ended March 31, 2017 , fee revenue reflects an increase of 26% over fiscal year
ended March 31, 2016 fee revenue of $693.8 million . For the fiscal years ended March 31, 2018 , 2017 and 2016 , we earned fee revenue of $133.3 million , $111.6
million and $92.6 million , respectively, from our international operations.
Based on historical experience, we believe the current economic condition (high corporate cash balances and lower but increasing interest rates) provides a
healthier environment for M&A and capital markets activities. In the United States, our dialog with clients who are evaluating strategic alternatives remains good and the
availability of capital for the mid-cap space continues to be strong, which has the potential to fuel continued activity in M&A. In addition, in the current economic
environment, companies and financial sponsors globally are pursuing M&A in order to drive greater efficiencies by reducing costs and increasing cash flows.
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At the same time, we continue to experience demand for our Financial Restructuring services due to opportunities arising as a result of dislocations in certain
geographies and industries. In addition, we are positioned to identify attractive opportunities in geographies where restructuring markets are just beginning to evolve,
driven by increased external investment and continued development of financial and legal sophistication, such as India, China, and other parts of Asia.
Key Financial Measures
Fee
Revenue
Fee revenue reflects revenues from our Corporate Finance (“CF”) , Financial Restructuring (“FR”), and Financial Advisory Services (“FAS”) business segments
that substantially consist of fees for advisory services.
Revenue for all three business segments is recognized when earned and realizable. 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”). Retainer Fees are generally recognized on a monthly basis, except in situations where there is uncertainty
as to the timing of collection of the amount due. Progress Fees are recognized based on management’s estimates of the relative proportion of services provided through the
financial reporting date to the total services required to be performed. Completion Fees are recognized only upon substantial completion of the contingencies stipulated by
the engagement agreement. In some cases, approval of our fees is required from the courts or other regulatory authority; in these circumstances, the recognition of revenue
is often deferred until approval is granted. However, if the fee that is going to be collected from the client is fixed and determinable, and the collectability of the fee is
reasonably assured, there are instances when revenue recognition prior to such approval is appropriate under GAAP. In instances when the revenue recognized on a
specific engagement exceeds the amounts billed, unbilled work-in-process is recorded. Billed receivables are recorded as accounts receivable in the consolidated balance
sheets. See “Critical Accounting Policies and Estimates” included in Part II, Item 7 of this Form 10-K for a more detailed discussion.
Corporate Finance 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 Corporate Finance revenues consists of Completion Fees. A Corporate Finance 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 earned.
Financial Restructuring provides advice to debtors, creditors and other parties-in-interest in connection with recapitalization/deleveraging transactions
implemented both through bankruptcy proceedings and though 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 Financial Restructuring 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, a Financial Restructuring 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 initial Retainer Fees and/or Progress Fees.
Financial Advisory Services 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 Financial Advisory Services
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 Financial Advisory Services business segment
provides dispute resolution services to clients where fees are usually based on the hourly rates of our financial professionals. Lastly, our Financial Advisory Services
business segment provides strategic consulting services to clients where fees are either fixed or based on the hourly rates of our consulting professionals. Unlike our
Corporate Finance or Financial Restructuring segments, the fees generated in our Financial Advisory Services segment are generally not contingent on the successful
completion of a transaction.
Operating
Expenses
Our operating expenses are classified as employee compensation and benefits expense and non-compensation expenses; headcount is the primary driver of our
operating expenses. Expenses are recorded on the consolidated statements of comprehensive income, net of any expenses reimbursed by clients.
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Table of Contents
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 salaries, payroll taxes, benefits, annual incentive compensation payable as cash bonus awards,
deferred cash bonus awards, and the amortization of equity-based bonus awards. Base salaries and benefits are paid ratably throughout the year. Our annual equity-based
bonus awards include fixed share compensation awards and 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 three- or 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 quarter of each year with respect to prior year performance. Generally, a portion of the cash bonus is also deferred and paid in the third
quarter of the next fiscal year.
In managing employee compensation and benefits expense, we focus on the following: (i) the ratio of our employee compensation and benefits to fee revenue
(“Compensation Ratio”), (ii) the ratio of our employee compensation and benefits to fee revenue, excluding certain equity and cash grants vesting in connection with our
IPO (“Adjusted Compensation Ratio”), (iii) the ratio of cash compensation and benefits plus deferred stock compensation with respect to the applicable year less any
forfeitures of unvested deferred stock that occurred during the applicable year to fee revenue (“Awarded Compensation Ratio”) and, (iv) for periods commencing on
October 1, 2015 through March 31, 2018, the Awarded Compensation Ratio, excluding certain equity and cash grants awarded in connection with our IPO (“Adjusted
Awarded Compensation Ratio”). We believe adjusted awarded employee compensation and benefits reflects the actual compensation cost more accurately than the GAAP
measure of compensation cost, which includes applicable-period cash compensation and the amortization of deferred incentive compensation principally attributable to
prior periods’ deferred compensation. For periods commencing on October 1, 2015 through March 31, 2018, we targeted an Adjusted Awarded Compensation Ratio of
approximately 65.0% to 66.0%. With the adoption of ASU No. 2014-09, Revenue from Contracts with Customers , post April 1, 2018, we target an Adjusted
Compensation Ratio of approximately 60.5% to 61.5%. However, our Adjusted Compensation Ratio may increase or decrease to a level outside of this target range if we
continue to achieve improved operating leverage, identify opportunities to grow fee revenue through significant expansion, position our business during challenging market
conditions for future growth or for other reasons.
Non-Compensation Expenses. The balance of our operating expenses includes costs for travel, meals and entertainment, rent, depreciation and amortization,
information technology and communications, professional fees, other operating expenses and provision for bad debts. We refer to all of these expenses as non-
compensation expenses. A portion of our non-compensation expenses fluctuate in response to changes in headcount. Reimbursed client expenses are netted against non-
compensation expenses.
Other
(Income)
Expense,
net
Other (Income) Expense, net includes (i) interest income earned on non-marketable securities, cash and cash equivalents, loans receivable from affiliates and
employee loans, (ii) interest expense and/or gains or losses associated with our Revolving Credit Facility (defined herein), the loan payable to affiliate and loans payable to
former shareholders, (iii) interest expense on the loan payable to non-affiliate, (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/losses associated with the reduction/increase of earnout liabilities.
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Table of Contents
Results of Consolidated Operations
The following is a discussion of our results of operations for the years ended March 31, 2018 , 2017 and 2016 . For a more detailed discussion of the factors that
affected the revenues and the operating expenses of our Corporate Finance, Financial Restructuring and Financial Advisory Services business segments in these periods,
see "Business Segments" below.
Year ended March 31,
Year-over-Year Change
($ in thousands)
Fee revenue
Operating expenses:
Employee compensation and benefits
Non-compensation expenses
Total operating expenses
Operating income
Other (income) expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Net income attributable to noncontrolling interest
2018
963,364 $
$
2017
872,091 $
2016
693,765
636,631
112,287
748,918
214,446
(3,390)
217,836
45,553
172,283
—
582,244
107,852
690,096
181,995
3,508
178,487
70,144
108,343
—
461,609
105,756
567,365
126,400
770
125,630
55,863
69,767
(26)
Net income attributable to Houlihan Lokey, Inc.
$
172,283 $
108,343 $
69,741
______________________________________________________________________________
N/M = Not Meaningful
Year
ended
March
31,
2018
versus
March
31,
2017
'17-'18
'16-'17
10 %
9 %
4 %
9 %
18 %
N/M
22 %
(35)%
59 %
N/M
59 %
26 %
26 %
2 %
22 %
44 %
N/M
42 %
26 %
55 %
(100)%
55 %
Fee revenue was $963.4 million for the year ended March 31, 2018 , compared with $872.1 million for the year ended March 31, 2017 , representing an increase
of 10% . For the year ended March 31, 2018 , Corporate Finance revenues increased 22% , Financial Restructuring revenues decreased 4% , and Financial Advisory
Services revenues increased 8% , compared with the year ended March 31, 2017 .
Operating expenses were $748.9 million for the year ended March 31, 2018 , compared with $690.1 million for the year ended March 31, 2017 , an increase of
9% . Employee compensation and benefits expense, as a component of operating expenses, was $636.6 million for the year ended March 31, 2018 , compared with $582.2
million for the year ended March 31, 2017 , an increase of 9% . The increase in employee compensation and benefits expense was primarily due to the increase in revenues
for the fiscal year. The Compensation Ratio was 66% for the year ended March 31, 2018 and 67% for the year ended March 31, 2017 . Non-compensation expenses, as a
component of operating expenses, were $112.3 million for the year ended March 31, 2018 , compared with $107.9 million for the year ended March 31, 2017 , an increase
of 4% . The increase in non-compensation expenses was primarily a result of higher general operating expenses. Acquisition-related amortization of intangible assets are a
component of non-compensation expenses and were $1.7 million for the year ended March 31, 2018 , compared with $3.1 million for the year ended March 31, 2017 .
Other (income) expense, net was $(3.4) million for the year ended March 31, 2018 , compared with $3.5 million for the year ended March 31, 2017 . The increase
in other (income) expense, net was primarily a result of (i) gains from our joint venture investments for the year ended March 31, 2018 compared with losses from our joint
ventures for the year ended March 31, 2017 , (ii) gains from the reduction in earnout liabilities associated with our acquisitions, and (iii) higher interest income generated
on higher cash balances.
The provision for income taxes for the year ended March 31, 2018 was $45.6 million , which reflected an effective tax rate of 20.9% . The provision for income
taxes for the year ended March 31, 2017 was $70.1 million , which reflected an effective tax rate of 39.3% . The decrease in the effective tax rate was a result of (i) the Tax
Cuts and Jobs Acts (the "Tax Act") that was enacted into law in December 2017 that resulted in a lower effective federal tax rate; the re-measurement of deferred tax assets
and liabilities based on the new tax rate; a one-time deemed repatriation tax on foreign earnings, among other discrete items and (ii) the positive difference between the
price of the stock at the time of vesting in October 2017 (accelerated from April/May 2018) and our stock price at the time of grant for the shares that vested.
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Table of Contents
Year
Ended
March
31,
2017
versus
March
31,
2016
Fee revenue was $872.1 million for the year ended March 31, 2017, compared with $693.8 million for the year ended March 31, 2016, representing an increase of
26%. For the year ended March 31, 2017, Corporate Finance revenues increased 17%, Financial Restructuring revenues increased 52%, and Financial Advisory Services
revenues increased 9%, compared with the year ended March 31, 2016.
Operating expenses were $690.1 million for the year ended March 31, 2017, compared with $567.4 million for the year ended March 31, 2016, an increase of
22%. Employee compensation and benefits expense, as a component of operating expenses, was $582.2 million for the year ended March 31, 2017, compared with $461.6
million for the year ended March 31, 2016, an increase of 26%. The increase in employee compensation and benefits expense was primarily due to the increase in revenues
for the fiscal year. The Compensation Ratio was 67% for both the year ended March 31, 2017 and the year ended March 31, 2016. Non-compensation expenses, as a
component of operating expenses, were $107.9 million for the year ended March 31, 2017, compared with $105.8 million for the year ended March 31, 2016, an increase
of 2%. The increase in non-compensation expenses was primarily a result of an increase in costs associated with being a public company for the full year that were only
partially included in the year ended March 31, 2016, and an increase in variable operating expenses associated with our revenue growth, offset by transaction costs incurred
in the year ended March 31, 2016 related to our IPO in August 2015. Acquisition expenses and acquisition-related amortization of intangible assets are a component of
non-compensation expenses and were $3.7 million for the year ended March 31, 2017, compared with $5.5 million for the year ended March 31, 2016.
Other (income) expense, net was $3.5 million for the year ended March 31, 2017, compared with $0.8 million for the year ended March 31, 2016. The decrease in
other (income) expense, net was primarily a result of lower interest income generated on lower cash balances, higher interest expense associated with our debt obligations,
and losses incurred from investments in unconsolidated entities.
The provision for income taxes for the year ended March 31, 2017 was $70.1 million, which reflected an effective tax rate of 39.3%. The provision for income
taxes for the year ended March 31, 2016 was $55.9 million, which reflected an effective tax rate of 44.5%. The decrease in the effective tax rate was due to a significant
portion of the professional services fees associated with the IPO being non-tax deductible.
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Table of Contents
Business Segments
The following table presents revenues, expenses and contributions from our continuing operations by business segment. The revenues by segment represents each
segment's revenues, and the profit by segment represents profit for each segment before corporate expenses, other (income) expense, net, and income taxes.
($ in thousands)
Revenues by Segment
Corporate Finance
Financial Restructuring
Financial Advisory Services
Total Revenues
Segment Profit (1)
Corporate Finance
Financial Restructuring
Financial Advisory Services
Total Segment Profit
Corporate Expenses (2)
Other (income) expense, net
Year ended March 31,
Year-over-Year Change
2018
2017
2016
'17-'18
'16-'17
$
528,643 $
434,558 $
371,790
$
$
294,142
140,579
307,595
129,938
202,343
119,632
963,364 $
872,091 $
693,765
177,575 $
119,739 $
103,447
73,691
26,334
92,831
28,905
277,600
241,475
63,154
(3,390)
59,480
3,508
54,950
30,313
188,710
62,310
770
22 %
(4)%
8 %
10 %
48 %
(21)%
(9)%
15 %
6 %
(197)%
22 %
6 %
(2)%
— %
5 %
1 %
8 %
17 %
52 %
9 %
26 %
16 %
69 %
(5)%
28 %
(5)%
356 %
42 %
(2)%
2 %
3 %
33 %
29 %
5 %
Income Before Provision for Income Taxes
$
217,836 $
178,487 $
125,630
Segment Metrics:
Number of Managing Directors (3)
Corporate Finance
Financial Restructuring
Financial Advisory Services
Number of Closed Transactions/Fee Events (4)
Corporate Finance
Financial Restructuring
Financial Advisory Services
92
42
35
226
76
1,339
87
43
35
216
75
1,236
89
42
34
162
58
1,179
_______________________________________________________________________________
N/M = Not Meaningful
(1) We adjust the compensation expenses for a business segment in situations where an employee assigned to one business segment is performing work in
another business segment, and we want to adequately reflect the compensation expenses in the business segment where the revenue is being booked.
(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, human capital management, and human resources.
(3) As of period end.
(4) Fee Events applicable to FAS only; a Fee Event includes any engagement that involves revenue activity during the measurement period with a revenue
minimum of $1,000.
Corporate
Finance
Year
ended
March
31,
2018
versus
March
31,
2017
Revenues for Corporate Finance were $528.6 million for the year ended March 31, 2018 , compared with $434.6 million for the year ended March 31, 2017 ,
representing an increase of 22% . The increase in revenues was primarily a result of an increase in the average transaction fee on closed deals for the year ended March 31,
2018 , compared with the year ended March 31, 2017 .
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Table of Contents
Segment profit for Corporate Finance was $177.6 million for the year ended March 31, 2018 , compared with $119.7 million for the year ended March 31, 2017 ,
representing an increase of 48% . The increase in segment profit was a result of the increase in revenues, and lower compensation and non-compensation expenses as a
percentage of revenues.
Year
Ended
March
31,
2017
versus
March
31,
2016
Revenues for Corporate Finance were $434.6 million for the year ended March 31, 2017, compared with $371.8 million for the year ended March 31, 2016,
representing an increase of 17%. The increase in revenues was primarily a result of an increase in the number of closed transactions for the year ended March 31, 2017,
compared with the year ended March 31, 2016.
Segment profit for Corporate Finance was $119.7 million for the year ended March 31, 2017, compared with $103.4 million for the year ended March 31, 2016,
representing an increase of 16%. The increase in segment profit was a result of the increase in revenues, partially offset by higher compensation expenses as a percentage
of revenues.
Financial
Restructuring
Year
ended
March
31,
2018
versus
March
31,
2017
Revenues for Financial Restructuring were $294.1 million for the year ended March 31, 2018 , compared with $307.6 million for the year ended March 31, 2017 ,
representing a decrease of 4% . The decrease in revenues was primarily driven by a decline in retainers and monthly fees, partially offset by a slight increase in average fee
per closed transaction and the number of closed transactions.
Segment profit for Financial Restructuring was $73.7 million for the year ended March 31, 2018 , compared with $92.8 million for the year ended March 31, 2017
, a decrease of 21% . The decrease in segment profit was a result of the decrease in revenues, and higher compensation and non-compensation expenses as a percentage of
revenues.
Year
Ended
March
31,
2017
versus
March
31,
2016
Revenues for Financial Restructuring were $307.6 million for the year ended March 31, 2017, compared with $202.3 million for the year ended March 31, 2016,
representing a increase of 52%. The increase in revenues was primarily driven by both an increase in the number of closed transactions as well as an increase in the average
fee per closed transaction.
Segment profit for Financial Restructuring was $92.8 million for the year ended March 31, 2017, compared with $55.0 million for the year ended March 31, 2016,
an increase of 69%. The increase in profitability was primarily a result of the corresponding increase in revenues, as well as lower employee compensation and benefits
expense and non-compensation expenses as a percentage of revenues when compared to the year ended March 31, 2016.
Financial
Advisory
Services
Year
ended
March
31,
2018
versus
March
31,
2017
Revenues for Financial Advisory Services were $140.6 million for the year ended March 31, 2018 , compared with $129.9 million for the year ended March 31,
2017 , representing an increase of 8% . The increase in revenues was primarily a result of strong performance by our transaction advisory, portfolio valuation, and
technology and intellectual property advisory product lines.
Segment profit for Financial Advisory Services was $26.3 million for the year ended March 31, 2018 , compared with $28.9 million for the year ended March 31,
2017 , representing a decrease of 9% . The decrease in profitability was primarily a result of higher non-compensation expenses as a percentage of revenues.
Year
Ended
March
31,
2017
versus
March
31,
2016
Revenues for Financial Advisory Services were $129.9 million for the year ended March 31, 2017, compared with $119.6 million for the year ended March 31,
2016, representing an increase of 9%. The increase in revenues was primarily a result of strong performance by our transaction advisory, portfolio valuation, and strategic
consulting product lines.
Segment profit for Financial Advisory Services was $28.9 million for the year ended March 31, 2017, compared with $30.3 million for the year ended March 31,
2016, representing a decrease of 5%. The decrease in profitability was a result of higher employee compensation and benefits expense and increased non-compensation
expenses when compared to the year ended March 31, 2016.
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Table of Contents
Corporate
Revenues
and
Expenses
Year
ended
March
31,
2018
versus
March
31,
2017
Corporate expenses were $63.2 million for the year ended March 31, 2018 , compared with $59.5 million for the year ended March 31, 2017 , representing an
increase of 6% . This increase was primarily a result of higher employee compensation and benefits expense, offset by a decrease in non-compensation expenses compared
with the year ended March 31, 2017 . Corporate expenses include expenses that are not allocated to individual business segments such as Office of the Executives,
accounting, information technology, compliance and legal, marketing, human capital management, and human resources, including related employee compensation and
benefits expense for corporate employees.
Year
Ended
March
31,
2017
versus
March
31,
2016
Corporate expenses were $59.5 million for the year ended March 31, 2017, compared with $62.3 million for the year ended March 31, 2016, representing a
decrease of 5%. This decrease was primarily a result of a decrease in non-compensation expenses that were higher for the year ended March 31, 2016 as a result of
expenses relating to our IPO and offset by higher employee compensation and benefits expense for the year ended March 31, 2017 as compared to the year ended March
31, 2016. Corporate expenses include expenses that are not allocated to individual business segments such as Office of the Executives, accounting, information technology,
compliance and legal, marketing, human capital management, and human resources, including related employee compensation and benefits expense for corporate
employees.
Liquidity and Capital Resources
Our current assets comprise cash, investment securities, receivable from affiliates, income tax receivable, accounts receivable and unbilled work in process related
to fees earned from providing advisory services. Our current liabilities include deferred income, accounts payable and accrued expenses, including accrued employee
compensation and benefits expense and current portion of loan obligations.
Our cash and cash equivalents include cash held at banks. We have not experienced any losses in our cash accounts. We maintain moderate levels of cash on hand
in support of regulatory requirements for our registered broker-dealer. At March 31, 2018 , we had $184.3 million of cash in foreign subsidiaries. In August 2015, prior to
the consummation of the IPO, we paid a dividend to our shareholders in connection with which the receivable from ORIX USA was repaid in full. A portion of the
dividend was paid to ORIX USA in the form of a $45.0 million note (the “ORIX Note”) that bears interest at an annual rate of LIBOR plus 165 basis points and is payable
quarterly. Beginning on June 30, 2016, the Company began making required quarterly repayments of principal in the amount of $7.5 million, with the remaining principal
amount due on the second anniversary of the completion of the IPO. On May 23, 2017, the remaining $15 million of the ORIX Note was repaid with interest and without
penalty. Excess cash on hand in our U.K. subsidiary had been generally maintained in a receivable owned by ORIX Global Capital Ltd. (“OGC”), a U.K. subsidiary of
ORIX Corporation (the “Cash Management Agreement”). OGC paid interest to us under the Cash Management Agreement at an annual rate of LIBOR plus 165 basis
points, calculated and payable monthly. As of March 31, 2016, the Company maintained a receivable from OGC of $20.1 million and in May 2016, OGC notified the
Company that it will no longer be accepting deposits under the agreement and repaid all outstanding amounts. Currently, we are maintaining any excess cash in bank and
investment accounts.
On November 16, 2015, we issued the loan payable to non-affiliates in connection with the Leonardo transaction, which is a EUR 14.0 million note bearing
interest at an annual rate of 1.50% and is payable on November 16, 2040. Under certain circumstances, the note may be paid in part or in whole over a five year period in
cash and fixed shares that were determined at the time of loan issuance. In January 2017 and December 2017, we paid a portion of this loan in the amount of EUR 2.9
million and EUR 2.9 million, respectively. The remaining balance of the loan payable to non-affiliate as of March 31, 2018 was $8.8 million , which included foreign
currency translation adjustments.
Subsequent to the end of fiscal 2018, our Board of Directors declared a quarterly cash dividend of $0.27 per share of common stock, payable on June 15, 2018 to
shareholders of record as of the close of business on June 4, 2018.
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Table of Contents
As of March 31, 2018 and March 31, 2017 , our unrestricted cash and cash equivalents including investment securities were as follows:
Cash and cash equivalents
Investment securities
Total unrestricted cash and cash equivalents including investment securities
March 31, 2018
March 31, 2017
$
$
206,723 $
209,319
416,042 $
300,314
—
300,314
As of March 31, 2018 and March 31, 2017 , our restricted cash was $93.5 million and $192.4 million which represents the proceeds received from the issuance of
shares in secondary public offerings and required to be set aside by a contractual agreement with a related party in conjunction with forward purchase obligations. The
fiscal 2017 restriction lapsed when the related forward purchase liability was paid off on April 5, 2017 and the fiscal 2018 restriction lapsed when the related forward
purchase liability was paid off on April 5, 2018.
Our liquidity is highly dependent upon cash receipts from clients which in turn are generally dependent upon the successful completion of transactions, as well as
the timing of receivable collections, which typically occurs within 60 days of billing. As of March 31, 2018 and March 31, 2017 , net accounts receivables were $77.3
million and $60.7 million , respectively. As of March 31, 2018 and March 31, 2017 , unbilled work in process were $45.9 million and $57.7 million , respectively.
We currently maintain a revolving line of credit pursuant to a loan agreement, dated as of August 18, 2015, by and among Houlihan Lokey, certain domestic
subsidiaries of Houlihan Lokey party thereto and Bank of America, N.A., which provides for a revolving line of credit of $75.0 million (the “Revolving Credit Facility”).
As of March 31, 2018 , there were no outstanding borrowings under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility require payments of
interest at the annual rate of LIBOR plus 1.00%. The loan agreement requires compliance with certain loan covenants including but not limited to the maintenance of
minimum earnings before interest, taxes, depreciation and amortization of no less than $120 million as of the end of any quarterly 12-month period and certain leverage
ratios including a consolidated leverage ratio of less than 1.50 to 1.00 and a consolidated fixed charge coverage ratio of greater than 1.25 to 1.00, as of the end of any
quarterly 12-month period. As of March 31, 2018 , we were and we expect to continue to be in compliance with such covenants. On July 28, 2017, we entered into a First
Amendment to Credit Agreement which extended the maturity of the revolving line of credit from August 18, 2017 to August 18, 2019, and did not change any other
material terms of the Revolving Credit Facility.
Cash Flows
Our operating cash flows are primarily influenced by the amount and timing of receipt of advisory fees and the payment of operating expenses, including
payments of incentive compensation to our employees. We pay a significant portion of our incentive compensation during the first and third quarters of each fiscal year. A
summary of our operating, investing, and financing cash flows is as follows:
($ in thousands)
Cash provided by (used in)
Operating activities:
Net income
Non-cash charges
Other operating activities
Total operating activities
Investing activities (1)
Financing activities
Effects of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash, cash equivalents, and restricted cash—beginning of year
Cash, cash equivalents, and restricted cash—end of year
Year ended March 31,
2018
2017
2016
$
172,283 $
108,343 $
48,894
29,470
250,647
(218,584)
(225,311)
785
(192,463)
492,686
300,223 $
46,125
97,552
252,020
(1,653)
102,924
(4,018)
349,273
166,169
515,442 $
$
69,767
40,929
(98,975)
11,721
179,553
(114,210)
443
77,507
88,662
166,169
_____________________________________________________________________________
(1)
Includes $209,319 of investment securities. See Note 5 for further details on these investments.
39
Table of Contents
Year
ended
March
31,
2018
Operating activities resulted in a net inflow of $250.6 million for fiscal 2018, which was higher than the prior year due primarily to increased earnings for the
period. Investing activities resulted in a net outflow of $218.6 million primarily attributable to capital expenditures and purchases of investment securities. Financing
activities resulted in a net outflow of $225.3 million primarily related to proceeds from the issuance of Class A shares through our public offering, offset by (i) dividend
distributions, (ii) settlement of forward purchase contracts, and (iii) payments to settle employee tax obligations on share-based awards.
Year
ended
March
31,
2017
Operating activities resulted in a net inflow of $229.3 million for fiscal 2017, which was higher than the prior year due to (i) increased earnings for the period, (ii)
higher accruals for bonuses, and (iii) increased accounts payable, accrued expenses, and income taxes payable. Investing activities resulted in a net outflow of $1.7 million
primarily attributable to capital expenditures, offset by a decrease in receivables from affiliates. Financing activities resulted in a net inflow of $102.9 million primarily
related to proceeds from the issuance of Class A shares through our public offering, offset by (i) dividend distributions, (ii) repayment of loans to affiliates and non-
affiliates, and (iii) redemptions of loans payable to former shareholders.
Year
ended
March
31,
2016
Operating activities resulted in a net inflow of $11.7 million for fiscal 2016, which was lower than the prior year due to (i) lower net income, (ii) lower accruals
for bonuses due to the change on October 1, 2015 from a revenue sharing model that historically approximated an Awarded Compensation Ratio of between 67% and 71%
to a target Adjusted Awarded Compensation Ratio of between 65% and 66%, and (iii) reduced accounts payable, accrued expenses, and income taxes payable. Investing
activities resulted in a net inflow of $179.6 million primarily attributable to a decrease in receivables from affiliates as the receivable from ORIX USA was paid in full in
conjunction with the payment of a pre-IPO dividend. Financing activities resulted in a net outflow of $114.2 million primarily related to dividend distributions.
Contractual Obligations
The following table summarizes our payment obligations and commitments as of March 31, 2018 .
($ in thousands)
Payment Due by Period
Total
Less than
1 Year
1 to 3
Years
3 to 5
Years
More than 5 Years
Operating Leases
Loans payable to former shareholders
$
$
122,769 $
3,036 $
22,186 $
989 $
42,072 $
1,229 $
Loan payable to non-affiliate (1)
8,825 $
___________________________________________________
(1) Under certain circumstances, the note may be paid in part or in whole over a five year period in equal annual installments.
— $
— $
$
30,040 $
481 $
— $
28,471
337
8,825
Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us
to any liability that is not reflected in our consolidated financial statements except for certain stand-by letters of credit and bank guarantees with Bank of America in
support of various office leases totaling approximately $0.7 million.
Critical Accounting Policies and Estimates
We believe that the critical accounting policies included below represent those that are most important to the presentation of our financial condition and results
of operations and require management's subjective and complex judgment. For a discussion of these and other significant accounting policies and their impact on our
consolidated financial statements, see Note 2—Summary of Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this
Form 10-K.
40
Table of Contents
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.
Historically, and until the closing of our IPO, certain expenses were allocated from ORIX USA to Houlihan Lokey based on an allocation of incurred corporate
level support services. For fiscal 2018 , 2017 and 2016 , the allocation from ORIX USA to Houlihan Lokey was $0.0 million , $0.0 million and $0.9 million , respectively.
After the IPO, this allocation was replaced with payments under the Transition Services Agreement, whereby ORIX USA provides certain administrative services to
Houlihan Lokey for a fee.
Recognition
of
Revenue
We earn fees from our clients for providing advisory services on mergers, acquisitions, divestitures, leveraged buyouts, financings, restructurings and similar
corporate finance matters. It is our accounting policy to recognize revenue when (i) there is persuasive evidence of an arrangement with a client, (ii) fees are fixed or
determinable, (iii) the agreed-upon services have been completed and delivered to the client or the transaction or events contemplated in the engagement letter are
determined to be substantially completed and (iv) collectability is reasonably assured. We record revenue on the consolidated statements of comprehensive income as
follows:
In general, advisory fees are paid at the time we sign an engagement letter (Retainer Fees), during the course of the engagement (Progress Fees) or upon the
successful completion of a transaction or of an engagement (Completion Fees). Retainer Fees and Progress Fees are recognized based on management's estimates of the
relative proportion of services provided through the financial reporting date to the total services required to be performed. Completion Fees are recognized only upon
substantial completion of the conditions stipulated by the engagement agreement. In some circumstances, and as a function of the terms of an engagement letter, we may
receive Retainer Fees for advisory services concurrently with, or soon after, the execution of the engagement letter where the engagement letter will specify a future
service period associated with that fee. In such circumstances, these Retainer Fees are initially recorded as deferred revenue, which is recorded within other current
liabilities on the consolidated balance sheets, and subsequently recognized as revenue during the applicable time period within which the service is rendered.
Revenues related to fairness or valuation opinions are recognized when the opinion has been rendered and delivered to the client and all other requirements for
revenue recognition are satisfied. Completion Fees for advisory services, such as M&A advice, are recognized when the transaction(s) or event(s) are determined to be
completed or substantially completed and all other requirements for revenue recognition are satisfied. In the event the Company were to receive a fee for an opinion or a
Completion Fee in advance of the completion conditions noted above, such fee would initially be recorded as deferred revenue and subsequently recognized as advisory
fee revenue when the conditions of completion have been satisfied. Revenues under fixed fee contracts are recognized based on management's determination of the
milestone or stage achieved for each engagement (e.g., retained, performance of analysis, delivery of work product, etc.) to which standardized percentages of completion
of the total services required to be performed have been assigned by the accounting function in collaboration with management. In some cases, approval of our fees is
required from the courts or other regulatory authority; in these circumstances, the recognition of revenue is often deferred until approval is granted. However, if the fee that
is going to be collected from the client is fixed and determinable, and the collectability of the fee is reasonably assured, there are instances when revenue recognition prior
to such approval is appropriate under GAAP. In instances when the revenue recognized on a specific engagement exceeds the amounts billed, unbilled work in process is
recorded. Billed receivables are recorded as accounts receivable in the consolidated balance sheets. 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 our consolidated statements of comprehensive income.
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers , which requires an entity to
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand
the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. For a discussion of this accounting development and its
potential impact on our consolidated financial statements, see “Note 2 - Summary of Significant Accounting Policies” included in Part II, Item 8.
41
Table of Contents
Operating
Expenses
The majority of our operating expenses relates to compensation and benefits for employees, which includes the amortization of the relevant portion of our share-
based incentive awards. We account for share-based payments in accordance with Financial Accounting Standards Board ASC 718, " Compensation—Stock Compensation
". We grant employees awards that vest subject to continued employment in good standing. Employee compensation and benefits expense is accrued if it is probable that
the condition will be achieved and is not accrued if it is not probable that the condition will be achieved. The fair value of awards that vest from one to five years are
amortized over the vesting period or requisite substantive service period, as required by ASC 718. See “Note 10—Employee Benefit Plans” included in Part II, Item 8 of
this Form 10-K for a more detailed discussion.
Other examples of operating expenses include: travel, meals and entertainment; rent; depreciation and amortization; professional fees, which relate primarily to
outside legal and consulting fees and employee training costs; information technology and communication costs; and other operating expenses, which include such items as
business license and registration fees, non-income-related taxes, and charitable contributions. Reimbursements received from customers for out-of-pocket expenses we
incur are presented net against the related expenses in the accompanying consolidated statements of comprehensive income.
Accounts
Receivable
The allowance for doubtful accounts on receivables reflects management's best estimate of probable inherent losses determined principally on the basis of
historical experience and review of uncollected revenues and is recorded through a provision for bad debts in the accompanying consolidated statements of comprehensive
income. Amounts deemed to be uncollectible are written off against the allowance for doubtful accounts.
Provision
for
Income
Taxes
Prior to the IPO, ORIX USA and its subsidiaries, including the Company, filed consolidated federal income tax returns and separate returns in state and local
jurisdictions and did so for fiscal year 2016 through the date of the IPO. The Company reported income tax expense as if it filed separate returns in all jurisdictions.
Following the IPO, the Company files a consolidated federal income tax return separate from ORIX USA, as well as consolidated and separate returns in state and local
jurisdictions, and the Company reports income tax expense on this basis.
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 trade names 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. We have a deferred tax liability in the amount of approximately $77 million
for both fiscal 2017 and fiscal 2016, related to trade names.
During fiscal 2018, 2017, and 2016, goodwill was reviewed for impairment in accordance with Accounting Standards Update (ASU) No. 2011-08, Testing
Goodwill for Impairment , which permits us to make a qualitative assessment of whether it is more likely than not that one of our reporting unit's fair value is less than its
carrying amount before applying the two-step goodwill impairment test. If we conclude that it is not more likely than not that the fair value of the reporting unit is less than
its carrying amount, then we 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, we must test further for impairment utilizing a two-step process. 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. During the annual impairment reviews, management concluded that it is not more likely than not that our fair value is
less than its carrying amount and no further impairment testing was considered necessary.
During fiscal 2018 , 2017 , and 2016 , indefinite-lived intangible assets were reviewed for impairment in accordance with ASU 2012-02, Testing Indefinite-lived
Intangible Assets for Impairment , which provides us 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. During the annual impairment review of indefinite-lived intangible assets, we determined
that it is not more likely than not that the fair values were less than the carrying values.
42
Table of Contents
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, we first compare
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. To date, no
events or changes in circumstances were identified that indicated that the carrying amount of the finite-lived intangible assets were not recoverable.
Recent Accounting Developments
For a discussion of recently issued accounting developments and their impact or potential impact on our consolidated financial statements, see “Note 2 - Summary of
Significant Accounting Policies” included in Part II, Item 8 of this Form 10-K for a more detailed discussion.
43
Table of Contents
Item 7A. 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. 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 in U.S. dollars, pound sterling , euros, Australian dollars, Hong Kong dollars, Chinese yuan, and Japanese yen and
we face foreign currency risk in our cash balances and other assets and liabilities held in accounts outside the United States due to potential currency movements and the
associated foreign currency translation accounting requirements.
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. For the years ended March 31, 2018 , 2017 and 2016 , the net
impact of the fluctuation of foreign currencies in other comprehensive income within the consolidated statements of comprehensive income was $8.0 million , $(7.3)
million and $(3.3) million , 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 United States 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 have entered into transactions to hedge our exposure to certain foreign currency fluctuations through the use of derivative instruments or
other methods. As of March 31, 2018, 2017 and 2016, we have foreign currency forward contracts between the euro and pound sterling outstanding with aggregate notional
value of approximately EUR 9 million , 5 million, and 1 million. Gains (losses) in relation to the fair value of the foreign currency forward contracts have been included in
other operating expenses of $90 , $58 , and $(62) during the twelve months ended March 31, 2018 , 2017 , and 2016 , respectively.
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.
Credit Risk
We regularly review our accounts receivable and allowance for doubtful accounts 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 doubtful accounts that, in our opinion, provides for an adequate reserve to cover losses that may be incurred.
44
Table of Contents
Item 8. Financial Statements and Supplementary Data
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended March 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders' Equity for the years ended March 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended March 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Supplemental Financial Information
Consolidated Quarterly Results of Operations (unaudited)
Financial Statement Schedule: Schedule II—Valuation and Qualifying Accounts
45
Page
46
48
49
50
53
54
80
80
81
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Houlihan Lokey, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Houlihan Lokey, Inc. and subsidiaries (the "Company") as of March 31, 2018 and 2017, the related
consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2018, and the
related notes and financial statement Schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of March 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the
three-year period ended March 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control
over financial reporting as of March 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated May 25, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the
risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2006.
Los Angeles, California
May 25, 2018
46
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Houlihan Lokey, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Houlihan Lokey, Inc.’s and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of
the Company as of March 31, 2018 and 2017, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in
the three-year period ended March 31, 2018, and the related notes and financial statement Schedule II (collectively, the consolidated financial statements), and our report
dated May 25, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Los Angeles, California
May 25, 2018
47
Table of Contents
Assets:
Cash and cash equivalents
Restricted cash (note 2)
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data and par value)
Investment securities (fair value of $209,266 as of March 31, 2018)
Accounts receivable, net of allowance for doubtful accounts of $11,391 and $11,199 as of March 31, 2018, and March
31, 2017, respectively
Unbilled work in process
Receivable from affiliates
Property and equipment, net of accumulated depreciation $37,078 and $32,193 as of March 31, 2018, and March 31,
2017, respectively
Goodwill and other intangibles, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Accrued salaries and bonuses
Accounts payable and accrued expenses
Deferred income
Income taxes payable
Deferred income taxes
Forward purchase liability
Loan payable to affiliate
Loans payable to former shareholders
Loan payable to non-affiliate
Other liabilities
Total liabilities
Redeemable noncontrolling interest
Commitments and contingencies (note 15)
Stockholders' equity:
Class A common stock, $0.001 par value. Authorized 1,000,000,000 shares; issued and outstanding 30,604,405 and
22,026,811 shares as of March 31, 2018 and March 31, 2017, respectively
Class B common stock, $0.001 par value. Authorized 1,000,000,000 shares; issued and outstanding 37,187,932 and
50,883,299 shares as of March 31, 2018 and March 31, 2017, respectively
Treasury stock, at cost; 2,000,000 and 6,900,000 shares as of March 31, 2018, and March 31, 2017, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Stock subscription receivable
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
48
As of March 31,
2018
2017
$
206,723 $
$
$
93,500
209,319
77,259
45,862
8,732
32,146
723,310
21,990
1,418,841 $
377,901 $
40,772
3,620
9,967
22,180
93,500
—
3,036
8,825
6,227
$
566,028 $
—
31
37
(93,500)
753,077
207,124
(13,956)
—
$
852,813
1,418,841 $
300,314
192,372
—
60,718
57,682
10,913
30,416
715,343
17,949
1,385,707
336,465
41,655
3,717
4,937
31,196
192,372
15,000
5,482
12,080
12,348
655,252
3,838
22
51
(193,572)
854,750
87,407
(21,917)
(124)
726,617
1,385,707
Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands, except per share data)
Fee revenue (a)
Operating expenses:
Employee compensation and benefits
Travel, meals, and entertainment
Rent
Depreciation and amortization
Information technology and communications
Professional fees (b)
Other operating expenses, net (c)
Total operating expenses
Operating income
Other (income) expense, net (d)
Income before provision for income taxes
Provision for income taxes
Net income
Net income attributable to noncontrolling interests
Net income attributable to Houlihan Lokey, Inc.
Other comprehensive income, net of tax:
Foreign currency translation adjustments
Comprehensive income attributable to Houlihan Lokey, Inc.
Attributable to Houlihan Lokey, Inc. common stockholders: (e)
Weighted average shares of common stock outstanding:
Basic
Diluted
Net income per share of common stock
Basic
Diluted
Year Ended March 31,
2018
2017
2016
$
963,364 $
872,091 $
693,765
636,631
582,244
461,609
26,445
28,560
7,905
18,481
17,117
13,779
748,918
214,446
(3,390)
217,836
45,553
172,283
—
21,707
27,094
8,853
17,628
13,073
19,497
690,096
181,995
3,508
178,487
70,144
108,343
—
172,283 $
108,343 $
7,961
180,244 $
(7,304)
101,039 $
20,955
26,459
7,499
16,017
20,687
14,139
567,365
126,400
770
125,630
55,863
69,767
(26)
69,741
(3,275)
66,466
62,494,275
66,324,093
61,100,497
66,579,130
59,044,981
63,475,903
2.76 $
2.60 $
1.77 $
1.63 $
1.18
1.10
$
$
$
$
(a)
(b)
(c)
(d)
(e)
including related party fee revenue of $3,006 , $7,504 , and $504 during the years ended March 31, 2018 , 2017 , and 2016 respectively.
including related party professional fees of $0 , $269 , and $214 during the years ended March 31, 2018 , 2017 , and 2016 respectively.
including related party expenses of $0 , $0 , and $874 during the years ended March 31, 2018 , 2017 , and 2016 respectively; including related party income of
$286 , $461 , and $205 during the years ended March 31, 2018 , 2017 , and 2016 respectively; and including realized foreign currency translation gain of $5,123 ,
$309 , and $2,239 during the years ended March 31, 2018 , 2017 , and 2016 respectively.
including related party interest income of $110 , $33 , and $1,954 during the years ended March 31, 2018 , 2017 , and 2016 , respectively, and related party
interest expense of $62 , $806 , and $922 during years ended March 31, 2018 , 2017 , and 2016 , respectively. The Company recognized (gain) loss related to
investments in unconsolidated entities of $(3,210) , $3,839 , and $1,604 during years ended March 31, 2018 , 2017 , and 2016 , respectively.
the number of shares and per share amounts presented for FY16 have been retroactively restated to reflect the conversion of Fram shares to HLI shares at a ratio
of 10.425 shares to each share of Fram stock (note 1).
See accompanying notes to consolidated financial statements.
49
Table of Contents
Balances - April 1, 2015
Fram shares issued
(note 1)
Fram stock
compensation vesting
(note 13)
Fram share
redemptions (note 14)
Dividend
Stock subscriptions
receivable issued, net
Conversion of Fram
shares to HLI
Shares issued to non-
employee directors
Shares
repurchased/forfeited
Excess tax benefits
Adjustment of
noncontrolling interest
to redeemable value
Net income
Change in
unrealized foreign
currency
translation
Total
comprehensive
income
Balances-March 31,
2016
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended March 31, 2018 , 2017 and 2016
($ in thousands)
Common - shares
Class A - shares
Class B - shares
Shares
$
Shares
$
Shares
$
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Stock
Subscriptions
Receivable
Equity
attributable
to Houlihan
Lokey, Inc.
Noncontrolling
interest
Total
stockholders'
equity
587,866 $59
— $—
— $— $ 670,182 $170,929 $
(11,338)
$
(7,135)
$
822,697 $
1,809
$
824,506
— —
— —
31,414 —
13,320
—
— —
— —
— —
— —
— —
— —
— —
— —
— —
28,765
—
(64,285) —
— —
(2,295)
(74,432)
—
(211,034)
— —
(587,866)
(59) 12,075,000
12 53,321,893
53
— —
9,524 —
— —
— —
— —
— —
— —
— —
— —
(69,719) —
— —
—
1,798
— —
— —
— —
— —
—
—
(1,013)
69,741
—
(6)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13,320
—
13,320
—
—
4,168
2,720
28,765
(2,295)
(281,298)
2,720
—
—
—
—
—
—
—
—
—
1,798
(1,013)
69,741
—
—
28,765
(2,295)
(1,835)
(283,133)
—
—
—
—
—
—
26
2,720
—
—
—
1,798
(1,013)
69,767
— —
— —
— —
—
—
(3,275)
—
(3,275)
—
(3,275)
— —
— —
— —
—
69,741
(3,275)
—
66,466
26
66,492
— $— 12,084,524 $12 53,219,303 $53 $ 637,332 $ 28,623 $
(14,613)
$
(247)
$
651,160 $
— $
651,160
See accompanying notes to consolidated financial statements.
50
Common -
shares
Class A - shares
Class B - shares
Treasury Stock
Shares
$
Shares
$
Shares
$
Shares
$
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Stock
Subscriptions
Receivable
Equity
attributable
to Houlihan
Lokey, Inc.
Noncontrolling
interest
Total
stockholders'
equity
— $— 12,084,524 $12 53,219,303 $53 $
— $
— $637,332 $ 28,623 $
(14,613) $
(247)
$651,160 $
— $ 651,160
Table of Contents
Balances - April 1,
2016
Shares issued (note
1)
Stock compensation
vesting (note 13)
Share redemptions
(note 14)
— —
— —
— —
— —
— — 1,858,864
2
— —
— —
— —
— —
— —
(71,913) —
— —
— —
(9)
— — 9,200,000
9 (9,200,000)
733,150
1
(733,150)
(1)
9,137 —
— —
— — (1,089,805)
— —
(1)
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
Dividends
Stock subscriptions
receivable redeemed — —
— —
Secondary offering
Shares subject to
forward purchase
agreement
Conversion of Class
B to Class A shares
Shares issued to non-
employee directors
Shares
repurchased/forfeited — —
— —
— —
— —
Excess tax benefits
Adjustment of
noncontrolling
interest to
redeemable value
Net income
Change in
unrealized
foreign currency
translation
Total
comprehensive
income
Balances-March 31,
2017
— — 6,900,000
7 (6,900,000)
(193,572)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,152
—
39,357
—
—
—
—
—
—
—
—
—
—
—
—
(330)
—
—
(47,883)
—
193,572
(7)
—
—
(27,308)
6,982
—
—
—
—
—
—
—
(1,676)
—
— 108,343
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,154
—
39,357
—
—
(330)
(47,883)
123
—
123
193,572
—
(193,572)
—
—
—
—
—
—
(27,309)
6,982
—
—
—
—
—
—
—
—
—
—
—
5,154
39,357
(330)
(47,883)
123
193,572
(193,572)
—
—
(27,309)
6,982
—
—
(1,676)
108,343
—
—
(1,676)
108,343
—
—
—
(7,304)
—
(7,304)
—
(7,304)
—
— 108,343
(7,304)
—
101,039
—
101,039
— $— 22,026,811 $22 50,883,299 $51 (6,900,000) $(193,572) $854,750 $ 87,407 $
(21,917) $
(124)
$726,617 $
— $ 726,617
See accompanying notes to consolidated financial statements.
51
Table of Contents
Balances - April 1,
2017
Shares issued
Stock compensation
vesting (note 13)
— —
— —
Dividends
Stock subscriptions
receivable redeemed — —
— —
— —
Secondary offerings
Retirement of shares
upon settlement of
forward purchase
agreement
Shares subject to
forward purchase
agreement
Conversion of Class
B to Class A shares
Shares issued to non-
employee directors
(note 14)
Shares purchased
and retired under
repurchase program
Other shares
repurchased/forfeited — —
Adjustment of
noncontrolling
interest to
redeemable value
— —
— —
— —
— —
Net income
Change in
unrealized
foreign
currency
translation
Total
comprehensive
income
Balances-March 31,
2018
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended March 31, 2018 , 2017 and 2016
($ in thousands)
Common -
shares
Class A - shares
Class B - shares
Treasury Stock
Shares
$
Shares
$
Shares
$
Shares
$
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Stock
Subscriptions
Receivable
Equity
attributable
to Houlihan
Lokey, Inc.
Noncontrolling
interest
Total
stockholders'
equity
— $— 22,026,811 $22 50,883,299 $51 (6,900,000) $(193,572) $854,750 $ 87,407 $
— —
— — 1,331,370
7,984
—
—
1
—
(21,917) $
—
(124)
$726,617 $
—
7,985
— $ 726,617
—
7,985
— —
— —
— —
— —
— —
— —
(8)
—
—
—
—
—
—
—
—
41,900
—
—
(51,305)
—
93,500
—
—
—
—
—
—
—
—
41,900
(51,305)
124
—
124
93,500
— — 7,750,000
8 (7,750,000)
— — (6,900,000)
(7) 6,900,000
193,572
(193,565)
—
—
—
—
— — 2,000,000
2 (2,000,000)
(93,500)
— — 1,252,242
1 (1,252,242)
(1)
—
(2)
—
—
—
—
—
—
(93,500)
—
—
5,589 —
— —
(430,237) —
— —
— — (1,124,495)
(1)
— —
— —
— —
— —
—
—
—
—
—
—
—
(15,139)
—
(36,351)
—
—
—
—
—
—
(1,261)
172,283
—
—
—
—
—
(15,139)
—
(36,352)
—
—
(1,261)
172,283
—
—
(1,261)
172,283
—
—
—
—
—
—
—
—
—
—
41,900
(51,305)
124
93,500
—
(93,500)
—
—
(15,139)
(36,352)
— —
— —
— —
— —
— —
— —
—
—
—
7,961
—
7,961
—
7,961
—
—
172,283
7,961
—
180,244
—
180,244
— $— 30,604,405 $31 37,187,932 $37 (2,000,000) $ (93,500) $753,077 $207,124 $
(13,956) $
— $852,813 $
— $ 852,813
See accompanying notes to consolidated financial statements.
52
—
—
—
—
—
—
—
—
Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Year Ended March 31,
2018
2017
2016
$
172,283 $
108,343 $
69,767
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax benefit
Provision for bad debts
Depreciation and amortization
Contingent consideration valuation
Compensation expense – restricted share grants (note 13)
Changes in operating assets and liabilities:
Accounts receivable
Unbilled work in process
Other assets
Accrued salaries and bonuses
Accounts payable and accrued expenses
Deferred income
Income taxes receivable (payable)
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of investment securities
Receivables from affiliates
Acquisition of business, net of cash acquired
Purchase of property and equipment, net
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Dividends paid
Settlement of forward purchase contract
Proceeds from issuance of Class A shares placed in escrow
Earnouts paid
Stock subscriptions receivable redeemed
Shares purchased and retired under stock repurchase program
Other share repurchases
Payments to settle employee tax obligations on share-based awards
Loans payable to former shareholders redeemed
Repayments of loans to affiliates
Borrowings from non-affiliates
Repayments of loans to non-affiliates
Excess tax benefits
Other financing activities, net
Net cash used in financing activities
Effects of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash – beginning of period
(6,569)
1,983
7,905
(1,536)
47,111
(18,202)
11,875
(1,703)
34,556
392
(31)
2,583
250,647
(209,319)
1,155
(2,701)
(7,719)
(218,584)
(52,081)
(192,372)
93,500
—
124
(15,139)
(2,936)
(33,419)
(2,446)
(15,000)
—
(1,661)
—
(3,881)
(225,311)
785
(192,463)
492,686
(6,093)
4,008
8,853
—
39,357
(5,527)
(6,382)
3,745
82,046
13,499
(1,970)
12,141
252,020
—
16,495
(3,725)
(14,423)
(1,653)
(55,293)
—
193,565
(964)
123
—
—
(22,756)
(11,256)
(30,000)
65,000
(65,000)
6,982
(233)
80,168
(4,018)
326,517
166,169
(4,165)
2,538
7,499
—
35,057
(1,387)
(8,360)
(643)
(56,184)
(13,959)
2,475
(20,917)
11,721
—
225,792
(36,854)
(9,385)
179,553
(114,297)
—
—
(1,417)
2,720
—
—
—
(3,047)
—
—
—
1,798
33
(114,210)
443
77,507
88,662
166,169
94,520
22,800
45,000
4,168
901
(763)
Cash, cash equivalents, and restricted cash – end of period
$
300,223 $
492,686 $
Supplemental disclosures of noncash activities:
Dividends paid via settlement of receivable from affiliate (note 3)
Dividends paid via distribution of non-cash assets
Dividends paid via loan payable to affiliate
Dividends paid via settlement of employee loans
Taxes paid via settlement of receivable from affiliate
Shares redeemed via settlement of receivable from affiliate (note 3)
—
—
—
—
—
—
—
—
—
—
—
—
Shares issued via vesting of liability classified awards
Shares issued as consideration for acquisitions
Debt forgiven as consideration for acquisitions
Fully depreciated assets written off
Cash acquired through acquisitions
Cash paid during the year:
Interest
Taxes
—
7,797
1,894
38
—
656
47,629
4,754
457
—
829
—
1,621
57,286
—
11,306
—
443
14,688
1,314
75,365
See accompanying notes to consolidated financial statements.
53
Table of Contents
(1) BACKGROUND
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
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 the 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.
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.").
On August 18, 2015, the Company successfully completed an initial public offering ("IPO") of its Class A common stock.
Prior to a corporate reorganization that was consummated immediately prior to the closing of the IPO, the Company was incorporated in California as Houlihan
Lokey, Inc., a California corporation ("HL CA"), and was a wholly owned indirect subsidiary of Fram Holdings, Inc., a Delaware corporation ("Fram"), which, in turn, was
a majority owned subsidiary of ORIX USA Corporation, a Delaware corporation ("ORIX USA"), with the remaining minority interest being held by Company employees
("HL Holders"). ORIX USA and the HL Holders held their interests in HL CA indirectly through their ownership of Fram. On July 24, 2015, HL CA merged with and into
HL, Inc., with HL, Inc. as the surviving entity. In connection with the IPO, the HL Holders deposited their shares of HL, Inc. Class B common stock into a voting trust (the
"HL Voting Trust") and own such common stock through the HL Voting Trust. Houlihan Lokey has separated from Fram and as a result, HL, Inc. common stock is held
directly by ORIX USA (through ORIX HLHZ Holding, LLC, its wholly owned subsidiary), the HL Voting Trust, for the benefit of the HL Holders, non-employee
directors, and public shareholders.
In addition, prior to the consummation of the IPO, the Company distributed to its existing owners a dividend of $270.0 million , consisting of (i) a short-term note
in the aggregate amount of $197.2 million , which was repaid immediately after the consummation of the IPO, and was allocated $94.5 million to ORIX USA and $102.7
million to the HL Holders, (ii) a note to ORIX USA in the amount of $45.0 million (see Note 9), and (iii) certain of our non-operating assets to certain of the HL Holders
(consisting of non-marketable minority equity interests in four separate businesses that ranged in carrying value from $2.5 million to $11.0 million , and were valued in the
aggregate at approximately $22.8 million as of June 30, 2015), together with $5.0 million in cash to be used to complete a potential additional investment and in the
administration of these assets in the future. All issued and outstanding Fram shares were converted to HL, Inc. common stock at a ratio of 10.425 shares for each share of
Fram stock. Immediately following the IPO, there were 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. As of March 31, 2018 (without giving effect to the transaction provided for in the January 2018 Forward Share Purchase Agreement (defined below)),
there were 30,141,915 Class A shares held by the public, 24,250 Class A shares held by non-employee directors, and 438,240 Class A shares held by ORIX USA. In
addition, there were 25,477,601 Class B shares held by the HL Voting Trust, and 11,710,331 Class B shares held by ORIX USA.
The Company did not receive any proceeds from the sale of its Class A common stock in the IPO.
Expenses related to the corporate reorganization and IPO recorded in the consolidated statements of comprehensive income include the following:
•
$12,783 of professional service and other third-party fees and expenses associated with Houlihan Lokey’s IPO, corporate reorganization, spin-out of non-
operating assets, shareholder solicitation process and other related activities for the year ended March 31, 2016;
54
Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
•
•
$14,153 , $14,330 and $7,420 of compensation expenses associated with the amortization of restricted stock granted in connection with the IPO for the years
ended March 31, 2018, 2017 and 2016, respectively; amortization expense of restricted stock granted in connection with the IPO is being recognized over a four
and one-half year vesting period; and
$10,764 , $11,873 and $7,855 of compensation expenses associated with the accrual of certain deferred cash payments granted in connection with the IPO for the
years ended March 31, 2018, 2017 and 2016, respectively; accrual expense of deferred cash payments granted in connection with the IPO is being recognized
over a four and one-half year vesting period.
On February 14, 2017, pursuant to a registered underwritten public offering, we issued and sold 6,000,000 shares of our Class A common stock and certain of our
former and current employees and members of our management (the “Selling Stockholders”) sold 2,000,000 shares of our Class A common stock, in each case, at a price
to the public of $29.25 per share (the “February 2017 Follow-on Offering”). On March 15, 2017, we issued and sold an additional 900,000 shares of Class A common
stock and the Selling Stockholders sold an additional 300,000 shares of Class A common stock in connection with the underwriters’ exercise in full of their option to
purchase additional shares in the February 2017 Follow-on Offering.
In connection with, and prior to, the February 2017 Follow-on Offering, on February 6, 2017, we entered into a Forward Share Purchase Agreement (the "February
2017 Forward Share Purchase Agreement"), with an indirect wholly owned subsidiary of ORIX USA pursuant to which we agreed to repurchase from ORIX USA on April
5, 2017 the number of shares of our Class B common stock equal to the number of shares of our Class A common stock sold by us in the February 2017 Follow-on
Offering (including any shares sold upon the exercise by the underwriters of their option to purchase additional shares of our Class A common stock) for a purchase price
per share equal to the public offering price in the February 2017 Follow-on Offering less underwriting discounts and commissions. The cash proceeds from the February
2017 Follow-on Offering that were used to consummate the purchase pursuant to the February 2017 Forward Share Purchase Agreement were held in an escrow account as
of March 31, 2017 and presented as restricted cash as discussed in note 2. On April 5, 2017 we settled the transaction provided for in the February 2017 Forward Share
Purchase Agreement and acquired 6,900,000 shares of Class B common stock from ORIX USA using the net proceeds we received from the February 2017 Follow-on
Offering. In accordance with the terms of the February 2017 Forward Share Purchase Agreement, the purchase price per share was reduced by the per share amount of the
dividend paid to ORIX USA on the shares of our Class B common stock subject to the February 2017 Forward Share Purchase Agreement prior to the settlement of such
transaction. As the February 2017 Forward Share Purchase Agreement required physical settlement by purchase of a fixed number of shares in exchange for cash, the
6,900,000 shares that were purchased are excluded from the Company's calculation of basic and diluted earnings per share in the Company's financial statements for the
years ended March 31, 2018 and 2017. In addition, as the agreement provides for the refund of any dividends paid during the term on the underlying Class A common
stock, such shares are not classified as participating securities and the Company does not apply the two-class method for calculating its earnings per share.
On October 25, 2017, pursuant to a registered underwritten public offering, ORIX USA sold 1,750,000 shares of our Class A common stock and certain of our
former and current employees and members of our management sold 1,750,000 shares of our Class A common stock, in each case, at a price to the public of $42.00 per
share, and such transaction closed on October 30, 2017 (the "October 2017 Follow-on Offering"). On November 3, 2017, ORIX USA sold an additional 125,000 shares of
Class A common stock and our former and current employees and members of our management sold an additional 125,000 shares of Class A common stock in
connection with the underwriters’ partial exercise of their option to purchase additional shares in the offering.
On March 12, 2018, pursuant to a registered underwritten public offering, we issued and sold 2,000,000 shares of our Class A common stock and certain of our
former and current employees and members of our management (the “Selling Stockholders”) sold 2,000,000 shares of our Class A common stock, in each case, at a price
to the public of $47.25 per share (the “March 2018 Follow-on Offering”).
55
Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
In connection with, and prior to, the March 2018 Follow-on Offering, on January 26, 2018, we entered into a Forward Share Purchase Agreement (the "January
2018 Forward Share Purchase Agreement"), with an indirect wholly owned subsidiary of ORIX USA pursuant to which we agreed to purchase from ORIX USA on April
5, 2018 the number of shares of our Class B common stock equal to the number of shares of our Class A common stock sold by us in the March 2018 Follow-on Offering
for a purchase price per share equal to the public offering price in the March 2018 Follow-on Offering less underwriting discounts and commissions. The cash proceeds
from the March 2018 Follow-on Offering that were used to consummate the purchase pursuant to the January 2018 Forward Share Purchase Agreement were held in an
escrow account as of March 31, 2018 and presented as restricted cash as discussed in note 2. On April 5, 2018 we settled the transaction provided for in the January 2018
Forward Share Purchase Agreement and acquired 2,000,000 shares of Class B common stock from ORIX USA using the net proceeds we received from the March 2018
Follow-on Offering. In January 2018 and April 2017 Forward Share Purchase Agreements required physical settlement by purchase of a fixed number of shares in
exchange for cash, the 2,000,000 and 6,900,000 shares that were purchased are excluded from the Company's calculation of basic and diluted earnings per share in the
Company's financial statements for the years ended March 31, 2018 and 2017. In addition, as the agreement provides for the refund of any dividends paid during the term
on the underlying Class A common stock, such shares are not classified as participating securities and the Company does not apply the two-class method for calculating its
earnings per share.
Expenses related to the February 2017 Follow-on Offering and the February 2017 Forward Share Purchase Agreement included in the consolidated statements of
comprehensive income include $1,633 of professional service and other third-party fees and expenses during the year ended March 31, 2017 .
Expenses related to the October 2017 Follow-on Offering and the March 2018 Follow-on Offering and the January 2018 Forward Share Purchase Agreement
included in the consolidated statements of comprehensive income include $2,084 of professional service and other third-party fees and expenses during the year ended
March 31, 2018 .
The Company offers financial services and financial advice to a broad clientele located throughout the United States of America, Europe, and the Asia-Pacific
region. The Company has U.S. offices in Los Angeles, San Francisco, Chicago, New York City, Minneapolis, McLean (Virginia), Dallas, Houston, Miami, and Atlanta as
well as foreign offices in London, Paris, Frankfurt, Madrid, Amsterdam, Dubai, Sydney, Tokyo, Hong Kong, Beijing and Singapore. 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 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 Corporate Finance revenues consists of fees paid upon the successful completion of the transaction or
engagement ("Completion Fees"). A Corporate Finance 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 earned.
Financial Restructuring provides advice to debtors, creditors and other parties-in-interest in connection with recapitalization/deleveraging transactions
implemented both through bankruptcy proceedings and though 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 Financial Restructuring 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, a Financial Restructuring
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 initial Retainer Fees
and/or Progress Fees.
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Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
•
Financial Advisory Services 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 Financial Advisory
Services 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 Financial Advisory
Services business segment provides dispute resolution services to clients where fees are usually based on the hourly rates of our financial professionals. Lastly,
our Financial Advisory Services business segment provides strategic consulting services to clients where fees are either fixed or based on the hourly rates of our
consulting professionals. Unlike our Corporate Finance or Financial Restructuring segments, the fees generated in our Financial Advisory Services segment are
generally not contingent on the successful completion of a transaction.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") and
pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC") and include all information and footnotes required for
financial statement presentation, and include all disclosures required under GAAP in the United States for annual financial statements.
(b)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries where it has a controlling financial interest. All
significant intercompany balances and transactions have been eliminated in consolidation.
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.
(c)
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: the allowance for doubtful accounts, the valuation
of deferred tax assets, goodwill, accrued expenses, and share based compensation and reserves for income tax uncertainties and other contingencies.
(d)
Recognition of Revenue
Revenues consist primarily of professional service fees.
The Company and its clients enter into agreements that outline the general terms and conditions of the specific engagements. The Company performs
professional services in accordance with the engagement terms on both a fixed and contingent fee basis.
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Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
Revenues are recognized when earned and realizable. Revenues under fixed fee contracts are recognized based on management’s estimates of the
relative proportion of services provided through the financial reporting date to the total services required to be performed. The recognition of revenues under
contingent fee contracts depends on whether the revenues relate to monthly retainers or success fees. Monthly retainers are generally recognized on a monthly
basis, except in situations where there is uncertainty as to the timing of collection of the amount due. Success fees are recognized only upon substantial
completion of the contingencies stipulated by the engagement agreement. In some cases, approval of the Company’s fees is required from the courts or other
regulatory authority; in these circumstances, the recognition of revenue is often deferred until approval is granted; however, if the fee that is going to be collected
from the client is fixed and determinable, and the collectability of the fee is reasonably assured, there are instances when revenue recognition prior to such
approval is appropriate.
Engagements related to Financial Advisory Services are most often structured as fixed fee contracts, and engagements related to Corporate Finance and
Financial Restructuring are most often structured as contingent fee contracts. Further, Financial Restructuring contracts are commonly subject to the applicable
court’s approval.
In those instances when the revenue recognized on a specific engagement exceeds both the amounts billed and the amounts collected, unbilled work-in-
process is recorded. Billed receivables are recorded as accounts receivable in the accompanying consolidated balance sheets. Deferred income results when cash
is received in advance of dates when revenues are recognized.
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.
(e)
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 13). Other examples of operating expenses include: travel, meals and entertainment; rent; depreciation
and amortization; information technology and communication; professional fees and other operating expenses, which include such items as office expenses,
business license and registration fees, non-income-related taxes, legal expenses, related-party support services, and charitable contributions. During the years
ended March 31, 2018 , 2017 , and 2016 , the Company recognized reimbursements of $30,200 , $33,015 , and $28,183 respectively, from customers for out-of-
pocket expenses incurred by the Company that are presented net against the related expenses in the accompanying consolidated statements of comprehensive
income.
(f)
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 year. Resulting translation
adjustments are reported as a separate component of accumulated other comprehensive loss, net of applicable taxes. The Company's operating expenses includes
realized foreign currency translation gains and (losses) of $5,123 , $309 , and $2,239 during the years ended March 31, 2018 , 2017 , and 2016 , respectively.
From time to time, we have entered into transactions to hedge our exposure to certain foreign currency fluctuations through the use of derivative
instruments or other methods. As of March 31, 2018, 2017 and 2016, we have foreign currency forward contracts between the euro and pound sterling outstanding
with aggregate notional value of approximately EUR 9 million , 5 million , and 1 million . Gains (losses) in relation to the fair value of the foreign currency
forward contracts have been included in other operating expenses of $90 , $58 , and $(62) during the twelve months ended March 31, 2018 , 2017 , and 2016 ,
respectively.
(g)
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.
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Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
Depreciation on furniture and office equipment is provided on a straight-line basis over the estimated useful lives of the respective assets. Leasehold
improvements are depreciated over the lesser of the lease term or estimated useful life.
(h)
Cash and Cash Equivalents
Cash and cash equivalents include cash held at banks and highly liquid investments with original maturities of three months or less. At March 31, 2018
and 2017 , the Company had cash balances with banks in excess of insured limits. The Company has not experienced any losses in its cash accounts and believes
it is not exposed to any significant credit risk with respect to cash and cash equivalents.
(i)
Restricted cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to
the total of the same amounts shown in the statement of cash flows.
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
March 31, 2018
March 31, 2017
$
$
206,723 $
93,500
300,223 $
300,314
192,372
492,686
Amounts in restricted cash include cash received from the issuance of shares in the February 2017 Follow-on Offering and the March 2018 Follow-on
Offering and required to be set aside pursuant to the February 2017 Forward Share Purchase Agreement and January 2018 Forward Share Purchase Agreement
(notes 1 and 3). The restriction lapsed when the related forward purchase liability was paid off.
(j)
Investment Securities
Investment securities consists of corporate debt, certificates of deposit, and U.S. treasury securities with maturities less than one year. The Company
classifies its investment securities as held to maturity which are recorded at amortized cost based on the Company’s positive intent and ability to hold these
securities to maturity. Management evaluates whether securities held to maturity are other-than-temporarily impaired on a quarterly basis.
(k)
Accounts Receivable
The allowance for doubtful accounts on receivables reflects management’s best estimate of probable inherent losses determined principally on the basis
of historical experience and review of uncollected revenues and is recorded through provision for bad debts in the accompanying consolidated statements of
comprehensive income. Amounts deemed to be uncollectible are written off against the allowance for doubtful accounts.
(l)
Income Taxes
Prior to the IPO, ORIX USA and its subsidiaries, including the Company, filed consolidated federal income tax returns and separate returns in state and
local jurisdictions and did so for fiscal 2016 through the date of the IPO. The Company reported income tax expense as if it filed separate returns in all
jurisdictions. Following the IPO, the Company files a consolidated federal income tax return separate from ORIX USA, 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 Accounting Standards Codification 740 (“ASC 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.
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Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
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.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance on accounting for the tax effects
of the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act, enacted on December 22, 2017, is comprehensive tax legislation which makes broad and complex
changes to the U.S. tax code that will affect the year ended March 31, 2018 as well as future years. SAB 118 provides a measurement period that should not
extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company
must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s
accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the
consolidated financial statements.
The impacts of the Tax Act, including both the adjustment to the deferred tax accounts and a one-time toll charge on deemed repatriated earnings of
foreign subsidiaries (toll charge), are the Company’s best estimates based on the information that is available at the time of these consolidated financial statements
and may change as additional information becomes available. As for the Tax Act’s one-time repatriation tax, the calculation involves a number of variables and
assumptions, including state tax impacts, which will continue to be refined by the Company through the filing date of the Company’s federal and state tax returns.
In addition, the Tax Act is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations
and implementing regulations by the Treasury Department and the Internal Revenue Service (“IRS”), any of which could affect the estimates included in the
provision. Furthermore, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a
starting point for computing state and local tax liabilities. If an adjustment related to the Tax Act is required, it will be reflected as a discrete expense or benefit in
the quarter that it is identified, as allowed by SAB 118, not to exceed the permissible one year measurement period.
(m)
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.
When HL CA was acquired by Fram in January 2006, approximately $392,600 of goodwill and $192,210 of indefinite-lived intangible assets were
generated and recognized. In accordance with ASC Topic 805, Business Combinations , since HL CA was wholly owned by Fram, this goodwill and all other
purchase accounting-related adjustments were pushed down to the Company’s reporting level. Through both foreign and domestic acquisitions made directly by
HL CA and the Company since 2006, additional goodwill of approximately $136,289 , inclusive of foreign currency translations has been recognized.
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Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
We assign goodwill to reporting units. Our reporting units include Corporate Finance, Financial Restructuring and Financial Advisory Services. For each
reporting unit we performed a qualitative assessment and determined whether it was more likely than not that the carrying value of the reporting unit, including
the recorded goodwill, was in excess of the fair value of the reporting unit. In any instance in which we are unable to qualitatively conclude that it is more likely
than not that the fair value of the reporting unit exceeds the reporting unit carrying value including goodwill, a quantitative analysis of the fair value of the
reporting unit would be performed. Based upon the outcome of our qualitative assessments, we determined that no quantitative analysis of the fair value of any of
the reporting units was required, and we concluded that none of the goodwill allocated to any of those reporting units was impaired. No events have occurred
since our assessment that would cause us to update this impairment testing.
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. During the years ended March 31, 2018, 2017, and 2016, 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. During the years ended March 31, 2018, 2017, and 2016, no events or changes in circumstances were identified
that indicated that the carrying amount of the finite-lived intangible assets were not recoverable.
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Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
(n)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers , which requires an
entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of
financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015,
the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers , Deferral of Effective Date which deferred the effective date of the new standard to
annual and interim periods within that reporting period beginning after December 15, 2017 (year ending March 31, 2019 for the Company). The new standard is
to be applied using either the retrospective or cumulative-effective transition method. The Company adopted the standard effective April 1, 2018 using the
modified retrospective method which requires the recognition of a cumulative-effect adjustment as of that date. The Company evaluated the potential impact of
the new guidance including (i) the timing of revenue recognition for Corporate Finance, Financial Restructuring, and Financial Advisory fees and (ii) the
presentation of reimbursable out-of-pocket expenses. With respect to revenue recognition, the Company assessed the potential impact of the new guidance on the
Company’s recognition of advisory fees (e.g., transaction success and retainer fees), including whether the Company’s fulfillment of its performance obligations
under Corporate Finance, Financial Restructuring, and Financial Advisory engagement contracts would be deemed to occur over time, or at specific points in
time, under the new guidance. The Company considered the proposed guidance which includes an assessment of whether the client receives and consumes
benefits from the services as the services are being performed to achieve over-time recognition, and has concluded that the vast majority of Financial
Restructuring advisory contracts would be recognized over time as performance occurs, subject to constraints, using an appropriate measure of progress.
Corporate Finance contracts will be a mix of over-time and point-in-time based on terms of the specific contract. The vast majority of Financial Advisory
contracts will be recognized point-in-time as the performance obligation will be satisfied upon the delivery of a report at the completion of the engagement.
Interpretive guidance on over-time or point-in-time recognition continues to be issued and interpreted, in particular by the AICPA industry task force on Broker-
Dealers, the AICPA's Revenue Recognition Working Group and the AICPA's Financial Reporting Executive Committee. The Company will continue to monitor
and evaluate any additional guidance. The Company is still in the process of evaluating its contracts to determine whether point-in-time or over time recognition
is appropriate. The result of adoption is expected to result in a cumulative effect adjustment decrease to opening retained earnings and an increase to deferred
income. With respect to contract costs, certain reimbursable out-of-pocket expenses incurred by the Company are currently presented net against the related
expenses in the accompanying consolidated statements of comprehensive income (amounts for each of the three years ended March 31, 2018 are included in note
2e); however under the new standard these will be reported on a gross basis resulting in an increase to both fee revenue and operating expenses.
In February 2016, the FASB issued ASU No. 2016-02, Leases . The amendments in this ASU requires lessees to recognize right-of-use assets and lease
liabilities on the balance sheet for all leases with terms longer than 12 months. For leases with a term of 12 months or less, a lessee is permitted to make an
accounting policy election by class of underlying asset not to recognize a right-of-use asset and lease liability. Additionally, when measuring assets and liabilities
arising from a lease, optional payments should be included only if the lessee is reasonable certain to exercise an option to extend the lease, exercise a purchase
option, or not exercise an option to terminate the lease. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018
(year ending March 31, 2020 for the Company). Early application is permitted. The Company is currently in the process of determining the impact that the
updated accounting guidance will have on our consolidated financial statements. See Note 15 for a summary of our undiscounted minimum rental commitments
under operating leases as of March 31, 2018.
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Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments . The
amendments in this ASU include eight specific guidance measures for cash flow classification issues for (1) debt prepayment or debt extinguishment costs, (2)
debt instruments with coupon interest rates, (3) contingent consideration payments made after a business combination, (4) settlement proceeds from insurance
claims, (5) settlement proceeds from corporate-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in
securitization transactions, and (8) classification of cash receipts and payments that have aspects of more than one class of cash flows. ASU 2016-15 is effective
for interim and annual reporting periods beginning after December 15, 2017 (year ending March 31, 2019 for the Company). This new accounting guidance will
result in some changes in classification in the consolidated statement of cash flows, which the Company does not expect will be significant, and will not have a
material impact on its consolidated financial position or results of operations.
In January 2017, the FASB issued ASU No. 2017-04, Intangible - Goodwill and Other: Simplifying the Test for Goodwill Impairment . The amendments
in this ASU do not change the guidance on Step 1 of the goodwill impairment test but eliminates the requirement to calculate an implied goodwill value using
Step 2. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value but should not
exceed the total amount of goodwill allocated to that reporting unit. Also, an entity still has the option to perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15,
2019 (year ending March 31, 2021 for the Company) with early adoption permitted. Management does not believe this guidance will have a material impact on
the Company's consolidated financial statements and related disclosures.
In May 2017, the FASB issued amended guidance that clarifies when changes to the terms or conditions of share-based payment awards require an entity
to apply modification accounting (ASU 2017-09). The amended guidance states an entity should account for the effects of a modification unless certain criteria
are met which include that the modified award has the same fair value, vesting conditions and classification as the original award. The guidance is first effective
for our fiscal year beginning October 1, 2019 on a prospective basis; however, early adoption is permitted. Given that this guidance applies to specific
transactions and would only become relevant in certain circumstances, we are unable to estimate the impact, if any, this new guidance may have on our financial
position.
(o)
Reclassifications
Certain prior year amounts have been reclassified to conform with current year presentation.
(3) RELATED‑‑PARTY TRANSACTIONS
The Company provides financial advisory services to ORIX USA, Infrastructure Holdings, and their affiliates and received fees for these services totaling
approximately $3,006 , $7,504 , and $504 during the years ended March 31, 2018 , 2017 , and 2016 , respectively.
The Company provides certain management and administrative services for the Company's unconsolidated entities and receive fees for these services. These fees
are offset with the compensation costs related to the administrative staffs. As a result, the Company received fees of $286 , $461 , and $205 during the years ended
March 31, 2018 , 2017 , and 2016 , respectively.
In connection with the IPO, ORIX USA and the Company entered into a Transition Services Agreement, pursuant to which ORIX USA provided services for
Sarbanes-Oxley compliance, internal audit, and other services for specified fees. Expenses incurred by the Company related to these services were $0 , $269 , and $214 for
the years ended March 31, 2018 , 2017 , and 2016 , respectively, which are included in professional fees in the accompanying consolidated statements of comprehensive
income. To the extent that ORIX USA and its affiliates pay for expenses of the Company, ORIX USA is reimbursed for such payments by the Company.
Interest income earned by the Company related to cash balances held by the affiliate of ORIX USA was $0 , $33 and $1,954 for the years ended March 31, 2018 ,
2017 and 2016 , respectively.
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Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
In November 2015, the Company entered into a joint venture arrangement with Leonardo & Co. NV, a European-based investment banking firm ("Leonardo"), in
relation to Leonardo's Italian business by means of acquisition of a minority ( 49% ) interest. In conjunction with this transaction, a subsidiary of the Company loaned the
joint venture EUR 5,500 ( $6,034 as of March 31, 2018) which is included in receivables from affiliates and which bears interest at 1.5% and matures no later than
November 2025. Interest income earned by the Company related to this receivable from affiliate was approximately $97 , $90 , and $34 during the years ended March 31,
2018 , 2017 , and 2016 , respectively. Included in receivables from affiliates is also reimbursable third party costs incurred on behalf of Leonardo totaling approximately
$2,698 and $1,424 as of March 31, 2018, and 2017, respectively.
As described in note 1 above, in connection with, and prior to, the February 2017 Follow-on Offering, on February 6, 2017, the Company entered into the
February 2017 Forward Share Purchase Agreement, pursuant to which the Company agreed to repurchase from ORIX USA on April 5, 2017 the number of shares of our
Class B common stock equal to the number of shares of our Class A common stock sold by the Company in the February 2017 Follow-on Offering (including any shares
sold upon the exercise by the underwriters of their option to purchase additional shares of our Class A common stock) for a purchase price per share equal to the public
offering price in the February 2017 Follow-on Offering less underwriting discounts and commissions. On April 5, 2017, the Company settled the transaction provided for
in the February 2017 Forward Share Purchase Agreement and acquired 6,900,000 shares of Class B common stock from ORIX USA using the net proceeds we received
from the February 2017 Follow-on Offering and the shares were retired. In accordance with the terms of the February 2017 Forward Share Purchase Agreement, the
purchase price per share under the February 2017 Forward Share Purchase Agreement was reduced by the per share amount of the dividend paid to ORIX USA on the
shares of our Class B common stock subject to the February 2017 Forward Share Purchase Agreement prior to the settlement of the transaction.
In July 2017, the Company purchased the remaining interest of Houlihan Lokey (Australia) Pty Limited ("HL Australia"), which was historically operating as our
joint venture in Australia. As part of the consideration paid, a loan receivable from certain principals of the joint venture was forgiven. In addition, as a result of the
acquisition we eliminated from our consolidated financial statements as of December 31, 2017 a loan agreement entered into with HL Australia in February 2017 for AUD
2,500 ( $2,001 as of July 31, 2017) which bore interest at 2.0% and was previously included in receivables from affiliates. Interest income earned by the Company related
to this receivable from affiliate was approximately $13 and $19 during the years ended March 31, 2018 and 2017 , respectively.
In connection with, and prior to, the March 2018 Follow-on Offering, on January 26, 2018, the Company entered into the January 2018 Forward Share Purchase
Agreement, pursuant to which the Company agreed to repurchase from ORIX USA on April 5, 2018 the number of shares of our Class B common stock equal to the
number of shares of our Class A common stock sold by the Company in the March 2018 Follow-on Offering for a purchase price per share equal to the public offering
price in the March 2018 Follow-on Offering less underwriting discounts and commissions. On April 5, 2018, the Company settled the transaction provided for in the
January 2018 Forward Share Purchase Agreement and acquired 2,000,000 shares of Class B common stock from ORIX USA using the net proceeds we received from the
March 2018 Follow-on Offering and the shares were retired. In accordance with the terms of the January 2018 Forward Share Purchase Agreement, the purchase price per
share under the January 2018 Forward Share Purchase Agreement was reduced by the per share amount of the dividend paid to ORIX USA on the shares of our Class B
common stock subject to the January 2018 Forward Share Purchase Agreement prior to the settlement of the transaction.
In the accompanying consolidated balance sheet, the Company carried accounts receivable and unbilled work in progress from related parties totaling
approximately $21 and $455 as of March 31, 2018 and 2017, respectively. The Company also deferred income from related parties for service fees totaling $25 and $0 as
of March 31, 2018 and 2017, respectively.
Other assets in the accompanying consolidated balance sheets includes loans receivable from certain employees of $7,489 and $5,865 as of March 31, 2018 and
2017 , respectively.
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Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
(4) FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
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 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 on the best
information available, may incorporate management's own assumptions and involves a significant degree of judgment.
The following methods and assumptions were used by the Company in estimating fair value disclosures:
Certificates of deposit : Fair values for certificates of deposit are based upon a discounted cash flow approach.
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.
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:
Certificates of deposit
Corporate debt securities
U.S. Treasury Securities
Total asset measured at fair value
March 31, 2018
Level I
Level II
Level III
Total
$
$
— $
—
—
— $
10,106 $
183,578
15,582
209,266 $
— $
—
—
— $
10,106
183,578
15,582
209,266
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 Company had no transfers between fair value levels for the year ended March 31, 2018 .
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.
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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, unbilled work in process, receivables from affiliates, accounts payable, and
deferred income approximates fair value due to the short maturity of these instruments.
The carrying value of the loan payable to affiliate, loans payable to former shareholders and an unsecured loan which is included in loan payable to non-affiliates,
approximates fair value due to the variable interest rate borne by those instruments.
(5) INVESTMENT SECURITIES
The amortized cost, gross unrealized gains (losses), and fair value of securities held to maturity as of March 31, 2018 were as follows:
Corporate debt securities
Certificate of deposit
U.S. Treasury Securities
Total securities with unrealized gains
Amortized Cost
Gross Unrealized Gains
Gross Unrealized (Losses)
Fair Value
$
$
183,632 $
10,106
15,581
209,319 $
13 $
—
11
24 $
(67)
$
—
(10)
(77)
$
183,578
10,106
15,582
209,266
Scheduled maturities of the Company's debt securities within the investment securities portfolio as of March 31, 2018 were as follows:
Due within one year
$
209,319 $
Amortized Cost
Estimated Fair Value
209,266
The Company has the ability and intent to hold the corporate debt securities to maturity until a recovery of fair value is equal to an amount approximating its
amortized cost, which may be at maturity, and has not incurred credit losses on such debt securities. The Company does not consider such unrealized loss positions to be
other-than-temporarily impaired as of March 31, 2018 .
(6) ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE
Balance-beginning
Provision for bad debt
Write-off of uncollectible accounts
Balance-ending
66
Year Ended
March 31,
2018
2017
$
$
11,199 $
1,983
(1,791)
11,391 $
7,844
4,008
(653)
11,199
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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
(7) PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation consist of the following:
Equipment
Furniture and fixtures
Leasehold improvements
Computers and software
Other
Total cost
Less: accumulated depreciation
Total net book value
Useful Lives
5 Years
5 Years
10 Years
3 Years
N/A
2018
2017
$
6,653 $
19,189
31,916
10,346
1,120
69,224
(37,078)
32,146 $
$
6,731
18,171
26,298
10,319
1,090
62,609
(32,193)
30,416
Additions to property and equipment during the years ended March 31, 2018 and 2017 were primarily related to costs incurred to furnish new leased office space
and refurbish existing space.
Depreciation expense of $6,195 , $5,708 , and $4,588 was recognized during the years ended March 31, 2018 , 2017 , and 2016 , respectively.
(8) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangibles consist of the following.
Goodwill
Tradename-Houlihan Lokey
Other intangible assets
Total cost
Less: accumulated amortization
Total net book value (before taxes)
Deferred tax liability
Total net book value
Useful Lives
Indefinite
Indefinite
1-30 Years
March 31, 2018
March 31, 2017
$
528,889 $
192,210
15,464
736,563
(13,253)
723,310
(50,541)
$
672,769 $
519,487
192,210
14,829
726,526
(11,183)
715,343
(77,184)
638,159
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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
Goodwill attributable to the Company’s business segments is as follows:
Business Segments
Corporate Finance
Financial Restructuring
Financial Advisory Services
Total
April 1, 2017
Changes
March 31, 2018
$
$
265,260 $
162,512
91,715
519,487 $
8,552 $
850
—
9,402 $
273,812
163,362
91,715
528,889
In July 2017, the Company purchased the remaining interest of HL Australia, which was historically operating as our joint venture in Australia. Changes also
include foreign currency translation adjustments of $6,902 for the year ended March 31, 2018 .
Amortization expense of approximately $1,710 , $3,145 , and $2,911 was recognized for the years ended March 31, 2018 , 2017 , and 2016 , respectively. The
estimated future amortization for amortizable intangible assets for each of the next five years are as follows:
Year Ended March 31,
2019
2020
2021
2022
2023
$
677
583
373
157
7
68
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(9) LOANS PAYABLE
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
In August 2015, prior to the IPO, the Company paid a dividend to its shareholders, a portion of which was paid to ORIX USA in the form of a $45.0 million note
that bore interest at a rate of LIBOR plus 165 basis points or 4.31% and 3.45% as of March 31, 2018 and 2017 , respectively. The Company paid interest on the note of $62
and $806 for the years ended March 31, 2018 and 2017 , respectively. Beginning on June 30, 2016, the Company was required to make quarterly repayments of principal in
the amount of $7.5 million , with the remaining principal amount due on the second anniversary of the completion of the IPO. The loan was repaid in full in May 2017.
In August 2015, the Company entered into a revolving line of credit with Bank of America, N.A., which allows for borrowings of up to $75.0 million and
originally matured in August 2017. On July 28, 2017, the Company extended the maturity date of the revolving credit facility to August 18, 2019 (or if such date is not a
business day, the immediately preceding business day). 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. As of March 31, 2018 ,
no principal was outstanding under the line of credit. The Company paid interest and unused commitment fees of $228 and $400 for the years ended March 31, 2018 and
2017 , respectively, under the line of credit.
Prior to the IPO, Fram maintained certain loans payable to former shareholders consisting of unsecured notes payable which were transferred to the Company in
conjunction with the IPO. The interest rate on the individual notes was 3.10% and 2.55% per annum for the years ended March 31, 2018 and 2017 , respectively, and the
maturity dates range from 2018 to 2027. The Company incurred interest expense on these notes of $124 and $203 for the years ended March 31, 2018 and 2017 ,
respectively.
In November 2015, the Company acquired the investment banking operations of Leonardo in Germany, the Netherlands, and Spain, and made a 49% investment
in Leonardo's operations in Italy. Total consideration included an unsecured loan of EUR 14.0 million payable on November 16, 2040, which is included in loan payable to
non-affiliates in the accompanying consolidated balance sheets. Under certain circumstances, the note may be paid in part or in whole over a five year period in equal
annual installments. This loan bears interest at an annual rate of 1.50% . In January 2017 and December 2017, we paid a portion of this loan in the amount of EUR 2.9
million and 2.9 million , respectively. The Company incurred interest expense on this loan of $179 , $213 and $91 for the years ended March 31, 2018 , 2017 , and 2016 ,
respectively.
See note 15 for aggregated 5-year maturity table on loans payable.
(10) OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS
The only component of other comprehensive income relates to foreign currency translation adjustments of $7,961 , $(7,304) , and $(3,275) for the years ended
March 31, 2018 , 2017 , and 2016 , respectively. The change in foreign currency translation was impacted by the vote in the U.K. to withdraw from the European Union.
We are currently in a two-year time period in which the terms of withdrawal will be negotiated and there may be impacts on our European business that are unknown at
this time. We believe the change in foreign currency translation will become more volatile, but we do not expect this to have a material impact on our operating results and
financial position.
Accumulated other comprehensive loss at March 31, 2018 , 2017 , and 2016 was comprised of the following:
Balance, April 1, 2015
Foreign currency translation adjustments
Balance, March 31, 2016
Foreign currency translation adjustments
Balance, March 31, 2017
Foreign currency translation adjustments
Balance, March 31, 2018
69
$
$
$
$
(11,338)
(3,275)
(14,613)
(7,304)
(21,917)
7,961
(13,956)
Table of Contents
(11) INCOME TAXES
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
The Company’s provision for income taxes was $45,553 , $70,144 , and $55,863 for the years ended March 31, 2018 , 2017 , and 2016 , respectively. This
represents effective tax rates of 20.9% , 39.3% , and 44.5% for the years ended March 31, 2018 , 2017 , and 2016 , respectively. The decrease in the Company’s tax rate
during the year ended March 31, 2018 relative to fiscal 2017 which was a result of the Tax Act and the adoption of ASU 2016-09, Compensation - Stock Compensation
which resulted in a decrease to the provision for income taxes in the amount of $16,173 due to the vesting of share awards that were accelerated.
The Tax Act reduced the U.S. federal corporate tax rate from 35.0% to 21.0% for all corporations effective January 1, 2018. For fiscal year companies, the change
in law requires the application of a blended rate, which in the Company’s case is approximately 31.5% for the fiscal year ending March 31, 2018 . Thereafter, the
applicable statutory rate is 21.0% .
ASC 740 requires all companies to reflect the effects of the new law in the period in which the law was enacted. Accordingly, the Company reduced the statutory
rate that applies to its year-to-date earnings from 35.0% to 31.5% . In addition, the Company remeasured its deferred tax assets and liabilities based on the new rate, as well
as recorded a one-time deemed repatriation tax (a “toll charge”) on its foreign earnings. The combined result of the Tax Act resulted in a tax benefit of $(10,731) for the
year ended March 31, 2018 .
This net income tax benefit is primarily the result of the revaluation of our net deferred tax liability as a result of the reduction of the corporate income tax rate
from 35.0% to 21.0% for a benefit of $(13,211) plus the toll charge of $2,480 . This tax is based on previously untaxed accumulated and current earnings and profits of
certain of the Company’s non-U.S. subsidiaries. To determine the amount of the Transition Tax, the Company estimated, in addition to other factors, the amount of post-
1986 earnings and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The available foreign tax credits were not
fully utilized against the toll charge, leaving the Company with excess foreign tax credit carryforwards of approximately $3,865 . The Company does not expect to utilize
the excess foreign tax credits in the future as the Company does not currently project future foreign source income. Accordingly, the Company believes it is appropriate to
apply a valuation allowance against the excess foreign tax credits of $3,865 in full. The Company was able to make a reasonable estimate of the toll charge and has
recorded this provisional amount; however, the Company may continue to refine its estimate as allowed by SAB 118.
The provision (benefit) for income taxes on operations for the years ended March 31, 2018 , 2017 , and 2016 comprises the following approximate values:
Current:
Federal
State and local
Foreign
Subtotal
Deferred:
Federal
State and local
Foreign
Subtotal
Total
March 31, 2018
March 31, 2017
March 31, 2016
$
34,638 $
60,024 $
9,768
7,716
52,122
(2,398)
(646)
(3,525)
(6,569)
12,686
3,527
76,237
(7,262)
(962)
2,131
(6,093)
$
45,553 $
70,144 $
43,252
10,895
5,881
60,028
(3,867)
(93)
(205)
(4,165)
55,863
The provision for income taxes on operations for the years ended March 31, 2018 , 2017 , and 2016 is reconciled to the income taxes computed at the statutory
federal income tax rate (computed by applying the federal corporate rate of 31.5% for fiscal 2018 and 35% for fiscal 2017 and 2016 to consolidated operating income
before provision for income taxes) as follows:
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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
Federal income tax provision computed at statutory rate
$
68,618
31.5 % $
62,470
35.0 % $
43,963
March 31, 2018
March 31, 2017
March 31, 2016
State and local taxes, net of federal tax effect
Foreign taxes, rate differential
Nondeductible expenses
Nondeductible public offering-related expenses
Stock Compensation
Uncertain tax positions, true-up items & other
Enactment of the Tax Act
Total
7,600
(3,972)
1,414
—
(16,173)
(1,203)
(10,731)
3.5 %
(1.8)%
0.6 %
— %
(7.4)%
(0.6)%
(4.9)%
8,139
(1,741)
1,422
562
—
(708)
—
4.6 %
(1.0)%
0.8 %
0.3 %
— %
(0.4)%
— %
7,108
(453)
1,475
3,930
—
(160)
—
$
45,553
20.9 % $
70,144
39.3 % $
55,863
35.0 %
5.7 %
(0.4)%
1.2 %
3.1 %
— %
(0.1)%
— %
44.5 %
Deferred income taxes arise principally from temporary differences between book and tax recognition of income, expenses, and losses relating to financing and
other transactions. The deferred income taxes on the accompanying consolidated balance sheets at March 31, 2018 , 2017 , and 2016 comprise the following:
Deferred tax assets:
Deferred compensation expense/accrued bonus
Allowance for doubtful accounts
US Foreign Tax Credits - Toll Charge
Other, net
Total deferred tax assets
Deferred tax asset valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Intangibles
Accounts receivable and work in process
Total deferred tax liabilities
Net deferred tax liabilities
March 31, 2018
March 31, 2017
March 31, 2016
$
32,358 $
57,379 $
2,347
3,865
11,271
49,841
(13,334)
36,507
(50,541)
(8,146)
(58,687)
4,920
—
11,235
73,534
(10,984)
62,550
(77,184)
(16,562)
(93,746)
$
(22,180) $
(31,196) $
43,348
3,195
—
13,127
59,670
(11,728)
47,942
(77,184)
(8,046)
(85,230)
(37,288)
A valuation allowance is required when it is more likely than not that some portion of the deferred tax assets will not be realized. The Company has determined
that deferred tax assets related to US foreign tax credits and certain foreign deferred tax assets are not likely to be realized. After the toll charge calculation, there were
excess foreign tax credits of approximately $3,865 that were not fully utilized against the toll charge. The Company does not expect to utilize the excess foreign tax credits
in the future as the Company does not currently project future foreign source income. Accordingly, the Company believes it is appropriate to apply a valuation allowance
against the excess foreign tax credits of $3,865 in full. In addition, certain deferred tax assets related to tax goodwill from previous acquisitions were not more likely than
not realizable and therefore the Company maintained valuation allowances for March 31, 2018, 2017 and 2016 of $9,469, $10,984 and $11,728, respectively.
As of March 31, 2018 , 2017 , and 2016 , the Company had recorded liabilities for interest and penalties related to uncertain tax positions in the amounts of $934 ,
$816 , and $313 net of any future tax benefit of such interest, respectively. Unrecognized tax positions totaled $4,563 , $3,694 and $1,024 as of March 31, 2018 , 2017 ,
and 2016 , respectively. If the income tax impacts from these tax positions are ultimately realized, such realization would affect the income tax provision and effective tax
rate.
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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
A reconciliation of the unrecognized tax position for the years ended March 31, 2018 , 2017 , and 2016 is as follows:
Unrecognized tax position at the beginning of the year
Increases related to prior year tax positions
Decreases related to prior year tax positions
Unrecognized tax position at the end of the year
March 31, 2018
March 31, 2017
March 31, 2016
$
$
3,694 $
1,033
(164)
4,563 $
1,024 $
2,670
—
3,694 $
133
891
—
1,024
In the next 12 months, certain uncertain tax positions may reverse as the related statutes expire, but the Company does not anticipate a material change.
Prior to the IPO, the Company filed as a member of the ORIX USA consolidated federal income tax group and did so for fiscal 2016 through the date of the IPO.
Following the IPO, the Company files a consolidated federal income tax return separate from ORIX USA, as well as consolidated and separate returns in state and local
jurisdictions. As of March 31, 2018, all of the federal income tax returns filed since 2015 by ORIX USA which include the Company as a subsidiary or filed by the
Company are still subject to adjustment upon audit. The Company is currently under federal income tax audit by the Internal Revenue Service for the year ended March 31,
2016. The Company also files combined and separate income tax returns in many states which are also open to adjustment. Additionally, ORIX USA is currently under
California audit for the years ended March 31, 2012, March 31, 2013 and March 31, 2014, Illinois audit for the years ended March 31, 2013, March 31, 2014, and March
31, 2015, as well as under Minnesota audit for the years ended March 31, 2013, March 31, 2014, March 31, 2015 and March 31, 2016.
(12) NET INCOME PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
The calculations of basic and diluted net income per share attributable to holders of shares of common stock for the years ended March 31, 2018 , 2017 , and 2016
are presented below.
Numerator:
Net income attributable to holders of shares of common stock—basic
Net income attributable to holders of shares of common stock—diluted
Denominator:
Weighted average shares of common stock outstanding—basic
Weighted average number of incremental shares issuable from unvested restricted stock and restricted
stock units, as calculated using the treasury stock method
Weighted average shares of common stock outstanding—diluted
Net income per share attributable to holders of shares of common stock
Basic
Diluted
Twelve Months Ended March 31,
2018
2017
2016
172,283 $
172,283 $
108,343 $
108,343 $
69,741
69,741
62,494,275
61,100,497
59,044,981
3,829,818
5,478,633
66,324,093
66,579,130
4,430,922
63,475,903
2.76 $
2.60 $
1.77 $
1.63 $
1.18
1.10
$
$
$
$
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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
(13) EMPLOYEE BENEFIT PLANS
(a)
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 $2,018 , $2,321 and $2,060 during the years ended March 31, 2018 , 2017 and 2016 ,
respectively, to these defined contribution plans.
(b)
Share-Based Incentive Plans
During the period it was a subsidiary of Fram, certain employees of HL CA were granted restricted shares of Fram. Compensation expense related to
these shares was recorded at the HL CA level as it was related to services provided by its employees. Under its 2006 incentive plan (the "2006 Incentive Plan"),
Fram granted restricted share awards to employees of the Company as a component of annual incentive pay and occasionally in conjunction with new hire
employment. Under the 2006 Incentive Plan, awards typically vested after three years of service from the date of grant. Forfeitures of unvested share awards are
recognized as they occur. Prior to the IPO, the grant-date fair value of each award was determined by Fram's board of directors as discussed further below. In
addition, the stock grants to employees of the Company in connection with the IPO were made under the 2006 Incentive Plan.
Following the IPO, additional awards of restricted shares 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. An aggregate of 24,250 restricted shares of Class A common stock were granted under the 2016 Incentive Plan to (i) two independent directors in August
2015 at $21.00 per share (ii) two independent directors in the first quarter of fiscal 2017 at $25.21 per share, (iii) one independent director in the first quarter of
fiscal 2017 at $23.93 per share, and (vi) three independent directors in the first quarter of fiscal 2018 at $33.54 per share.
In March 2016, the FASB issued ASU No. 2016-09 which simplified several aspects of the accounting for share-based payment transactions, including
the income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. The Company adopted ASU
2016-09 in the first quarter of fiscal 2018. The changes that impacted the Company included a requirement that excess tax benefits and deficiencies be recognized
as a component of provision for income taxes on the consolidated statements of comprehensive income rather than additional paid-in capital on the consolidated
statements of changes in stockholders' equity as required in the previous guidance. Under the transition provisions, we have applied this new guidance
prospectively with respect to excess tax benefits arising from vesting of share awards and are no longer presented within financing activities in the Consolidated
Statements of Cash Flows and are included the change in income taxes receivable (payable) as an operating activity in the Consolidated Statements of Cash Flows
for the year ended March 31, 2018. During the year ended March 31, 2018 excess tax benefits of $16,173 were recorded as as a component of the provision for
income taxes and an operating activity on the Consolidated Statements of Cash Flows. The adoption of ASU 2016-09 resulted in a decrease to the provision for
income taxes due to the vesting of share awards that were accelerated on February 14, 2017. The decrease to the provision occurred in the first quarter of fiscal
2018 because the Company’s tax deduction is delayed to its tax year that corresponds to the tax year that the employees report the taxable income. In addition,
there was an additional decrease to the provision due to the vesting of share awards that were accelerated on October 21, 2017. As required under the transition
provisions, we reclassified, on a retrospective basis, a cash outflow of $22,756 related to the settlement of share-based awards in satisfaction of withholding tax
requirements from operating activities to financing activities for the year ended March 31, 2017.
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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
The share awards are classified as equity awards at the time of grant unless the number of shares granted is unknown. Award offers that are settleable in
shares based upon a future determinable stock price are classified as a liability 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 2006 Incentive Plan and the 2016
Incentive Plan during the years ended March 31, 2018 and 2017 is as follows:
Nonvested share awards
Balance at April 1, 2016
Granted
Vested
Forfeited
Balance at March 31, 2017
Granted
Vested
Shares repurchased/forfeited
Balance at March 31, 2018
Shares
5,903,168 $
1,604,120
(2,791,213)
(1,089,805)
3,626,270 $
1,235,779
(1,023,078)
(984,078)
2,854,893 $
Weighted average
grant date
fair value
18.80
25.24
18.33
18.77
22.35
34.86
24.03
24.60
26.39
Activity in liability classified share awards during the years ended March 31, 2018 and 2017 is as follows:
Awards settleable in shares
Balance at April 1, 2016
Offer to grant
Share price determined-converted to cash payments
Share price determined-transferred to equity grants 1
Forfeited
Balance at March 31, 2017
Offer to grant
Share price determined-converted to cash payments
Share price determined-transferred to equity grants 1
Forfeited
Balance at March 31, 2018
Fair value
13,982
5,625
(1,687)
(4,752)
(425)
12,743
9,637
(6,040)
—
(847)
15,493
$
$
$
1 0 and 183,570 shares for the years ended March 31, 2018 and 2017, respectively.
Compensation expenses for the Company associated with both equity and liability classified awards totaled $47,111 , $45,059 , and $35,057 for the years
ended March 31, 2018 , 2017 , and 2016 , respectively. At March 31, 2018 , there was $74,950 of total unrecognized compensation cost related to unvested share
awards granted under both the 2006 Incentive Plan and 2016 Incentive Plan. That cost is expected to be recognized over a weighted average period of 1.6 years .
On February 14, 2017, in connection with the February 2017 Follow-on Offering discussed in notes 1 and 3, the Company accelerated the vesting of
certain awards that were due to vest in April and May 2017. On October 30, 2017, in connection with the October 2017 Follow-on Offering discussed in notes 1
and 3, the Company accelerated the vesting of certain awards that were due to vest in April and May 2018. Under the terms of both the 2006 Incentive Plan and
2016 Incentive Plan, upon the vesting of awards, shares may be withheld to meet the minimum statutory tax withholding requirements. The Company satisfied
such obligations upon vesting by retiring 704,528 shares upon the accelerated vesting of 1,907,890 shares and 806,248 shares upon the accelerated vesting of
1,737,461 shares in February 2017 and October 2017, respectively.
74
Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
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 will be increased 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.
Prior to the IPO, the Fram board of directors determined the fair value of the shares using input from a third party, which used a combination of
historical and forecasted results and market data. The methods used to estimate the fair value of Fram shares included the market approach and the income
approach. Under the market approach, fair value was determined by multiplying revenues of comparable public companies by the relevant valuation multiple,
adjusted for any differences with the referenced comparable. Under the income approach, fair value was determined by converting future cash flows to a single
present amount (discounted) using current expectations about those future amounts. The significant assumptions used to develop the fair value estimates included
the discount rate ( 11.5% for 2015) used under the income approach and revenue multiples ( 0.9 x - 4.4 x for 2015) used under the market approach.
(14) STOCKHOLDERS' EQUITY
(a)
Class A Common Stock
In conjunction with the Company's IPO, 12,075,000 Class A shares were sold to the public by existing shareholders and 9,524 Class A shares were
issued to non-employee directors. During the year ended March 31, 2017, an additional 9,200,000 Class A shares were sold to the public in the February 2017
Follow-on Offering as discussed in note 1, 9,137 shares were issued to non-employee directors, and 733,150 shares were converted from Class B to Class A. Each
share of Class A common stock is entitled to one vote per share. During the year ended March 31, 2018 , 5,589 shares were issued to non-employee directors, and
1,252,242 shares were converted from Class B to Class A, in October and November 2017 an additional 3,750,000 Class A shares and in March 2018 an
additional 4,000,000 shares were sold to the public in the October 2017 and March 2018 Follow-on Offerings as discussed in note 1. As of March 31, 2018 , there
were 438,240 shares of Class A common stock held by ORIX USA. Each share of Class A common stock is entitled to one vote per share.
(b)
Class B Common Stock
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. In April 2017, the Company settled its $192,372 forward purchase obligation with a related party and the funds held in escrow were released and the
related 6,900,000 Class B shares were retired. In April 2017 and March 2018, the Company repurchased 71,913 and 68,504 shares, respectively of Class B
common stock from employees received pursuant to contractual arrangements entered into in connection with a prior acquisition. As of March 31, 2018 (before
giving effect to the transaction under the January 2018 Forward Share Purchase Agreement), there were 25,477,601 Class B shares held by the HL Voting Trust
and 11,710,331 Class B shares held by ORIX USA.
(c)
Dividends
Unpaid dividend of $3,983 and $3,284 were declared previously related to unvested shares as of March 31, 2018 and 2017 , respectively.
75
Table of Contents
(d)
Noncontrolling interests
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
Net income (loss) attributable to noncontrolling interests primarily represents the income (loss) associated with persons other than Houlihan Lokey that
are its co-investors in a consolidated subsidiary that holds an equity method investment in an unconsolidated entity. As described in note 1, the assets associated
with certain noncontrolling interests were distributed to shareholders in conjunction with a pre-IPO dividend in August 2015.
(e)
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.
(f)
Share repurchase program
In February 2017, the board of directors authorized the repurchase of up to $50.0 million of the Company's Class A common stock. In May 2017, the
Company entered into a stock buyback program with a third-party financial institution to purchase shares of common stock. During the twelve months ended
March 31, 2018, the Company repurchased and retired 430,237 shares of its outstanding common stock at a weighted average price of $35.17 per share, excluding
commissions, for an aggregate purchase price of $15,131 .
(15) 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.
Our obligation under the loan payable to affiliate is subordinated to our obligations under the revolving credit facility with Bank of America, N.A. The scheduled
aggregate repayments of the loan payable to affiliate, the loans payable to former shareholders, and the loan payable to non-affiliates are as follows:
Year ended March 31:
2019
2020
2021
2022
2023
2024 and thereafter
Total
$
$
989
654
575
280
201
9,162
11,861
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 March 31, 2018 or 2017 .
76
Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
In addition, an acquisition made in January 2015 included contingent consideration with a carrying value of $0 and $2,619 , respectively, as of March 31, 2018
and 2017 , and non-contingent consideration with a carrying value of $226 and $3,181 , respectively, as of March 31, 2018 and 2017 , which are included in other
liabilities in the accompanying consolidated balance sheets. An acquisition made in January 2017 included contingent consideration with a carrying value of $4,085 and
non-contingent consideration with a carrying value of $1,918 as of March 31, 2018 , which are included in other liabilities in the accompanying consolidated balance
sheets.
Straight-line rent expense under noncancelable operating lease arrangements and the related operating expenses were approximately $27,799 , $26,205 , and
$25,645 for the years ended March 31, 2018 , 2017 , and 2016 , respectively. The approximate future minimum annual noncancelable rental commitments required under
these agreements with initial terms in excess of one year are as follows:
Year ended March 31:
2019
2020
2021
2022
2023
2024 and thereafter
Total
$
$
22,186
21,795
20,277
17,236
12,804
28,471
122,769
(16) SEGMENT AND GEOGRAPHICAL INFORMATION
The Company’s reportable segments are described in note 1 and each are individually managed and provide separate services which 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 represents each
segment’s profit, which consists of segment revenues, less (1) direct expenses including compensation, employee recruitment, 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
Resources, Human Capital Management, Marketing, Information Technology, and Compliance and Legal. The following tables present information about revenues, profit
and assets by segment and geography.
77
Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
Revenues by segment:
Corporate Finance
Financial Restructuring
Financial Advisory Services
Total segment revenues
Segment profit
Corporate Finance
Financial Restructuring
Financial Advisory Services
Total segment profit
Corporate expenses
Other income (expense), net
Income before provision for income taxes
Assets by segment:
Corporate Finance
Financial Restructuring
Financial Advisory Services
Total segment assets
Corporate assets
Total assets
Revenues by geography:
United States
International
Total revenues
Income before provision for income taxes by geography:
United States
International
Total income before provision for income taxes
78
Year ended March 31,
2018
2017
2016
528,643 $
434,558 $
294,142
140,579
307,595
129,938
963,364 $
872,091 $
177,575 $
119,739 $
73,691
26,334
277,600
63,154
(3,390)
92,831
28,905
241,475
59,480
3,508
217,836 $
178,487 $
371,790
202,343
119,632
693,765
103,447
54,950
30,313
188,710
62,310
770
125,630
March 31, 2018
March 31, 2017
March 31, 2016
337,584 $
316,561 $
185,486
126,034
649,104
769,737
193,275
121,640
631,476
754,231
309,605
196,473
111,637
617,715
453,169
1,418,841 $
1,385,707 $
1,070,884
2018
March 31,
2017
830,079 $
133,285
963,364 $
760,450 $
111,641
872,091 $
2018
March 31,
2017
185,380 $
32,456
217,836 $
154,268 $
24,219
178,487 $
2016
601,197
92,568
693,765
2016
108,221
17,409
125,630
$
$
$
$
$
$
$
$
$
$
Table of Contents
Assets by geography:
United States
International
Total assets
(17) SUBSEQUENT EVENTS
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All tables and balance disclosures are in thousands, except share data or otherwise stated)
March 31, 2018
March 31, 2017
March 31, 2016
$
$
957,897 $
460,944
964,273 $
421,434
721,937
348,947
1,418,841 $
1,385,707 $
1,070,884
On May 4, 2018, the Board of Directors of the Company declared a regular quarterly cash dividend of $0.27 per share for holders of record as of June 4, 2018 and
payable on June 15, 2018.
On April 4, 2018, the Company completed it's acquisition of Quayle Munro Limited (“Quayle Munro”), an independent advisory firm that provides corporate
finance advisory services to companies underpinned by data & analytics, content, software, and services.
On April 5, 2018, the Company settled its $93,500 forward purchase obligation with a related party and the funds held in escrow were released and the related
2,000,000 Class B shares were retired.
On May 22, 2018 the Company completed it's acquisition of BearTooth Advisors ("BearTooth"), an independent advisory firm that provides strategic advisory
and placement agency services to alternative investment managers.
The Company has evaluated subsequent events from the consolidated balance sheet date through the date at which the consolidated financial statements were
available to be issued. As a result of that evaluation, we have determined that there were no additional subsequent events requiring disclosure in the financial statements.
79
SUPPLEMENTAL FINANCIAL INFORMATION
Consolidated Quarterly Results of Operations (Unaudited)
($ in thousands, except per share data)
Revenues
Total operating expenses
Operating income
Net income attributable to Houlihan Lokey, Inc.
Net income per share of common stock:
Basic
Diluted
Dividends declared per share of common stock
Revenues
Total operating expenses
Operating income
Net income attributable to Houlihan Lokey, Inc.
Net income per share of common stock:
Basic
Diluted
Dividends declared per share of common stock
June 30, 2017
September 30, 2017 December 31, 2017 March 31, 2018
For the Three Months Ended
217,491 $
242,183 $
258,937 $
170,618
46,873
188,857
53,326
204,452
54,485
39,244 $
33,357 $
61,583 $
0.63 $
0.59 $
0.20 $
0.54 $
0.50 $
0.20 $
0.98 $
0.93 $
0.20 $
244,753
184,991
59,762
38,099
0.61
0.58
0.20
June 30, 2016
September 30, 2016 December 31, 2016 March 31, 2017
For the Three Months Ended
180,774 $
186,537 $
247,680 $
147,913
32,861
151,560
34,977
190,857
56,823
19,411 $
20,876 $
33,980 $
0.32 $
0.29 $
0.17 $
0.34 $
0.31 $
0.17 $
0.56 $
0.51 $
0.17 $
257,100
199,766
57,334
34,076
0.55
0.51
0.20
$
$
$
$
$
$
$
$
$
$
80
Balance – April 1, 2015
Provision for bad debts
Write-off of uncollectible accounts
Balance – March 31, 2016
Provision for bad debts
Write-off of uncollectible accounts
Balance – March 31, 2017
Provision for bad debts
Write-off of uncollectible accounts
Balance – March 31, 2018
Schedule II—Valuation and Qualifying Accounts
March 31, 2018, 2017 and 2016
($ in thousands)
Allowance for Uncollectible Accounts
81
$
$
$
$
6,786
2,538
(1,480)
7,844
4,008
(653)
11,199
1,983
(1,791)
11,391
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
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 Annual
Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under 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 March 31, 2018 .
Management’s
Annual
Report
on
Internal
Control
over
Financial
Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act.
The Company’s system of internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of the
Company’s financial statements for external reporting purposes in accordance with GAAP. The Company’s management, including the chief executive officer and chief
financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2018 . In conducting its assessment, management
used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission on Internal Control-Integrated Framework (2013 Framework). Based
on this assessment, management concluded that, as of March 31, 2018 , the Company’s internal control over financial reporting was effective based on those criteria.
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.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2018. In making this
assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission's 2013 Internal Control -
Integrated Framework . Based on its assessment, management believes that, as of March 31, 2018, the Company’s internal control over financial reporting is effective
based on those criteria.
The Company’s independent registered public accounting firm, KPMG LLP, has issued an audit report on the Company’s internal control over financial
reporting. This report appears on page 42 of this report.
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 March 31, 2018 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information relating to this Item 10 is incorporated by reference to the Company's definitive proxy statement to be filed with the SEC no later than 120 days after
the end of the fiscal year covered by this Form 10-K.
82
Table of Contents
Item 11. Executive Compensation
Information relating to this Item 11 is incorporated by reference to the Company's definitive proxy statement to be filed with the SEC no later than 120 days after
the end of the fiscal year covered by this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to this Item 12 is incorporated by reference to the Company's definitive proxy statement to be filed with the SEC no later than 120 days after
the end of the fiscal year covered by this Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information relating to this Item 13 is incorporated by reference to the Company's definitive proxy statement to be filed with the SEC no later than 120 days after
the end of the fiscal year covered by this Form 10-K.
Item 14. Principal Accounting Fees and Services
Information relating to this Item 14 is incorporated by reference to the Company's definitive proxy statement to be filed with the SEC no later than 120 days after
the end of the fiscal year covered by this Form 10-K.
PART IV
Item 15. Exhibits, Financial Statement Schedules
Financial Statements
The consolidated financial statements required to be filed in the Form 10-K are listed in Part II, Item 8 hereof.
Financial Statement Schedules
See "Index to Consolidated Financial Statements" in this Form 10-K listed in Part II, Item 8 hereof.
Exhibits
A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this Form 10-K, and is incorporated herein by reference.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to
the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us
in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs
as of the date they were made or at any other time.
83
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,
SIGNATURES
thereunto duly authorized.
Date: May 25, 2018
HOULIHAN LOKEY, INC.
By:
/s/ SCOTT L. BEISER
Name:
Scott L. Beiser
Title:
Chief Executive Officer
Each of the officers and directors of Houlihan Lokey, Inc. whose signature appears below, in so signing, also makes, constitutes and appoints each of Scott L.
Beiser, J. Lindsey Alley, Christopher M. Crain and Charles A. Yamarone, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power to act
separately and full power of substitution, for him or her in any and all capacities, to execute and cause to be filed with the SEC any and all amendments (including post-
effective amendments) to this Annual Report on Form 10-K, with all exhibits thereto and all other documents in connection therewith and to perform any acts necessary to
be done in order to file such documents, and hereby ratifies and confirms all that said attorneys-in-fact or their substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities on the dates
indicated.
Date: May 25, 2018
Date: May 25, 2018
Date: May 25, 2018
Date: May 25, 2018
Date: May 25, 2018
Date: May 25, 2018
HOULIHAN LOKEY, INC.
/s/ SCOTT L. BEISER
Scott L. Beiser
Chief Executive Officer
(Principal Executive Officer)
/s/ J. LINDSEY ALLEY
J. Lindsey Alley
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ IRWIN N. GOLD
Irwin N. Gold
Executive Chairman and Director
/s/ SCOTT J. ADELSON
Scott J. Adelson
Co-President and Director
/s/ DAVID A. PREISER
David A. Preiser
Co-President and Director
/s/ RON K. BARGER
Ron K. Barger
Director
Date: May 25, 2018
Date: May 25, 2018
Date: May 25, 2018
Date: May 25, 2018
Date: May 25, 2018
Date: May 25, 2018
/s/ JACQUELINE B. KOSECOFF
Jacqueline B. Kosecoff
Director
/s/ ROBERT J.B. LENHARDT
Robert J.B. Lenhardt
Director
/s/ HIDETO NISHITANI
Hideto Nishitani
Director
/s/ ROBERT A. SCHRIESHEIM
Robert A. Schriesheim
Director
/s/ BENNET VAN DE BUNT
Bennet Van de Bunt
Director
/s/ PAUL E. WILSON
Paul E. Wilson
Director
Exhibit Index
Incorporated by Reference
Exhibit Description
Form
File No.
Exhibit
Filed /
Furnished
Herewith
Filing
Date
8/21/15
8/21/15
8/21/15
3.1
3.2
9.1
333-205610
333-205610
Amended and Restated Certificate of Incorporation of the Company, dated August
18, 2015
8-K
333-205610
8-K
8-K
8-K
8-K
8-K
8-K
8-K
Amended and Restated Bylaws of the Company, dated August 18, 2015
Voting Trust Agreement, dated as of August 18, 2015, by and among the
Company, the holders of shares of Class B common stock party thereto, and each
trustee named therein
Amendment No. 1 to the Voting Trust Agreement, dated as of August 28, 2015, by
and among the Company and the Trustees
Stockholders' Agreement, dated as of August 18, 2015, by and among the
Company and the holders identified therein
First Amendment to Credit Agreement, dated as of July 28, 2017, among Houlihan
Lokey, Inc., the Guarantors party thereto and Bank of America, N.A.
Amended and Restated Houlihan Lokey, Inc. 2016 Incentive Award Plan
Amendment to Amended and Restated Houlihan Lokey, Inc. 2016 Incentive
Award Plan
Registration Rights Agreement, dated as of August 18, 2015, by and between the
Company and ORIX HLHZ Holding, LLC
Form of HL Lock- up Agreement
Registration Rights Agreement, dated as of August 18, 2015, by and among the
Company and the stockholders party thereto
Transition Services Agreement, dated as of August 18, 2015, by and between
ORIX USA, LP and the Company
Amended and Restated Subordinated Promissory Note, effective as of August 18,
2015, issued by the Company to ORIX USA Corporation
Credit Agreement, dated as of August 18, 2015, by and among the Company,
certain domestic subsidiaries of the Company party thereto and Bank of America,
N.A.
Amended and Restated Tax Sharing Agreement, dated as of August 18, 2015, by
and among ORIX USA Corporation, HL Transitory Merger Company, Inc., the
Company, and all corporations that are as of this date eligible to file a consolidated
return as a member of the affiliated group of ORIX USA Corporation within the
meaning of Section 1504(a) of the Internal Revenue Code of 1986, as amended,
including ORIX Commercial Alliance Corporation, ORIX Real Estate Capital,
Inc., and ORIX Capital Markets, LLC
Cash Management Agreement, entered into on August 18, 2015, by and between
Houlihan Lokey Capital (Holdings) Ltd. And ORIX Global Capital, Ltd
Form of Indemnification Agreement between Houlihan Lokey, Inc. and its
directors and executive officers
Guarantee Agreement, dated as of August 18, 2015, by and between Houlihan
Lokey Capital (Holdings) Ltd. and ORIX USA Corporation
333-205610
9.1
8/28/15
333-205610
10.1
8/21/15
001-37537
10.1
8/2/17
001-37537
001-37537
10.1
10.1
9/25/17
10/20/17
8-K
333-205610
10.2
8/21/15
S-1
8-K
8-K
8-K
8-K
333-205610
333-205610
10.2
10.3
7/10/15
8/21/15
333-205610
10.4
8/21/15
333-205610
10.5
8/21/15
333-205610
10.6
8/21/15
8-K
333-205610
10.7
8/21/15
8-K
333-205610
10.8
8/21/15
S-1/A
333-205610
10.8
7/27/15
8-K
333-205610
10.9
8/21/15
Exhibit
Number
3.1
3.2
9.1
9.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Exhibit Description
Form
File No.
Exhibit
Filing
Date
Filed /
Furnished
Herewith
Incorporated by Reference
Exhibit
Number
10.15 ‡
10.16
10.17 ‡
10.18 ‡
10.19 ‡
10.20 ‡
10.21 ‡
10.22 ‡
21.1
23.1
31.1
31.2
32.1
32.2
Houlihan Lokey,
Compensation Plan
Inc.
Second Amended and Restated 2006 Incentive
S-1/A
333-205610
10.9
8/3/15
Letter Agreement, dated as of August 18, 2015, by and among the Company,
ORIX USA Corporation and Fram Holdings, LLC
Form of Restricted Stock Award Grant Notice and Restricted Stock Award
Agreement under the Houlihan Lokey, Inc. Second Amended and Restated 2006
Incentive Compensation Plan
Form of Deferred Restricted Stock Award Grant Notice and Agreement under the
Second Amended and Restated 2006 Incentive
Houlihan Lokey,
Compensation Plan
Inc.
Form of Restricted Stock Award Agreement under the Houlihan Lokey, Inc. 2016
Incentive Award Plan
Form of Restricted Stock Unit Award Agreement under the Houlihan Lokey, Inc.
2016 Incentive Award Plan
Houlihan Lokey, Inc. Director Compensation Program
8-K
333-205610
10.10
8/21/15
S-1/A
333-205610
10.10
8/3/15
S-1/A
333-205610
10.11
8/3/15
S-1/A
333-206337
10.13
8/3/15
S-1/A
333-206337
10.14
8/3/15
Notice to Fram Holdings, Inc. Second Amended and Restated 2006 Incentive
Compensation Plan Equity Award Holders
S-1/A
333-205610
10.19
8/3/15
Subsidiaries of Registrant
Consent of Independent Public Accountants
Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL†
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB†
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
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Filed herewith.
Furnished herewith.
In accordance with Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as
amended, and otherwise is not subject to liability under these sections
Indicates a management contract or compensation plan or arrangement.
HOULIHAN LOKEY, INC. DIRECTOR COMPENSATION PROGRAM
(Revised as of May 4, 2018)
Exhibit 10.21
Eligible Directors (as defined below) on the board of directors (the “ Board
”) of Houlihan Lokey, Inc. (the “ Company
”) shall be eligible
to receive cash and equity compensation as set forth in this Director Compensation Program (this “ Program
”). This Program is an amendment
and restatement of the Company’s Director Compensation Program that was adopted by the Board on July 29, 2015 (the “ Original
Program
”).
The changes to the Original Program that are effected by this Program shall take effect on July 1, 2018. The cash and equity compensation
described in this Program shall be paid or be made, as applicable, automatically and without further action of the Board, to each member of the
Board who (i) is not an employee of the Company or any parent or subsidiary of the Company, (ii) is not designated to serve on the Board by
ORIX USA Corporation or its subsidiaries, and (iii) qualifies as “independent” under the rules of the NYSE, including the NYSE rules relating to
compensation committee independence, and as a “non-employee director” under Exchange Act Rule 16b-3 (each, a “ Eligible
Director
”), who
may be eligible to receive such cash or equity compensation, unless such Eligible Director declines the receipt of such cash or equity compensation
by written notice to the Company.
This Program shall remain in effect until it is revised or rescinded by further action of the Board. This Program may be amended, modified
or terminated by the Board at any time in its sole discretion. No Eligible Director shall have any rights hereunder, except with respect to equity
awards granted pursuant to Section 2 of this Program.
1. Cash Compensation.
a.
b.
Annual Retainers. Each Eligible Director shall be eligible to receive an annual cash retainer of $62,500 for service on the Board.
Payment of Retainers. The annual cash retainers described in Sections 1(a) and 1(b) above shall be earned on a quarterly basis
based on a calendar quarter and shall be paid by the Company in arrears not later than thirty days following the end of each
calendar quarter. In the event an Eligible Director does not serve as an Eligible Director for an entire calendar quarter, the retainer
paid to such Eligible Director shall be prorated for the portion of such calendar quarter actually served as an Eligible Director.
2. Equity Compensation. Eligible Directors shall be granted the equity awards described below. The awards described below shall be
granted under and shall be subject to the terms and provisions of the Company’s Amended and Restated 2016 Incentive Award Plan or any other
applicable Company equity incentive plan then-maintained by the Company (such plan, as may be amended from time to time, the “ Equity
Plan
”)
and may be granted subject to the execution and delivery of award agreements, including attached exhibits, in substantially the forms approved by
the Board prior to or in connection with equity grants under the Equity Plan. All applicable terms of the Equity Plan apply to this Program as if
fully set forth herein, and all grants of equity awards hereby are subject in all respects to the terms of the Equity Plan. Capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the Company’s Amended and Restated 2016 Incentive Award Plan.
a.
b.
Annual Common Stock Awards. An Eligible Director who is serving on the Board as of May 15 of each calendar year
automatically shall be granted, on such May 15, an Award of Common Stock covering a number of shares of Class A common
stock equal to $87,500, divided by the Fair Market Value of a share of Class A common stock on the applicable grant date, rounded
to the nearest whole share and subject to adjustment as provided in the Equity Plan. These awards shall be referred to herein as the
“ Annual
Awards
.” With respect to the first Annual Award granted to an Eligible Director following the date on which he or she
becomes an Eligible Director (the “ Eligible
Director
Date
”), such award shall be pro-rated based on the period of time served as
an Eligible Director from (and including) the Eligible Director Date through the May 15 grant date of such Annual Award. Each
Annual Award shall be vested in full on the applicable grant date.
Committee Chair Award . Each Eligible Director who serves as a Chair of a Committee of the Board as of May 15 of each calendar
year automatically shall be eligible to be awarded, at the discretion of the Compensation Committee, on such May 15, an Award of
Common Stock covering a number of shares of Class A common stock equal to $30,000, divided by the Fair Market Value of a
share of Class A common stock on the applicable grant date, rounded to the nearest whole share and subject to adjustment as
provided in the Equity Plan. These awards shall be referred to herein as the “ Committee
Chair
Awards
.” With respect to the first
Committee Chair Award granted to a Committee Chair following the date on which he or she becomes a Committee Chair (the “
Eligible
Chair
Date
”), such award shall be pro-rated based on the period of time served as a Committee Chair from (and
including) the Eligible Chair Date through the May 15 grant date of such Committee Chair Award. Each Committee Chair Award
shall be vested in full on the applicable grant date.
Subsidiaries of Registrant
Exhibit 21.1
Legal Name
Houlihan Lokey Capital (Holdings) Limited
Houlihan Lokey Capital, Inc.
Houlihan Lokey Financial Advisors, Inc.
Houlihan Lokey EMEA, LLP
England
California
California
England
Jurisdiction of Incorporation
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Houlihan Lokey, Inc.:
We consent to the incorporation by reference in the registration statement (No. 333-206337) on Form S-8 of Houlihan Lokey, Inc. of our report dated May 25, 2018, with
respect to the consolidated balance sheets of Houlihan Lokey, Inc. as of March 31, 2018 and 2017, and the related consolidated statements of comprehensive income,
changes in stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2018, and the related financial statement schedule, which
report appears in the March 31, 2018 annual report on Form 10-K of Houlihan Lokey, Inc.
(Signed) KPMG LLP
Dallas, Texas
May 25, 2018
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Scott L. Beiser, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the period ending March 31, 2018 of Houlihan Lokey, Inc. as filed with the Securities and Exchange
Commission on the date hereof;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date:
May 25, 2018
/s/ SCOTT L. BEISER
Scott L. Beiser
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, J. Lindsey Alley, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the period ending March 31, 2018 of Houlihan Lokey, Inc. as filed with the Securities and Exchange
Commission on the date hereof;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date:
May 25, 2018
/s/ J. LINDSEY ALLEY
J. Lindsey Alley
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Scott L. Beiser, Chief Executive Officer and Director of Houlihan Lokey, Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Annual Report on Form 10-K of the Company for the period ended March 31, 2018 (the “Report”) fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
May 25, 2018
/s/ SCOTT L. BEISER
Scott L. Beiser
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, J. Lindsey Alley, Chief Financial Officer of Houlihan Lokey, Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Annual Report on Form 10-K of the Company for the period ended March 31, 2018 (the “Report”) fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
May 25, 2018
/s/ J. LINDSEY ALLEY
J. Lindsey Alley
Chief Financial Officer
(Principal Financial and Accounting Officer)