# Houlihan Lokey, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Houlihan Lokey, Inc.](/companies/hli.md) (CIK 1302215)
- Form: 10-Q
- Filed: 2023-11-08
- Accepted by EDGAR: Nov 8, 2023, 16:37 ET
- Period: 2023-09-30
- Accession: 0001302215-23-000089
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1302215/000130221523000089/hli-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1302215/000130221523000089/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $467.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-04-01 to 2023-09-30 | $882.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $142.6m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-04-01 to 2023-09-30 | $262.7m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $90.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-04-01 to 2023-09-30 | $163.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $26.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-04-01 to 2023-09-30 | $41.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $67.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-04-01 to 2023-09-30 | $128.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.99 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-04-01 to 2023-09-30 | $1.89 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-04-01 to 2023-09-30 | $2.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 67,867,381 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-04-01 to 2023-09-30 | 67,881,623 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-04-01 to 2023-09-30 | $2.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-04-01 to 2023-09-30 | $38.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-04-01 to 2023-09-30 | $77.4m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2023-09-30 | $493.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $2.78bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $1.14bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $1.65bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 34,605 characters.

### Forward-Looking Statements

The following discussion should be read together with our consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q. We make statements in this discussion that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “intends,” “predicts,” “potential” or “continue,” the negative of these terms or other similar expressions. These forward-looking statements, which are subject to risks, uncertainties, and assumptions about us, may include projections of our future financial performance, based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including but not limited to, the factors listed under the heading “Cautionary Note Regarding Forward-Looking Statements” in our Annual Report on Form 10-K for the year ended March 31, 2023 (the "2023 Annual Report"). Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements speak only as of the date of this filing. You should not rely upon forward-looking statements as a prediction of future events. We are under no duty to and we do not undertake any obligation to update or review any of these forward-looking statements after the date of this filing to conform our prior statements to actual results or revised expectations whether as a result of new information, future developments or otherwise.

### Key Financial Measures

### Revenues

Revenues include fee revenues and reimbursements of expenses (see Note 2 and Note 3 to our unaudited consolidated financial statements in this Form 10-Q for additional information). Revenues reflect revenues from our Corporate Finance (“CF”), Financial Restructuring (“FR”), and Financial and Valuation Advisory (“FVA”) business segments that substantially consist of fees for advisory services.

Revenues for all three business segments are recognized upon satisfaction of the performance obligation and may be satisfied over time or at a point in time. The amount and timing of the fees paid vary by the type of engagement. In general, advisory fees are paid at the time an engagement letter is signed (“Retainer Fees”), during the course of the engagement (“Progress Fees”), or upon the successful completion of a transaction or engagement (“Completion Fees”).

CF provides general financial advisory services in addition to advice on mergers and acquisitions and capital markets offerings. We advise public and private institutions on a wide variety of situations, including buy-side and sell-side transactions, as well as leveraged loans, private mezzanine debt, high-yield debt, initial public offerings, follow-ons, convertibles, equity private placements, private equity, and liability management transactions, and advise financial sponsors on all types of transactions. The majority of our CF revenues consists of Completion Fees. A CF transaction can fail to be completed for many reasons that are outside of our control. In these instances, our fees are generally limited to Retainer Fees and in some cases Progress Fees that may have been received.

FR provides advice to debtors, creditors and other parties-in-interest in connection with recapitalization/deleveraging transactions implemented through bankruptcy proceedings and out-of-court exchanges, consent solicitations or other mechanisms, as well as in distressed mergers and acquisitions and capital markets activities. As part of these engagements, our FR business segment offers a wide range of advisory services to our clients, including: the structuring, negotiation, and confirmation of plans of reorganization; structuring and analysis of exchange offers; corporate viability assessment; dispute resolution and expert testimony; and procuring debtor-in-possession financing. Although atypical, FR transactions can fail to be completed for many reasons that are outside of our control. In these instances, our fees are generally limited to the Retainer Fees and/or Progress Fees.

FVA primarily provides valuations of various assets, including: companies; illiquid debt and equity securities; and intellectual property (among other assets and liabilities). These valuations are used for financial reporting, tax reporting, and other purposes. In addition, our FVA business segment renders fairness opinions in connection with mergers and acquisitions and other transactions, and solvency opinions in connection with corporate spin-offs and dividend recapitalizations, and other types of financial opinions in connection with other transactions. Also, our FVA business segment provides dispute resolution services to clients where fees are usually based on the hourly rates of our financial professionals. Unlike our CF or FR segments, the fees generated in our FVA segment are generally not contingent on the successful completion of a transaction.

### Operating Expenses

Our operating expenses are classified as employee compensation and benefits expense and non-compensation expense; revenue and headcount are the primary drivers of our operating expenses. Reimbursements of certain out-of-pocket deal expenses are recorded on a gross basis and are therefore included in both Revenues and Operating expenses on the Consolidated Statements of Comprehensive Income.

*Employee Compensation and Benefits Expense*. Our employee compensation and benefits expense, which accounts for the majority of our operating expenses, is determined by management based on revenues earned, headcount, the competitiveness of the prevailing labor market, and anticipated compensation expectations of our employees. These factors may fluctuate, and as a result, our employee compensation and benefits expense may fluctuate materially in any particular period. Accordingly, the amount of employee compensation and benefits expense recognized in any particular period may not be consistent with prior periods or indicative of future periods.

Our employee compensation and benefits expense consists of base salary, payroll taxes, benefits, annual incentive compensation payable as cash bonus awards, deferred cash bonus awards, and the amortization of equity-based bonus awards. Base salary and benefits are paid ratably throughout the year. Our annual equity-based bonus awards include fixed share compensation awards and liability classified fixed dollar awards as a component of the annual bonus awards for certain employees. These equity awards are generally subject to annual vesting requirements over a four-year period beginning at the date of grant, which typically 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, and in certain cases if certain financial metrics are not met. 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 fiscal year with respect to prior year performance. Generally, a portion of the cash bonus is deferred and paid in the third quarter of the fiscal year in which the bonus is awarded. We refer to the ratio of our employee compensation and benefits expenses to our revenues as our "Compensation Ratio."

*Non-Compensation Expense*. The balance of our operating expenses includes costs for travel, meals and entertainment, rent, depreciation and amortization, information technology and communications, professional fees, and other operating expenses. We refer to all of these expenses as non-compensation expenses. A portion of our non-compensation expenses fluctuates in response to changes in headcount.

### Other (Income)/Expense, Net

Other (income)/expense, net includes (i) interest income earned on non-marketable and investment securities, cash and cash equivalents, loans receivable from affiliates, employee loans, and commercial paper, (ii) interest expense and fees on our HLI Line of Credit (defined herein), (iii) equity income and/or gains or losses from funds and partnership interests where we have had 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, (iv) gains and/or losses associated with the reduction/increase of earnout liabilities, and (vi) other miscellaneous non-operating expenses.

### Results of Consolidated Operations

The following is a discussion of our results of operations for the six months ended September 30, 2023 and 2022. For a more detailed discussion of the factors that affected the revenues and the operating expenses of our CF, FR, and FVA business segments in these periods, see Part I, Item 2 of this Form 10-Q under the heading “Business Segments” below.

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change | Six Months Ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $466,989 | $489,537 | (5)% | $882,818 | $908,181 | (3)% |
| Operating expenses: |  |  |  |  |  |  |
| Employee compensation and benefits | 296,542 | 309,859 | (4)% | 560,025 | 575,594 | (3)% |
| Non-compensation | 80,170 | 90,307 | (11)% | 159,169 | 165,646 | (4)% |
| Total operating expenses | 376,712 | 400,166 | (6)% | 719,194 | 741,240 | (3)% |
| Operating income | 90,277 | 89,371 | 1% | 163,624 | 166,941 | (2)% |
| Other (income)/expense, net | (3,296) | 5,104 | (165)% | (6,301) | 6,853 | (192)% |
| Income before provision for income taxes | 93,573 | 84,267 | 11% | 169,925 | 160,088 | 6% |
| Provision for income taxes | 26,542 | 23,537 | 13% | 41,504 | 28,576 | 45% |
| Net income attributable to Houlihan Lokey, Inc. | $67,031 | $60,730 | 10% | $128,421 | $131,512 | (2)% |

#### Three Months Ended September 30, 2023 versus September 30, 2022

Revenues were $467.0 million for the three months ended September 30, 2023, compared with $489.5 million for the three months ended September 30, 2022, representing a decrease of (5)%. For the quarter, CF revenues decreased (11)%, FR revenues increased 17%, and FVA revenues decreased (8)% when compared with the three months ended September 30, 2022.

Operating expenses were $376.7 million for the three months ended September 30, 2023, compared with $400.2 million for the three months ended September 30, 2022, representing a decrease of (6)%. Employee compensation and benefits expense, as a component of operating expenses, was $296.5 million for the three months ended September 30, 2023, compared with $309.9 million for the three months ended September 30, 2022, representing a decrease of (4)%. The decrease in employee compensation and benefits expense was primarily a result of a decrease in revenues for the quarter when compared with the same quarter last year. The Compensation Ratio was 63.5% for the three months ended September 30, 2023, compared with 63.3% for the three months ended September 30, 2022. Non-compensation expense, as a component of operating expenses, was $80.2 million for the three months ended September 30, 2023, compared with $90.3 million for the three months ended September 30, 2022, representing a decrease of (11)%. The decrease in non-compensation expense was the result of a decrease in depreciation and amortization and other operating expenses.

Other (income)/expense, net decreased (165)% to $(3.3) million for the three months ended September 30, 2023, compared with $5.1 million for the three months ended September 30, 2022. This was primarily due to a gain recognized in association with earnout liability settlements made during the three months ended September 30, 2023, compared with losses recognized during the three months ended September 30, 2022 driven by an increase in the fair value of an earnout liability for one of our previous acquisitions and an unfavorable periodic warrant revaluation.

The provision for income taxes for the three months ended September 30, 2023 was $26.5 million, which reflected an effective tax rate of 28.4%. The provision for income taxes for the three months ended September 30, 2022 was $23.5 million which reflected an effective tax rate of 27.9%.

#### Six Months Ended September 30, 2023 versus September 30, 2022

Revenues were $882.8 million for the six months ended September 30, 2023, compared with $908.2 million for the six months ended September 30, 2022, representing a decrease of (3)%. For the six months ended September 30, 2023, CF revenues decreased (12)%, FR revenues increased 35%, and FVA revenues decreased (11)% when compared with the six months ended September 30, 2022.

Operating expenses were $719.2 million for the six months ended September 30, 2023, compared with $741.2 million for the six months ended September 30, 2022, a decrease of (3)%. Employee compensation and benefits expense, as a component of operating expenses, was $560.0 million for the six months ended September 30, 2023, compared with $575.6 million for the six months ended September 30, 2022, a decrease of (3)%. The decrease in employee compensation and benefits expense was primarily a result of lower revenues when compared with the same period last year. The Compensation Ratio was 63.4% for the six months ended September 30, 2023, compared with 63.4% for the six months ended September 30, 2022. Non-compensation expense, as a component of operating expenses, was $159.2 million for the six months ended September 30, 2023, compared with $165.6 million for the six months ended September 30, 2022, a decrease of (4)%. The decrease in non-compensation expense was the result of a decrease in depreciation and amortization and other operating expenses.

Other (income)/expense, net decreased (192)% to $(6.3) million for the six months ended September 30, 2023, compared with $6.9 million for the six months ended September 30, 2022, primarily due to the aforementioned quarterly fluctuation, in addition to an increase in interest income and dividend income generated by our investment securities and gains recognized on various investment securities.

The provision for income taxes for the six months ended September 30, 2023 was $41.5 million, which reflected an effective tax rate of 24.4%. The provision for income taxes for the six months ended September 30, 2022 was $28.6 million, which reflected an effective tax rate of 17.9%. The increase in the Company's tax rate during the six months ended September 30, 2023 relative to the same period in 2022 was primarily a result of the release of the provision for an uncertain tax position as a result of the successful closure of a state audit that occurred during the six months ended September 30, 2022 and did not repeat during the six months ended September 30, 2023.

### Business Segments

The following table presents revenues, expenses and contributions from our continuing operations by business segment. The revenues by segment represent 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 | Three Months Ended September 30, 2023 | 2022 | Change | Six Months Ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Corporate Finance | $281,684 | $315,016 | (11)% | $508,735 | $578,967 | (12)% |
| Financial Restructuring | 114,670 | 97,694 | 17% | 238,038 | 176,532 | 35% |
| Financial and Valuation Advisory | 70,635 | 76,827 | (8)% | 136,045 | 152,682 | (11)% |
| Revenues | $466,989 | $489,537 | (5)% | $882,818 | $908,181 | (3)% |
| Segment profit (1) |  |  |  |  |  |  |
| Corporate Finance | $90,517 | $93,794 | (3)% | $152,139 | $185,359 | (18)% |
| Financial Restructuring | 32,499 | 17,563 | 85% | 76,093 | 44,259 | 72% |
| Financial and Valuation Advisory | 19,593 | 26,169 | (25)% | 34,492 | 45,203 | (24)% |
| Total segment profit | 142,609 | 137,526 | 4% | 262,724 | 274,821 | (4)% |
| Corporate expenses (2) | 52,332 | 48,155 | 9% | 99,100 | 107,880 | (8)% |
| Other (income)/expense, net | (3,296) | 5,104 | (165)% | (6,301) | 6,853 | (192)% |
| Income before provision for income taxes | $93,573 | $84,267 | 11% | $169,925 | $160,088 | 6% |
| **Segment metrics** |  |  |  |  |  |  |
| Number of Managing Directors |  |  |  |  |  |  |
| Corporate Finance | 211 | 210 | —% | 211 | 210 | —% |
| Financial Restructuring | 60 | 56 | 7% | 60 | 56 | 7% |
| Financial and Valuation Advisory | 40 | 40 | —% | 40 | 40 | —% |
| Number of closed transactions/Fee Events (3) |  |  |  |  |  |  |
| Corporate Finance | 117 | 114 | 3% | 212 | 238 | (11)% |
| Financial Restructuring | 31 | 24 | 29% | 61 | 40 | 53% |
| Financial and Valuation Advisory | 852 | 890 | (4)% | 1,255 | 1,404 | (11)% |

(1) We adjust the compensation expense for a business segment in situations where an employee residing in one business segment is performing work in another business segment where the revenues are accrued. Segment Profit may vary significantly between periods depending on the levels of collaboration among the different segments.

(2) Corporate expenses represent expenses that are not allocated to individual business segments such as office of the executives, accounting, information technology, legal and compliance, marketing, and human capital.

(3) Fee Events applicable to FVA only; a Fee Event includes any engagement that involves revenue activity during the measurement period with a revenue minimum of $1,000. References to closed transactions should be understood to be the same as transactions that are “effectively closed” as described in Note 3 of our Consolidated Financial Statements.

### Corporate Finance

#### Three Months Ended September 30, 2023 versus September 30, 2022

Revenues for CF were $281.7 million for the three months ended September 30, 2023, compared with $315.0 million for the three months ended September 30, 2022, representing a decrease of (11)%. Revenues decreased due to a decrease in the average transaction fee on closed transactions, which was driven by transaction mix, and did not represent a trend in the average transaction fee on closed transactions.

Segment profit for CF was $90.5 million for the three months ended September 30, 2023, compared with $93.8 million for the three months ended September 30, 2022, representing a decrease of (3)%. Profitability decreased primarily as a result of a decrease in revenues when compared to the same quarter last year.

#### Six Months Ended September 30, 2023 versus September 30, 2022

Revenues for CF were $508.7 million for the six months ended September 30, 2023, compared with $579.0 million for the six months ended September 30, 2022, representing a decrease of (12)%. Revenues decreased primarily due to a decrease in the number of closed transactions, which was driven by softness in the M&A markets.

Segment profit for CF was $152.1 million for the six months ended September 30, 2023, compared with $185.4 million for the six months ended September 30, 2022, representing a decrease of (18)%. Profitability decreased primarily as a result of a decrease in revenues and higher non-compensation expenses when compared to the same quarter last year.

### Financial Restructuring

#### Three Months Ended September 30, 2023 versus September 30, 2022

Revenues for FR were $114.7 million for the three months ended September 30, 2023, compared with $97.7 million for the three months ended September 30, 2022, representing an increase of 17%. Revenues increased primarily due to an increase in the number of closed transactions during the quarter, which was driven by favorable market conditions for restructuring transactions.

Segment profit for FR was $32.5 million for the three months ended September 30, 2023, compared with $17.6 million for the three months ended September 30, 2022, an increase of 85%. Profitability increased primarily as a result of higher revenues and lower compensation expenses as a percentage of revenues when compared to the same quarter last year.

#### Six Months Ended September 30, 2023 versus September 30, 2022

Revenues for FR were $238.0 million for the six months ended September 30, 2023, compared with $176.5 million for the six months ended September 30, 2022, representing an increase of 35%. The increase in revenues was a result of an increase in the number of closed transactions, which was driven by favorable market conditions for restructuring transactions. This increase was partially offset by a reduction in the average transaction fee when compared to the same period last year, which was driven by transaction mix, and did not represent a trend in the average transaction fee on closed transactions.

Segment profit for FR was $76.1 million for the six months ended September 30, 2023, compared with $44.3 million for the six months ended September 30, 2022, an increase of 72%. Profitability increased primarily as a result of higher revenues and lower compensation expenses as a percentage of revenues when compared to the same period last year.

### Financial and Valuation Advisory

#### Three Months Ended September 30, 2023 versus September 30, 2022

Revenues for FVA were $70.6 million for the three months ended September 30, 2023, compared with $76.8 million for the three months ended September 30, 2022, representing a decrease of (8)%. Revenues decreased primarily due to a decrease in the number of Fee Events. The decrease in the number of Fee Events was driven by softness in the M&A markets, which affected one or more of the service lines within our FVA business.

Segment profit for FVA was $19.6 million for the three months ended September 30, 2023, compared with $26.2 million for the three months ended September 30, 2022, a decrease of (25)%. Profitability decreased primarily as a result of lower revenues and higher non-compensation expenses when compared to the same quarter last year.

#### Six Months Ended September 30, 2023 versus September 30, 2022

Revenues for FVA were $136.0 million for the six months ended September 30, 2023, compared with $152.7 million for the three months ended September 30, 2022, representing a decrease of (11)%. The decrease in revenues was due to a decrease in the number of Fee Events. The decrease in the number of Fee Events was driven by softness in the M&A markets, which affected one or more of the service lines within our FVA business.

Segment profit for FVA was $34.5 million for the six months ended September 30, 2023, compared with $45.2 million for the three months ended September 30, 2022, a decrease of (24)%. Profitability decreased primarily as a result of lower revenues and an increase in non-compensation expenses when compared to the same period last year.

### Corporate Expenses

#### Three Months Ended September 30, 2023 versus September 30, 2022

Corporate expenses were $52.3 million for the three months ended September 30, 2023, compared with $48.2 million for the three months ended September 30, 2022. This 9% increase was driven by increased compensation expenses when compared to the same quarter last year.

#### Six Months Ended September 30, 2023 versus September 30, 2022

Corporate expenses were $99.1 million for the six months ended September 30, 2023, compared with $107.9 million for the three months ended September 30, 2022. This (8)% decrease was driven primarily by decreased non-compensation expenses when compared to the same period last year, due to a decrease in depreciation and amortization expense.

### Liquidity and Capital Resources

Our current assets comprise cash and cash equivalents, investment securities, receivables from affiliates, accounts receivable, and unbilled work in progress related to fees earned from providing advisory services. Our current liabilities include deferred income, accounts payable and accrued expenses, accrued salaries and bonuses, income taxes payable, and the current portion of loan obligations.

Our cash and cash equivalents include cash held at banks. We maintain moderate levels of cash on hand in support of regulatory requirements for our registered broker-dealer. As of September 30, 2023 and March 31, 2023, we had $392.1 million and $475.0 million of cash in foreign subsidiaries, respectively. Our excess cash may be invested from time to time in short-term investments, including treasury securities, commercial paper, certificates of deposit, and investment grade corporate and government debt securities. Please refer to Note 6 for further detail.

As of September 30, 2023 and March 31, 2023, our restricted cash, cash and cash equivalents, and investment securities were as follows:

*(In thousands)*

|  | September 30, 2023 | March 31, 2023 |
| --- | ---: | ---: |
| Cash and cash equivalents | $493,929 | $714,439 |
| Investment securities | 31,214 | 37,309 |
| Total unrestricted cash and cash equivalents, including investment securities | 525,143 | 751,748 |
| Restricted cash (1) | 373 | 373 |
| Total cash, cash equivalents, and restricted cash, including investment securities | $525,516 | $752,121 |

(1) Represents a deposit in support of a letter of credit issued for our Frankfurt office.

Our liquidity is highly dependent upon cash receipts from clients that are generally dependent upon the successful completion of transactions, as well as the timing of receivables collections, which typically occur within 60 days of billing. As of September 30, 2023, accounts receivable, net of credit losses was $152.2 million. As of September 30, 2023, unbilled work in progress, net of credit losses was $133.8 million.

On August 23, 2019, the Company entered into a syndicated revolving line of credit with the Bank of America, N.A. and certain other financial institutions party thereto, which was amended by the First Amendment to Credit Agreement dated as of August 2, 2022 (the "HLI Line of Credit"), which allows for borrowings of up to $100.0 million (and, subject to certain conditions, provides the Company with an uncommitted expansion option, which, if exercised in full, would provide for a total credit facility of $200.0 million), and matures on August 23, 2025. As of September 30, 2023 and March 31, 2023, no principal was outstanding under the HLI Line of Credit. Borrowings under the HLI Line of Credit bear interest at a floating rate, which can be either, at the Company’s option, (i) Term Secured Overnight Financing Rate (“SOFR”) plus a 0.10% SOFR adjustment plus a 1.00% margin or (ii) base rate, which is the highest of (a) the Federal Funds Rate plus one-half of one percent (0.50%), (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” and (c) Term SOFR plus a 0.10% SOFR adjustment. Commitment fees apply to unused amounts, and the HLI Line of Credit contains debt covenants which require that the Company maintain certain financial ratios. The loan agreement requires compliance with certain loan covenants including but not limited to the maintenance of minimum consolidated earnings before interest, taxes, depreciation and amortization of no less than $150 million as of the end of any quarterly 12-month period and certain leverage ratios including a consolidated leverage ratio of less than 2.00 to 1.00. As of September 30, 2023, we were, and expect to continue to be, in compliance with such covenants.

The majority of the Company's payment obligations and commitments pertain to routine operating leases. The Company also has various obligations relating to notes payable and contingent consideration issued in connection with businesses previously acquired (see Note 10 included in Part I, Item 1 of this Form 10-Q).

In connection with certain acquisitions, certain employees may be entitled to deferred consideration, primarily in the form of retention payments, should certain service and/or performance conditions be met in the future. As a result of these conditions, such deferred consideration would be expensed as compensation in current and future periods and a portion thereof has been accrued as liabilities on the Consolidated Balance Sheets as of September 30, 2023 and March 31, 2023.

The Company entered into a settlement agreement (the “Settlement) with the Securities and Exchange Commission (“SEC”) to resolve an investigation of the Company’s compliance with records preservation requirements related to business communications sent over off-channel electronic messaging platforms, as described in our 2023 Annual Report. The terms of the Settlement are consistent with previously and subsequently announced settlements between firms similar to the Company and the SEC relating to these issues. In the Settlement, the Company agreed to a cease and desist order, admitted the SEC’s factual findings, agreed to pay a civil monetary penalty of $15.0 million, and to comply with certain undertakings, including retaining an independent compliance consultant, related to retention of electronic communications as enumerated in the Settlement. As described in our 2023 Annual Report, the Company recognized a $15 million accrual in other (income)/expense, net for the fourth fiscal quarter and fiscal year ended March 31, 2023, relating to the Settlement, which was paid in August, 2023.

### 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)*

| Operating activities: | Six Months Ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Net income | $128,421 | $131,512 | (2)% |
| Non-cash charges | 113,209 | 132,202 | (14)% |
| Other operating activities | (239,378) | (456,631) | (48)% |
| Net cash provided by/(used) in operating activities | 2,252 | (192,917) | (101)% |
| Net cash provided by/(used in) investing activities | (32,974) | 53,465 | (162)% |
| Net cash (used in) financing activities | (178,833) | (168,937) | 6% |
| Effects of exchange rate changes on cash, cash equivalents, and restricted cash | (10,955) | (21,502) | (49)% |
| Net decrease in cash, cash equivalents, and restricted cash | (220,510) | (329,891) | (33)% |
| Cash, cash equivalents, and restricted cash — beginning of period | 714,812 | 834,070 | (14)% |
| Cash, cash equivalents, and restricted cash — end of period | $494,302 | $504,179 | (2)% |

#### Six Months Ended September 30, 2023

Operating activities resulted in a net inflow of $2.3 million, primarily attributable to net income plus equity and liability classified share awards issued, almost entirely offset by cash bonus payments paid in May, 2023. Investing activities resulted in a net outflow of $(33.0) million, primarily attributable to purchases of property and equipment, net. Financing activities resulted in a net outflow of $(178.8) million, primarily attributable to dividends paid and payments made to settle employee tax obligations on share-based awards.

#### Six Months Ended September 30, 2022

Operating activities resulted in a net outflow of $(192.9) million, primarily attributable to cash bonus payments paid in May 2022. Investing activities resulted in a net inflow of $53.5 million, primarily attributable to sales or maturities of investment securities. Financing activities resulted in a net outflow of $(168.9) million, primarily attributable to dividends paid, share repurchases, and payments to settle employee tax obligations on share-based awards.

### Contractual Obligations

There have been no material changes outside of the ordinary course of business to our known contractual obligations, which are included in Item 7 of our 2023 Annual Report.

### Critical Accounting Policies and Estimates

The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period for which they are determined to be necessary.

### Business Combinations

Accounting for business combinations requires management to make significant estimates and assumptions. We allocate the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value as of the acquisition date, with the consideration in excess recorded a goodwill. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, expected asset lives, geographic risk premiums, discount rates, and more. The amounts and useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense.

For additional information on critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in the MD&A of the 2023 Annual Report.

### Recent Accounting Developments

For information on recently issued accounting developments and their impact or potential impact on our consolidated financial statements, see Note 2 to our unaudited consolidated financial statements in this Form 10-Q.

## Market risk

As filed, 4,717 characters.

### Market Risk and Credit Risk

Our business is not capital intensive and we generally do not issue debt or invest in derivative instruments, other than for foreign currency hedging purposes. As a result, we are not subject to significant market risk (including interest rate risk) or credit risk (except in relation to receivables). We maintain our cash and cash equivalents with financial institutions with high credit ratings. Although these deposits are generally not insured, management believes we are not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

Our cash and cash equivalents are denominated primarily in U.S. dollars, pound sterling and euros, and we face foreign currency risk in our cash balances and other assets and liabilities held in accounts outside the U.S. due to potential currency movements and the associated foreign currency translation accounting requirements.

We regularly review our accounts receivable and allowance for credit losses by considering factors such as historical experience, credit quality, age of the accounts receivable and recoverable expense balances, and the current economic conditions that may affect a customer’s ability to pay such amounts owed to us. We maintain an allowance for credit losses that, in our opinion, provides for an adequate reserve to cover losses that may be incurred.

### Risks Related to Cash and Short-Term Investments

Our cash is maintained in U.S. and non-U.S. bank accounts. We have exposure to foreign exchange risks through all of our international affiliates and some of our investments. However, we believe our cash is not subject to any material interest rate risk, equity price risk, credit risk or other market risk. Consistent with our past practice, we expect to maintain our cash in bank accounts or highly liquid securities.

### Exchange Rate Risk

The exchange rate of the U.S. dollar relative to the currencies in the non-U.S. countries in which we operate may have an effect on the reported value of our non-U.S. dollar denominated or based assets and liabilities and, therefore, be reflected as a change in other comprehensive income. Our non-U.S. assets and liabilities that are sensitive to exchange rates consist primarily of trade payables and receivables, work in progress, and cash. The net impact of the fluctuation of foreign currencies in other comprehensive income within the Consolidated Statements of Comprehensive Income was $(19,883) and $(28,554) during the three months ended September 30, 2023 and 2022, respectively, and $(16,909) and $(50,863) during the six months ended September 30, 2023 and 2022, respectively.

In addition, the reported amounts of our revenues and expenses may be affected by movements in the rate of exchange between the currencies in the non-U.S. countries in which we operate and the U.S. dollar, affecting our operating results. We have analyzed our potential exposure to changes in the value of the U.S. dollar relative to the pound sterling and euro, the primary currencies of our European operations, by performing a sensitivity analysis on our net income, and determined that while our earnings are subject to fluctuations from changes in foreign currency rates, at this time we do not believe we face any material risk in this respect.

From time to time, we enter into transactions to hedge our exposure to certain foreign currency fluctuations through the use of derivative instruments or other methods. As of September 30, 2023 we had three foreign currency forward contracts outstanding between the U.S. dollar and the pound sterling with an aggregate notional value of $35.2 million and two foreign currency forward contracts outstanding between the euro and the pound sterling with a notional value of €9.4 million. As of September 30, 2022, we had two foreign currency forward contracts outstanding between the pound sterling and the euro with notional values of €7.5 million and €0.5 million. The change in fair value of these contracts represented a loss included in Other operating expenses of $(1,217) and $(232) during the three months ended September 30, 2023 and September 30, 2022, 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.

## Controls and procedures

As filed, 1,945 characters.

### Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management, including the chief executive officer and chief financial officer, recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023.

### 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 September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Nov 8, 2023.
Source: SEC EDGAR, the filing index for accession 0001302215-23-000089. Last ingested by Listed: Nov 10, 2026, 06:58 ET. No prices; not investment advice.