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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ______________
Commission File Number: 001-37537
 
Houlihan Lokey, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
95-2770395
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
10250 Constellation Blvd.
5th Floor
Los Angeles, 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
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A Common Stock, par value $0.001
 
HLI
 
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x  No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No x
As of October 30, 2019, the registrant had 41,761,893 shares of Class A common stock, $0.001 par value per share, and 23,887,137 shares of Class B common stock, $0.001 par value per share, outstanding.
 



HOULIHAN LOKEY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
          



PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data and par value)
September 30, 2019
 
March 31, 2019
Assets
 
 
 
Cash and cash equivalents
$
220,248

 
$
285,746

Restricted cash
372

 
369

Investment securities
84,822

 
125,258

Accounts receivable, net of allowance for doubtful accounts of $3,962 and $4,255, respectively
64,814

 
70,830

Unbilled work in process, net of allowance for doubtful accounts of $1,413 and $1,341, respectively
62,722

 
71,891

Receivable from affiliates

 
8,631

Income taxes receivable
3,380

 

Deferred income taxes
6,539

 
2,854

Property and equipment, net
40,938

 
31,034

Operating lease right-of-use asset
131,776

 

Goodwill and other intangibles, net
797,564

 
794,604

Other assets
34,725

 
34,695

Total assets
$
1,447,900

 
$
1,425,912

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Liabilities:
 
 
 
Accrued salaries and bonuses
$
297,396

 
$
404,717

Accounts payable and accrued expenses
40,911

 
55,048

Deferred income
29,709

 
27,812

Income taxes payable

 
7,759

Deferred income taxes
3,327

 
8,058

Loans payable to former shareholders
1,810

 
2,047

Loan payable to non-affiliate
6,458

 
6,610

Operating lease liabilities
151,669

 

Other liabilities
24,756

 
22,532

Total liabilities
556,036

 
534,583

 
 
 
 
Commitments and contingencies (Note 17)
 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
Class A common stock, $0.001 par value. Authorized 1,000,000,000 shares; issued and outstanding 41,817,614 and 38,200,802 shares, respectively
42

 
38

Class B common stock, $0.001 par value. Authorized 1,000,000,000 shares; issued and outstanding 24,079,076 and 27,197,734 shares, respectively
24

 
27

Treasury stock, at cost: 252,306 and 0 shares, respectively
(11,219
)
 

Additional paid-in capital
635,362

 
645,090

Retained earnings
311,360

 
276,468

Accumulated other comprehensive (loss)
(43,705
)
 
(30,294
)
Total stockholders' equity
891,864

 
891,329

Total liabilities and stockholders' equity
$
1,447,900

 
$
1,425,912


See accompanying Notes to Consolidated Financial Statements
1


HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Three Months Ended September 30,
 
Six Months Ended September 30,
(In thousands, except share and per share data)
2019
 
2018
 
2019
 
2018
Revenues
$
272,810

 
$
274,992

 
$
523,159

 
$
494,994

Operating expenses:
 
 
 
 
 
 
 
Employee compensation and benefits
174,638

 
175,321

 
337,949

 
314,501

Travel, meals, and entertainment
10,200

 
10,111

 
19,817

 
19,697

Rent
14,922

 
10,437

 
24,923

 
18,625

Depreciation and amortization
3,981

 
3,706

 
7,944

 
7,174

Information technology and communications
6,928

 
4,709

 
12,252

 
10,298

Professional fees
5,834

 
5,784

 
10,290

 
12,061

Other operating expenses
11,154

 
8,749

 
17,054

 
16,333

Total operating expenses
227,657

 
218,817

 
430,229

 
398,689

Operating income
45,153

 
56,175

 
92,930

 
96,305

Other (income)/expense, net
(1,101
)
 
(1,007
)
 
(2,748
)
 
(2,613
)
Income before provision for income taxes
46,254

 
57,182

 
95,678

 
98,918

Provision for income taxes
13,144

 
17,063

 
19,793

 
29,115

Net income
$
33,110

 
$
40,119

 
$
75,885

 
$
69,803

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(9,440
)
 
(3,695
)
 
(13,411
)
 
(16,278
)
Comprehensive income
$
23,670

 
$
36,424

 
$
62,474

 
$
53,525

 
 
 
 
 
 
 
 
Attributable to Houlihan Lokey, Inc. common stockholders:
  Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
    Basic
62,477,085

 
62,258,919

 
62,292,798

 
62,620,017

    Fully diluted
66,086,210

 
66,045,921

 
65,851,514

 
66,099,770

Earnings per share (Note 13)
 
 
 
 
 
 
 
    Basic
$
0.53

 
$
0.64

 
$
1.22

 
$
1.11

    Fully diluted
$
0.50

 
$
0.61

 
$
1.15

 
$
1.06




See accompanying Notes to Consolidated Financial Statements
2


HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands, except share data)
Class A common stock
 
Class B common
stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Shares
 
$
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total stockholders' equity
Balances – July 1, 2019
40,913,727

 
$
41

 
25,308,293

 
$
25

 
(55,164
)
 
$
(2,502
)
 
$
631,189

 
$
298,831

 
$
(34,265
)
 
$
893,319

Shares issued

 

 
2,311

 

 

 

 

 

 

 

Stock compensation vesting (Note 14)

 

 

 

 

 

 
16,543

 

 

 
16,543

Class B shares sold
1,172,250

 
1

 
(1,172,250
)
 
(1
)
 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 
(20,581
)
 

 
(20,581
)
Conversion of Class B to Class A shares
13,728

 

 
(13,728
)
 

 

 

 

 

 

 

Shares issued to non-employee directors (Note 14)

 

 

 

 

 

 

 

 

 

Other shares repurchased/forfeited
(282,091
)
 

 
(45,550
)
 

 
(197,142
)
 
(8,717
)
 
(12,370
)
 

 

 
(21,087
)
Net income

 

 

 

 

 

 

 
33,110

 

 
33,110

Change in unrealized translation

 

 

 

 

 

 

 

 
(9,440
)
 
(9,440
)
Total comprehensive income

 

 

 

 

 

 

 
33,110

 
(9,440
)
 
23,670

Balances – September 30, 2019
41,817,614

 
$
42

 
24,079,076

 
$
24

 
(252,306
)
 
$
(11,219
)
 
$
635,362

 
$
311,360

 
$
(43,705
)
 
$
891,864

(In thousands, except share data)
Class A common stock
 
Class B common
stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Shares
 
$
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total stockholders' equity
Balances – July 1, 2018
33,509,497

 
$
34

 
32,678,476

 
$
33

 

 
$

 
$
644,125

 
$
201,702

 
$
(26,539
)
 
$
819,355

Cumulative effect of the change in accounting principle related to revenue recognition from contracts with clients, net of tax

 

 

 

 

 

 

 
(1,993
)
 

 
(1,993
)
Shares issued

 

 
5,326

 
(1
)
 

 

 
984

 

 

 
983

Stock compensation vesting (Note 14)

 

 

 

 

 

 
11,034

 

 

 
11,034

Class B shares sold
195,840

 

 
(195,840
)
 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 
(17,506
)
 

 
(17,506
)
Secondary offering

 

 

 

 

 

 

 

 

 

Retired shares upon settlement of forward purchase agreement

 

 

 

 

 

 

 

 

 

Conversion of Class B to Class A shares
1,403,809

 
1

 
(1,403,809
)
 
(1
)
 

 

 

 

 

 

Shares issued to non-employee directors (Note 14)

 

 

 

 

 

 
187

 

 

 
187

Other shares repurchased/forfeited
(413,141
)
 

 
(20,708
)
 

 

 

 
(20,180
)
 

 

 
(20,180
)
Net income

 

 

 

 

 

 

 
40,121

 

 
40,121

Change in unrealized translation

 

 

 

 

 

 

 

 
(3,695
)
 
(3,695
)
Total comprehensive income

 

 

 

 

 

 

 

 

 
36,426

Balances – September 30, 2018
34,696,005

 
$
35

 
31,063,445

 
$
31

 

 
$

 
$
636,150

 
$
222,324

 
$
(30,234
)
 
$
828,306


See accompanying Notes to Consolidated Financial Statements
3


HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands, except share data)
Class A common stock
 
Class B common
stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Shares
 
$
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total stockholders' equity
Balances – April 1, 2019
38,200,802

 
$
38

 
27,197,734

 
$
27

 

 
$

 
$
645,090

 
$
276,468

 
$
(30,294
)
 
$
891,329

Shares issued

 

 
1,494,171

 
1

 

 

 
6,453

 

 

 
6,454

Stock compensation vesting (Note 14)

 

 

 

 

 

 
27,456

 

 

 
27,456

Class B shares sold
1,586,321

 
2

 
(1,586,321
)
 
(1
)
 

 

 

 

 

 
1

Dividends

 

 

 

 

 

 

 
(40,993
)
 

 
(40,993
)
Conversion of Class B to Class A shares
2,305,555

 
2

 
(2,305,555
)
 
(2
)
 

 

 

 

 

 

Shares issued to non-employee directors (Note 14)
7,027

 

 

 

 

 

 

 

 

 

Other shares repurchased/forfeited
(282,091
)
 

 
(720,953
)
 
(1
)
 
(252,306
)
 
(11,219
)
 
(43,637
)
 

 

 
(54,857
)
Net income

 

 

 

 

 

 

 
75,885

 

 
75,885

Change in unrealized translation

 

 

 

 

 

 

 

 
(13,411
)
 
(13,411
)
Total comprehensive income

 

 

 

 

 

 

 

 

 
62,474

Balances – September 30, 2019
41,817,614

 
$
42

 
24,079,076

 
$
24

 
(252,306
)
 
$
(11,219
)
 
$
635,362

 
$
311,360

 
$
(43,705
)
 
$
891,864


(In thousands, except share data)
Class A common stock
 
Class B common
stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Shares
 
$
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total stockholders' equity
Balances – April 1, 2018
30,604,405

 
$
31

 
37,187,932

 
$
37

 
(2,000,000
)
 
$
(93,500
)
 
$
753,077

 
$
207,124

 
$
(13,956
)
 
$
852,813

Cumulative effect of the change in accounting principle related to revenue recognition from contracts with clients, net of tax

 

 

 

 

 

 

 
(19,680
)
 

 
(19,680
)
Shares issued

 

 
1,158,001

 
1

 

 

 
6,991

 

 

 
6,992

Stock compensation vesting (Note 14)

 

 

 

 

 

 
25,571

 

 

 
25,571

Class B shares sold
195,840

 

 
(195,840
)
 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 
(34,923
)
 

 
(34,923
)
Secondary offering
3,000,000

 
3

 
(3,000,000
)
 
(3
)
 

 

 

 

 

 

Retired shares upon settlement of forward purchase agreement

 

 
(2,000,000
)
 
(2
)
 
2,000,000

 
93,500

 
(93,498
)
 

 

 

Conversion of Class B to Class A shares
2,001,689

 
2

 
(2,001,689
)
 
(2
)
 

 

 

 

 

 

Shares issued to non-employee directors (Note 14)
4,212

 

 

 

 

 

 
187

 

 

 
187

Other shares repurchased/forfeited
(1,110,141
)
 
(1
)
 
(84,959
)
 

 

 

 
(56,178
)
 

 

 
(56,179
)
Net income

 

 

 

 

 

 

 
69,803

 

 
69,803

Change in unrealized translation

 

 

 

 

 

 

 

 
(16,278
)
 
(16,278
)
Total comprehensive income

 

 

 

 

 

 

 

 

 
53,525

Balances – September 30, 2018
34,696,005

 
$
35

 
31,063,445

 
$
31

 

 
$

 
$
636,150

 
$
222,324

 
$
(30,234
)
 
$
828,306



See accompanying Notes to Consolidated Financial Statements
4


HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended September 30,
(In thousands, except share data)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
75,885

 
$
69,803

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred income taxes
(6,571
)
 
(4,602
)
Provision for bad debts
(128
)
 
613

Unrealized gains on investment securities
(179
)
 

Non-cash lease expense
6,576

 

Depreciation and amortization
7,944

 
7,174

Contingent consideration valuation

 
(708
)
Compensation expenses – restricted share grants (Note 14)
31,109

 
30,759

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
6,619

 
27,550

Unbilled work in process
9,522

 
14,021

Other assets
(536
)
 
(7,144
)
Accrued salaries and bonuses
(107,940
)
 
(114,099
)
Accounts payable and accrued expenses and other
226

 
(832
)
Deferred income
1,872

 
(4,485
)
Income taxes payable
(11,256
)
 
(2,193
)
Net cash provided by operating activities
13,143

 
15,857

Cash flows from investing activities:
 
 
 
Purchases of investment securities
(232,112
)
 
(26,513
)
Sales or maturities of investment securities
272,727

 
209,268

Acquisition of business, net of cash acquired
8,710

 
(71,407
)
Receivables from affiliates
(170
)
 
862

Purchase of property and equipment, net
(14,280
)
 
(3,199
)
Net cash provided by investing activities
34,875

 
109,011

Cash flows from financing activities:
 
 
 
Dividends paid
(42,210
)
 
(33,574
)
Settlement of forward purchase contract

 
(93,500
)
Other share repurchases
(23,503
)
 
(54,233
)
Payments to settle employee tax obligations on share-based awards
(31,354
)
 
(1,947
)
Earnouts paid

 
(1,923
)
Loans payable to former shareholders redeemed
(237
)
 
(394
)
Repayments of loans to non-affiliates
(8,397
)
 

Other financing activities

 
187

Net cash (used in) financing activities
(105,701
)
 
(185,384
)
Effects of exchange rate changes on cash, cash equivalents, and restricted cash
(7,812
)
 
(11,742
)
(Decrease) in cash, cash equivalents, and restricted cash
(65,495
)
 
(72,258
)
Cash, cash equivalents, and restricted cash – beginning of period
286,115

 
300,223

Cash, cash equivalents, and restricted cash – end of period
$
220,620

 
$
227,965

 
 
 
 
Supplemental disclosures of non-cash activities:
 
 
 
Shares issued via vesting of liability classified awards
$
6,453

 
$

Fully amortized intangibles written off

 
8,272

Cash acquired through acquisitions
$
10,506

 
$
16,141

Cash paid during the period:
 
 
 
Interest
$
475

 
$
432

Taxes
42,587

 
40,450


See accompanying Notes to Consolidated Financial Statements
5

Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)


Note 1 — Background
Houlihan Lokey, Inc. ("Houlihan Lokey," or "HL, Inc." also referred to as the "Company," "we," "our," or "us") is a Delaware corporation that controls the following primary subsidiaries:
Houlihan Lokey Capital, Inc., a California corporation ("HL Capital, Inc."), is a wholly owned direct subsidiary of HL, Inc. HL Capital, Inc. is registered as a broker-dealer under Section 15(b) of the Securities Exchange Act of 1934 and a member of Financial Industry Regulatory Authority, Inc.

Houlihan Lokey Financial Advisors, Inc., a California corporation ("HL FA, Inc."), is a wholly owned direct subsidiary of HL, Inc.

HL Finance, LLC ("HL Finance"), a syndicated leveraged finance platform established to arrange senior secured leveraged loans for financial sponsor-backed, privately-held, and public corporate entities. HL Finance acts as an arranger on syndicated loan transactions and has entered into an agreement with a third party as the initial strategic investor.

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. Expenses related to the corporate reorganization and IPO recorded in the Consolidated Statements of Comprehensive Income include the following:
$3,491 and $3,549 of compensation expenses associated with the amortization of restricted stock granted in connection with the IPO during the three months ended September 30, 2019 and 2018, respectively, and $7,051 and $6,872 during the six months ended September 30, 2019 and 2018, 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

$2,473 and $2,653 of compensation expenses associated with the accrual of certain deferred cash payments granted in connection with the IPO during the three months ended September 30, 2019 and 2018, respectively, and $5,025 and $5,406 during the six months ended September 30, 2019 and 2018, 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.

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 Corporation USA (formerly 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.

In April 2018, the Company completed the acquisition of Quayle Munro Limited, an independent advisory firm that provides corporate finance advisory services to companies underpinned by data & analytics, content, software, and services. 

In May 2018, the Company completed the acquisition of BearTooth Advisors, an independent advisory business providing strategic advisory and placement agency services to alternative investment managers.

In June 2019, the Company exercised its option to acquire the remaining 51% of the shares of Lara (Italy Holdco) Limited ("Lara"). Lara's only operating subsidiary, Houlihan Lokey S.p.A., is an Italian-based company that provides corporate finance advisory services.
 

6

Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

The Company offers financial services and financial advice to a broad clientele located throughout the United States of America ("U.S."), Europe, and the Middle East and Asia-Pacific regions. 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 ("CF") provides general financial advisory services in addition to advice on mergers and acquisitions and capital markets offerings. We advise public and private institutions on a wide variety of situations, including buy-side and sell-side transactions, as well as leveraged loans, private mezzanine debt, high-yield debt, initial public offerings, follow-ons, convertibles, equity private placements, private equity, and liability management transactions, and advise financial sponsors on all types of transactions. The majority of our CF revenues consists of fees paid upon the successful completion of the transaction or engagement ("Completion Fees"). A CF transaction can fail to be completed for many reasons that are outside of our control. In these instances, our fees are generally limited to the fees paid at the time an engagement letter is signed ("Retainer Fees") and in some cases fees paid during the course of the engagement ("Progress Fees") that may have been received.

Financial Restructuring ("FR") provides advice to debtors, creditors and other parties-in-interest in connection with recapitalization/deleveraging transactions implemented both through bankruptcy proceedings and 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 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, a FR 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 Retainer Fees and/or Progress Fees.

Financial Advisory Services ("FAS") 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 FAS 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 FAS 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 FAS segment are generally not contingent on the successful completion of a transaction.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP"), pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"), and include all information and footnotes required for consolidated financial statement presentation. The results of operations for the six months ended September 30, 2019 are not necessarily indicative of the results of operations to be expected for the fiscal year ending March 31, 2020. The unaudited interim consolidated financial statements and notes to consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2019 (the "2019 Annual Report").
Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. These reclassifications had no impact on net income, shareholder’s equity or cash flows as previously reported.



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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries where it has a controlling financial interest. All intercompany balances and transactions have been eliminated 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.
Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Management estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period, and disclosure of contingent assets and liabilities at the reporting date. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Items subject to such estimates and assumptions include, but are not limited to: the allowance for doubtful accounts; the valuation of deferred tax assets, goodwill, accrued expenses, and share based compensation; the allocation of goodwill and other assets across the reporting units (segments); and reserves for income tax uncertainties and other contingencies.
Revenues

Revenues consist of fee revenues from advisory services and reimbursed costs incurred in fulfilling the contract. Revenues reflect fees generated from our CF, FR, and FAS business segments. See Note 3 for additional information.
Operating Expenses

The majority of the Company’s operating expenses are related to compensation for employees, which includes the amortization of the relevant portion of the Company’s share-based incentive plans (Note 14). Other types of operating expenses include: Travel, meals, and entertainment; Rent; Depreciation and amortization; Information technology and communications; Professional fees; and Other operating expenses.
Translation of Foreign Currency Transactions

The reporting currency for the consolidated financial statements of the Company is the U.S. dollar. The assets and liabilities of subsidiaries whose functional currency is other than the U.S. dollar are included in the consolidation by translating the assets and liabilities at the reporting period-end exchange rates; however, revenues and expenses are translated using the applicable exchange rates determined on a monthly basis throughout the fiscal year. Resulting translation adjustments are reported as a separate component of accumulated other comprehensive loss, net of applicable taxes.
From time to time, we enter into transactions to hedge our exposure to certain foreign currency fluctuations through the use of derivative instruments or other methods. In the quarter ended September 30, 2019, we entered into a foreign currency forward contract between the pound sterling and the U.S. dollar with an aggregate notional value of $4.8 million. In the quarter ended September 30, 2018, we entered into foreign currency forward contracts between the euro and pound sterling with an aggregate notional value of approximately EUR 10.4 million. The fair value of these contracts represented a loss included in Other operating expenses of $53 and $14 during the three months ended September 30, 2019 and 2018, respectively.
    
Cash and Cash Equivalents, and Restricted Cash

Cash and cash equivalents include cash held at banks and highly liquid investments with original maturities of three months or less. As of September 30, 2019 and March 31, 2019, the Company had cash balances with banks in excess of insured limits. The Company believes it is not exposed to any significant credit risk with respect to Cash and cash equivalents.

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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

The following table provides a reconciliation of Cash and cash equivalents, and Restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows.     
 
September 30, 2019
 
March 31, 2019
Cash and cash equivalents
$
220,248

 
$
285,746

Restricted cash (1)
372

 
369

Total cash, cash equivalents, and restricted cash
$
220,620

 
$
286,115


(1)
Restricted cash as of September 30, 2019 and March 31, 2019 consisted of a cash secured letter of credit issued for our Frankfurt office.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (the “FASB”) issued the following authoritative guidance amending the FASB Accounting Standards Codification (“ASC”).
On April 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), and all related amendments. See Note 16 for additional information.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting. 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 Company adopted guidance effective April 1, 2019 and its application did not have a material impact on the consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses - Measurement of Credit Losses on Financial Instruments. The amended guidance involves several aspects of the accounting for credit losses related to certain financial assets that are not accounted for at fair value through net income and includes trade receivables and net investments in leases. The new guidance, and subsequent updates, broadens the information that an entity must consider in developing its estimated credit losses expected to occur over the remaining life of assets measured either collectively or individually to include historical experience, current conditions and reasonable and supportable forecasts, replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses (“CECL”) model.  The new guidance expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This new guidance is first effective for our fiscal year beginning on April 1, 2020 and will be adopted under a modified retrospective approach. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations, which will depend on, among other things, the current and expected macroeconomic conditions and the nature and characteristics of financial assets held by us on the date of adoption.

In 2019, the following ASU became effective, but there was no quantitative or qualitative effect on our financial statements:
ASU 2019-01, Leases - Topic 842: Codification Improvements.