10-Q 1 hli-20220930.htm 10-Q hli-20220930
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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, 2022
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)
Delaware95-2770395
(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 ClassTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, par value $0.001HLINew 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 31, 2022, the registrant had 49,850,823 shares of Class A common stock, $0.001 par value per share, and 18,802,093 shares of Class B common stock, $0.001 par value per share, outstanding.



HOULIHAN LOKEY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS



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, 2022March 31, 2022
Assets
Cash and cash equivalents$503,806 $833,697 
Restricted cash373 373 
Investment securities35,742 109,143 
Accounts receivable, net of allowance for credit losses of $7,698 and $8,954, respectively
135,191 144,029 
Unbilled work in progress, net of allowance for credit losses of $6,974 and $4,320, respectively
155,935 104,751 
Deferred income taxes112,092 95,278 
Property and equipment, net62,206 52,176 
Operating lease right-of-use assets168,291 171,942 
Goodwill1,051,294 1,070,442 
Other intangible assets, net214,598 247,333 
Other assets70,671 57,646 
Total assets$2,510,199 $2,886,810 
Liabilities and Stockholders' Equity
Liabilities:
Accrued salaries and bonuses$685,568 $953,604 
Accounts payable and accrued expenses98,182 126,190 
Deferred income35,482 28,753 
Income taxes payable3,869 61,266 
Deferred income taxes538 789 
Loans payable to former shareholders506 539 
Operating lease liabilities188,937 197,091 
Other liabilities50,449 74,873 
Total liabilities1,063,531 1,443,105 
Commitments and contingencies (Note 17)
Stockholders' equity:
Class A common stock, $0.001 par value. Authorized 1,000,000,000 shares; issued and outstanding 49,780,875 and 49,853,564 shares, respectively
50 50 
Class B common stock, $0.001 par value. Authorized 1,000,000,000 shares; issued and outstanding 18,874,122 and 17,649,555 shares, respectively
19 18 
Additional paid-in capital559,605 564,761 
Retained earnings981,204 922,223 
Accumulated other comprehensive loss(94,210)(43,347)
Total stockholders' equity1,446,668 1,443,705 
Total liabilities and stockholders' equity$2,510,199 $2,886,810 
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)2022202120222021
Revenues$489,537 $537,272 $908,181 $909,994 
Operating expenses:
Employee compensation and benefits309,859 333,374 575,594 565,678 
Travel, meals, and entertainment12,370 4,687 23,420 6,374 
Rent13,285 9,050 25,075 19,275 
Depreciation and amortization19,475 4,344 38,618 8,515 
Information technology and communications13,183 8,858 24,173 15,819 
Professional fees9,598 6,915 16,067 13,616 
Other operating expenses22,396 12,725 38,293 15,722 
Total operating expenses400,166 379,953 741,240 644,999 
Operating income89,371 157,319 166,941 264,995 
Other expense, net5,104 853 6,853 752 
Income before provision for income taxes84,267 156,466 160,088 264,243 
Provision for income taxes23,537 43,583 28,576 65,400 
Net income60,730 112,883 131,512 198,843 
Other comprehensive income, net of tax:
Foreign currency translation adjustments(28,554)(6,037)(50,863)(4,412)
Comprehensive income attributable to Houlihan Lokey, Inc.$32,176 $106,846 $80,649 $194,431 
Attributable to Houlihan Lokey, Inc. common stockholders:
Weighted average shares of common stock outstanding:
Basic63,422,701 65,156,968 63,350,545 65,433,649 
Fully diluted69,800,028 68,566,127 69,316,792 68,641,962 
Earnings per share (Note 13)
Basic$0.96 $1.73 $2.08 $3.04 
Fully diluted$0.87 $1.65 $1.90 $2.90 

See accompanying Notes to Consolidated Financial Statements
2


HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Class A Common Stock
Class B Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Stockholders' Equity
(In thousands, except share data)
Shares
$
Shares
$
$
$
$
$
Balances – July 1, 202249,649,765 $50 19,136,952 $19 $527,666 $955,484 $(65,656)$1,417,563 
Shares issued— — 32,310 — — — — — 
Stock compensation vesting (Note 14)— — — — 40,195 — — 40,195 
Dividends— — — — — (35,010)— (35,010)
Conversion of Class B to Class A shares231,367 — (231,367)— — — — — 
Other shares repurchased/forfeited(100,257)— (63,773)— (8,256)— — (8,256)
Net income— — — — — 60,730 — 60,730 
Change in unrealized translation— — — — — — (28,554)(28,554)
Total comprehensive income— — — — — 60,730 (28,554)32,176 
Balances – September 30, 202249,780,875 $50 18,874,122 $19 $559,605 $981,204 $(94,210)$1,446,668 
Class A Common Stock
Class B Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Stockholders' Equity
(In thousands, except share data)
Shares
$
Shares
$
$
$
$
$
Balances – July 1, 202151,091,269 $51 17,745,973 $18 $745,705 $657,375 $(18,551)$1,384,598 
Shares issued— — 31,867 — 2,615 — — 2,615 
Stock compensation vesting (Note 14)— — — — 17,717 — — 17,717 
Dividends— — — — — (28,580)— (28,580)
Conversion of Class B to Class A shares384,632 — (384,632)— — — — — 
Other shares repurchased/forfeited(548,896)— (44,903)(1)(45,458)— — (45,459)
Net income— — — — — 112,883 — 112,883 
Change in unrealized translation— — — — — — (6,037)(6,037)
Total comprehensive income— — — — — 112,883 (6,037)106,846 
Balances – September 30, 202150,927,005 $51 17,348,305 $17 $720,579 $741,678 $(24,588)$1,437,737 
See accompanying Notes to Consolidated Financial Statements
3


HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Class A Common Stock
Class B Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Stockholders' Equity
(In thousands, except share data)
Shares
$
Shares
$
$
$
$
$
Balances – April 1, 202249,853,564 $50 17,649,555 $18 $564,761 $922,223 $(43,347)$1,443,705 
Shares issued— — 2,304,890 2 6,019 — — 6,021 
Stock compensation vesting (Note 14)— — — — 79,362 — — 79,362 
Dividends— — — — — (72,531)— (72,531)
Conversion of Class B to Class A shares497,859 — (497,859)— — — — — 
Shares issued to non-employee directors (Note 14)6,739 — — — 570 — — 570 
Other shares repurchased/forfeited(577,287)— (582,464)(1)(91,107)— — (91,108)
Net income— — — — — 131,512 — 131,512 
Change in unrealized translation— — — — — — (50,863)(50,863)
Total comprehensive income— — — — — 131,512 (50,863)80,649 
Balances – September 30, 202249,780,875 $50 18,874,122 $19 $559,605 $981,204 $(94,210)$1,446,668 
Class A Common Stock
Class B Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Stockholders' Equity
(In thousands, except share data)
Shares
$
Shares
$
$
$
$
$
Balances – April 1, 202151,245,442 $51 16,951,696 $17 $803,573 $600,096 $(20,176)$1,383,561 
Shares issued— — 2,014,510 2 14,638 — — 14,640 
Stock compensation vesting (Note 14)— — — — 49,014 — — 49,014 
Dividends— — — — — (57,261)— (57,261)
Conversion of Class B to Class A shares1,103,085 1 (1,103,085)(1)— — —  
Shares issued to non-employee directors (Note 14)6,512 — — — — — — — 
Other shares repurchased/forfeited(1,428,034)(1)(514,816)(1)(146,646)— — (146,648)
Net income— — — — — 198,843 — 198,843 
Change in unrealized translation— — — — — — (4,412)(4,412)
Total comprehensive income— — — — — 198,843 (4,412)194,431 
Balances – September 30, 202150,927,005 $51 17,348,305 $17 $720,579 $741,678 $(24,588)$1,437,737 
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) 20222021
Cash flows from operating activities:
Net income$131,512 $198,843 
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes(14,088)(8,068)
Provision for bad debts, net6,103 5,559 
Unrealized losses on investment securities2,140 575 
Non-cash lease expense14,554 10,951 
Depreciation and amortization38,618 8,515 
Contingent consideration valuation2,869  
Compensation expense – equity and liability classified share awards (Note 14)82,006 53,246 
Changes in operating assets and liabilities:
Accounts receivable5,388 (24,388)
Unbilled work in progress(53,837)2,383 
Other assets(13,025)7,732 
Accrued salaries and bonuses(264,724)(69,542)
Accounts payable and accrued expenses and other(79,174)(19,434)
Deferred income6,729 (945)
Income taxes payable(57,988)(45,309)
Net cash provided by/(used in) operating activities(192,917)120,118 
Cash flows from investing activities:
Purchases of investment securities(11,263)(24,721)
Sales or maturities of investment securities82,524 192,339 
Acquisition of business, net of cash acquired  (304)
Purchase of property and equipment, net(17,796)(2,500)
Net cash provided by investing activities53,465 164,814 
Cash flows from financing activities:
Dividends paid(73,812)(59,504)
Share repurchases(48,905)(112,946)
Payments to settle employee tax obligations on share-based awards(42,191)(33,700)
Earnouts paid(2,078)(1,723)
Loans payable to former shareholders redeemed(33)(107)
Repayments of loans to non-affiliates(2,488) 
Other financing activities570 478 
Net cash used in financing activities(168,937)(207,502)
Effects of exchange rate changes on cash, cash equivalents, and restricted cash(21,502)(1,272)
Net increase/(decrease) in cash, cash equivalents, and restricted cash(329,891)76,158 
Cash, cash equivalents, and restricted cash – beginning of period834,070 847,224 
Cash, cash equivalents, and restricted cash – end of period$504,179 $923,382 
Supplemental disclosures of non-cash activities:
Shares issued via vesting of liability classified awards$5,955 $4,270 
Fully amortized intangibles written off 2,000 
Cash acquired through acquisitions$ $15,285 
Cash paid during the period:
Interest$1,861 $454 
Taxes, net of refunds102,418 118,685 
See accompanying Notes to Consolidated Financial Statements
5

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 an unaffiliated third party investor that may provide commitments with respect to certain syndicated loans arranged by HL Finance.

Houlihan Lokey EMEA, LLP, a limited liability partnership registered in England ("HL EMEA, LLP"), is an indirect subsidiary of HL, Inc. HL EMEA, LLP is regulated by the Financial Conduct Authority in the United Kingdom ("U.K.").

The Company offers financial services and financial advice to a broad clientele located through more than thirty offices in the United States of America, Europe, the Middle East, and the Asia-Pacific region. Together, the Company and its subsidiaries form an organization that provides financial services to meet a wide variety of client needs. The Company concentrates its efforts toward the earning of professional fees with focused services across the following three business segments:

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

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

Financial and Valuation Advisory ("FVA") primarily provides valuations of various assets, including: companies; illiquid debt and equity securities; and intellectual property (among other assets and liabilities). These valuations are used for financial reporting, tax reporting, and other purposes. In addition, our FVA business segment renders fairness opinions in connection with mergers and acquisitions and other transactions, and solvency opinions in connection with corporate spin-offs and dividend recapitalizations, and other types of financial opinions in connection with other transactions. Also, our FVA business segment provides dispute resolution services to clients where fees are usually based on the hourly rates of our financial professionals. Unlike our CF or FR segments, the fees generated in our FVA segment are generally not contingent on the successful completion of a transaction.
6

HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
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, 2022 are not necessarily indicative of the results of operations to be expected for the fiscal year ending March 31, 2023. 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, 2022 (the "2022 Annual Report").
Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries where it has a controlling financial interest. All intercompany balances and transactions have been eliminated.
The Company carries its investments in unconsolidated entities over which it has significant influence but does not control using the equity method, and includes its ownership share of the income and losses in Other expense, net in the Consolidated Statements of Comprehensive Income.
The Company’s equity method investments include variable interest entities (VIEs), which are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary, and is generally the entity with (i) the power to direct the activities that most significantly impact the VIE’s economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE.
Our involvement with VIEs arises from our variable interest related to a special purpose acquisition company of which the Company is a sponsor. The Company's exposure to loss from such VIEs is not material to our operating results and financial position.
Use of Estimates

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

Revenues consist of fee revenues from advisory services and reimbursed costs incurred in fulfilling the contracts. Revenues reflect fees generated from our CF, FR, and FVA business segments.
The Company generates revenues from contractual advisory services and reimbursed costs incurred in fulfilling the contracts for such services. Revenues for all three business segments (CF, FR, and FVA) are recognized upon satisfaction of the performance obligation, which may be satisfied over time or at a point in time. The amount and timing of the fees paid vary by the type of engagement.

7

HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised services (i.e., the “transaction price”). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as market volatility or the judgment and actions of third parties. The substantial majority of the Company’s advisory fees (i.e., the success related Completion Fees) are considered variable and constrained as they are contingent upon a future event which includes factors outside of our control (e.g., completion of a transaction or third party emergence from bankruptcy or approval by the court).

Revenues for all three business segments are recognized upon satisfaction of the performance obligation and may be satisfied over time or at a point in time. The amount and timing of the fees paid vary by the type of engagement.
Revenues from CF engagements primarily consist of fees generated in connection with advisory services related to corporate finance, mergers and acquisitions, and capital markets offerings. Completion Fees from these engagements are recognized at a point in time when the related transaction has been effectively closed. At that time, the Company has transferred control of the promised service and the customer obtains control. CF contracts generally contain a variety of promised services that may be capable of being distinct, but they are not distinct within the context of the contract as the various services are inputs to the combined output of successfully brokering a specific transaction.

Revenues from FR engagements primarily consist of fees generated in connection with advisory services to debtors, creditors and other parties-in-interest involving recapitalization or deleveraging transactions implemented both through bankruptcy proceedings and through out-of-court exchanges, consent solicitations or other mechanisms, as well as in distressed mergers and acquisitions and capital markets activities. Retainer Fees and Progress Fees from restructuring engagements are recognized over time using a time elapsed measure of progress as our clients simultaneously receive and consume the benefits of those services as they are provided. Completion Fees from these engagements are considered variable and constrained until the related transaction has been effectively closed as they are contingent upon a future event, which includes factors outside of our control (e.g., completion of a transaction or third party emergence from bankruptcy or approval by the court).

Revenues from FVA engagements primarily consist of fees generated in connection with valuation and diligence services and rendering fairness, solvency and other financial opinions. Revenues are recognized at a point in time as these engagements include a singular objective that does not transfer any notable value to the Company’s clients until the opinions have been rendered and delivered to the client. However, certain engagements consist of advisory services where fees are usually based on the hourly rates of our financial professionals. Such revenues are recognized over time as the benefits of these advisory services are transferred to the Company’s clients throughout the course of the engagement, and, as a practical expedient, the Company has elected to use the ‘as-invoiced’ approach to recognize revenue.

Taxes, including value added taxes, collected from customers and remitted to governmental authorities are accounted for on a net basis, and therefore, are excluded from revenue in the Consolidated Statements of Comprehensive Income.
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.
8

HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
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, 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. As of September 30, 2021, we had one foreign currency forward contract outstanding between the pound sterling and the euro with a notional value of €1.7 million. The change in fair value of these contracts represented a net loss included in Other operating expenses of $(232) and $(7) during the three months ended September 30, 2022 and September 30, 2021, respectively.

Fair Value Measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels in accordance with Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurement:

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
For Level 3 investments in which pricing inputs are unobservable and limited market activity exists, management's determination of fair value is based upon the best information available, and may incorporate management's own assumptions or involve a significant degree of judgment.
The following methods and assumptions were used by the Company in estimating fair value disclosures:
Corporate debt securities: All fair value measurements are obtained from a third-party pricing service and are not adjusted by management.
U.S. treasury securities: Fair values for U.S. treasury securities are based on quoted prices from recent trading activity of identical or similar securities. All fair value measurements are obtained from a third-party pricing service and are not adjusted by management.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the instrument.
The fair values of the financial instruments represent the amounts that would be received to sell assets or that would be paid to transfer liabilities in an orderly transaction between market participants as of a specified date. Fair value measurements maximize the use of observable inputs; however, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk-adjusted discount rates, as well as available observable and unobservable inputs.
The carrying value of Cash and cash equivalents, Restricted cash, Accounts receivable, Unbilled work in progress, Accounts payable and accrued expenses, and Deferred income approximates fair value due to the short maturity of these instruments.

9

HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
The carrying value of the loans to employees included in Other assets, Loans payable to former shareholders, and an unsecured loan which is included in Loan payable to non-affiliate approximates fair value due to the variable interest rate borne by those instruments.

Cash and Cash Equivalents, and Restricted Cash

Cash and cash equivalents include cash held at banks and highly liquid investments with original maturities of three months or less. As of September 30, 2022 and March 31, 2022, the Company had cash balances with banks in excess of insured limits. The Company believes it is not exposed to any significant credit risk with respect to Cash and cash equivalents.
The following table provides a reconciliation of Cash and cash equivalents, and Restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows.     
September 30, 2022March 31, 2022
Cash and cash equivalents$503,806 $833,697 
Restricted cash (1)
373 373 
Total cash, cash equivalents, and restricted cash$504,179 $834,070 
(1)Restricted cash as of September 30, 2022 and March 31, 2022 consisted of a cash secured letter of credit issued for our Frankfurt office.

Investment Securities

Investment securities consist primarily of corporate debt and U.S. treasury securities with original maturities over 90 days. The Company classifies its corporate debt and U.S. treasury securities as trading and measures them at fair value in the Consolidated Balance Sheets. Unrealized holding gains and losses for trading securities are included in Other operating expenses in the accompanying Consolidated Statements of Comprehensive Income.     

Allowance for Credit Losses

The allowance for credit losses on accounts receivable and unbilled work in progress reflects management’s best estimate of expected losses using the Company's internal current expected credit losses model. This model analyzes expected losses based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that could potentially affect the collectibility of the reported amounts. This is recorded through provision for bad debts, which is included in Other operating expenses in the accompanying Consolidated Statements of Comprehensive Income. Amounts deemed to be uncollectible are written off against the allowance for credit losses.

Property and Equipment

Property and equipment are stated at cost. Repair and maintenance charges are expensed as incurred and costs of renewals or improvements are capitalized at cost. Depreciation on furniture and office equipment is recognized on a straight-line basis over the estimated useful lives of the respective assets.
Income Taxes

The Company files consolidated federal income tax returns, as well as consolidated and separate returns in state and local jurisdictions, and the Company reports income tax expense on this basis.
We account for income taxes in accordance with ASC Topic 740, Income Taxes, which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax basis of our assets and liabilities. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The measurement of the deferred items is based on enacted tax laws and applicable tax rates. A valuation allowance related to a deferred tax asset is recorded if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
10

HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as 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.
The Global Intangible Low-Taxed Income tax (“GILTI inclusion”) can be recognized in the financial statements through an accounting policy election by either recording a period cost (permanent item) or providing deferred income taxes stemming from certain basis differences that are expected to result in GILTI inclusion. The Company has elected to account for the tax impacts of the GILTI inclusion as a period cost.
Leases

We assess whether an arrangement is or contains a lease at the inception of the agreement. Right-of-use ("ROU") assets represent our right to use underlying assets for the lease term and lease liabilities represent our obligation to make lease payments arising from leases. ROU assets and lease liabilities are recognized at the commencement date based on the present value of future lease payments over the lease terms utilizing the discount rate implicit in the leases. If the discount rate implicit in the leases is not readily determinable, the present value of future lease payments is calculated utilizing the Company’s incremental borrowing rate, which approximates the interest that the Company would have to pay on a secured loan. The Company elected to utilize a portfolio approach and applies the rates to a portfolio of leases with similar terms and economic environments. The terms of our leases used to determine the ROU asset and lease liability account for options to extend when it is reasonably certain that we will exercise those options, if applicable. ROU assets and lease liabilities are subject to adjustment in the event of modification to lease terms, changes in probability that an option to extend or terminate a lease would be exercised and other factors. In addition, ROU assets are periodically reviewed for impairment.
Lease expense is recognized on a straight-line basis over the lease terms. Lease expense includes amortization of the ROU assets and accretion of the lease liabilities. Amortization of ROU assets is calculated as the periodic lease cost less accretion of the lease liability. The amortized period for ROU assets is limited to the expected lease term.
The Company has elected a practical expedient to combine the lease and non-lease components into a single lease component. The Company also elected the short-term lease measurement and recognition exemption and does not establish ROU assets or lease liabilities for operating leases with terms of 12 months or less.
Goodwill and Intangible Assets

Goodwill represents an acquired company’s acquisition cost over the fair value of acquired net tangible and intangible assets. Goodwill is the net asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Intangible assets identified and accounted for include tradenames and marks, backlog, developed technologies, and customer relationships. Those intangible assets with finite lives, including backlog and customer relationships, are amortized over their estimated useful lives.
11

HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Goodwill is reviewed annually for impairment and more frequently if potential impairment indicators exist. Goodwill is reviewed for impairment in accordance with Accounting Standards Update ("ASU") No. 2011-08, Testing Goodwill for Impairment, which permits management to make a qualitative assessment of whether it is more likely than not that one of its reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If management concludes that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then management would not be required to perform the two-step impairment test for that reporting unit. If the assessment indicates that it is more likely than not that the reporting unit’s fair value is less than its carrying value, management must test further for impairment utilizing a two-step 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. As of September 30, 2022, management concluded that it was not more likely than not that the Company’s reporting units’ fair value was less than their carrying amount and no further impairment testing had been considered necessary.
Indefinite-lived intangible assets are reviewed annually for impairment in accordance with ASU 2012-02, Testing Indefinite-lived Intangible Assets for Impairment, which provides management the option to perform a qualitative assessment. If it is more likely than not that the asset is impaired, the amount that the carrying value exceeds the fair value is recorded as an impairment expense. As of September 30, 2022, management concluded that it was not more likely than not that the fair values were less than the carrying values.
Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group (inclusive of other long-lived assets) be tested for possible impairment, management first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. As of September 30, 2022, no events or changes in circumstances were identified that indicated that the carrying amount of the finite-lived intangible assets were not recoverable.
Business Combinations
Accounting for business combinations requires management to make significant estimates and assumptions. We allocate the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value as of the acquisition date, with the consideration in excess recorded as 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.
Note 3 — Revenue Recognition
Disaggregation of Revenues

The Company has disclosed disaggregated revenues based on its business segment and geographical area, which provides a reasonable representation of how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. See Note 18 for additional information.

Contract Balances

The timing of revenue recognition may differ from the timing of payment by customers. The Company records a receivable when revenue is recognized prior to payment and there is an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred income (contract liability) until the performance obligations are satisfied.

12

HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Costs incurred in fulfilling advisory contracts with point-in-time revenue recognition are recorded as a contract asset when the costs (i) relate directly to a contract, (ii) generate or enhance resources of the Company that will be used in satisfying performance obligations, and (iii) are expected to be recovered. The Company amortizes the contract asset costs related to fulfilling a contract based on recognition of fee revenues for the corresponding contract.

Costs incurred in fulfilling an advisory contract with over-time revenue recognition are expensed as incurred.

The change in the Company’s contract assets and liabilities during the period primarily reflects the timing difference between the Company’s performance and the customer’s payment. The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers:
April 1, 2022Increase/(Decrease)September 30, 2022
Receivables (1)
$139,680 $(9,739)$129,941 
Unbilled work in progress, net of allowance for credit losses104,751 51,184 155,935 
Contract Assets (1)
4,349 901 5,250 
Contract Liabilities (2)
28,753 6,729 35,482 
(1)Included within Accounts receivable, net of allowance for credit losses in the September 30, 2022 Consolidated Balance Sheet.
(2)Included within Deferred income in the September 30, 2022 Consolidated Balance Sheet.

During the three and six months ended September 30, 2022, $1.0 million and $6.5 million of Revenues, respectively, were recognized that were included in the Deferred income balance at the beginning of the period.

As a practical expedient, the Company does not disclose information about remaining performance obligations pertaining to (i) contracts that have an original expected duration of one year or less, and/or (ii) contracts where the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that is or forms part of a single performance obligation. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at September 30, 2022.
Note 4 — Related Party Transactions
Other assets in the accompanying Consolidated Balance Sheets includes loans receivable from certain employees of $23,447 and $17,100 as of September 30, 2022 and March 31, 2022, respectively.
13

HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Note 5 — Fair Value Measurements
The following table presents information about the Company's financial assets, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values:
September 30, 2022
Level ILevel IILevel IIITotal
Corporate debt securities$ $20,100 $ $20,100 
U.S. treasury securities 12,544  12,544 
Certificates of Deposit 517  517 
Total asset measured at fair value (1)
$ $33,161 $ $33,161 
(1) Included within Investment securities in the Consolidated Balance Sheets.

March 31, 2022
Level ILevel IILevel IIITotal
Corporate debt securities$ $87,074 $ $87,074 
U.S. treasury securities 17,662  17,662 
Certificates of Deposit 516  516 
Total asset measured at fair value (1)
$ $105,252 $ $105,252 
(1) Included within Investment securities in the Consolidated Balance Sheets.

The Company had no transfers between fair value levels during the six months ended September 30, 2022.
14

HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Note 6 — Investment Securities
The amortized cost and gross unrealized gains (losses) of marketable investment securities accounted under the fair value method were as follows:
September 30, 2022
Amortized CostGross Unrealized GainsGross Unrealized (Losses)
Fair Value (1)
Corporate debt securities$21,910 $ $(1,810)$20,100 
U.S. treasury securities13,196  (652)12,544 
Certificates of Deposit517   517 
Total securities with unrealized gains/(losses)$35,623 $ $(2,462)$33,161 
(1) Included within Investment securities in the Consolidated Balance Sheets.

March 31, 2022
Amortized CostGross Unrealized GainsGross Unrealized (Losses)
Fair Value (1)
Corporate debt securities$88,475 $2 $(1,403)$87,074 
U.S. treasury securities17,891  (229)17,662 
Certificates of Deposit516   516 
Total securities with unrealized gains/(losses)$106,882 $2 $(1,632)$105,252 
(1) Included within Investment securities in the Consolidated Balance Sheets.

Scheduled maturities of the debt securities held by the Company included within the investment securities portfolio were as follows:
September 30, 2022March 31, 2022
Amortized CostEstimated Fair ValueAmortized CostEstimated Fair Value
Due within one year$4,886 $4,809 $72,963 $72,950 
Due within years two through five30,737 28,352 33,919 32,302 
Total debt within the investment securities portfolio$35,623 $33,161 $106,882 $105,252 
Note 7 — Allowance for Credit Losses
The following table presents information about the Company's allowance for credit losses:
September 30, 2022
Beginning balance$13,274 
Provision for bad debt, net6,103 
Recovery/(write-off) of uncollectible accounts, net (4,705)
Ending balance$14,672 
15

HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(In thousands, except share data or as otherwise stated)
Note 8 — Property and Equipment
Property and equipment, net of accumulated depreciation consists of the following:
September 30, 2022March 31, 2022
Equipment$9,752 $9,692 
Furniture and fixtures20,050 22,704
Leasehold improvements73,104 59,462
Computers and software14,549 14,308
Other7,487 7,476
Total cost124,942 113,642 
Less: accumulated depreciation(62,736)(61,466)
Total net book value$62,206 $52,176 
Additions to property and equipment during the six months ended September 30, 2022 were primarily related to leasehold improvement costs incurred.
Depreciation expense of $3,849 and $2,732 was recognized for the three months ended September 30, 2022 and 2021, respectively, and $7,228 and $5,839 was recognized for the six months ended September 30, 2022 and 2021, respectively.
Note 9 — Goodwill and Other Intangible Assets
The following table provides a reconciliation of Goodwill and other intangibles, net reported on the Consolidated Balance Sheets.
Useful LivesSeptember 30, 2022March 31, 2022
GoodwillIndefinite$1,051,294 $1,070,442 
Tradename-Houlihan LokeyIndefinite192,210 192,210 
Other intangible assetsVaries91,022 92,941 
Total cost