HOULIHAN LOKEY, INC. (HLI) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our historical financial statements and related notes included elsewhere in this Form 10-K. Actual results and the timing of events may differ significantly from those expressed or implied in any forward-looking statements due to a number of factors, including those set forth in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Form 10-K. For discussion related to changes in financial condition and the results of operations for fiscal year 2021-related items, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal year 2022, which was filed with the Securities and Exchange Commission on May 27, 2022.
Executive Overview
Established in 1972, Houlihan Lokey is a leading global independent investment bank with expertise in mergers and acquisitions, capital markets, financial restructurings, and financial and valuation advisory. With offices in the United States, South America, Europe, the Middle East, and the Asia-Pacific region, the Company serves a diverse set of clients including corporations, financial sponsors and government agencies worldwide. Houlihan Lokey’s financial professionals deliver meaningful and differentiated advice to clients on strategy and financial decisions employing a rigorous analytical approach coupled with deep product and industry expertise.
We operate in three segments: Corporate Finance ("CF"); Financial Restructuring ("FR"); and Financial and Valuation Advisory ("FVA"). In our CF business segment, we believe we are an established leader in M&A and capital markets advisory services. Through our FR business segment, we advise on some of the largest and most complex restructurings around the world. Our FVA business segment is one of the largest and most respected valuation, financial opinion and financial consulting practices in the United States.
As of March 31, 2023, we served our clients globally with 1,904 financial professionals, including 313 Managing Directors. We plan to continue to grow our firm across industry sectors, geographies and products to deliver quality advice and innovative solutions to our clients, both organically and through acquisitions. Acquisitions over the last several years include: Fidentiis Capital in November 2019, an independent advisory business providing corporate finance advisory services relating to mergers and acquisitions, capital raising, and financing; Freeman & Co. in December 2019, an independent advisory business providing mergers and acquisitions advisory, capital raising, and other investment banking advisory services for the financial services sector; MVP Capital, LLC, in August 2020, an independent advisory firm that provides a range of financial advisory services to clients in the technology, media, and telecommunications sectors; and in October 2021, GCA Corporation ("GCA"), a global technology-focused investment bank providing M&A advisory and capital markets advisory services in Europe, Japan/Asia, and the United States. The addition of GCA significantly increases the Company's position in the technology sector, which is critical to meeting the needs of our clients as technology increasingly touches every business sector. Most recently, the Company acquired Oakley Advisory in February 2023, further increasing our global coverage of the digital infrastructure sector and significantly augments the existing sector coverage in Europe.
We generate revenues primarily from providing advisory services on transactions that are subject to individually negotiated engagement letters that set forth our fees. A significant portion of our engagements include Progress Fees (as defined herein) consisting of both periodic and milestone-related payments. The occurrence and timing of milestone-related payments, such as upon the closing of a transaction, are generally not within our control. Accordingly, revenue and net income in any period may not be indicative of full year results or the results of any other period and may vary significantly from year to year and quarter to quarter.
Corporate expenses represent expenses that are not allocated to individual business segments such as office of the executives, accounting, information technology, legal and compliance, marketing, human capital, including related compensation expense for corporate employees.
Business Environment and Outlook
Economic and global financial conditions can materially affect our operational and financial performance. See “Risk Factors” for a discussion of some of the factors that can affect our performance.
Our fiscal year ends on March 31 of each year. For the fiscal year ended March 31, 2023, we earned revenues of $1.81 billion, a decrease of (20)% from the $2.27 billion earned during the fiscal year ended March 31, 2022. For our fiscal year ended March 31, 2022, revenues increased 49% over our fiscal year ended March 31, 2021 revenues of $1.53 billion.
For the fiscal years ended March 31, 2023, 2022, and 2021, we earned revenues of $520 million, $579 million, and $333 million, respectively, from our international operations.
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Based on historical experience, we believe current economic conditions provide a stable environment for M&A and capital markets activities, but the continued threat from inflation and the war in Ukraine provide a measure of uncertainty in the coming quarters. In the United States, our dialogue with clients who are evaluating strategic alternatives remains measured as we continue to see good activity in M&A as a result of the availability of capital in the mid-cap space, but concerns remain around the macro-economic factors mentioned above.
Our Financial Restructuring activity has moderately improved as a result of the factors mentioned above (inflation and the war in Ukraine). It is too early to tell if and when this improvement will result in revenues, be we continue to remain optimistic about the current restructuring outlook over the medium and long term due to record levels of company leverage, inflation, supply-chain issues, recent geopolitical events, and contracting monetary policy. We are poised to address any increase in market activity if and when markets shift.
Key Financial Measures
Revenues
Revenues include fee revenues and reimbursements of expenses (see Note 2 and Note 3 included in Part II, Item 8 of this Form 10-K). Revenues reflect revenues from our CF, FR, and FVA business segments that substantially consist of fees for advisory services.
Revenues for all three business segments are recognized upon satisfaction of the performance obligation and may be satisfied over time or at a point in time. The amount and timing of the fees paid vary by the type of engagement. In general, advisory fees are paid at the time an engagement letter is signed (“Retainer Fees”), during the course of the engagement (“Progress Fees”), or upon the successful completion of a transaction or engagement (“Completion Fees”).
CF provides general financial advisory services in addition to advice on mergers and acquisitions and capital markets offerings. We advise public and private institutions on a wide variety of situations, including buy-side and sell-side transactions, as well as leveraged loans, private mezzanine debt, high-yield debt, initial public offerings, follow-ons, convertibles, equity private placements, private equity, and liability management transactions, and advise financial sponsors on all types of transactions. The majority of our CF revenues consists of Completion Fees. A CF transaction can fail to be completed for many reasons that are outside of our control. In these instances, our fees are generally limited to Retainer Fees and in some cases Progress Fees that may have been received.
FR provides advice to debtors, creditors and other parties-in-interest in connection with recapitalization/deleveraging transactions implemented both through bankruptcy proceedings and through out-of-court exchanges, consent solicitations or other mechanisms, as well as in distressed mergers and acquisitions and capital markets activities. As part of these engagements, our FR business segment offers a wide range of advisory services to our clients, including: the structuring, negotiation, and confirmation of plans of reorganization; structuring and analysis of exchange offers; corporate viability assessment; dispute resolution and expert testimony; and procuring debtor-in-possession financing. Although atypical, FR transactions can fail to be completed for many reasons that are outside of our control. In these instances, our fees are generally limited to the Retainer Fees and/or Progress Fees.
FVA primarily provides valuations of various assets, including: companies; illiquid debt and equity securities; and intellectual property (among other assets and liabilities). These valuations are used for financial reporting, tax reporting, and other purposes. In addition, our FVA business segment renders fairness opinions in connection with mergers and acquisitions and other transactions, and solvency opinions in connection with corporate spin-offs and dividend recapitalizations, and other types of financial opinions in connection with other transactions. Also, our FVA business segment provides dispute resolution services to clients where fees are usually based on the hourly rates of our financial professionals. Unlike our CF or FR segments, the fees generated in our FVA segment are generally not contingent on the successful completion of a transaction.
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.
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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) interest expense on the loan payable to affiliate, loans payable to former shareholders, and the loan payable to non-affiliates, (iv) equity income and/or gains or losses from funds and partnership interests where we have 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, (v) 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 years ended March 31, 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 "Business Segments" below.
| Year Ended March 31, | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2023 | 2022 | '22-'23 | |||||||||
| Revenues | $ | 1,809,447 | $ | 2,269,958 | (20) | % | ||||||
| Operating expenses: | ||||||||||||
| Employee compensation and benefits | 1,147,879 | 1,408,634 | (19) | % | ||||||||
| Non-compensation expenses | 319,830 | 248,460 | 29 | % | ||||||||
| Total operating expenses | 1,467,709 | 1,657,094 | (11) | % | ||||||||
| Operating income | 341,738 | 612,864 | (44) | % | ||||||||
| Other (income)/expense, net | 17,738 | 8,926 | 99 | % | ||||||||
| Income before provision for income taxes | 324,000 | 603,938 | (46) | % | ||||||||
| Provision for income taxes | 69,777 | 165,614 | (58) | % | ||||||||
| Net income | 254,223 | 438,324 | (42) | % | ||||||||
| Net income attributable to noncontrolling interest | — | (573) | 100 | % | ||||||||
| Net income attributable to Houlihan Lokey, Inc. | $ | 254,223 | $ | 437,751 | (42) | % |
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Year Ended March 31, 2023 versus March 31, 2022
Revenues were $1,809 million for the year ended March 31, 2023, compared with $2,270 million for the year ended March 31, 2022, representing a decrease of (20)%. The decrease in revenues was primarily attributable to a decrease in CF revenues as described in more detail below. For the year ended March 31, 2023, CF revenues decreased (29)%, FR revenues increased 1%, and FVA revenues increased 1% when compared with the year ended March 31, 2022.
Operating expenses were $1,468 million for the year ended March 31, 2023, compared with $1,657 million for the year ended March 31, 2022, a decrease of (11)%. Employee compensation and benefits expense, as a component of operating expenses, was $1,148 million for the year ended March 31, 2023, compared with $1,409 million for the year ended March 31, 2022, a decrease of (19)%. The decrease in employee compensation and benefits expense was primarily due to the decrease in revenues for the fiscal year. The Compensation Ratio was 63% and 62% for the years ended March 31, 2023 and 2022, respectively. Non-compensation expenses, as a component of operating expenses, were $320 million for the year ended March 31, 2023, compared with $248 million for the year ended March 31, 2022, an increase of 29%. The increase in non-compensation expenses was primarily a result of an increase in travel, meals, and entertainment expenses as employees continued to return to travel and an increase in other operating expenses.
Other (income)/expense, net increased to $17.7 million for the year ended March 31, 2023, compared with $8.9 million for the year ended March 31, 2022. The increase in other (income)/expense, net was primarily due to a $15 million accrual relating to an anticipated settlement with the SEC. On May 10, 2023 the staff of the SEC's Division of Enforcement proposed a potential settlement with the Company to resolve an investigation of the Company's compliance with records preservation requirements related to business communications sent over off-channel electronic messaging platforms. The Company has notified the SEC's Division of Enforcement of its present intention to agree to a settlement to resolve the investigation that includes a $15 million civil penalty. The potential settlement is subject to the negotiation of definitive documentation, which is expected to include terms consistent with previously announced settlements between other firms and the SEC, and any formal offer, proposed civil penalty, and additional terms submitted by the Company would be subject to approval by the Commission. As a result of the foregoing, the Company determined that it should recognize a $15 million accrual in other (income)/expense, net for the fourth fiscal quarter and fiscal year ended March 31, 2023 relating to the anticipated settlement with the SEC.
The provision for income taxes for the year ended March 31, 2023 was $69.8 million, which reflected an effective tax rate of 22%. The provision for income taxes for the year ended March 31, 2022 was $165.6 million, which reflected an effective tax rate of 27%. The decrease in the Company’s tax rate during the year ended March 31, 2023 relative to the year ended March 31, 2022 was primarily a result of increased stock compensation deductions, the release of the provision for an uncertain tax position as a result of the successful closure of a state audit and the release of a valuation allowance.
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Business Segments
The following table presents revenues, expenses, and contributions from our continuing operations by business segment. The revenues by segment represents each segment's revenues, and the profit by segment represents profit for each segment before corporate expenses, Other (income)/expense, net, and income taxes.
| Year Ended March 31, | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2023 | 2022 | 22-'23 | |||||||||
| Revenues by segment | ||||||||||||
| Corporate Finance | $ | 1,127,126 | $ | 1,593,083 | (29) | % | ||||||
| Financial Restructuring | 395,733 | 392,818 | 1 | % | ||||||||
| Financial and Valuation Advisory | 286,588 | 284,057 | 1 | % | ||||||||
| Revenues | $ | 1,809,447 | $ | 2,269,958 | (20) | % | ||||||
| Segment profit (1) | ||||||||||||
| Corporate Finance | $ | 354,075 | $ | 606,268 | (42) | % | ||||||
| Financial Restructuring | 121,618 | 100,882 | 21 | % | ||||||||
| Financial and Valuation Advisory | 81,388 | 88,136 | (8) | % | ||||||||
| Total segment profit | 557,081 | 795,286 | (30) | % | ||||||||
| Corporate expenses (2) | 215,343 | 182,422 | 18 | % | ||||||||
| Other (income)/expense, net | 17,738 | 8,926 | 99 | % | ||||||||
| Income before provision for income taxes | $ | 324,000 | $ | 603,938 | (46) | % | ||||||
| Segment Metrics: | ||||||||||||
| Number of Managing Directors | ||||||||||||
| Corporate Finance | 217 | 202 | 7 | % | ||||||||
| Financial Restructuring | 57 | 53 | 8 | % | ||||||||
| Financial and Valuation Advisory | 39 | 34 | 15 | % | ||||||||
| Number of closed transactions/Fee Events (3) | ||||||||||||
| Corporate Finance | 503 | 600 | (16) | % | ||||||||
| Financial Restructuring | 106 | 90 | 18 | % | ||||||||
| Financial and Valuation Advisory | 2,257 | 2,183 | 3 | % |
(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 one thousand dollars. References to closed transactions should be understood to be the same as transactions that are “effectively closed” as described in Note 2 of our Consolidated Financial Statements.
Corporate Finance
Year Ended March 31, 2023 Compared to the Year Ended March 31, 2022
Revenues for CF were $1,127 million for the year ended March 31, 2023, compared with $1,593 million for the year ended March 31, 2022, representing a decrease of (29)%. The decrease in revenues was primarily a result of (i) a decrease in the average transaction fee on closed transactions and a decrease in the number of transactions that closed for the year ended March 31, 2023, compared with the year ended March 31, 2022. The decrease in the average transaction fee on closed transactions was driven by the size and timing of transactions that closed and does not represent a trend in the average fee on closed transactions.
Segment profit for CF was $354 million for the year ended March 31, 2023, compared with $606 million for the year ended March 31, 2022, representing a decrease of (42)%. The decrease in segment profit was primarily a result of lower revenues and higher non-compensation expenses for the year ended March 31, 2023, compared with the year ended March 31, 2022.
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Financial Restructuring
Year Ended March 31, 2023 Compared to the Year Ended March 31, 2022
Revenues for FR were $396 million for the year ended March 31, 2023, compared with $393 million for the year ended March 31, 2022, representing an increase of 1%. The increase in revenues was primarily due to an increase in the number of closed transactions, partially offset by a decrease in the average transaction fee for the year ended March 31, 2023, compared with the year ended March 31, 2022. The decrease in the average transaction fee was driven by the size and timing of transactions that closed during the quarter, and does not represent a trend in the average fee on closed transactions. The increase in the number of closed transactions was driven by favorable market conditions for restructuring transactions.
Segment profit for FR was $122 million for the year ended March 31, 2023, compared with $101 million for the year ended March 31, 2022, an increase of 21%. The increase in segment profit was primarily a result of a decrease in compensation expenses, partially offset by a higher non-compensation expenses for the year ended March 31, 2023, compared with the year ended March 31, 2022.
Financial and Valuation Advisory
Year Ended March 31, 2023 Compared to the Year Ended March 31, 2022
Revenues for FVA were $287 million for the year ended March 31, 2023, compared with $284 million for the year ended March 31, 2022, representing an increase of 1%. The increase in revenues was primarily due to an increase in the number of fee events for the year ended March 31, 2023, compared with the year ended March 31, 2022.
Segment profit for FVA was $81 million for the year ended March 31, 2023, compared with $88 million for the year ended March 31, 2022, representing a decrease of (8)%. The decrease in segment profit was primarily a result of higher non-compensation expenses for the year ended March 31, 2023, compared with the year ended March 31, 2022.
Corporate Expenses
Year Ended March 31, 2023 Compared to the Year Ended March 31, 2022
Corporate expenses were $215 million for the year ended March 31, 2023, compared with $182 million for the year ended March 31, 2022, representing an increase of 18%. The increase in corporate expenses was primarily a result of higher compensation expenses for the year ended March 31, 2023, compared with the year ended March 31, 2022.
Liquidity and Capital Resources
Our current assets comprise cash and cash equivalents, investment securities, accounts receivable, and unbilled work in progress related to fees earned from providing advisory services. Our current liabilities include deferred income, accounts payable and accrued expenses, accrued salaries and bonuses, income taxes payable, and current portion of loan obligations.
Our cash and cash equivalents include cash held at banks. We maintain moderate levels of cash on hand in support of regulatory requirements for our registered broker-dealers. As of March 31, 2023 and 2022, we had $475 million and $477 million of cash in foreign subsidiaries, respectively. Our excess cash may be invested in short term investments, including treasury securities, commercial paper, certificates of deposit, and investment grade corporate debt securities. Please refer to Note 6 for further detail.
As of March 31, 2023 and 2022, our Cash and cash equivalents, Investment securities, and Restricted cash were as follows:
| (In thousands) | March 31, 2023 | March 31, 2022 | ||||
|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 714,439 | $ | 833,697 | ||
| Investment securities | 37,309 | 109,143 | ||||
| Total unrestricted cash and cash equivalents, including investment securities | 751,748 | 942,840 | ||||
| Restricted cash (1) | 373 | 373 | ||||
| Total cash, cash equivalents, and restricted cash, including investment securities | $ | 752,121 | $ | 943,213 |
(1)Represents a deposit in support of a letter of credit issued for our Frankfurt office.
As of each fiscal year end, a material portion of our Cash and cash equivalents is reserved to cover accrued, but unpaid bonuses, that are paid the following May and November.
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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 March 31, 2023 and 2022, we had $182 million and $144 million of Accounts receivable, net of credit losses, respectively. As of March 31, 2023 and 2022, we had $115 million and $105 million of Unbilled work in progress, net of credit losses, respectively.
Subsequent to the end of fiscal 2023, our Board of Directors declared a quarterly cash dividend of $0.55 per share of common stock, payable on June 15, 2023 to shareholders of record as of the close of business on June 2, 2023.
Subsequent to the end of fiscal 2023, on May 10, 2023 the staff of the SEC's Division of Enforcement proposed a potential settlement with the Company to resolve an investigation of the Company's compliance with records preservation requirements related to business communications sent over electronic messaging channels that have not been approved by the Company. The Company has notified the SEC's Division of Enforcement of its present intention to agree to a settlement to resolve the investigation that includes a $15 million civil penalty. This is expected to be paid during the first quarter of fiscal 2024.
On August 23, 2019, the Company entered into a syndicated revolving line of credit with the Bank of America, N.A. and certain other financial institutions party thereto, which allows for borrowings of up to $100 million (and, subject to certain conditions, provides the Company with an uncommitted expansion option, which, if exercised in full, would provide for a total credit facility of $200 million), which was amended by a First Amendment to Credit Agreement dated as of August 2, 2022, and matures on August 23, 2025 (the "HLI Line of Credit"). As of 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 March 31, 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 II, Item 8 of this Form 10-K).
In connection with certain acquisitions, certain employees may be entitled to deferred consideration, primarily in the form of retention payments, should certain service and/or performance conditions be met in the future. As a result of these conditions, such deferred consideration would be expensed as compensation in current and future periods and has been accrued as liabilities on the Consolidated Balance Sheets as of March 31, 2023 and 2022.
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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:
| Year Ended March 31, | ||||||
|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | ||||
| Operating activities: | ||||||
| Net income | $ | 254,223 | $ | 438,324 | ||
| Non-cash charges | 250,560 | 115,902 | ||||
| Other operating activities | (368,510) | 182,378 | ||||
| Net cash provided by operating activities | 136,273 | 736,604 | ||||
| Net cash used in investing activities | (3,004) | (273,914) | ||||
| Net cash used in financing activities | (240,462) | (459,060) | ||||
| Effects of exchange rate changes on cash and cash equivalents | (12,065) | (16,784) | ||||
| Net increase/(decrease) in cash, cash equivalents, and restricted cash | (119,258) | (13,154) | ||||
| Cash, cash equivalents and restricted cash – beginning of period | 834,070 | 847,224 | ||||
| Cash, cash equivalents and restricted cash – end of period | $ | 714,812 | $ | 834,070 |
Year Ended March 31, 2023
Operating activities resulted in a net inflow of $136.3 million for the year ended March 31, 2023, primarily due to net income of $254.2 million and non-cash charges of $250.6 million, partially offset by a decrease in other operating activities of $(368.5) million. Investing activities resulted in a net outflow of $(3.0) million for the year ended March 31, 2023, primarily due to acquisitions of property and equipment, cash consideration used for the acquisition of Oakley Advisory, LLC, and purchases of investment securities, partially offset by the sale or maturity of investment securities. Financing activities resulted in a net outflow of $(240.5) million primarily due to dividends paid, share repurchases, and payments to settle employee tax obligations on share-based awards during the year ended March 31, 2023.
Year Ended March 31, 2022
Operating activities resulted in a net inflow of $736.6 million for the year ended March 31, 2022, primarily due to increased net income. Investing activities resulted in a net outflow of $(273.9) million for the year ended March 31, 2022, primarily due to cash consideration used for the acquisition of GCA. Financing activities resulted in a net outflow of $(459.1) million primarily due to share repurchases completed during the year ended March 31, 2022.
Critical Accounting Policies and Estimates
We believe that the critical accounting policies and practices included below are both most important to the portrayal of the Company's financial condition and results, and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. For a discussion of these and other significant accounting policies and their impact on our consolidated financial statements, see Note 2 included in part II, Item 8 of this Form 10-K.
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.
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Recognition of Revenue
CF provides general financial advisory services in addition to advice on mergers and acquisitions and capital markets offerings. We advise public and private institutions on a wide variety of situations, including buy-side and sell-side transactions, as well as leveraged loans, private mezzanine debt, high-yield debt, initial public offerings, follow-ons, convertibles, equity private placements, private equity, and liability management transactions, and advise financial sponsors on all types of transactions. The majority of our CF revenues consists of Completion Fees. A CF transaction can fail to be completed for many reasons that are outside of our control. In these instances, our fees are generally limited to Retainer Fees and in some cases Progress Fees that may have been received.
FR provides advice to debtors, creditors and other parties-in-interest in connection with recapitalization/deleveraging transactions implemented both through bankruptcy proceedings and through out-of-court exchanges, consent solicitations or other mechanisms, as well as in distressed mergers and acquisitions and capital markets activities. As part of these engagements, our FR business segment offers a wide range of advisory services to our clients, including: the structuring, negotiation, and confirmation of plans of reorganization; structuring and analysis of exchange offers; corporate viability assessment; dispute resolution and expert testimony; and procuring debtor-in-possession financing. Although atypical, FR transactions can fail to be completed for many reasons that are outside of our control. In these instances, our fees are generally limited to the Retainer Fees and/or Progress Fees.
FVA primarily provides valuations of various assets, including: companies; illiquid debt and equity securities; and intellectual property (among other assets and liabilities). These valuations are used for financial reporting, tax reporting, and other purposes. In addition, our FVA business segment renders fairness opinions in connection with mergers and acquisitions and other transactions, and solvency opinions in connection with corporate spin-offs and dividend recapitalizations, and other types of financial opinions in connection with other transactions. Also, our FVA business segment provides dispute resolution services to clients where fees are usually based on the hourly rates of our financial professionals. Unlike our CF or FR segments, the fees generated in our FVA segment are generally not contingent on the successful completion of a transaction.
See Note 2 included in Part II, Item 8 of this Form 10-K for additional information.
Provision for 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.
See Note 12 included in Part II, Item 8 of this Form 10-K for additional information.
Business Combinations
Accounting for business combinations requires management to make significant estimates and assumptions. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, expected asset lives, geographic risk premiums, discount rates, and more. The amounts and useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense.
Recent Accounting Developments
For additional information on recently issued accounting developments and their impact or potential impact on our consolidated financial statements, see Note 2 included in Part II, Item 8 of this Form 10-K.
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