Houlihan Lokey Inc (HLI) 2021 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan Lokey Third Quarter Fiscal Year 2021 Earnings Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, January 28, 2021.

I'd now like to turn the call over to Christopher Crain, Houlihan Lokey's General Counsel.

Thank you, operator, and hello, everyone. By now everyone should have access to our third quarter fiscal year 2021 earnings release, which can be found on the Houlihan Lokey website at www.hl.com in the Investor Relations section.

Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements, which are usually identified by use of words such as will, expect, anticipate, should or other similar phrases, are not guarantees of future performance.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. And therefore, you should exercise caution when interpreting and relying on them.

We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings including the Form 10-Q for the quarter ended December 31, 2020, when it is filed with the SEC.

During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release and our investor presentation on the hl.com website.

Hosting the call today, we have Scott Beiser, Houlihan Lokey's Chief Executive Officer; and Lindsey Alley, Chief Financial Officer of the company. They will provide some opening remarks, and then we will open the call to questions. With that, I'll turn the call over to Scott.

Thank you, Christopher. Welcome, everyone, to our third quarter fiscal 2021 earnings call. By every measure, the firm's quarterly results were very strong. We recorded $1.77 in adjusted earnings per share, an increase of 84% above our previous quarterly record of $0.96. We achieved $538 million in revenues, 61% above our previous quarterly record of $334 million.

All 3 of our business segments recorded record quarterly results. Corporate Finance achieved $306 million in revenues, 52% above its previous record; financial restructuring achieved $178 million in revenues, 42% of its previous record; and Financial and Valuation Advisory achieved $54 million in revenues, 13% above its previous record.

Year-to-date revenues were $1.025 billion, up 20% versus the same period last year, notwithstanding the material impact of the COVID-19 pandemic on our first and second fiscal quarters. And all 3 business segments are at record highs through the first 9 months of the fiscal year.

Overall, the firm benefited this quarter from a confluence of events that enabled us to achieve record results which will be a challenge to repeat in the near term.

We entered calendar 2020 with expectations of solid performance for the year. By spring, everything changed with the onset of the effects of the pandemic. Corporate Finance revenues and prospects quickly deteriorated while financial restructuring prospects rapidly increased.

Similar to previous shocks to the economy, we redeployed our industry and valuation bankers towards focusing on distressed businesses and financial restructuring opportunities, and our capital market bankers pivoted to help -- helping raise capital for companies suddenly under stress.

Our differentiated, resilient business model worked the way it's supposed to and consistent with previous distressed cycles. By summer of 2020, the business environment, most notably the capital markets took a positive turn, and this trend has steadily accelerated. The downturn in Corporate Finance and Valuation activity reversed course and turned upward.

Current activity levels in both Corporate Finance and Financial and Valuation Advisory are at all-time highs. However, near-term prospects for new financial restructuring engagements have meaningfully slowed.

I'll now provide some specific comments for each of our business segments. Corporate Finance closed a record 121 transactions this quarter, 27% higher than any previous quarter. Up to 1/3 of our close transactions came from pre-COVID engagements put on hold that might have closed in our first or second fiscal quarter without the impact of the pandemic.

Additionally, a small portion of our closed transactions this quarter were likely accelerated as a result of concern about potential tax law changes in calendar 2021. Offsetting the factors that positively impacted this quarter's results was the lack of new business generated in spring and early summer, reducing the number of engagements that would likely have closed in our third fiscal quarter.

Now a few specifics about the quarter and year-to-date performance for the Corporate Finance business segment, we did not exhibit any unusual mega fee projects this quarter. All industry sectors are performing well.

Our international revenues are growing faster than our U.S. revenues, our capital markets business is up substantially versus last year and has proven itself to be recession-resistant through this calendar challenging year. The number of new engagements this quarter set a record, up nicely from our second quarter and up substantially from our first quarter.

And finally, the number of dead deals and deals on hold this quarter are now at normal levels versus what we are experiencing early this fiscal year.

Our FDA results were driven by strength in almost all of our subproduct lines. Our Portfolio Valuation business, which is our largest subproduct line, continues to produce record results and has proven to do so in both bull and bear markets.

Also, the improvement in M&A activity has positively impacted our transaction opinion practice which does work for both corporate and financial sponsor clients. The resilience of our FDA segment even during the business trough created by the pandemic has been impressive. Revenues barely declined earlier in the year and have been growing since summer. New business activity and the average size of fee events continues to improve.

Financial restructuring revenues for the quarter and year-to-date are significantly higher than any other comparable period. Our practice benefited from the distress caused by the pandemic and the historic amount of global debt.

In general, our financial restructuring revenues have been strong across geographies and industries, and year-to-date revenues are slightly weighted towards debtor assignments versus creditor assignments. Financial restructuring tends to be more volatile on a quarterly basis and didn't benefit from both a large number of quarterly closings and a few mega events.

As described over the last 2 quarters, new business activity and restructuring has been slowing. And in our third quarter, it slowed substantially, driven by one of the strongest equity and debt capital markets in recent history. The current business environment suggests restructuring revenues have likely peaked for the time being. However, the amount of worldwide leverage continue to grow during the pandemic, and an extraordinary amount of debt has been added to the balance sheets of struggling businesses, given government support and unprecedented access to capital, there may be a short-term decline in new restructuring activity. However, the mid and long-term prospects for financial restructuring are stronger today than they were pre-COVID.

Rounding out other firm news for the quarter, we added Ekpedeme Bassey and Cyrus Walker as independent Board member. Ekpedeme and Cyrus bring a wealth of knowledge and experience, and we fully expect them to be great additions to our Board.

On the acquisition front, the renewed bullish environment has benefited sellers of financial services businesses and slowed our progress, but we remain more active with potential acquisitions than pre-COVID levels and currently have 2 situations that look promising.

With respect to league table rankings, which come out every year in January, Houlihan Lokey was recognized for the sixth year in a row as the #1 firm in the U.S. in M&A, based on the number of completed M&A transactions. And for the seventh year in a row, we were recognized as the #1 restructuring firm globally based upon the number of completed restructuring transactions. We're very proud of these accomplishments and congratulate all of our employees for achieving these rankings.

In closing, I want to thank our employees who have continued to show incredible energy and perseverance despite these unusual times. I wanted to thank our clients who continue to entrust us with their important strategic business decisions and also their difficult business challenges. And I wanted to thank our shareholders who've continued to have faith in our business model and who have supported us throughout a turbulent year. We are very pleased with our results this quarter and feel we are well positioned for calendar 2021 and beyond. And with that, I'll turn the call over to Lindsey.

Thank you, Scott. Corporate Finance closed 121 transactions this quarter compared to 95 in the same period last year. And our average transaction fee on closed deals increased significantly this quarter when compared to the same period last year. Also, as Scott stated, we closed a number of transactions that were put on hold earlier this year due to COVID-19, contributing to a strong increase in revenues for the quarter.

Taking a step back and comparing year-to-date performance, Corporate Finance is up 2% for the first 9 months of fiscal 2021 when compared to the same period last year. This is a significant improvement from last quarter when Corporate Finance was down 32% year-to-date through September as a result of the pandemic. As we enter our fourth fiscal quarter, we are seeing a return to more normalized operating metrics for this business segment.

Financial restructuring closed 44 transactions this quarter compared to 28 in the same period last year, and our average transaction fee on closed deals was significantly higher this quarter when compared to the same quarter last year.

However, as Scott suggested, as the economy continues to recover from the pandemic and access to both debt and equity capital remains robust, the current activity level of new mandates is now around pre-COVID levels. We still expect to see COVID impacted transactions close in our fourth quarter. But at this time, we expect those transactions to make a meaningfully reduced contribution to financial restructuring results in fiscal 2022.

We remain committed to our belief that global leverage levels and acceleration in the adoption of technology resulting in secular changes across many industries and other long-term impacts of the pandemic make for an attractive financial restructuring market over the medium and long term. However, current trends in government stimulus and strong capital markets are a short-term headwind to our restructuring business.

In Financial and Valuation advisory, we had 639 fee events during the quarter compared to 530 in the same period last year. Overall, FDA saw improving results across most of its subproduct lines, and we have continued to see growth and productivity throughout the year.

FDA is experiencing the same benefits that corporate finance is experiencing as the M&A markets continue to make up for lost time.

Before we get to expenses, I would like to make a few comments about our pretax margin performance year-to-date. We have benefited this year from an unusually low non-compensation expense ratio as a result of the pandemic.

Offsetting that, we have seen slightly higher compensation ratio, driven in large part by lower reimbursable expenses, also a result of the pandemic. This dynamic has produced adjusted pretax margins of 28% year-to-date versus 24% for the same period last year. As we sit here today, it is too early to determine how COVID-19 is going to affect our long-term targets for any of our expense categories. But given our business model, 28% pretax margins are abnormally high.

Turning to expenses. Our adjusted compensation expenses were $335 million for the quarter versus $203 million for the same period last year. We had one adjustment this quarter for retention payments related to certain acquisitions. Our adjusted compensation expense ratio was 62.3% for the quarter, which is above our current long-term target for the adjusted compensation expense ratio of between 60.5% and 61.5%. We reduced our compensation expense ratio slightly from last quarter as a result of an increase in reimbursable expenses as compared to last quarter.

As I have discussed on previous calls, our compensation ratio is slightly higher than our long-term target, primarily as a result of lower-than-expected reimbursable expenses for fiscal 2021 due to the impact from the pandemic.

Our adjusted non-compensation expenses were $39 million for the quarter versus $50 million for the same period last year, a decline of about 23%. This resulted in an adjusted non-compensation expense ratio of 7.2% for the quarter versus 15% in the same quarter last year. Our non-compensation expense ratio year-to-date is running well below our current long-term target as a result of the pandemic.

This decline is a direct result of lower travel meals and entertainment expenses as well as lower marketing, office-related and other operating expenses, all due to the firm's response to the stay-at-home orders imposed because of the pandemic. We expect to continue to see significantly reduced non-compensation expenses in these categories at least through the first half of this calendar year.

This quarter, we adjusted only 1 item out of our non-compensation expenses relating to acquisition-related amortization. Other income and expense decreased for the quarter to income of approximately $200,000 versus income of approximately $1 million in the same period last year.

This was primarily a result of lower interest earned on our cash and investment balances. Our adjusted effective tax rate for the quarter was 25.3% compared to 29.2% during the same period last year. The adjusted effective tax rate is running below our current long-term target driven by a significant decline in nontax deductible items such as meals and entertainment and certain other expenses. As a result, we expect our adjusted tax rate for fiscal 2021 to be closer to 26%.

Turning to the balance sheet and uses of cash. As of the quarter end, we had $868 million of unrestricted cash and equivalents and investment securities. As a reminder, a significant portion of this cash is earmarked to cover accrued but unpaid bonuses for fiscal 2021. Also in this past quarter, we repurchased approximately 283,000 shares at an average price of $65.69 per share as part of our share repurchase program.

In our earnings release, we announced that we increased our share repurchase program to $200 million. And for fiscal 2022, and we expect to increase share repurchases above our stated goal of offsetting the dilution associated with shares issued as part of our compensation program. And finally, we are pleased to announce that we are paying a dividend of $0.33 per share payable on March 15 to shareholders of record as of March 2.

With that, operator, we can open the line for questions.

(Operator Instructions) Your first question comes from the line of Ken Worthington with JPMorgan.

I appreciate all your comments in terms of restructuring, where are you -- where would you say you are right now in terms of working through your COVID-driven restructuring backlog? Where would you say you are, I guess, in terms of completions versus retainers? Like any information you can give us about how that's working through the pipeline?

Yes. I think, Ken, it's a good question, but I prefer not to give specifics. I think it just kind of leads to fourth quarter performance. But I will tell you that it is our expectation that we will see some COVID-related transactions closing in our fourth quarter that will have a positive impact on our restructuring results that quarter. But prefer not to comment on the specifics in terms of how much we've worked through.

Okay. Maybe trying a more vague approach. As we think about where you stand versus the current calendar year or maybe even skip the next quarter, but maybe the following 4 quarters. Is there any color you can give us maybe looking out further into the future in terms of what needs to be worked through? Or is that just -- did I just repackaged the same question again? I'm sorry if I did.

Ken, in terms of what we've said, we saw a very large amount of new business come in, in our first and second fiscal quarter, it started to slow down in the third quarter and suspect it will still maybe continue to slow down in the fourth quarter.

There's still is, I'll call it, normal work, having nothing to do with COVID issues. And it's what we talked about a year ago. And whether it's technology disruptors, whether just generally over-leveraged businesses, et cetera, et cetera. And there's still business that we have not completely worked through from the COVID standpoint. I think in our comments, we've clearly described, when we look at the world in totality, in terms of the amount of still leverage out there with companies and the number of companies that are still struggling and may not totally resolve their business plan issues. We still feel very optimistic about the mid and long term.

Short-term capital markets are very wide open, and the government intervention has slowed down probably what we all would have thought would have been restructuring potential short term, but conversely, that's what's helped our corporate finance business. And we've literally seen probably a flip in the last 2 months from where business activity was coming in today versus 6 months ago.

Okay. Okay. And then just the average fee rate was higher per deal in M&A. Can you talk about the mix change that's continuing to help that fee rate? Like the trend we've been seeing. But anyway, more color on mix and what you're seeing driving that higher deal fee per deal?

When you say mix, Ken, do you -- are you talking about a restructuring business and the debtor/creditor, et cetera?

No, no, I'm sorry. It was M&A and sort of middle-market M&A, the Corporate Finance business. Like you had mentioned more non-U. S.-based transactions, I believe, this quarter. Is that contributing to the higher fee per deals? Is it just size? Is size related to market?

I don't think it has anything to do with international versus U.S. And I'd say maybe there is a skew because of the benefit that we've had in our capital markets business. Increasing those fees slightly. But I think it's really just for the quarter. We saw, generally speaking, larger transactions than we had in previous quarters, and it had an impact on the average fee size.

Okay. But nothing we should read forward from what we saw this quarter?

No, there's no theme there. And that does generally fluctuate a little quarter-by-quarter just depending on what engagements close and things along those lines.

Your next question comes from the line of Devin Ryan with JMP Securities.

Great. So a couple here on Corporate Finance. Clearly, a really special quarter. And it seems like the pace of completions sped up, and maybe you touched on a couple of reasons. People squeezing in deals for taxes potentially change or just some deals that were in the backlog prior to the pandemic.

But I'm curious if the pace of completions does feel like it's sped up. So can that continue? And then maybe in a related question, of the 121 Corporate Finance completions, how many were tied to capital markets? And I'm assuming those deals probably come together and close faster as well. So just trying to think about that just given how quick it seems like the completions changed maybe relative to what we were thinking a few months ago.

Yes taking them in isolation. I mean, M&A transactions typically take longer to close than capital market transactions. But if you were to dissect them individually, I would say, the normal time period to close any of those 2 types of transactions hasn't really changed this quarter versus last quarter versus a year ago, et cetera.

What we did have is a smaller percentage of deals maybe were driven by purposely wanting to get accomplished by December 31, but it wasn't an overwhelming pattern drove the quarter. And as we mentioned, yes, there were some deals that were maybe already partially completed, put on hold in spring. And so therefore, part of the time frame had already been eaten up, and therefore, you could close those deals quicker.

But conversely, as we mentioned, the normal amount of new deals that we probably would have brought in, in March, April, May, et cetera, were much lighter than normal because of the pandemic. So there was some balancing there.

But your overall comment regarding the time line to close deals, I don't think has meaningfully changed in today's world versus where we were pre-pandemic.

Okay. That's helpful. And then maybe just a follow-up here, if you can, just elaborate a little bit on the thought process for the $200 million repurchase. Is that really trying to return the capital that was raised last May without kind of a large-scale M&A occurring given kind of a similar size? Or should we read this more as just being flexible and opportunistic? Obviously, the business is creating a lot of excess cash or potentially to the extent that continues, that you may continue to look to lean in on buybacks. You try to think about this announcement and whether this is potentially, kind of, a more of a one-off situation or to the extent business continues to perform well, we may see you kind of reload and continue to do the same thing?

I think, several factors. The Board continues to talk about what we can and should be doing with our cash to continue to maximize shareholder value. We have looked at, obviously, the total market value of our company stock continues to grow. We've, I think, 2 or 3 other times have raised the total size of the repurchase authority we had.

So I think somewhat, it's consistent with the business. Profitability has grown, the size of the business and the market cap. The business has grown. Clearly feel, we have some additional financial flexibility to continue to repurchase. And as Lindsey mentioned, we've historically always focused on at least doing repurchases, approximating the amount of shares that we've issued. Goal, at least heading into fiscal '22 is, in fact, to do something more than that.

And I won't read anything more other than we've lifted the size. We recognize the financial condition of the company. And I thought that was a prudent thing to do in terms of returning some of our cash to shareholders.

Your next question comes from the line of Manan Gosalia with Morgan Stanley.

Maybe coming back to your comments on the non-comp expense line. And maybe just thinking about it more so much near term, but maybe more as we get into fiscal '22 and maybe even '23. You've managed to keep it really low even in a record quarter, and our noncomp ratio is half of where it was pre-COVID. I know there's also some operating leverage in there. But clearly, people are willing to do more things virtually. So is there a reason why the noncomp expense ratio should ever go back to that 15% number you had a year ago?

It's a good question. And honestly, we don't know the answer to that question. I think it is -- we're anticipating that we will see some real kind of efficiency benefits out of what's happened over the last 9 months with the pandemic and that we will see that efficiency primarily in our TM&E expense, which is one of our largest expense items. So we're hoping the answer is no. We do -- we don't expect it to go back to those normal -- to those levels.

But until we come out of the pandemic, until we start to see how people travel again and how they react to whatever the new normal looks like, it's hard to answer that question. But as we sit here today, it will be a shame if we don't see some efficiencies coming out of this and not just with respect to TM&E, but over kind of the medium and long term, even with respect to our rent payments.

And the need for everyone to have an extra separate cube and everyone to have their own office. The world has likely changed in that regard. But we're at least a few quarters away from really getting a glimpse of what that might look like.

Got it. And then maybe on the M&A side, you spoke about how the international business is doing well. Can you talk a little bit about the investments you've made there? And curious about how much of the strength is sort of a ramp-up in activity internationally overall versus how much you think you're gaining some share here?

I think it's both. I mean, over the last half dozen years, we've meaningfully invested internationally. Added in terms of acquisitions, hiring individuals, our London office is now our second largest office. It was much, much smaller, nearly 5, 10 years ago. So part of it is our presence, our brand, our position is much greater outside of the United States today than it was even half a dozen years ago. And then partly, the international business, I think, has lagged the U.S. for many years. And while there's been some stops and starts in it over the last year at least for us, it does feel like it is picking up from where it's been. Maybe it's finally due to some resolution of Brexit. Maybe it's because they're coming off of a lower base, and as you mentioned before, (inaudible) it, just because we also have a greater presence. I think all of that is causing our business profile and results to be growing rather nicely at the moment internationally.

Congrats on a great quarter.

Your next question comes from the line of Richard Ramsden with Goldman Sachs.

This is James Yaro filling in for Richard. So obviously, this is a fantastic quarter. And so congratulations on that. Perhaps, I'll start with the Capital markets advisory business, which has obviously been a bright spot across both your results and those of your peers over, say, the last 12 months.

Maybe you could update us on the growth in HL finance, how it's performed versus your expectations and whether your views on the long-term growth potential of this business are higher or unchanged versus maybe a year ago?

So we're still very optimistic about what I'll define as our overall financing capabilities. Remember, we tend to do much more in the private marketplace and the public marketplace, much more focused on debt capital raising and equity capital raising, and we continue to see that there's been ongoing interest by our client base, both in corporates and financial sponsors to use advisers, Houlihan Lokey and others.

We really do not participate anything meaningful to what some of our other peers have done on the equity side. We're not a classical IPO or equity shop. We haven't benefited from that. But everything that we see on the financing side, we're just as optimistic about where it can go over the next 5, 10 years today as we were a year ago or 2 years ago.

Got it. That makes sense. And then maybe you could talk about the dialogue with sponsors and how that's developed over the past few months and so far, perhaps in 2021? And how you think that could change over the next year?

The number of sponsors and the number of sponsors we cover and their interest and ability to do deals, while they were probably a bit in sleeping mode in spring and summer. They're in full force mode, both buy side, sell side, refinancing side, restructuring side, been very active and effected at certain points. I think they've been too active to even look at certain things.

So part of it is they played catch up. And part of it is just where the capital markets are, they're able to go borrow money again.

And I think most people believe that there is eventually light at the end of the tunnel here in the pandemic. We may argue over exactly what the time period is, but kind of with the vaccine out, people are feeling a little better about what things might look like in the world's economies in the next year or 2, and all of that is driving, I think, deal activity by sponsors and corporates.

Okay. And then last quarter, you did talk about focus on continuing to grow inorganically. But that the dialogue with potential targets had slowed down a little bit. Maybe you could characterize the environment today, and how that's changed? And what the timeline is for potentially returning the cash that you raised over the past year, if you don't see any acquisitions, and if this has changed at all?

So we always felt when we raised the money back in May of 2020, and this is probably a 2-year-ish type time line in terms of finding acquiring and closing on transactions. So we're still only maybe 1/3 or so in that time period. Having said that, what we said last quarter, and we repeated, again, this quarter, is due to the improved marketplace out there. Some of the sellers who were maybe sellers 6 months ago are kind of feeling like they want to stay independent. Some have gotten their expectations from a price perspective that maybe we think is not quite in line.

Having said that, we are still talking to numerous companies. As I mentioned, there's 2 of them that we feel really good about at this juncture. They're still not close to the closing line, but all of these do always take some time and months. So we're still optimistic about opportunities out there.

The terms of the number of situations and maybe sometimes the size of those situations or the time line to close some of these situations, we think have gotten a little more elongated and a little more difficult than where we were 6 months ago and just due to the improvement in the marketplace.

Congratulations on the great quarter.

Your next question comes from the line of Michael Brown with KBW.

I appreciate all the commentary on the Corporate Finance business, but I wanted to take a little bit of a different tack there. So clearly, we've kind of got the wall of worry behind us right with the election done, and obviously, the vaccination's rolling out. So a lot of the major concerns out there have seemed to have dissipated. What I'm curious now is what are some of the concerns that C-suites are raising in kind of conversations with your bankers and what are the potential risks here that we may not be contemplating now that they're a lot less obvious. And is it just more of a focus on how valuations relative to where they were like pre COVID? Or I'm sure the buyers is still kind of top of mind, but just curious how those discussions have evolved recently?

I think no matter what time frame, buyers are always going to be concerned about the certain things. I mean, a few that I'd say we still hear in no particular order, but one is potential, changes in the corporate tax code, both in the U.S. and other parts of the globe could impact people's views on what they can and shouldn't do. Increased regulatory issues coming from the current administration could have some impact on transactions probably more likely on larger-sized deals that we tend not to work on.

Third thing out there, just general business valuations. Anything you look at clearly suggests that the valuation multiples of companies are at the upper quartile versus the lower quartile. And then we still don't know for many, many companies, what does a normal post-pandemic world look like. And so when people are typically putting together their 3 or 5-year business plans, I think there's still generally more uncertainty, and you can have disagreements between the way sellers see the world and buyers see the world.

And it may take a full year post-pandemic before people can say, yes, now I know exactly how you'll be able to operate post-pandemic. And so I think those are some of the handful of issues out there. And at any given time, I think there's always concerns and issues that both buyers and sellers would have, but those will be some of them that we're hearing from the C-suite today.

Okay, great. That's helpful. So the operating margin, pushing over 30% was certainly great to see and something I really hadn't expected to see what you'll be able to do. Of course, little to no travel certainly helps. When I see a revenue result like this quarter, though, I suppose I would have expected that the comp ratio could have maybe come down just given the operating leverage that is kind of inherent in this business model.

So I understand the dynamics of the reimbursable expenses, but I just wanted to hear a little bit about how you're thinking about that? And if that's something that you're contemplating perhaps at the full year comp ratio as you think about the fiscal fourth quarter results?

I think we've always focused primarily on compensation for the full year. We try not to vary too much quarter-to-quarter, but there is going to be some variability. So that's part of it.

Second, I think we've always told ourselves and told analysts and investors, we are typically going to have less movement and volatility in our compensation payout ratio, whether you view them to be good years or bad years. So you will typically just not see our pretax margins shrinking much or at all. In more difficult times. And likewise, it necessarily doesn't meaningfully increase during good times.

This was an abnormal quarter just because our revenues are so much higher than we've ever seen before. And a noncomp is usually a little bit more on the fixed side than on a percentage side. So we did lower the compensation payout ratio a bit this quarter based upon some of the comments that you've mentioned.

But we've always said, look, we've generally stayed within a -- it seems like 100% level from where we started at the beginning of the year to the end of the year. This year had some twist to it mostly due to the significant decline in reimbursables, which in our minds, are not necessarily classical revenues because you're obviously not earning a profit off of it. And it's the way we run our business. And I think not too different today than what we would have told you 3 years ago or the eve of us going public or even pre-public.

(Operator Instructions) Your next question comes from the line of Jeff Harte with Piper Sandler.

Can you help me or us to think about the order of magnitude of the benefits to corporate finance revenues from things like deals on hold closing and year-end kind of pre-administration change acceleration. I'm just trying to kind of get a feel for how to think about going forward after a quarter where revenues just were so much stronger than any of the visible pipeline stuff we can kind of see from the outside?

So I'd take a step backwards and maybe start with looking at 9 months' worth of results versus just 1 quarter. We clearly mentioned there are certain things that had the pandemic not occurred, we would have had a better first and second quarter. And then arguably, we would have had a worse third quarter.

Having said that, the momentum that exists today is maybe is as great as we've ever seen. So at least as the market presents it, we're very optimistic about what Corporate Finance can continue to do for the next couple of quarters, but I don't think you can look at this last quarter and say that's some normalized level for us.

That's probably the best way to look at it. I mean the -- I think there was a smaller amount of deals that maybe ultimately closed third fiscal quarter instead of fourth fiscal quarter for tax reasons, I think a lot of it was just, as we mentioned, a confluence of events, things that should have closed first and second quarter. Some of that ended up closing in the third quarter, and some were still close in the fourth quarter and beyond. But offsetting that is we weren't playing with a full deck heading into the quarter because we didn't bring in the amount of new business. So if we sit here today and try to analyze the business and what do we think about it, kind of going forward for the next half year, a year, 2 years, however you want to look at it, we feel better about it now than we did pre-pandemic before we knew what was going to happen with the pandemic. So we all got hit. We've seemed to have recovered, and we're back in growth mode.

Okay. And as we think about non-comp expenses and maybe leased in the near term, do you have a kind of a feel for what you're expecting kind of dollar-wise? I mean, we're kind of running $30 million a quarter when the pandemic was hot. Now it's $39 million. It used to run $45 million. I mean, do you have any feel for at least the near-term trajectory and what we might see there?

Some of the increase is really driven by reimbursable expenses, which are hard to predict. So I think the better we do from a revenue standpoint, frankly, the higher our non-comp expenses just because of the accounting for it. So look, I think that it's hard to tell you what the fourth quarter is going to look like. A proxy for that might be an average of the last 3 quarters. But that's a guess given that so much of it is driven by revenue growth in Q4.

And usually, when you grow revenues, you have reimbursable expenses from clients attached to it, and that will drive non-comp expense. And so a little harder to answer that question than it used to be pre-accounting change.

And Jeff, if you look back historically, there's a couple of seasonal reasons and why this occurs. But historically, our fiscal third quarter on an absolute dollar amount just is our highest non-comp. And then our fiscal fourth quarter has tended to come in lower.

So if the similar facts tend to occur, that's not an unreasonable assumption, but though as Lindsey mentioned, thing that we can't predict is the amount of reimbursables. Some of it's tied to revenue, some of it's timing and then there are certain things used to be because it's when you ran conferences or when you had certain costs and training, certain things have absolutely nothing to do with seasonality. But there has been some seasonality quarter-by-quarter to the absolute amount of our noncomp.

Okay. And then finally, should we think of something as being kind of a minimum targeted cash to hold on the balance sheet? I mean, there's just there's so much cash there on an absolute dollar basis, but also as kind of a percent of total assets. Is it kind of a targeted range you guys like to keep it up?

It's a complicated answer. I think we have accrued and unpaid bonuses as a liability on our balance sheet. Those do have to be paid. So you are going to have to keep enough cash for those payments. Those payments to remind you occur in May and November.

The other thing is, there is a certain amount of money that is overseas. And there is some expense even with the new laws to bring that home. And so that capital is not necessarily easily distributable from us. And then there's regulatory cash and operating cash that needs to be kept in the balance sheet, not only in the U.S. but overseas. And so I think it's a hard one to answer. We don't think of it in terms of an absolute minimum dollar number. We do believe we're sitting here with excess cash today.

And as Scott suggested, we, at the Board level, are having conversations about what to do with that excess cash. You're seeing a little bit of movement on the share repurchase that was mentioned earlier and probably more to come over the coming quarters.

Your next question comes from the line of Steven Chubak with Wolfe Research.

So I want to start off with a question on restructuring. When thinking about the pace of new restructuring mandates, getting back to pre-COVID levels, is it reasonable for us to infer that restructuring fees, at least over the medium term, should be running at the pre-COVID run rate of roughly $90 million a quarter. Just recognizing highly leveraged corporates may not face our day of reckoning so quickly, simply given the existence of the Fed backstop, low rates, tighter credit spreads, what have you?

I don't -- I think it's a little early to tell what restructuring is going to look like in the short term, you're going to continue to see some benefits from COVID-related transactions in our Q4.

You'll see some in some periods next year as well. Activity levels for restructuring are tough because the typical restructuring mandate can take years to complete. So what does that mean for Q3 of fiscal 2022 is hard to tell. But you are going to see a return to normality. And whether that's in 1 quarter, 2 quarters, 3 quarters, it's hard to answer. But -- and whether that normality is kind of that $300 million to $350 million level that we experienced for those sort of 2 or 3 years prior to COVID. We hope it's to that level. We just -- too early to tell.

Steven, I'd add, as Lindsey mentioned, the last 4 fiscal years, fiscal '17 to '20, our restructuring revenues generally range from $300 million to $350 million, a couple of positive and negative factors, kind of ignoring the pandemic for the moment, obviously, lower interest rates and a very healthy capital markets tends to slow things down in the restructuring world.

On the other hand, the ever-increasing impact of technology, which kind of disrupts businesses, the total absolute dollar amount of leverage across the system. The number of companies that still today are -- have been and may never completely come out of the pandemic as healthy as they once were, all of those kind of lead you to giving yourself to be more optimistic.

So the total size of the market, I would start with, it just has continued to grow year-by-year, having nothing to do with -- for the moment, a blip in the pandemic. The complexities of restructuring continue to get more difficult.

I think we've maintained a leadership position in this business. And then one other thing, while we obviously did very well this quarter and so far, these first 9 months, and I would say there's been a number of mega size deals we worked on. There really hasn't been the super mega size deals that we saw in the great global financial crisis of a decade or so ago. There's not been that Lehman Brothers or CIT or some of these other ones.

And so in fact, the business is probably healthier when you really analyze it from a standpoint, a number of transactions we're working on, kind of the typical size not getting skewed by any super mega deals, the size of our staff and the experience of our staff, in many regards, pretty much the same staff we had a decade ago. They're just basically more skilled, more mature, et cetera, leads us to all those comments that we said.

We're feeling very good about where restructuring can go over the medium and long term. There's going to be some bumps in the road where it may continue to see some good results from some of the COVID work that still isn't done. On the other hand, until things kind of stabilize in other areas we have been witnessing for the last several months, a slowdown in new business activity.

Just for my follow-up, on the subject or the topic of normality, but focus more on the Corporate Finance side. You alluded to some expectation for obviously, not -- at least a decline versus the most recent quarter. I mean, I think that's to be expected.

If I look at the productivity levels, this quarter, it was north of $10 million per banker. You alluded to the fact that about 1/3 of the transactions that closed probably should have closed in the 2 earlier quarters. And as I tried to square what -- in a very healthy M&A environment, what's a reasonable productivity per banker expectation that you guys are comfortable underwriting. Recognizing it was $6 million pre-COVID activity seems to be healthier now, not quite a $10 million per.

Obviously, you can drive a truck through that range. What do you think is a reasonable expectation as we look out for the next year or 2 years in terms of what that productivity trajectory might look like?

Here's the good news. The good news is we've proven that productivity can increase from $6 million to $10 million overnight. And so there is capacity for us to continue to drive productivity of our M&A bankers. And there's a number of things that keep the productivity levels below 10. I think one of them is we hire constantly new people, then productivity levels are lower. Our overseas expansion is also a headwind on productivity levels because of the fee structure overseas relative to the U.S.

But there is capacity in the system. And I think the M&A bankers, our Corporate Finance bankers worked extraordinarily hard in this last quarter. That is not sustainable, but we have proven that there is capacity there, and we will continue to look for ways to drive productivity quarter-by-quarter.

And we've seen, it not only in our Corporate Finance business over the last few years, but we've continued improvements in productivity in our SPA business. And we believe that will be a theme for us over the next 3 to 5 years.

Your next question comes from the line of Brennan Hawken with UBS.

You referenced in your prepared remarks that the year-end and potential anticipation of tax law change drove some acceleration in activity in your Corporate Finance business. I just would -- is it possible to try to understand or size that impact so that we can know the right base of revenue in which we'd be wanting to build off of when we're looking forward and kind of bringing -- thinking about squaring up our forecast into next year?

Yes. I don't Brennan, there isn't a number we could give you that says, "Oh, yes, it was 5 or 10 or 20, projects of our 121". What we really comment is when we talk to our bankers out in the field, a number of them would say, yes, there were transactions where the client very much wanted to close by December 31. Some of them achieved that, and some didn't.

Many of them had expectations to be able to close. But if we got hired in late summer, early fall, while there are probably some people who are optimistic that you can get closed by December 31, the debt just isn't practical, at least on the M&A landscape.

So I think it was more of a small rounding amount that actually was pushed into this quarter because of people trying to accelerate a deal. And don't really have an easy way of being able to analyze all 121 projects and said, which ones were -- had to close by December 31. Otherwise, we wouldn't have gotten hired or the project won't have closed. It's -- like I said, there was a commentary that several people had for different reasons. I don't think it was an overwhelming reason that caused our revenues in this quarter to be strong. I'd say it warranted a footnote commentary, not a major statistical adjustment to analyze our business.

Okay. And then thinking about the quarter from a different way and just trying to understand, I'd want to say that you had said that this has involved some business that kind of was -- deals that were reinvigorated, reanimated, what have you from when everybody, when the kind of world shuts down. And then there were some that were brought on with new business.

Is it -- given that, is it -- when we think about the cadence of the quarter-over-quarters this year, which is clearly going to look really funky, are we better off just focusing on, like, your full year fiscal number when we want to think about fiscal year 2021? And rather than trying to think about what a quarterly jumping off period is since it seems like there was some business that had been in the ground for a while that just got quickly brought to the finish line this quarter and some regular way stuff, so it's -- it might be a bit misleading?

I think Scott mentioned it earlier, Brennan. If you look at the year-to-date numbers, our Corporate Finance business is up slightly year-over-year. There's no reason not to take a look at Q4 of last year and have that as a jumping-off point and realizing that there's going to be some benefit in Q4 of this year from transactions that might have closed earlier had not the pandemic occurred.

But if you look at the year-to-date numbers and you kind of go through what my comments are, which is a lot of the metrics we're seeing in Corporate Finance are normalized, then I think we're probably back to quarter-on-quarter comparisons, potentially with a little bit of upside for the next quarter or 2 relative to pandemic related things. If that makes sense?

It does.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Scott Beiser for closing remarks.

I want to thank you all for participating in our third quarter fiscal 2021 earnings call, and we look forward to updating everybody on our progress when we discuss our fourth quarter results for fiscal 2021 this coming spring.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.