Moelis & Company — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2019. Moelis is a global independent investment bank focused on advisory services, including M&A, recapitalizations, restructurings and other corporate finance matters. Revenue depends substantially on transaction activity and completion timing.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $153.5m | $220.4m | $291.3m | $439.8m |
| Operating income | $33.9m | $55.6m | $43.5m | $110.7m |
| Net income | $37.7m | $53.1m | $53.8m | $107.1m |
| Net income attributable to Moelis & Company | $29.5m | $35.7m | $43.0m | $69.0m |
| Diluted EPS | $0.54 | $0.72 | $0.79 | $1.47 |
- Revenue fell 30% year over year in Q2 and 34% in the first half. Management attributed the decline primarily to fewer completed transactions.
- Operating margin, calculated as operating income divided by revenue, was approximately 22% in Q2 versus 25% a year earlier, and 15% for the first half versus 25%.
- Compensation and benefits were $84.5m in Q2 and $174.6m in the first half. They represented 55% and 60% of revenue, respectively, versus 58% in both comparable 2018 periods. Lower discretionary bonuses partly offset higher fixed compensation and equity amortization.
- Non-compensation expenses were $35.2m in Q2 and $73.2m in the first half, broadly lower in dollars but higher as a share of revenue because revenue declined.
- Other income and expenses were $4.3m in Q2 and $5.7m in the first half, compared with $1.3m and $1.9m, respectively, in 2018. Income from equity-method investments, primarily Moelis Australia, declined to $0.7m in Q2 and $1.4m in the first half.
Cash, balance sheet and capital
- At June 30, cash and cash equivalents were $108.4m, down from $261.1m at December 31, 2018; including restricted cash, period-end cash was $109.0m. Total assets were $714.8m and total equity was $312.9m.
- First-half operating cash flow was an outflow of $50.4m, versus an inflow of $70.0m in 2018. Investing activities provided $76.0m, mainly from net investment sales; financing activities used $179.3m, mainly for dividends and distributions. The company cited compensation payments and other operating cash uses as contributors to the operating outflow.
- The company reported no borrowings under its $65m revolving credit facility, which matures June 30, 2020. Available credit was $60.0m after $5.0m of letters of credit. Management said the business generally does not borrow through debt issuance.
- Lease liabilities were $54.3m at quarter-end following adoption of the new lease accounting standard; the company recorded $63.3m of lease liabilities and corresponding right-of-use assets at adoption. The balance sheet also included a $311.4m tax receivable agreement liability and a $406.7m deferred tax asset.
- The company paid $2.25 per share in dividends during the first half, including a $1.25 special dividend. A further $0.50 dividend was declared after quarter-end, payable September 27, 2019. The remaining share repurchase authorization was $95.0m at June 30.
Changes, outlook and risks
- The revenue decline reflected weaker transaction completions: global completed M&A transactions over $100m were down 16% year over year in the first half, according to market data cited by the company. Moelis reported fewer clients and fewer clients paying fees of at least $1m in both Q2 and the first half.
- Management described client conversations and demand for independent advice as strong, and cited technological disruption, shareholder activism, substantial private-equity and sovereign-wealth-fund capital, corporate cash balances and relatively low interest rates as potential supports for M&A. It also noted slower European activity, including geopolitical uncertainty surrounding the U.K.’s exit from the EU, while restructuring remained a steady contributor despite low defaults.
- No quantitative earnings or revenue guidance is provided. Management cautioned that quarterly results can vary significantly because fees are often tied to transaction milestones and completions outside the company’s control. Transactions may be delayed or terminated by regulatory, approval, financing, market or counterparty issues.
- Ordinary-course legal and regulatory matters may result in fines or other sanctions, but the company said it was not aware of material pending proceedings expected to have a material effect. It could not estimate possible losses for such matters. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
- Other notable items: the allowance for doubtful accounts increased to $3.9m from $2.0m at year-end; cash balances in some U.S. and U.K. bank accounts exceeded deposit-insurance limits; and the company entered into a New York headquarters lease expected to commence in late 2019, with an initial term through 2036. In July 2019 it also renewed a related-party aircraft lease through 2022 on terms described as comparable to market.
Important facts for investors to verify
- Whether transaction completions and advisory revenue recover after the first-half slowdown, and whether management’s positive client commentary translates into completed assignments.
- The sustainability of cash generation given negative first-half operating cash flow, compensation-payment timing, dividends and repurchases.
- Receivable collectability, including the higher doubtful-account allowance and long-term private-fund advisory receivables.
- The assumptions, timing and potential cash impact of the $311.4m tax receivable agreement liability, particularly if there is a change of control or early termination.
- The cost and commencement timing of the expanded headquarters lease and the company’s capital-return plans relative to operating performance.