Business context and reporting period
Moelis & Company filed this unaudited Form 10-Q for the quarter ended March 31, 2018. It is a global, single-segment investment banking advisory firm serving corporations, governments and financial sponsors in M&A, restructurings and other corporate finance matters. The company reported 514 advisory bankers and 19 global locations.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 or prior period |
|---|---|---|
| Revenue | $219.4 million | $173.3 million; up 27% |
| Operating income | $55.1 million | $43.0 million; up 28% |
| Operating margin | 25.1% | 24.8% |
| Net income | $54.0 million | $39.4 million; up 37% |
| Net income attributable to Moelis & Company | $33.3 million | $15.3 million |
| Class A EPS | $0.92 basic; $0.75 diluted | $0.58 basic; $0.46 diluted |
| Cash, cash equivalents and restricted cash | $131.6 million | $213.9 million at December 31, 2017 |
| Operating cash flow | $7.4 million inflow | $25.2 million outflow |
| Debt and credit | No facility borrowings | $40.0 million revolving facility; $34.7 million available after letters of credit |
Operating expenses were $164.3 million, or 75% of revenue, unchanged as a share of revenue year over year. Compensation and benefits were $127.2 million (58% of revenue); non-compensation expenses were $37.2 million (17%). Cash, cash equivalents and restricted cash fell by $82.3 million during the quarter, mainly reflecting $137.0 million of dividends and distributions and employee tax-withholding payments, partly offset by investment-sale proceeds. The company described first-quarter cash declines as typical because of annual incentive compensation and partner tax distributions.
Material changes versus the prior comparable period
- Revenue increased 27%, driven by higher M&A activity and higher average fees per completed transaction, alongside steady restructuring activity. This contrasted with a 14% decline in global completed M&A transactions above $100 million and a 16% decline in their volume, as cited by management.
- Operating expenses rose 26%, broadly in line with revenue growth. Compensation expense increased 25%, including higher equity amortization; non-compensation expense increased 30%, partly because client-reimbursement contra expenses were absent.
- Equity-method investment income declined to $0.9 million from $3.1 million, primarily reflecting the company’s share of Moelis Australia results.
- The income-tax provision declined to $2.6 million from $7.0 million, and the effective tax rate fell to 5% from 15%, reflecting the lower U.S. federal corporate tax rate and a share-based compensation tax benefit, partly offset by a higher allocable share of taxable earnings.
- Class A shares outstanding increased following a March 2018 offering. The company stated it retained no proceeds from the offering.
Outlook, risks, contingencies and unusual items
- No quantified financial guidance was provided. Management described client conversations as robust, cited growing demand for independent advice, and said U.S. tax reform and favorable financing conditions could support strategic M&A. These are management views, not guidance.
- Results can vary materially by quarter: fees are negotiated engagement by engagement, and transaction fees may depend on successful completion. Delays or failed transactions, regulatory approvals, financing, market conditions or client difficulties can reduce or defer fees.
- On January 1, 2018, the company adopted Topic 606. The change presented reimbursable expenses gross: it added $3.2 million to reported Q1 revenue and increased certain expenses. The company reported that adoption reduced net income by $0.2 million versus results excluding the new standard; prior periods were not restated.
- The March offering-related exchange of partnership units increased the deferred tax asset by $79.5 million. The tax receivable agreement liability was $244.0 million at quarter-end; $66.8 million of the quarter’s tax-basis-related benefits was payable to exchanging partners under the agreement. The company’s agreement generally entitles eligible managing directors to 85% of qualifying realized tax savings.
- Dividends declared for Q1 totaled $1.97 per Class A share, including a $1.50 special dividend and the $0.47 regular dividend. A further $0.47 quarterly dividend was declared April 19, payable May 17, 2018.
- The company had no borrowings on its $40.0 million revolving credit facility. It reported $68.2 million of net minimum operating lease payments and $244.0 million due under the tax receivable agreement.
- Management said it was not party to material pending legal proceedings expected to have a material effect, while noting that potential losses in proceedings or investigations generally could not be estimated. The filing states there were no material changes to previously reported risk factors, with an additional risk factor referenced in Part II; its details are not clear in the supplied filing text.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It does not hedge its foreign-currency exposure; currency translation produced a $1.7 million gain in other comprehensive income.
Most important facts for investors to verify
- Whether M&A and restructuring fee activity, client demand and transaction completion rates continued after Q1; quarterly revenue is not necessarily indicative of full-year results.
- How much of reported revenue growth reflects underlying advisory fees versus Topic 606’s gross presentation of reimbursable expenses.
- The sustainability of compensation and expense ratios, including equity-based compensation expense and future share dilution.
- Cash generation and the impact of dividends, partner distributions, tax payments and investment activity on liquidity.
- The assumptions supporting the $313.5 million deferred tax asset and $244.0 million tax receivable agreement liability, including the timing and realization of expected tax benefits.
- The full text of the additional risk factor referenced in Part II and any subsequent developments in legal or regulatory matters.