Moelis & Company — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2017, compared with the same periods in 2016. Moelis is a global investment bank focused on advisory services, including M&A, restructurings and other corporate finance matters. Revenue is transaction-driven and can fluctuate with deal timing and closings.
Key financial metrics
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $170.0 | $150.7 | $515.4 | $408.8 |
| Operating income | $39.9 | $40.1 | $125.6 | $99.6 |
| Operating margin | 23.5% | 26.6% | 24.4% | 24.4% |
| Net income, consolidated | $43.3 | $35.3 | $132.2 | $87.1 |
| Net income attributable to Moelis & Company | $19.2 | $9.5 | $54.2 | $23.4 |
| Class A diluted EPS | $0.48 | $0.39 | $1.51 | $0.99 |
| Operating cash flow | Not reported separately | Not reported separately | $135.3 | $93.9 |
Q3 compensation and benefits were $99.7 million, or 59% of revenue, versus $88.0 million, or 58%. Non-compensation expenses were $30.5 million, or 18% of revenue, versus $22.5 million, or 15%. For the nine-month period, compensation was 59% of revenue in both years; non-compensation costs were 17% in both years.
At September 30, cash and cash equivalents were $127.6 million, down from $318.9 million at year-end 2016. Investments at fair value were $116.4 million, and total assets were $795.1 million. Total liabilities were $448.0 million, including a $314.7 million tax receivable agreement liability. The filing reports no borrowings under the revolving credit facility; of its $40.0 million commitment, $33.7 million was available after letters of credit. The filing does not report funded debt.
Material changes versus comparable periods
- Nine-month revenue rose 26%, compared with a relatively flat global completed M&A market, which management attributed to more completed transactions and higher average fees. Q3 revenue increased 13%, primarily due to higher average fees per completed transaction.
- Nine-month operating income rose 26%, while operating margin was essentially unchanged. Q3 operating income was approximately flat, and operating margin declined about 3.1 percentage points as operating expenses grew faster than revenue.
- Nine-month net income attributable to Moelis more than doubled. Results included substantial gains from dilution of the Company’s Moelis Australia ownership interest; other income and expenses were $32.9 million for the nine-month period versus $0.4 million in 2016. The filing identifies a $14.4 million Q3 dilution gain and an approximately $15.2 million gain tied to Moelis Australia’s April IPO, among other items.
- Operating cash flow increased to $135.3 million from $93.9 million. Investing cash flow was a $87.3 million outflow, mainly from investment purchases; financing cash flow was a $241.8 million outflow, mainly from dividends and distributions. Cash declined by $191.3 million over the nine months.
- The January and July 2017 follow-on offerings increased the Company’s share count and tax basis in Group LP assets. The associated deferred tax asset increased to $405.7 million from $167.8 million at year-end; the tax receivable agreement liability increased to $314.7 million from $120.9 million.
Outlook, commentary and risks
- Management described client discussions as robust and demand for independent advice as growing. It cited corporate cash, low interest rates and credit availability as supportive of M&A, with improving activity in Europe and positive contributions from other regions. No specific financial guidance was provided.
- Management cautioned that advisory fees are often earned only when transactions close; delays, failed transactions, market conditions, or approval and financing hurdles can reduce or defer fees. Revenues and earnings may vary significantly between quarters.
- Liquidity depends on client fee collections, generally within 60 days of billing. Accounts receivable, net, increased to $50.5 million from $23.2 million at year-end; the allowance for doubtful accounts rose to $1.5 million from $0.5 million.
- The Company has operating lease commitments of $70.1 million net of committed sublease income. It noted that a change of control or early termination of the tax receivable agreement could result in payments exceeding realized tax savings under specified assumptions.
- The Company reported no material change to the risk factors previously disclosed, other than the previously noted expectation that it would cease to be an emerging growth company at fiscal year-end 2017. It said it was not aware of material pending legal proceedings, while noting that ordinary-course regulatory and other matters may arise and losses may be difficult to estimate.
- The Board declared a $0.37-per-share quarterly dividend after quarter-end, payable November 20, 2017. The filing also reports $3.36 per share in aggregate dividends paid during the first nine months, including special dividends.
Important facts for investors to verify
- How much of earnings growth reflects recurring advisory performance versus Moelis Australia dilution gains and other investment-related items.
- Whether revenue momentum and completed transaction fees can be sustained, given the unpredictable timing and completion of advisory engagements.
- Cash conversion and working-capital trends, including receivable collection and the effects of compensation payments and distributions.
- The realizability and timing of the $405.7 million deferred tax asset, and the cash-payment assumptions behind the $314.7 million tax receivable agreement liability.
- The sustainability of dividends and the reported per-share dividend amounts, considering the filing’s separate reporting of dividends declared and aggregate dividends paid.
- Potential dilution from equity awards and exchangeable Group LP units; the filing reports 9.45 million unvested restricted shares and RSUs at September 30, 2017.