Moelis & Company — Q1 2017 Form 10-Q
Business context and reporting period: Global independent investment bank providing advisory services in M&A, recapitalizations, restructurings and other corporate finance matters. This unaudited filing covers the three months ended March 31, 2017, compared with Q1 2016. The company reports one business segment.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $173.3 million | $126.4 million | +37% |
| Operating expenses | $130.2 million | $97.5 million | +34% |
| Operating income | $43.0 million | $28.9 million | +49% |
| Operating margin | 24.8% | 22.9% | +1.9 percentage points |
| Consolidated net income | $39.4 million | $25.6 million | +54% |
| Net income attributable to Moelis & Company | $15.3 million | $7.0 million | +119% |
| Class A diluted EPS | $0.46 | $0.31 | +48% |
| Operating cash flow | $(25.2) million | $(50.6) million | Outflow narrowed |
Compensation and benefits were $101.7 million, or 59% of revenue, unchanged as a revenue share. Non-compensation expenses were $28.5 million, or 16% of revenue versus 18% a year earlier. Equity-method income was $3.1 million versus $2.1 million; Q1 2016 included $1.7 million from an investment substantially liquidated in 2016. The effective tax rate was 15%, down from 18%, primarily reflecting the adoption of accounting guidance for equity-compensation tax benefits.
Balance sheet, liquidity and capital
- Cash and cash equivalents were $156.3 million at March 31, 2017, down from $318.9 million at year-end. The company also held $28.2 million of investments at fair value and had $39.2 million of receivables.
- Total liabilities were $281.8 million and total equity was $273.2 million. The filing reports no borrowings under its revolving credit facility; therefore, no funded debt was outstanding under that facility.
- The $40.0 million unsecured revolver matures June 30, 2017. Available credit was $33.2 million after $6.8 million of standby letters of credit.
- Operating cash outflow reflected payment of prior-year discretionary bonuses, partly offset by client collections. Financing outflow of $141.8 million primarily reflected dividends and distributions, including payment of the previously declared $1.25-per-share special dividend, tax distributions and the quarterly dividend.
- Accounts receivable rose to $34.5 million from $23.2 million; management says collections typically occur within 60 days of billing. Most U.S. and U.K. bank-account balances exceeded applicable deposit-insurance limits.
Material changes and notable items
- Revenue growth outpaced reported global market activity: management cited an 11% decline in the number of completed global M&A transactions above $100 million and a 19% decrease in their volume. The company attributed its growth to more transaction completions and clients advised: 141 clients versus 126, including 46 clients paying at least $1 million in fees versus 28.
- Revenue grew in the U.S., Europe and rest of world. The filing notes stronger recent middle-market and sponsor-related M&A activity and reports robust client conversations, but provides no formal financial guidance.
- A January follow-on offering increased outstanding Class A shares by approximately 5.36 million; the company received no proceeds because the offering facilitated selling-holder liquidity. Class A and Class B share counts and the ownership mix changed accordingly.
- The deferred tax asset increased by $105.5 million, primarily due to a tax-basis step-up associated with the follow-on-related partnership-unit redemptions. The related tax receivable agreement liability rose to $198.5 million. The agreement generally entitles eligible managing directors to 85% of specified realized tax savings.
- After quarter-end, the Australian joint venture completed an IPO on April 10. Moelis’s ownership declined from 50% to 40%; the company expects to recognize an approximately $15.2 million gain and its share of a $9.6 million payment from termination of a revenue-sharing agreement in Q2. It also received an approximately $11.7 million JV dividend in April, accounted for as a return of investment.
- The board declared a $0.37-per-share quarterly dividend on April 21, payable May 24 to holders of record May 10. Separately, Q1 cash payments included the $1.25-per-share special dividend and the regular $0.37 dividend.
Outlook, risks and contingencies
Management described M&A conditions as supported by corporate cash balances, relatively low interest rates and credit availability, and cited growing demand for independent advice. It cautioned that advisory revenue depends on individually negotiated engagements and transaction closings; timing is outside the company’s control, and quarterly results may vary materially and may not predict full-year performance. Potential delays or cancellations include financing, regulatory or shareholder approvals, market conditions and counterparties’ operating or financial issues.
The company reported ordinary-course legal and regulatory matters but said it was not currently party to material pending proceedings expected to have a material effect. It could not estimate potential losses or ranges for such matters. No material changes were reported to the risk factors in its 2016 Form 10-K. The filing also identifies foreign-exchange exposure without hedging and potential counterparty risk from bank deposits above insurance limits. No material change to internal control over financial reporting was reported, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the 37% revenue increase and improved operating margin persist, given transaction-dependent and potentially volatile fee income.
- Cash conversion and receivable collections, particularly after substantial annual bonus and dividend-related cash outflows.
- The timing, realization and payment assumptions underlying the $273.3 million deferred tax asset and $198.5 million tax receivable agreement liability.
- Q2 effects of the Australian JV IPO, including the expected gain, revenue-sharing termination payment and lower ownership percentage.
- Renewal or replacement of the revolver, which was scheduled to mature June 30, 2017, and continued availability of committed liquidity.