Moelis & Company 2014 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2014; the filing also reports fourth-quarter results. Moelis is a global independent investment bank focused on financial advice, including M&A, recapitalizations and restructurings, and other corporate finance matters. The advisory business was reorganized and the company completed its IPO in April 2014, making year-over-year results less directly comparable.
Financial performance and liquidity
- Full-year revenue: $518.8 million, up 26% from $411.4 million in 2013. The company reported revenue growth in both the U.S. and internationally; clients paying fees of at least $1 million increased to 130 from 109.
- Profitability: Operating income was $47.7 million versus $70.1 million; pretax income was $46.3 million versus $73.0 million; consolidated net income was $32.6 million versus $70.2 million. Reported operating margin was about 9.2% (13.7% in 2013), and net margin about 6.3% (17.1% in 2013).
- Attributable earnings: Moelis & Company reported a $3.0 million net loss attributable to the company, or $0.19 loss per Class A share. Most consolidated earnings were attributable to noncontrolling Group LP unit holders; the IPO-era ownership structure affects comparisons.
- Expenses and unusual items: Operating expenses rose 38% to $471.0 million. Compensation and benefits were $377.2 million, or 73% of revenue, compared with 64% in 2013. The year included approximately $112.4 million of pre-tax IPO/reorganization-related charges, primarily accelerated vesting of pre-IPO equity. Management said the charges materially reduced reported 2014 earnings.
- Fourth quarter: Revenue was $143.9 million, operating income $45.3 million, and consolidated net income $38.3 million, of which $9.5 million was attributable to Moelis & Company. Fourth-quarter 2013 revenue was $154.3 million and operating income $33.7 million; ownership and reporting bases differ following the IPO.
- Cash flow: Operating cash flow was $208.9 million, investing cash flow was $18.5 million, and financing cash flow was negative $329.2 million. Cash and cash equivalents ended the year at $197.9 million, down from $303.0 million; financing outflows included partner distributions and dividends.
- Liquidity and debt: The company also held $40.0 million of Treasury investments. It reported no revolver borrowings and had $16.7 million of available capacity on a $25.0 million unsecured facility after letters of credit. Total liabilities were $289.9 million, including a $119.7 million tax receivable agreement payable; the filing describes no material funded debt.
- Dividends: The company declared $1.40 per Class A share in 2014, including a $1.00 special dividend. A $0.20 quarterly dividend was declared in February 2015. The board authorized up to $25 million of share or partnership-unit repurchases in the first quarter of 2015.
Changes, outlook and risks
- Management described improving M&A conditions, citing increased global announced and completed activity, strong corporate balance sheets, accessible financing, and client discussions. It expected continued gradual M&A improvement and considered Europe a potential growth opportunity. No quantified revenue or earnings guidance was provided.
- Management stated a target compensation ratio of approximately 57%–58%, while noting it could exceed that level to support expansion or strategic hiring. The 2014 ratio was elevated by the IPO-related equity acceleration.
- The Australian joint venture reported a $4.4 million net loss in 2014, compared with $7.4 million net income in 2013; Moelis recorded a $2.2 million equity-method loss. JV revenue declined 25%.
- Key risks include volatile, transaction-dependent advisory fees; economic and market conditions; retention and recruitment of senior bankers; competition and fee pressure; regulatory, litigation, reputational and cybersecurity exposure; foreign exchange movements (not hedged); and execution costs of international expansion.
- The $119.7 million tax receivable agreement liability represents 85% of specified realized tax savings payable to eligible Managing Directors. Payments may differ from actual cash tax benefits, particularly in certain change-of-control or early-termination scenarios. The company also has $82.2 million of operating lease commitments.
- The filing reports no pending legal proceedings expected by management to have a material adverse effect. Deloitte issued an unqualified opinion on the financial statements; neither management nor the auditor reported an internal-control effectiveness assessment, under the newly public company transition provisions.
Most important facts for investors to verify
- How much of 2014’s earnings decline reflects the approximately $112.4 million of IPO/reorganization charges, and what is the sustainable post-IPO compensation expense?
- Reconcile consolidated net income with the loss attributable to Moelis & Company, including the noncontrolling ownership interests and fully exchanged share count.
- Track recurring revenue, fee-paying client trends, transaction closures, and quarterly volatility against the company’s optimistic M&A commentary.
- Assess the tax receivable agreement’s cash-payment schedule, deferred-tax-asset realizability, and potential acceleration obligations.
- Monitor liquidity after dividends and repurchases, the credit facility’s June 2015 maturity, regulatory capital restrictions, and the Australian JV’s performance and put/call options.