Moelis & Company — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing was signed February 28, 2017. Moelis is a global independent investment bank focused primarily on transaction-based financial advisory services.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $613.4 million | $551.9 million | +11% |
| Operating expenses | $452.3 million | $414.4 million | +9% |
| Operating income | $161.1 million | $137.5 million | +17% |
| Operating margin | 26.3% | 24.9% | +1.4 percentage points |
| Net income, consolidated | $141.9 million | $120.2 million | +18% |
| Net income attributable to Moelis & Company | $38.4 million | $33.1 million | +16% |
| Diluted earnings per Class A share | $1.58 | $1.55 | +2% |
| Operating cash flow | $231.5 million | $142.3 million | +$89.2 million |
Fourth-quarter revenue was $204.6 million versus $174.8 million a year earlier; operating income was $61.5 million versus $43.4 million, and consolidated net income was $54.7 million versus $38.8 million. Fourth-quarter net income attributable to Moelis & Company was $15.0 million versus $10.5 million.
Compensation and benefits were $360.9 million, or 59% of revenue, compared with $311.2 million, or 56%, in 2015. Non-compensation expense fell to $91.4 million from $103.1 million. The company attributed higher compensation mainly to increased revenue and equity-compensation amortization; lower non-compensation costs reflected reduced consulting and recruiting fees, lower other expenses, and greater recovery of reimbursable expenses.
Liquidity, capital and distributions
- Cash and cash equivalents totaled $318.9 million at year-end, up from $248.0 million; the company also held $33.4 million in investments at fair value, primarily Treasury bills.
- Cash flow from investing was a $1.4 million inflow; financing activities used $157.9 million, primarily for dividends and distributions.
- No borrowings were outstanding under the $40 million unsecured revolver, which matured June 30, 2017. Available capacity was $33.2 million after letters of credit.
- Total liabilities were $347.4 million and equity was $251.4 million. The filing reports no funded debt outstanding. A $120.9 million tax receivable agreement liability was recorded.
- Dividends declared were $3.29 per share for 2016, including a $1.25 special dividend paid January 5, 2017. The board also declared a regular $0.37 quarterly dividend in January 2017.
Material changes and business developments
- Revenue increased 11% despite a 7% decline in global completed M&A transactions over $100 million. Growth was driven by higher U.S. and rest-of-world fees, partly offset by lower European fees.
- Fee-paying clients increased to 305 from 269; clients paying at least $1 million in fees rose to 167 from 139. The top 10 transactions represented about 20% of revenue, down from 25%.
- U.S. revenue rose to $516.7 million from $444.0 million; Europe declined to $54.3 million from $88.1 million; rest-of-world revenue increased to $42.4 million from $19.8 million.
- The Australian joint venture contributed $3.4 million of equity-method income, compared with $0.3 million in 2015. In February 2017 it announced plans for an Australian listing and a proposed share issue; Moelis expected its economic interest to fall from 50% to 40% if completed. The offering was not assured.
- A January 2017 offering of 5.75 million Class A shares facilitated liquidity for existing holders; the company retained no proceeds.
Outlook, risks and unusual items
- Management gave no quantified financial guidance. It described client discussions as robust and cited corporate cash balances, relatively low interest rates and available credit as supportive of M&A. It said potential U.S. regulatory and tax reforms could benefit activity, but outcomes were uncertain.
- Results are volatile because most revenue comes from advisory fees tied to transaction milestones and closings. Delays, failed deals, market changes or client decisions can reduce or defer fees, while compensation and other costs may not adjust as quickly.
- Key disclosed risks include competition and fee pressure, attracting and retaining senior bankers, reliance on leadership and reputation, conflicts of interest, litigation and regulatory exposure, cybersecurity and operational disruption, foreign currency movements, Brexit-related uncertainty, and risks associated with international operations and the Australian JV.
- Foreign currency translation reduced comprehensive income by $1.5 million in 2016. The company stated it did not hedge currency exposure.
- 2016 operating lease expense included a $1.7 million reserve related to planned U.K. subleasing. The company also disclosed ordinary-course legal and regulatory matters but said it was not aware of material pending proceedings expected to materially affect it.
- The 2014 comparison included approximately $112.4 million of one-time pre-tax IPO and reorganization charges; this is not a 2016 item. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation because the company was an emerging growth company.
Important facts for investors to verify
- Whether revenue growth and improving operating margins persist, especially given transaction-timing volatility and lower European revenue.
- The composition and cash realization of the $120.9 million tax receivable agreement liability, including possible acceleration or payments exceeding realized tax savings.
- Dividend sustainability and the cash impact of distributions, including the special dividend and declared-but-unpaid amounts at year-end.
- Completion, terms and resulting ownership of the proposed Moelis Australia listing, and the status of the revolver that matured in June 2017.
- Potential dilution from outstanding partnership units exchangeable for Class A shares, equity awards and the January 2017 offering; also consider the founder’s voting control and related governance limitations.