Moelis & Company — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2022. Moelis is a global, single-segment independent investment bank providing M&A, restructuring, capital markets and other corporate finance advice. It reported 769 advisory bankers at quarter-end. Results are transaction-driven and can vary substantially between periods.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $233.5m | $490.8m | $778.1m | $1,115.6m |
| Operating income | $35.0m | $152.1m | $186.7m | $342.8m |
| Operating margin | 15.0% | 31.0% | 24.0% | 30.7% |
| Net income attributable to Moelis | $25.6m | $120.3m | $130.3m | $266.2m |
| Diluted EPS | $0.37 | $1.76 | $1.86 | $3.94 |
- Revenue fell 52% year over year in Q3 and 30% year to date, mainly because fewer transactions completed. Q3 was the slowest quarter for global M&A announcements in two years, according to management.
- Q3 operating expenses were $198.5m, or 85% of revenue, versus $338.7m, or 69%, a year earlier. Compensation expense declined with revenue, but rose to 69% of revenue from 63%; non-compensation expense increased 22% to $38.0m, chiefly reflecting higher travel costs. For the nine-month period, operating expenses declined 23%, while their share of revenue increased to 76% from 69%.
- Other income was $2.6m in Q3 2022, compared with $30.4m in Q3 2021. For the first nine months, other expense was $2.7m versus $36.4m of income in 2021. The prior-year comparison included a $20.2m gain from selling MA Financial shares; 2022 year-to-date results included $10.1m of unrealized losses on equity investments.
- Operating cash flow was negative $89.4m for the first nine months, versus positive $547.1m in 2021. Management attributed the 2022 outflow primarily to operating cash payments, including discretionary bonuses, net of client collections. Investing cash flow was positive $4.2m; financing cash flow was negative $274.4m, mainly from dividends, tax distributions and treasury-stock purchases.
Balance sheet, liquidity and capital
- At September 30, 2022, cash, cash equivalents and restricted cash totaled $148.9m, down from $521.0m at December 31, 2021. The company also held $192.7m of U.S. Treasury investments. Accounts receivable, net, was $59.0m, with a $4.1m credit-loss allowance.
- Total assets were $1.16bn and total equity was $444.9m. Lease liabilities were $194.4m. The company reported no borrowings on its revolving credit facilities; it had $64.2m available under a $65m corporate facility and $30m available under a broker-dealer facility.
- The balance sheet included a $427.7m deferred tax asset and a $307.8m liability under the tax receivable agreement. Management estimated $5.5m of that agreement liability would be due within one year and said payments were not expected to materially affect liquidity.
- The company paid $1.80 per share in dividends during the first nine months and declared a further $0.60 per-share dividend payable December 2, 2022. It repurchased 3.17m shares during the nine-month period; $62.5m remained authorized under its repurchase program at quarter-end.
- U.S. Broker Dealer net capital was $189.9m, $189.6m above its stated minimum requirement.
Outlook, risks and other notable disclosures
- Management said client engagement remained robust, new restructuring mandates had increased amid financial stress and economic uncertainty, and the firm continued advising companies on capital raising and liquidity. It viewed structural M&A drivers as supportive over the intermediate and long term. The filing gives no quantitative earnings or revenue guidance.
- Management cited rising interest rates, inflation, the war in Ukraine and regulatory changes as sources of uncertainty, while describing the firm’s client coverage and balanced business model as positioning it well. Advisory fees depend on transaction milestones and may be delayed or lost if transactions fail to close.
- Foreign-currency translation reduced comprehensive income by $10.0m in the first nine months of 2022; the company said it does not hedge these exposures. Most bank-account balances exceeded applicable deposit-insurance coverage limits.
- The company said it was not party to any material pending legal proceeding expected to have a material effect, based on current knowledge and consultation with counsel; it could not estimate possible losses for proceedings generally. It reported no material changes to its previously disclosed risk factors, and management concluded disclosure controls were effective.
- The Inflation Reduction Act was not expected to have a material financial-statement impact based on the company’s initial assessment. The filing also disclosed related-party transactions, including an aircraft lease with an entity related to the CEO and advisory revenue involving affiliates.
Most important facts for investors to verify
- Whether the downturn in completed transactions and M&A announcements persists, and how the restructuring pipeline converts into completed, fee-generating engagements.
- Client collections, receivable aging and the drivers of negative operating cash flow, including the timing of compensation payments.
- How compensation and non-compensation costs adjust if revenue remains lower, and the effect of equity compensation and share repurchases on diluted share count.
- The liquidity available after dividends and repurchases, as well as the terms and maturity of credit facilities and lease obligations.
- Assumptions supporting the deferred tax asset and tax receivable agreement liability, and any developments in legal, regulatory, foreign-exchange or related-party risks.