Moelis & Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Moelis is a global investment bank focused on advisory services, including M&A, restructuring and other corporate finance matters. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $153.7 | $137.8 | +12% |
| Operating expenses | $129.3 | $128.2 | +1% |
| Operating income | $24.4 | $9.6 | +154% |
| Operating margin | 15.9% | 7.0% | +8.9 percentage points |
| Net income attributable to Moelis & Company | $25.1 | $13.6 | +85% |
| Diluted earnings per share | $0.44 | $0.25 | +76% |
| Operating cash flow | $(73.1) | $(122.3) | Improved by $49.3 |
- Profit and taxes: Consolidated net income was $30.1 million, including $5.0 million attributable to noncontrolling interests. The income tax provision was a benefit of $7.3 million, versus a $4.5 million benefit in Q1 2019; the reported benefit included $7.3 million related to equity compensation and $5.7 million attributed to the CARES Act. These tax effects materially affect the quarter’s reported net income.
- Expenses and margins: Compensation and benefits rose 6% to $95.1 million, but declined to 62% of revenue from 65%. Non-compensation expense fell 10% to $34.1 million, or 22% of revenue versus 28%. No discretionary cash bonus expense was accrued in either period.
- Cash and investments: Cash, cash equivalents and restricted cash totaled $124.8 million at March 31, down $43.8 million from year-end 2019. Investments were $58.9 million, compared with $213.2 million at year-end, primarily reflecting investment sales. The company reported $60.1 million of available capacity under its revolving facility, after letters of credit.
- Debt and obligations: No borrowings were outstanding under the credit facility, and management described the company as having zero debt. The balance sheet included $194.6 million of lease liabilities and a $300.9 million tax receivable agreement liability; these are significant obligations, but not reported borrowings.
- Balance sheet: Total assets were $889.7 million versus $1.072 billion at December 31, 2019; total equity was $352.6 million versus $393.8 million. The decline in assets largely coincided with the reduction in investments and cash.
- Cash flow detail: Investing activities provided $140.0 million, mainly from net investment sales. Financing activities used $108.5 million, primarily for dividends, tax distributions and treasury stock purchases. Operating cash outflow included substantial compensation payments, including prior-year incentive compensation.
Material changes and management commentary
- Revenue increased despite a 23% decline in global completed M&A transactions above $100 million, according to management. The company attributed growth to more transaction completions and higher average fees per completed transaction. Fee-paying clients increased to 117 from 90; clients paying at least $1 million increased to 39 from 29.
- Management said M&A activity was put on hold and fewer new transactions launched toward the end of Q1 as COVID-19 drove market volatility and uncertainty. It cautioned that delays between mandates and completed transactions could pressure revenue timing. Restructuring activity increased substantially, but restructuring completions may lag, potentially creating a period of weaker revenue.
- COVID-19 was identified as a significant near-term risk to revenue, operating results and financial condition. The company cited uncertainty around economic recovery, client willingness to transact, transaction volumes and its ability to adjust costs. Remote work also heightens cybersecurity, technology, operational and employee-productivity risks.
- The quarterly dividend was temporarily reduced: the board declared $0.255 per share for payment June 30, 2020, compared with $0.51 per share in Q1, when shareholders also received a $0.75 special dividend. Management said the change was intended to preserve capital and financial flexibility.
- The company renewed its $65 million revolving credit facility in April 2020, extending maturity to June 30, 2021. It reported no material pending legal proceedings expected to have a material effect, based on current knowledge and consultation with counsel.
Investor verification priorities
- Assess whether COVID-19-related pauses in M&A and delays in transaction completions affect subsequent revenue and fee realization, and whether increased restructuring mandates convert into completed engagements.
- Separate recurring operating performance from the substantial equity-compensation and CARES Act tax benefits included in Q1 results.
- Monitor cash generation and liquidity, including the effects of annual compensation payments, dividends, share repurchases and further investment sales.
- Review the scale and timing of lease payments and tax receivable agreement obligations, as well as the continued availability and terms of the revolving credit facility.
- Confirm future dividend decisions and capital allocation; the Q1 dividend included a special payment, while the announced next-quarter dividend was lower.