Moelis & Company — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Moelis is a global independent investment bank focused on advisory services, including M&A, restructuring and other corporate finance matters. It reported one business segment and 584 advisory bankers.
Financial performance
Amounts below are in millions of dollars unless noted.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $159.9 (+4%) | $153.5 | $313.6 (+8%) | $291.3 |
| Operating income (loss) | $(17.2) | $33.9 | $7.3 | $43.5 |
| Net income (loss) | $(9.0) | $37.7 | $21.1 | $53.8 |
| Net income (loss) attributable to Moelis & Company | $(5.7) | $29.5 | $19.4 | $43.0 |
| Basic EPS | $(0.10) | $0.59 | $0.36 | $0.88 |
| Operating expenses as % of revenue | 111% | 78% | 98% | 85% |
- Margins: Operating margin was approximately (10.7%) in Q2 2020 versus 22.1% a year earlier, and 2.3% for the first half versus 14.9%. Compensation and benefits were 94% of Q2 revenue and 78% of first-half revenue.
- Cash flow: First-half operating cash flow was $2.8 million, compared with an outflow of $50.4 million in 2019. Investing activities provided $50.7 million, mainly from net investment sales; financing activities used $126.2 million, primarily for dividends, tax distributions and share repurchases.
- Liquidity: Cash, cash equivalents and restricted cash were $93.7 million at June 30, down from $168.6 million at year-end 2019. The company also held $100.8 million of U.S. Treasury instruments in investments. Accounts receivable, net, was $45.5 million, with a $4.7 million credit-loss allowance.
- Debt and obligations: No borrowings were outstanding under the $65 million revolving credit facility; $60.1 million remained available after letters of credit. Total liabilities were $613.3 million, including $194.9 million of lease liabilities and $318.7 million payable under the tax receivable agreement.
- Balance sheet: Total assets were $973.9 million and total equity was $360.6 million at June 30, 2020.
Changes versus prior period
- First-half revenue increased 8%, despite a 22% decline in global completed M&A transactions above $100 million, according to management. Management attributed growth to more fee-paying clients and higher average fees per completed transaction.
- Q2 revenue rose 4%, but the company moved from operating profit of $33.9 million to an operating loss of $17.2 million. Management cited a $71.5 million discretionary cash-bonus accrual in Q2 2020, compared with $5.3 million in Q2 2019; the prior-year accrual occurred mainly in the second half.
- Non-compensation expenses declined 22% in Q2 and 16% in the first half, principally reflecting lower travel and business-development costs during COVID-19 restrictions and expense discipline.
- Cash and cash equivalents declined from year-end, while investment purchases and sales generated a net investing cash inflow. First-half dividends paid were $1.515 per share, including a $0.75 special dividend. The board declared a further $0.255-per-share dividend for payment September 30, 2020.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified revenue or earnings guidance. Management said client conversations remained strong but warned that COVID-19 could delay transaction completions and reduce near-term revenue. M&A activity had slowed, while restructuring demand increased. In Q2, the firm placed $14 billion of capital across 14 transactions; management cautioned that this activity may not persist at the same level if the global economy improves.
- COVID-19 risks: Management warned of potentially sustained adverse effects on business, revenues, profitability and financial condition, including fewer or delayed transactions and the possibility that costs cannot be reduced quickly enough to match lower revenue. Remote work also heightens operational and cybersecurity risks.
- Tax items: CARES Act loss-carryback provisions contributed income-tax benefits of $8.0 million in Q2 and $13.8 million for the first half. The company recorded a $32.9 million income-tax receivable related to operating losses and remeasured its tax receivable agreement liability; the related adjustment contributed to other expense.
- Contingencies: The company described 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 possible losses for such matters. The filing also identifies indemnification commitments.
- Other: The company adopted the expected-credit-loss standard in 2020, recording a $0.4 million net opening retained-earnings reduction. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Track whether M&A, restructuring and capital-raising activity convert into completed transactions and advisory fees, given the stated risk of delays and fee variability.
- Assess the sustainability of compensation expense and the timing of discretionary bonus accruals, which drove the Q2 loss despite higher revenue.
- Monitor cash generation, receivable collections and the $4.7 million credit-loss allowance as economic conditions evolve.
- Review the timing and assumptions behind the $318.7 million tax receivable agreement liability and the realization of CARES Act tax benefits.
- Confirm ongoing liquidity and capital returns, including facility availability, lease commitments, repurchases and dividends.