Moelis & Company (NYSE: MC) — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 26, 2020. The filing is an annual report, not a standalone Q4 filing. It also provides unaudited quarterly results.
Business context and financial performance
Moelis is a global independent investment bank focused primarily on advisory services, including M&A, restructuring and recapitalization, capital markets advice and other corporate finance matters. At year-end it had 609 advisory professionals, including 126 Managing Directors, across 20 locations.
- Revenue: $746.5 million, down 16% from $885.8 million in 2018. Management attributed the decline mainly to fewer transaction completions, partly offset by higher average fees per completed transaction.
- Profitability: Operating income was $114.5 million, down 49%; operating margin was approximately 15.3%, versus 25.6% in 2018. Consolidated net income was $135.7 million, down 35%; net income attributable to Moelis & Company was $105.1 million, versus $140.7 million. Diluted EPS was $1.89, down from $2.78.
- Costs: Compensation and benefits were $488.4 million, or 65% of revenue (58% in 2018). Non-compensation expenses were $143.6 million, or 19% of revenue (16% in 2018). Total operating expenses declined 4%, less than the revenue decline.
- Cash flow: Operating cash flow was $209.3 million, compared with $390.9 million in 2018. Investing activities used $51.9 million; financing activities used $252.7 million. Cash, cash equivalents and restricted cash ended the year at $168.6 million, down from $261.8 million.
- Liquidity and debt: The company reported $167.8 million of cash and cash equivalents and $213.2 million of investments at year-end. It had no borrowings under its $65 million revolving facility; approximately $60 million remained available after letters of credit. The facility matured June 30, 2020. Lease liabilities were $197.6 million; these are operating lease obligations, not reported borrowings.
- Other metrics: Total assets were $1.072 billion and total liabilities $677.9 million. The effective tax rate was 8%, versus 12.8% in 2018. Dividends declared were $3.25 per share for 2019.
Material changes and quarterly results
- Global completed M&A transactions over $100 million declined 8%; U.S. financial sponsor M&A completions over $100 million fell 14%. Moelis’s fee-paying clients declined to 265 from 308, and clients paying at least $1 million declined to 150 from 198.
- FY2019 included $20.7 million of gains from selling 20.5 million Moelis Australia shares. The sales reduced the company’s ownership interest. Management described this as its first monetization of that investment.
- Q4 2019 revenue was $223.5 million, versus $238.3 million in Q4 2018. Operating income was $16.8 million, versus $63.2 million; net income attributable to Moelis & Company was $21.5 million, versus $39.2 million. Q4 2019 included an $8.1 million gain on Moelis Australia shares.
- Operating lease accounting was adopted in 2019, adding right-of-use assets and lease liabilities to the balance sheet. A new headquarters lease commenced in Q4 and added approximately $151 million to each balance-sheet category.
Outlook, risks and unusual items
- Outlook: No numerical revenue or earnings guidance was provided. Management said client conversations and demand for independent advice remained strong, and viewed technological disruption, shareholder activism, private-capital deployment, corporate cash and relatively low interest rates as supportive of M&A. It also noted 2019 market volatility, trade tensions, slower European activity and Brexit uncertainty. Restructuring remained a steady contributor despite low defaults.
- Key risks: Revenue depends on transaction activity, transaction completion and fee timing, making results volatile. Other material risks include talent retention and recruitment, competition and fee pressure, conflicts of interest, litigation and regulation, cybersecurity and data protection, foreign exchange exposure, international operations, and dependence on senior leadership. The filing identifies pandemic disruption, including coronavirus, as a potential operational and market risk.
- Contingencies and governance: The company reported no material pending legal proceedings expected to materially affect it, while noting that losses from proceedings and examinations may be difficult to estimate. Kenneth Moelis controlled approximately 68% of voting power; the company qualified as a controlled company and may rely on NYSE governance exemptions.
- Tax receivable agreement: The company reported a $298.0 million payable, with $85% of realized specified tax savings payable to eligible Managing Directors. It cautioned that certain change-of-control or early-termination payments could exceed actual tax savings.
- Dividends: On February 4, 2020, the board declared a $0.51 regular quarterly dividend plus a $0.75 special dividend per share, payable March 27, 2020. Future dividends remain discretionary.
- Audit and controls: Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Revenue recognition for transaction fees recognized before subsequent-period closings was identified as a critical audit matter requiring significant judgment.
Important facts for investors to verify
- Whether transaction activity, fee-paying client counts and revenues recover after the 2019 decline, and how fee timing affects quarterly results.
- Whether compensation and other expenses can adjust sufficiently if revenue remains weak; compensation rose to 65% of revenue.
- The sustainability of operating cash flow and dividends given cash outflows for dividends, tax distributions and share repurchases.
- The terms and refinancing or renewal status of the revolving credit facility, which matured in June 2020, and the company’s lease commitments.
- The realization and timing of tax benefits relative to the $298.0 million tax receivable agreement payable.
- The financial and strategic implications of reduced ownership in Moelis Australia, and the extent to which FY2019 earnings benefited from the share-sale gains.
- Potential dilution from equity awards and exchangeable Group LP units, as well as the implications of concentrated voting control.