Moelis & Company — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Moelis is a global independent investment bank focused on advisory services, including M&A, restructuring and other corporate finance advice.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $885.8 million | $684.6 million | +29% |
| Operating expenses | $659.1 million | $520.3 million | +27% |
| Operating income | $226.8 million | $164.3 million | +38% |
| Operating margin | 25.6% | 24.0% | +1.6 percentage points |
| Consolidated net income | $208.0 million | $126.5 million | Higher; prior year affected by unusual tax and other items |
| Net income attributable to Moelis & Company | $140.7 million | $29.4 million | |
| Diluted EPS attributable to Class A holders | $2.78 | $0.78 | |
| Operating cash flow | $390.9 million | $233.2 million |
Operating margin is calculated from reported revenue and operating income. Compensation and benefits were $513.9 million, or 58% of revenue, versus 59% in 2017; non-compensation expenses were $145.2 million, or 16% of revenue, versus 17%.
- Liquidity: Cash and cash equivalents were $261.1 million at year-end, with $0.7 million restricted cash and $80.7 million of investments. The company reported $261.8 million of cash, cash equivalents and restricted cash in its cash flow statement.
- Debt and facility: No borrowings were outstanding under the $65 million revolving credit facility, which matures June 30, 2019. Available credit was $60.2 million after letters of credit.
- Other obligations: The balance sheet included $311.2 million due under the tax receivable agreement (TRA); this is a contractual tax-benefit-sharing obligation, not reported borrowing. Net operating lease commitments were $65.0 million.
- Returns of capital: Dividends declared were $4.88 per share in 2018, including two special dividends. The company repurchased 185,671 shares under its program for $6.7 million. In February 2019, the board authorized a new $100 million repurchase program and declared a further $1.75 per-share dividend.
Q4 2018: Revenue was $238.3 million, operating income $63.2 million, consolidated net income $56.0 million, and diluted EPS $0.72. Q4 2017 revenue was $169.2 million and operating income $38.7 million; that quarter included substantial tax-related items.
Material changes versus prior period
- Revenue rose 29%, driven primarily by stronger M&A activity, restructuring work, more completed transactions and higher average fees per completed transaction. This compared with a 3% decline in global completed M&A transactions above $100 million.
- Fee-paying clients numbered 308 versus 311 in 2017, while clients generating at least $1 million in fees increased to 198 from 175. No client contributed more than 10% of revenue; the top 10 transactions represented 18% of revenue.
- Headcount and capacity grew: advisory professionals increased to 583 from 512, and managing directors to 125 from 118.
- 2017 results included a $134.7 million gain from reducing the TRA liability and a $181.0 million tax expense, principally from remeasurement of deferred tax assets following U.S. tax reform. 2017 also included $41.7 million of gains related to Moelis Australia share issuances. These items make year-over-year net income and tax-rate comparisons less representative of recurring operations.
- Beginning in 2018, adoption of the new revenue standard caused reimbursable client expenses to be reported gross in revenue and expenses; $16.7 million of reimbursements were included in 2018 revenue. The standard also led to recognition of $4.8 million of transaction revenue in 2018 for transactions that closed subsequently.
Outlook, commentary and risks
- The filing provides no quantified revenue or earnings guidance. Management described client conversations and demand for independent advice as strong, and viewed technological disruption, activism, private-equity and sovereign-wealth-fund capital, corporate cash and available credit as supportive of M&A activity.
- Management cautioned that U.S. government shutdown-related delays could affect deal approvals and closings. It also cited slower European activity and uncertainty around the U.K.’s exit from the EU. Restructuring remained a steady contributor despite a low-default environment.
- Revenue is transaction- and milestone-dependent, with no substantial long-term contracted revenue base. Delayed, abandoned or unapproved deals can reduce fees after significant work has been performed; results may vary materially by quarter.
- Key risks include market and transaction-volume declines, competition and fee pressure, recruitment and retention of senior bankers, conflicts of interest, litigation and regulatory exposure, cybersecurity and confidentiality breaches, foreign-exchange movements, and international operating risks. The company said it does not hedge its foreign-currency exposure.
- Legal proceedings arise in the ordinary course, but management stated it was not aware of material pending proceedings expected to have a material effect. Losses from certain proceedings cannot be estimated. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
- Subsequent items include a new New York headquarters lease, expected to commence in late 2019 and run through 2036, and the February 2019 dividend and repurchase authorization.
Important facts for investors to verify
- Assess how much of 2018’s revenue and margin growth reflects repeatable advisory activity versus transaction timing, higher average fees and the revenue-recognition change.
- Review cash conversion and the timing of client collections, incentive compensation, partner tax distributions and dividends; operating cash flow was strong, but financing outflows were $351.7 million.
- Examine the $311.2 million TRA liability, its estimated payment schedule, and the possibility that payments could exceed realized tax savings under specified circumstances.
- Monitor the revolving facility’s June 2019 maturity and the effect of the new headquarters lease and ongoing capital returns on liquidity.
- Consider the lack of quantified guidance, geographic concentration in U.S. revenue, deal-approval and market risks, and the company’s exposure to foreign currencies without hedging.
- Review ownership and governance: the filing describes Mr. Moelis as controlling approximately 70% of voting power and the company as a NYSE controlled company using certain governance exemptions.