Moelis & Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Unless stated otherwise, amounts below are in U.S. dollars. The company is a global investment banking advisory firm operating as one segment, focused on M&A, recapitalizations, restructurings and other corporate finance advice.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $126.4 million | $99.4 million; up 27% |
| Operating expenses | $97.5 million | $78.0 million; up 25% |
| Operating income | $28.9 million | $21.4 million; up 35% |
| Operating margin | 22.9% | 21.5% |
| Income before taxes | $31.1 million | $24.3 million |
| Income tax provision / effective rate | $5.4 million / 18% | $4.3 million / 18% |
| Consolidated net income | $25.6 million | $20.0 million |
| Net income attributable to Moelis & Company | $7.0 million | $5.3 million |
| Class A diluted EPS | $0.31 | $0.25 |
| Operating cash flow | $(50.7) million | $(88.6) million |
| Cash and cash equivalents at quarter-end | $90.6 million | $248.0 million at Dec. 31, 2015 |
- Compensation and benefits rose 35% to $74.7 million, equal to 59% of revenue versus 56% a year earlier. Non-compensation expense was $22.8 million, nearly unchanged, and declined to 18% of revenue from 23%.
- Cash and cash equivalents plus fair-value investments were approximately $139.2 million at March 31, including $48.6 million of investments; restricted cash was $0.8 million. Total assets were $388.4 million and total equity was $204.9 million.
- The company reported no borrowings on its $40 million unsecured revolving facility. After $7.4 million of letters of credit, available credit was $32.6 million. No other debt balance is reported in the filing text.
- Operating cash outflow primarily reflected payment of 2015 discretionary bonuses. Financing outflow of $94.7 million largely reflected dividends and distributions; the company paid $92.8 million of dividends and distributions during the quarter.
Changes versus the prior comparable period
- Revenue growth was attributed primarily to increased M&A activity and higher M&A fees per completed transaction. This contrasted with management’s cited 23% decline in the number of global completed M&A transactions over $100 million and a 5% decline in their volume.
- Operating income and margins improved as revenue growth exceeded expense growth. Compensation costs rose due to higher headcount, increased equity-award amortization and higher discretionary bonuses; fixed compensation was $56.3 million versus $40.3 million, and discretionary cash bonuses were $18.4 million versus $15.1 million.
- Equity-method investment income fell to $2.1 million from $2.9 million, mainly reflecting lower income from the related-party fund investment ($1.7 million versus $2.6 million). The Australian joint venture contributed $0.4 million versus $0.3 million.
- Cash fell $157.5 million from year-end, compared with a $100.1 million decline in Q1 2015. Q1 cash use is seasonal, with annual incentive compensation and partner tax distributions generally paid early in the year.
Outlook, risks, contingencies and unusual items
- Outlook: No quantified earnings or revenue guidance was provided. Management said client conversations remained robust and financing was available, while market volatility, wider credit spreads, and more aggressive antitrust and tax scrutiny had weighed on M&A announcements. Dislocation in energy, commodities and emerging markets could support restructuring and capital-markets work. Management cautioned that transaction-driven revenue can vary significantly by quarter and depends on successful deal completion.
- Client and execution risk: Engagements are generally separately negotiated, with no predictable long-term revenue base; many fees depend on transactions closing. Two clients each represented more than 10% of Q1 2016 revenue, versus one in Q1 2015.
- Liquidity and commitments: Contractual obligations totaled $219.6 million, including $99.3 million of operating lease commitments and a $120.3 million tax receivable agreement liability. Management said tax-agreement payments are generally expected after realizing the related tax savings, but change-of-control or early-termination provisions could produce payments exceeding actual tax savings. A put option relating to the Australian joint venture could also require a purchase payment if specified conditions occur.
- Legal matter: The company reached an agreement in principle in March 2016 to settle litigation arising from 2011 activities. It had recognized $2.8 million of expense in Q4 2015; court approval was uncertain and the ultimate cost could be higher. The company said it was not otherwise party to material pending proceedings expected to have a material effect, while noting that some legal or regulatory matters cannot yet be estimated.
- Distributions and equity: The Q1 declared dividend was $1.10 per Class A share, including a $0.80 special dividend and a $0.30 regular quarterly dividend. A further $0.30 quarterly dividend was declared April 21, payable June 3, 2016. Unvested restricted stock and RSUs increased to 8.38 million from 5.12 million at year-end; related unrecognized compensation expense was $140.2 million.
- Other exposures: Most U.S. and U.K. bank balances exceeded deposit-insurance coverage limits. The company did not hedge foreign-currency exposure; currency translation produced a $0.1 million Q1 loss in other comprehensive income. The $165.3 million deferred tax asset and its realization depend on estimates. No material changes to the previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether revenue growth and deal pipeline persist given weaker broad M&A market activity and the company’s dependence on transaction closings.
- The identity and ongoing revenue contribution of the two clients each exceeding 10% of quarterly revenue, and the effect of this concentration if engagements do not recur.
- How compensation expense, equity-award dilution and the substantial unrecognized award expense evolve as headcount and revenue change.
- The sustainability of liquidity after the large dividend and distribution outflow, seasonal bonus payments, lease commitments and tax receivable agreement obligations.
- Whether the court approves the litigation settlement and whether the Australian joint-venture put option or tax-agreement termination provisions create additional cash obligations.
- The assumptions supporting the deferred tax asset and the timing and amount of future tax receivable agreement payments.