Moelis & Company — Q2 2015 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2015. Moelis is a single-segment global investment banking advisory firm, earning most revenue from transaction-related advisory work. Results are presented in thousands of dollars unless noted. Because the 2014 comparative periods include the company’s April 2014 IPO and reorganization, reported year-over-year profit comparisons are materially affected by related one-time expenses.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $125.9m | $131.7m | $225.3m | $246.2m |
| Operating income (loss) | $32.8m | ($57.3m) | $54.2m | ($33.4m) |
| Net income (loss), consolidated | $26.9m | ($60.6m) | $46.8m | ($38.5m) |
| Net income (loss) attributable to Moelis & Company | $7.1m | ($19.0m) | $12.5m | ($19.0m) |
| Diluted earnings (loss) per Class A share | $0.34 | ($1.25) | $0.59 | ($1.25) |
- Revenue declined 4% in Q2 and 8% in the first half year over year. Management attributed the declines primarily to a soft restructuring environment and fewer capital-markets advisory completions.
- Operating expenses were $93.1m in Q2 and $171.1m in the first half, respectively 74% and 76% of revenue. Compensation was 55% of Q2 revenue and 56% of first-half revenue.
- At June 30, cash and cash equivalents were $127.6m, down $70.3m from year-end; U.S. Treasury bills classified as investments were $27.0m. Operating cash flow was negative $28.4m for the first half, driven primarily by payment of 2014 discretionary bonuses. Investing cash flow was positive $10.9m and financing cash flow negative $53.8m, primarily reflecting tax distributions and dividends.
- Total assets were $394.3m and total liabilities $201.2m. The $120.4m tax receivable agreement liability is a substantial component of liabilities. The filing reports no borrowings under the revolving credit facility; the $40.0m facility had $31.7m available after letters of credit.
- Q2 and first-half effective tax rates were 18%. Q2 and first-half dividends declared were $0.20 and $0.40 per share, respectively. Subsequent to quarter-end, the board declared a $0.30 quarterly dividend.
Material changes versus prior comparable periods
- Profitability improved sharply from 2014 reported losses to 2015 income, but the comparison is distorted by approximately $99.1m of Q2 2014 and $109.5m of first-half 2014 IPO/reorganization-related expenses, principally equity-compensation acceleration.
- Excluding those prior-year one-time effects, compensation costs still reflect increased headcount and additional equity amortization; discretionary cash bonuses fell in 2015, mainly with lower revenue.
- Equity-method investment results improved: income was $0.2m in Q2 and $3.1m in the first half of 2015, compared with losses of $2.9m and $4.1m in 2014. First-half 2015 included $2.8m income from another equity-method investment.
- Cash declined from $197.9m at December 31, 2014, mainly due to bonus payments, distributions and dividends. Total assets also decreased to $394.3m from $464.2m.
Outlook, commentary, risks and unusual items
- Management said global M&A activity improved in the first half of 2015, particularly for transactions above $5bn, while mid-market activity was more subdued. It viewed high corporate cash, healthy capital markets and low interest rates as supportive of continued M&A, while expecting low interest and default rates to constrain restructuring activity. No numerical earnings or revenue guidance was provided.
- Revenue is transaction-dependent, with fees often recognized only upon closing; delays, failed transactions, market conditions and client approvals can make results volatile. Management cautioned that quarterly results may not indicate full-year performance.
- Foreign-currency movements affect reported results; the company had no currency hedges. Most U.S. bank balances exceeded FDIC insurance limits. The filing states the company generally does not borrow or use derivatives.
- Contractual operating lease payments totaled $74.8m, including $14.6m due within one year. A put/call arrangement relating to the Australian joint venture could require a purchase at fair value upon specified events. Management reported no pending or threatened legal actions believed likely to have a material adverse effect.
- The company’s $163.3m deferred tax asset and $120.4m tax receivable agreement liability depend on estimates. Under the agreement, eligible holders generally receive 85% of realized tax savings; certain change-of-control or early-termination provisions could produce payments exceeding actual tax savings.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings improvement reflects the absence of 2014 IPO-related compensation charges versus underlying operating performance.
- Whether advisory revenue trends and transaction closings recover, especially in restructuring and capital-markets work, and how revenue mix evolves geographically.
- Cash conversion and seasonal compensation and partner-tax payments, alongside the planned dividend and share-repurchase program.
- The realizability and timing of deferred tax benefits and related tax receivable agreement payments, including change-of-control exposure.
- Equity-based compensation: $93.6m of unrecognized restricted-stock/RSU expense and $13.2m of unrecognized stock-option expense at June 30, 2015.