Moelis & Company — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015; filed March 14, 2016. Moelis is a global independent advisory investment bank. The audited consolidated and combined statements include the advisory business before its 2014 IPO reorganization; most earnings are attributable to noncontrolling Group LP holders.
Financial performance and position
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $551.9 million | $518.8 million |
| Operating expenses | $414.4 million | $471.0 million |
| Operating income | $137.5 million | $47.7 million |
| Income before taxes | $144.1 million | $46.3 million |
| Net income | $120.2 million | $32.6 million |
| Net income attributable to Moelis & Company | $33.1 million | $(3.0) million |
| Basic / diluted Class A EPS | $1.65 / $1.55 | $(0.19) / $(0.19) |
| Operating cash flow | $142.3 million | $208.9 million |
- Operating margin was approximately 24.9% (9.2% in 2014); compensation was 56% of revenue (73% in 2014) and total operating expenses were 75% of revenue (91% in 2014).
- Year-end cash and cash equivalents were $248.0 million; short-term investments were $38.6 million. Total assets were $539.5 million and total liabilities $282.0 million. No borrowings were outstanding under the $40 million revolving facility; $31.4 million remained available after letters of credit.
- Contractual obligations included $81.9 million of operating leases and $120.3 million under the tax receivable agreement. The filing does not report material funded debt outstanding.
- Quarterly revenue increased through the year, reaching $174.8 million in Q4; Q4 operating income was $43.4 million, net income $38.8 million and diluted EPS $0.48.
Changes versus the prior comparable period
- Revenue rose 6% from 2014, despite a 5% decline in global completed M&A transactions over $100 million. Fee-paying clients increased to 269 from 256, including clients paying at least $1 million in fees, up to 139 from 130.
- U.S. revenue grew 8%; non-U.S. revenue declined 1%. The filing reports international operations generated approximately 20% of revenue.
- Operating income and net income rose sharply, principally because 2014 included approximately $112.4 million of one-time IPO/reorganization expenses. Thus, year-over-year earnings growth is not solely an indicator of underlying operating improvement.
- Operating cash flow fell to $142.3 million from $208.9 million, while cash and cash equivalents increased by $50.1 million. Financing outflows of $89.7 million mainly reflected dividends and distributions.
- Headcount expanded: advisory bankers increased to 462 from 381, and Managing Directors to 105 from 94.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management described client discussions as robust and cited corporate cash balances and relatively low interest rates as supportive of M&A; it also saw potential 2016 restructuring and capital-markets activity in energy, commodities and emerging markets.
- Revenue is primarily transaction-contingent advisory fees, often earned at closing; deal timing, completion, market conditions and client decisions can make quarterly results volatile. Management cautions that current-period results may not predict future periods.
- Key risks include market-driven declines in transaction activity, competition and fee pressure, recruiting and retaining senior bankers, foreign-exchange exposure (not hedged), regulation, litigation, conflicts, cybersecurity and operational disruptions. The Australian business is a 50%-owned joint venture with associated governance and put/call option risks.
- A March 2016 agreement in principle to settle litigation arising from 2011 activities resulted in $2.8 million of expense recognized in FY 2015. Final terms and court approval remained uncertain; the ultimate cost could be higher. The company said it was not otherwise party to material pending proceedings.
- The Board declared a $0.80 special dividend plus a $0.30 regular dividend in February 2016; $1.10 per share was paid March 4, 2016. FY 2015 dividends declared were $1.00 per share.
- Management concluded internal control over financial reporting was effective; the auditor did not provide an internal-control attestation because the company was an emerging growth company. The financial statement audit opinion was unqualified.
Important facts for investors to verify
- Separate consolidated net income ($120.2 million) from income attributable to Moelis & Company ($33.1 million), and assess earnings alongside the noncontrolling interests and share/unit structure.
- Normalize the 2014 comparison for the $112.4 million IPO/reorganization charges and review ongoing compensation, equity awards and dilution.
- Track deal completions, fee-paying client trends, geographic revenue and quarterly revenue volatility against management’s commentary.
- Review the $120.3 million tax receivable agreement obligation, lease commitments and the terms of the litigation settlement once finalized.
- Consider dividend sustainability, the undrawn but partly encumbered credit facility, and the controlling voting interest held through Class B shares.