Moelis & Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Moelis is a global independent investment bank focused on advisory services, including M&A, restructurings and other corporate finance matters. Results are transaction-dependent and can vary substantially by quarter.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $137.8 million | $219.4 million | -37% |
| Operating income | $9.6 million | $55.1 million | -83% |
| Net income | $16.2 million | $54.0 million | -70% |
| Net income attributable to Moelis & Company | $13.6 million | $33.3 million | -59% |
| Diluted EPS | $0.25 | $0.75 | -67% |
| Operating margin | 7.0% | 25.1% | Down 18.1 percentage points |
Compensation and benefits expense declined 29% to $90.2 million, but increased to 65% of revenue from 58%. Non-compensation expense rose 2% to $38.0 million, or 28% of revenue versus 17%. Management attributed lower compensation mainly to reduced revenue and bonus expense; fixed compensation rose with headcount and equity amortization. Revenue came from 90 clients versus 131; 29 clients paid fees of at least $1 million versus 51.
The income tax line was a $4.5 million benefit, compared with $2.6 million of expense in Q1 2018. The filing attributes the tax results primarily to the company’s share of Group LP earnings and excess tax benefits from equity compensation.
Cash flow, liquidity and balance sheet
- Operating cash flow was negative $122.3 million, versus positive $7.4 million a year earlier. Management cited cash operating expenses, including discretionary bonuses paid, partly offset by client collections.
- Investing cash flow was positive $69.1 million, primarily from net investment sales. Financing cash flow was negative $140.2 million, mainly due to dividends and tax distributions.
- Cash, cash equivalents and restricted cash ended at $69.5 million, down from $261.8 million at December 31, 2018 and $131.6 million at March 31, 2018. Management noted that cash typically falls in Q1 following incentive compensation and partner tax payments.
- At March 31, total assets were $681.7 million and total liabilities $394.5 million. Balances included a $392.4 million deferred tax asset, a $311.2 million tax receivable agreement liability and $59.3 million in lease liabilities.
- No borrowings were outstanding under the $65 million revolving credit facility; $60.3 million remained available after letters of credit. The facility was due to mature June 30, 2019.
- Accounts receivable, net, was $44.4 million, with an allowance for doubtful accounts of $3.1 million. The company reported $13.1 million in minimum net lease payments due within one year.
Material changes and notable items
- Management said revenue fell because fewer transactions completed. The company reported a meaningful slowdown in transaction announcements and completions despite solid activity levels at the firm. Global completed M&A transactions over $100 million declined 18% year over year, while transaction volume increased 13%.
- U.S. revenue was $122.7 million versus $178.7 million; Europe revenue was $6.7 million versus $23.4 million; rest-of-world revenue was $8.4 million versus $17.3 million.
- Q1 dividends totaled $1.75 per share, including a $1.25 special dividend and the regular $0.50 dividend. A further $0.50-per-share dividend was declared for payment June 25, 2019.
- In February, the board authorized up to $100 million in share or partnership-unit repurchases, replacing the prior program. Q1 treasury purchases were $27.0 million, including shares withheld for employee tax obligations.
- The company adopted the new lease standard on January 1, 2019, recording $63.3 million of lease liabilities and corresponding right-of-use assets. A new New York headquarters lease, with an initial term through 2036, is expected to commence in late 2019; its future payments were excluded from the disclosed lease commitment table.
Outlook, risks and contingencies
No numerical earnings or revenue guidance was provided. Management described client conversations and demand for independent advice as strong, and cited potential support for M&A from corporate cash, private equity and sovereign wealth capital, and relatively low interest rates. It also noted Q1 market and transaction slowdowns, the U.S. government shutdown, and slower European activity partly associated with Brexit uncertainty. Restructuring remained a steady contributor despite low defaults.
Key business risks include the timing or failure of transactions, which can delay or eliminate fees despite substantial work; competitive, economic and market conditions; and foreign-currency movements. The company does not hedge foreign exchange exposure. Most U.S. and U.K. bank balances exceeded applicable deposit-insurance limits. The $311.2 million tax receivable agreement obligation is estimated; payments may be affected by tax savings and, in certain change-of-control or termination circumstances, could exceed realized savings. Management said it was not aware of material pending legal proceedings expected to have a material effect, while noting that some legal and regulatory matters cannot be estimated. No material change to previously disclosed risk factors was reported.
Investor verification points
- Review the drivers and sustainability of the sharp revenue decline, including transaction completions, client concentration and geographic trends.
- Assess the cash-flow decline, seasonal compensation and tax-distribution payments, and liquidity after dividends and repurchases.
- Verify the revolving credit facility’s renewal or replacement ahead of its June 30, 2019 maturity.
- Monitor the realization and assumptions underlying the $392.4 million deferred tax asset and $311.2 million tax receivable agreement liability.
- Evaluate the costs and timing of the New York headquarters lease and the company’s ongoing lease commitments.