Moelis & Company — Q3 2015 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2015, compared with the same periods in 2014. Moelis is a global independent investment bank focused on advisory services, including M&A, recapitalizations and restructurings. Figures below are in U.S. dollars; financial amounts are rounded to millions.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $151.8m | $128.7m | $377.1m | $374.9m |
| Operating income | $39.9m | $35.8m | $94.1m | $2.4m |
| Net income (loss), consolidated | $34.6m | $32.8m | $81.4m | $(5.7)m |
| Net income (loss) attributable to Moelis & Company | $10.1m | $6.5m | $22.6m | $(12.5)m |
| Class A EPS, basic / diluted | $0.50 / $0.47 | $0.43 / $0.40 | $1.13 / $1.07 | $(0.82) / $(0.82) |
| Operating expenses | $111.9m | $92.9m | $283.0m | $372.5m |
- Revenue increased 18% in Q3 and 1% year to date. Q3 growth reflected increased M&A activity and higher M&A fees per completed transaction.
- Operating margin was approximately 26% in Q3 2015 versus 28% in Q3 2014, and 25% year to date versus less than 1% in 2014. The prior-year comparison is heavily affected by IPO and reorganization charges.
- Compensation and benefits were $86.3m in Q3 (57% of revenue) and $211.3m year to date (56%). The nine-month 2014 amount included approximately $104.8m of reorganization/IPO-related compensation expense. Q3 2015 compensation rose with headcount and equity amortization; discretionary bonuses also increased with revenue.
- Cash and cash equivalents were $87.8m at September 30, down from $197.9m at year-end 2014. The company also held $113.0m of short-term U.S. Treasury investments. Accounts receivable were $34.1m net; total receivables were $40.4m.
- Nine-month operating cash flow was $36.9m, investing cash outflow $75.7m, and financing cash outflow $71.0m. Cash declined $110.1m, with investing outflows mainly reflecting investment purchases and financing outflows mainly dividends and tax distributions.
- Total liabilities were $228.3m and equity was $222.6m. No borrowings were outstanding on the revolving facility; the $40m facility had $31.7m available after standby letters of credit. The filing reports no material debt borrowings.
Material changes and management commentary
- Year-to-date operating performance improved sharply from 2014, principally because the prior-year period included approximately $110.9m of reorganization/IPO-related expenses. These included a large noncash acceleration of Managing Director equity compensation; comparisons are therefore not purely operational.
- Moelis advised 213 clients in the first nine months of 2015, compared with 206 in 2014. The filing reports no client represented more than 10% of revenue.
- Management said global M&A activity improved in the first nine months of 2015, particularly for transactions above $5bn, while middle-market activity was softer. It saw strategic deal rationale, low interest rates and financial sponsor assets supporting a longer-term M&A cycle, potentially offsetting subdued restructuring activity.
- No numerical earnings or revenue guidance is provided. Management emphasizes that transaction closings and fee timing are outside its control, so results can vary substantially by quarter and are not necessarily predictive of full-year performance.
- The Board declared a $0.30-per-share quarterly dividend on October 28, payable December 8, 2015. The company also had a share repurchase authorization of up to $25m, with approximately $20m remaining at quarter-end.
Risks, contingencies and unusual items
- Revenue depends on separately negotiated advisory engagements and often on successful transaction completion; delayed, abandoned or unapproved transactions may reduce or defer fees. Headcount and compensation costs can also fluctuate materially.
- The company recorded a $120.9m liability under its tax receivable agreement, under which eligible Managing Directors receive 85% of specified realized tax savings. No payments had been made by September 30; approximately $1.6m was expected to be paid in Q4 2015. Change-of-control or early-termination provisions could result in payments exceeding tax savings actually realized.
- Operating lease commitments totaled $73.7m. A put/call arrangement relating to the Australian joint venture could require a purchase at fair value upon specified events. Management reported no legal proceedings expected to have a material adverse effect.
- Foreign currency movements affect reported results; the company had not hedged this exposure. Management also noted that most U.S. bank balances exceeded the FDIC coverage limit. Disclosure controls were judged effective, with no material change in internal control reported.
Important facts for investors to verify
- How much of revenue growth and profitability depends on M&A completions, and whether the Q3 improvement persists across future quarters.
- The effect of equity-based compensation, expanding headcount and bonus accruals on margins and cash generation.
- The timing and estimated cash cost of tax receivable agreement obligations, including potential acceleration under its contractual provisions.
- Cash conversion and liquidity, including receivable collections, investment balances, dividends, lease commitments and available revolver capacity.
- Comparable-period adjustments: 2014 results included substantial IPO/reorganization costs, and the 2014 reporting period also reflects the post-IPO change in corporate tax status and ownership structure.