Business context and reporting period
Moelis & Company is a global investment bank focused on advisory services, including M&A, restructurings, capital markets and other corporate finance matters. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. Revenue depends substantially on transaction activity and completion, so results can vary significantly between periods.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $179.9m | $242.5m | $367.7m | $544.6m |
| Operating income (loss) | ($9.6m) | $62.2m | ($11.0m) | $151.6m |
| Operating margin | (5.3%) | 25.6% | (3.0%) | 27.8% |
| Net income (loss) | ($13.2m) | $43.9m | ($9.7m) | $117.5m |
| Net income (loss) attributable to Moelis & Company | ($12.0m) | $39.0m | ($8.3m) | $104.7m |
| Basic EPS | ($0.17) | $0.59 | ($0.12) | $1.60 |
Q2 operating expenses were $189.5m, up 5%; compensation and benefits were $145.8m, or 81% of revenue, versus 58% a year earlier. First-half expenses were $378.7m, down 4%, but were 103% of revenue versus 72% in 2022. The company recorded a $10.0m SEC settlement accrual in other income and expenses.
For the six months, operating cash flow was a use of $81.0m, investing cash flow a source of $172.0m, and financing cash flow a use of $137.7m. Cash, cash equivalents and restricted cash were $160.8m at June 30, down $46.7m from year-end. Total assets were $1.018bn and equity was $405.7m. The company reported no borrowings under either revolving facility: $64.2m was available under its $65m facility and $30.0m under its broker-dealer facility. Lease liabilities were $201.1m; the filing reports no other debt borrowings. The tax receivable agreement liability was $304.8m, with an estimated $21.7m due within one year.
Material changes versus the prior comparable period
- Q2 revenue fell 26%; first-half revenue fell 32%. Management attributed the decline to fewer completed transactions; first-half results also reflected lower average fees per completed transaction.
- For the first half, completed global M&A transactions above $100m declined 45%, according to management’s cited market data. Moelis’s revenue decline was 32%.
- Q2 shifted from operating profit and net income in 2022 to operating and net losses in 2023. The lower first-half revenue reduced compensation expense, but fixed costs and higher non-compensation costs weighed on margins.
- First-half cash used in operations improved from $214.9m in 2022 to $81.0m in 2023. Investment sales generated $213.3m of proceeds, contributing to positive investing cash flow.
Outlook, risks and unusual items
Management reported active client dialogue and engagement, rising restructuring mandates, and continuing capital-markets advice on client funding and liquidity needs. It cited record financial-sponsor capital as supportive of potential intermediate- and longer-term M&A activity, while cautioning that client engagement may not translate quickly into revenue. The filing provides no specific financial guidance.
Management identified higher interest rates, inflation, the war in Ukraine and increasing regulatory burdens as sources of uncertainty. Transaction delays or failures can defer or eliminate fees despite work already performed; revenue also depends on successful completion and client collections. Most U.S. and U.K. bank balances exceed deposit-insurance limits, and the company does not hedge its foreign-currency exposure.
The company reached an agreement in principle with SEC staff regarding recordkeeping of business communications on messaging applications, including a proposed $10.0m civil penalty subject to SEC approval; the amount was accrued. A putative shareholder class action filed in Delaware in March 2023 challenges provisions of the stockholders agreement and seeks declaratory relief and fees. The company stated it could not estimate possible losses for legal matters generally, but did not believe other pending proceedings would have a significant adverse effect.
The board declared a $0.60-per-share dividend payable September 22, 2023, to holders of record August 7. Disclosure controls were concluded to be effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the SEC approves the proposed settlement and whether any further costs or conditions arise.
- How transaction completions, fee levels and client activity develop, and whether restructuring and capital-markets work offsets weak M&A conditions.
- Whether expense levels, especially compensation and benefits relative to revenue, adjust as activity changes.
- Cash collection and operating cash-flow trends, including the effect of seasonal compensation and distributions.
- Developments in the Delaware shareholder litigation, the $304.8m tax receivable agreement liability and upcoming lease and facility maturities.