Moelis & Company (NYSE: MC) — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results; dollar amounts below are in millions unless stated otherwise. Moelis is a global investment banking advisory firm focused on M&A, recapitalizations, restructurings, capital markets and other corporate finance matters.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $490.8 | $207.6 | $1,115.6 | $521.2 |
| Operating income | $152.1 | $52.0 | $342.8 | $59.2 |
| Operating margin | 31.0% | 25.0% | 30.7% | 11.4% |
| Net income | $140.5 | $41.8 | $309.5 | $62.9 |
| Net income attributable to Moelis & Company | $120.3 | $33.0 | $266.2 | $52.3 |
| Diluted EPS | $1.76 | $0.54 | $3.94 | $0.88 |
| Operating cash flow | Not presented separately | Not presented separately | $547.1 | $103.4 |
- Expenses and margins: Q3 compensation and benefits were $307.6 million, or 63% of revenue, versus $127.1 million, or 61%, a year earlier. Nine-month compensation was $678.1 million, or 61% of revenue, versus $371.9 million, or 71%. Total operating expenses were 69% of revenue for the first nine months, down from 89%.
- Cash and liquidity: Cash and cash equivalents were $278.7 million at September 30, 2021, with an additional $1.0 million of restricted cash. The company also held $279.7 million of U.S. Treasury instruments classified as investments. Cash, cash equivalents and restricted cash increased $76.4 million during the first nine months.
- Cash flow and uses: Nine-month investing cash outflow was $93.1 million and financing cash outflow was $375.9 million, mainly reflecting investment purchases, dividends and tax distributions, and treasury stock purchases. The company paid $259.6 million in dividends and tax distributions and repurchased $100.0 million of treasury stock during the period.
- Debt and obligations: No borrowings were outstanding under either revolving credit facility. The company reported $64.2 million available on its $65 million facility and $30 million available on a separate facility for its U.S. broker-dealer. Lease liabilities were $191.2 million. The tax receivable agreement liability was $307.6 million.
Material changes versus the prior comparable period
- Revenue rose 136% in Q3 and 114% in the first nine months, driven primarily by more transaction completions and higher average fees per completed transaction.
- Q3 fee-paying clients increased to 167 from 146; clients paying at least $1 million in fees increased to 80 from 43. For the first nine months, clients increased to 332 from 238, and clients paying at least $1 million increased to 220 from 126.
- Operating income increased 193% in Q3 and 479% for the first nine months. The improvement reflected higher revenue and lower operating expenses as a proportion of revenue.
- Other income shifted to income of $30.4 million in Q3 and $36.4 million for the nine months, from losses in the comparable 2020 periods. The 2021 results included a $20.2 million gain from selling MA Financial shares and $5.0 million of net unrealized investment gains.
- Cash and cash equivalents increased from $202.5 million at December 31, 2020 to $278.7 million at September 30, 2021. Investments increased from $211.8 million to $338.6 million.
Outlook, commentary and risks
- Management described the global M&A environment as exceptionally strong, with Q3 2021 the strongest quarter for announced deal activity by number and value, and said underlying drivers should support strong activity in the near to intermediate term.
- Restructuring activity remained steady, but new mandates slowed substantially from the prior year as the economy improved and financing remained available. Management cited elevated corporate debt issuance as a potential longer-term source of restructuring work.
- The filing provides no specific financial guidance or quantified forecast. Management noted that revenue and earnings can vary significantly by quarter because advisory fees are often contingent on transaction milestones and completions.
- Key business risks include transaction delays or failures, market and economic conditions, competition for advisory mandates and talent, and the uncertain effects of COVID-19. Most bank-account balances exceeded applicable deposit-insurance limits; the company reported no hedging of foreign-currency exposure.
- Legal and regulatory matters arise in the ordinary course. The company said it was not aware of material pending proceedings expected to have a material effect, while noting that potential losses in some matters could not be estimated.
- Subsequent event: the board declared a $2.50 special dividend plus a $0.60 regular dividend per share, payable November 19, 2021 to shareholders of record November 8, 2021.
Important facts for investors to verify
- How much of the exceptional revenue growth reflects sustainable advisory demand versus the timing and completion of transactions.
- The composition and recurrence of other income, particularly the MA Financial sale gain and unrealized investment gains; these contributed to reported earnings but are not necessarily recurring.
- Compensation expense, bonus accruals and equity-based compensation as revenue and hiring levels change.
- The valuation and realizability assumptions for the $417.1 million deferred tax asset and the timing and potential cash cost of the $307.6 million tax receivable agreement liability.
- Cash available after dividends, repurchases, partner tax distributions and lease obligations; also monitor the concentration of bank deposits above insurance limits.
- Transaction completion risk and the sensitivity of results to M&A market conditions; the filing cautions that current-period results may not predict future periods.