Business context and reporting period
Moelis & Company filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The firm is a global, single-segment investment bank focused on advisory services, including mergers and acquisitions, restructurings and other corporate finance matters. It reported 617 advisory bankers at quarter-end. Revenue is transaction-dependent and may vary substantially between periods.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $231.7 | $207.7 | $523.0 | $647.5 |
| Operating expenses | $177.4 | $154.8 | $425.2 | $483.9 |
| Operating income | $54.3 | $52.9 | $97.8 | $163.6 |
| Operating margin | 23.4% | 25.5% | 18.7% | 25.3% |
| Consolidated net income | $54.7 | $44.9 | $108.5 | $152.0 |
| Net income attributable to Moelis & Company | $40.6 | $32.4 | $83.6 | $101.5 |
| Diluted EPS | $0.73 | $0.61 | $1.52 | $2.06 |
- Revenue and earnings: Q3 revenue increased 12% year over year, while nine-month revenue declined 19%. Q3 operating income rose 3%; nine-month operating income fell 40%. Nine-month diluted EPS declined from $2.06 to $1.52.
- Costs: Compensation expense was $141.7 million in Q3 (61% of revenue) and $316.3 million for nine months (60%). Total expenses were 77% of Q3 revenue versus 75% in Q3 2018, and 81% of nine-month revenue versus 75% in 2018.
- Cash flow and liquidity: Nine-month operating cash flow was $8.7 million, down from $232.6 million. Cash, cash equivalents and restricted cash were $49.6 million at September 30, compared with $261.8 million at December 31, 2018. The company held $112.6 million in government securities classified as investments. Cash outflows included dividends, tax distributions and share repurchases.
- Debt and obligations: The company had no borrowings on its $65 million revolving facility, with $60.0 million available after letters of credit; the facility matures June 30, 2020. Lease liabilities were $54.2 million. The tax receivable agreement liability was $311.4 million.
- Other balance-sheet items: Accounts receivable, net, was $96.3 million, including $21.3 million of long-term receivables. The deferred tax asset was $393.4 million. Total assets were $806.2 million and total equity was $364.6 million.
- Capital returns: The company paid $2.75 per share in dividends during the first nine months, including a $1.25 special dividend, and repurchased 1.05 million shares for $42.1 million. A further $0.50-per-share dividend was declared for payment December 13, 2019.
Material changes and unusual items
- Q3 revenue growth reflected higher average fees per completed transaction and stronger restructuring activity. Nine-month revenue fell primarily because fewer transactions closed; higher average fees partly offset the decline. The company served 203 clients in the nine-month period versus 246 in 2018, and clients paying fees of at least $1 million declined from 150 to 105.
- Q3 compensation rose with revenue; nine-month compensation declined as lower revenue reduced discretionary bonuses, partly offset by higher fixed compensation and equity amortization.
- The September sale of 12.5 million Moelis Australia shares generated a $12.6 million gain, included in other income. A further 8.0 million-share sale to Moelis Australia was announced and expected to settle in November 2019.
- The company adopted lease accounting on January 1, 2019, recording initial lease liabilities and right-of-use assets of $63.3 million. A new New York headquarters lease, with an initial term through 2036, was expected to commence in Q4 2019 and was excluded from the contractual-obligations table.
Outlook, commentary and risks
Management gave no specific financial guidance. It described client conversations and demand for independent advice as strong, and cited conditions it believes support sustained M&A activity. However, it noted that 2019 deal completions were affected by equity-market volatility and trade tensions, with slower European activity amid geopolitical uncertainty including Brexit. Restructuring remained a steady contributor despite low defaults.
- Results depend on transaction completions, fee timing and client collections; deals may be delayed or terminated, and the filing notes transaction-fee revenue may be constrained until completion conditions are met.
- Management said the firm was not currently party to material pending legal proceedings expected to have a material effect, while noting that regulatory and other proceedings can result in fines or other sanctions and that potential losses may be difficult to estimate.
- The filing added an employee-misconduct risk disclosure after a former junior employee was publicly charged on October 21, 2019 with insider trading involving two transactions the firm advised on in 2013. The filing does not allege misconduct by the company.
- Foreign-currency movements affect reported results; the company had not hedged this exposure. Most U.S. and U.K. bank-account balances exceeded applicable deposit-insurance coverage limits.
Important facts for investors to verify
- Whether transaction activity and advisory fee revenue recovered after the nine-month decline, and whether Q3 strength was sustained.
- How accounts receivable growth and the increase in the doubtful-account allowance affect collections and credit quality.
- The cash-flow implications of dividends, repurchases, compensation payments, the tax receivable agreement and the new headquarters lease.
- Whether the announced Moelis Australia share sale settled as expected and how the reduced investment affects future earnings.
- The filing’s risk disclosures, including transaction-dependent revenue, regulatory and legal exposures, employee misconduct and uninsured cash balances.