Moelis & Company — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Moelis is a global investment bank focused on advisory services, including M&A, recapitalizations, restructurings and other corporate finance matters. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Revenue | $131.7 | $125.9 | $258.1 | $225.3 |
| Operating income | $30.6 | $32.8 | $59.5 | $54.2 |
| Consolidated net income | $26.2 | $26.9 | $51.8 | $46.8 |
| Net income attributable to Moelis & Company | $6.9 | $7.1 | $13.9 | $12.5 |
| Class A diluted EPS | $0.29 | $0.34 | $0.60 | $0.59 |
| Operating margin | 23.2% | 26.0% | 23.0% | 24.0% |
| Compensation and benefits / revenue | 59% | 55% | 59% | 56% |
- Revenue drivers: Management attributed growth to increased M&A activity and higher M&A fees per completed transaction. H1 revenue rose 15%, despite management citing a 17% decline in the number of global completed M&A transactions over $100 million and a 4% decline in volume.
- Geographic mix: H1 U.S. revenue rose to $213.0 million from $164.5 million; Europe fell to $24.1 million from $49.0 million; Rest of World increased to $21.0 million from $11.8 million.
- Costs and margins: Operating expenses rose 9% in Q2 and 16% in H1. Compensation expense increased 12% in Q2 and 22% in H1, reflecting higher headcount and equity compensation amortization. Non-compensation expenses were broadly flat year over year.
- Cash flow: H1 operating cash flow was $14.4 million, versus an outflow of $28.4 million in H1 2015. Investing cash flow was negative $27.5 million; financing cash flow was negative $120.4 million, primarily reflecting dividends and distributions.
- Liquidity and balance sheet: Cash and cash equivalents were $113.1 million at June 30, down from $248.0 million at year-end 2015. Fair-value investments were $63.6 million, principally Treasury bills. Total assets were $433.0 million; total liabilities were $205.3 million. The filing reports no borrowings under the revolving facility.
- Debt and credit: The company had a $40.0 million unsecured revolving credit facility maturing June 30, 2017; $6.8 million was committed to standby letters of credit, leaving $33.2 million available. No facility borrowings were outstanding.
- Dividends and capital: The company declared and paid $1.40 per Class A share in H1, including a $0.80 special dividend in March. A further quarterly dividend of $0.32 was declared after quarter-end, payable September 6, 2016. H1 dividends and distributions totaled $117.9 million.
Material changes versus the prior comparable period
- Q2 revenue increased 5%, but operating income fell 7%; operating margin narrowed to 23.2% from 26.0%. H1 revenue increased 15% and operating income increased 10%, while operating margin narrowed to 23.0% from 24.0%.
- H1 compensation costs grew faster than revenue, rising to 59% of revenue from 56%. Equity-based compensation expense was $38.7 million for H1, versus $20.5 million a year earlier.
- Q2 occupancy expense included a $2.4 million reserve related to subletting excess U.K. office space. H1 operating lease expense also increased year over year.
- Cash declined substantially from year-end, chiefly due to distributions and investment purchases. Operating cash flow improved from the prior-year period, partly reflecting noncash charges and working-capital movements.
- H1 income from equity-method investments declined to $2.3 million from $3.1 million, mainly because income from the related-party fund investment fell to $1.7 million from $2.8 million.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific numerical earnings or revenue guidance. Management said client conversations remained robust and cited corporate cash balances, low interest rates and available credit as supportive of U.S. M&A, while noting opportunities in restructuring and capital-markets activity. Advisory revenue depends heavily on transaction completion and timing, so quarterly results may vary substantially.
- Brexit and Europe: Management linked European market volatility and the U.K. referendum to weaker European M&A activity. The company warned that uncertainty over the U.K.’s exit could affect client confidence, markets, European M&A revenue and results; it said it would monitor developments and may adjust its regional operations.
- Transaction and market risks: Fees are often contingent on transactions closing. Delays or failed transactions, regulatory approvals, financing, market conditions or client circumstances can defer or eliminate fees despite work already performed.
- Contingencies: A settlement agreement in principle was reached in March 2016 in litigation arising from 2011 activities. The company had recognized $2.8 million of expense in Q4 2015; court approval was uncertain, and an adverse outcome could result in higher costs. Management said it was not aware of other material pending proceedings expected to materially affect the company, but could not estimate losses for certain legal or regulatory matters.
- Other obligations: The balance sheet included a $120.8 million tax receivable agreement liability and a $167.5 million deferred tax asset. Operating lease commitments totaled $93.6 million. The tax receivable agreement generally allocates 85% of realized tax savings to eligible Managing Directors; change-of-control or early-termination assumptions could make payments exceed realized savings.
- Other risks and controls: The company reported foreign currency translation losses in H1 and had not hedged currency exposure. Most U.S. and U.K. bank balances exceeded applicable deposit-insurance limits. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether M&A activity and completed transactions sustain revenue growth, particularly in the U.S., and whether European business stabilizes after Brexit-related uncertainty.
- Whether compensation expense, equity awards and potential share dilution remain elevated relative to revenue growth; unvested restricted stock and RSUs totaled 8.2 million at June 30.
- How cash and short-term investments evolve after the large H1 dividend and distribution outflow, and whether the company maintains adequate liquidity without drawing its facility.
- The outcome of the pending litigation settlement and the financial effect, if any, of other legal or regulatory proceedings.
- The assumptions and timing behind the $120.8 million tax receivable agreement liability and the substantial deferred tax asset.
- The impact of the $2.4 million U.K. sublease reserve, future lease commitments, and the company’s plans for excess office space.