Moelis & Company — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with the three months ended March 31, 2014 unless noted. Moelis is a global investment banking advisory firm focused on M&A, recapitalizations and restructurings, and other corporate finance matters. Financial statements are unaudited. The 2014 comparison is a combined pre-IPO period, so tax treatment and the allocation of earnings to public-company shareholders differ.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Revenue | $99.4 million | $114.5 million | Down 13%; fewer significant transaction closings, extended credit-sensitive M&A processes and softer restructuring activity |
| Compensation and benefits | $55.4 million | $70.4 million | Down 21%; 56% of revenue versus 62%. Discretionary cash bonus expense fell to $15.1 million from $30.1 million |
| Non-compensation expenses | $22.6 million | $20.1 million | Up 12%; 23% of revenue versus 18%, reflecting headcount, recruiting, business development and public-company costs |
| Total expenses | $78.0 million | $90.6 million | Down 14%; 78% of revenue versus 79% |
| Operating income | $21.4 million | $23.9 million | Down 11%; operating margin approximately 21.5% versus 20.9% |
| Equity-method investment income (loss) | $2.9 million | ($1.2 million) | Includes $2.6 million income from a related-party investment made in 2014; Australian JV contributed $0.3 million income versus $1.2 million loss |
| Pre-tax income | $24.3 million | $22.7 million | Up 7%; pre-tax margin approximately 24.4% versus 19.9% |
| Income tax provision | $4.3 million | $0.6 million | Effective tax rate 18% versus 3%; higher rate reflects corporate tax on the company’s post-IPO allocable earnings |
| Net income | $20.0 million | $22.1 million | Down 10%; Q1 2015 attributable to Moelis & Company was $5.3 million and to noncontrolling interests $14.6 million |
| Class A earnings per share | $0.27 basic; $0.25 diluted | Not presented as comparable in the supplied filing text | 2014 predates the IPO |
- Cash flow: Operating cash outflow was $88.6 million, compared with $45.2 million outflow in Q1 2014. Management primarily attributed the 2015 outflow to payment of 2014 discretionary bonuses. Investing activities provided $29.4 million, mainly from investment sales; financing activities used $39.8 million, primarily for tax distributions and the quarterly dividend.
- Cash and investments: Cash and cash equivalents were $97.9 million at March 31, down from $197.9 million at year-end. The company also held $10.0 million in Treasury investments, versus $40.0 million at year-end. Accounts receivable, net, was $18.3 million, down from $23.0 million.
- Balance sheet: Total assets were $334.9 million and total liabilities $172.7 million at March 31. The balance sheet includes a $119.7 million tax receivable agreement liability and a $159.2 million deferred tax asset. No debt borrowings were reported.
- Liquidity facility: The unsecured revolving facility had a $25.0 million commitment and matures June 30, 2015. No borrowings were outstanding; $16.8 million was available after $8.2 million of letters of credit.
- Capital returns: The company paid a $0.20-per-share quarterly dividend in Q1 and declared another $0.20 dividend on April 23, payable June 9. It repurchased 129,863 shares under a newly authorized $25 million repurchase program for approximately $4.1 million; $20.9 million remained authorized at quarter-end.
Material changes and management commentary
- Revenue declined despite management’s view that global M&A activity continued to improve. Announced large-cap deals strengthened, while mid-market activity was slower; management cited higher valuation multiples and tighter bank credit availability as extending some deal processes.
- Management said market fundamentals—including corporate cash, healthy capital markets and low interest rates—supported a gradually improving M&A cycle, which it expected to offset a more subdued restructuring environment. This was commentary, not quantified company guidance.
- Q1 results can fluctuate materially because transaction fees are often earned only when deals close, and the timing and completion of transactions are outside the company’s control. The filing provides no specific revenue or earnings guidance.
- One client accounted for more than 10% of revenue in each comparative quarter. Revenue is not allocated by advisory service type.
- The related-party equity-method investment generated $2.6 million of Q1 income on an investment initially made for $0.3 million. Its contribution materially supported pre-tax results; investors may wish to assess its nature, valuation and repeatability.
Risks, contingencies and unusual items
- Revenue depends on transaction completions, client fee collection and market conditions; failed or delayed deals can reduce fees despite substantial work. The company also identifies foreign-currency exposure and does not hedge these fluctuations. Q1 foreign currency translation reduced other comprehensive income by $0.8 million.
- Cash balances typically fall in the first quarter as prior-year bonuses and estimated partner tax distributions are paid. Most U.S. bank balances exceed the FDIC insurance limit.
- Contractual operating lease payments totaled $77.7 million, including $14.4 million due in less than one year. The $119.7 million tax receivable agreement liability is excluded from the contractual-obligations table because its ultimate payment timing and amount are uncertain. In certain change-of-control or early-termination situations, payments could exceed realized tax savings.
- The Australian JV has put and call options that could require a purchase of interests at fair value following specified events. The filing reports no pending or threatened legal matters expected to have a material adverse effect.
- The filing added a risk concerning potential Class A share-price pressure from sales or exchanges of a large number of shares and partnership units. Certain pre-IPO shareholder resale restrictions expired April 22, 2015; SMBC also received staged rights to exchange partnership units beginning July 2015.
- Disclosure controls were assessed as effective at quarter-end, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether transaction closings and revenue recovery support the outlook, particularly in mid-market M&A and restructuring.
- How much of pre-tax income depends on the related-party equity-method investment and whether that income is recurring.
- Cash conversion and liquidity after seasonal bonus and partner-tax payments, including renewal or replacement of the revolving facility maturing June 30, 2015.
- The actual timing and amount of tax receivable agreement payments relative to realized tax savings.
- Potential dilution and selling pressure from partnership-unit exchanges, outstanding equity awards and eligible shareholder resales.
- Revenue concentration: one client exceeded 10% of revenue in each reported quarter.