Moelis & Company — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Moelis is a global independent investment bank focused on advisory services. The company completed its IPO and corporate reorganization in April 2014; the statements combine pre-IPO advisory-business results with post-IPO consolidated results, so comparisons are affected by the changed structure and tax treatment. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $128.7 | $98.7 | $374.9 | $257.1 |
| Operating expenses | $92.9 | $84.2 | $372.5 | $220.6 |
| Operating income | $35.8 | $14.5 | $2.4 | $36.5 |
| Net income (loss) | $32.8 | $14.5 | ($5.7) | $36.3 |
| Operating expenses as % of revenue | 72% | 85% | 99% | 86% |
| Operating cash flow | — | — | $117.8 | ($5.8) |
- Q3 revenue rose 30% year over year; nine-month revenue rose 46%. Management attributed growth to a more active M&A environment and market-share gains. Revenue came from 206 clients in the first nine months, versus 201 a year earlier; clients paying fees of at least $1 million increased from 74 to 99.
- Q3 net income attributable to Moelis & Company was $6.5 million, or $0.43 basic and $0.40 diluted per Class A share; $26.3 million of Q3 net income was attributable to noncontrolling interests. For the nine months, net loss attributable to the company was $12.5 million, or $0.82 per share. The post-IPO allocation of earnings to Class A shareholders began in April 2014.
- Q3 compensation and benefits were $68.1 million, or 53% of revenue, versus $65.0 million, or 66%, a year earlier. For the nine months, compensation was $300.8 million, or 80% of revenue, including substantial IPO-related equity acceleration expense. Non-compensation expenses were $71.7 million for the nine months, up 33%.
- Nine-month tax provision was $5.8 million despite pretax income of only $0.1 million, primarily reflecting nondeductible expenses associated with partnership-unit vesting and the IPO reorganization. The company recorded a $69.4 million deferred tax asset and a $51.8 million tax receivable agreement liability.
Liquidity, cash flow and capital
- Cash and cash equivalents were $142.1 million at September 30, down from $303.0 million at year-end 2013. The company also held $74.0 million of U.S. Treasury bills classified as investments and $0.9 million of restricted cash.
- Nine-month operating cash flow was $117.8 million, substantially supported by $112.7 million of equity-based compensation and other noncash adjustments. Investing cash outflow was $14.1 million; financing cash outflow was $263.8 million, largely reflecting partner distributions, tax distributions and IPO-related distributions.
- No borrowings were outstanding under the $25 million unsecured revolver, which matures June 30, 2015. Standby letters of credit of $8.3 million left $16.7 million available. The filing reports no debt borrowings.
- Total liabilities were $177.5 million and total equity was $174.7 million at quarter-end. Operating lease commitments totaled $76.8 million, extending through 2023. The Australian joint venture put option may require a future purchase at fair value upon specified events.
Changes, outlook and risks
- The April IPO and reorganization materially changed the company’s equity, tax and reporting structure. Nine-month results include $87.6 million of one-time noncash expense from accelerated Managing Director equity, plus other IPO-related compensation and professional-fee items. This was a principal reason nine-month expenses nearly matched revenue and operating income fell sharply.
- The company’s Australian joint venture generated a $5.9 million loss for the nine months, versus $5.2 million income a year earlier; Moelis recorded its 50% share as a $3.0 million loss. The venture’s revenue fell 43%.
- Management cited high corporate cash balances, low interest rates and improving announced M&A activity as supportive of further market improvement, while describing European recovery as gradual. It targeted a compensation ratio of approximately 57%–58%, while noting that growth initiatives or challenging markets could push the ratio higher. No revenue or earnings guidance was provided.
- Advisory revenue depends on transaction completion and timing, and may vary substantially by quarter; fees can be lost or delayed if transactions fail to close. The company has foreign-currency exposure and had no currency hedges. Most U.S. bank balances exceeded FDIC insurance limits.
- After quarter-end, the board declared a $1.00 special dividend and a $0.20 regular quarterly dividend per share, payable November 24, 2014. The company reported effective disclosure controls, no material change in internal controls, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported earnings and operating cash flow reflects recurring operations versus IPO-related noncash compensation and other adjustments.
- The post-IPO share and partnership-unit structure, including noncontrolling interests (72% at quarter-end), potential unit exchanges and resulting dilution.
- The assumptions supporting realization of the deferred tax asset and the timing and potential amount of tax receivable agreement payments, including change-of-control provisions.
- Whether advisory fee momentum and the stated compensation-ratio target are sustainable given transaction timing, market conditions and ongoing hiring or expansion costs.
- The financial performance of the Australian joint venture, potential exercise of its put option, lease commitments and the effect of the declared special dividend on liquidity.