Moelis & Company — Q2 2014 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and six months ended June 30, 2014. Moelis is a global investment-banking advisory firm focused on M&A, recapitalizations, restructurings and other corporate finance matters. The statements combine historical advisory-business results before the April 2014 IPO and consolidated results afterward, so the periods include a significant organizational and accounting transition.
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Revenue | $131.7m | $98.5m | $246.2m | $158.4m |
| Operating expenses | $189.0m | $75.8m | $279.6m | $136.4m |
| Operating income (loss) | $(57.3)m | $22.7m | $(33.4)m | $21.9m |
| Consolidated net income (loss) | $(60.6)m | $21.1m | $(38.5)m | $21.8m |
| Net income (loss) attributable to Moelis & Company | $(19.0)m | Not presented | $(19.0)m | Not presented |
- Revenue increased 34% in Q2 and 55% in H1. Management attributed growth to more fee-paying clients; H1 growth exceeded the reported global M&A market trend.
- Compensation and benefits were $162.2m in Q2 and $232.6m in H1, equal to 123% and 94% of revenue, respectively. Non-compensation costs were $26.8m and $46.9m, or 20% and 19% of revenue.
- Cash from operating activities was $42.8m in H1, versus a $43.4m use in H1 2013. Investing activities provided $57.9m; financing activities used $247.1m, primarily for partner distributions and tax distributions, partly offset by IPO proceeds.
- Cash and cash equivalents were $158.0m at June 30, down from $303.0m at year-end 2013. Total assets were $305.9m, versus $443.5m at year-end; the decline reflects IPO-related distributions and other balance-sheet changes.
- No borrowings were outstanding under the $25m revolving facility. Available capacity was $16.6m after $8.4m of letters of credit. The company reported no funded debt in the provided filing text.
- Liquidity-related obligations include a $51.8m recorded tax receivable agreement payable and $62.7m of future minimum operating lease payments. A $0.20-per-share dividend was declared after quarter-end, payable September 8, 2014.
Material changes and unusual items
- The April IPO and reorganization materially affected the results. Q2 included $87.6m of noncash compensation expense from accelerated vesting of Managing Director equity, in addition to other IPO and reorganization-related compensation and professional costs.
- Management said equity amortization expense was expected to decline beginning in Q3 after the vesting acceleration, then build over time as future awards are granted. Management’s stated longer-term target compensation ratio was approximately 57%–58%, subject to hiring, growth and market conditions.
- The company recorded a $68.8m deferred tax asset at June 30, versus $1.3m at year-end, principally associated with the reorganization and IPO. Under the tax receivable agreement, 85% of certain realized tax savings are payable to eligible Managing Directors; $51.8m was recorded as due.
- The 50%-owned Australian joint venture generated a $5.7m Q2 loss and an $8.1m H1 loss. Moelis recorded its 50% share: losses of $2.9m in Q2 and $4.1m in H1, compared with a $0.6m Q2 loss and $0.8m H1 income in 2013.
Outlook, risks and contingencies
- Management described improving announced M&A activity, available financing and stabilizing European economies as supportive conditions, but provided no revenue or earnings forecast. It cautioned that advisory fees depend on transaction closings and may vary substantially between periods.
- Principal business risks include transaction delays or failures, market conditions, competition, client concentration and foreign-exchange movements. One client contributed approximately 11% of Q2 revenue; the company reported no other client above 10% for the periods disclosed.
- The company reported no material change to previously disclosed risk factors and said ordinary-course legal matters were not expected to have a material adverse effect. The Australian JV put option could require a future purchase at fair value under specified events; it generally cannot be exercised before March 2015, except in certain circumstances.
- The tax receivable agreement’s ultimate payments depend on tax savings. Certain change-of-control or early-termination provisions could result in payments exceeding actual tax savings, according to the filing.
Important facts for investors to verify
- Separate the $60.6m Q2 consolidated loss from the $19.0m loss attributable to Moelis & Company; the company’s post-IPO ownership structure allocates substantial results to noncontrolling interests.
- Assess underlying compensation and profitability excluding the $87.6m one-time vesting acceleration and other IPO-related charges, and compare subsequent quarters with management’s 57%–58% compensation-ratio target.
- Track cash conversion, receivable collections and cash after partner distributions; H1 operating cash flow benefited from noncash charges, including $106.2m of equity-based compensation.
- Monitor the Australian JV’s performance, the $51.8m tax receivable agreement payable and any developments involving the JV put/call options.
- Consider the post-IPO reporting-period comparability and governance/economic structure: existing Group LP holders retained a 72% noncontrolling interest at June 30, 2014.