Moelis & Company — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Moelis is a global independent investment bank focused on advisory services, including M&A, restructurings, recapitalizations and other corporate finance matters. All figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $207.6 | $231.7 | $521.2 | $523.0 |
| Operating expenses | $155.6 | $177.4 | $462.0 | $425.2 |
| Operating income | $52.0 | $54.3 | $59.2 | $97.8 |
| Net income | $41.8 | $54.7 | $62.9 | $108.5 |
| Net income attributable to Moelis & Company | $33.0 | $40.6 | $52.3 | $83.6 |
| Diluted EPS | $0.54 | $0.73 | $0.88 | $1.52 |
- Operating margin was approximately 25.0% in Q3 2020 versus 23.4% in Q3 2019; for the first nine months it was 11.4% versus 18.7%.
- Q3 compensation expense was $127.1 million, or 61% of revenue, compared with $141.7 million and 61% a year earlier. Nine-month compensation rose 18% to $371.9 million, or 71% of revenue, primarily reflecting higher discretionary bonus accruals and increased headcount.
- Non-compensation expense fell 20% in Q3 to $28.5 million and 17% for the nine months to $90.1 million, partly due to lower travel and business-development costs amid COVID-19 restrictions.
Cash flow, liquidity and obligations
- Nine-month operating cash flow was $103.4 million, versus $8.7 million in 2019. Investing cash outflow was $38.9 million and financing cash outflow was $144.3 million, mainly reflecting dividends, tax distributions and treasury stock purchases.
- Cash, cash equivalents and restricted cash totaled $86.1 million at September 30, down from $168.6 million at December 31, 2019. The company also held $180.8 million of U.S. Treasury investments; reported investments totaled $219.5 million, including its equity-method investment.
- Accounts receivable, net, was $65.3 million, up from $45.1 million at year-end, with a $4.5 million allowance for credit losses.
- No borrowings were outstanding under the $65 million revolving credit facility. Available capacity was $60.5 million after letters of credit. The facility was renewed through June 30, 2021, with an automatic extension possible to June 30, 2022.
- Lease liabilities were $193.4 million. The $323.3 million tax receivable agreement liability is another significant contractual obligation; no payments were made under it in the first nine months. The filing does not report conventional debt borrowings outstanding.
Changes, outlook and risks
- Q3 revenue declined 10%, reflecting fewer completed transactions and lower average fees per completed transaction. Nine-month revenue was nearly flat year over year despite a reported 20% decline in global completed M&A transactions above $100 million.
- Management said U.S. announced M&A activity rebounded in Q3, with transaction count up 10% and announced volume up 32%. Mandates were accelerating, restructuring activity remained strong, and capital markets capabilities continued to contribute. Management provided no quantified earnings or revenue guidance and cautioned that the pandemic’s impact and recovery remain uncertain.
- COVID-19 negatively affected the business, particularly transaction activity in the first half of 2020. Further market disruption, delayed or abandoned deals, client financial distress, and the inability to reduce fixed costs quickly could pressure revenue and profitability. Remote work also heightens operational and cybersecurity risks.
- Other income and expense was a $1.6 million expense in Q3 2020, primarily from a tax receivable agreement adjustment related to the CARES Act; Q3 2019 included a $12.6 million gain on the sale of Moelis Australia shares. For the nine months, 2020 included a $10.2 million income tax benefit, including CARES Act loss-carryback benefits; the filing reports a $37.8 million income tax receivable related to operating losses.
- The board declared a $0.3825-per-share dividend payable November 30, 2020. Nine-month dividends paid totaled $1.77 per share, including a $0.75 special dividend. The company reported no material pending legal proceeding expected to materially affect it, while noting ordinary-course regulatory and legal matters.
Important facts for investors to verify
- Whether announced mandates convert into completed transactions and fees, given transaction-related revenue timing and the continuing COVID-19 uncertainty.
- How compensation accruals and headcount affect margins if revenue weakens or improves; nine-month compensation grew while revenue was essentially flat.
- Cash conversion and receivable collections, including the increase in accounts receivable and the adequacy of the credit-loss allowance.
- The terms, timing and realization assumptions behind the $323.3 million tax receivable agreement liability and CARES Act-related tax benefits.
- Capital allocation and liquidity after dividends and repurchases, alongside lease commitments and the revolving facility’s renewal and extension provisions.