Moelis & Company — Q2 2018 Form 10-Q
Business context and reporting period
Global independent investment bank providing advisory services, including M&A, restructurings and other corporate finance advice. This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are to the corresponding 2017 periods. Results can fluctuate significantly with transaction timing and completion.
Key financial metrics
Amounts in $ millions, except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | 220.4 | 172.1 | 439.8 | 345.4 |
| Operating expenses | 164.8 | 129.4 | 329.1 | 259.7 |
| Operating income | 55.6 | 42.7 | 110.7 | 85.7 |
| Net income | 53.1 | 49.5 | 107.1 | 88.9 |
| Net income attributable to Moelis & Company | 35.7 | 19.7 | 69.0 | 35.0 |
| Diluted EPS | $0.72 | $0.57 | $1.47 | $1.04 |
| Operating margin | 25.2% | 24.8% | 25.2% | 24.8% |
| Compensation / revenue | 58% | 59% | 58% | 59% |
- First-half operating cash flow was $70.0 million, versus $72.6 million; investing cash flow was positive $33.9 million, versus negative $48.3 million; financing cash flow was negative $184.8 million, versus negative $165.1 million.
- Cash, cash equivalents and restricted cash totaled $133.4 million at June 30, down $80.5 million from year-end 2017. Cash and cash equivalents were $132.9 million; investments at fair value were $58.6 million.
- Total assets were $727.5 million; total liabilities $374.4 million. The filing reports no borrowings on the $65 million revolving credit facility; $60.3 million remained available after letters of credit.
Material changes versus prior period
- Revenue increased 28% in Q2 and 27% in the first half. Management attributed growth mainly to stronger M&A activity, more completed transactions and higher average fees per completed transaction. The first-half increase occurred despite a reported 7% decline in global completed M&A transactions above $100 million.
- Expenses rose broadly in line with revenue. Operating expenses remained 75% of revenue; compensation grew 27% in Q2 and 26% in the first half.
- Q2 pretax income was nearly unchanged from 2017 despite higher operating income. The prior-year quarter included a roughly $15.2 million gain related to Moelis Australia’s IPO and a roughly $2.4 million related charge in equity-method investment results; these items affect comparability.
- Lower 2018 tax expense and effective tax rates (Q2 10% versus 16%; first half 7% versus 16%) reflected the reduced federal corporate tax rate and share-based compensation tax benefits, partly offset by a larger share of earnings subject to corporate tax following the March 2018 offering.
- The company adopted ASC 606 in 2018. It recognized $36.9 million of revenue in Q2 for transactions that closed after quarter-end; under its prior policy those fees would have been recognized later. Prior periods were not restated.
Outlook, commentary and risks
- Management described a supportive M&A backdrop, citing U.S. tax reform, corporate cash balances, relatively low interest rates and available credit. Restructuring remained a steady contributor despite low defaults. No specific financial guidance was provided.
- Transaction fees depend on deal completion and can be delayed or lost because of approvals, financing, market conditions or other deal complications. Revenue and earnings may therefore vary materially between periods.
- Cash fell principally because of dividends and tax distributions. First-half dividends declared were $2.44 per Class A share. Subsequent to quarter-end, the board declared a $1.97-per-share dividend, including a $1.50 special dividend, payable September 12, 2018.
- The tax receivable agreement liability was $244.0 million, while the deferred tax asset was $313.9 million. The agreement generally provides eligible managing directors 85% of realized tax savings; no payments were made in the first half. The company cautions that change-of-control or early-termination payments could exceed actual tax savings.
- Risks also include foreign-currency movements (not hedged), collection risk, and bank balances that largely exceed deposit-insurance limits. Management reported no material pending legal proceedings expected to have a material effect, while noting that some potential losses cannot be estimated.
Investor verification points
- Assess how much of reported growth reflects sustainable deal activity versus ASC 606’s $36.9 million of fees recognized before subsequent-quarter closings.
- Review the sustainability of M&A-driven revenue, fee concentration and transaction completion risk; no client exceeded 10% of revenue in the periods reported.
- Track cash conversion, receivable collections, dividend outflows and available revolving-credit capacity.
- Monitor the assumptions and future cash payments underlying the $244.0 million tax receivable agreement liability and $313.9 million deferred tax asset.
- Consider equity dilution: weighted-average diluted shares increased to 49.3 million in Q2 from 34.4 million, and to 47.0 million for the first half from 33.8 million.