Moelis & Company — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Moelis is a global investment bank focused on advisory services, including M&A, recapitalizations, restructurings and other corporate finance matters. Results are unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $150.7m | $151.8m | $408.8m | $377.1m |
| Operating income | $40.1m | $39.9m | $99.6m | $94.1m |
| Operating margin | 26.6% | 26.3% | 24.4% | 24.9% |
| Consolidated net income | $35.3m | $34.6m | $87.1m | $81.4m |
| Net income attributable to Moelis & Company | $9.5m | $10.1m | $23.4m | $22.6m |
| Diluted EPS | $0.39 | $0.47 | $0.99 | $1.07 |
- Expenses: Q3 total operating expenses declined 1% to $110.6m; nine-month expenses increased 9% to $309.2m. Compensation and benefits rose 2% in Q3 and 14% year to date, reaching 58% and 59% of revenue, respectively. Non-compensation expense declined 12% in Q3 and 5% year to date.
- Cash flow: Nine-month operating cash flow was $93.8m, versus $36.9m in 2015. Investing activities provided $1.5m, compared with $75.7m used in 2015. Financing activities used $138.3m, mainly for dividends and distributions. Cash and cash equivalents fell $45.4m from year-end to $202.6m.
- Liquidity and debt: At September 30, cash and cash equivalents were $202.6m, with a further $33.0m of Treasury bills classified as investments. The company reported no borrowings under its $40m revolving facility; $33.2m remained available after letters of credit. Total liabilities were $227.8m. The filing says the business generally does not borrow through debt issuance.
- Other balance-sheet items: Total assets were $490.3m; deferred tax assets were $168.7m and the tax receivable agreement liability was $120.8m. Accounts receivable, net, was $25.6m.
- Dividends: The company declared $1.72 per Class A share during the first nine months, including a $0.32 quarterly dividend declared for payment on December 7, 2016.
Changes versus the prior comparable period
- Q3 revenue was broadly flat, down 1%; nine-month revenue increased 8%. Management attributed year-to-date growth primarily to the U.S. and rest of world, partly offset by lower Europe revenue.
- Year-to-date revenue growth exceeded the reported market trend: management cited a 12% decline in global completed M&A transactions above $100m and a 7% decline in volume. European revenue fell to $41.6m from $67.5m, while U.S. revenue increased to $338.3m from $295.2m.
- Despite higher nine-month revenue, operating expenses grew faster, and operating margin declined to 24.4% from 24.9%. Compensation expense growth reflected increased headcount and equity-award amortization; discretionary cash bonus expense was lower.
- Cash and cash equivalents were $202.6m versus $248.0m at December 31, 2015, largely reflecting $135.8m of dividends and distributions. This followed a stronger operating cash inflow than in the prior-year period.
Outlook, risks and unusual items
- Outlook: No specific financial guidance was provided. Management described client conversations as robust and cited corporate cash, low interest rates and available credit as supportive of M&A. It also noted continued opportunities in restructuring and capital-markets-related work. Management cautioned that deal timing and completion are outside the company’s control, so quarterly revenue and earnings can vary significantly.
- Market and operating risks: Advisory fees are often contingent on transaction completion; delays, failed approvals, financing constraints or market conditions can reduce or defer fees. Management cited Brexit and market volatility among factors weighing on European activity. Foreign-currency movements affect reported results, and the company does not hedge this exposure. Many U.S. and U.K. bank balances exceeded deposit-insurance coverage limits.
- Unusual items: The company recorded a $2.359m sublease-loss reserve in the first nine months, related to UK growth space. It paid $2.8m into escrow in September for a previously agreed litigation settlement, pending final court approval; the expense had been recognized in Q4 2015. Convertible notes received for services converted into publicly traded common stock after the issuer’s July 2016 IPO.
- Contingencies and obligations: Management said it was not aware of material pending proceedings expected to have a material effect, while noting that losses in some proceedings cannot be estimated. The Australian JV includes put and call options that could require a fair-value purchase payment upon specified events. Operating lease commitments totaled $89.0m; the tax receivable agreement liability was $120.8m.
- Controls: Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the period.
Key facts for investors to verify
- Whether revenue and transaction activity continue to grow, particularly in the U.S., and whether European activity recovers after Brexit-related disruption.
- Whether rising compensation and equity-award costs weigh on margins and dilute per-share earnings.
- How cash generation, dividends and distributions affect liquidity; confirm the revolving facility’s availability and June 2017 maturity.
- Whether the $2.8m settlement receives final court approval and whether the sublease reserve or JV options result in further costs or payments.
- How much of the $168.7m deferred tax asset is realized and the timing and assumptions underlying future tax receivable agreement payments.