Moelis & Company — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context
Moelis is a global independent investment bank focused primarily on advisory services, including M&A, restructuring and recapitalization, capital markets advisory, and other corporate finance matters. At year-end, it reported 512 advisory professionals, 118 Managing Directors, and 19 offices. Revenue is transaction-dependent and can fluctuate substantially with market activity and deal closings.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $684.6 million | $613.4 million |
| Operating expenses | $520.3 million | $452.3 million |
| Operating income | $164.3 million | $161.1 million |
| Operating margin | 24.0% | 26.3% |
| Net income, consolidated | $126.5 million | $141.9 million |
| Net income attributable to Moelis & Company | $29.4 million | $38.4 million |
| Diluted EPS | $0.78 | $1.58 |
| Operating cash flow | $233.2 million | $231.6 million |
Revenue rose 12%, despite a 1% decline in global completed M&A transactions above $100 million. Management attributed growth mainly to more M&A completions, higher average fees, and increased capital markets advisory activity. Operating expenses rose 15%; compensation was 59% of revenue in both years, while non-compensation expenses increased to 17% of revenue from 15%.
Fourth-quarter 2017 revenue was $169.2 million and operating income was $38.7 million. Consolidated net loss was $5.7 million; net loss attributable to Moelis & Company was $24.8 million, or diluted EPS of $(0.72). The quarter included the Tax Act-related deferred-tax remeasurement.
Cash and cash equivalents were $213.2 million at year-end, down from $318.9 million; government debt investments were $96.1 million. Operating cash flow was $233.2 million, while investing and financing cash flows were outflows of $69.4 million and $272.5 million, respectively, with financing outflows primarily reflecting dividends and tax distributions. Total assets were $699.1 million, liabilities $354.8 million, and equity $344.3 million. The company reported no borrowings on its $40 million revolving facility; $34.7 million remained available after letters of credit.
Material changes and unusual items
- The Tax Cuts and Jobs Act led to a provisional $181.0 million reduction in deferred tax assets and a $134.7 million reduction in the tax receivable agreement liability recorded as other income. The resulting reported effective tax rate was 63.9%, compared with 14.9% in 2016.
- Other income included approximately $41.7 million of gains associated with Moelis Australia’s IPO and subsequent share issuances. Moelis’s ownership in that business declined to approximately 33% from 50%.
- Moelis Australia generated $83.6 million of revenue and $21.4 million of net income in 2017, compared with $41.3 million and $6.8 million in 2016.
- Accounts receivable increased to $56.7 million from $23.2 million. The company’s cash flow and fee collection depend on completed transactions and client payments.
- Moelis declared $2.48 per share of dividends during 2017. The filing also reports $3.73 per share paid during 2017, including special dividends and regular dividends; a further $1.97 per share was declared in February 2018.
- The company adopted new revenue-recognition guidance on January 1, 2018, expecting most engagement revenue and related deal expenses to be recognized over time and reimbursed expenses and underwriting revenue to be presented gross.
Outlook, risks, and contingencies
Management described client discussions as robust, cited improving European activity, and said U.S. tax reform and favorable financing conditions could support M&A. The filing provides no numerical revenue or earnings guidance. Results remain exposed to deal volume, transaction timing and completion, competition and fee pressure, and the ability to recruit and retain senior bankers. Other highlighted risks include foreign exchange exposure (not hedged), international regulatory and operating risks, cybersecurity, conflicts of interest, and the concentration of voting control. The CEO controlled approximately 86% of voting interest at year-end.
The company reported ordinary-course legal and regulatory matters but stated it was not aware of material pending proceedings expected to have a material effect; potential losses could not be estimated. Operating lease commitments, net of sublease income, totaled $71.1 million, and the tax receivable agreement liability was $177.1 million. Deloitte gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Separate underlying operating performance from the large Tax Act-related deferred-tax charge and tax receivable agreement gain; check any subsequent refinements to the provisional tax accounting.
- Reconcile declared dividends of $2.48 per share with the $3.73 per share reported as paid in 2017, including timing of prior-period declarations and special dividends.
- Monitor revenue quality and cash conversion, including the increase in receivables and the dependence on successful transaction closings.
- Assess dilution from equity compensation and exchangeable partnership units, as well as potential share supply from unit exchanges and future sales.
- Review the tax receivable agreement’s expected payments and its potential acceleration or mismatch with realized tax savings under specified circumstances.