Moelis & Company — Q1 2014 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2014. Financial statements present the historical carved-out advisory operations of Moelis & Company Holdings LP before its April 2014 reorganization and IPO; they do not represent the results of a standalone public company. Moelis provides global investment-banking advisory services, including M&A, recapitalizations and restructurings, and other corporate finance advice.
Key financial metrics
Amounts below are in millions of dollars unless noted. Historical results compare Q1 2014 with Q1 2013.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $114.5 | $59.8 |
| Compensation and benefits | $70.4 | $43.6 |
| Non-compensation expenses | $20.1 | $17.0 |
| Total operating expenses | $90.6 | $60.6 |
| Operating income (loss) | $23.9 | $(0.8) |
| Income before taxes | $22.7 | $0.7 |
| Net income | $22.1 | $0.7 |
| Operating cash flow | $(45.2) | $(83.4) |
- Revenue increased 91% year over year. Operating margin was approximately 20.9%, compared with an operating loss in the prior-year quarter; net income was approximately 19.3% of revenue.
- Compensation was 62% of revenue versus 73%; non-compensation expenses were 18% versus 28%. Total operating expenses were 79% versus 101% of revenue.
- Cash and cash equivalents were $263.4 million at March 31, down $39.7 million from year-end. Investing cash inflow was $62.0 million, mainly from investment sales; financing outflow was $56.4 million, primarily partner tax distributions.
- No borrowings were outstanding under the $25 million revolving facility. $16.6 million remained available after $8.4 million of letters of credit. The filing reports no funded debt.
- At March 31, total assets were $350.4 million and total liabilities $66.6 million. Accounts receivable, net, was $29.3 million; compensation payable was $35.1 million.
Material changes versus the prior comparable period
- Revenue reached a record first quarter, rising 91% even as the filing cites a 16% decline in global completed M&A transaction count and a 1% decline in volume. The firm served 110 clients, compared with 97; 24 generated fees of at least $1 million, versus 20.
- Compensation expense increased 62%, mainly due to a higher discretionary bonus accrual. Discretionary cash bonus expense was $30.1 million versus $1.4 million, while fixed compensation costs declined to $40.3 million from $42.2 million.
- The Australian joint venture moved from $1.4 million of equity-method income to a $1.2 million loss. Its revenue fell 76%, to $3.1 million, and it reported a $2.4 million net loss.
- Operating cash outflow narrowed from $83.4 million to $45.2 million, primarily reflecting the timing and amount of annual incentive compensation payments.
Outlook, management commentary, risks and unusual items
- Management said high corporate cash balances, healthy capital markets, sponsor demand to return capital, improving U.S. confidence and gradual European stabilization support an active M&A environment. It said the firm was well positioned for the remainder of 2014; no revenue or earnings forecast was provided.
- Management stated an intended compensation-ratio target of approximately 57%–58%, while noting expansion or difficult market conditions could push the ratio higher. It also expects increased non-compensation costs as the firm expands and becomes public.
- Transaction fees are often contingent on successful closing, and timing is outside the firm’s control. Delays, failed transactions, market conditions, regulatory approvals or financing constraints can reduce or defer revenue. The filing cautions that quarterly results may not predict full-year performance.
- One client contributed approximately 19% of Q1 revenue. Receivables are subject to collection risk; the allowance for doubtful accounts rose to $1.7 million from $0.8 million at year-end.
- The April IPO and reorganization materially changed the ownership and tax structure. The company expects a material increase in corporate income taxes; the pro forma analysis uses a 40% tax rate. The IPO-adjusted illustrative Q1 pro forma showed $3.5 million attributable to Moelis & Company and earnings per share of $0.23; this is not the historical carved-out result.
- Following the IPO, approximately $87.6 million of previously unrecognized equity compensation was accelerated, a non-cash charge expected to be recorded after Q1. A further $2.2 million expense for shares issued to settle employee rights was also expected in Q2. The pro forma statements do not include the $87.6 million acceleration.
- The reorganization and IPO included an approximately $215 million pre-offering distribution to existing owners and a $138.9 million distribution from offering proceeds. The filing also describes a tax receivable agreement under which eligible former owners receive 85% of specified realized tax savings, with potential change-of-control or early-termination payments that may exceed realized savings.
- Commitments include $64.8 million of future operating lease payments. A put option relating to the Australian joint venture may require a purchase at fair value under specified events; it generally cannot be exercised before March 2015. Management reported no pending legal matters it expects to have a material adverse effect and no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of Q1’s unusually high revenue came from transactions unlikely to recur, and how the firm’s advisory pipeline and client concentration evolved after quarter-end.
- The effect of the IPO, distributions, tax receivable agreement and higher corporate tax burden on cash available to the public company and earnings attributable to Class A shareholders.
- The timing and reported impact of the approximately $87.6 million equity-compensation acceleration and other IPO-related compensation charges.
- Whether the 57%–58% compensation-ratio target is achieved, given bonus variability, recruitment and growth plans.
- Australian joint-venture performance and any potential cash obligation under the put or call options.
- Cash conversion and receivable collections, including the larger doubtful-account allowance, alongside ongoing lease and other contractual commitments.