Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our
unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and our audited consolidated and combined financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2015.
Forward-Looking Statements and Certain Factors that May Affect Our Business
The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes that
appear elsewhere in this Form 10-Q. We have made statements in this discussion that are forward-looking statements. In some cases, you can identify these statements by forward-looking words
such as "may," "might," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "intend," "predict," "potential" or "continue," the negative of these terms and other comparable
terminology. These forward-looking statements, which are subject to risks, uncertainties, and assumptions about us, may include projections of our future financial performance, based on our growth
strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could
cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the
forward-looking statements. In particular, you should consider the numerous risks outlined under "Risk Factors" in our Annual Report on Form 10-K.
Although
we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as a
prediction of future events. We are under no duty to and we do not undertake any obligation to update or review any of these forward-looking statements after the date of this filing to conform our
prior statements to actual results or revised expectations whether as a result of new information, future developments or otherwise.
Executive Overview
Moelis & Company is a leading global independent investment bank that provides innovative strategic advice and solutions to a
diverse client base, including corporations, governments and financial sponsors. With 17 offices located in North and South America, Europe, the Middle East, Asia and Australia, we advise clients
around the world on their most critical decisions, including mergers and acquisitions, recapitalizations and restructurings and other corporate finance matters.
We
were founded in July 2007 by veteran investment bankers to create a global independent investment bank that offers multi-disciplinary solutions and exceptional transaction execution.
We opened for business in New York and Los Angeles with a team of top tier advisory professionals. The dislocation in the financial services industry caused by the global financial crisis provided us
with a unique
opportunity to rapidly build a firm with global scale and broad advisory expertise, and we more than tripled our professional headcount from the end of 2008 through the end of 2011. Since our
founding, we have added new Managing Directors with sector, regional or transactional expertise and with strong client relationships. In addition, we have established recruiting programs at top
universities to hire talented junior professionals and instituted training programs to help develop them into advisory specialists.
We
have added Managing Directors to expand our sector expertise, and currently provide capabilities across all major industries including Consumer, Retail & Restaurants; Energy,
Power &
31
Table of Contents
Infrastructure;
Financial Institutions; Financial Sponsors; General Industrials; Healthcare; Real Estate, Gaming, Lodging & Leisure and Technology, Media & Telecommunications. In
addition, we hired professionals to broaden our global reach and opened a network of offices, expanding into London in 2008, Sydney in 2009, Dubai in 2010, Hong Kong and Beijing in 2011, Frankfurt,
Mumbai and Paris in 2012 and Melbourne and São Paulo in 2014. We also added regional capabilities in the U.S., opening offices in Boston in 2007, Chicago in 2008, Houston and Palo Alto
in 2011 and Washington DC in 2014. We have developed additional areas of advisory expertise to complement our strong M&A capabilities and to meet the changing needs of our clients. Our early
investment in recapitalization and restructuring talent in mid-2008 positioned us to capitalize on the significant increase in restructuring volume during the global financial crisis. In 2009, we
added expertise in advising clients on capital markets matters and advising financial institutions on complex risk exposures. In 2014, we added capabilities to provide capital raising, secondary
transaction and other advisory services to private fund sponsors and limited partners. Our ability to provide services to our clients across sectors and regions and through all phases of the business
cycle has led to long-term client relationships and a diversified revenue base.
As
of March 31, 2016, we served our clients globally with 446 advisory bankers. We plan to continue to grow our firm across sectors, geographies and products to deliver the most
relevant advice and innovative solutions to our clients.
We
generate revenues primarily from providing advisory services on transactions that are subject to individually negotiated engagement letters which set forth our fees. We generally
generate fees at key transaction milestones, such as closing, the timing of which is outside of our control. As a result, revenues and net income in any period may not be indicative of full year
results or the results of any other period and may vary significantly from year to year and quarter to quarter. The performance of our business depends on the ability of our professionals to build
relationships with clients over many years by providing trusted advice and exceptional transaction execution.
Business Environment and Outlook
Economic and global financial conditions can materially affect our operational and financial performance. See "Risk Factors" in our
Form 10-K for a discussion of some of the factors that can affect our performance. Revenues and net income in any period may not be indicative of full year results or the results of any other
period and may vary significantly from year to year and quarter to quarter.
For
the three months ended March 31, 2016, we earned revenues of $126.4 million, or an increase of 27% from the $99.4 million earned during the same period in 2015.
This compares favorably with a 23% decrease in the number of global completed M&A transactions greater than $100 million and a 5% decrease in volume in the same period.
In
the current environment, we are witnessing many companies pursue M&A in order to grow revenues and/or drive greater efficiencies by reducing costs. Based on historical experience, we
believe the current economic backdrop (high corporate cash balances and relatively low interest rates), provides a solid foundation for M&A. However, M&A announcements were down during the first
quarter of 2016 given market volatility and the widening of credit spreads in January and February as well as the anti-trust and tax authorities becoming more aggressive in their stance on deals. Our
conversations with clients remain robust and financing continues to be available, which may fuel continued growth in M&A. In addition, the dislocation in energy and other commodity-related sectors as
well as in the emerging markets continues to provide opportunity for restructuring and capital markets related activity in 2016.
32
Table of Contents
Results of Operations
The following is a discussion of our results of operations for the three months ended March 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Variance
|
|
|
|
2016 vs. 2015
|
|
($ in thousands)
|
|
2016
|
|
2015
|
|
|
Revenues
|
|
$
|
126,364
|
|
$
|
99,412
|
|
|
27
|
%
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
74,668
|
|
|
55,393
|
|
|
35
|
%
|
|
Non-compensation expenses
|
|
|
22,805
|
|
|
22,638
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
97,473
|
|
|
78,031
|
|
|
25
|
%
|
|
Operating income (loss)
|
|
|
28,891
|
|
|
21,381
|
|
|
35
|
%
|
|
Other income and (expenses)
|
|
|
103
|
|
|
15
|
|
|
587
|
%
|
|
Income (loss) from equity method investments
|
|
|
2,069
|
|
|
2,865
|
|
|
–28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
31,063
|
|
|
24,261
|
|
|
28
|
%
|
|
Provision for income taxes
|
|
|
5,444
|
|
|
4,300
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25,619
|
|
$
|
19,961
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
We operate in a highly competitive environment. Each revenue-generating engagement is separately solicited, awarded and negotiated, and
there are usually no long-term contracted sources of revenue. As a consequence, our fee-paying client engagements are not predictable, and high levels of revenues in one quarter are not necessarily
predictive of continued high levels of revenues in future periods. To develop new business, our professionals maintain an active business dialogue with a large number of existing and potential
clients. We add new clients each year as our bankers continue to expand their relationships, as we hire senior bankers who bring their client relationships and as we receive introductions from our
relationship network of senior executives, board members, attorneys and other third parties. We also lose clients each year as a result of the sale or merger of clients, changes in clients' senior
management, competition from other financial services firms and other causes.
We
earn substantially all of our revenues from advisory engagements, and, in many cases, we are not paid until the successful completion of an underlying transaction. Complications that
may terminate or delay a transaction include failure to agree upon final terms with the counterparty, failure to obtain required regulatory consents, failure to obtain board or stockholder approvals,
failure to secure financing, adverse market conditions or unexpected operating or financial problems related to either party to the transaction. In these circumstances, we often do not receive
advisory fees that would have been received if the transaction had been completed, despite the fact that we may have devoted considerable time and resources to the transaction. Barriers to the
completion of a restructuring transaction may include a lack of anticipated bidders for the assets of our client or the inability of our client to restructure its operations or indebtedness due to a
failure to reach agreement with its creditors. In these circumstances, our fees are generally limited to monthly retainer fees and reimbursement of certain out-of-pocket expenses.
We
do not allocate our revenues by the type of advice we provide (M&A, recapitalizations and restructurings or other corporate finance matters) because of the complexity of the
transactions on which we may earn revenues and our holistic approach to client service. For example, a restructuring engagement may evolve to require a sale of all or a portion of the client, M&A
assignments can
33
Table of Contents
develop
from relationships established on prior restructuring engagements and capital markets expertise can be instrumental on both M&A and restructuring assignments.
Three Months Ended March 31, 2016 versus 2015
Revenues were $126.4 million for the three months ended March 31, 2016 as compared with $99.4 million for the same
period in 2015, representing an increase of 27%. The increase in revenues was primarily driven by increased M&A related activity and higher M&A related fees per completed transaction.
Operating Expenses
The following table sets forth information relating to our operating expenses, which are reported net of reimbursements by our clients:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Variance
|
|
|
|
2016 vs. 2015
|
|
($ in thousands)
|
|
2016
|
|
2015
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
74,668
|
|
$
|
55,393
|
|
|
35
|
%
|
|
% of revenues
|
|
|
59
|
%
|
|
56
|
%
|
|
|
|
|
Non-compensation expenses
|
|
$
|
22,805
|
|
$
|
22,638
|
|
|
1
|
%
|
|
% of revenues
|
|
|
18
|
%
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
97,473
|
|
$
|
78,031
|
|
|
25
|
%
|
|
% of revenues
|
|
|
77
|
%
|
|
78
|
%
|
|
|
|
Our
operating expenses are classified as compensation and benefits expenses and non-compensation expenses, and headcount is the primary driver of the level of our expenses. Compensation
and benefits expenses account for the majority of our operating expenses. Non-compensation expenses, which include the costs of professional fees, travel and related expenses, communication,
technology and information services, occupancy, depreciation and other expenses, generally have been less significant in comparison with compensation and benefits expenses. Expenses are recorded on
the condensed consolidated statements of operations, net of any expenses reimbursed by clients.
Three Months Ended March 31, 2016 versus 2015
Operating expenses were $97.5 million for the three months ended March 31, 2016 and represented 77% of revenues, compared
with $78.0 million for the same period in 2015 which represented 78% of revenues. The increase in operating expenses was primarily driven by higher compensation expenses due to increased
headcount, an additional tranche of equity amortization as compared to the prior year, as well as modified vesting terms associated with that equity which have a five year pro-rata vest for Managing
Directors as compared with awards issued in the previous two years which have a five year vest, pro-rata in years three, four and five.
Compensation and Benefits Expenses
Our compensation and benefits expenses are determined by management based on revenues earned, the competitiveness of the prevailing
labor market and anticipated compensation requirements for our employees, the level of recruitment of new Managing Directors, the amount of compensation expenses amortized for equity awards and other
relevant factors.
34
Table of Contents
Our
compensation expenses consist of base salary and benefits, annual incentive compensation payable as cash bonus awards, including certain amounts subject to clawback and contingent
upon a required period of service ("contingent cash awards") and amortization of equity-based compensation awards. Base salary and benefits are paid ratably throughout the year. Equity awards are
amortized into compensation expenses on a graded basis (based upon the fair value of the award at the time of grant) during the service period over which the award vests, which is typically four or
five years. The awards are recorded within equity as they are expensed. Contingent cash awards are amortized into compensation expenses over the required service period, which is typically two to
three years. Cash bonuses, which are accrued each quarter, are discretionary and dependent upon a number of factors including the performance of the Company and are generally paid during the first two
months of each calendar year with respect to prior year performance. The equity component of the annual incentive award is determined with reference to the Company's estimate of grant date fair value,
which in turn determines the number of equity awards granted subject to a vesting schedule.
Our
compensation expenses are primarily based upon revenues, prevailing labor market conditions and other factors that can fluctuate, including headcount, and as a result, our
compensation expenses may fluctuate materially in any particular period. Accordingly, the amount of compensation expenses recognized in any particular period may not be consistent with prior periods
or indicative of future periods.
Three Months Ended March 31, 2016 versus 2015
For the three months ended March 31, 2016, compensation-related expenses of $74.7 million represented 59% of revenues,
compared with $55.4 million which represented 56% of revenues in the prior year period. The increase in compensation expenses primarily relates to an increase in headcount in addition to
increased equity amortization during 2016 as compared with 2015.
Our
fixed compensation costs, which are primarily the sum of base salaries, payroll taxes and benefits and the amortization of previously issued equity and contingent cash awards, were
$56.3 million and $40.3 million for the three months ended March 31, 2016 and 2015, respectively. The increase in fixed compensation expense relates to an increase in headcount
(which drives salaries and benefits) and an additional tranche of equity amortization as compared to the prior year. The aggregate amount of discretionary cash bonus expenses, which generally
represents the excess amount of total compensation over base compensation and amortization of equity and contingent cash awards, was $18.4 million and $15.1 million for the three months
ended March 31, 2016 and 2015, respectively. The increase in discretionary cash bonus expense primarily relates to higher revenues earned.
Non-Compensation Expenses
Our non-compensation expenses include the costs of occupancy, professional fees, communication, technology and information services,
travel and related expenses, depreciation and other expenses. Reimbursed client expenses are netted against non-compensation expenses.
Historically,
our non-compensation expenses, particularly occupancy and travel costs associated with business development, have increased as we have increased headcount and the related
non-compensation support costs which results from growing our business. This trend may continue as we expand into new sectors, geographies and products to serve our clients' evolving needs.
Three Months Ended March 31, 2016 versus 2015
For the three months ended March 31, 2016, non-compensation expenses of $22.8 million represented 18% of revenues,
compared with $22.6 million which represented 23% of revenues in the prior year period. Non-compensation expense, which is related to headcount, increased when marginally compared with the same
period in 2015. As a percentage of revenue, non-compensation expense decreased due to increased revenues.
35
Table of Contents
Income (Loss) From Equity Method Investments
The Company accounts for its equity method investments under the equity method of accounting as the Company does not control these
entities but has the ability to exercise significant influence. The amounts recorded on the condensed consolidated financial statements of financial condition reflects the Company's share of
contributions made to, distributions received from, and the equity earnings and losses of, the investments. The Company reflects its share of gains and losses of the investment in income (loss) from
equity method investments in the condensed consolidated statements of operations.
On April 1, 2010, we entered into the Australian JV, investing a combination of cash and certain net assets in exchange for a
50% interest in the Australian JV. The remaining 50% of the Australian JV is owned by an Australian trust established by and for the benefit of Australian executives. The Australian JV's primary
business is offering advisory services, much like the Company. The Australian JV also has an equity capital markets and research, sales and trading business covering Australian public equity
securities and an asset management business. The Australian JV has offices in Sydney and Melbourne.
Three Months Ended March 31, 2016 versus 2015
Income (loss) from equity method investments related to our share of gains and losses of the Australian JV, was income of $0.4 and
$0.3 million for the three months ended March 31, 2016 and 2015, respectively. During the three months ended March 31, 2016, the Australian JV's revenues decreased by 5% compared
with the same period in 2015. The Australian JV generally derives revenues from closed transactions on which it advised each period which may result in revenues that vary significantly from period to
period. Operating expenses decreased 7% during the three months ended March 31, 2016 when compared with the same period in 2015.
In June 2014, the Company made an investment into a general partner entity which invests third-party funds and is controlled by a
related party, Moelis Asset Management LP. The Company has determined that it should account for this investment as an equity method investment on its condensed consolidated financial
statements.
Three Months Ended March 31, 2016 versus 2015
Income (loss) from equity method investments related to our investment in an entity which invests in funds was $1.7 million and
$2.5 million for the three months ended March 31, 2016 and 2015, respectively.
Provision for Income Taxes
Prior to the Company's reorganization and IPO of Moelis & Company, the Company had been primarily subject to the New York City
unincorporated business tax ("UBT") and certain other foreign, state and local taxes. The Company's operations are comprised of entities that are organized as limited liability companies and limited
partnerships. For U.S. federal income tax purposes, taxes related to income earned by these entities represent obligations of the non-controlling interest, which is made up of individual partners and
members and have historically not been reflected in the condensed consolidated statements of financial condition. In connection with the Company's reorganization and IPO, the Company became subject to
U.S. corporate federal, state and local income tax on its allocable share of results of operations from Group LP.
36
Table of Contents
Three Months Ended March 31, 2016 versus 2015
The Company's provision for income taxes and effective tax rates were $5.4 million and 18% and $4.3 million and 18% for
the three months ended March 31, 2016 and 2015, respectively. The income tax provision and effective tax rate for the aforementioned periods primarily reflect the Company's allocable share of
earnings from Group LP at the prevailing U.S. federal, state and local corporate income tax rate and the effect of the allocable earnings to noncontrolling interests being subject to UBT and
certain other foreign, state and local taxes.
Liquidity and Capital Resources
Our current assets have historically comprised cash, short-term liquid investments and receivables related to fees earned from
providing advisory services. Our current liabilities are primarily comprised of accrued expenses, including accrued employee compensation. We pay a significant portion of incentive compensation during
the first two months of each calendar year with respect to the prior year's results. We also distribute estimated partner tax payments in the first quarter of each year in respect of the prior year's
operating results. Therefore, levels of cash generally decline during the first quarter of each year after incentive compensation has been paid to our employees and estimated tax payments have been
distributed to partners. Cash then typically increases over the remainder of the year.
We
evaluate our cash needs on a regular basis in light of current market conditions. Cash and cash equivalents include all short-term highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three months or less from the date of purchase. As of March 31, 2016 and December 31, 2015, the Company had cash
equivalents of $60.3 million and $178.9 million, respectively, invested in U.S. Treasury Bills and government securities money market funds. Additionally, as of March 31, 2016 and
December 31, 2015, the Company had cash of $30.2 million and $69.1 million, respectively, maintained in U.S. and non-U.S. bank accounts, of which most bank account balances
exceeded the U.S. Federal Deposit Insurance Corporation ("FDIC") and U.K. Financial Services Compensation Scheme ("FSCS\") coverage limits.
In
addition to cash and cash equivalents, we hold U.S. treasury bills classified as investments on our statement of financial condition as they have original maturities of three months
or more from the date of purchase. As of March 31, 2016 and December 31, 2015, the Company held $48.0 million and $38.0 million of U.S. Treasury Bills classified as
investments, respectively.
Our
liquidity is highly dependent upon cash receipts from clients which are generally dependent upon the successful completion of transactions as well as the timing of receivable
collections, which typically occurs within 60 days of billing. As of March 31, 2016 and December 31, 2015 accounts receivable were $21.6 million and $28.9 million,
respectively, net of allowances of $1.6 million and $1.1 million, respectively.
To
provide for additional working capital and other general corporate purposes, we maintain a $40.0 million unsecured revolving credit facility that matures on June 30,
2017. Advances on the facility bear interest at the greater of a fixed rate of 3.50% per annum or at the Company's option of (i) LIBOR plus 1% or (ii) Prime minus 1.50%. As of
March 31, 2016, the Company had no borrowings under the credit facility.
As
of March 31, 2016, the Company's available credit under this facility was $32.6 million as a result of the issuance of an aggregate amount of $7.4 million of
various standby letters of credit, which were required in connection with certain office leases and other agreements. The Company incurs a 1% per annum fee on the outstanding balances of issued
letters of credit.
On
April 21, 2016, the Board of Directors of Moelis & Company declared a quarterly dividend of $0.30 per share. The dividend will be paid on June 3, 2016 to
Class A common stockholders of record
37
Table of Contents
on
May 20, 2016. During the three months ended March 31, 2016 the Company declared and paid dividends of $1.10 per share ($0.30 per share regular quarterly dividend and $0.80 per share
special dividend).
Regulatory Capital
We actively monitor our regulatory capital base. Our principal subsidiaries are subject to regulatory requirements in their respective
jurisdictions to ensure general financial soundness and liquidity. This requires, among other things, that we comply with certain minimum capital requirements, record-keeping, reporting procedures,
experience and training requirements for employees and certain other requirements and procedures. These regulatory requirements may restrict the flow of funds to and from affiliates. See
Note 11 of the condensed consolidated financial statements as of March 31, 2016 for further information. These regulations differ in the United States, United Kingdom, Hong Kong and
other countries in which we operate a registered broker-dealer. The license under which we operate in each such country is meant to be appropriate to conduct an advisory business. We believe that we
provide each of our subsidiaries with sufficient capital and liquidity, consistent with their business and regulatory requirements.
Tax Receivable Agreement
In connection with the IPO in April 2014, we entered into a tax receivable agreement with our eligible Managing Directors that provides
for the payment to eligible Managing Directors of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we realize as a result of (a) the
increases in tax basis attributable to exchanges by our eligible Managing Directors and (b) tax benefits related to imputed interest deemed to be paid by us as a result of this tax receivable
agreement. The Company expects to benefit from the remaining 15% of income tax cash savings, if any, that we realize.
For
purposes of the tax receivable agreement, income tax cash savings will be computed by comparing our actual income tax liability to the amount of such taxes that we would have been
required to pay had there been no increase to the tax basis of the tangible and intangible assets of Group LP as a result of the exchanges and had we not entered into the tax receivable
agreement. The term of the tax receivable agreement commenced upon consummation of the IPO and will continue until all such tax benefits have been utilized or expired, unless we exercise our right to
terminate the tax receivable agreement for an amount based on an agreed value of payments remaining to be made under the agreement.
Payments
made under the tax receivable agreement are required to be made within 225 days of the filing of our tax returns. Because we generally expect to receive the tax savings
prior to making the cash payments to the eligible selling holders of Group LP partnership units, we do not expect the cash payments to have a material impact on our liquidity.
In
addition, the tax receivable agreement provides that, upon a merger, asset sale, or other form of business combination or certain other changes of control or if, at any time, we elect
an early termination of the tax receivable agreement, our (or our successor's) obligations with respect to exchanged or acquired units (whether exchanged or acquired before or after such change of
control or early termination) will be based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and
tax basis and other benefits related to entering into the tax receivable agreement, and, in the case of an early termination election, that any units that have not been exchanged are deemed exchanged
for the market value of the Class A common stock at the time of termination. Consequently, it is possible, in these circumstances, that the actual cash tax savings realized by us may be
significantly less than the corresponding tax receivable agreement payments.
38
Table of Contents
Cash Flows
Our operating cash flows are primarily influenced by the amount and timing of receipt of advisory fees, which are generally collected
within 60 days of billing, and the payment of operating expenses, including payments of incentive compensation to our employees. We pay a significant portion of incentive compensation during
the first two months of each calendar year with respect to the prior year's results. Our investing and financing cash flows are primarily influenced by activities to fund investments and payments of
dividends and estimated partner taxes. A summary of our operating, investing and financing cash flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
($ in thousands)
|
|
2016
|
|
2015
|
|
|
Cash Provided By (Used In)
|
|
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25,619
|
|
$
|
19,961
|
|
|
Non-cash charges
|
|
|
16,067
|
|
|
7,411
|
|
|
Other operating activities
|
|
|
(92,354
|
)
|
|
(115,931
|
)
|
|
|
|
|
|
|
|
|
|
|
Total operating activities
|
|
|
(50,668
|
)
|
|
(88,559
|
)
|
|
Investing Activities
|
|
|
(11,277
|
)
|
|
29,385
|
|
|
Financing Activities
|
|
|
(94,651
|
)
|
|
(39,777
|
)
|
|
Effect of exchange rate changes
|
|
|
(872
|
)
|
|
(1,134
|
)
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(157,468
|
)
|
|
(100,085
|
)
|
|
Cash and cash equivalents, beginning of period
|
|
|
248,022
|
|
|
197,944
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
90,554
|
|
$
|
97,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
Cash and cash equivalents were $90.6 million at March 31, 2016, a decrease of $157.4 million from
$248.0 million of cash and cash equivalents at December 31, 2015. Operating activities resulted in a net outflow of $50.7 million primarily attributable to discretionary bonuses
earned in 2015 and paid in 2016. Investing activities resulted in a net outflow of $11.3 million primarily attributable to the purchase of investments, partially offset by proceeds from sales
of investments. Financing activities resulted in a net outflow of $94.7 million primarily related to the payment of a special and quarterly dividend and tax distributions.
Three Months Ended March 31, 2015
Cash and cash equivalents were $97.9 million at March 31, 2015, a decrease of $100.1 million from
$197.9 million of cash and cash equivalents at December 31, 2014. Operating activities resulted in a net outflow of $88.6 million primarily attributable to the payment of
discretionary bonuses earned in 2014 during the three months ended March 31, 2015. Investing activities resulted in a net inflow of $29.4 million primarily attributable to proceeds from
sales of investments, partially offset by the purchase of investments. Financing activities resulted in a net outflow of $39.8 million primarily related to tax distributions and payment of the
quarterly dividend.
39
Table of Contents
Contractual Obligations
The following table sets forth information relating to our contractual obligations as of March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
($ in thousands)
|
|
Total
|
|
Less than
1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
More than
5 Years
|
|
|
Operating Leases (net of $658 committed sublease income)
|
|
$
|
99,290
|
|
$
|
16,747
|
|
$
|
34,799
|
|
$
|
26,162
|
|
$
|
21,582
|
|
|
Tax Receivable Agreement
|
|
|
120,334
|
|
|
5,064
|
|
|
10,812
|
|
|
12,092
|
|
|
92,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
219,624
|
|
$
|
21,811
|
|
$
|
45,611
|
|
$
|
38,254
|
|
$
|
113,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2016, the Company has a total payable of $120.3 million due pursuant to the tax receivable agreement in the condensed consolidated financial statements
which represents management's best estimate of the amounts currently expected to be owed under the tax receivable agreement. Payments made under the tax receivable agreement are required to be made
within 225 days of the filing of our tax returns. Because we generally expect to receive the tax savings prior to making the cash payments to the eligible selling holders of Group LP
partnership units, we do not expect the cash payments to have a material impact on our liquidity. No payment due pursuant to the tax receivable agreement was made during the first quarter of 2016.
In
connection with the Company's Australian JV, the Company granted a put option enabling the key senior Australian executive to sell his shares held in the Australian JV back to the
Company at fair value upon certain defined exit events. If the put option is exercised, the Company will be required to pay 50% of the purchase price upon exercise and the remaining balance within
18 months (in cash or listed stock). In addition, the Company holds a call option, exercisable upon the occurrence of certain defined events, to purchase the shares from the Australian Trust at
fair value with the same payment terms as called for under the put option, described above.
Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage
in any activities that expose us to any liability that is not reflected in our condensed financial statements except for those described under "Contractual Obligations" above.
Market Risk and Credit Risk
Our business is not capital-intensive and we do not invest in derivative instruments or, generally, borrow through issuing debt. As a
result, we are not subject to significant market risk (including interest rate risk, foreign currency exchange rate risk and commodity price risk) or credit risk.
Our cash and cash equivalents include all short-term highly liquid investments that are readily convertible to known amounts of cash
and have original maturities of three months or less from the date of purchase. We invest most of our cash in U.S. Treasury Bills and government securities money market funds. Cash is maintained in
U.S. and non-U.S. bank accounts. Most U.S. and U.K. account balances exceed the FDIC and FSCS coverage limits. In addition to cash and cash equivalents, we hold U.S. Treasury Bills classified as
investments on our statement of financial condition as they have original maturities of three months or more (but less than twelve months) from the date of purchase. We believe our cash and short-term
investments are not subject to any material interest rate risk, equity price risk, credit risk or other market risk.
40
Table of Contents
We regularly review our accounts receivable and allowance for doubtful accounts by considering factors such as historical experience,
credit quality, age of the accounts receivable, and the current economic conditions that may affect a customer's ability to pay such amounts owed to the Company. We maintain an allowance for doubtful
accounts that, in our opinion, provides for an adequate reserve to cover losses that may be incurred. See "—Critical Accounting Policies—Accounts Receivable and Allowance for
Doubtful Accounts."
The Company is exposed to the risk that the exchange rate of the U.S. dollar relative to other currencies may have an adverse effect on
the reported value of the Company's non-U.S. dollar denominated assets and liabilities. Non-functional currency-related transaction gains and losses are recorded in the condensed consolidated
statements of operations. In addition, the reported amounts of our revenues may be affected by movements in the rate of exchange between the
pound sterling and the euro and the U.S. dollar, in which our financial statements are denominated. For the three months ended March 31, 2016 and 2015, the net impact of the fluctuation of
foreign currencies in other comprehensive income (loss) in the condensed statements of comprehensive income was a loss of $0.1 million and a loss of $0.8 million, respectively. We have
not entered into any transactions to hedge our exposure to these foreign currency fluctuations through the use of derivative instruments or other methods.
Critical Accounting Policies
We believe that the critical accounting policies included below represent those that are most important to the presentation of our
financial condition and results of operations and require management's most difficult, subjective and complex judgment.
The
preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period for which they are determined to be
necessary.
In
connection with the Company's restructuring and IPO, the Company entered into a services agreement with a related party, Moelis Asset Management LP, whereby the Company
provides certain administrative services and office space to Moelis Asset Management LP for a fee. See Note 10 for further information.
All
intercompany balances and transactions within the Company have been eliminated.
Revenue and Expense Recognition
The Company recognizes revenues from providing advisory services when earned and collection is reasonably assured. Upfront fees and
retainers are recognized over the estimated period during which the related services are to be performed. Transaction-related fees are recognized when all services for a transaction have been
provided, specified conditions have been met and the transaction closes. Deferred revenues are recorded for fees received that have not yet been
earned. Expenses are recorded on the condensed consolidated financial statements, net of client reimbursements.
41
Table of Contents
Accounts Receivable and Allowance for Doubtful Accounts
The accompanying condensed consolidated statements of financial condition present accounts receivable balances net of allowance for
doubtful accounts based on the Company's assessment of the collectability of customer accounts.
The
Company maintains an allowance for doubtful accounts that, in management's opinion, provides for an adequate reserve to cover losses that may be incurred. The Company regularly
reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable, and the current economic conditions that may affect a customer's ability to
pay such amounts owed to the Company.
After
concluding that a reserved accounts receivable is no longer collectible, the Company will charge-off the receivable. This is determined based on several factors including the age
of the accounts receivable and the credit worthiness of the customer. This has the effect of reducing both the gross receivable and the allowance for doubtful accounts.
Equity-based Compensation
The Company recognizes the cost of employee services received in exchange for an equity instrument award. The cost is based on its
grant-date fair value based on quoted market prices at the time of grant amortized over the service period required by the award's vesting terms.
For
the purposes of calculating diluted net income (loss) per share to holders of Class A common stock, unvested service-based awards are included in the diluted weighted average
shares of Class A common stock outstanding using the treasury stock method.
The
Company has a retirement plan whereby a retiring employee generally will not forfeit certain qualifying incentive RSUs granted during employment if at retirement the employee
(i) is at least 54 years old and (ii) has provided at least 8 consecutive years of service to the Company. Any such RSUs will continue to vest on their applicable vesting
schedule, subject to noncompetition and other terms. Over time a greater number of employees may become retirement eligible and the related requisite service period over which we will expense these
awards will be shorter than the stated vesting period. Any unvested RSUs prior to meeting the stated requisite service period or retirement eligibility date are eligible to receive dividends in kind;
however, the right to dividends in kind will be forfeited if the underlying award does not vest.
Equity Method Investments
The Company accounts for its equity method investments under the equity method of accounting as the Company does not control these
entities but has the ability to exercise significant influence. The amounts recorded on the condensed consolidated financial statements of financial condition reflects the Company's share of
contributions made to, distributions received from, and the equity earnings and losses of, the investments. The Company reflects its share of gains and losses of the investment in income (loss) from
equity method investments in the condensed consolidated statements of operations.
Income Taxes
Prior to the Company's reorganization and IPO in April 2014, the Company had been primarily subject to the New York City UBT and
certain other foreign, state and local taxes as applicable. The Company's operations were historically comprised of entities that are organized as limited liability companies and limited partnerships.
For U.S. federal income tax purposes, taxes related to income earned by these entities represent obligations of the individual partners and members and have historically not been reflected in the
condensed consolidated statements of financial condition. In
42
Table of Contents
connection
with the Company's reorganization and IPO, the Company became subject to U.S. corporate federal and state income tax on its allocable share of results of operations from Group LP.
The
Company accounts for income taxes in accordance with ASC 740, "
Accounting for Income Taxes
" ("ASC 740"), which requires the
recognition of tax benefits or expenses on temporary differences between the financial reporting and tax bases of its assets and liabilities by applying the enacted tax rates in effect for the year in
which the differences are expected to reverse. Such net tax effects on temporary differences are reflected on the Company's condensed consolidated statements of financial condition as deferred tax
assets and liabilities. Deferred tax assets are reduced by a valuation allowance when the Company believes that it is more-likely-than-not that some portion or all of the deferred tax assets will not
be realized.
ASC
740-10 prescribes a two-step approach for the recognition and measurement of tax benefits associated with the positions taken or expected to be taken in a tax return that affect
amounts reported in the financial statements. The Company has reviewed and will continue to review the conclusions reached regarding uncertain tax positions, which may be subject to review and
adjustment at a later date based on ongoing analyses of tax laws, regulations and interpretations thereof. For the three months ended March 31, 2016 and 2015, no unrecognized tax benefit was
recorded. To the extent that the Company's assessment of the conclusions reached regarding uncertain tax positions changes as a result of the evaluation of new information, such change in estimate
will be recorded in the period in which such determination is made. The Company reports income tax-related interest and penalties relating to uncertain tax positions, if applicable, as a component of
income tax expense. For the three months ended March 31, 2016 and 2015, no such amounts were recorded.
Recent Accounting Developments
For a discussion of recently issued accounting developments and their impact or potential impact on our financial statements, see
Note 3—Recent Accounting Pronouncements, of the condensed consolidated financial statements included in this 10-Q.