UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
Or
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
|
|
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
(Address of principal executive offices) |
|
(Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title |
Trading Symbol |
Name of Exchange on which registered |
|
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
|
☒ |
|
Accelerated filer |
☐ |
Non-accelerated filer |
☐ |
|
Smaller reporting company |
|
Emerging growth company |
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
As of October 15, 2020, there were
TABLE OF CONTENTS
|
|
|
Page |
|
|
|
|
|
|
|
|
|||
Item 1. |
|
3 |
||
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
26 |
|
Item 3. |
|
36 |
||
Item 4. |
|
36 |
||
|
|
|||
Item 1. |
|
37 |
||
Item 1A. |
|
37 |
||
Item 2. |
|
38 |
||
Item 3. |
|
38 |
||
Item 4. |
|
38 |
||
Item 5. |
|
38 |
||
Item 6. |
|
39 |
||
|
|
40 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Financial Statements (Unaudited)
|
|
Page |
|
|
|
|
4 |
|
|
5 |
|
|
6 |
|
|
7 |
|
|
8 |
|
|
10 |
3
Moelis & Company
Condensed Consolidated Statements of Financial Condition
(Unaudited)
(dollars in thousands, except per share amounts)
|
|
September 30, |
|
|
December 31, |
|
||||
|
|
2020 |
|
|
2019 |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
|
$ |
|
|
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
Receivables: |
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance for credit losses of $ |
|
|
|
|
|
|
|
|
|
|
Accrued and other receivables |
|
|
|
|
|
|
|
|
|
|
Total receivables |
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
Right-of-use assets |
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net |
|
|
|
|
|
|
|
|
|
|
Deferred tax asset and income tax receivable |
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
|
$ |
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
Compensation payable |
|
$ |
|
|
|
|
$ |
|
|
|
Accounts payable, accrued expenses and other liabilities |
|
|
|
|
|
|
|
|
|
|
Amount due pursuant to tax receivable agreement |
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
|
Lease liabilities |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Note 11) |
|
|
|
|
|
|
|
|
|
|
Class A common stock, par value $ |
|
|
|
|
|
|
|
|
|
|
Class B common stock, par value $ |
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost; |
|
|
|
( |
) |
|
|
|
( |
) |
Additional paid-in-capital |
|
|
|
|
|
|
|
|
|
|
Retained earnings (accumulated deficit) |
|
|
|
( |
) |
|
|
|
( |
) |
Accumulated other comprehensive income (loss) |
|
|
|
( |
) |
|
|
|
|
|
Total Moelis & Company equity |
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
|
( |
) |
|
|
|
( |
) |
Total equity |
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
|
|
|
|
$ |
|
|
|
See notes to the condensed consolidated financial statements (unaudited).
4
Moelis & Company
Condensed Consolidated Statements of Operations
(Unaudited)
(dollars in thousands, except per share amounts)
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||||||
Revenues |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication, technology and information services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel and related expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expenses) |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Moelis & Company |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Weighted-average shares of Class A common stock outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to holders of shares of Class A common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Diluted |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
See notes to the condensed consolidated financial statements (unaudited).
5
Moelis & Company
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(dollars in thousands)
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||||||
Net income (loss) |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Foreign currency translation adjustment, net of tax |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
|
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive income (loss) attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Moelis & Company |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
See notes to the condensed consolidated financial statements (unaudited).
6
Moelis & Company
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
|
|
Nine Months Ended September 30, |
|
|||||||
|
|
2020 |
|
|
2019 |
|
||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
|
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
Bad debt expense |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
Equity-based compensation |
|
|
|
|
|
|
|
|
|
|
Deferred tax provision and income tax receivable |
|
|
|
( |
) |
|
|
|
|
|
Gain on partial sale of equity method investment |
|
|
|
— |
|
|
|
|
( |
) |
Other |
|
|
|
|
|
|
|
|
( |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
( |
) |
|
|
|
( |
) |
Accrued and other receivables |
|
|
|
( |
) |
|
|
|
( |
) |
Prepaid expenses and other assets |
|
|
|
|
|
|
|
|
( |
) |
Deferred compensation |
|
|
|
( |
) |
|
|
|
( |
) |
Compensation payable |
|
|
|
( |
) |
|
|
|
( |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
|
|
|
|
|
|
( |
) |
Deferred revenue |
|
|
|
|
|
|
|
|
( |
) |
Dividends received |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
Purchase of investments |
|
|
|
( |
) |
|
|
|
( |
) |
Proceeds from sales of investments |
|
|
|
|
|
|
|
|
|
|
Notes issued to employees |
|
|
|
( |
) |
|
|
|
— |
|
Purchase of equipment and leasehold improvements |
|
|
|
( |
) |
|
|
|
( |
) |
Proceeds from partial sale of equity method investment |
|
|
|
— |
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
|
( |
) |
|
|
|
( |
) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
Dividends and distributions |
|
|
|
( |
) |
|
|
|
( |
) |
Proceeds from exercise of stock options |
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases |
|
|
|
( |
) |
|
|
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
|
( |
) |
|
|
|
( |
) |
Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash |
|
|
|
( |
) |
|
|
|
|
|
Net increase (decrease) in cash, cash equivalents, and restricted cash |
|
|
|
( |
) |
|
|
|
( |
) |
Cash, cash equivalents, and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash, end of period |
|
$ |
|
|
|
|
$ |
|
|
|
Supplemental cash flow disclosure: |
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
|
|
|
|
$ |
|
|
|
Other non-cash activity |
|
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment upon adoption of ASU 2016-13 |
|
$ |
|
|
|
|
$ |
|
— |
|
Dividend equivalents issued |
|
$ |
|
|
|
|
$ |
|
|
|
Class A Partnership Units or other equity converted into Class A Common Stock |
|
$ |
|
|
|
|
$ |
|
|
|
Forfeiture of fully-vested Group LP units or other equity units |
|
$ |
|
|
|
|
$ |
|
|
|
See notes to the condensed consolidated financial statements (unaudited).
7
Moelis & Company
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
(dollars in thousands, except share amounts)
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
Class A |
|
|
Class B |
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
|
|
|
|
|
Additional |
|
|
Earnings |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
Common |
|
|
Common |
|
|
Treasury |
|
|
Common |
|
|
Common |
|
|
Treasury |
|
|
Paid-In |
|
|
(Accumulated |
|
|
Comprehensive |
|
|
Noncontrolling |
|
|
Total |
|
|||||||||||||||||||
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
Deficit) |
|
|
Income (Loss) |
|
|
Interests |
|
|
Equity |
|
|||||||||||||||||||
Balance as of January 1, 2020 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
Cumulative effect adjustment upon adoption of ASU 2016-13 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
Balance as of January 1, 2020, as adjusted |
|
|
52,773,617 |
|
|
|
10,397,915 |
|
|
|
(2,757,558 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Dividends declared ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Treasury Stock Purchases |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
Exercise of Stock options |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Equity-based payments to non-employees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Equity-based compensation |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Dividends declared ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Treasury Stock Purchases |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
Exercise of Stock options |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Issuance of Class A common stock and cancellation of Class B common stock in connection with offerings and other exchanges |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Equity-based payments to non-employees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Balance as of June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Dividends declared ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Treasury Stock Purchases |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
Issuance of Class A common stock and cancellation of Class B common stock in connection with offerings and other exchanges |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Equity-based payments to non-employees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Balance as of September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
( |
) |
|
$ |
|
( |
) |
|
$ |
|
|
|
See notes to the condensed consolidated financial statements (unaudited).
8
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
(dollars in thousands, except share amounts)
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
Class A |
|
|
Class B |
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
|
|
|
|
|
Additional |
|
|
Earnings |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
Common |
|
|
Common |
|
|
Treasury |
|
|
Common |
|
|
Common |
|
|
Treasury |
|
|
Paid-In |
|
|
(Accumulated |
|
|
Comprehensive |
|
|
Noncontrolling |
|
|
Total |
|
|||||||||||||||||||
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
Deficit) |
|
|
Income (Loss) |
|
|
Interests |
|
|
Equity |
|
|||||||||||||||||||
Balance as of January 1, 2019 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Treasury Stock Purchases |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
Exercise of Stock options |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Equity-based payments to non-employees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Dividends declared ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Treasury Stock Purchases |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
Exercise of Stock options |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Issuance of Class A common stock and cancellation of Class B common stock in connection with offerings and other exchanges |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Equity-based payments to non-employees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Balance as of June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Dividends declared ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Treasury Stock Purchases |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
Exercise of Stock options |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Equity-based payments to non-employees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
Other |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
Balance as of September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
See notes to the condensed consolidated financial statements (unaudited).
9
1. ORGANIZATION AND BASIS OF PRESENTATION
Moelis & Company and its consolidated subsidiaries (the “Company,” “we,” “our,” or “us”) is a leading global investment bank, incorporated in Delaware. Prior to the Company’s IPO, the business operated as a Delaware limited partnership that commenced operations during 2007. Following the IPO, the operations are owned by Moelis & Company Group LP (“Group LP”), a U.S. Delaware limited partnership, and Group LP is controlled by Moelis & Company. Moelis & Company’s shareholders are entitled to receive a portion of Group LP’s economics through their direct ownership interests in shares of Class A common stock of Moelis & Company. The noncontrolling interest owners of Group LP (not Moelis & Company) receive economics of the operations primarily through their ownership interests in Group LP partnership units.
The Company’s activities as an investment banking advisory firm constitute a single business segment offering clients, including corporations, governments and financial sponsors, a range of advisory services with expertise across all major industries in mergers and acquisitions, recapitalizations and restructurings and other corporate finance matters.
Basis of Presentation —The condensed consolidated financial statements of Moelis & Company include its partnership interests in Group LP, its equity interest in the sole general partner of Group LP, Moelis & Company Group GP LLC (“Group GP”), and its interests in its subsidiaries. Moelis & Company will operate and control all of the business and affairs of Group LP and its operating entity subsidiaries indirectly through its equity interest in Group GP. The Company operates through the following subsidiaries:
|
• |
Moelis & Company LLC (“Moelis U.S.”), a Delaware limited liability company, a registered broker-dealer with the U.S. Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”). |
|
• |
Moelis & Company International Holdings LLC (“Moelis International”), a Delaware limited liability company, owns the following entities and investments, directly or indirectly: |
|
• |
Moelis & Company UK LLP (“Moelis UK”), a limited liability partnership registered under the laws of England and Wales. In addition to the United Kingdom, Moelis UK maintains operations through the following branches: |
|
• |
Moelis & Company UK LLP, French Branch (French branch) |
|
• |
Moelis & Company Europe Limited, Frankfurt am Main Branch (German branch) |
|
• |
Moelis & Company UK LLP, DIFC Branch (Dubai branch) |
|
• |
Moelis & Company Asia Limited (“Moelis Asia”), a limited company incorporated in Hong Kong licensed under the Hong Kong Securities and Futures Ordinance to provide financial advisory services. In addition to Hong Kong, Moelis Asia maintains operations in Beijing, China through a wholly-owned Chinese subsidiary, Moelis & Company Consulting (Beijing) Company Limited. |
|
• |
Moelis & Company Netherlands BV, a private limited company incorporated in Amsterdam, Netherlands. |
|
• |
Moelis & Company India Private Limited, a private limited company incorporated in Mumbai, India. |
|
• |
Moelis & Company Assessoria Financeira Ltda. (“Moelis Brazil”), a limited liability company incorporated in São Paulo, Brazil. |
|
• |
An equity method investment in Moelis Australia Limited (“Moelis Australia”), a public company listed on the Australian Securities Exchange |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting —The Company prepared the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). As permitted by the interim reporting rules and regulations set forth by the SEC, the condensed consolidated financial statements presented exclude certain financial information and footnote disclosures normally included in audited financial statements prepared in accordance with U.S. GAAP. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to fairly present the accompanying unaudited condensed consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.
10
Consolidation —The Company’s policy is to consolidate (i) entities in which it has a controlling financial interest, (ii) variable interest entities where the Company has a variable interest and is deemed to be the primary beneficiary and (iii) limited partnerships where the Company has ownership of the majority of voting interests. When the Company does not have a controlling interest in an entity, but exerts significant influence over the entity’s operating and financial decisions, the Company applies the equity method of accounting in which it records in earnings its share of income or losses of the entity. All intercompany balances and transactions with the Company’s subsidiaries have been eliminated in consolidation.
Use of Estimates —The preparation of condensed consolidated 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 in which they are determined to be necessary.
In preparing the condensed consolidated financial statements, management makes estimates and assumptions regarding:
|
• |
the adequacy of the allowance for credit losses; |
|
• |
the assessment of whether revenues from variable consideration should be constrained due to the probability of a significant revenue reversal; |
|
• |
the assessment of probable lease terms and the measurement of the present value of such obligations; |
|
• |
the measurement and realization of deferred taxes; |
|
• |
the measurement of amount due pursuant to tax receivable agreement; and |
|
• |
other matters that affect the reported amounts and disclosures of contingencies in the financial statements. |
Cash, Cash Equivalents and Restricted Cash —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.
The Company’s cash is maintained in U.S. and non-U.S. bank accounts, of which most bank account balances had little or no insurance coverage (most balances are held in U.S. and U.K. accounts which exceeded the U.S. Federal Deposit Insurance Corporation and U.K. Financial Services Compensation Scheme coverage limits). The Company’s cash equivalents are invested primarily in U.S. Treasury instruments and government securities money markets.
The Company’s restricted cash is comprised of collateral deposits primarily held by certain non-U.S. subsidiaries. These deposits are required for certain direct debit accounts and are also used to satisfy future medical claims.
|
|
September 30, |
|
|||||||
|
|
2020 |
|
|
2019 |
|
||||
Cash |
|
$ |
|
|
|
|
$ |
|
|
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows |
|
$ |
|
|
|
|
$ |
|
|
|
Additionally, as of December 31, 2019, the Company held cash of $
Receivables —The accompanying condensed consolidated statements of financial condition present accounts receivable balances net of allowance for credit losses based on the Company’s assessment of the collectability of customer accounts.
Included in the accounts receivable balances at September 30, 2020 and December 31, 2019 were $
11
The Company maintains an allowance for credit losses that, in management’s opinion, provides for an adequate reserve to cover losses that may be incurred. For purposes of determining appropriate allowances, the Company stratifies its population of accounts receivable into two categories, one for short-term receivables and a second for private funds advisory receivables. Each population is separately evaluated using an aging method that results in a percentage reserve based on the age of the receivable, in addition to considerations of historical charge-offs and current economic conditions.
After concluding that a reserved accounts receivable is no longer collectible, the Company will charge-off the receivable. This has the effect of reducing both the gross receivable and the allowance for credit losses. If a reserved accounts receivable is subsequently collected, such recoveries reduce the gross receivable and the allowance for credit losses and is a reduction of bad debt expense, which is recorded within other expenses on the condensed consolidated statement of operations. The combination of recoveries and the provision for credit losses of a reported period comprise the Company’s bad debt expense.
On January 1, 2020, the Company adopted Accounting Standards Update No. 2016-13— “Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13") using the modified retrospective method. Upon adoption, a cumulative adjustment was recorded which decreased retained earnings by $
The following tables summarize credit loss allowance activity for the three and nine months ended September 30, 2020:
|
|
Three Months Ended September 30, 2020 |
|
||||||||||||
|
|
Accounts Receivable |
|
||||||||||||
|
|
|
Short-term Receivables |
|
|
|
Private Funds Advisory Receivables |
|
|
|
Total |
|
|||
Allowance for Credit Losses, beginning balance |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Charge-offs |
|
|
|
( |
) |
|
|
|
- |
|
|
|
|
( |
) |
Recoveries |
|
|
|
( |
) |
|
|
|
- |
|
|
|
|
( |
) |
Reduction to allowance |
|
|
|
( |
) |
|
|
|
- |
|
|
|
|
( |
) |
Provision for credit losses |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Allowance for credit losses, ending balance |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
|
Nine Months Ended September 30, 2020 |
|
||||||||||||
|
|
Accounts Receivable |
|
||||||||||||
|
|
|
Short-term Receivables |
|
|
|
Private Funds Advisory Receivables |
|
|
|
Total |
|
|||
Allowance for Credit Losses, beginning balance |
|
$ |
|
|
|
|
$ |
|
- |
|
|
$ |
|
|
|
Adjustment for adoption of ASU 2016-13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses, adjusted beginning balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
|
( |
) |
|
|
|
- |
|
|
|
|
( |
) |
Recoveries |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Reduction to allowance |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, ending balance |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Deferred Compensation —Deferred compensation costs represent arrangements with certain employees whereby cash payments are subject to a required period of service subsequent to payment by the Company. These amounts are charged to expenses over the period that the employee is required to provide services in order to vest in the payment.
Financial Instruments at Fair Value —Fair value is generally based on quoted prices, however if quoted market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations, price activity for equivalent instruments and valuation pricing models. The Company established a fair value hierarchy which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of instrument, the characteristics specific to the instrument and the state of the marketplace (including the existence and transparency of transactions between market participants). Financial instruments with readily-available actively quoted prices or for which fair value can be measured from actively-quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
12
Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories (from highest to lowest) based on inputs:
Level 1 —Quoted prices (unadjusted) are available in active markets for identical instruments that the Company has the ability to access as of the reporting date. The Company, to the extent that it holds such instruments, does not adjust the quoted price for these instruments, even in situations in which the Company holds a large position and a sale could reasonably affect the quoted price.
Level 2 —Pricing inputs are observable for the instruments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies.
Level 3 —Pricing inputs are unobservable for the instruments and include situations where there is little, if any, market activity for the investments. The inputs into the determination of fair value require significant judgment or estimation by the Company’s management.
For level 3 investments in which pricing inputs are unobservable and limited market activity exists, management’s determination of fair value is based on the best information available, may incorporate management’s own assumptions and involves a significant degree of judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the instrument.
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 in investments on the condensed consolidated statements of financial condition reflect 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 other income and expenses in the condensed consolidated statements of operations using the most recently available earnings data at the end of the period.
Leases — The Company maintains operating leases for corporate offices and an aircraft. The Company determines if a contract contains a lease at inception. Operating leases are recorded as right-of-use (“ROU”) assets and lease liabilities on the condensed consolidated statements of financial condition. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at the lease commencement date and are measured at the present value of anticipated lease payments over the lease term. The operating lease ROU assets are equal to the lease liabilities, adjusted for certain lease incentives, accrued rents, and prepaid rents. Typically, our borrowing rate is used to determine the present value of lease payments because the implicit rate is not readily determinable. Our lease terms may include options to extend or terminate the lease. These options are factored into our present value calculations when it is reasonably certain that such options will be exercised. Operating lease expense is recognized on a straight-line basis over the lease term.
Adoption of ASU 2016-02
In February 2016, the FASB issued Accounting Standards Update 2016-02—Leases (“ASU 2016-02”) to improve transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Additionally, in July 2018, the FASB issued ASU 2018-11 which permits entities to apply the requirements of ASU 2016-02 as of the adoption date, as opposed to the earliest comparative period disclosed.
The Company adopted both standards as of January 1, 2019, and is applying the requirements of ASU 2016-02 as of the adoption date instead of the earliest comparative period disclosed. In addition, we elected to use certain practical expedients to assist in our transition and are not reassessing the identification and classification of leases upon adoption. Upon adoption, the Company recorded lease liabilities and corresponding ROU assets of $
Software— Costs related to implementation of cloud computing arrangements that qualify for capitalization are stated at cost less accumulated amortization within prepaid and other assets on the Company’s condensed consolidated statement of financial condition. Such capitalized costs are amortized using the straight-line method over the term of the cloud computing service contract or another rational basis, beginning when the cloud computing arrangement is substantially complete and ready for its intended use. All costs not directly related to the implementation of cloud computing arrangements, including overhead costs and costs of service agreements, will be expensed in the period they are incurred. The amortization expense of such capitalized costs will be presented under communication, technology and information services on the condensed consolidated statement of operations.
Effective January 1, 2020, the Company adopted ASU 2018-15, “Goodwill and Other —Internal Use Software” using a prospective approach (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in cloud computing arrangements with the requirements for capitalizing costs to develop or obtain internal-use software. See Note 4—Fixed and Intangible Assets below for further details on the Company’s capitalized cloud computing arrangements.
13
Equipment and Leasehold Improvements —Office equipment and furniture and fixtures are stated at cost less accumulated depreciation, which is determined using the straight-line method over the estimated useful lives of the assets, ranging from
Major renewals and improvements are capitalized and minor replacements, maintenance and repairs are charged to expenses as incurred. Assets that are in development and have not yet been placed in service are generally classified as “Construction in Progress” and are reclassified to the appropriate category when the associated assets are placed in service. Upon retirement or disposal of assets, the cost and related accumulated depreciation or amortization are removed from the condensed consolidated statements of financial condition and any gain or loss is reflected in the condensed consolidated statements of operations.
Deferred Tax Asset and Amount Due Pursuant to Tax Receivable Agreement —In conjunction with the IPO, the Company was treated for U.S. federal income tax purposes as having directly purchased Class A partnership units in Group LP from the existing unitholders. Additional Group LP Class A partnership units may be exchanged for shares of Class A common stock in the Company. The initial purchase and future exchanges are expected to result in an increase in the tax basis of Group LP’s assets attributable to the Company’s interest in Group LP. These increases in the tax basis of Group LP’s assets attributable to the Company’s interest in Group LP would not have been available but for the initial purchase and future exchanges. Such increases in tax basis are likely to increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of income tax the Company would otherwise be required to pay in the future. As a result, the Company records a deferred tax asset for such increase in tax basis.
The Company has entered into a tax receivable agreement with its eligible Managing Directors that will provide for the payment by the Company to its eligible Managing Directors of
Revenue and Expense Recognition—We earn substantially all of our revenues from advisory engagements and, in many cases, we are not paid until the completion of an underlying transaction. The Company recognizes revenues from providing advisory services when or as our obligations are fulfilled and collection is reasonably assured. The vast majority of our advisory revenues, which include reimbursements for certain out-of-pocket expenses, are recognized over time; however, a small number of transactions may be recognized at a point in time. We provide our advisory service on an ongoing basis which, for example, may include evaluating and selecting one of multiple strategies. During such engagements, our clients are continuously benefitting from our counsel and the over time recognition matches the transfer of such benefits. However, the recognition of transaction fees is constrained until substantially all services have been provided, specified conditions have been met and it is probable that a significant reversal of revenue will not occur in a future period. Upfront fees and retainers specified in our engagement letters that meet the over time criteria will be recognized on a systematic basis over the estimated period where the related services are performed. Revenues may be recognized at a point in time if the engagement represents a singular objective that does not transfer any notable value until formally completed, such as when issuing a fairness opinion. In these instances, the point in time recognition appropriately matches the transfer and consumption of our services.
Incremental costs of obtaining a contract are expensed as incurred since such costs are generally not recoverable and the typical duration of our advisory contracts is less than one year. Costs to fulfill contracts consist of out-of-pocket expenses that are part of performing our advisory services and are typically expensed as incurred, except where the transfer and consumption of our services occurs at a point in time. For engagements recognized at a point in time, out-of-pocket expenses are capitalized and subsequently expensed in the condensed consolidated statement of operations upon completion of the engagement. The Company records deferred revenues when it receives fees from clients that have not yet been earned (e.g. an upfront fee) or when the Company has an unconditional right to consideration before all performance obligations are complete (e.g. upon satisfying conditions to earn an announcement fee, but before the transaction is consummated).
14
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, 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 revenue by the type of advice we provide because of the complexity of the transactions on which we may earn revenue 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 develop from relationships established on prior restructuring engagements, and capital markets expertise can be instrumental on both M&A and restructuring assignments.
Equity-based Compensation — The Company recognizes the cost of services received in exchange for equity instrument awards. 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. The Company records as treasury stock shares repurchased from its employees for the purpose of settling tax liabilities incurred upon the vesting of restricted stock units (“RSUs”). The Company records dividends in kind, net of forfeitures, on outstanding RSUs as a reduction of retained earnings with a corresponding increase in additional paid-in capital, resulting in no net change to equity. Dividends in kind on RSUs are subject to the same vesting conditions as the underlying RSUs on which they were accrued. Dividends in kind will be forfeited if the underlying award does not vest.
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 meets certain requirements. For qualifying awards issued prior to December 1, 2016, the employee must (i) be at least
Effective January 1, 2019, the Company adopted ASU 2018-07, “Compensation—Stock Compensation” (“ASU 2018-07”) using the modified retrospective method. The adoption of this new standard generally requires the accounting for equity-based payments to nonemployees to be consistent with the accounting for employees. As a result, the Company will recognize the cost of services received from a nonemployee in exchange for an equity instrument based on the award’s grant-date fair value. Unsettled equity-based payments to nonemployees have been remeasured at fair value as of the adoption date. No adjustment to the opening balance of retained earnings was required.
Income Taxes — 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 and nine months ended September 30, 2020 and 2019,
The Company recognizes excess tax benefits and deficiencies as income tax benefits or expenses in the condensed consolidated statement of operations. These are reflected in accounts payable, accrued expenses and other liabilities within the condensed consolidated statement of cash flows.
Foreign Currency Translation — Assets and liabilities held in non-U.S. dollar denominated currencies are translated into U.S. dollars at exchange rates in effect at the end of the reporting period. Revenues and expenses are translated at average exchange rates during the reporting period. A charge or credit is recorded to other comprehensive income to reflect the translation of these amounts to the extent the non-U.S. currency is designated the functional currency of the subsidiary. Non-functional currency related transaction gains and losses are immediately recorded in the condensed consolidated statements of operations.
15
3. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, “Reference Rate Reform” (“ASU 2020-04”). ASU 2020-04 provides optional guidance for entities that are impacted by interest rate reform. Specifically, ASU 2020-04 allows for contracts under the scope of Topic 310—Receivables to be accounted for prospectively with the updated interest rate, among other specifications for debt, derivative instruments, and other contracts. ASU 2020-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application is permitted. Upon initial evaluation, we do not anticipate any material changes to our condensed consolidated financial statements.
4. FIXED AND INTANGIBLE ASSETS
Equipment and leasehold improvements, net consists of the following:
|
|
September 30, |
|
|
December 31, |
|
||||
|
|
2020 |
|
|
2019 |
|
||||
Office equipment |
|
$ |
|
|
|
|
$ |
|
|
|
Furniture and fixtures |
|
|
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
|
|
Construction in progress |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization |
|
|
|
( |
) |
|
|
|
( |
) |
Equipment and leasehold improvements, net |
|
$ |
|
|
|
|
$ |
|
|
|
Depreciation and amortization expenses for fixed assets totaled $
As of September 30, 2020, there were $
5. INVESTMENTS
Fair value investments are contained within the balance of investments on the Company’s condensed consolidated statements of financial condition. The Company established a fair value hierarchy which prioritizes and ranks the level of market price observability used in measuring investments at fair value. Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories (from highest to lowest) based on inputs:
Level 1—Quoted prices (unadjusted) are available in active markets for identical instruments that the Company has the ability to access as of the reporting date. The Company, to the extent that it holds such instruments, does not adjust the quoted price for these instruments, even in situations in which the Company holds a large position and a sale could reasonably affect the quoted price.
Level 2—Pricing inputs are observable for the instruments, either directly or indirectly, as of the reporting date, but are not the same as those used in level 1. Fair value is determined through the use of models or other valuation methodologies.
Level 3—Pricing inputs are unobservable for the instruments and include situations in which there is little, if any, market activity for the investments. The inputs into the determination of fair value require significant judgment or estimation by the Company’s management.
16
The estimated fair values of government securities money markets, U.S. Treasury instruments, and government debt securities are based on quoted prices for recent trading activity in identical or similar instruments. The Company generally invests in U.S. Treasury instruments with maturities of less than twelve months. The Company considers these securities to be risk free and does not reserve for expected credit losses on these treasury investments. See Note 2 for further information on the Company’s fair value hierarchy.
The Company’s methodology for reclassifications impacting the fair value hierarchy is that transfers in/out of the respective category are reported at fair value as of the beginning of the period in which the reclassification occurred.
At the end of the reporting period, the Company reviews U.S. treasury instruments held to determine whether the securities are of the most recent issuance of that security with the same maturity (referred to as “on-the-run”, which is the most liquid version of the maturity band). If a U.S. treasury instrument held at the end of the reporting period was from the most recent issuance of all securities with the same term, it is classified as level 1; otherwise it is referred to as “off-the-run” and is classified as level 2.
The following table summarizes the levels of the fair value hierarchy into which the Company’s financial assets fall as of September 30, 2020:
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury instruments |
|
$ |
|
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
$ |
— |
|
||
Government securities money market |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
||
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury instruments |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
Total financial assets |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
— |
|
For the three and nine months ended September 30, 2020, unrealized losses of $
The following table summarizes the levels of the fair value hierarchy into which the Company’s financial assets fall as of December 31, 2019:
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury instruments |
|
$ |
|
|
|
|
$ |
|
— |
|
|
$ |
|
|
|
|
$ |
— |
|
|
Government securities money market |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
||
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury instruments |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
||
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
Total financial assets |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
— |
|
For the three and nine months ended September 30, 2019, unrealized gains of $
Equity-method investments are contained within the balance of investments on the Company’s condensed consolidated statements of financial condition. On April 1, 2010, the Company entered into a
On February 19, 2020 and February 20, 2019, Moelis Australia declared dividends, of which the Company received $
17
On September 2, 2019 and November 4, 2019, the Company sold
The balances of the Company’s equity method investment as of September 30, 2020 and December 31, 2019 were $
6. NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO CLASS A COMMON SHAREHOLDERS
The calculations of basic and diluted net income (loss) per share attributable to holders of shares of Class A common stock for the three and nine months ended September 30, 2020 and 2019 are presented below.
|
|
Three Months Ended September 30, |
|
|
|
Nine Months Ended September 30, |
|
|
||||||||||||||||
(dollars in thousands, except per share amounts) |
|
2020 |
|
|
|
2019 |
|
|
|
2020 |
|
|
|
2019 |
|
|
||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of shares of Class A common stock—basic |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
Add (deduct) dilutive effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests related to Class A partnership units |
|
|
|
|
|
(a) |
|
|
|
|
|
(a) |
|
|
|
|
|
(a) |
|
|
|
|
|
(a) |
Net income (loss) attributable to holders of shares of Class A common stock—diluted |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of Class A common stock outstanding—basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add (deduct) dilutive effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests related to Class A partnership units |
|
|
|
|
|
(a) |
|
|
|
|
|
(a) |
|
|
|
|
|
(a) |
|
|
|
|
|
(a) |
Weighted average number of incremental shares issuable from unvested restricted stock, RSUs and stock options, as calculated using the treasury stock method |
|
|
|
|
|
(b) |
|
|
|
|
|
(b) |
|
|
|
|
|
(b) |
|
|
|
|
|
(b) |
Weighted average shares of Class A common stock outstanding—diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to holders of shares of Class A common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
Diluted |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
We have not included the impact of Class B common stock because these shares are entitled to an insignificant amount of economic participation.
|
(a) |
Class A partnership units may be exchanged for Moelis & Company Class A common stock on a |
|
(b) |
Certain shares of Moelis & Company’s Class A common stock assumed to be issued pursuant to certain RSUs as calculated using the treasury stock method were antidilutive and therefore have been excluded from the calculation of diluted net income (loss) per share attributable to Moelis & Company for certain periods. During the three months ended September 30, 2020 and 2019, there were |
18
7. EQUITY-BASED COMPENSATION
Partnership Units
Prior to the Company’s restructuring and IPO, the business operated as a partnership and its ownership structure was comprised of common partners (principally outside investors) holding units. The common partners contributed capital to the partnership and were not subject to vesting. Units granted to Managing Directors upon joining the Company and as part of annual incentive compensation generally vested based on service over
In connection with the reorganization and IPO, Group LP issued Class A partnership units to Moelis & Company and to certain existing unit holders. Following the reorganization, a Class A partnership unit (not held by Moelis & Company or its subsidiaries) is exchangeable into
The Company recognized compensation expenses of $
2014 Omnibus Incentive Plan
In connection with the IPO, the Company adopted the Moelis & Company 2014 Omnibus Incentive Plan (the “Plan”) to provide additional incentives to selected officers, employees, Managing Directors, non-employee directors, independent contractors, partners, senior advisors and consultants. The Plan provides for the issuance of incentive stock options (“ISOs”), nonqualified stock options, stock appreciation rights (“SARs”), restricted stock, RSUs, stock bonuses, other stock-based awards and cash awards.
Share Repurchase Plan
In the first quarter of 2015, the Board of Directors authorized the repurchase of up to $
Restricted Stock and Restricted Stock Units (RSUs)
Pursuant to the Plan and in connection with the Company’s annual compensation process and ongoing hiring process, the Company issues RSUs which generally vest over a service life of
The following table summarizes activity related to restricted stock and RSUs for the nine months ended September 30, 2020 and 2019.
|
|
Restricted Stock & RSUs |
|
|||||||||||||||
|
|
2020 |
|
|
2019 |
|
||||||||||||
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
||||
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
||||
|
|
Number of |
|
|
Grant Date |
|
|
Number of |
|
|
Grant Date |
|
||||||
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
||||||
Unvested Balance at January 1, |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Unvested Balance at September 30, |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
|
|
19
As of September 30, 2020, the total compensation expense related to unvested restricted stock and RSUs not yet recognized was $
Stock Options
Pursuant to the Plan, the Company issued
|
|
Assumptions |
|
||
Expected life (in years) |
|
|
|
|
|
Weighted-average risk free interest rate |
|
|
|
|
% |
Expected volatility |
|
|
|
|
% |
Dividend yield |
|
|
|
|
% |
Weighted-average fair value at grant date |
|
$ |
|
|
|
The Company paid special dividends of $
The following table summarizes activity related to stock options for the nine months ended September 30, 2020 and 2019.
|
|
Stock Options Outstanding |
|
|||||||||||||||
|
|
2020 |
|
|
2019 |
|
||||||||||||
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
||||
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
||||
|
|
Number |
|
|
Exercise Price |
|
|
Number |
|
|
Exercise Price |
|
||||||
|
|
Outstanding |
|
|
Per Share |
|
|
Outstanding |
|
|
Per Share |
|
||||||
Outstanding at January 1, |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
|
|
Exercises |
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Forfeitures or expirations |
|
|
— |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
Outstanding at September 30, |
|
|
— |
|
|
$ |
|
— |
|
|
|
|
|
|
$ |
|
|
|
For the three months ended September 30, 2020 and 2019, the Company recognized expenses of $
8. STOCKHOLDERS EQUITY
Class A Common Stock
In April 2014, the Company issued
|
|
Total Shares |
|
|
Total Increase in |
|
||
Date of Offering |
|
Offered |
|
|
Shares Outstanding |
|
||
November, 2014 |
|
|
|
|
|
|
|
|
January, 2017 |
|
|
|
|
|
|
|
|
July, 2017 |
|
|
|
|
|
|
|
|
March, 2018 |
|
|
|
|
|
|
|
|
August, 2018 |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
20
As of September 30, 2020, there were
Class B Common Stock
In conjunction with Moelis & Company’s IPO of its Class A common stock, the Company issued
|
|
Class B Stock |
|
|
|
|
|
|
|
|
|
Purchased / |
|
|
|
Purchase Cost |
|
||
Date of Offering |
|
Surrendered |
|
|
|
(in thousands) |
|
||
November, 2014 |
|
|
|
|
|
$ |
|
|
|
January, 2017 |
|
|
|
|
|
|
|
|
|
July, 2017 |
|
|
|
|
|
|
|
|
|
March, 2018 |
|
|
|
|
|
|
|
|
|
August, 2018 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
As of September 30, 2020, and December 31, 2019,
Treasury Stock
During the nine months ended September 30, 2020 and 2019, the Company repurchased
Noncontrolling Interests
A Group LP Class A partnership unit (not held by Moelis & Company or its subsidiaries) is exchangeable into
Controlling Interests
Moelis & Company operates and controls all of the business and affairs of Group LP and its operating entity subsidiaries indirectly through its equity interest in Group GP, and thus the
21
9. RELATED-PARTY TRANSACTIONS
Aircraft Lease— On August 30, 2014, a related party, Moelis & Company Manager LLC ("Manager"), acquired an aircraft with funds received solely from its managing member (Mr. Moelis). The aircraft was used and operated by the Company pursuant to a dry lease with Manager. The terms of the dry lease were comparable to the market rates of leasing from an independent third party. Pursuant to this dry lease arrangement, the lessee is obligated to bear its share of the costs of operating the aircraft. In addition, Mr. Moelis was the other lessee of the aircraft and shared the operating and related costs of the plane in proportion to his respective use pursuant to a cost sharing and operating agreement. On July 12, 2019, the Company terminated its aircraft dry lease with Manager, the lessor, and Mr. Moelis, the other lessee (the “Old Lease”) and the related cost sharing agreement with Mr. Moelis, which were set to expire by their terms on December 31, 2019, and entered into a new dry lease with Manager, the lessor, and Mr. Moelis, the other lessee (the “New Lease”) and cost sharing agreement with Mr. Moelis, which terminate on December 31, 2022. The terms of the New Lease and new cost sharing agreement are substantially similar to the Old Lease and related cost sharing agreement.
For the three months ended September 30, 2020 and 2019, the Company incurred $
Promissory Notes —As of September 30, 2020, there were $
Services Agreement —In connection with the Company’s IPO, the Company entered into a services agreement with a related party, Moelis Asset Management LP, whereby the Company provides certain administrative services to Moelis Asset Management LP for a fee. This fee totaled $
Moelis Australia —As of September 30, 2020 and December 31, 2019, the Company had $
Revenues —From time to time, the Company enters into advisory transactions with Moelis Asset Management LP and its affiliates. The Company earned revenues associated with such transactions of $
10. REGULATORY REQUIREMENTS
Under the SEC Uniform Net Capital Rule (SEC Rule 15c3-1) Alternative Standard under Section (a)(1)(ii), the minimum net capital requirement is $
Moelis U.S. does not carry customer accounts and does not otherwise hold funds or securities for, or owe money or securities to, customers and accordingly is exempt under Section (k)(2)(ii) of SEC Rule 15c3-3.
At September 30, 2020, the aggregate regulatory net capital of Moelis UK was $
22
11. COMMITMENTS AND CONTINGENCIES
Bank Line of Credit — In April 2020, the Company renewed its $
Borrowings on the facility bear interest at the greater of a fixed rate of
As of September 30, 2020, the Company’s available credit under this facility was $
Leases —The Company maintains operating leases for corporate offices and an aircraft with various expiration dates, some of which extend through 2036. Some leases include options to terminate or to extend the lease terms. The Company records lease liabilities measured at the present value of anticipated lease payments over the lease term, including options to extend or terminate the lease when it is reasonably certain such options will be exercised. The implicit discount rates used to determine the present value of the Company’s leases are not readily determinable, thus the Company uses its secured borrowing rate, which was determined with reference to our available credit line.
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||||||||||||
|
|
September 30, |
|
September 30, |
||||||||||||||||||
($ in thousands) |
|
2020 |
|
|
2019 |
|
|
|
2020 |
|
|
2019 |
|
|
||||||||
Supplemental Income Statement Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating cash outflows for operating leases |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations (e.g. new leases and amendments commenced during the period): |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term - operating leases |
|
|
|
|
|
years |
|
|
|
|
years |
|
|
|
|
|
years |
|
|
|
|
years |
Weighted-average discount rate - operating leases |
|
|
|
|
|
% |
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
The future sublease income and maturities of our operating lease liabilities as of September 30, 2020, are as follows:
Fiscal year ended |
|
Sublease Income |
|
|
Operating Leases |
|
||||
Remainder of 2020 |
|
$ |
|
( |
) |
|
$ |
|
|
|
2021 |
|
|
|
( |
) |
|
|
|
|
|
2022 |
|
|
|
( |
) |
|
|
|
|
|
2023 |
|
|
|
( |
) |
|
|
|
|
|
2024 |
|
|
|
( |
) |
|
|
|
|
|
Thereafter |
|
|
|
( |
) |
|
|
|
|
|
Total Payments |
|
$ |
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Tenant improvement allowances |
|
|
|
|
( |
) |
||||
Less: Present value adjustment |
|
|
|
|
( |
) |
||||
Total |
|
|
$ |
|
|
|
Contractual Arrangements —In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and which provide indemnification for specified losses, including certain indemnification of certain officers, directors and employees.
Legal —In the ordinary course of business, from time to time the Company and its affiliates are involved in judicial or regulatory proceedings, arbitration or mediation concerning matters arising in connection with the conduct of its businesses, including contractual and employment matters. In addition, government agencies and self-regulatory organizations conduct periodic examinations and initiate administrative proceedings regarding the Company’s business, including, among other matters, compliance, accounting and operational matters, that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer, investment advisor, or its directors, officers or employees. In view of the inherent difficulty of determining whether any loss in connection with such matters is probable and whether the amount of such loss can be reasonably estimated, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot estimate the amount of such loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, the Company believes, based on current knowledge and after consultation with counsel, that it is not currently party to any material pending proceedings, individually or in the aggregate, the resolution of which would have a material effect on the Company.
12. EMPLOYEE BENEFIT PLANS
The Company covers substantially all U.S. salaried employees with a defined contribution 401(k) plan. Each salaried employee of the Company who has attained the age of 21 is eligible to participate in the 401(k) plan on their first day of employment. Any employer contributions to the 401(k) plan are entirely at the discretion of the Company. The Company accrued expenses relating to employer matching contributions to the 401(k) plan for the three months ended September 30, 2020 and 2019, in the amounts of $
13. INCOME 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 their interest holders, except for the New York City unincorporated business tax (“UBT”) and certain other foreign, state, and local taxes. The Company is subject to U.S. corporate federal, state, and local income tax on its allocable share of results of operations from Group LP.
The Company’s provision for income taxes and effective tax rate were $
24
14. REVENUES AND BUSINESS INFORMATION
The Company’s activities as an investment banking advisory firm constitute a single business segment offering clients, including corporations, governments, sovereign wealth funds, and financial sponsors, a range of advisory services with expertise across all major industries in mergers and acquisitions, recapitalizations and restructurings, capital markets and other corporate finance matters.
Since the financial markets are global in nature, the Company generally manages its business based on the operating results of the enterprise taken as whole, not by geographic region. The following table disaggregates the revenues and assets based on the location of the office that generates the revenues or holds the assets, and therefore may not be reflective of the geography in which our clients are located.
|
Three Months Ended September 30, |
|
|
|
Nine Months Ended September 30, |
|
||||||||||||||
|
2020 |
|
|
2019 |
|
|
|
2020 |
|
|
2019 |
|
||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
$ |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rest of World |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
|
September 30, |
|
|
December 31, |
|
||||
|
|
2020 |
|
|
2019 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
|
|
|
|
$ |
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
Rest of World |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
$ |
|
|
|
As of September 30, 2020, and December 31, 2019, the Company had deferred revenues of $
Due to the factors that may delay or terminate a transaction (see Note 2), the Company does not estimate constrained transaction fees for revenue recognition. Quantitative disclosures of constrained variable consideration are not provided for remaining, wholly unsatisfied, performance obligations. These remaining performance obligations related to retainers, upfront fees and announcement fees are typically associated with contracts that have durations of one year or less.
15. SUBSEQUENT EVENTS
The Board of Directors of Moelis & Company has declared a dividend of $
25
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 financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.
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. These factors include, among other things, uncertainties associated with the coronavirus (“COVID-19”) pandemic, including the negative effect that the COVID-19 pandemic has had and the significant and adverse effect it is expected to continue to have on our business. You should consider the numerous risks outlined under “Risk Factors” in our Annual Report on Form 10-K and in this Form 10-Q.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In particular, statements herein about the effects of the COVID-19 pandemic on our business, results, financial position and liquidity may constitute forward-looking statements and are subject to the risk that the actual impact may differ, possibly materially, from what is currently estimated. In addition, new risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 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. We assist our clients in achieving their strategic goals by offering comprehensive integrated financial advisory services across all major industry sectors. With 20 geographical locations in the Americas, 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, capital markets and other corporate finance matters. Our ability to provide confidential, independent advisory 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 September 30, 2020, we served our clients globally with 644 advisory bankers. 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 Part II. Other Information of this Form 10-Q and in our Form 10-K for a discussion of some of the factors that can affect our performance. The M&A market data for announced and completed transactions during the three and nine months ended September 30, 2020 and 2019, referenced throughout this Form 10-Q was obtained from Thomson Financial as of October 4, 2020, and October 4, 2019.
For the first nine months of 2020, we earned revenues of $521.2 million compared with $523.0 million earned during the same period in 2019. This compares favorably with a 20% decrease in the number of global completed M&A transactions greater than $100 million in the same period.
The economic disruption caused by COVID-19 has negatively impacted our results and we caution that COVID-19 continues to add uncertainty to the business environment. More encouragingly, our team of investment banking professionals continues to be very active, providing high quality advice to clients around the globe. In the third quarter of 2020, the M&A market for announced transactions rebounded dramatically from the historic low point that we witnessed during the first half of 2020. In particular, we saw a 10% increase in the number of transactions, and a 32% increase in the volume of announced transactions in the United States, which has historically been the biggest driver of our revenues, and which should result in a more positive business environment in the near to intermediate term. Our announced M&A
26
transactions have recovered and the pace and magnitude of our mandates continues to accelerate. In addition, our restructuring activity continues to be very strong as companies across the economy are continuing to experience ongoing financial issues as a result of the business disruption caused by COVID-19. Combined with our capital markets capabilities, which continues to be an important contributor to our business, we are well positioned to provide advice to companies across all sectors on their capital and liquidity needs.
Overall, we feel confident about our market position in each of our businesses, but cannot control or predict the ultimate magnitude of the pandemic, the timing and speed of the economic recovery, and the ultimate impact that it may have on our revenues or profitability.
Operationally, many of our offices are open for our employees to return to the office in compliance with applicable public health requirements and guidelines. A majority of our employees are continuing to work from home at this time. We are confident about the current strength of our franchise and our operational health in this uncertain environment.
Results of Operations
The following is a discussion of our results of operations for the three and nine months ended September 30, 2020 and 2019.
|
|
Three Months Ended September 30, |
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
||||||||||||||
($ in thousands) |
|
2020 |
|
|
2019 |
|
|
Variance |
|
|
2020 |
|
|
2019 |
|
|
Variance |
|||||||||
Revenues |
|
$ |
|
207,604 |
|
|
$ |
|
231,700 |
|
|
-10% |
|
$ |
|
521,248 |
|
|
$ |
|
523,006 |
|
|
0% |
||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
|
127,148 |
|
|
|
|
141,697 |
|
|
-10% |
|
|
|
371,884 |
|
|
|
|
316,343 |
|
|
18% |
||
Non-compensation expenses |
|
|
|
28,498 |
|
|
|
|
35,720 |
|
|
-20% |
|
|
|
90,116 |
|
|
|
|
108,872 |
|
|
-17% |
||
Total operating expenses |
|
|
|
155,646 |
|
|
|
|
177,417 |
|
|
-12% |
|
|
|
462,000 |
|
|
|
|
425,215 |
|
|
9% |
||
Operating income (loss) |
|
|
|
51,958 |
|
|
|
|
54,283 |
|
|
-4% |
|
|
|
59,248 |
|
|
|
|
97,791 |
|
|
-39% |
||
Other income and (expenses) |
|
|
|
(1,631 |
) |
|
|
|
14,301 |
|
|
N/M |
|
|
|
(6,568 |
) |
|
|
|
21,413 |
|
|
N/M |
||
Income (loss) before income taxes |
|
|
|
50,327 |
|
|
|
|
68,584 |
|
|
-27% |
|
|
|
52,680 |
|
|
|
|
119,204 |
|
|
-56% |
||
Provision (benefit) for income taxes |
|
|
|
8,534 |
|
|
|
|
13,886 |
|
|
-39% |
|
|
|
(10,195 |
) |
|
|
|
10,662 |
|
|
N/M |
||
Net income (loss) |
|
$ |
|
41,793 |
|
|
$ |
|
54,698 |
|
|
-24% |
|
$ |
|
62,875 |
|
|
$ |
|
108,542 |
|
|
-42% |
N/M = Not meaningful
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 period are not necessarily predictive of continued high levels of revenues in future periods. To develop new business, our professionals maintain an active 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 completion of an underlying transaction. The vast majority of our advisory revenues are recognized over time, although the recognition of our transaction fees are constrained until the engagement is substantially complete.
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 revenue by the type of advice we provide because of the complexity of the transactions on which we may earn revenue 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 develop from relationships established on prior restructuring engagements, and capital markets expertise can be instrumental on both M&A and restructuring assignments.
27
Three Months Ended September 30, 2020 versus 2019
Revenues were $207.6 million for the three months ended September 30, 2020 as compared with $231.7 million for the same period in 2019, representing a decrease of 10%. The decrease in revenues was primarily driven by fewer transaction completions and a decrease in average fees earned per completed transaction. COVID-19 has adversely impacted our business and may continue to have a significant and adverse effect on our business, revenues and operating results in the short term.
For the three months ended September 30, 2020 and 2019 we earned revenues from 146 and 116 clients, respectively, and the number of clients generating revenues equal to or greater than $1 million increased to 43 clients from 42 clients for the same period of 2019.
Nine Months Ended September 30, 2020 versus 2019
Revenues were $521.2 million for the nine months ended September 30, 2020 as compared with $523.0 million for the same period in 2019. The nominal decrease in revenues was primarily driven by fewer transaction completions. COVID-19 has adversely impacted our business and may continue to have a significant and adverse effect on our business, revenues and operating results in the short term.
For the nine months ended September 30, 2020 and 2019 we earned revenues from 238 and 203 clients, respectively, and the number of clients generating revenues fees equal to or greater than $1 million increased to 126 clients from 105 clients for the same period of 2019.
Operating Expenses
The following table sets forth information relating to our operating expenses:
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
||||||||||||||
($ in thousands) |
|
2020 |
|
|
2019 |
|
|
Variance |
|
2020 |
|
|
2019 |
|
|
Variance |
||||||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
$ |
|
127,148 |
|
|
$ |
|
141,697 |
|
|
|
-10 |
% |
|
|
$ |
|
371,884 |
|
|
$ |
|
316,343 |
|
|
|
18 |
% |
|
% of revenues |
|
|
|
61 |
% |
|
|
|
61 |
% |
|
|
|
|
|
|
|
|
71 |
% |
|
|
|
60 |
% |
|
|
|
|
|
Non-compensation expenses |
|
$ |
|
28,498 |
|
|
$ |
|
35,720 |
|
|
|
-20 |
% |
|
|
$ |
|
90,116 |
|
|
$ |
|
108,872 |
|
|
|
-17 |
% |
|
% of revenues |
|
|
|
14 |
% |
|
|
|
15 |
% |
|
|
|
|
|
17 |
% |
|
|
|
21 |
% |
|
|
||||||
Total operating expenses |
|
$ |
|
155,646 |
|
|
$ |
|
177,417 |
|
|
|
-12 |
% |
|
|
$ |
|
462,000 |
|
|
$ |
|
425,215 |
|
|
|
9 |
% |
|
% of revenues |
|
|
|
75 |
% |
|
|
|
77 |
% |
|
|
|
|
|
|
|
|
89 |
% |
|
|
|
81 |
% |
|
|
|
|
|
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.
Three Months Ended September 30, 2020 versus 2019
Operating expenses were $155.6 million for the three months ended September 30, 2020 and represented 75% of revenues, compared with $177.4 million for the same period in 2019 which represented 77% of revenues. The decrease in operating expenses was primarily driven by decreased compensation and benefits expenses.
Nine Months Ended September 30, 2020 versus 2019
Operating expenses were $462.0 million for the nine months ended September 30, 2020 and represented 89% of revenues, compared with $425.2 million for the same period in 2019 which represented 81% of revenues. The increase in operating expenses was primarily driven by increased compensation and benefits expenses.
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.
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
28
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. Cash bonuses, which are accrued throughout the year, 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 the 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 September 30, 2020 versus 2019
For the three months ended September 30, 2020, compensation related expenses of $127.1 million represented 61% of revenues, compared with $141.7 million of compensation-related expenses which represented 61% of revenues in the prior year period. The decrease in compensation expenses was primarily related to lower discretionary cash bonus expense driven by our year-to-date cash bonus estimation process combined with lower revenues as compared to the prior year period.
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 $85.5 million and $83.0 million for the three months ended September 30, 2020 and 2019, respectively. The increase in fixed compensation costs was primarily related to increased headcount compared to the prior year period. Discretionary cash bonus expenses, which generally represent the excess amount of total compensation over base compensation and amortization of equity and contingent cash awards, was $41.6 million and $58.7 million for the three months ended September 30, 2020 and 2019, respectively. The decrease in discretionary cash bonus expense was primarily related to our year-to-date cash bonus estimation process combined with lower revenues as compared to the prior year period. The combination of the discretionary and fixed compensation expenses represents the overall compensation expense pool.
Nine Months Ended September 30, 2020 versus 2019
For the nine months ended September 30, 2020, compensation related expenses of $371.9 million represented 71% of revenues, compared with $316.3 million which represented 60% of revenues in the prior year period. The increase in compensation expenses was primarily related to higher discretionary cash bonus expense driven by our year-to-date cash bonus estimation process in 2020 versus 2019.
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 $258.8 million and $252.3 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in fixed compensation costs was primarily related to increased headcount as compared to the prior year period. 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 $113.1 million and $64.0 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in discretionary cash bonus expense was primarily related to our year-to-date cash bonus estimation process in 2020 versus 2019. The combination of the discretionary and fixed compensation expenses represents the overall compensation expense pool.
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.
Historically, our non-compensation expenses 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’ growing needs.
Three Months Ended September 30, 2020 versus 2019
For the three months ended September 30, 2020, non‑compensation expenses of $28.5 million represented 14% of revenues, compared with $35.7 million which represented 15% of revenues in the prior year period. The decrease in non-compensation expenses was primarily related to decreased travel and other business development expenses related to COVID-19 social distancing restrictions, in addition to our continued and focused expense discipline.
Nine Months Ended September 30, 2020 versus 2019
29
For the nine months ended September 30, 2020, non‑compensation expenses of $90.1 million represented 17% of revenues, compared with $108.9 million which represented 21% of revenues in the prior year period. The decrease in non-compensation expenses was primarily related to decreased travel and other business development expenses related to COVID-19 social distancing restrictions, in addition to our continued and focused expense discipline.
Other Income and Expenses
Other income and expenses consists of earnings from equity method investments, gains and losses on investments, interest income and expense, and other infrequent gains or losses.
Three Months Ended September 30, 2020 versus 2019
Other income and expenses were an expense of $1.6 million and income of $14.3 million for the three months ended September 30, 2020 and 2019, respectively. The expense of $1.6 million for the three months ended September 30, 2020 is primarily related to an adjustment to the amounts due pursuant to the Company’s Tax Receivable Agreement in connection with the CARES Act. The prior year period includes a gain of $12.6 million related to the sale of 12.5 million shares of Moelis Australia common stock.
Nine Months Ended September 30, 2020 versus 2019
Other income and expenses were an expense of $6.6 million and income of $21.4 million for the nine months ended September 30, 2020 and 2019, respectively. The expense of $6.6 million for the nine months ended September 30, 2020 is primarily related to an adjustment to the amounts due pursuant to the Company's Tax Receivable Agreement in connection with the CARES Act. The prior year period includes a gain of $12.6 million related to the sale of 12.5 million shares of Moelis Australia common stock.
Provision for Income 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 their interest holders, except for certain foreign, state and local income taxes. The Company is subject to U.S. corporate, federal, state, and local income tax on its allocable share of results of operations from Group LP.
Three Months Ended September 30, 2020 versus 2019
The Company’s provision for income taxes and effective tax rates were $8.5 million and 17%, and $13.9 million and 20%, for the three months ended September 30, 2020 and 2019, respectively. The income tax provision and effective tax rate for the aforementioned periods primarily reflect the Company’s allocable share of operating results from Group LP at the prevailing U.S. federal, state, and local corporate income tax rate. For the three months ended September 30, 2020, the income tax provision includes $2.6 million of tax benefit in connection with the loss carryback provisions provided under the CARES Act. The Company’s liability pursuant to Tax Receivable Agreement was also re-measured as a result of the benefit in connection with the CARES Act and the estimated impact was recorded within other income and expenses on the condensed consolidated statement of operations.
Nine Months Ended September 30, 2020 versus 2019
For the nine months ended September 30, 2020 and 2019, the Company’s provision for income taxes were a benefit of $10.2 million and expense of $10.7 million, respectively, compared to pre-tax operating results of $52.7 million and $119.2 million, respectively. The income tax provision 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. For the nine months ended September 30, 2020, the income tax provision includes $7.4 million of excess tax benefit recognized in connection with the delivery of equity-based compensation at an appreciated price above the grant date price. In addition, the tax benefit for the nine months ended September 30, 2020 included $16.3 million of tax benefit in connection with the loss carryback provisions provided under the CARES Act. The Company’s liability pursuant to Tax Receivable Agreement was also re-measured as a result of the benefit in connection with the CARES Act and the estimated impact was recorded within other income and expenses on the condensed consolidated statement of operations.
Liquidity and Capital Resources
Our current assets have historically been comprised of 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 primarily in the first quarter of each year with respect to 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
30
estimated tax payments have been distributed to partners. Cash before dividends and share buybacks then typically builds 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 September 30, 2020 and December 31, 2019, the Company had cash equivalents of $39.5 million and $96.0 million, respectively, invested in U.S. Treasury instruments and government securities money market. Additionally, as of September 30, 2020 and December 31, 2019, the Company had cash of $46.0 million and $71.8 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 various types of government debt securities that are classified as investments on our condensed consolidated statements of financial condition as they have original maturities of three months or more from the date of purchase. As of September 30, 2020 and December 31, 2019, the Company held $180.8 million and $174.0 million of U.S. treasury instruments classified as investments, respectively.
Our liquidity is highly dependent upon cash receipts from clients which generally requires the successful completion of transactions. The timing of receivable collections typically occurs within 60 days of billing. As of September 30, 2020 and December 31, 2019 accounts receivable were $65.3 million and $45.1 million, respectively, net of allowances of $4.5 million and $4.1 million, respectively.
To provide for additional working capital and other general corporate purposes, we maintain a $65.0 million revolving credit facility that matures on September 30, 2020. In April 2020, the Company renewed its $65.0 million revolving credit facility which extended the maturity date to June 30, 2021. 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 September 30, 2020, the Company had no borrowings under the credit facility.
As of September 30, 2020, the Company’s available credit under this facility was $60.5 million as a result of the issuance of an aggregate amount of $4.5 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.
The Board of Directors of Moelis & Company declared a dividend of $0.3825 per share to be paid on November 30, 2020 to Class A common shareholders of record on November 6, 2020. During the nine months ended September 30, 2020 the Company paid aggregate dividends of $1.77 per share, which included a special dividend of $0.75 per share and regular quarterly dividends of $1.02 per share.
In February 2019, the Board of Directors authorized the repurchase of up to $100 million of shares of Class A common stock and/or Class A partnership units of Group LP with no expiration date. This new authorization replaced the former repurchase program and the remaining authorization under the program was eliminated. During the nine months ended September 30, 2020 and 2019, the Company repurchased 925,857 and 1,046,490 shares, respectively, pursuant to the Company’s share repurchase program and shares repurchased from its employees for the purpose of settling tax liabilities upon delivery of equity-based compensation awards. The remaining balance of shares authorized for repurchase under the program was $80.9 million as of September 30, 2020.
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 10 of the condensed consolidated financial statements as of September 30, 2020 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.
31
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.
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:
|
|
Nine Months Ended |
|
|||||||
($ in thousands) |
|
2020 |
|
|
2019 |
|
||||
Cash Provided By (Used In) |
|
|
|
|
|
|
|
|
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
|
62,875 |
|
|
$ |
|
108,542 |
|
Non-cash charges |
|
|
|
105,146 |
|
|
|
|
96,891 |
|
Other operating activities |
|
|
|
(64,580 |
) |
|
|
|
(196,697 |
) |
Total operating activities |
|
|
|
103,441 |
|
|
|
|
8,736 |
|
Investing Activities |
|
|
|
(38,890 |
) |
|
|
|
(8,999 |
) |
Financing Activities |
|
|
|
(144,302 |
) |
|
|
|
(212,329 |
) |
Effect of exchange rate changes |
|
|
|
(2,672 |
) |
|
|
|
463 |
|
Net increase (decrease) in cash |
|
|
|
(82,423 |
) |
|
|
|
(212,129 |
) |
Cash, cash equivalents, and restricted cash, beginning of period |
|
|
|
168,572 |
|
|
|
|
261,771 |
|
Cash, cash equivalents, and restricted cash, end of period |
|
$ |
|
86,149 |
|
|
$ |
|
49,642 |
|
Nine months ended September 30, 2020
Cash, cash equivalents and restricted cash were $86.1 million at September 30, 2020, a decrease of $82.4 million from $168.6 million at December 31, 2019. Operating activities resulted in a net inflow of $103.4 million primarily attributable to cash collected from clients net of operating expenses, including discretionary bonuses paid during the period. Investing activities resulted in a net outflow of $38.9 million primarily attributable to cash outflows for construction in progress. Financing activities resulted in a net outflow of $144.3 million primarily related to the payment of dividends and tax distributions and treasury stock purchases.
Nine months ended September 30, 2019
Cash, cash equivalents and restricted cash were $49.6 million at September 30, 2019, a decrease of $212.1 million from $261.8 million at December 31, 2018. Operating activities resulted in a net inflow of $8.7 million primarily attributable to cash collected from clients net of operating expenses, offset by discretionary bonuses paid during the period. Investing activities resulted in a net outflow of $9.0 million primarily attributable to net purchases of investments partially offset by proceeds from the sale of shares of Moelis Australia. Financing activities resulted in a net outflow of $212.3 million primarily related to the payment of dividends and tax distributions and treasury stock buybacks.
32
Contractual Obligations
The following table sets forth information relating to our contractual obligations as of September 30, 2020:
|
|
Payment Due by Period |
|
||||||||||||||||||||||
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
More than |
|
||||||||||
($ in thousands) |
|
Total |
|
|
1 Year |
|
|
1 – 3 Years |
|
|
3 – 5 Years |
|
|
5 Years |
|
||||||||||
Operating leases (net of $4,085 of committed sublease income) |
|
$ |
|
273,855 |
|
|
$ |
|
17,120 |
|
|
$ |
|
42,267 |
|
|
$ |
|
34,358 |
|
|
$ |
|
180,110 |
|
Amount due pursuant to Tax Receivable Agreement |
|
|
|
323,312 |
|
|
|
|
22,010 |
|
|
|
|
52,364 |
|
|
|
|
38,945 |
|
|
|
|
209,993 |
|
Total |
|
$ |
|
597,167 |
|
|
$ |
|
39,130 |
|
|
$ |
|
94,631 |
|
|
$ |
|
73,303 |
|
|
$ |
|
390,103 |
|
As of September 30, 2020, the Company has a total payable of $323.3 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. We generally expect to receive the tax savings prior to making the cash payments to the eligible selling holders of Group LP partnership units, so we do not expect the cash payments to have a material impact on our liquidity. There were no payments made pursuant to the tax receivable agreement during the first nine months of 2020.
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 consolidated 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.
Risks Related to Cash and Short-Term Investments
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 highly-rated municipal bonds, U.S. government agency debt securities and U.S. treasury instruments. 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 various types of U.S. treasury instruments that are classified as investments on our condensed consolidated 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.
Credit Risk
We regularly review our accounts receivable and allowance for credit losses 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 credit losses 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 Credit Losses.”
33
Exchange Rate Risk
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, euro, Brazilian real, Hong Kong dollar, rupee and the U.S. dollar, in which our financial statements are denominated. For the three months ended September 30, 2020 and 2019, the net impact of the fluctuation of foreign currencies in other comprehensive income (loss) in the condensed statements of comprehensive income were losses of $0.5 million and $0.3 million, respectively, and a loss of $2.2 and a gain of $0.2 million for the nine months ended September 30, 2020 and 2019, 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.
All intercompany balances and transactions within the Company have been eliminated.
Revenue and Expense Recognition
We earn substantially all of our revenues from advisory engagements, and, in many cases, we are not paid until the completion of an underlying transaction. The Company recognizes revenues from providing advisory services when or as our obligations are fulfilled and collection is reasonably assured. The vast majority of our advisory revenues, which include reimbursements for certain out-of-pocket expenses, are recognized over time; however, a small number of transactions may be recognized at a point in time. We provide our advisory service on an ongoing basis which, for example, may include evaluating and selecting one of multiple strategies. During such engagements, our clients are continuously benefitting from our counsel and the over time recognition matches the transfer of such benefits. However, the recognition of transaction fees is constrained until substantially all services have been provided, specified conditions have been met and it is probable that a significant reversal of revenue will not occur in a future period. Upfront fees and retainers specified in our engagement letters that meet the over time criteria will be recognized on a systematic basis over the estimated period where the related services are performed. Revenues may be recognized at a point in time if the engagement represents a singular objective that does not transfer any notable value until formally completed, such as when issuing a fairness opinion. In these instances, the point in time recognition appropriately matches the transfer and consumption of our services.
Incremental costs of obtaining a contract are expensed as incurred since such costs are generally not recoverable and the typical duration of our advisory contracts is less than one year. Costs to fulfill contracts consist of out-of-pocket expenses that are part of performing our advisory services and are typically expensed as incurred, except where the transfer and consumption of our services occurs at a point in time. For engagements recognized at a point in time, out-of-pocket expenses are capitalized and subsequently expensed in the condensed consolidated statement of operations upon completion of the engagement. The Company records deferred revenues when it receives fees from clients that have not yet been earned (e.g. an upfront fee) or when the Company has an unconditional right to consideration before all performance obligations are complete (e.g. upon satisfying conditions to earn an announcement fee, but before the transaction is consummated).
Accounts Receivable and Allowance for Credit Losses
The accompanying condensed consolidated statements of financial condition present accounts receivable balances net of allowance for credit losses based on the Company’s assessment of the collectability of customer accounts.
34
The Company maintains an allowance for credit losses that, in management’s opinion, provides for an adequate reserve to cover losses that may be incurred. For purposes of determining appropriate allowances, the Company stratifies its population of accounts receivable into two categories, one for short-term receivables and a second for private funds advisory receivables. Each population is separately evaluated using an aging method that results in a percentage reserve based on the age of the receivable, in addition to considerations of historical charge-offs and current economic conditions.
After concluding that a reserved accounts receivable is no longer collectible, the Company will charge-off the receivable. This has the effect of reducing both the gross receivable and the allowance for credit losses. If a reserved accounts receivable is subsequently collected, such recoveries reduce the gross receivable and the allowance for credit losses and is a reduction of bad debt expense, which is recorded within other expenses on the condensed consolidated statement of operations. The combination of recoveries and the provision for credit losses of a reported period comprise the Company’s bad debt expense.
Income Taxes
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. 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 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 nine months ended September 30, 2020 and 2019, 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 nine months ended September 30, 2020 and 2019, no such amounts were recorded.
Leases
The Company maintains operating leases for corporate offices and an aircraft. The Company determines if a contract contains a lease at inception. Operating leases are recorded as right-of-use (“ROU”) assets and lease liabilities on the condensed consolidated statements of financial condition. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at the lease commencement date and are measured at the present value of anticipated lease payments over the lease term. The operating lease ROU assets are equal to the lease liabilities, adjusted for certain lease incentives, accrued rents, and prepaid rents. Typically, our borrowing rate is used to determine the present value of lease payments because the implicit rate is not readily determinable. Our lease terms may include options to extend or terminate the lease. These options are factored into our present value calculations when it is reasonably certain that such options will be exercised. Operating lease expense is recognized on a straight-line basis over the lease term.
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 Form 10-Q.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative disclosures about market risk are set forth above in “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk and Credit Risk.”
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Controls
No change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, from time to time the Company and its affiliates are involved in judicial or regulatory proceedings, arbitration or mediation concerning matters arising in connection with the conduct of its businesses, including contractual and employment matters. In addition, government agencies and self-regulatory organizations conduct periodic examinations and initiate administrative proceedings regarding the Company’s business, including, among other matters, compliance, accounting and operational matters, that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer, investment advisor, or its directors, officers or employees. In view of the inherent difficulty of determining whether any loss in connection with such matters is probable and whether the amount of such loss can be reasonably estimated, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot estimate the amount of such loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, the Company believes, based on current knowledge and after consultation with counsel, that it is not currently party to any material pending proceedings, individually or in the aggregate, the resolution of which would have a material effect on the Company.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes to the Risk Factors described in Part I "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission ("SEC").
The scale, scope and duration of the impact of the COVID-19 pandemic on our business are unpredictable and depend on a number of factors outside of our control. We cannot reasonably predict the magnitude of the ultimate impact that COVID-19 will have on us and the impact may have a sustained material adverse effect on our business, revenues, operating results and financial condition.
The rapid, worldwide spread of a novel strain of coronavirus (“COVID-19”) has created global economic disruption and uncertainty. COVID-19 has adversely impacted our business and is expected to continue to have a significant and adverse effect on our business, revenues and operating results in the short term. The scale, scope and duration of the impact of the COVID-19 pandemic are unpredictable. The negative impact of COVID-19 on our business may be sustained, increase in significance and affect us in ways we cannot foresee at this time.
As a financial services firm, we are materially affected by conditions in the global financial markets and economic conditions throughout the world. During periods of unfavorable market or economic conditions, including current market conditions, the volume and value of M&A transactions decreases, thereby reducing the demand for our M&A advisory services and increasing price competition among financial services companies seeking such engagements. At the outset of COVID-19, M&A transactions were generally put on hiatus and fewer new transactions were launching due to market volatility and uncertainty caused by COVID-19. In this most recent quarter, our announced transactions have recovered, but given the uncertainty and volatility in the world caused by COVID-19 and other geopolitical factors, the environment may be more fragile than usual. Our results of operations were adversely affected by the reduction in the volume in transactions in the first half of the year and if the reduction in volume returns or there is a reduction in the value of completed transactions, our results of operations will be adversely affected. Further, in the period following an economic downturn, the volume and value of M&A transactions typically takes time to recover and lags a recovery in market and economic conditions. Our profitability has been adversely affected in the short term due to COVID-19 and may be impacted for a sustained period if we determine not to, or are unable to, scale back fixed and other costs within a time frame sufficient to match decreases in revenue relating to changes in market and economic conditions. We believe COVID-19’s adverse impact will also be significantly driven by other factors that are beyond our control, including, for example: the timing, scope and effectiveness of additional governmental responses to the pandemic; medical advancements providing treatments for COVID-19, the timing and speed of economic recovery; and the impact on our clients’ willingness to transact in a sustained uncertain environment.
We have implemented various initiatives to reduce the impact of COVID-19, such as supporting the ability for all of our employees working remotely from home, while seeking to maintain business continuity. We face various cybersecurity and other operational risks related to our business on a day to day basis, which are heightened by COVID-19. We rely heavily on financial, accounting, communication and other information technology systems, including, without limitation, cloud based information technology systems, and the people who operate them. These systems, including the systems of third parties on whom we rely, may experience a disruption as a result of COVID-19 or increased cybersecurity threats. If we were unable to timely and successfully recover, that could materially disrupt our business and cause material financial loss, regulatory actions, reputational harm or legal liability. An extended period of remote working by our employees could strain our technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic. COVID-19 presents a threat to our employees’ well-being. As shelter-in-place restrictions have been lifted, we have implemented plans for our employees’ return to office. These plans need to comply with federal, state and local regulations and take into account local conditions, which may result in increased operational and compliance costs. There is no guarantee that the measures implemented will protect the health of our employees and could negatively impact employee sentiment and productivity. While we have implemented a business continuity plan to protect the health of our employees, such plans cannot anticipate all scenarios, and we may experience a potential loss of productivity.
37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales
None.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
that May Yet be |
|||
|
|
Total Number |
|
|
|
|
|
|
|
as Part of Publicly |
|
|
Purchased Under |
||||
|
|
of Shares |
|
|
Average Price |
|
|
Announced Plans |
|
|
the Plan |
||||||
Period |
|
Purchased(1) |
|
|
Paid per Share |
|
|
or Programs(2) |
|
|
Or Programs(2) |
||||||
July 1 - July 31 |
|
|
2,631 |
|
|
$ |
|
29.87 |
|
|
|
|
— |
|
|
$ |
80.9 million |
August 1 - August 31 |
|
|
26,444 |
|
|
|
|
29.93 |
|
|
|
|
— |
|
|
|
80.9 million |
September 1 - September 30 |
|
|
2,384 |
|
|
|
|
33.98 |
|
|
|
|
— |
|
|
|
80.9 million |
Total |
|
|
31,459 |
|
|
$ |
|
30.23 |
|
|
|
|
— |
|
|
$ |
80.9 million |
Issuer Purchases of Equity Securities
(1) |
Includes treasury transactions arising from net settlement of equity awards to satisfy minimum tax obligations. |
(2) |
In February 2019, the Board of Directors authorized the repurchase of up to $100 million of shares of Class A common stock and/or Class A partnership units of Group LP with no expiration date. Under this share repurchase program, shares may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual number of shares repurchased will be opportunistic and measured in nature and will depend on a variety of factors, including price and market conditions. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
38
Item 6. Exhibits
Exhibit Number |
|
Description |
|
|
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
10.1 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1* |
|
|
|
|
|
32.2* |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema |
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase |
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as inline XBRL and contained Exhibit 101) |
* |
Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Registrant’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934 irrespective of any general incorporation language contained in any such filing. |
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized this 28th day of October, 2020.
|
MOELIS & COMPANY |
|
|
|
/s/ Kenneth Moelis |
|
Kenneth Moelis |
|
Chief Executive Officer |
|
|
|
/s/ Joseph Simon |
|
Joseph Simon |
|
Chief Financial Officer |
40