Moelis & pany(MC) - 2023 Q4 - Annual Report

Part I Business Moelis & Company is a global independent investment bank offering strategic and financial advisory services, including M&A and restructuring, to diverse clients, operating under a 'One Firm' approach and subject to extensive financial regulation - Moelis & Company is a global independent investment bank providing financial advisory services on M&A, recapitalizations, and capital markets transactions[14] - The firm operates with 824 advisory professionals, including 160 Managing Directors, across more than 20 locations worldwide[16] - The company's advisory focus allows it to offer advice free from conflicts associated with lending, trading, or cross-selling products, operating a capital-light model[32] - In 2023, the company hired 24 new Managing Directors to capitalize on market dislocation and enhance sector, product, and regional capabilities[33] - The business is diversified, with the top 10 transactions in 2023 accounting for approximately 22% of revenues[39] Our Advisory Offering - The firm offers holistic advisory solutions by integrating deep industry knowledge with global capabilities across sectors like Technology, Healthcare, Energy, and Real Estate[18][19] - Core services include M&A and strategic advisory, capital markets advice, capital structure advisory for distressed situations, and private funds advisory for sponsors[21][22][26] - The shareholder advisory team provides solutions for contested shareholder situations, including defense against activist campaigns and proxy fights[24] Our People - The company's compensation philosophy is discretionary and not commission-based, rewarding collaboration, client impact, and long-term relationships to align with firm interests[45] - Moelis & Company is committed to diversity and inclusion, driven by executive leadership, and supports over 50 nonprofit organizations globally[46][48] - The firm invests heavily in junior talent through dedicated campus recruiting, training, and mentoring programs with the goal of developing them into future Managing Directors[49] Our Strategic Alliances - The company maintains a significant investment and strategic alliance with MA Financial Group Limited (formerly Moelis Australia) for its investment banking advisory business in Australia and New Zealand[50][51] - A strategic alliance with Alfaro, Dávila y Scherer, S.C. (ADS) in Mexico provides advisory services for global clients, focusing on cross-border transactions and giving Moelis a presence in Latin America's two largest markets (Mexico and Brazil)[52] Competition - The financial services industry is intensely competitive, with primary competitors including large investment banks like Goldman Sachs and JPMorgan Chase, as well as independent firms such as Evercore and Lazard[53][54] - Large, diversified financial institutions can offer a wider range of products, such as lending and trading, potentially creating a competitive disadvantage and pricing pressure for advisory-focused firms[57][100] Regulation - The company's U.S. subsidiary, Moelis & Company LLC, is a registered broker-dealer subject to regulation by the SEC and FINRA, including the SEC's uniform net capital rule (Rule 15c3-1)[58][59] - Internationally, the firm is regulated by authorities such as the Financial Conduct Authority in the UK, the Securities and Futures Commission in Hong Kong, and the Dubai Financial Services Authority[60] - The company is subject to anti-money laundering laws, such as the Bank Secrecy Act and USA PATRIOT Act, and anti-corruption laws like the FCPA and UK Bribery Act[65][67] Organizational Structure - Moelis & Company is a holding company whose only assets are its partnership interests in the operating entity, Moelis & Company Group LP ("Group LP"), and its subsidiaries[73] - As of December 31, 2023, public stockholders held a 49% voting interest through Class A common stock, while Moelis & Company Partner Holdings LP held a 51% voting interest through Class B common stock[75] - Group LP Class A unitholders (other than Moelis & Company) have the right to exchange their units for shares of Class A common stock on a one-for-one basis or for cash, at Group LP's option[81] Risk Factors The company faces significant risks related to its business, organizational structure, and common stock, including intense competition, talent retention, market volatility, litigation, regulatory compliance, and the substantial voting power of its CEO Risks Related to Our Business - Future growth depends on the ability to recruit and retain qualified professionals, as the loss of Managing Directors could jeopardize client relationships and lead to lost engagements[93][95] - The business is materially affected by global financial market and economic conditions, which can reduce the volume and value of M&A transactions, thereby decreasing demand for advisory services[102] - Revenue is highly volatile as it is derived almost entirely from advisory fees on a limited number of engagements, with payment often contingent on the successful closing of transactions[108][109] - The firm faces substantial litigation risks from its role as an advisor, including potential liabilities from fairness opinions and capital markets transactions[121] - Extensive and evolving financial regulations expose the company to significant penalties for compliance failures; on August 8, 2023, the company settled with the SEC for a $10.0 million penalty regarding recordkeeping of business communications[122][124] - The business is subject to various cybersecurity risks, including data breaches and system disruptions, which could lead to financial losses, regulatory sanctions, and reputational damage[129][131] Risks Related to Our Organizational Structure - As a holding company, Moelis & Company's only asset is its interest in Group LP, making it dependent on distributions from Group LP to pay dividends, taxes, and other expenses[152][153] - The company is required to pay its Managing Directors 85% of the cash tax savings it realizes from the tax basis step-up resulting from exchanges of Group LP units for Class A common stock[158][159] - Under certain circumstances, such as a change of control, payments under the tax receivable agreement could be accelerated and may significantly exceed the actual tax benefits realized by the company[162] Risks Related to Our Class A Common Stock - Chairman and CEO Kenneth Moelis holds significant voting power (approximately 40% as of Dec 31, 2023) through his control of Partner Holdings, which holds all Class B common stock, allowing him to exert substantial influence over the company's management and affairs[164] - The company's dividend policy may change at any time, and there is no guarantee that it will continue to declare quarterly cash dividends[170] - Anti-takeover provisions in the company's organizational documents and Delaware law could delay or prevent a change in control that stockholders might consider favorable[171] Unresolved Staff Comments The company reports that it has no unresolved staff comments - Not applicable[172] Cybersecurity The company maintains a comprehensive cybersecurity program to manage threats related to sensitive client and proprietary information, overseen by a CISO and the Board of Directors - The company faces cybersecurity threats due to its management of sensitive client data and dependence on IT systems, with risks heightened by remote work[173] - A cybersecurity program is in place, utilizing industry strategies like identity management, network security, encryption, and incident response planning[174] - The program is overseen by a CISO with over 20 years of experience, who reports to the CIO; the Board of Directors is responsible for oversight of cybersecurity risks and reviews related matters at least quarterly[177][180] Properties The company does not own any real property, with its principal executive offices and all other global offices located in leased spaces - The company's principal executive offices are leased at 399 Park Avenue, New York, New York[181] - All global offices are in leased spaces, and the company does not own any real property[181] Legal Proceedings The company is involved in ordinary course legal and regulatory proceedings, including a $10.0 million SEC settlement for recordkeeping and a class action lawsuit challenging stockholder agreement provisions - On August 8, 2023, the company settled with the SEC for a $10.0 million civil penalty to resolve an administrative proceeding related to recordkeeping of business communications on messaging applications[183] - In March 2023, a class action lawsuit was filed by a stockholder in the Delaware Court of Chancery, seeking a declaratory judgment that certain provisions of the Stockholders Agreement with Partner Holdings are invalid under Delaware law[184] Mine Safety Disclosures The company reports that this item is not applicable - Not applicable[185] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on the NYSE, maintains a regular quarterly dividend policy, and repurchased shares in Q4 2023 with $62.5 million remaining under its authorization - The company's Class A common stock is traded on the New York Stock Exchange under the symbol "MC"[188] - In February 2024, the Board declared a quarterly dividend of $0.60 per share, payable on March 28, 2024[190] Share Repurchases in Q4 2023 | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | October 1 - October 31 | — | $ — | | November 1 - November 30 | 5,159 | $43.82 | | December 1 - December 31 | 24,394 | $51.52 | | Total | 29,553 | $50.18 | - As of the end of Q4 2023, approximately $62.5 million remained available for future purchases under the company's share repurchase program, which was authorized in July 2021 for up to $100 million[197][198] Selected Financial Data The company reports that this item is not applicable - Not Applicable[200] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2023, Moelis & Company reported revenues of $854.7 million, a 13% decrease from 2022, resulting in an operating loss of $40.4 million due to increased compensation costs from new hires, while maintaining a strong liquidity position Business Environment and Outlook - For the year ended December 31, 2023, GAAP revenues were $854.7 million, a 13% decrease from 2022, which was less severe than the 32% decrease in global completed M&A transactions over $100 million during the same period[206] - The company anticipates increased financial sponsor-related M&A activity due to record levels of accumulated capital and a backlog of unsold portfolio companies[207] - Restructuring mandates increased in 2023 due to higher borrowing costs, and the company expects continued demand for capital structure advice as companies face significant debt maturity walls[207] Results of Operations Consolidated Results of Operations ($ in thousands) | | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $854,748 | $985,297 | -13% | | Compensation and benefits | $714,749 | $618,195 | 16% | | Non-compensation expenses | $180,351 | $151,002 | 19% | | Total operating expenses | $895,100 | $769,197 | 16% | | Operating income (loss) | ($40,352) | $216,100 | N/M | | Income (loss) before income taxes | ($29,147) | $216,320 | N/M | | Net income (loss) | ($27,516) | $168,682 | N/M | - The 13% decrease in 2023 revenues was driven by a lower number of completed transactions compared to the prior year[217] - Total operating expenses increased by 16% in 2023, primarily due to higher compensation and benefits expense from significant new hires and increased transaction-related non-compensation expenses[220] - Compensation expenses as a percentage of revenue increased to 84% in 2023 from 63% in 2022, driven by a decline in revenues, new hire guarantees, and greater headcount[225] Liquidity and Capital Resources - As of December 31, 2023, the company had $49.1 million in cash and $137.4 million in cash equivalents, primarily invested in U.S. and U.K. sovereign debt securities and money market funds[235] - The company maintains a $65.0 million revolving credit facility for working capital, with $64.4 million available as of December 31, 2023, and no borrowings outstanding[238][239][240] - During 2023, the company paid aggregate dividends of $2.40 per share and repurchased 1,107,683 shares[242][244] - As of December 31, 2023, the company has a total payable of $304.6 million due under its tax receivable agreement, with an estimated $21.4 million due in less than one year[254] Critical Accounting Policies and Estimates - The vast majority of advisory services revenue is recognized over time; however, variable transaction fees are constrained and not recognized until services are substantially complete and a significant revenue reversal is improbable[265][266] - The allowance for credit losses is estimated by stratifying receivables into short-term and private funds advisory categories and applying a percentage reserve based on aging, historical charge-offs, and current economic conditions[270] - The company accounts for income taxes under ASC 740, requiring recognition of deferred tax assets and liabilities for temporary differences, with a valuation allowance applied if realization is not more-likely-than-not[273] Quantitative and Qualitative Disclosures About Market Risk The company's market risk disclosures are included in Item 7, primarily addressing credit risk related to accounts receivable and exchange rate risk from non-U.S. dollar denominated assets and liabilities - Disclosures about market risk are provided in "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk and Credit Risk"[276] Financial Statements and Supplementary Data This section presents the company's consolidated financial statements for fiscal year 2023, including Management's Report on Internal Control over Financial Reporting and the unqualified audit opinion from Deloitte & Touche LLP - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2023, based on the COSO framework[279] - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of the company's internal control over financial reporting[283][290] - The auditor identified the recognition of transaction fees at year-end as a critical audit matter due to the significant management judgment required to assess if recognition criteria were met prior to a transaction's closing[296][297] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports that there were no changes in or disagreements with its accountants on accounting and financial disclosure - None[436] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes during the period - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[437] - Management concluded that internal control over financial reporting was effective as of December 31, 2023[438] - No material changes were made to the company's internal control over financial reporting during the period[440] Other Information On February 22, 2024, the company renewed its Master Services Agreement with Moelis Asset Management LP for a one-year term, pertaining to shared administrative services - The company renewed its Master Services Agreement with Moelis Asset Management LP for one year on February 22, 2024[441] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections The company reports that this item is not applicable - Not Applicable[442] Part III Directors, Executive Officers, Corporate Governance, Compensation, Security Ownership, and Accountant Fees Information for Items 10 through 14, covering directors, executive officers, corporate governance, compensation, security ownership, and accountant fees, is incorporated by reference from the company's 2024 annual meeting proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's definitive proxy statement for its 2024 annual meeting of stockholders[445][446][451] Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Number of Shares to be Issued Upon Vesting | Number of Shares Remaining Available for Future Issuance | | :--- | :--- | :--- | | Equity compensation plans approved by shareholders | 11,822,548 | 6,205,941 | | Equity compensation plans not approved by shareholders | — | — | | Total | 11,822,548 | 6,205,941 | Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial data schedules, and various exhibits filed as part of the Form 10-K, including organizational documents, material contracts, and certifications - This section contains the list of consolidated financial statements filed in Item 8[454] - An index of all exhibits filed with the report is provided, including organizational documents, material contracts, and certifications[457][458]