MOELIS & COMPANY 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 endedDecember 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 theAmericas ,Europe , theMiddle East ,Asia andAustralia , 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 ofMarch 31, 2020 , we served our clients globally with 591 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 months endedMarch 31, 2020 and 2019, referenced throughout this Form 10-Q was obtained from Thomson Financial as ofApril 4, 2020 , andApril 4, 2019 . For the first three months of 2020, we earned revenues of$153.7 million , an increase of 12% from the$137.8 million earned during the same period in 2019. This compares favorably with a 23% decrease in the number of global completed M&A transactions greater than$100 million in the same period. The increase in revenues was driven by an increase in the number of transaction completions, as well as an increase in average fees earned per completed transaction as compared with the prior year period. Our team of investment banking professionals continues to be very active, providing high quality advice to clients around the globe. While our current conversations with clients remain strong, we caution that given the uncertainty and volatility in the world caused by COVID-19, there may be a more pronounced delay between the time we get mandated on a transaction and when a transaction can ultimately complete, which may temporarily have a negative impact on the timing of revenues. Starting toward the latter half of the first quarter of 2020, M&A transactions have generally been put on hiatus and fewer new transactions are launching due to market volatility, and a general uncertain 25
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environment caused by COVID-19. As a result, in the first quarter of 2020 global M&A transaction completions were down 23% versus the prior year period. At the same time, companies across the economy are experiencing severe financial distress as a result of the business cessation caused by COVID-19. Our restructuring activity has increased tremendously as companies across most sectors are seeking our advice on their capital and liquidity needs. We are confident about the longer-term revenue contribution from our restructuring business, but believe that there may be a period in our financial results where M&A transactions remain on hiatus and restructuring completions lag, causing revenues to decrease in the short term. We feel confident about our position in the market 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. We are confident about the current strength of our Franchise and our operational health in this uncertain environment. We have a strong balance sheet with substantial liquidity, zero debt, and virtually no future cash compensation obligations for past service. By remaining focused on the factors that are within our control, we are in a position to emerge from the current environment better than how we came into it.
Results of Operations
The following is a discussion of our results of operations for the three months
ended
Three Months Ended March 31,
($ in thousands) 2020 2019 Variance
Revenues $ 153,706 $ 137,783 12 %
Expenses:
Compensation and benefits 95,120 90,161 6 %
Non-compensation expenses 34,144 37,993 -10 %
Total operating expenses 129,264 128,154 1 %
Operating income (loss) 24,442 9,629 154 %
Other income and (expenses) (1,660 ) 2,090 N/M
Income (loss) before income taxes 22,782 11,719 94 %
Provision (benefit) for income taxes (7,344 ) (4,458 ) 65 %
Net income (loss) $ 30,126 $ 16,177 86 %
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.
Three Months Ended
Revenues were$153.7 million for the three months endedMarch 31, 2020 as compared with$137.8 million for the same period in 2019, representing an increase of 12%. The increase in revenues was driven by an increase in the number of transaction completions, as well as an increase in average fees earned per completed transaction as compared with the prior year period. Toward the end of the quarter, we saw many 26
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M&A transactions being put on hold due to the uncertainty and market volatility caused by COVID-19. 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. For the three months endedMarch 31, 2020 and 2019 there were 117 and 90 fee-paying clients, respectively, and the number of clients who paid fees equal to or greater than$1 million increased to 39 clients from 29 clients for the same period of 2019. Operating Expenses The following table sets forth information relating to our operating expenses: Three Months Ended March 31, ($ in thousands) 2020 2019 Variance Expenses: Compensation and benefits $ 95,120$ 90,161 6 % % of revenues 62 % 65 %
Non-compensation expenses $ 34,144
22 % 28 %
Total operating expenses $ 129,264 $ 128,154 1 %
% of revenues 84 % 93 %
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
Operating expenses were
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 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.
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Three Months Ended
For the three months ended
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$95.1 million and$90.2 million for the three months endedMarch 31, 2020 and 2019, respectively. The increase in fixed compensation costs relates to increased headcount as compared to the prior year period. Discretionary cash bonus expenses generally represent the excess amount of total compensation over base compensation and amortization of equity and contingent cash awards. For the three months endedMarch 31, 2020 and 2019, there was no accrued discretionary cash bonus expense. 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
For the three months endedMarch 31, 2020 , noncompensation expenses of$34.1 million represented 22% of revenues, compared with$38.0 million which represented 28% of revenues in the prior year period. The decrease in non-compensation expenses were primarily related to decreased travel and other business development expenses related to social distancing restrictions due to the COVID-19 virus, 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
Other income and expenses were an expense of$1.7 million and income of$2.0 million for the three months endedMarch 31, 2020 and 2019, respectively. The decrease in other income and expenses is primarily related to amounts due pursuant to the Company's Tax Receivable Agreement in connection with the CARES Act during the three months endedMarch 31, 2020
Provision for Income Taxes
The Company's operations are comprised of entities that are organized as limited liability companies and limited partnerships. ForU.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 toU.S. corporate, federal, state, and local income tax on its allocable share of results of operations fromGroup LP .
Three Months Ended
The Company's provision for income taxes and effective tax rates were a benefit of$7.3 million and (32%), and a benefit of$4.5 million and (38%), for the three months endedMarch 31, 2020 and 2019, respectively. The income tax provision and effective tax rate for the aforementioned periods primarily reflect the Company's allocable share of earnings fromGroup LP at the prevailingU.S. federal, state, and local corporate income tax rate, and the effect of the excess tax benefit recognized in connection with the delivery of equity-based compensation at an appreciated price above the grant date price for those periods in addition to the tax benefit from certain tax relief provisions provided under the CARES Act during the first quarter of 2020.
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
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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 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 shortterm 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 ofMarch 31, 2020 andDecember 31, 2019 , the Company had cash equivalents of$85.2 million and$96.0 million , respectively, invested inU.S. Treasury instruments and government securities money market. Additionally, as ofMarch 31, 2020 andDecember 31, 2019 , the Company had cash of$39.0 million and$71.8 million , respectively, maintained inU.S. and nonU.S. bank accounts, of which most bank account balances exceeded theU.S. Federal Deposit Insurance Corporation ("FDIC") andU.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 ofMarch 31, 2020 andDecember 31, 2019 , the Company held$21.2 million and$174.0 million ofU.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 ofMarch 31, 2020 andDecember 31, 2019 accounts receivable were$38.4 million and$45.1 million , respectively, net of allowances of$3.8 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 onJune 30, 2020 . InApril 2020 , the Company renewed its$65.0 million revolving credit facility which extended the maturity date toJune 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 ofMarch 31, 2020 , the Company had no borrowings under the credit facility. As ofMarch 31, 2020 , the Company's available credit under this facility was$60.1 million as a result of the issuance of an aggregate amount of$4.9 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 ofMoelis & Company declared a dividend of$0.255 per share to be paid onJune 30, 2020 to Class A common shareholders of record onMay 4, 2020 . The quarterly dividend has been temporarily modified to preserve capital and enhance financial flexibility during this period of uncertainty related to COVID-19. During the three months endedMarch 31, 2020 the Company paid aggregate dividends of$1.26 per share, which included a special dividend of$0.75 per share and a regular quarterly dividend of$0.51 per share. InFebruary 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 ofGroup LP with no expiration date. This new authorization replaced the former repurchase program and the remaining authorization under the program was eliminated. During the three months endedMarch 31, 2020 and 2019, the Company repurchased 869,779 and 616,796 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 ofMarch 31, 2020 .
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, recordkeeping, 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 ofMarch 31, 2020 for further information. These regulations differ inthe United States ,United Kingdom ,Hong Kong and other countries in which we operate a registered brokerdealer. 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
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In connection with the IPO inApril 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, inU.S. federal, state, and local income tax or franchise tax that we realize as a result of (a) the increases in tax basis attributable to exchanges by our eligible Managing Directors and (b) tax benefits related to imputed interest deemed to be paid by us as a result of this tax receivable agreement. The Company expects to benefit from the remaining 15% of income tax cash savings, if any, that we realize. For purposes of the tax receivable agreement, income tax cash savings will be computed by comparing our actual income tax liability to the amount of such taxes that we would have been required to pay had there been no increase to the tax basis of the tangible and intangible assets ofGroup 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
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:
Three Months Ended
($ in thousands) 2020 2019
Cash Provided By (Used In)
Operating Activities:
Net income (loss) $ 30,126 $ 16,177
Non-cash charges 35,348 51,551
Other operating activities (138,567 ) (190,074 )
Total operating activities (73,093 ) (122,346 )
Investing Activities 139,958 69,142
Financing Activities (108,506 ) (140,212 )
Effect of exchange rate changes (2,176 ) 1,126
Net increase (decrease) in cash (43,817 )
(192,290 ) Cash, cash equivalents, and restricted cash, beginning of period
168,572 261,771
Cash, cash equivalents, and restricted cash, end of period$ 124,755 $ 69,481
Three months ended
Cash, cash equivalents and restricted cash were$124.8 million atMarch 31, 2020 , a decrease of$43.8 million from$168.6 million atDecember 31, 2019 . Operating activities resulted in a net outflow of$73.1 million primarily attributable to net operating expenses, including discretionary bonuses paid during the period, offset by cash collected from clients. Investing activities resulted in a net inflow of$140.0 million primarily attributable to net sales of investments. Financing activities resulted in a net outflow of$108.5 million primarily related to the payment of dividends and tax distributions and treasury stock purchases.
Three months ended
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Cash, cash equivalents and restricted cash were$69.5 million atMarch 31, 2019 , a decrease of$192.3 million from$261.8 million atDecember 31, 2018 . Operating activities resulted in a net outflow of$122.3 million primarily attributable to cash operating expenses including discretionary bonuses paid during the period, partially offset by cash collected from clients. Investing activities resulted in a net inflow of$69.1 million primarily attributable to net sales of investments. Financing activities resulted in a net outflow of$140.2 million primarily related to the payment of dividends and tax distributions.
Contractual Obligations
The following table sets forth information relating to our contractual
obligations as of
Payment Due by Period
Less than More than
($ in thousands) Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
Operating leases (net of $4,331
of committed sublease income) $ 280,911 $ 16,565 $ 41,003 $ 36,658 $ 186,685
Amount due pursuant to Tax
Receivable Agreement 300,871 22,014 45,204 37,248 196,405
Total $ 581,782 $ 38,579 $ 86,207 $ 73,906 $ 383,090
As of March 31, 2020 , the Company has a total payable of $300.9 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 three 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 andU.S. treasury instruments. Cash is maintained inU.S. and non-U.S. bank accounts. MostU.S. andU.K. account balances exceed theFDIC and FSCS coverage limits. In addition to cash and cash equivalents, we hold various types ofU.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."
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Table of Contents Exchange Rate Risk The Company is exposed to the risk that the exchange rate of theU.S. dollar relative to other currencies may have an adverse effect on the reported value of the Company's nonU.S. dollar denominated assets and liabilities. Nonfunctional currencyrelated 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 theU.S. dollar, in which our financial statements are denominated. For the three months endedMarch 31, 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 a loss of$1.6 million and a gain of$0.5 million , respectively. We have not entered into any transactions to hedge our exposure to these foreign currency fluctuations through the use of derivative instruments or other methods.
Critical Accounting Policies
We believe that the critical accounting policies included below represent those that are most important to the presentation of our financial condition and results of operations and require management's most difficult, subjective and complex judgment. The preparation of financial statements and related disclosures in conformity withU.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.
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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 three months ended March 31, 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 three
months ended March 31, 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.
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