PJT Partners Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. PJT is a global advisory-focused investment bank, providing strategic advisory, restructuring and special situations, and private fund placement services.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $121.3 million | $147.3 million | $325.9 million | $302.1 million |
| Advisory fees | $100.7 million | $116.2 million | $241.4 million | $221.5 million |
| Placement fees | $18.3 million | $27.8 million | $78.9 million | $76.1 million |
| Total expenses | $123.3 million | $103.5 million | $335.4 million | $279.4 million |
| Income (loss) before taxes | $(2.0) million | $43.9 million | $(9.5) million | $22.7 million |
| Net income (loss) | $(10.3) million | $41.9 million | $(13.6) million | $18.8 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $97.0 million | $137.4 million |
Q3 pretax margin was approximately -1.6%, versus 29.8% a year earlier; nine-month pretax margin was approximately -2.9%, versus 7.5%. The filing does not report an operating margin measure. Class A net loss per share was $0.53 for both the quarter and nine-month period.
Balance sheet, liquidity and capital
- At September 30, cash and cash equivalents were $156.9 million, compared with $82.3 million at year-end 2015. Accounts receivable was $182.1 million, net of a $3.3 million allowance; $61.1 million was long-term placement-fee receivables.
- Total assets were $559.8 million and total liabilities were $170.1 million. Redeemable non-controlling interests were $392.0 million; reported equity was negative $2.3 million.
- Nine-month investing cash outflow was $11.4 million, primarily capital expenditures of $12.8 million. Financing cash outflow was $8.9 million, including dividends and tax distributions. Cash increased $74.6 million over the period.
- No borrowings were outstanding on the $60 million revolving credit facility at September 30; PJT reported compliance with its covenants. The facility maturity was subsequently extended to October 2, 2018. No conventional debt balance is reported in the presented balance sheet.
- Broker-dealer regulatory capital exceeded minimum requirements: PJT Partners LP net capital was $80.4 million and Park Hill Group LLC net capital was $17.0 million at September 30.
Changes and management commentary
- Q3 revenue declined 18% year over year: advisory fees fell 13%, primarily reflecting smaller closed transactions and lower strategic advisory activity, partly offset by stronger restructuring activity; placement fees fell 34% on fewer and smaller fund-placement closings.
- Nine-month revenue rose 8%, with advisory fees up 9% and placement fees up 4%. Management attributed advisory growth to more and larger transactions, particularly restructuring, and placement growth to more fund-placement closings.
- Q3 expenses rose 19%, while nine-month expenses rose 20%. Compensation and benefits increased 43% for Q3 and 24% for nine months, driven in part by higher equity compensation and headcount. Nine-month other expenses rose 184%, reflecting the Caspersen matter, bad-debt expense, the Blackstone tax-deduction payment obligation and stand-alone-company costs.
- Reported comparisons have limitations: the 2015 periods reflect Blackstone’s historical combined businesses before the October 1, 2015 spin-off and exclude PJT Capital LP before its acquisition on that date. Historical allocations and results may not represent PJT as a stand-alone company. Q3 2015 also included affiliate revenues; there were none in 2016.
- Management described worldwide announced M&A volume as down 22% year to date versus the prior year, while viewing the environment as constructive by historical standards. It cited ongoing energy and commodity restructuring activity and said short-term market volatility could pause investment and affect advisory and fund-placement businesses. Brexit’s impact remained uncertain.
Outlook, unusual items and risks
- The company expects to pay significant incentive compensation late in the year or early in the following year, which can reduce cash balances; a significant portion of compensation is equity-based. Management said operating cash flow, the revolver and cash on hand should provide adequate liquidity, while noting cash receipts depend on transaction completions and collections.
- The board declared a $0.05-per-share quarterly dividend, payable December 21, 2016. PJT stated it planned to pay regular quarterly dividends.
- The Caspersen matter involved an $8.9 million recorded expense and a $5.6 million insurance reimbursement deemed probable. PJT paid $8.1 million in Q3 and a further $0.5 million in October; the reimbursement was received in October. PJT said potential additional related claims were believed to be less than $30 million, without merit, and would be defended.
- After quarter-end, PJT paid $16.1 million from working capital to settle exchanges of 594,072 partnership units. The exchanges are expected to create a tax benefit and a corresponding Tax Receivable Agreement liability that could be material; the amount depends on tax savings ultimately realized.
- A putative securities class action alleges misstatements concerning business, operational and compliance controls. PJT said it considers the action without merit and intends to defend it. For other matters, the filing says potential losses cannot currently be estimated; management did not believe pending proceedings were likely to have a material adverse effect.
- Despite GAAP losses, PJT recorded income tax expense of $8.4 million in Q3 and $4.1 million for nine months. Management cited nondeductible compensation and other permanent differences, including equity-compensation amortization, and the use of a year-to-date tax rate in Q3.
- Management reported no material change in risk factors or market-risk exposure and concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the marked Q3 revenue decline and elevated compensation and other expenses persist, accounting for spin-off and acquisition comparability limitations.
- Collection timing and credit quality of the $182.1 million receivables balance, including $61.1 million of long-term placement-fee receivables.
- The ultimate cost and resolution of the Caspersen-related claims, the securities litigation, and the Tax Receivable Agreement liability from unit exchanges.
- Future cash needs from incentive compensation, unit exchanges, dividends and lease commitments; reported operating cash flow was lower year over year for the nine-month period.
- The scale and timing of future equity-compensation expense: the filing reports $80.4 million of unrecognized RSU expense, $82.1 million for partnership units, and $24.4 million for awards with service and market conditions.