PJT Partners Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results; comparisons are with Q1 2019 unless otherwise noted. Dollar amounts below are in millions unless stated otherwise.
Business context and results
PJT Partners is a global advisory-focused investment bank providing strategic and shareholder advisory, restructuring and special situations, and private fund advisory and fundraising services. The company reports as one segment.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $200.2 | $128.1 | +56% |
| Advisory fees | $156.6 | $104.5 | +50% |
| Placement fees | $39.0 | $23.3 | +67% |
| Expenses | $166.6 | $128.1 | +30% |
| Income before taxes | $33.6 | $(0.1) | — |
| Net income | $32.0 | $0.9 | — |
| Net income attributable to PJT Partners Inc. | $18.9 | $1.1 | — |
| Basic / diluted EPS | $0.78 / $0.72 | $0.05 / $0.04 | — |
Revenue growth reflected stronger restructuring and strategic advisory activity, as well as increased corporate private placements and fundraising for alternative asset managers. Total expenses rose mainly because compensation and benefits increased $38.9 million, principally with higher revenue. Income before taxes was 16.8% of revenue, compared with a slight pretax loss in Q1 2019; the effective tax rate was 4.6%, including a $3.7 million tax benefit from carrying back certain net operating losses under the CARES Act.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $88.3 million at March 31, 2020, down from $216.0 million at December 31, 2019. Cash plus investments was $112.7 million, versus $217.5 million.
- Operating cash flow was a use of $25.1 million, compared with a use of $39.9 million in Q1 2019. Investing cash flow used $28.0 million and financing cash flow used $71.6 million; cash declined by $127.6 million during the quarter.
- Total assets were $878.7 million and total liabilities were $288.4 million at quarter end. Accounts receivable was $245.7 million, including $77.4 million of long-term placement-fee receivables; the credit-loss allowance was $1.4 million.
- The $21.5 million term loan was repaid in full during Q1. No debt was outstanding at March 31, and the $40 million revolving facility was undrawn and available. The company reported compliance with debt covenants.
- Operating lease liabilities were $175.6 million. The company repurchased 539,297 shares for $25.2 million during the quarter; $59.9 million remained under its $100 million authorization. A $0.05-per-share quarterly dividend was declared, payable June 17, 2020.
Material changes and management outlook
- Worldwide announced M&A volume was down 25% year over year in Q1 2020, according to Refinitiv. Management said the pandemic’s short-term effect on M&A activity remained uncertain.
- Management reported a sharp increase in restructuring activity associated with the economic shutdown and continuing demand for restructuring and liability-management advice. Fundraising and active transactions faced delays or pauses as participants assessed market dislocation and portfolio valuations.
- The company said it had not yet experienced a material decline in demand for its services, but warned that COVID-19 could adversely affect demand, client decisions and payments, receivable collections, cash flows and financial condition. It provided no quantified earnings or revenue guidance.
- Most employees were working remotely. Management identified potential operational and cybersecurity risks from remote work, as well as possible goodwill, intangible-asset or deferred-tax-asset impairment if conditions deteriorate. It did not consider goodwill or intangible assets impaired at March 31.
- Other disclosed risks include economic and market volatility, foreign-exchange movements, uncertainty surrounding Brexit, and the possibility that future financing may not be available on acceptable terms. The company reported no hedging of foreign-currency exposure.
Contingencies and unusual items
- Management said potential additional claims related to the Caspersen fraud matter were believed to total less than $30 million, were without merit, and would be vigorously defended. A related complaint against PJT Partners and Park Hill was dismissed in its entirety by an appellate court in December 2019; a motion for reargument or leave to appeal was denied in March 2020.
- The company disclosed other ordinary-course legal matters but said it could not estimate possible losses; their eventual resolution could be material in the period incurred. It also reported an $8.7 million guarantee of certain employee loans, with expected loss described as insignificant.
- Credit-loss accounting guidance adopted January 1, 2020 reduced opening accounts receivable by $1.1 million and increased the opening accumulated deficit by $0.9 million, net of tax.
Important facts for investors to verify
- Whether COVID-19 and market conditions change advisory activity, fundraising closings, client payment timing or the collectability of receivables.
- How cash generation and liquidity evolve after the substantial Q1 cash decline, including incentive-compensation payments and any use of the revolving credit facility.
- Whether client and fee concentration increases: one client represented 13.5% of Q1 revenue and 11.0% of quarter-end receivables; three clients generated 42.6% of advisory fees and three generated 49.8% of placement fees.
- Progress and outcomes in disclosed litigation, and any changes in impairment assessments, tax assets, or other contingencies.