PJT Partners Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 7, 2017. PJT Partners is a global advisory-focused investment bank providing strategic advisory, restructuring and special situations, and private fund advisory and placement services. Comparisons below are with the corresponding 2016 periods.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $78.5m | $121.3m | $308.7m | $325.9m |
| Advisory fees | $60.5m | $100.7m | $233.1m | $241.4m |
| Placement fees | $15.9m | $18.3m | $68.9m | $78.9m |
| Total expenses | $94.1m | $123.3m | $324.3m | $335.4m |
| Pre-tax income (loss) | $(15.6)m | $(2.0)m | $(15.6)m | $(9.5)m |
| Consolidated net income (loss) | $(2.4)m | $(10.3)m | $0.04m | $(13.6)m |
| Net income (loss) attributable to PJT Partners Inc. | $3.3m | $(9.7)m | $4.9m | $(9.8)m |
| Class A diluted EPS | $0.16 | $(0.53) | $0.22 | $(0.53) |
| Operating cash flow | — | $71.1m | $97.0m |
Margins: Expenses exceeded revenue in both 2017 periods. The pre-tax loss was about 19.9% of revenue in Q3 2017, versus 1.6% in Q3 2016; for the nine-month periods, the corresponding loss margins were about 5.1% and 2.9%.
Liquidity, cash flow and capital
- At September 30, 2017, cash and cash equivalents were $102.3m and investments were $55.1m, or $157.4m combined. Net accounts receivable was $168.4m, including $65.3m of long-term placement-fee receivables.
- Nine-month operating cash flow was $71.1m. Investing activities used $56.0m, mainly for $55.2m of investment purchases; financing activities used $65.5m, including $39.4m for cash-settled exchanges of partnership units and $19.1m in tax distributions. Cash decreased $50.2m to $102.3m.
- No borrowings were outstanding under the $60m revolving credit facility, and PJT reported covenant compliance. An October 30, 2017 renewal extended facility maturity to October 1, 2019. The company reported no material change in market-risk exposure from year-end 2016.
- Total liabilities were $124.9m. Redeemable non-controlling interests were $574.3m; equity was a deficit of $137.1m, largely reflecting the accounting adjustment of redeemable non-controlling interests to redemption value.
Changes and management commentary
- Q3 revenue fell 35% year over year, mainly because advisory fees declined 40% amid the absence of large transaction closings seen in Q3 2016. Placement fees decreased 13%, despite more closings, as average fees per transaction fell. Nine-month revenue declined 5%.
- Q3 expenses fell 24%, primarily because compensation and benefits declined with revenue; lower other expenses and amortization also contributed. For the nine months, expenses fell 3%. Equity-based compensation expense rose to $88.4m from $65.1m for the nine-month period.
- Management described the M&A environment as constructive by historical standards, citing worldwide announced M&A volume up 3% for the first nine months of 2017. Restructuring activity gained momentum during Q3, while institutional demand for alternative assets remained supportive of Park Hill Group. Brexit’s effects remained uncertain.
- No numerical earnings or revenue guidance was provided. Management said cash typically declines around year-end or early in the first quarter as annual incentive compensation is paid, then generally builds during the rest of the year. It believes operating cash flow, available credit and existing funds should meet liquidity needs, while noting financing availability and transaction-dependent client receipts as uncertainties.
Other material items, risks and contingencies
- A $13.3m Q3 tax benefit contributed to parent-company-attributable income despite a consolidated net loss. The reported nine-month tax benefit was $15.6m; effective tax rates were unusually high and affected by entity mix, nondeductible compensation and the rate-estimation method.
- After quarter-end, the board authorized up to $100m of Class A share repurchases, without a specified expiration date. A quarterly dividend of $0.05 per share was declared for payment December 20, 2017.
- The company cited $189.4m of net minimum operating lease payments and $11.5m of purchase obligations in its contractual-obligations schedule. It also had $7.2m accrued for compensation-related tax benefits payable to Blackstone and $3.8m due under the tax receivable agreement.
- Management stated it was not currently party to material pending proceedings expected to have a material effect. A putative securities class action was dismissed, with judgment entered October 11, 2017. A separate suit by The Moore Charitable Foundation and Kendall JMAC alleging claims related to former employee Andrew Caspersen remained contested. The New Mexico action against Park Hill defendants was dismissed in June 2017, and plaintiffs appealed in October. PJT said potential additional Caspersen-related claims were without merit and estimated their total potential amount at less than $30m; the previously recorded $8.9m charge and $5.6m insurance reimbursement were paid and received in 2016, respectively.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. The company expected to cease being an emerging growth company at fiscal year-end 2017. It was assessing the impact of new revenue-recognition, lease and credit-loss accounting standards; revenue-standard adoption was planned for January 1, 2018, with the impact still under assessment.
Investor verification priorities
- Assess whether the sharp Q3 advisory-fee decline reflects timing of large closings or a more persistent change in engagement activity and average fees.
- Review the quality and collection timing of receivables, particularly the $65.3m of long-term placement-fee balances, and cash needs around annual incentive payments.
- Understand the effect of non-controlling interests, unit exchanges, equity compensation and redemption-value adjustments on reported parent earnings, dilution and equity deficit.
- Verify the assumptions behind the material tax benefit, the $100m repurchase authorization, and the company’s capacity to meet lease and other contractual commitments.
- Monitor developments in the Moore litigation, the New Mexico appeal, any additional Caspersen-related claims, and the forthcoming revenue-recognition assessment.