PJT Partners Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods. PJT Partners is a global advisory-focused investment bank providing strategic, restructuring, shareholder, capital markets and private-fund advisory and fundraising services. The company reports one operating segment.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $297.6 | $174.2 | $730.3 | $469.0 |
| Advisory fees | $262.4 | $146.1 | $611.5 | $383.6 |
| Placement fees | $31.8 | $25.6 | $106.0 | $77.6 |
| Expenses | $227.5 | $154.4 | $577.0 | $435.7 |
| Income before taxes | $70.1 | $19.8 | $153.3 | $33.3 |
| Net income | $58.1 | $14.8 | $131.0 | $25.7 |
| Net income attributable to PJT Partners Inc. | $30.9 | $6.8 | $71.4 | $12.8 |
| Diluted EPS | $1.22 | $0.28 | $2.87 | $0.52 |
| Effective tax rate | 17.1% | 25.3% | 14.5% | 22.7% |
- Revenue increased 71% in Q3 and 56% for the first nine months. Advisory fees rose 80% and 59%, respectively; placement fees rose 24% and 37%.
- Income before taxes was 23.6% of revenue in Q3 versus 11.4% a year earlier, and 21.0% for nine months versus 7.1%. Compensation and benefits remained the largest expense: $196.9 million in Q3 and $485.7 million for nine months.
- Operating cash flow was $300.1 million for nine months, compared with $87.0 million in 2019. The filing attributes $116.9 million of operating cash inflow to the increase in accrued compensation and benefits; cash flow also reflected a $50.6 million increase in accounts receivable.
Financial position and capital
- At September 30, cash and cash equivalents were $138.5 million and investments were $228.4 million, totaling $366.9 million in cash, cash equivalents and investments. The comparable total at December 31, 2019 was $217.5 million.
- Accounts receivable were $277.3 million, including $75.6 million in long-term placement-fee receivables. The allowance for credit losses was $1.7 million; a client represented 10.9% of receivables.
- No debt was outstanding at quarter-end. The $21.5 million term loan was repaid during the first nine months. The $40 million revolving credit facility was undrawn and available; its maturity was extended to October 1, 2021. The company reported compliance with debt covenants.
- Operating lease liabilities were $174.2 million. Total liabilities were $466.0 million and total equity was $681.3 million.
- The company repurchased 828,552 shares for $41.6 million during the first nine months at an average price of $50.20; $43.5 million remained under the $100 million authorization. A quarterly dividend of $0.05 per share was declared, payable December 16, 2020.
Material changes and management commentary
- Management attributed Q3 advisory-fee growth to substantially higher completed restructuring activity and increased strategic advisory revenue. Nine-month growth reflected increases in both restructuring and strategic advisory work. Placement-fee growth was attributed mainly to private-equity fund placements in Q3 and corporate private placements for the nine-month period.
- Compensation and benefits increased 60% in Q3 and 44% for nine months, principally reflecting improved operating performance. Travel expense declined 90% in Q3 and 67% for nine months because of reduced travel during the pandemic. Other expenses included increased charitable contributions supporting COVID-19 relief and racial equity.
- The lower effective tax rate included a $3.7 million tax-provision reduction from carrying back certain net operating losses under the CARES Act.
- Cash and investments increased from year-end, while cash alone declined from $216.0 million to $138.5 million, partly reflecting purchases of Treasury investments, share repurchases, unit exchanges and other financing outflows.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management said the longer-term effects of COVID-19 remain uncertain and depend on the pandemic’s duration and its impact on the U.S. and global economies. It reported no material demand decline to date.
- Management noted worldwide M&A announced volumes were down 18% in the first nine months of 2020 from the prior-year period. It described continued strong restructuring activity, while warning that pandemic uncertainty may challenge fundraising and transaction execution and make new investor relationships harder to establish.
- Liquidity depends substantially on client cash receipts, transaction completions and collection timing. Management believes operating cash flows, available revolver capacity and cash on hand should support near- and long-term needs, but cautioned that prolonged economic disruption could affect results and financing access.
- Two clients represented 22.9% of Q3 revenue; neither represented a material revenue concentration for the nine-month period. Revenue concentration and the timing and completion of advisory engagements can cause results to fluctuate.
- The company disclosed ongoing legal matters, including an appeal relating to claims arising from former employee Andrew Caspersen’s fraud. It estimated potential additional claims related to the matter at less than $30 million, considers them without merit and intends to defend them. It said other litigation outcomes and possible losses could not be estimated; management did not believe current proceedings would materially affect the financial statements.
- A guarantee for certain employee loans backed by investments in former parent Blackstone funds was $6.8 million; management expected associated loss risk to be insignificant. The company also noted tax receivable agreement obligations and indemnifications whose maximum exposure is not known.
- The filing reported no material changes to previously disclosed risk factors, while noting that COVID-19 may exacerbate existing risks. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether exceptional 2020 restructuring and advisory revenue levels are sustainable, and how much revenue depends on completion of transactions.
- Cash conversion: the extent to which nine-month operating cash flow benefited from accrued compensation timing, and subsequent cash payments of incentive compensation.
- Collection of receivables, including long-term placement-fee balances, the $1.7 million credit-loss allowance and customer concentration.
- Future compensation expense, equity award dilution and partnership-unit exchanges; 1,052,681 units presented for exchange in Q3 were scheduled for cash settlement on November 3, 2020.
- Potential impacts of COVID-19, M&A and fundraising conditions, litigation developments, and obligations under the tax receivable agreement.