PJT Partners Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. PJT Partners is a global advisory-focused investment bank, with advisory and restructuring services and private-fund fundraising through PJT Park Hill. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $232.6 | $166.7 | $432.7 | $294.8 |
| Advisory fees | $192.5 | $133.0 | $349.1 | $237.5 |
| Placement fees | $35.3 | $28.7 | $74.3 | $52.0 |
| Total expenses | $182.9 | $153.1 | $349.5 | $281.3 |
| Income before taxes | $49.7 | $13.6 | $83.2 | $13.5 |
| Net income | $40.9 | $10.0 | $72.9 | $11.0 |
| Net income attributable to PJT Partners Inc. | $21.7 | $4.8 | $40.5 | $5.9 |
| Class A diluted EPS | $0.86 | $0.20 | $1.61 | $0.24 |
Revenue increased 40% in Q2 and 47% year to date. Pretax margin, calculated as income before taxes divided by revenue, was approximately 21.4% in Q2 2020 versus 8.2% in Q2 2019, and 19.2% year to date versus 4.6%. Compensation and benefits rose 30% in Q2 and 35% year to date, primarily reflecting higher revenue. Travel expense fell sharply as pandemic conditions curtailed travel.
- Cash flow: Six-month operating cash flow was $122.2 million, versus $23.2 million in 2019. Investing activities used $137.3 million, mainly reflecting $146.6 million of investment purchases, partly offset by $16.3 million of proceeds. Financing activities used $81.6 million, including $25.2 million of share repurchases and $21.5 million repayment of the term loan. Cash declined $100.8 million to $115.1 million.
- Liquidity and debt: Cash, cash equivalents and investments totaled $247.0 million at June 30, 2020, compared with $217.5 million at year-end 2019. The company reported no debt outstanding; its $40 million revolving facility was undrawn and available. Accounts receivable were $257.2 million, including $77.8 million of long-term placement-fee receivables. The credit-loss allowance was $1.5 million.
- Balance sheet: Total assets were $1.010 billion and total liabilities $361.0 million. Operating lease liabilities were $171.7 million. No goodwill impairment was identified at quarter-end.
- Tax and capital returns: Effective tax rates were 17.6% for Q2 and 12.4% year to date. Carryback of certain losses under the CARES Act reduced six-month tax provision by $3.7 million. The company repurchased 539,297 shares for $25.2 million in the first half; $59.9 million remained under its authorization. A $0.05-per-share quarterly dividend was declared, payable September 16, 2020.
Material changes and business trends
- Q2 advisory fees rose 45%, principally from stronger strategic advisory revenues; placement fees rose 23%, driven mainly by corporate private-placement activity. For the first half, advisory fees rose 47% and placement fees 43%.
- Management cited Refinitiv data showing worldwide announced M&A volume down 41% in the first half versus 2019. The company had not yet experienced a material pandemic-related decline in demand, but said lower transaction volumes could pressure future advisory revenue.
- Restructuring engagement increased, which management expected to support restructuring revenue. Fundraising conditions were unsettled: some transactions were paused amid valuation uncertainty, while new investor relationships were harder to establish.
- One client represented 13.1% of Q2 revenue and 11.7% of receivables at June 30. Placement-fee revenue was also concentrated: two clients accounted for 46.7% of Q2 placement fees.
Outlook, risks and contingencies
- Management said the longer-term COVID-19 effects were uncertain and dependent on the pandemic’s duration and economic impact. Risks include reduced or delayed client mandates, delayed collections, weaker client creditworthiness, and potential goodwill or intangible-asset impairment.
- Most employees had worked remotely since mid-March. The company cited potential cybersecurity, data-security and operational risks associated with remote work, as well as employee health and office-reopening risks.
- Brexit-related operating and organizational effects remained uncertain; the U.K. transition period was expected to run through December 31, 2020.
- The company said it was in compliance with debt covenants and expected available cash, operating cash flow and the revolver to provide adequate liquidity, while noting financing availability could be affected by market conditions.
- Management described a New Mexico case appeal as denied in June 2020, subject to possible further appeal. Regarding claims arising from the Andrew Caspersen fraud, the company estimated potential claims below $30 million, considers them without merit and intends to defend them. Other litigation loss ranges were not estimable; management said it was not then party to material pending proceedings, but noted contingencies could affect results when resolved.
- The company guarantees certain employee loans related to investments in former parent Blackstone funds; the guarantee was $7.6 million and management expected associated loss risk to be insignificant. Tax receivable agreement amounts due were $11.1 million; actual payments may differ from estimates.
- No specific earnings or revenue guidance was provided. Management expects incentive compensation payments to create seasonal cash needs, typically late in the year or early the following year.
Important facts for investors to verify
- Whether advisory growth, especially strategic advisory and restructuring, is sustained as M&A and fundraising markets evolve.
- Collections and credit quality for the $257.2 million receivable balance, including long-dated placement fees and client concentration.
- Cash generation and liquidity after compensation payments, partnership-unit exchanges, dividends and repurchases; confirm revolver availability and covenant compliance.
- How much reported earnings growth reflects durable operating performance versus variable transaction timing and the $3.7 million CARES Act tax benefit.
- Developments in COVID-19, the Caspersen-related claims and other litigation, and any resulting impairment or material financial impact.