PJT Partners Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results; amounts below are in millions of dollars unless otherwise noted. PJT Partners is a global advisory-focused investment bank with strategic and restructuring advisory, shareholder advisory, and private fund advisory and placement businesses. CamberView, acquired in October 2018, is included in 2019 results.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $166.7 | $130.7 | $294.8 | $264.7 |
| Expenses | $153.1 | $120.5 | $281.3 | $252.0 |
| Income before taxes | $13.6 | $10.1 | $13.5 | $12.8 |
| Net income | $10.0 | $11.0 | $11.0 | $17.7 |
| Net income attributable to PJT Partners Inc. | $4.8 | $6.9 | $5.9 | $12.2 |
| Class A diluted EPS | $0.20 | $0.30 | $0.24 | $0.55 |
- Q2 revenue rose 28% year over year, led by advisory fees, up 35% to $133.0 million; placement fees were $28.7 million, up 2%.
- Six-month revenue increased 11%. Advisory fees rose 18% to $237.5 million, while placement fees declined 4% to $52.0 million and interest income and other fell 40% to $5.3 million.
- Expenses grew 27% in Q2 and 12% for the first half. Compensation and benefits were $119.2 million in Q2 and $214.3 million for six months; equity-based compensation expense was $65.6 million for the half.
- Q2 pretax margin was approximately 8.2% versus 7.8% a year earlier; first-half pretax margin was approximately 4.6% versus 4.8%. Net income attributable to PJT declined despite revenue growth, reflecting higher expenses and a shift from prior-year tax benefits to tax expense.
- Effective tax rates were 26.2% in Q2 and 18.8% for the first half, compared with tax benefits in the comparable 2018 periods. Management cited reduced tax benefits associated with delivery of vested shares as a principal reason for the first-half change.
Cash flow, balance sheet and capital
- Operating cash flow was $23.2 million for the first six months, versus $20.2 million in 2018. Investing activities provided $3.0 million, including $7.5 million from settlement of acquisition-related escrow; capital expenditures were $4.5 million.
- Financing activities used $47.7 million, including $25.7 million of share repurchases, $10.1 million of cash-settled partnership-unit exchanges and $2.3 million of dividends. Cash and cash equivalents declined $21.9 million to $84.2 million from year-end; management reported cash, cash equivalents and investments of $85.6 million at June 30.
- Accounts receivable was $221.9 million, including $75.9 million of long-term placement-fee receivables. Receivables are important to liquidity because collections depend partly on transaction completions and payment timing.
- Total liabilities were $282.0 million and total equity was $519.5 million. The balance sheet included $30.0 million of term-loan debt and $156.0 million of operating lease liabilities. The $40.0 million revolving facility was undrawn at June 30; its commitments may increase to $60.0 million during a specified seasonal window. The term loan matures January 2021, and the company reported compliance with debt covenants.
- Operating lease accounting adoption added $129.5 million of right-of-use assets and $146.2 million of lease liabilities at January 1, 2019; comparative periods were not restated.
- The board authorized an additional $100 million share-repurchase authorization in April. In the first half, PJT repurchased 639,204 shares for $25.7 million at an average $40.15 per share; $107.2 million of authorization remained at June 30. A $0.05-per-share quarterly dividend was declared, payable September 18, 2019.
Changes, outlook and risks
- Management attributed Q2 advisory-fee growth to strategic advisory and restructuring and special situations. First-half advisory growth came primarily from strategic advisory, with more modest growth in restructuring. First-half placement-fee weakness was primarily due to lower private-equity placement revenue.
- CamberView acquisition consideration was preliminarily $136.1 million. Measurement-period adjustments reduced goodwill by $5.1 million. Acquisition-related amortization, interest expense and expanded headcount contributed to higher costs.
- Management described the M&A environment as constructive by historical standards despite worldwide announced M&A volume declining 12% in the first half year over year. It said restructuring activity gained momentum and reported a No. 1 ranking in global completed restructurings for the first half, citing Refinitiv. Alternative-asset fundraising demand remained supportive, with interest in niche strategies and customized solutions.
- No quantitative company revenue or earnings guidance was provided. Management noted that M&A is cyclical, revenues depend on engagement activity and successful transaction closings, and liquidity depends in part on client receipts and collections. It expects cash to typically fall around year-end or early in the following year when incentive compensation is paid.
- Brexit remained uncertain, with the U.K. withdrawal deadline extended to October 31, 2019; the company said it was taking preparatory steps. Management also cited general economic, financial, competitive, legislative and regulatory factors as potential influences on results and financing access.
- Litigation includes actual or potential claims related to funds fraudulently obtained by Andrew Caspersen. Management estimated potential claims at less than $30 million, considered them without merit and said it would defend them; loss estimates for other matters were not available. The company guaranteed $11.5 million of employee loans and expected associated loss risk to be insignificant.
- An immaterial prior-period equity presentation error was corrected through reclassifications between additional paid-in capital and non-controlling interests; it did not affect statements of operations or cash flows. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether advisory-fee growth and transaction activity persist, given the cyclical nature of M&A and the dependence of fees on successful closings.
- Cash conversion and collection trends for the $221.9 million receivable balance, including the timing and collectability of long-term placement-fee receivables.
- Compensation and equity-award costs, including the $126.1 million of estimated unrecognized RSU compensation expense and their effect on future margins and share dilution.
- Capital allocation and liquidity after repurchases, partnership-unit exchanges, dividends, debt amortization and lease commitments; confirm availability and covenant terms of the revolving facility.
- Developments in the Caspersen-related claims, other legal matters, Brexit preparations and the tax receivable agreement, under which eligible holders receive 85% of specified tax benefits.
- Client concentration: the filing reports one Q2 client at 10.5% of total revenue and identifies one advisory client above 10% of advisory fees in the quarter.