PJT Partners Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 9, 2017. PJT Partners is a global advisory-focused investment bank offering strategic advisory, restructuring and special situations, and private fund advisory and placement services. Comparisons are with Q1 2016 unless otherwise noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $121.0 million | $115.3 million | +5% |
| Advisory fees | $99.3 million | $81.6 million | +22% |
| Placement fees | $19.5 million | $32.0 million | -39% |
| Total expenses | $118.9 million | $112.6 million | +6% |
| Income before taxes | $2.1 million | $2.7 million | -24% |
| Net income | $3.0 million | $1.4 million | +107% |
| Net income attributable to PJT Partners Inc. | $1.3 million; $0.07 per Class A share | $0.3 million; $0.01 per share | +423% |
Revenue less expenses was $2.1 million, a 1.7% margin, versus $2.7 million, or 2.4%, in Q1 2016. The reported tax benefit of $0.9 million (effective rate -41.7%) lifted net income; the prior-year period had a $1.3 million tax provision (47.6% effective rate). Management attributed the lower 2017 tax rate primarily to a benefit associated with delivery of vested shares above their amortized cost.
Advisory-fee growth reflected higher average fees in strategic advisory and restructuring/special situations. Placement-fee decline reflected lower average fees. Compensation and benefits rose 9% to $95.7 million, primarily due to increased headcount and improved business performance; equity-based compensation expense was $33.3 million versus $20.6 million. Depreciation and amortization fell 46% to $2.1 million, mainly because certain spin-off-related intangible assets had fully amortized.
Cash flow, liquidity and capital
- Operating cash flow was negative $35.7 million, compared with positive $10.8 million in Q1 2016. The principal working-capital outflow was a $101.0 million decrease in accrued compensation and benefits, partly offset by a $28.3 million cash benefit from accounts receivable.
- Investing cash outflow was $25.3 million, including $25.0 million of investment purchases. Financing cash outflow was $17.4 million, including $13.1 million for cash-settled partnership-unit exchanges and $1.0 million of dividends.
- Cash and cash equivalents were $73.5 million at March 31, 2017, down from $152.4 million at year-end 2016. Cash, cash equivalents and U.S. Treasury investments totaled $98.4 million, versus $152.4 million at year-end.
- Net accounts receivable was $200.4 million, including $65.7 million of long-term placement-fee receivables generally collected over three to four years. Total assets were $510.6 million; total liabilities were $78.1 million. Redeemable non-controlling interests were $494.6 million, representing 45.3% of the partnership’s economic interest. Reported equity was a $62.0 million deficit.
- No borrowings were outstanding under the $60 million revolving credit facility; commitments can increase to $80 million during a specified seasonal window. The facility matures October 2, 2018. PJT reported compliance with covenants. No other material funded debt was reported.
- Operating lease obligations, net of sublease commitments, totaled $184.5 million. The company declared a $0.05-per-share quarterly dividend, payable June 22, 2017.
Outlook, risks and unusual items
- Management described the M&A environment as constructive by historical standards, citing worldwide announced M&A volume up 12% year over year in Q1 2017. Restructuring activity remained strong, particularly in retail, energy and power; management also identified potential opportunities in healthcare, technology/media/telecommunications and shipping. It said global demand for alternative assets and specialized strategies supported Park Hill’s positioning.
- No quantified earnings or revenue guidance was provided. Management noted that results depend on transaction activity and successful deal completion, client fee collections, market conditions and employee compensation. Cash typically declines around year-end or in Q1 when prior-year incentive compensation is paid.
- Brexit’s effects remained uncertain and could affect client transactions and PJT’s organization or operations. The filing also highlights exposure to cyclical financial markets, transaction execution and collections, competition, regulatory requirements, and the ability to access financing on acceptable terms.
- Potential additional claims associated with former employee Andrew Caspersen’s unauthorized activity were estimated by management at less than $30 million; PJT said it considered such claims without merit and would defend them. The previously recorded $8.9 million charge and $5.6 million insurance reimbursement were paid and received, respectively, during 2016. Management did not consider current proceedings likely to have a material adverse effect, while noting that some contingencies could be material when resolved.
- After quarter-end, PJT paid $13.0 million for partnership units exchanged in Q4 2016 and settled another 526,733-unit exchange for $19.1 million on May 9, 2017. These exchanges use working capital and may affect liquidity. The company also disclosed an immaterial prior-period accounting restatement concerning classification of partnership interests; it did not affect prior-period operations or cash flows.
Most important facts for investors to verify
- Whether advisory-fee gains can offset continued weakness or volatility in placement fees, and how concentrated fee generation remains.
- Cash conversion and seasonal compensation payments, given negative Q1 operating cash flow and the decline in cash and Treasury investments.
- Future cash demands from partnership-unit exchanges, dividends, lease commitments and the tax receivable agreement.
- Compensation costs, including equity-based compensation and the substantial unrecognized expense associated with outstanding awards.
- Developments in the Caspersen-related matter, other legal contingencies, Brexit and transaction-market conditions.