PJT Partners Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts below are in U.S. dollars; financial-statement figures are rounded to millions unless otherwise noted. PJT is an advisory-focused investment bank providing strategic advisory, restructuring and special situations, and private-fund placement services. It operates as a single reportable segment.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $109.3m | $89.3m | $230.3m | $204.6m |
| Advisory fees | $73.3m | $59.1m | $172.7m | $140.6m |
| Placement fees | $33.5m | $28.7m | $53.0m | $60.6m |
| Total expenses | $111.4m | $99.5m | $230.3m | $212.1m |
| Pre-tax income (loss) | $(2.1)m | $(10.3)m | $0.005m | $(7.5)m |
| Consolidated net income (loss) | $(0.6)m | $(4.7)m | $2.4m | $(3.3)m |
| Net income (loss) attributable to PJT Partners Inc. | $0.2m | $(0.3)m | $1.5m | $(0.1)m |
- Margins and costs: Pre-tax margin was approximately (1.9)% in Q2 2017 versus (11.5)% in Q2 2016; first-half 2017 pre-tax income was approximately break-even. Compensation and benefits were $87.6m in Q2 and $183.2m for the first half, representing about 80% of revenue in each period.
- Cash flow: Operating cash flow was $(4.5)m for the first half, compared with $30.4m provided in the prior-year period. Investing activities used $35.5m, including $35.0m of Treasury purchases; financing activities used $51.3m, including $32.2m for cash-settled partnership-unit exchanges and $13.7m of tax distributions. Cash declined $91.6m to $60.9m.
- Liquidity and debt: Cash and Treasury investments totaled $95.8m at June 30, 2017, versus $152.4m at year-end 2016. Net accounts receivable was $220.6m, including $77.2m of long-term placement-fee receivables. No borrowings were outstanding under the $60m revolving credit facility (with a conditional seasonal increase to $80m); the facility was extended to October 2, 2018, and the company reported compliance with covenants. The filing does not present a conventional current ratio.
- Balance sheet and distributions: Total assets were $539.6m; total liabilities were $113.7m. Redeemable non-controlling interests were $575.6m, and stockholders’ equity was a deficit of $149.7m. The company declared a $0.05-per-share quarterly dividend, consistent with the prior-year quarter; a further $0.05 dividend was declared for payment in September 2017.
Changes versus the prior comparable period
- Q2 revenue rose 22%, with advisory fees up 24% and placement fees up 17%. Management attributed the advisory increase mainly to higher average fees, primarily in strategic advisory; placement growth also reflected higher average fees.
- First-half revenue increased 13%. Advisory fees rose 23%, supported by strategic advisory and restructuring, while placement fees fell 13% as average fees declined.
- Expenses increased 12% in Q2 and 9% in the first half, primarily because compensation and benefits rose with higher headcount and improved business performance. Lower amortization and professional fees partly offset the increase.
- Cash and investments fell by $56.6m from December 31, 2016, while accounts receivable declined by $7.0m. First-half operating cash flow moved from positive to negative, with accrued compensation payments a major working-capital outflow.
Outlook, risks, contingencies and unusual items
- Management’s market commentary: Management described M&A conditions as constructive by historical standards and cited worldwide announced M&A volume up 2% in the first half of 2017. It noted restructuring activity increased toward quarter-end and continued institutional demand for alternative assets. No numerical company revenue or earnings guidance was provided.
- Business risks: Results depend on transaction activity and successful closings; advisory fees can be delayed or lost if transactions fail. Management also highlighted uncertain Brexit effects and the cyclical sensitivity of M&A. Cash generation depends materially on client receipts and collection timing. One client accounted for 11.4% of Q2 total revenue.
- Legal matters: A June 2017 lawsuit by The Moore Charitable Foundation and Kendall JMAC alleges inadequate supervision related to former employee Andrew Caspersen’s fraud; PJT says it considers the action without merit and will defend it. Management estimated potential claims related to the Caspersen matter at less than $30m, while asserting claims are without merit. The filing says losses from other litigation cannot currently be estimated and their eventual disposition could be material in the period resolved. A separate New Mexico case was dismissed at the state’s request, though plaintiffs may appeal.
- Other notable items: Cash-settled exchanges of 888,321 partnership units used $32.2m in the first half; another 180,056 units presented in Q2 were expected to be settled in August. Equity-based compensation expense was $60.7m for the first half, with $84.2m of unrecognized RSU expense and $67.3m of unrecognized partnership-unit expense. The company recorded a large deficit adjustment primarily from remeasuring redeemable non-controlling interests to redemption value.
- Controls and accounting: Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. The company was assessing the impact of new revenue-recognition, lease and credit-loss accounting standards; it planned to adopt the revenue standard using the modified retrospective approach from January 1, 2018.
Important facts for investors to verify
- Whether advisory-fee growth and the constructive transaction environment continue, and how much revenue remains dependent on a small number of clients and successful closings.
- Cash conversion, collection of receivables—including the $77.2m long-term placement-fee balance—and seasonal compensation outflows.
- Cash needs for partnership-unit exchanges, tax distributions, dividends and the substantial lease commitments; operating lease obligations net of sublease proceeds totaled $194.3m.
- Developments in the Caspersen-related lawsuits, including any change to the company’s stated potential exposure or insurance position.
- The effect of ongoing equity compensation and partnership-unit exchanges on future expense, cash resources, ownership dilution and the redeemable non-controlling-interest balance.