PJT Partners Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports quarterly results, including the three months ended December 31, 2017. PJT Partners is an advisory-focused investment bank offering strategic advisory, restructuring and special situations, and private fund advisory and placement services. Year-over-year comparisons are against FY 2016, when the company was already operating as an independent public company.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Total revenue | $499.3 million | $499.4 million | Approximately flat |
| Advisory fees | $386.3 million | $377.6 million | Up 2% |
| Placement fees | $102.8 million | $115.0 million | Down 11% |
| Expenses | $489.2 million | $484.9 million | Up 1% |
| Income before taxes | $10.1 million | $14.5 million | Down 31% |
| Net income (loss) | $(28.3) million | $5.1 million | Turned to loss |
| Net income (loss) attributable to PJT Partners Inc. | $(32.6) million | $(3.0) million | Loss increased |
| Net cash provided by operating activities | $111.2 million | $116.9 million | Down $5.6 million |
FY 2017 pretax margin was approximately 2.0%, versus 2.9% in 2016; net margin was approximately negative 5.7%. The parent-attributable loss was approximately 6.5% of revenue. Compensation and benefits were $391.5 million, or about 78% of revenue, and increased 3%, primarily with higher headcount. Equity-based compensation expense was $115.9 million, up from $89.0 million.
- Fourth quarter: Revenue was $190.6 million, pretax income was $25.7 million, and net loss was $28.4 million. The loss attributable to PJT Partners Inc. was $37.4 million, or $1.98 per diluted share. The quarter’s results included the tax-reform-related deferred tax remeasurement described below.
- Cash and liquidity: Cash and cash equivalents were $145.6 million, and U.S. Treasury investments were $37.1 million, totaling $182.7 million at year-end, versus $152.4 million in cash and Treasury securities in 2016. Operating cash flow was $111.2 million. Cash declined by $6.8 million, while purchases and maturities of investments shifted funds into and out of Treasury securities.
- Receivables: Accounts receivable, net, was $190.4 million, down from $227.6 million; this included $77.7 million of long-term placement-fee receivables, generally collected over three to four years. The doubtful-account allowance was $1.9 million, versus $4.4 million.
- Debt and obligations: No amounts were drawn under the $60 million revolving credit facility at year-end; the facility could increase to $80 million seasonally and matured October 1, 2019. The company reported no current indebtedness. Operating lease commitments totaled $189.2 million net of sublease commitments; total disclosed contractual obligations were $204.2 million.
- Capital returns: Dividends declared were $0.20 per Class A share for 2017. The company repurchased 60,333 shares for $2.3 million and had $97.7 million remaining under its $100 million authorization at year-end.
Material changes and unusual items
- Advisory fees rose $8.7 million, but placement fees fell $12.2 million, primarily due to lower corporate private placement revenue; total revenue was essentially unchanged.
- The Tax Cuts and Jobs Act reduced the U.S. corporate tax rate to 21% beginning in 2018. PJT recorded an estimated $24.7 million increase in income tax expense from remeasuring deferred tax assets, partly offset by a $1.6 million reduction in the amount due under the tax receivable agreement. The company described these tax effects as provisional and subject to refinement. The resulting tax provision was $38.4 million and the reported effective tax rate was 381.7%, unusually high in part because pretax income was modest.
- Other expenses decreased to $19.0 million from $24.8 million, partly because 2016 included a non-recurring charge and higher bad-debt expense. Depreciation and amortization also declined, mainly because certain intangible assets had been fully amortized.
- On October 1, 2017, $574.3 million of redeemable non-controlling interests was reclassified as non-controlling interests after certain spin-off-related restrictions expired. This was a presentation change, not a cash inflow.
- FY 2017 cash used in financing activities was $79.6 million, including $45.5 million of cash-settled Partnership Unit exchanges, $23.9 million of tax distributions, dividends, and share repurchases.
Outlook, commentary, and risks
Management described the M&A environment as constructive by historical standards and noted worldwide announced M&A volume was broadly level with 2016. Restructuring activity slowed in 2017 as energy-related restructurings declined, although management cited continuing demand in retail, healthcare, power, technology, media and telecommunications, and international markets. Management also reported continuing institutional demand for alternative assets, including interest in niche strategies and customized solutions. The filing provides no numerical revenue or earnings guidance.
- Results are sensitive to transaction volumes, deal completion and timing, fundraising conditions, and client collections. Advisory fees are often contingent on successful transaction completion; placement fees may be collected over several years after recognition.
- Talent retention and recruiting are central risks. Significant restricted equity awards were expected to vest on March 31, 2018, which management said could affect retention and motivation.
- Two New York actions filed in 2017 and 2018 allege inadequate supervision related to former Park Hill employee Andrew Caspersen’s fraud. PJT and Park Hill dispute the claims and intend to defend them. The company previously recorded an $8.9 million charge and received $5.6 million of insurance reimbursement in 2016; it estimated potential additional claims related to the matter at less than $30 million, while stating it could not estimate losses for other litigation.
- The company guarantees certain employee loans secured by investments in former-parent funds; the guaranteed amount was $9.7 million at year-end.
- The tax receivable agreement requires payment to exchanging Partnership Unit holders of 85% of specified realized tax benefits. A hypothetical termination at December 31, 2017 was estimated to require $148.2 million; actual payments could differ materially and may exceed realized cash tax savings.
- Other identified risks include market and revenue volatility, competition, regulatory and compliance exposure, cybersecurity and operational risks, foreign-exchange exposure (not hedged), Brexit-related uncertainty, and possible changes to tax rules. Management said it believed available cash, operating cash flow and the revolver would provide adequate resources for liquidity needs.
Important facts for investors to verify
- Whether advisory-fee growth can offset weaker placement fees, and how the revenue mix and deal pipeline evolve.
- The cash and earnings effects of the 2017 tax remeasurement, final Tax Act accounting, and future tax receivable agreement payments.
- Collection timing and credit quality of the $77.7 million of long-term receivables and the broader receivables balance.
- Developments and potential exposure from the Caspersen-related litigation and other contingencies.
- Retention and compensation effects of upcoming equity vesting, and the cash requirements from Partnership Unit exchanges.
- The sustainability of dividends and repurchases given operating cash flow, contractual obligations, and the company’s holding-company structure.
The financial statements received an unqualified audit opinion, and management and the independent auditor reported effective internal control over financial reporting as of December 31, 2017.