PJT Partners Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 4, 2018. PJT Partners is a global advisory-focused investment bank offering strategic advisory, restructuring and special situations, and private fund advisory and placement services. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $134.0 million | $121.0 million | +11% |
| Advisory fees | $103.5 million | $99.3 million | +4% |
| Placement fees | $26.1 million | $19.5 million | +34% |
| Expenses | $131.4 million | $118.9 million | +11% |
| Income before tax benefit | $2.6 million | $2.1 million | +25% |
| Income tax benefit | $4.1 million | $0.9 million | — |
| Net income | $6.7 million | $3.0 million | +127% |
| Net income attributable to PJT Partners Inc. | $5.2 million | $1.3 million | +293% |
| Class A EPS, basic / diluted | $0.27 / $0.24 | $0.07 / $0.07 | — |
Reported net income includes a tax benefit that exceeded pretax income; the effective tax rate was -156.9%, compared with -41.7% in Q1 2017. The reported pretax margin was approximately 2.0%. Equity-based compensation expense was $37.1 million, up from $33.3 million.
Cash, liquidity and obligations
- Operating cash flow was a use of $53.0 million, versus a use of $35.7 million in Q1 2017. The filing attributes the period’s cash outflow in part to working-capital movements, including lower accrued compensation and higher receivables.
- Investing activities provided $11.2 million; financing activities used $48.7 million. Cash declined $89.3 million during the quarter to $56.3 million. Cash plus investments were $81.7 million at quarter-end, down from $182.7 million at December 31, 2017.
- Net accounts receivable was $219.1 million, including $72.1 million of long-term placement-fee receivables. Total assets were $501.6 million and total liabilities $89.6 million at March 31.
- No borrowings were outstanding under the $60 million revolving credit facility, which may increase to $80 million during a specified seasonal period. The facility matures October 1, 2019; the company reported compliance with its covenants.
- Operating lease commitments, net of sublease commitments, totaled $186.4 million. The company also guaranteed $10.5 million of employee loans related to investments in former-parent funds.
Material changes and management commentary
- Advisory-fee growth reflected stronger strategic and secondary advisory activity, more than offsetting reduced restructuring activity. Placement-fee growth was primarily driven by private equity fund placements.
- Management described the M&A environment as constructive and noted worldwide announced M&A volumes were up 60% year over year in Q1 2018. Restructuring closings slowed from 2017, mainly due to fewer energy-related restructurings; management cited continued demand across several industries. Alternative assets and specialized strategies remained in demand.
- Expenses rose 11%, led by compensation and benefits, travel, communications and professional fees. Management linked compensation growth to higher revenue and headcount, and cited business activity and technology/data-management investment as additional cost drivers.
- The company adopted new revenue-recognition guidance on January 1, 2018. The filing says reported Q1 net income was $1.4 million lower than it would have been without adoption; reimbursable expenses are now presented gross, and some fees are recognized over time. Comparative periods were not restated, limiting direct comparability.
- The Tax Cuts and Jobs Act reduced the U.S. corporate tax rate to 21%. PJT was still evaluating provisional tax estimates and said further adjustments during the measurement period could be material.
- No formal financial guidance was provided. Management said cash typically declines around year-end or in Q1 when prior-year incentive compensation is paid, then generally builds over the rest of the year, and believed available cash, operating cash flows and credit availability would support liquidity needs.
Risks, contingencies and unusual items
- Revenue depends substantially on transaction completions, fundraising closings and client collections; transactions may fail or be delayed. Management also identified economic, market and competitive conditions, Brexit uncertainty, and financing availability as relevant risks.
- Regarding actual or potential claims associated with funds fraudulently obtained by Andrew Caspersen, the company said it believes claims are without merit and will defend them; it estimated potential claims at less than $30 million. It could not estimate potential losses for certain other litigation matters, whose resolution could affect results in the period incurred.
- Partnership-unit exchanges resulted in $24.3 million of cash financing outflows in Q1; the company also repurchased $3.9 million of shares under its $100 million authorization, with $93.8 million remaining. The company declared a $0.05-per-share quarterly dividend, payable June 20, 2018.
- The filing reports $116.9 million of unrecognized compensation expense for unvested restricted stock units and $50.8 million for unvested partnership units. A $48 share-price target under certain market-condition awards was achieved during the quarter; service conditions still apply.
- Management stated that risk factors were not materially changed from the 2017 Form 10-K, market-risk exposures had not materially changed, and disclosure controls were effective.
Important facts for investors to verify
- How much of revenue growth and reported earnings reflects underlying advisory and placement activity versus the new revenue standard and the unusually large tax benefit.
- Whether the $219.1 million receivable balance, including long-dated placement-fee receivables, converts to cash as expected, and how cash generation progresses after seasonal compensation payments.
- The sustainability of expense growth, particularly compensation, headcount and technology investment, relative to revenue.
- Potential cash demands from partnership-unit exchanges, the share-repurchase program, lease commitments, tax receivable agreement payments and litigation or other contingencies.
- Final tax effects of the Tax Cuts and Jobs Act, and any resulting adjustments to deferred tax balances or reported earnings.